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FINANCIAL STABILITY AND FINANCIAL SECTOR SUPERVISION: LESSONS FROM THE PAST DECADE AND WAY FORWARD
DECEMBER 17, 2007 TOKYO, JAPAN
BANKING SUPERVISION AND
EXAMINATION IN THE PHILIPPINES
MR. NESTOR A. ESPENILLA, JR.
BANGKO SENTRAL NG PILIPINAS
Paper presented at the Conference: FINANCIAL STABILITY AND FINANCIAL SECTOR SUPERVISION: LESSONS FROM THE PAST DECADE AND WAY FORWARD Organized by IMF Regional Office for Asia and the Pacific (OAP), Keio University-21 Century COE-Market Quality Project and The Financial Research and Training Center (FRTC) of Japan’s Financial Services Agency (FSA) December 17, 2007 Tokyo, Japan
The views expressed in this paper are those of the author(s) only, and the presence of them, or of links to them, on the IMF website does not imply that the IMF, its Executive Board, or its management endorses or shares the views expressed in the paper.
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Banking Supervision and Examination in Banking Supervision and Examination in the Philippinesthe Philippines
17 December 2007
Nestor A. Espenilla, Jr.Deputy Governor
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
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OutlineOutline
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Overview of the Philippine Financial SystemThe Philippine Banking SystemBanking Supervision in the PhilippinesConcluding remarks
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Overview of the Philippine financial systemOverview of the Philippine financial system
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Bank-dominatedPhilippine financial supervisory agencies
Bangko Sentral ng Pilipinas (BSP)Securities and Exchange Commission (SEC)Insurance Commission (IC)Philippine Deposit Insurance Corporation (PDIC)
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Overview of the Philippine financial systemOverview of the Philippine financial system
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Financial Sector ForumFormed in July 2004BSP, SEC, IC, and PDIC as membersCooperative effort without any legal mandateNot an integrated supervisory bodyKey objectives
Improvement of the supervision of financial conglomeratesAddressing regulatory grey areas
Working groups: (1) supervision and regulatory policy, (2) reporting and information exchange, and (3) consumer protection
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The Philippine banking systemThe Philippine banking system
Banks differ according to capitalization and activities undertaken
Universal Banks (UBs) – KBs + investment house activities, 100% ownership of financial allied undertakingsCommercial Banks (KBs) – accept drafts, issue letters of credit, discount and negotiate evidences of indebtedness, accept deposits, buy/sell forexThrift Banks (TBs) – accumulate savings, grant retail loans, finance homebuildingRural Banks (RBs) – accept deposits, expected to meet credit needs of farmers/fishermen/cooperatives/merchantsSustainable non-subsidized microfinance also undertaken by RBsand TBs and by KBs through wholesale funding
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
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The Philippine banking systemThe Philippine banking system
728148.7Rural/Cooperative Banks
82477.9Thrift Banks (TBs)
22764.4Commercial Banks (KBs)
163,539.1Universal Banks (UBs)
8484,930.1All Banks
Physical CountAs of End-November 2007
Total AssetsPhP Millions
As of End-Sept. 2007
The Philippine Banking System
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
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Universal/Commercial
banks87%
Thrift banks 10%
Rural and cooperative
banks3%
The Philippine banking system: The Philippine banking system: Market ShareMarket Share
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
BANKING SYSTEM: ASSET SHARE BY CLASSIFICATION As of End-Year 2006
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The Philippine banking system: The Philippine banking system: Asset GrowthAsset Growth
-
1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
2000 2001 2002 2003 2004 2005 2006 Sep-07
P hp B n
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0 %Level Growth
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
BANKING SYSTEM: TOTAL ASSETS As of End-Years 2000- 2006 and End-September 2007
3,515.5
2,274.0
4,930.1
Sept.2007p/
3,497.62,970.7Deposits
2,294.92,008.7Loans, net
4,865.64,319.4Total Assets
20062005In PhP Bns
p/ preliminary
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The Philippine banking system: The Philippine banking system: ProfitabilityProfitability
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
BANKING SYSTEM: RETURN ON ASSETS (ROA)/ RETURN ON EQUITY (ROE)FY 1999- 2006 and for Nine Month Period Ended-30 September 2007
0
2
4
6
8
10
12
1999 2000 2001 2002 2003 2004 2005 2006 Sep-07
%
ROA ROE
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The Philippine banking system: The Philippine banking system: NPA CleanNPA Clean--upup
SPV TransactionsPhase I – P97 billion NPAs disposedPhase II of amended SPV Law1/
Done deals – P32.0 billionPending applications –P10.9 billion worth of NPAs for sale to SPVs and dacion en pago
Joint venture arrangements
1/Transactions as of 30 September 2007
