The development of financial markets in the

Philippines and its interaction with monetary policy

and financial stability1

Francisco G Dakila Jr2

Abstract

This paper analyses financial market development in the Philippines and its
interaction with monetary policy and financial stability. The interlinkages between
financial market development and monetary policy were evident in the Philippines
even prior to the global financial crisis (GFC). Rapid developments in financial
intermediation due to the financial liberalisation in the 1980s led to shifts in the
monetary policy framework, particularly the introduction of an inflation targeting
framework in 2002. Strong capital inflows in the post-GFC period contributed to the
weakening of the interest rate channel of monetary policy. This prompted a
reassessment of monetary policy operations, which eventually led to the
implementation of the Interest Rate Corridor (IRC) System in 2016. The increasing
reliance of IRC on market-based instruments is expected to aid the development of
the domestic money and capital markets in the country.
Meanwhile, financial market development increases market resilience and
reduces risk concentration in the country’s bank-centric financial system. However, it
may also engender greater systemic risk, encourage the growth of shadow banking,
amplify global spillovers, and raise the leverage of the non-financial sector.
Notwithstanding, the domestic financial markets remain resilient owing to the
continued implementation of structural and financial reforms. Based on various
financial market indicators, the country has made significant improvements in terms
of financial stability and efficiency and is now on a continued path towards
improving financial depth and accessibility.
To be at par with its neighbours in terms of financial market development, the
country will endeavour to implement the consolidated roadmap for local currency
debt market development. The country is also coordinating with other central banks
in Asia for the establishment of a local currency settlement framework that would
allow a foreign currency to be directly priced against the Philippine peso, and vice
versa. The Bangko Sentral ng Pilipinas (BSP) will continue to pursue the reform
agenda on macroprudential and microprudential tools to strengthen financial
supervision, mitigate financial stability risks, and strengthen financial risk
surveillance. The BSP will also closely monitor and assess future developments such
as the emergence of new players from fintechs to big techs. It will keep a watchful
eye on possible signs of market imbalances in carrying out its price and financial
stability mandates.
JEL classification: D53, E52, E58, G15, G32.

Keywords: financial market development, monetary policy, financial stability,

financial risk, Philippines.

1
A paper prepared for the BIS Emerging Markets Deputy Governors Meeting, 13-14 February 2020,
Basel, Switzerland. The usual institutional disclaimer applies.
2
Deputy Governor, Monetary and Economics Sector, Bangko Sentral ng Pilipinas.
BIS Papers No 113
1
Introduction

Financial markets in the Philippines have developed considerably since the Asian
Financial Crisis (AFC). Financial liberalisation, prudential supervision, and regulatory
reforms have significantly improved the stability, efficiency, depth, and accessibility
of the domestic financial markets and institutions. Although the financial system
remains dominated by banks, there have been important changes in the structure of
financial intermediation. Among the most striking changes are the expansion in the
share of foreign funding and a rise in the external indebtedness of the non-financial
sector, owing largely to the prolonged period of low global interest rates and ample
global liquidity after the global financial crisis (GFC).
Financial market development provides important information to policymakers
given their intrinsic links with monetary policy3 and financial stability. It has
propelled changes in the BSP’s monetary policy framework beginning in the second
half of the 1990s until inflation targeting was adopted in 2002, including the
adoption of measures to improve monetary operations of the BSP. While financial
market development helps reduce risk concentration and increase market resilience,
greater global integration has also increased systemic risk.
This note discusses how financial market development has affected monetary
policy and financial stability in the Philippines. It starts with a discussion on the
development of financial markets in the country since the AFC (Section 2), followed
by the interaction of financial market development with monetary policy (Section 3),
and financial stability (Section 4), and finally with a discussion of recent challenges
and corresponding policies in the last section (Section 5).

Financial market development in the Philippines

There has been significant improvement in terms of financial stability and, to a

certain extent, efficiency in the Philippine financial markets. They are on a sustained
path towards improving their financial depth and accessibility as compared with
those of selected EMEs in South East Asia (World Bank (2016)).4
Financial depth in the Philippines has improved since the AFC. Based on the
traditional indicator of financial deepening, the country’s broad money (M3)-to-GDP
ratio increased by more than 2,000 basis points (bp) from 42.1% 5 in 1999 to 67.3%6
in 2017, further rising to 69.7%5 in 2019.7 The improvement in depth has been
observed for both financial institutions and financial markets. The depth of financial
institutions measured in terms of the ratio of domestic private credit to the real
sector by deposit money banks to GDP averaged 41.7% from 2015–17, a slight
improvement

3
Hildebrand (2006).
4
World Bank (2016). This approach was also based on Milo (2019).
5
For 1999, BSP data based on monetary survey.
6
BSP data based on the Standardized Report Forms (SRFs).
7
The marked increase in the Philippines’ M3-to-GDP ratio is corroborated by the data from the
World Bank,7 which showed a 2,000 bp increase in liquid liabilities to GDP ratio, from 54.9% in 1999
to 74.9% in 2017.

2 BIS Papers No
 from 39.2% in 1999,8 but much better than the 35.1% average of lower-middle-
income economies for 2015–17.9 The depth of financial markets in terms of the ratio
of stock market capitalisation to GDP has averaged 81.0% from 2015–17, a marked
improvement from 47.9% in 1999. The figure is also much higher than the 54.8%
and 33.6% recorded for upper middle income and lower middle-income economies,
respectively, for the same period.10
However, the country’s financial depth is modest compared with
neighbouring EMEs. Relative to selected EMEs in South East Asia, the country’s
2017 ratio pales in comparison with that of Malaysia (122.2%), Thailand (120.9%)
and Vietnam (145.3%) as shown in Graph 1.

Liquid liabilities-to-GDP ratio (in %, 1999–2017) Graph 1

160
PhilippinesMalaysiaThailandVietnam 145.3
140 122.2 120.9
120
100
80 74.9
54.9 58.4
60 49.0
40
20
0
1999 2005 2010 2017

Source: World Bank (2019a).

A similar story can be seen in the Philippines’ share of domestic credit to the
private sector to GDP (Graph 2). While it increased from 38.5% in 1999 to 47.8% in
2017 and 50.2% in 2019,11 the 2017 share is still low compared with those of
Malaysia (118.8%), Thailand (145.0%), and Vietnam (130.7%). The size of the banking
sector in the country is also smaller as the ratio of total assets of deposit money
banks to GDP in 2017 was only 58.3%,12 compared with 131.9% in Malaysia, 139.0%
in Thailand, and
137.4% in Vietnam.

