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BSP's Negradas: Supervision of Financial Institutions a Must

Posted May 31, 2024

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At the 2024 Cooperative Leaders’ Congress of the NATCCO Network in Davao City on May 5 attended by 1,200 delegates from all over the country, Bangko Sentral ng Pilipinas Director of Financial Supervision Department, Atty. Orlando Negradas explained the details and the reasons for BSP’s Supervision Framework for financial institutions. If credit cooperatives are to be at par with the standards and build trust of their members, we must see how BSP does it and more importantly . . . why.

NATCCO’s Mission is to enable cooperatives to serve their members better.  To do that, NATCCO must first improve the financial condition of cooperatives.  How?  By strengthening governance in primary cooperatives.  

Bangko Sentral ng Pilipinas is doing just that – not for cooperatives, because that is the job of the Cooperative Development Authority – but for the banks and non-bank financial institutions.  

What is the supervisory framework for BSP Financial Institutions – banks and non-banks?

There are three things you need to understand: 

1.    BSP assesses banks’ risk profiles

2.    BSP assesses the systemic risk or implication of specific banks, and

3.    BSP implements its supervisory action based on numbers 1 and 2

Why are we doing this?  One of the thrusts of the BSP is financial stability – which focuses more on the banking system.  BSP is also regulating and developing the Payment System.  When I say “financial stability”, it applies more on the banking system but also to the entire financial system.

“Banks” comprises commercial and universal banks which hold about 95% of the assets, and the rural and co-op banks which may be smaller in terms of assets, but in terms of network they have more branches and greater reach for the “unbanked”.

So it’s really a balancing act.  It’s not just financial significance but also financial inclusion in terms of the network.

BSP is supervising banks to comply with rules and regulations.

Smooth operations and adequate protection for all sectors is important.  That is why there is the Insurance Commission, the Philippine Deposit Insurance Corporation -- they are part of and play roles in the financial sector’s stability.  

In 2009, deposit insurance covered only up to a maximum of Php 100,000.  But it was later raised to 250,000, then 500,000 just to meet the universal standards. Why? Because banks operate on people’s trust and confidence.  If people fear that their deposits will be lost, nobody will deposit and that is disastrous to the economy.  Of course, liquidity is the bread and butter of banks!

 In terms of prevention of isolated systemic risk, the supervisory intensity is more focused on banks with “systemic implications”.  

These banks are so big and their impact on the economy so vast and critical, that the economy will be impacted or affected if they close.  There simply are banks that BSP cannot just close.  On the other hand, if a bank is really pasaway (non-compliant) and their systemic implication is not so big, BSP will just close it and liquidate it.

BSP-Supervised Financial Institutions or BSPFIs undergo monitoring using the ‘risk-based approach’.  We go back to the supervisory intensity. If a bank is assessed to be ‘not so risky’ (although banking is essentially risky), supervisory is usually much lower.  This assessment is a result of BSP’s onsite observation, off-site surveillance, assessment of the risk management, internal audit, culture of compliance and good governance.

If a bank is asses to be ‘not-so-high-risk’, supervisory intensity is usually much lower.  

So for such banks, BSP can visit every 36 months.  That is three years!

It’s good if a bank is a “good boy”.

Another factor is the systemic importance.  If a financial institution is systemically important – regardless of risk profile, we conduct onsite examination on a yearly basis.

This is the gist of the “Supervisory Assessment Framework“ (SAFr) of the BSP.  It’s even more stringent than the previously used CAMELS Rating System that involves Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity.

In 2019, BSP shifted from CAMELS to SAFr.  

In that framework, we have to know the business model of the bank – the significant activity of the bank?  If it’s traditional banking, then the significant activity would be retail banking – loans and deposits.

Since that would be the simple business model, that’s where we will focus on.  

We ask: What is their Risk Management System?  What is their culture?  How strong is internal audit?  Then we have a risk rating system.

That’s the SAFER Rating with four (4) support systems:

CAPITAL LEVEL – if the capital level of the bank is high enough to buffer any risk, then BSP is confident that the bank can go on even if there is any volatility

If the bank’s liquidity is good, if the bank is earning (diba 

Earnings 

GOVERNANCE STRUCTURE OF THE BANK

All these contribute to the over-all performance of a bank and the continuation of a bank’s operations.

Then, BSP tabulate all that in terms of “systemic importance” – how important is a bank to the economy.  It answers the question: “What is the impact of this specific bank to the economy or the financial system?”

BSP categorizes banks as 

1.    Globally important financial institution

2.    Domestically important

3.    Significantly important institutions – some banks are like this because of their offerings 

4.    Others – they may not be significantly important but because of their network and their thrusts on “consumer inclusion” 

After assessing the impact and risk assessment, we can determine the supervisory intensity deployed by BSP.

BSP identifies, measures, controls, and monitors the risks, list the elements of the risk, and make sure there are effective policies and procedures, measures, active board and senior management oversight, and the comprehensive internal controls and audit.

We establish the risk profile of the bank and we aim to know how robust the FI is.

If BSP thinks a bank is no longer contributing to the economy, then it is dangerous to the public, and should be closed down.

SUPERVISORY CONTINUUM

Based on the supervisory intensity on a bank, we have stages for problematic banks that need advanced intervention.

BSP has “Prompt Corrective Action”.  This is the most intrusive, where every month, BSP will meet with the Board of the bank, and Management is required to submit progress reports quite frequently.

But if a bank is in the “resolution stage”, when a bank is on the brink of closure.  Depending on the systemic importance of a bank, if it is not that high, it will just be closed.

If the bank is systemically important, the bank is merged with other banks.  Or for acquisition, BSP finds a “White Knight” to invest in the bank.

Or there is also “Balance Sheet Restructuring” involving the transfer of credit accounts or unsecured subordinated debts into capital.  

MORAL SUASION ON PURCHASE AND ASSUMPTION   

But when there isn’t much to do . . . even for bigger banks, the BSP can provide emergency loans.  But if the bank persists to be non-compliant, then BSP’s only option is to close that bank.

That is why even if there are commercial banks that are big, some have actually been closed by the BSP.  Famous examples are Banco Filipino, Urban Bank, and Orient Bank.

Just last year, BSP closed one cooperative bank.  So there are now only 23 cooperative banks, then there was a recent merger so there are now 22.

BSP closes down an average 20 rural banks every year.  

For universal banks and commercial banks, not so much because of their systemic importance.

In closing, let me quote BSP Deputy Governor Diwa Gunigundo: “Maintaining financial stability is not the sole task of the BSP , but is a shared responsibility by the relevant segments of the financial system.” 



 







Tags

  • BSP standards
  • financial institution standards
  • NATCCO General Assembly 2024
  • Orlando Negradas

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