In managing systemic risks to the country’s financial stability, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said regulators must first and foremost strive to contain any threats of unpleasant surprises to the market and investing public.

“We want systemic risk communication to be helpful and not to be a source of undue panic,” said Diokno on Monday, June 6, during the launch of the Financial Stability Coordination Council’s (FSCC) Systemic Risk Crisis Management (SRCM) framework. The SCRM involves the continuous surveillance of risk trends; review of infrastructures; conduct of systemic stress tests; and arrangements for communication both under normal and stressed conditions.

The FSCC is composed of the BSP, Philippine Deposit Insurance Corp (PDIC), Securities and Exchange Commission (SEC), the Department of Finance and the Insurance Commission. Malacanang’s Executive Order no. 144 signed last year, institutionalized the FSCC and gave it more teeth and power to intervene when needed to avert a financial market collapse.

The incoming finance chief in the next administration said the critical aspect of communication is context. “It is difficult to imagine an absolute and fixed threshold on what is too little versus what is too much. The guiding principle is to help people make informed decisions and an important element of that is to minimize the surprises,” he said.

BSP Assistant Governor Johnny Noe E. Ravalo of the Office of Systemic Risk Management​, said the SRCM framework is about the concept of resilience. “(It’s) about being able to recover very quickly,” he said during the launch.

Ravalo also clarified that not every vulnerability has to be classified as systemic. “At the end of the day, the story is not about the math. The story about the SRCM and the rest of what we do in the FSCC is really about the narrative,” he said. It is who will affect these systemic risks and what are the interventions that FSCC needed to undertake.

“Communication is the last mile. It’s not an equation, it’s not a formula. When you convey all of these messages (to the public) ... it’s always a narrative and that’s where risk communication becomes a very challenging field because normally, regulators really don’t like to talk about risks. We’d like to talk about the upside of the market,” said Ravalo.

There will always be some vulnerability that will drive the market. “So, the idea of the SRCM is organize the framework that allows us to anticipate, to assess, to evaluate, where the vulnerabilities will lie, and what those interventions will be. The point of the SRCM is not to forecast but to be prepared for the next crisis,” he added.

The PDIC, which is also part of the FSCC, has had to balance transparency versus crucial information.

“The public needs to know as to what is happening and what regulators are doing,” said PDIC President Roberto B. Tan during the SRCM event. “(It’s) a balance on how much information you want to give but you have to give prompt and timely information that is relevant and needed for investors to be reassured that you are addressing and on top of a situation,” he said.

Tan cites as example the increasing borrowing rates and how this will impact the public. He said banks need to be more careful now in assuring the credit quality of their portfolio. “Liquidity risk is of course increasing because of the uptrend in the cost of borrowings and I think even the FSCC becomes very critical in this respect when it now has a monitoring framework for corporates given that this can be the source of systemic risk in the banking industry,” said Tan.

The PDIC chief said the FSCC surveillance and monitoring is important and it is also critical that banks share their liquidity situation with the BSP.

The Covid-19 years of 2020 until 2021 were a period of low interest rates. This year, with the US Federal Reserve’s start of policy normalization, central banks including the BSP has started to raise key rates as well.

“Therefore, what was a risk-off scenario for the rest of the market was actually a boon for the capital market. That’s the context of what we’re seeing right now,” said Ravalo.

For PDIC, he said the challenge is the changing risk premiums. “The conglomerates and the borrowers in general (onshore and offshore) as they go through the banks, rising interest rates add a little bit more pressure,” said Ravalo. The FSCC has to be careful in communicating this to the public.

The Securities and Exchange Commission (SEC), also part the FSCC, similar with the other SECs such as in the US, has not been that much involved in financial stability. But according to SEC Chairman Emilio B. Aquino, they have their own information campaign to update the capital market.

“On one hand, we have to be circumspect when it comes to giving out information especially from the angle of investor protection. On the other hand, we also adopted the full disclosure regime where we adhere to that principle that sunlight is the best disinfectant. We are bound to communicate and to disclose risks they (market) are facing (to help) investing public to arrive at good investment decisions,” said Aquino on Monday.

Meantime, Diokno explained during the SRCM launch that systemic risk analysis have non-stationarity aspects. “This makes the narrative of systemic risk analysis all the more difficult,” he said.

The field of systemic risk analysis are borrowed from several academic fields such as connectivity theories, economics, accounting, physics, communication and financial econometrics. “This why it is challenging to convey these messages,” said Diokno. With technology, the financial market both local and global has also changed and has become “complex and highly interlinked” and this has created a value chain as well as the channels for various spillovers, he added.

“Stability is therefore simply about risks and resilience –ensuring the latter by both avoiding shocks to the system as well as strengthening the ability to recover once those shocks occur,” said Diokno.

The SRCM basically defines arrangements among the FSCC members. “While it is virtually impossible to forecast the next crisis, its timing and its specific nature, this should not stop us from being prepared. This is the essence of the SRCM and it includes technical aspects as well as the critical element of communication,” said Diokno.

The BSP has said that it is ready to implement a policy response to address global financial spillovers that may weaken the peso, disrupt the flow of capital, and interrupt the growth momentum.

These spillover of risks will come from the oil market as well as the US Fed’s quantitative tightening, the still ongoing Russia-Ukraine war and its impact on the domestic inflation. All this could have a ripple effect on the local economy.