8
World Bank (2019a).
9
World Bank (2019b).
10
World Bank (2019b).
11
Based on both BSP and World Bank data.
12
Based on BSP data, the total assets-to-GDP ratio of the Philippine banking system was 95.9% in 2017
and 95.7% in end-October 2019 while that of universal/commercial banks was 87.1% in 2017 and
88.1% in end-October 2019.
BIS Papers No 113
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Domestic credit to private sector-to-GDP
(in %, 1999, 2017, October 2019) liquid liabilities-to-GDP ratio (in %, 1999–2017) Graph 2

150
120 145.0
130.7
90 118.8
60

47.8 50.2
38.5
30
0

PhilippinesPhilippinesMalaysiaThailandVietnamPhilippines
1999 2017 2019

Sources: World Bank (2019a), Bangko Sentral ng Pilipinas.

While the 82.1% share of stock market capitalisation-to-GDP of the Philippines

in 2017 is greater than the world’s average for middle income economies, it is still
small compared with those of Malaysia (128.1%) and Thailand (109.5%). 13 The total
value of stocks traded-to-GDP even declined from 18.3% in 1999 to 10.8% in 2017,
lagging behind Malaysia (37.0%), Thailand (74.3%), and Vietnam (15.7%). Moreover,
the country’s ratio of corporate bond issuance volume-to-GDP marginally increased
from 0.6% in 2004 to 0.9% in 2017. This is also lower than those of Thailand (3.7%),
Malaysia (4.2%), and Indonesia (1.3%).14
The provision of financial services in the country has expanded but lags
behind EMEs. Relative to working population, the share of individuals 15 with an
account at a financial institution increased from 26.6% in 2011 to 31.8% in 2017.
However, this is lower than the 39.7% average for lower-middle income economies
from 2015–17 and 2017 data of Malaysia (85.1%), Thailand (81.0%), and Indonesia
(48.4%) (Graph 3).

13
Based on BSP data, stock market capitalisation to GDP of the Philippines was 111.2% in 2017 and
89.8% in 2019.
14
The country’s ratio is higher than that of Vietnam (0.1%). In terms of insurance, the country is in a
similar position to that of Indonesia and Vietnam as the volume of life and non-life insurance
premium to GDP in the country was still less than 2% in 2017 and the share of insurance company
assets to GDP did not improve that much and remained below 10%. Malaysia and Thailand
continued to lead among EMEs in the region, with 20% of GDP worth of insurance company assets
and around 5% share of volume of life and non-life insurance premium to GDP.
15
Total population of 15 years old and above.

4 BIS Papers No
Individuals who reported an account at a financial institution
(in % of 15 and above years old population, 2011, 2015–17, 2017) Graph 3
90
85.1 81.0
60

48.4
30 39.7
31.8
26.6

0
Lower-Middle PhilippinesPhilippines Indonesia MalaysiaThailand
Income
2015-2017 2011 2017

Sources: World Bank (2019a).

The country also trails behind its neighbouring countries in terms of access to
banking services. The number of deposit accounts per 1,000 adults increased only to
510.1 in 2017 from 394.6 in 2006, which is relatively low compared with 846.3 in
Malaysia and 1,270 in Thailand (no data available for Vietnam and Indonesia). The
country’s shares of population above 15 years old that used debit cards and made
use of digital payments in the past year were 21.0% and 13.6%, respectively, in 2017.
These are also low compared with Malaysia (73.8% and 60.1%), Thailand (59.8% and
43.2%), Vietnam (26.7% and 16.1%), and Indonesia (30.8% and 26.8%).
Nevertheless, financial institutions in the country are fairly efficient in
managing their investment portfolios. Efficiency means the ability of financial
institutions to successfully intermediate resources and facilitate transactions. 16 With
a net interest margin (NIM)17 of 4.1% in 2017, banks in the Philippines are the most
profitable among those of South East Asian EMEs after those of Indonesia (6.0%).
This improvement in the NIM of banks in the Philippines, from 2.8% in 1999 to 4.1%
in 2017, indicates a relatively more efficient investment of funds than in Malaysia
(2.3%), Thailand (3.5%) and Vietnam (3.6%) in 201718 (Graph 4).

16
World Bank (2019b).
17
Difference between interest income earned and interest paid relative to interest-earning assets (Milo
(2019)).
18
A similar story can be seen using BSP and IMF data, which showed that the interest margin-to-gross
income ratio as of September 2019 was at 73.4% in the Philippines, higher than in either Malaysia
(57.5%) or Indonesia (65.9%).

BIS Papers No 113

5
Net interest margin
(in %, 1999, 2017) Graph 4

10
8
6
6.0
4.1
4
3.5 3.6
2 2.8
2.3
0
PhilippinesPhilippinesIndonesiaMalaysiaThailand Vietnam
1999 2017

Source: World Bank (2019a).

Almost the same is implied by the latest return-on-assets (RoA) and return-on-
equity (RoE) data of banks in these Asian EMEs. As of September 2019, the RoA of
banks in the Philippines at 1.5% is comparable with that of Malaysia, although lower
than in Indonesia (2.5%).19 The RoE of banks in the country at 13.8% is better than
that of Malaysia (12.9%), but still lower than in Indonesia (16.0%).20

In the stock market, however, the turnover ratio 21 declined from 48.8% in 1999
to 13.1% in 2017. This indicates a less liquid stock market compared with selected
South East Asian economies (Malaysia at 34.1%, Thailand at 68.1%, Vietnam at
45.1% and Indonesia at 19.6%).
The Philippine financial system is also one of the most stable among EMEs
in the region. The Philippine financial system’s Z-score 22 declined from 22.7 in 1999
to 17.7 in 2017. However, this level is still high, next to Malaysia (23.4) but better
than in Vietnam (12.3), Thailand (7.9) and Indonesia (6.2). The country’s average Z-
score from 2015–17 at 18.0 is also higher than the 13.6 of upper-middle income and
14.6 of lower-middle income economies.
Moreover, the ratio of non-performing loans-to-gross loans of banks in the
country substantially declined from 14.6% in 1999 to 1.6% in 2017. 23 This latest NPL
ratio is comparable with that of Malaysia (1.5%) and much better than that of
Thailand (3.1%), Indonesia (2.6%) and Vietnam (2.3% in 2015) (Graph 5).

