mean up to a 15 basis point drop in gdp growth per year due to higher interest rates passed on to borrowers. mckinsey ( 2011 ), on the other hand, suggests that the return on equity of us banks can fall by as much as 320 bps as a result of basel 3. these are not very encouraging thoughts but the upside is that we do not believe right now that such is the case for philippine banks. with industry car of between 16 % and 17 % of which tier 1 capital is 13 % to 14 %, there should be no reason to deleverage for the sake of hitting the capital standards of basel 3. all these notwithstanding, the weaknesses in the us and the eurozone as well as the displayed strength of the philippine banking industry will have capital flow implications as investors seek destinations for the freed up assets, or for funding sources, as a result of deleveraging. this brings us to the third risk. third risk … capital inflows to emes, including the philippines, could continue in light of prolonged easy monetary policy in the advanced economies and as growth prospects and financial markets remain relatively healthier in emes. yesterday, we reported a us $ 3. 2 billion surplus in bop in july 2012, a large part of which was due to portfolio inflows on top of the current account surplus. from a macro perspective, the broader concern with continued foreign inflows is that it could encourage more leveraging or risk - taking activities beyond the economy ’ s absorptive capacity for risk. this complicates monetary policy and more particularly, strong and rapid inflows of capital are often associated with asset price bubbles that could potentially undermine financial stability. what are bsp ’ s policy thrusts in light of these three risks? to answer this question, let me first give you four lessons from the recent past. one key lesson we, at the bsp, have drawn from the last few years is that achieving price stability is no longer enough to ensure macroeconomic stability. as we witnessed during the “ great moderation ”, an extended period of price stability can also plant the seeds of future distress by causing agents to take on a disproportionate amount of risk. in short, price stability must go hand - in - hand with financial stability. another lesson we have learned is this – capital can move freely across borders. thus, policymakers must maintain a delicate balancing act between ensuring a relatively stable currency and sustaining the use

benjamin e diokno : bangko sentral ng research fair “ central banking in the time of pandemic ” keynote speech by mr benjamin e diokno, governor of bangko sentral ng pilipinas ( bsp, the central bank of the philippines ), at the bsp research fair “ central banking in the time of pandemic ”, organized by the bsp research academy, virtual, 12 july 2021. * * * good morning to our speakers and participants. thank you for gracing this milestone event for the bsp, a timely testimonial of the bsp ’ s support for robust and evidence - based research, especially as we celebrate 72 years of central banking in the philippines, and 28 years as the bangko sentral ng pilipinas. this research fair represents many firsts for the bsp : it is our first international research fair organized by the recently established bsp research academy. as you know, we have a main conference for day 1 and a less formal research cafe for day 2, co - hosted with the seacen centre. it is also the first completely virtual international conference organized by the bsp, where various researchers from local and international institutions are presenting their papers. this is also the first international conference of this nature we have organized since the onset of the pandemic. this year ’ s theme, “ central banking in the time of pandemic ” is the most pressing issue facing central banks today. the repercussions of the covid - 19 pandemic are unprecedented in our global economic history, even when compared to the spanish flu of 1918 — the most devastating pandemic of all time in terms of the number of deaths. this is also because the covid - 19 pandemic has, in effect, caused a trio of shocks — a supply shock, a demand shock, and a shock to financial systems, as well. the covid - 19 pandemic is the first epidemic in the world ’ s history that has caused significant damage not only to people, the health sector and the macroeconomy, but also posed a considerable potential threat to the stability of financial sectors. financial market reaction to the uncertainty and risks during the acute stages of the covid - 19 outbreak have led to significant strains in global financial markets. in the first quarter of 2020, there were sharp downfalls in the equity markets in advanced economies, as well as in emerging market economies. the speedy and substantial