No threat from rapid credit growth – BSP
Published Sep 17, 2018 12:00 am
By Lee C. Chipongian
The Bangko Sentral ng Pilipinas (BSP) yesterday reiterated there is no immediate threat of unmanageable rapid credit growth which could lead to an overheating economy.
In its second quarter “Report on Economic and Financial Developments” the BSP remains confident it has the necessary early warning signals and “intensified” bank lending monitoring to detect danger signs.
“(The) BSP currently does not see an unduly high probability that credit growth would accelerate to excessive and unmanageable levels,” it said, but added that it “continues to pursue intensified surveillance of bank lending activity and reinforcement of financial sector regulatory reforms that would help in maintaining a safe and resilient financial system while ensuring the availability of credit to support economic growth.”
The report, released Friday, echoed the maiden review of the Financial Stability Report (FSR) last August 28, which focused on the impact of globally rising interest rates and weaker currencies against the benchmark US dollar as this relates to the repayment, refinancing and repricing of debt in the Philippines.
The latest BSP report reiterated the FSR’s assessment that with the uninterrupted GDP growth, bank credit has expanded along with the economy but there is still “no unequivocal evidence of contemporaneous and sustained dislocations in the credit market.”
However, the BSP said there is a need to remain vigilant since credit risks are often among the first to instigate a crisis situation.
“Despite the steady and sustainable performance of the economy and the existence of flexible systems that counter possible risks of overheating, the BSP is not complacent and recognizes the need to continually update its surveillance activities and assessment of credit conditions,” the report said.
The BSP has set up several macroprudential measures to power up its oversight of banks’ lending behavior, such as caps on real estate loans and loan-to-value ratio, the real estate stress test and the residential real estate price index. All these have indicated manageable levels of credit growth.
In the pipeline are additional enhanced macroprudential measures to further strengthen its credit growth monitoring. These include:
• Countercyclical capital buffer or CCyB at zero percent, a component of the Basel III Framework, which aims to ensure that the banking sector in aggregate has enough capital on hand to help maintain the flow of credit in the economy without its solvency being questioned when the broader financial system experiences stress;
• Debt-to-Earnings-of-Borrowers’ Test or DEBT, which evaluates the debt-servicing capacity of bank borrowers under the stress scenario of higher interest rates and/or a depreciationof the Philippine peso;
Borrowers’ Interconnectedness Index or BII, which will determine the systemic importance of a borrower in the banking system based on a defined quantitative measure.
Based on the FSR – a report that BSP intends to release every year – these three measures are “transformational” in that it will ensure that credit will be utilized “within prudential norms.”
The CCyB, for example, is the “stressed time” counterpart of the Capital Conservation Buffer, which was introduced as early as 2014. “With the CCyB, the credit market is meant to be prevented from drying up during not-so-good times while also providing a means to curb credit growth if it is deemed as expanding at ‘too-strong’ a pace,” said the BSP.
DEBT, on the other hand, is a stress test that is similar to the REST test. It basically evaluates the debt servicing capacity of bank borrowers under the hypothetical scenario of higher interest rates and/or a depreciation of the peso, the BSP explained.
“While banks are expected to have determined the repayment capacity of their borrowers before the loan was approved, what DEBT contributes is setting a common threshold for debt payments under stressed market prices,” said the BSP. It added that “having the common threshold as a percentage of the income of borrowers – which is proposed to be 60 percent in this case – makes DEBT a prudential tool for systemic risk purposes (as it) essentially sets an informal buffer for the downside risk that market rates provide against the borrower at a time that the loan is being repriced, repaid or refinanced.”
The BII, said the BSP, is for the loan portfolio of each bank and it will determine whether the credit market in the aggregate has exposures that are concentrated to certain borrowers. In short, it will “quantify if there are systemically important borrowers.”
In its second quarter “Report on Economic and Financial Developments” the BSP remains confident it has the necessary early warning signals and “intensified” bank lending monitoring to detect danger signs.
“(The) BSP currently does not see an unduly high probability that credit growth would accelerate to excessive and unmanageable levels,” it said, but added that it “continues to pursue intensified surveillance of bank lending activity and reinforcement of financial sector regulatory reforms that would help in maintaining a safe and resilient financial system while ensuring the availability of credit to support economic growth.”
The report, released Friday, echoed the maiden review of the Financial Stability Report (FSR) last August 28, which focused on the impact of globally rising interest rates and weaker currencies against the benchmark US dollar as this relates to the repayment, refinancing and repricing of debt in the Philippines.
The latest BSP report reiterated the FSR’s assessment that with the uninterrupted GDP growth, bank credit has expanded along with the economy but there is still “no unequivocal evidence of contemporaneous and sustained dislocations in the credit market.”
However, the BSP said there is a need to remain vigilant since credit risks are often among the first to instigate a crisis situation.
“Despite the steady and sustainable performance of the economy and the existence of flexible systems that counter possible risks of overheating, the BSP is not complacent and recognizes the need to continually update its surveillance activities and assessment of credit conditions,” the report said.
The BSP has set up several macroprudential measures to power up its oversight of banks’ lending behavior, such as caps on real estate loans and loan-to-value ratio, the real estate stress test and the residential real estate price index. All these have indicated manageable levels of credit growth.
In the pipeline are additional enhanced macroprudential measures to further strengthen its credit growth monitoring. These include:
• Countercyclical capital buffer or CCyB at zero percent, a component of the Basel III Framework, which aims to ensure that the banking sector in aggregate has enough capital on hand to help maintain the flow of credit in the economy without its solvency being questioned when the broader financial system experiences stress;
• Debt-to-Earnings-of-Borrowers’ Test or DEBT, which evaluates the debt-servicing capacity of bank borrowers under the stress scenario of higher interest rates and/or a depreciationof the Philippine peso;
Borrowers’ Interconnectedness Index or BII, which will determine the systemic importance of a borrower in the banking system based on a defined quantitative measure.
Based on the FSR – a report that BSP intends to release every year – these three measures are “transformational” in that it will ensure that credit will be utilized “within prudential norms.”
The CCyB, for example, is the “stressed time” counterpart of the Capital Conservation Buffer, which was introduced as early as 2014. “With the CCyB, the credit market is meant to be prevented from drying up during not-so-good times while also providing a means to curb credit growth if it is deemed as expanding at ‘too-strong’ a pace,” said the BSP.
DEBT, on the other hand, is a stress test that is similar to the REST test. It basically evaluates the debt servicing capacity of bank borrowers under the hypothetical scenario of higher interest rates and/or a depreciation of the peso, the BSP explained.
“While banks are expected to have determined the repayment capacity of their borrowers before the loan was approved, what DEBT contributes is setting a common threshold for debt payments under stressed market prices,” said the BSP. It added that “having the common threshold as a percentage of the income of borrowers – which is proposed to be 60 percent in this case – makes DEBT a prudential tool for systemic risk purposes (as it) essentially sets an informal buffer for the downside risk that market rates provide against the borrower at a time that the loan is being repriced, repaid or refinanced.”
The BII, said the BSP, is for the loan portfolio of each bank and it will determine whether the credit market in the aggregate has exposures that are concentrated to certain borrowers. In short, it will “quantify if there are systemically important borrowers.”