19
Data cited were sourced from BSP and IMF. Using World Bank data, the RoA of banks in the
Philippines improved from 0.3% in 1999 to 1.2% in 2017. This is better than that of Thailand (1.3%)
and Vietnam (1.0%), but lower than those of Indonesia (1.9%) and Malaysia (1.6%).
20
Data cited were sourced from BSP and IMF. Using World Bank data, the RoE of banks in the
Philippines improved to 11.0% in 2017 from 1.7% in 1999. This is slightly lower than in Vietnam
(14.2%), Indonesia (12.8%) and Malaysia (12.3%) but better than in Thailand (9.6%).
21
Value of domestic shares traded divided by market capitalisation.
22
Defined as the ratio of capitalisation and return-on-assets to the volatility of return-on-assets.
23
Data cited were sourced from the World Bank. Using BSP data, the NPL ratio of the Philippines
declined from 12.3% in 2009 to 1.2% in 2017, although it increased to 1.6% in 2019.

6 BIS Papers No
Non-performing loans to gross loans ratio
(in %, 1999, 2017) Graph 5

15 14.6

12

3 1.6
2.6 3.1
1.5 2.3
0
PhilippinesPhilippinesIndonesiaMalaysiaThailand
Vietnam
(2015)
1999 2017
Source: World Bank (2019a).

Meanwhile, the country’s financial system continues to be dominated by

the banking sector. According to the ASEAN+3 Bond Market Guide 2017,24 the
corporate bond market is relatively small despite a significant pickup in recent years.
This is reflected by the 1.2% average share of corporate bond issuance volume to
GDP from 2015–17 data for the Philippines. 25 The Philippine domestic bond market
also continued to be dominated by Treasury notes and bonds. Further, banks
continued to be the preferred source of financing due mainly to the relative ease of
accessing bank loans compared with the issuance of bonds.
The current stability of the Philippine financial system benefits from the
lessons learned from the AFC and the GFC. The experiences from the two crises
significantly shaped the emerging regulatory and supervisory architecture of the
Philippine financial system. The AFC revealed weaknesses in risk measurement and
management as well as vulnerability to currency and maturity mismatches. The GFC
further underlined the importance of monitoring not only the strength of individual
banks but of the financial system and of effective collaboration between the central
bank and other regulators in maintaining financial stability.26
Notwithstanding the crisis episodes, the country’s economic fundamentals have
been generally strong, backed by a resilient and stable banking system. Even with
the increasing exposure of the country’s financial system to global shocks in recent
years, its economic strength has been reinforced by more prudent policies and
conservatism in the banking system. The country also maintains sufficient reserves
that have helped to absorb shocks. The BSP’s implementation of banking reforms,
such as disclosure requirements, enhanced risk management framework, and
consolidated supervision, has enabled financial markets to withstand domestic and
global shocks.27

24
Asian Development Bank (2017).
25
World Bank (2019a).
26
Diokno (2019).
27
Guinigundo (2011).
BIS Papers No 113
7
Interaction of financial market development with monetary
policy

Financial market developments are expected to affect monetary policy since the
latter is implemented mainly via the financial markets. The various channels – which
include the interest rate, credit (eg bank lending and balance sheet), exchange rate,
asset price or wealth, and expectations – through which monetary policy affects the
real economy largely depend on the structure of the financial system, particularly on
the level of financial market development.28 In general, improvements in financial
market development are expected to make the conduct of monetary policy more
efficient and effective. Meanwhile, monetary policy and its operations also have
implications for the development of the financial markets. These could promote or
limit financial market development and in recent years, these include not only
domestic but also external monetary policy decisions, particularly of the advanced
economies.
Prior to the GFC, financial market primarily affected monetary policy
through its role in transmitting monetary policy changes to the real sector via
short-term interest rates. A hike in the policy rate usually leads to an increase in
the short-term market interest rate, which in turn could lead to higher borrowing
and lending rates.29 This could also result in higher long-term interest rate and asset
prices through the expected future path of short-term interest rates.30 According to
Mohanty and Rishabh (2016), since banks are at the centre of financial
intermediation in most EMEs, the effects of monetary policy have been largely
determined by developments in the banking system in these countries. While the
financial system was already relatively open during this period, capital flows were
still limited, so that domestic interest rates were tightly linked to the central bank’s
key monetary policy instruments. The introduction of inflation targeting by many
EMEs in the 1990s, together with interest rate reforms, the strengthening of central
bank credibility and the development of local bond markets also increased the role
of interest and exchange rates31 in monetary policy transmission.32
However, major modifications have occurred in the pattern of financial
intermediation in EMEs since the GFC. The quantitative easing policies of
advanced economies have led to an abundant supply of short-term and volatile
global liquidity in the financial markets and a decline in global interest rates. These
have resulted in the expansion of credit markets and the availability of low-cost
borrowing for EMEs. These factors may have improved the strength of monetary
policy transmission since financial deepening (ie a higher share of financial assets
and liabilities relative to income) makes the behaviour of savers and borrowers
more sensitive to interest rate

28
Singh et al (2008).
29
Mohanty and Rishabh (2016).
30
Based on the Expectations Theory of the Term Structure, expected future short-term interest rates
primarily determine bond yields. The longer is the maturity of the long-term rates, the weaker is the
link of long-term rates with the current short-term rates. This is due to uncertainty about the future
evolution of short-term interest rates and time-varying risk premiums (see Hildebrand (2006)).
31
The exchange rate is the fastest transmission channel for monetary policy. This is affected by
monetary policy via the yield curve of both the home and foreign countries (ie interest rate parity
relations). However, in practice, exchange rate movements often deviate significantly from what
interest rate differentials indicate (Source: Hildebrand (2006)).

