In light of recent developments in the global banking system, which saw the collapse of two banks in the US due to a bank run, the Bangko Sentral ng Pilipinas (BSP) has issued a statement recently stating that the Philippine banking system remains safe and sound.
“We have shown our resilience through the pandemic, and we continue to be strong in the face of the ongoing turbulence in the global markets. The BSP recognizes the actions taken by banking supervisory authorities to address the potential contagion risk from the closure of banks,” the statement read.
“Our longstanding efforts in consultation with the industry in setting prudent standards and executing risk practices remain the key pillar in safeguarding the interests of the Filipino people. Nonetheless, we will respond accordingly as market conditions evolve,” it further said.
California-based financial institution Silicon Valley Bank (SVB) is one of the two banks that collapsed more than a week ago due to a bank run after it faced financing health issues. It was immediately trailed by the collapse of New York-based Signature Bank (SB) after its depositors withdrew large amounts following the news about SVB.
The SVB’s fall is the second-largest bank failure in the US.
Domestic banks remain strong
Despite these developments, the BSP said domestic banks remain strong amidst the increased challenges brought by the collapse of two US-based banks, citing the Philippine banks’ lower market risk exposure and diversified lending base.
“Domestic banks are more resilient than US banks because the formers’ losses, including estimated net unreleased losses on security holdings due to the rising interest rate environment, are expected to be smaller (as a percentage of assets),” the BSP explained.
The central bank attributed this to several factors, one of which is the more extensive hikes in the Federal Reserve’s key rates which came from lower levels than the BSP rates. The Fed’s key rates have increased by 450 basis points since March 2022, bringing it to between 4.50 and 4.75 percent as of Feb. 1, 2023.
Meanwhile, the BSP’s key rates have been hiked by 400 basis points since May 2022, bringing the overnight reverse repurchase (RRP) rate to 6 percent. The RRP rate was reduced to a record low of 2 percent last year to help cushion the impact of the pandemic on the domestic economy by encouraging lending.
Furthermore, notes shared by the BSP’s Supervisory Policy and Research Department (SPRD) stated that the yield curve in the Philippines “did not invert similar to the US yield curve.”
According to the SPRD’s notes, the bond holdings of US banks have longer tenors — at 30 years at the most — compared to the maximum tenor holdings of domestic banks at 15 years.
It also said domestic banks have stronger risk governance and risk management systems and are usually able to maintain sufficient capital to absorb unexpected losses from policy rate increases.
“Philippine banks are highly liquid and tend to rely on a wide depositor base compared to US banks,” the note said, adding that domestic banks “do not have material exposure to the failed banks.”