amando m tetangco, jr : opportunities in financial inclusion and financial integration speech by mr amando m tetangco, jr, governor of bangko sentral ng pilipinas ( bsp, the central bank of the philippines ), at the baiphil induction of directors and officers and first general membership meeting, makati, 21 july 2015. * * * this is an auspicious time to be involved in baiphil. your term covering fiscal year july 2015 - june 2016 coincides with baiphil ’ s 75th anniversary! by any measure, this is a significant milestone. congratulations baiphil! and congratulations to your officers and members, past and present! by tradition, diamonds symbolize 75th anniversaries. this is because diamonds represent a highly prized quality – which is, enduring fidelity. faithfulness. commitment. i am pleased to know therefore, that the theme you selected for this year ’ s induction of officers is – “ building capacity for financial inclusion and integration. ” the industry is in the midst of so many facets of change that the concept of “ capacity building ” takes on new dimensions. it is no longer enough that you position yourself as a trainor for your peers. baiphil itself must navigate through a fast - evolving market landscape, appreciate and relate all the strands of change, if you are to become an effective venue for continuing education. training and education cannot be just about holding lectures and workshops. it is more akin to telling a good story with different chapters. in financial inclusion, we see the dimension of access and calibration so that the financial system itself is responsive to the diverse needs of differentiated stakeholders. how much more appropriate can this be than in an archipelago such as the philippines. this literally forces us to think out of the box, that comfort zone that we refer to as “ traditional banking ”. in financial integration, we bring together the collective aspirations of a regional community. this materially changes the landscape but more importantly, it does so at the same time that global best practices are themselves being re - set to a higher and more prescriptive bar. this forces us to think within the box, examining what we have, how we wish to position ourselves in this sea of change and what we need to do to remain competitively in the service of our respective constituents. in each of these two facets, we have a lot that needs to be covered. taken together, the strategic and tactical implications are

the target. this was especially important when the economy was hit by a supply shock, and we needed to trade off reaching the inflation target and closing the output gap. inflation was below target until last year. now, hit by a demand shock and looking ahead, we know that a trade - off is absent – the economy needs stimulus. but in the face of an unusually high degree of uncertainty, and given an unusually large shock, i believe that it is sensible to continue to be patient. we still try to have a long - term perspective, and we will carefully consider the effects of measures already taken as we move along. even with monetary policy able to counteract cyclical fluctuations to some extent, there is a limit to how much the one tool at the central bank ’ s disposal – the key policy rate – can accomplish. regulations need to underpin the robustness of the financial system with respect to cyclical fluctuations. supply side policy needs to support the capacity of the economy to absorb asset price fluctuations. as for regulatory reform of the financial sector, i believe we both need to reconsider the structural elements and we need some new discretionary features. in order to limit excessive credit growth, the leverage ratio of banks should be contained, with higher capital requirements. the procyclical effects of such capital requirements need to be addressed. since profits fall during a recession, capital requirements then tend to be more binding, reducing credit availability when it is most needed. the work aimed at changing the procyclical effects of capital requirements is still in its infancy. banks ’ incentives to increase loan provisions during upturns could be strengthened. this would smooth profits and hence make capital requirements less procyclical. ideally, loan provisions should internalise some of the cyclical risk by being based on longer term risk assessments. in addition, one could reduce the procyclical effects of capital requirements more directly by making the capital requirements themselves more flexible over the cycle. imposing capital requirements always involves a trade - off between financial stability concerns and efficient capital allocation. in a downturn, when concern about the availability of credit may be greater than in an upturn, a temporarily reduced capital requirement may be justified. the condition must be that the buffer is built up again during the upturn. such time variant capital requirements would also be demanding to implement, however. it would leave the relevant authority with the discretion to assess the cyclical situation and impose appropriate capital requirements. the time horizon over which the