8 BIS Papers No
32
Mohanty and Rishabh (2016).

BIS Papers No 113

9
 movements.33 However, these have also led to a shift in the structure of financial
intermediation as the share of foreign funding, both in terms of foreign-
denominated funds from domestic sources and direct external financing, has
significantly increased. Financial intermediation through debt markets has also
expanded, with most of the debt issued internationally.34 This has also been
observed in the increased issuance of international debt by non-financial
corporations.35 As a result, the role of banks has declined, although they continue to
be driver of credit allocation in EMEs, particularly in Asia.36
Structural changes in financial intermediation post-GFC affect the
monetary policy transmission in EMEs. The larger share of foreign currency in the
domestic assets and liabilities of EMEs after the GFC may have weakened the influence
of monetary policy. This is because policy rates are mainly effective through
domestic currency assets and liabilities.37 Moreover, foreign funding is less sensitive
to monetary policy as it is more influenced by foreign interest rates and global
financial conditions. The limited pass-through of monetary policy and the greater
influence of foreign interest rates could cause market interest rates to deviate from
the policy rate. Aside from the interest rate and credit channels of monetary policy,
financial market developments after the GFC have also affected the exchange rate
channel, whereby exchange rate-induced capital flow movements affect domestic
financial conditions and hence, increase the transmission of global financial markets
developments to the domestic economy.
A number of studies point to an increasing correlation of EME long-term
interest rate with global long-term rates, particularly the US long-term rate, after the
GFC. Some studies even indicate that global factors exert a much stronger influence
on long-term interest rates than do local factors such as the domestic business cycle
or monetary policy.38 The growing importance of global factors makes the
management of domestic financial conditions more challenging for central banks in
EMEs.39 The weakened role of policy rate in the transmission mechanism also creates
risks to monetary and financial stability due to the reduced effectiveness of policy
responses by the central bank to shocks. However, some studies indicate otherwise.
For instance, Mohanty and Rishabh (2016) suggest that India’s monetary policy may
have been relatively insulated from global shocks due to the country’s cautious
approach to securities or financial market liberalisation.
In the Philippines, the liberalisation of the financial sector beginning in
the 1980s has led to rapid development in financial intermediation and shifts
in the monetary policy framework in the 1990s. Rapid developments in financial
intermediation and proliferation of various forms of financial innovations (eg
increased use of ATMs, plastic money and other modern financial products and

33
Alper et al (2015).
34
Op cit.
35
Ibid.
36
Ibid.
37
Alper et al (2015).
38
Op cit.
39
Op cit.

1 BIS Papers No
services) resulted in volatility in money demand in early 1990s. 40, 41 The “structural
breaks” in the income velocity of money and volatilities and instabilities in the
money multiplier,42 weakened the link between quantitative monetary targets and
inflation. As the BSP found it increasingly difficult to attain its domestic liquidity
target and price stability, it modified its monetary aggregate targeting framework in
the mid- 1990s, putting greater emphasis on price stability instead of strict
observance of the targets set for monetary aggregates. However, the unstable
relationship between money, output and inflation increasingly complicated the
conduct of monetary targeting.43 This eventually led to a shift in the monetary policy
framework to inflation targeting, which was first considered in the late 1990s and
then implemented in 2002.
Under the inflation targeting framework and continued financial market
development, the conduct of monetary policy in the country has become more
efficient and effective. Based on Guinigundo (2015), financial development in the
country has led to stronger interest rate pass-through, particularly since the inflation
targeting regime was introduced. Guinigundo argues that monetary policy has
become more effective in influencing the cost of funds in the country. He attributed
this to enhanced transparency and accountability in a stronger banking system and
greater banking convenience through technology and market innovations.
However, strong liquidity growth brought about by strong capital inflows
poses a significant challenge to the BSP. The prolonged period of
accommodative monetary policy in the major economies, and the country’s greater
financial market openness, created an excess structural liquidity condition. This
drove short-term interest rates in the country to unusually low levels and the
government’s short-term Treasury bill rate (ie traditional benchmark reference rate)
fell outside the corridor of BSP interest rates. This put pressure on monetary
operations as market interest rates began to disconnect from the BSP’s policy rate.
This, in turn, hampered the ability of the BSP to implement monetary policy and
manage liquidity effectively. The situation was exacerbated by the BSP’s institutional
constraints, such as its inability to issue its own debt instruments and its limited
capitalisation.
In response, the BSP initially turned to alternative instruments such as the
Special Deposit Account (SDA) as a means of absorbing excess liquidity. Banks
and other qualified financial institutions (such as trust entities) place their excess
funds in the SDA instead of deploying these to other productive uses (eg credit,
interbank loans etc). This hindered the development of the domestic money market
as counterparties considered the SDA to be an investment vehicle rather than a tool
for monetary policy and liquidity management. As a result, market interest rates
gravitated towards the SDA rate, which was far below the BSP’s official policy rate or
the overnight RRP rate. To address this, the BSP ultimately rationalised the SDA by
prohibiting non-resident funds from being placed in the SDA facility in 2012 and by
limiting the access of trust institutions to the facility in 2013.
To help strengthen the transmission of monetary policy to market interest
rates, amid a huge structural liquidity surplus due to strong capital inflows,
the BSP adopted the Interest Rate Corridor (IRC) System in 2016. Under the IRC,
the operational framework for monetary policy implementation was redesigned to

40
Guinigundo (2005).
41
Guinigundo and Cacnio (2019).
42
Lim (2008).
BIS Papers No 113
11
43
Guinigundo and Cacnio (2019).

1 BIS Papers No
 accommodate a varying balance of monetary instruments, including rules-based
and market-based instruments. The BSP allowed for more active liquidity
management with the use of market-based instruments for open market operations
to steer short- term market interest rates towards the policy rate. Moreover, access
to the term deposit facility (TDF) was limited only to aid in the development of the
domestic money market, particularly the interbank market.
Market rates have moved in line with the BSP’s policy rate since 2018 (Graph 6).
A closer relationship between the policy rate and the market interest rates enables
the BSP to generate a more effective policy signal. The BSP also introduced further
refinements to the IRC framework to encourage active and dynamic liquidity
management by banks as well as provide the BSP with greater operational
flexibility.44 These refinements help lessen the BSP’s reliance on reserve
requirements to manage liquidity in the financial system over the medium term.
This, in turn, should reduce intermediation costs and free up resources to finance
productive economic activities.45

Market rates closely track BSP policy rate

(in %, June 2016-February 2020) Graph 6

Source: Bangko Sentral ng Pilipinas.

With the increasing reliance on market-based instruments, the IRC is

expected to aid the development of the domestic money and capital markets.
IRC will support increased money market transactions as well as promote more
active liquidity management by individual financial institutions. The BSP also
encourages the development of an active and liquid repo market that will support
the establishment of interest rate benchmarks and strengthen the monetary policy
transmission process. The repo market allows market-makers to consistently provide
two-way prices for traded securities, improving price discovery. This environment
will help provide valuable information on the prevailing cost of liquidity, thereby,
facilitating the establishment of sound interest rate benchmarks.

