rafael buenaventura : laying the foundation for a progressive financial system speech by mr rafael buenaventura, governor of bangko sentral ng pilipinas ( central bank of the philippines ), at the asset forum, asean capital markets forum series, makati city, 20 october 2004. * * * ladies and gentlemen, good morning. introduction we are indebted to the asset magazine, headed by its dynamic editor - in - chief, mr.. danny yu, for organizing this forum on philippine capital markets. this is an issue that should be high in our agenda for reform. clearly it is critical for the government to immediately deal with a looming fiscal crisis but that should not distract us from the equally important task of accelerating the development of the domestic capital market. indeed, these two reforms are closely linked. fiscal stability is an important precondition to financial system stability. a well developed capital market enhances flexibility in fiscal management. bsp agenda the bsp, as the monetary authority and supervisor of the banking system, is firmly committed to the prioritization of domestic capital market development. first, well - functioning financial markets support the more effective conduct of monetary policy that is key to achievement of price stability. second, a robust domestic capital market complements the banking system in financial intermediation and can even relieve pressure especially during times of crises by providing alternative means of financing to the economy. third, the banking system has greater flexibility in managing and re - distributing its risks via the capital market particularly through securitization and hedging. an even more basic reason is the need to improve on the current low domestic saving rate. according to comparative data from adb as of 2003, the gross domestic saving rate in the philippines was only 20. 1 % of gdp compared with hong kong ( 31. 6 % ), thailand ( 33. 1 % ), malaysia ( 42. 9 % ) and singapore ( 46. 7 % ). even indonesia is slightly higher at 21. 5 %. a low domestic saving rate is a basic constraint to achieving higher levels of investment needed to support a faster pace of economic growth. to promote savings, the philippine financial market needs to offer a broader array of financial instruments beyond bank deposits and equity. we are particularly keen on seeing the faster development of the domestic debt market. as of 2003, total outstanding domestic bonds accounted for just around 40 percent of gdp, compared with 85 percent for bank assets and 69 percent for equity. most of these

the perception of the institution ’ s financial health — that each bank must confront as it manages its funding resources, risk profile, and liquidity. at the same time, we should explore ways that the federal reserve can work to mitigate stigma concerns. in some ways, the design of primary discount window credit, where a borrower must meet financial standards for borrowing, suggest that the “ market signal ” of discount - 11 window borrowing should perhaps speak more toward market liquidity disruption than an individual institution ’ s financial condition. we should explore ways to validate the use of discount window lending in our regulatory framework. while the federal banking agencies have encouraged institutions to be prepared to access discount window loans, we should also seriously consider whether we should finally recognize discount window borrowing capacity in our assessment of a firm ’ s liquidity resources, including in meeting a firm ’ s obligations under the liquidity coverage ratio. 15 one of the emerging arguments about how the federal reserve can mitigate stigma concerns is simply by mandating that banks pre - position collateral and periodically borrow from the discount window. the notion is that the “ signaling ” effect of discount window borrowing becomes more muted when more participants are essentially forced to use it to meet a regulatory requirement or a supervisory expectation. i question whether this approach will truly address the underlying stigma concern. the discount window has not historically functioned as a source of ordinary day - to - day liquidity for the banking system, but rather as a backup liquidity resource and it is priced as such. our expectation should not be that the federal reserve replaces existing sources of market liquidity for banks in normal times. as a source of backup liquidity, the question becomes whether requiring pre - positioned collateral would mitigate the stigma of drawing on the discount window. to be effective, banks must be willing to obtain discount window loans when needed, see board of governors of the federal reserve system, federal deposit insurance corporation, national credit union administration, office of the comptroller of the currency, “ agencies update guidance on liquidity risks and contingency planning, ” news release, july 28, 2023, https : / / www. federalreserve. gov / newsevents / pressreleases / bcreg20230728a. htm. “ the updated guidance encourages depository institutions to incorporate the discount window as part of their contingency funding plans. consistent with other contingency funding sources, the guidance reinforces the supervisory expectation that if the