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
0
2
4
6
8
10
12
14
16
18
1999 2000 2001 2002 2003 2004 2005 2006 Sep-07
%
NPL Ratio NPA Ratio
BANKING SYSTEM: NPL & NPA RATIOSAs of End-Years 1999-2006 and end-
September 2007
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The Philippine banking system: The Philippine banking system: SolvencySolvency
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
BANKING SYSTEM: CAPITAL ADEQUACY RATIO (CAR)As of End-Years 2001- 2006 and end-June 2007
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Legal FrameworkR.A. No. 7653 (The New Central Bank Act, 1993) –Consolidated supervisionGeneral Banking Law of 2000 – Risk-based approach to supervision
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Consolidated supervisionDriven by complex banking groups and mixed conglomeratesSince 1998; accelerated implementation since 2005
Risk-based approach to supervisionDriven by complexity of banking businessGradual shift since 1997; accelerated implementation since 2005Allows banks to take risks as long as these are ably managed, absorbed, and priced
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Internal requirements for the risk-based approach to supervision
Data collection and storageFinancial reporting packageData Warehouse SystemInformal arrangements with financial regulatory agencies
Overhaul of the examination/off-site monitoring processes
Report of Examination, CAMELS, Institutional Overview
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Internal requirements for the risk-based approach to supervision
Skill sets and trainingIn-house structured training programExternal training programsInternational certifications
Re-organization of the BSP Supervision and Examination Sector
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Supervision and Examination Department (SED) I
Supervision and Examination Department (SED) I
Supervision and Examination Department (SED) II
Supervision and Examination Department (SED) II
Supervision and Examination Department (SED) III
Supervision and Examination Department (SED) III
Supervision and Examination Department (SED) IV
Supervision and Examination Department (SED) IV
OFFICE OF THE DEPUTY GOVERNOROFFICE OF THE DEPUTY GOVERNOR
OFFICE OF THE ASSISTANT GOVERNOR - Supervisory Policy Development and Data Center
(SPDDC)
OFFICE OF THE ASSISTANT GOVERNOR - Supervisory Policy Development and Data Center
(SPDDC)
Office of Supervisory Policy Development (OSPD)
Office of Supervisory Policy Development (OSPD)
OFFICE OF THE MANAGING DIRECTOR -Supervision and Examination (SE) IIOFFICE OF THE MANAGING DIRECTOR -Supervision and Examination (SE) II
Supervisory Data Center (SDC)
Supervisory Data Center (SDC)
Core IT Supervision
Group (CITSG)
Core IT Supervision
Group (CITSG)
Banking supervision in the PhilippinesBanking supervision in the Philippines
Past Organizational Structure of the BSP Supervision and Examination Sector (SES)
OFFICE OF THE MANAGING DIRECTOR -Supervision and Examination (SE) IOFFICE OF THE MANAGING DIRECTOR -Supervision and Examination (SE) I
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Examination Department (ED) I
Examination Department (ED) I
Trust SpecialistGroup (TG)
Trust SpecialistGroup (TG)
Integrated Supervision Department
(ISD) I
Integrated Supervision Department
(ISD) I
OFFICE OF THE MANAGING DIRECTOR -
Supervision and Examination (SE) I
OFFICE OF THE MANAGING DIRECTOR -
Supervision and Examination (SE) I
OFFICE OF THE DEPUTY GOVERNOROFFICE OF THE DEPUTY GOVERNOR
OFFICE OF THE ASSISTANT GOVERNOR - Supervisory Policy Development and
Data Center (SPDDC)
OFFICE OF THE ASSISTANT GOVERNOR - Supervisory Policy Development and
Data Center (SPDDC)
OFFICE OF THE MANAGING DIRECTOR -
Supervision and Examination (SE) II
OFFICE OF THE MANAGING DIRECTOR -
Supervision and Examination (SE) II
Supervisory Data Center (SDC)Supervisory Data
Center (SDC)
Centralized Administrative Support Group
(CASG)
Centralized Administrative Support Group
(CASG)
Banking supervision in the PhilippinesBanking supervision in the PhilippinesNew Organizational Structure of the BSP
Supervision and Examination Sector (SES)
Inclusive Finance Advocacy Staff
(IFAS)
Inclusive Finance Advocacy Staff
(IFAS)
Examination Staff IExamination Staff I
OFFICE OF THE MANAGING DIRECTOR -
Supervision and Examination (SE) III
OFFICE OF THE MANAGING DIRECTOR -
Supervision and Examination (SE) III
Office of Supervisory Policy Development (OSPD)Office of Supervisory Policy
Development (OSPD)
SES Operations Management
Group (SOMG)
SES Operations Management
Group (SOMG) Integrated Supervision Department
(ISD) II
Integrated Supervision Department
(ISD) II
Central Point of Contact
Department (CPCD) I
Central Point of Contact
Department (CPCD) I
Central Point of Contact
Department (CPCD) II
Central Point of Contact
Department (CPCD) II
AML SpecialistGroup (AMLSG)
AML SpecialistGroup (AMLSG)
Core ITSupervision
Group(CITSG)
Core ITSupervision
Group(CITSG)
Capital MarketSupervision
Group (CMSG)
Capital MarketSupervision
Group (CMSG)
MSME Finance Specialist Group
MSME Finance Specialist Group
Examination Department (ED) II
Examination Department (ED) II
Examination Staff IIExamination Staff IIExamination
Department (ED) III
Examination Department (ED) III
Regional Supervisory
Support Division I
Regional Supervisory
Support Division IRegional