44
BSP (2019).
45
BSP (2019).

BIS Papers No 113

13
 Meanwhile, the BSP continues to implement a flexible exchange rate
regime, which serves as the country’s first line of defence against external
shocks. By helping reduce spillovers to the economy, adherence to a flexible
exchange rate strengthens the BSP’s monetary policy autonomy. The flexible
exchange rate regime allows the BSP to intervene only if volatility in the foreign
exchange market is perceived to adversely affect the inflation outlook. In recent
years, a number of studies have shown that exchange rate pass-through has
declined, particularly under the IT regime.46
Moreover, the BSP has been using macroprudential policies to complement
monetary policy in the face of financial market developments. Monetary policy
is considered better suited to managing aggregate demand and addressing broader
macroeconomic conditions.47 Using monetary policy to mitigate the effects of
financial distortions can be destabilising, as seen in the 1970s and the 1980s. Hence,
the BSP has made several regulatory reforms to further strengthen risk management
practices in the banking system and enhance capital buffers against possible
unforeseen shocks. Currently, the BSP also has an ongoing rationalisation of reserve
requirement policy that aims to promote a more efficient financial system and to
reduce market distortions. The BSP also constantly refines its monetary operations
and continues to closely monitor developments in domestic credit and liquidity
conditions in conjunction with the evolving inflation outlook in order to assess the
need for further adjustments, as necessary.
The BSP also continues to use financial market development indicators in aid of
monetary operations and monetary policy formulation, given that financial market
prices reflect market expectations about future economic developments. 48 The BSP
evaluates the information contained in financial market data, together with other
monetary and economic indicators.
For instance, the BSP continues to use the information contained in the yield
curve to gauge inflation expectations. Also, following the implementation of the IRC
in 2016, transactions in the interbank call loan (IBCL) market have increased in
volume, with the average IBCL rate now closely tracking the policy rate.
Notwithstanding increased activity in the IBCL market, the IBCL rate may not always
be a precise indicator of aggregate liquidity conditions due to market
segmentation, with smaller banks often unable to borrow at the IBCL rate. Hence,
the BSP supplements the IBCL with other market-determined rates, eg the term
deposit facility (TDF) rates. The BSP also looks at credit thresholds developed by the
Bank for International Settlements and the International Monetary Fund to help
identify periods of excessive credit growth, as well as the NPL ratio, NIMs, the loans-
to-deposit ratio (LDR) of the Philippine banking system, and residential real estate
prices (RREPI) to monitor house price inflation.
Together with financial market development, communication has become
a more important tool for monetary policy through the policy signalling
channel. The BSP believes that the effectiveness of its monetary policy depends
largely on its ability to anchor the public’s expectations, particularly of its key
stakeholders. Clear and credible communication is an indispensable tool in
anchoring economic agents’ expectations. For instance, following the BSP’s
adoption of the IRC system in June

46
Dakila et al (2019); Delloro et al (2017); Glindro et al (2016); Tuano-Amador et al (2009).
47
Guinigundo and Cacnio (2019).
48
Hildebrand (2006).

1 BIS Papers No
2016, clear and effective communication was very important in allaying market
concerns. The BSP clarified that the changes implemented were mainly operational
adjustments that did not involve a change in the stance of monetary policy.
Moreover, the IRC reforms were specifically calibrated to have a neutral impact on
monetary conditions upon implementation. At the same time, the expected
migration of liquidity from the overnight deposit facility (ODF) to auction-based
instruments (such as the TDF and the RRP facility) is seen to bring market interest
rates closer to the BSP policy interest rate.
The BSP’s monetary policy communication strategy has been generally
consistent even as the domestic financial market continues to evolve. It follows a
targeted approach in its monetary policy communications, with financial market
participants as the key target audience. Alignment of commentaries of financial
market analysts with the BSP’s messaging is seen to reflect the effectiveness of BSP
in conveying its key monetary policy messages to its main target audience.
Meanwhile, the BSP also hopes to reach a wider audience, especially the non-
financial sector public, to help in managing inflation expectations. To do this, the
BSP has recently been expanding its online presence on various social media
platforms via infographics and live streams of its press conferences on monetary
policy decisions and data releases.

Interaction of financial market development with financial

stability

Financial market development is intended to control systemic risk and to

promote price discovery and transparency, with the ultimate goal of ensuring
the stability and effectiveness of the financial system. A well functioning
financial market helps avoid disruptions and provides an avenue for the smooth
functioning of the financial system. Financial stability is needed to ensure smooth
flow of financial transactions and efficient allocation of resources, in which financial
asset prices are in synch with economic fundamentals.49
The BSP strongly supports financial market reforms for a more balanced
financial ecosystem where a “well-functioning banking system is complemented
by deep and liquid debt and equity markets and where there are viable alternative
sources of financing for long-term investments, including the development of
necessary financial market infrastructures” (Espenilla (2017b)). Financial market
development could help reduce risk concentration in the banking sector, specifically
the inherent maturity mismatches in the banking books. A less-than-balanced
financial system could make the banking sector more vulnerable than it would be,
had other complementary markets been better developed. Moreover, well
developed financial market segments (eg capital, money market, derivatives and
foreign exchange) are necessary in credit intermediation as they promote efficiency,
productivity and innovation. For instance, a well developed foreign exchange
market allows investors to hedge or mitigate exchange rate risk.
Recognisably, financial market development may result in greater
systemic risk. The concept of systemic risks, arising from correlation risks and the
interlinked behaviour of the agents in the system, gives vulnerability assessments a
new

49
See the Bank of Korea’s definition of financial stability.
BIS Papers No 113
15
perspective beyond the usual risk analysis involving credit, liquidity and market
risks. Interlinkages between products, market players and institutions are now
recognised to have a greater significance in the assessment of risks as they can
serve as channels for transferring risks and amplifying vulnerabilities in the financial
system.
The growth of shadow banking is an offshoot of greater financial market
development. Since the purpose of financial markets is to manage risk, there could
be a shift in the pattern of financial intermediation from banks to the non-bank
sector. On one hand, this may foster the growth of “shadow banking” as financial
market development strengthens credit intermediation not only in the banking
sector but also provides access to non-bank financial institutions (NBFIs). On the
other hand, the proliferation of “shadow banks” could likewise be a risk to financial
stability unless appropriate monitoring and regulations are in place.
Financial market development enables the broadening and deepening of the
financial sector and encourages the entry of foreign investors. Initiatives to develop
the financial market have increased the external positions of different sectors. Based
on the international investment position data of the Philippines, external financial
liabilities increased particularly for deposit-taking corporations (banks except BSP),
general government, and NBFIs. The increase in external financial liabilities was
mostly due to investments in equity capital and debt instruments (Table 1).

