IMF Executive Board concludes financial system stability assessment with the Philippines

IMF Executive Board concludes financial system stability assessment with the Philippines

Washington, DC:
The Executive Board of the International Monetary Fund (IMF) concluded the
Financial System Stability Assessment

Stress tests show that while banks can withstand the already severe
baseline scenario, they could experience systemic solvency distress if the
economic impact of COVID-19 turns out to be severer. The economic shock
would weigh on corporate earnings and then spill over to banks. Bank stress
could limit credit supply, reducing economic growth noticeably even more.
Physical risks from climate change are relevant for financial stability,
though the infrastructure destruction from typhoon wind alone is not
systemic unless extreme tail events materialize. Higher median and
estimated losses were used in the stress testing exercise for severer

The economy faces both COVID-related and structural risks. Real GDP
contracted by 9.5 percent in 2020—a much steeper decline than during the
Asian Financial Crisis. However, it is now recovering, and macroeconomic
fundamentals at the onset of the COVID-19 were stronger than in the late
1990s. In addition, the Financial Action Task Force (FATF) may put the
country on the so-called grey list in 2021 without significant reforms on
the effectiveness of the Anti-Money Laundering and Counter Financing of
Terrorism (AML/CFT) regime. However, significant legislative measures were
enacted in early 2021 to address some of the FSAP recommendations. The
Philippines is also vulnerable to increased typhoon risks from climate
change owing to its geographical position.

The Bangko Sentral ng Pilipinas (BSP) has modernized its oversight
framework for banks since the 2010 FSAP and shows reasonably good
compliance with the Basel Core Principles (

The work of the Financial Sector Assessment Program (FSAP) was conducted
during the COVID-19 outbreak, with the virtual missions concluding on
October 20, 2020, and adapted to include the immediate risks and
vulnerabilities brought up by the pandemic.
with the Philippines on March 5, 2021.

).The BSP also plays the central role in macroprudential policy framework
given the dominance of banks in the financial system. The 2019 amendments
to the BSP charter further strengthened the financial stability policy
framework. Nonetheless, material gaps remain on BSP’s legal powers related
to conglomerate supervision, and bank secrecy laws are limiting the
effectiveness of supervision, but also have wider financial sector
implications. At the wake of the COVID-19 crisis, the BSP issued time-bound
regulatory relief measures, including unusually strong forms of forbearance
related to non-performing loan recognition and provisions, subject to prior
notification to and approval of the BSP.
2020 BCP assessment

The Financial Sector Assessment Program (FSAP), established in
1999, is a comprehensive and in-depth assessment of a country’s
financial sector. FSAPs provide input for Article IV consultations
and thus enhance Fund surveillance. FSAPs are mandatory for the 29
jurisdictions with systemically important financial sectors and
otherwise conducted upon request from member countries. The key
findings of an FSAP are summarized in a Financial System Stability
Assessment (FSSA).
While there has been some progress with reforming financial safety net, a
number of issues highlighted in the 2010 FSAP are still relevant. The
resolution powers are provided to both Philippine Deposit Insurance
Corporation (PDIC) and the BSP, making the resolution process relatively
complex, while the prompt corrective action framework could be enhanced by
including more specific escalation procedures. The resolution toolkit is
largely limited to liquidation and resolution planning and resolvability
assessments are not in place yet.

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