Supervisory Support Division II
Regional Supervisory
Support Division II
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Other supervisory tools Bank Performance Reports (BPR) systemBank Early Warning System (EWS)Examiner Resource Scheduling System (ERSS)
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Identified gaps in Compliance with the Basel Core Principles for Effective Banking Supervision (based on 2002 IMF assessment)
Legal protection for supervisorsFormalization of information sharing and cooperation with local and foreign financial supervisory agenciesConduct of consolidated supervision and bank examinationFramework for prompt corrective action and problem bank resolutionAppropriate standards for banks’ risk management systems
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Developments in Compliance with the Basel Core Principles for Effective Banking Supervision
Legal protection for supervisors –included in proposed revisions to BSP Charter
Formalization of information sharing and cooperation with local and foreign financial supervisory agencies
Information exchange and cooperation among local financial supervisors through the Financial Sector Forum (FSF)5 formal agreements with foreign financial supervisory agencies, negotiating with 7 others
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Developments in Compliance with the Basel Core Principles for Effective Banking Supervision
Conduct of consolidated supervision and bank examination
BSP-SES reorganization also intended to support consolidated supervisionOne of proposed revisions to BSP Charter is the grant of authority to BSP to look into banks’ non-allied subsidiaries and affiliatesManual on Supervision and Examination of Banks revised through a TA with USAIDDevelopment of a sustainable and relevant formal foundation training program for BSP examiners through a TA with First Initiative
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Developments in Compliance with the Basel Core Principles for Effective Banking Supervision
Framework for prompt corrective action and problem bank resolution
PCA framework reviewed and enhanced in 2006Explicit criteria for placing banks under PCA and measures to be undertakenProcedures already in place for financially distressed banks, but application is hampered by absence of coercive legal instruments
Proposed revisions to BSP Charter intended to give BSP more powers to effectively carry out problem bank resolution
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Developments in Compliance with the Basel Core Principles for Effective Banking Supervision
Appropriate standards for banks’ risk management systems
The following supervisory guidelines on risk management have already been issued and implemented
Risk management of financial derivativesInternal credit risk rating systemsMarket risk managementLiquidity risk managementIT risk managementSupervision by risk
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Adoption of international standards Basel II adopted in July this year
Preparatory work: Active monitoring of developments, revisions/adjustments in local framework, capacity-buildingSimple approaches adopted + Pillar 3 guidelinesAdvanced approaches may be allowed by 2010; ICAAP guidelines under exposure to industryApproach to home-host issues on approval work to be dictated by legal status of foreign bank entities
International accounting standards adopted since 2005
Supported by an external auditor accreditation system
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Enhancing corporate governanceRe-defined duties and responsibilities of bank’s board of directorsAdoption of “fit and proper” standards for bank officers
Strengthening anti-money laundering regulationsCustomer identification requirementsKYC programs compliant with BCBS standards
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Banking supervision in the PhilippinesBanking supervision in the Philippines
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Developmental Initiatives Capital market development through:
contributions to foreign exchange liberalizationdomestic bond and derivatives market developmentpayments systems upgrade
Enhanced access to banking services by the poor through:
sustainable microfinance practices of banksinnovative deployment of mobile banking services
Financial literacyLegislative advocacies
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Concluding remarksConcluding remarks
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas
Supervision of banks in the Philippines has gone a long way in the last 10 yearsDespite the limits set by the existing legal framework, the BSP continues to upgrade its supervision and examination approaches in line with internationally accepted standardsThe BSP also strives to improve banking practices through the issuance of relevant regulationsHowever, critical changes to the BSP Charter are necessary to achieve further improvements in the practice of banking supervision in the Philippines
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Banking Supervision and Examination in Banking Supervision and Examination in the Philippinesthe Philippines
17 December 2007
Nestor A. Espenilla, Jr.Deputy Governor
Bangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng PilipinasBangko Sentral ng Pilipinas