International investment position of the Philippines (BPM6) Table 1

2009 End-Sep 2019

Assets growth rate (%, 2009 vs 2006; end-Sep 2019 vs 2009) 53.7 140.9
Contribution to asset growth (in ppt)
Direct investment 15.3 54.9
Portfolio investment -2.4 23.3
Financial derivatives 0.2 0.4
Other investment -0.4 10.7
Reserve assets 40.9 51.7
Liabilities growth rate (%, 2009 vs 2006; end-Sep 2019 vs 2009) 11.1 107.6
Contribution to liabilities growth (in ppt)
Direct investment 6.2 55.2
Portfolio investment 1.6 39.8
Financial derivatives 0.2 0.2
other investment 3.2 12.5
Liabilities (without direct investment) by sector growth rate
(%, 2009 vs 2006; end-Sep 2019 vs 2009)
Deposit-taking corporations, except central bank -28.7 218.7
Other sectors 11.4 74.8
General government 17.7 24.3
Central bank -54.2 -28.4
Source: Bangko Sentral ng Pilipinas.

Moreover, foreign transactions in the Philippine stock exchange have

accounted for the majority of the total value traded in recent years. From a 28.6%
share after the AFC in 1999 to a 32.5% share after the GFC in 2009, foreign
transactions started accounting for more than half of the total value traded in 2016
with a 51.5% share, and rising further to 57.4% in the first two months of 2020.
As a result, financial market development amplifies, to some degree, the
global spillovers to Philippine financial markets. With the development of

1 BIS Papers No
 domestic money, bond and equity markets, offshore players have found increasing
investment opportunities in the Philippines, leading to substantial inflows of foreign
funds. As the Philippine financial markets have grown more integrated with the
global economy, domestic asset prices and the Philippine peso have become more
responsive to economic developments that affect investor sentiment abroad (Graph
7). This was also shown by Guinigundo (2014) 50 in his vector autoregressive model
analysis, which indicated that the degree of pass-through from the US 10-year bond
to the Philippine 10-year bond became more significant between 2008 and 2013
than in the pre-crisis period of 2003–07. This can be a source of vulnerability, as
foreign investors have increasingly displayed a tendency toward risk aversion and
are now quick to rebalance their portfolios.

Risk appetite (VIX), CDS and 10-year Philippine government bond interest rate
(in %, Q1 2011-Q4 2019) Graph 7

10-year Phillippine Gov. bond (LHS) 10-year Phillippine Gov. bond (LHS)
Philippine 5YR CDS (RHS) 300
VIX (RHS) 50 9
9 250
40 7
7 30 200
5 5 150
20 100
3 10 3 50
1 0 1 0
2341 23 41 23 412341234123412341234123 2341 23 41 23412341234123412341234123
2012 2013 2014 2015 2016 2017 2018 2019 2012 2013 2014 2015 2016 2017 2018 2019
Sources: Bureau of Treasury; Bloomberg.

The low domestic interest rate environment and greater availability of

credit after the GFC could also pose potential risks to financial stability. One
possible risk is the rise in leverage of non-financial corporations (NFCs) as firms
channel the funds sourced from both the banking system and the capital markets to
fund regular business operations and investments in financial assets. Initial findings
from the Corporate Financial Trends Survey (CFTS) conducted by the BSP in August
201851 show a continued rise in corporate borrowings. This can also be seen in the
increase in bank lending to the non-bank private sector in the country in recent
years (Graph 8).52 The increase in corporate debt exposes firms to greater interest
rate and foreign exchange risks.

50
Guinigundo (2014).
51
Preliminary results are still subject to the approval of the Monetary Board as of writing.
52
Based on limited data, household debt in the Philippines remained modest. Data from the Family
Income and Expenditures Survey show that from 2000 to 2015, total household debt had a
compounded annual growth rate of 6.5% (BSP Financial Stability Report (2017)) but in terms of its
ratio to GDP, it declined from 2.0% in 2000 to 1.4% in 2015. Guinigundo (2015) also made a similar
observation but using outstanding consumer loans data.

BIS Papers No 113

17
Bank credit to non-financial private sector
(in % of GDP, March 2008–November 2019) Graph 8

60
55
50
45
40
35
30

08

09
Dec-
09
Jul-
10
Feb-
11
Sep-
11

12
Nov-
12
Jun-
13

14
Mar-
08
Oct-

May-

Apr-

Jan-
Source: Bangko Sentral ng Pilipinas.

The Philippine financial markets have demonstrated resilience in the face

of recent economic pressures and geopolitical tensions. This resilience is
attributed to the implementation of structural and financial reform programmes that
expand the depth and breadth of financial markets as well as enhance their
efficiency in funds intermediation. This may also be partially traced to the flexible
exchange rate regime and close monitoring of foreign currency exposures in the
public and private sectors, with the aim of ensuring that foreign borrowing remains
manageable. The BSP’s presence in the market, together with the BSP’s regulations,
keeps the peso’s volatility at levels comparable with that of regional peers. Data
from universal and commercial banks indicate that FX funds in the country have
been relatively stable in recent years as shown by the ratios of FX deposits and
credit to GDP (Graph 9) and to the UKB’s balance sheets (Graph 10).

1 BIS Papers No
Ratios of universal/commercial banks FX credit and FX deposits
Q1 2008–Q1 2019
(in % of GDP) Graph 9

FX Deposits/GDP FX Credits/GDP
14
13
12
11
10
9
8
7
6
5
4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
3 20082009201020112012201320142015201620172018 2019
2

Source: Bangko Sentral ng Pilipinas.

Ratios of universal/commercial banks FX credit and FX deposits

Q1 2008–Q1 2019
(in % share of total deposits/credits ) Graph 10

FX Deposits/Total Deposits FX Credits/Total Credits

30
28
26
24
22
20
18
16
14
12
10 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
20082009201020112012201320142015201620172018 2019

Source: Bangko Sentral ng Pilipinas.

While greater foreign participation in the domestic markets may lead to

increased sensitivity to global risk dynamics, it may actually increase market
resilience. Increased participation by offshore investors in the domestic financial
markets makes these markets deeper and more liquid. The influx of funds also
contributes to the growth of the real economy, as the supply of capital to finance
productive endeavours increases. Moreover, as investor types diversify, selling
pressures during periods of increased global uncertainty may lessen, as increased
interest from one group of investors may serve to offset divestments by another

BIS Papers No 113

19
group. Also, the presence of foreign investors encourages Philippine issuers to
adopt global best practice in governance and disclosure frameworks.
Major reforms in the local currency debt market lead to lower financing
costs at home, providing an incentive to reduce foreign currency exposure. The
BSP believes that a sound local currency debt market supports the development of
the country's financial sector and efficiently channels foreign capital into the
economy. This could be a valuable source of long-term financing. As pointed out by
Espenilla (2017a), this is important for more efficient fiscal operations since a robust
local currency debt market supports a sustainable, market-oriented debt strategy at
reasonable cost and with a desirable mix of maturities. A more liquid money market
could also strengthen the monetary transmission mechanism.
The development of the domestic currency debt market is valuable to the
private sector as it broadens investment opportunities and paves the way for
increased availability of financial products (Espenilla (2017a)). This may include
hedging instruments that could help boost the country’s economic resilience to
external shocks. The development of interest rate and foreign exchange-related
hedging instruments supports risk management and hence financial stability as
these allow market participants to mitigate risks related to rising interest rates and
volatilities in the exchange rate. Also, developments in non-residents’ use of the
Philippine peso, particularly in the non-deliverable forwards (NDF) market, are
important from a policy perspective. For instance, there are important linkages
between the onshore markets and the offshore NDF market. For one, there could be
volatility spillovers from the NDF market to the onshore spot market, particularly
during uncertain market conditions. NDF prices also provide useful information for
policymakers about market expectations of potential pressures on the exchange
rate or changes in perception about country risk.
The development of the local money market plays an important role in the
evolution of FX cash and derivatives markets. Reforms to further deepen the
domestic money markets (eg the IRC system and the development of the overnight
indexed swap market) are essential to adequately price FX risk-management (or
hedging) instruments such as forwards and swaps, and to improve liquidity to
support the growing hedging market. Deepening the domestic money market could
strengthen the county’s resilience against external shocks such as capital flow
volatility and FX volatility. Hedging markets are important when pressures arise
from sudden flight of capital due to narrow return differentials in a domestic
financial market. The ability of market participants to hedge their exposures reduces
the impulse for destabilising capital flight.

Borrowing in local currency may help overcome “original sin”53 or a

situation in which a country is unable to borrow abroad in its own currency,
resulting in a currency mismatch in the balance sheet. However, while the local
currency bond market could protect the borrowing country from the adverse effects
of large currency depreciations, this does not totally ensure financial stability when
the share of foreign participants in the market is large. The country will still be
susceptible to capital flow reversals when foreign exchange risk materialises.
The BSP has also been coordinating with other central banks in Asia for
the establishment of a local currency settlement framework (LCSF), which, in a
way, may help overcome “original sin”. An LCSF would allow a foreign currency
to be

53
Eichengreen et al (2003).

2 BIS Papers No
directly priced against the Philippine peso, and vice versa. This could reduce foreign
exchange risks and encourage a wider use of both currencies. This is expected to
boost trading and investment volume and is also viewed as a good opportunity to
deepen bilateral economic and commercial ties between the countries involved. A
well developed financial market paves the way for smooth and easy cross-border
capital movements. This financial market infrastructure could also foster risk-sharing
between resident borrowers and foreign investors in terms of foreign exchange risk
and interest rate risk, as well as credit risk.
For instance, the Philippines has signed three pairs of bilateral letters of intent
on LCSFs with Indonesia,54 Thailand55 and Malaysia56 in 2019. The bilateral
arrangement between two central banks centres on the use of their local currencies
for the settlement of trade in goods and services, which may later include direct
investments and other similar activities such as income transfers. The framework
promotes use of the local currency and reduces reliance on the US dollar, and it
could also strengthen economic linkages among countries, thereby moderating
financial stability risks. It also supports the development of domestic financial
markets due to increasing demand for regional currencies and ultimately support
regional economic and financial integration. Aside from ASEAN, the Philippines is
also coordinating with other countries in Asia.57
While important strides have been made in deepening the Philippine capital
market, further reforms are needed for the country to be at par with its
neighbours. To date, the local currency bond market in the country consists mostly
of public issuances and the corporate bond market remains small. This is partly due
to the strong policy bias of the national government in favour of domestic
borrowing in order to reduce foreign exchange risks and support the development
of the domestic bond market. Based on investor profile data, domestic investors,
mostly banks and investment houses, hold the largest share of government bonds.
The availability and take-up of hedging solutions in the domestic market in the
country appear to be limited at present.58
To further develop the local debt market, the BSP will spearhead the
implementation of the consolidated roadmap for local currency debt market
development, which was jointly introduced by the BSP with other government
agencies59 in 2017. It comprises harmonised programmes and policies that specify a
set of steps to expand market depth and breadth as well as encourage active
trading and the development of market-based benchmarks. The initiatives follow a
deliberate, sequenced programme of immediate to medium-term action plans to
ensure that urgent and important issues are tackled without disrupting the financial
markets. The

54
A BSP-BI bilateral meeting was held on 8 August 2019 to discuss the technical details of the proposed
LCSF, which include the criteria and process for the selection of ACCDs and the foreign exchange
administration flexibilities that may be extended to support the proposed LCSF.
55
The BSP is currently reviewing the list of regulations that will be affected by the implementation of
LCSF with Thailand.
56
In November 2019, the BNM delegation informed the BSP that it is undertaking a review of its existing
LCSF agreements with BOT and BI before proceeding with discussions with the BSP.
57
With Japan, China and Russia.
58
Based on the 2019 Financial Stability Report, the total outstanding notional amount of derivatives
positions as of December 2018 was lower than its level three years previously (in 2015) and is
equivalent to 2% of the total resources of all Philippine UKBs.
59
Includes the Securities and Exchange Commission (SEC), the Department of Finance (DoF), and the

BIS Papers No 113

21
 Bureau of the Treasury (BTr).

2 BIS Papers No
BSP has also further liberalised foreign exchange rules to facilitate the flow of
foreign portfolio investments to fuel the development of the local debt market.
These reforms aim to promote greater ease in the use of the foreign exchange
resources of the banking system for legitimate needs by relaxing FX rules and
streamlining procedures and requirements.
Meanwhile, to further strengthen the Philippine banking system, the BSP
has consistently pursued a reform agenda on macroprudential and
microprudential tools to strengthen financial supervision and mitigate
financial stability risks. After the AFC, the BSP learned that while micro regulatory
oversight is crucial in ensuring that financial institutions continue to be safe and
sound, this is insufficient for maintaining financial stability. This is because the
interlinkages within the financial network create risk behaviours that are distinct
from the risks that are seen at the firm level. As a result, the BSP started to
implement macroprudential measures to mitigate systemic risk or the likelihood of
failure of a significant part of the financial system. The early implementation of
combined macroprudential and microprudential measures is one of the reasons why
the country was not as heavily affected as other emerging economies when the GFC
hit in 2008.60 The GFC also underscores the need for a more systematic and wide-
ranging macroprudential supervision due to the great potential damage from
systemic breakdowns.61 Based on the BSP’s experience, macroprudential measures
are effective if these are administratively manageable and can alter risk behaviours
by, for example, making banks more risk-sensitive and prudent in managing their
risk-taking activities. Meanwhile, effective microprudential measures require not
only adherence to the technical and quantitative aspects of regulatory standards,
but also the development of an appropriate culture within a sound corporate
governance framework.
The BSP also continues to strengthen its financial risk surveillance. With
high-quality data, timely insights on system-wide and idiosyncratic risks can be
derived. The BSP has put in place a number of tools to enhance data capture in
support of its financial stability framework. These tools enable the BSP to provide a
holistic assessment of the condition and performance of the banking system,
identify emerging vulnerabilities and risks confronting the banking sector and their
potential impact on financial stability. They also allow the BSP to make more
informed and calibrated policy decisions in areas that require careful supervisory
action. Aside from strengthening the surveillance of the financial system to identify
and manage these risks, clear, transparent and timely communication is essential for
a more effective financial stability framework. The BSP communicates financial
system vulnerabilities and corresponding actions or responses primarily through
media releases, interviews and speeches within a communications framework.

Future challenges and policies

Due to their intrinsic links, financial market developments interact with monetary
policy and financial stability. Hence, central banks should closely monitor and assess

60
Fonacier (2019).
61
Ibid.

BIS Papers No 113

23
 future developments in the financial market as these could affect the efficiency and
effectiveness of monetary policy as well as the stability of the financial system.
Central banks in EMEs also grapple with the emergence of new players
from fintechs to big techs62 that may disrupt some sectors of the financial
market. These innovations include new business models such as peer-to-peer (P2P)
payments and lending, crowdsourced funding and social network credit scoring, as
well as enhanced solutions to traditional businesses in the payments sphere. While
new entrants could bolster market competition and enhance financial inclusion
efforts, these firms may also pose financial stability risks. These businesses could be
a destabilising force for banking businesses and the payments system. For one, they
could also be a channel for capital outflows, promoting currency speculation and
capital flight, over which the central bank would have little control. Moreover, new
lending platforms may introduce financial stability risks if the credit activity of new
entrants were to grow, given the uncertainties in the quality of data being used in
assessing risks and the lending standards. Risks may also arise from the increasing
utilisation of cloud services as these may be exposed to cyber threats or widespread
disruption in the financial system should cloud services malfunction or be
inaccessible.
In response, regulators should recognise that they are now operating in a more
complex financial landscape, where traditional banks compete or cooperate with
these new players. As new forms of risks arise, the goal of policymakers is to find
the right balance such that rules do not become a burden to the entry of innovative
players while ensuring that new entrants not entail financial stability risks.
The BSP remains dedicated and committed to supporting beneficial
innovations through an enabling policy and regulatory environment. It openly
engages with fintech players and innovators through a flexible “test and learn”
environment or the “regulatory sandbox”, which enables it to fully understand
emerging business models while assessing the attendant risks. The BSP is also
undertaking capacity-building programmes that would help operationalise the
institution’s duty to ensure resilience against the risks that new technologies may
bring to the financial system. Training opportunities are being deployed to provide
regulators with the proficiency and competence to keep track of fast-evolving
innovations. The BSP is crafting a roadmap that espouses collaborative engagement,
capacity-building initiatives, and commensurate regulation.
Going forward, the BSP will keep a watchful eye on possible signs of
imbalances in the market in carrying out its price and financial stability
mandates. In particular, the digitalisation of the payments system, the adoption of
new forms of electronic payments and stores of value, and the issuance of digital
currency could fundamentally affect money demand. As these forces take root in
the Philippines, the BSP will need to assess how any resulting changes in money
demand could affect its liquidity forecasts for monetary operations. In this regard, it
is also exploring the use of big data to supplement its current data needs for
monitoring liquidity conditions.
The BSP envisions its monetary policy operations and financial policy to be
more flexible and dynamic to adapt to emerging financial market
developments. It will continue to calibrate monetary tools to address the greater
role

62
Big techs are large technology firms providing digital services such as messaging services, search
engines, and e-commerce platforms. In the process, they have accumulated large amounts of data
which can be used to further expand their businesses.

2 BIS Papers No
of financial markets in policy transmission. It will also push for continuous and
sequenced reforms of its financial policies as well as the modernisation of its
internal processes through the adoption of technology-enabled solutions. It will
transform its supervisory assessment framework into a seamless, dynamic and
more-forward- looking supervisory model.
Monetary operations will be supported by the restoration of the BSP’s
ability to issue debt securities under the Republic Act No 11211 63on 14
February 2019. The restoration of the BSP’s authority to issue its own debt
securities even in normal times64 provides the BSP with additional tool for managing
financial system liquidity. Issuance of BSP securities will be used for the absorption
of any structural liquidity surplus in the face of persistently large capital inflows as
well as for siphoning off liquidity released from the planned operational reductions
in reserve requirements over the medium term. At the same time, issuance of BSP
securities will help in the development of the domestic bond market as it facilitates
the construction of the benchmark yield curve at the short end.
Moreover, the Charter further strengthens the BSP’s capability to promote the
stability of the financial system and addresses supervisory gaps in the areas of data
and information-gathering65 as well as wider institutional coverage, among others.
For instance, BSP’s regulatory and examination powers have been expanded to
include the quasi-banking operations of NBFIs (eg money service businesses and
credit granting entities) to manage the build-up of systemic risks such as those that
could possibly stem from shadow banking. The law also paves the way for the BSP
to implement a more forceful inspection and disciplinary authority over the banks
and other financial institutions it regulates nationwide.
Lastly, the BSP is committed to implementing timely, necessary, and
appropriate measures to address any turbulence in the financial market. While
the Philippine financial system remains sound with adequate capital and liquidity
buffers, the volatility in the domestic financial market in the early part of 2020 due
to uncertainties over the impact of Covid-19 has led the BSP to undertake
extraordinary measures to support domestic liquidity, shore up market confidence,
and ensure the proper functioning of the financial market.66

63
An Act Amending R.A. No 7653, otherwise known as the “New Central Bank Act”.
64
Prior to the approval of the amended BSP Charter (RA 11211) on 14 February 2019 (which amended
RA 7653), the BSP was allowed to issue its own debt securities only during periods of extraordinarily
high inflation.
65
On data information and gathering, the new law provides the BSP with the authority to require from
any person or entity, including government offices and instrumentalities, or government-owned or
– controlled corporations, any data, for statistical and policy development purposes in relation to
the proper discharge of its functions and responsibilities.
66
BSP (2020).

BIS Papers No 113

25
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