FSCC seeks to reinforce financial system buffers amid lingering global risks

By Katherine K. Chan, Reporter

THE FINANCIAL Stability Coordination Council (FSCC) is pursuing preemptive actions to cushion the Philippine financial system against vulnerabilities and shocks emerging from global risks. 

In a statement following its latest executive committee meeting held earlier this month, the interagency body noted the financial system remains resilient even as uncertainties tied to the Middle East war and volatile global markets persist.

“Global risks remain elevated, with geopolitical tensions in the Middle East and volatile financial markets,” FSCC Chairman and Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. said. “Nonetheless, our financial system remains well-positioned to absorb shocks.”

Still, the council said it is implementing tighter preemptive monitoring of the financial system and the developments surrounding it to mitigate potential threats and ensure its continued stability. 

“At the same time, the FSCC is taking steps to further boost its ability to identify emerging vulnerabilities early and increase the financial system’s capacity to manage potential shocks,” it said.

Among the measures being pursued include stricter oversight of nonbank financial intermediaries to promote their sustainable growth, along with enhanced evaluation of liquidity, leverage, concentration, interconnectedness, and the linkages among banks, nonbank intermediaries, corporates, and financial markets.

The council is likewise streamlining its data collection and information sharing within its network.

Meanwhile, results of the FSCC’s latest Survey of Salient Risks showed that respondents continue to see threats to the financial system from geopolitical tensions, cyberattacks, and global supply-chain disruptions.

These risks, according to the respondents, should prompt close monitoring.

The Survey of Salient Risks, conducted annually by the FSCC, is designed to gather the outlook of BSP-supervised institutions, other financial institutions, industry and market players, and the academe on the risks weighing on the financial system over the near (next one to two years) and medium (three to six years) terms. 

SOUND FINANCIAL SYSTEM
Still, the FSCC noted that financial institutions hold strong capital and liquidity positions, with their prudent risk management serving as an additional buffer against looming shocks. 

“These strengths enable financial institutions to continue lending to households and businesses,” it added.

In the private sector, continued household consumption and businesses’ financing needs have helped lending grow steadily, the council noted.

Domestic demand remains fueled by sustained consumer lending, according to the FSCC.

Based on latest data from the central bank, universal and commercial banks extended P2.062 trillion in consumer loans as of July, 17.1% higher than the P1.761 trillion logged a year earlier.

On the other hand, loans for residents’ production activities went up by 9.8% year on year to P12.624 trillion from P11.497 trillion. This accounted for the bulk of big banks’ total outstanding loans to residents during the period.

Meanwhile, the council also noted that firms’ investment and working-capital needs continue to boost corporate borrowings, with the real estate sector still accounting for most of lenders’ loan exposure. 

However, Philippine banks and trust entities’ exposure to the property sector plunged to its weakest in nearly seven years in the second quarter as tighter economic conditions strained market sentiment. 

BSP data showed the industry’s real estate exposure ratio fell to 18.72% as of end-June from 19.07% in the first quarter and 19.61% a year ago. This was the lowest ratio since the 18.65% as of end-December 2018.

“Overall asset quality, however, remains stable,” the FSCC said.

Nonperforming loans (NPLs), or those unpaid for at least 90 days after the due date, rose to P585.081 billion in July from P535.448 billion a year ago.

This brought banks’ latest gross NPL ratio to a two-month high of 3.35%, higher than 3.29% in June but lower than 3.4% in the same month last year.

In its latest Financial Stability Report released in June, the FSCC warned that risk-off sentiment due to uncertainties arising from the Middle East war may take a toll on the financial system, with risks increasing as the conflict drags on.

However, it reaffirmed that banks’ direct financial exposure to the conflict remains limited and that overall risks to the financial system are still manageable.

“The Council stressed that early identification of risks supports stronger preparedness,” the FSCC said. “It allows financial authorities and market participants to improve safeguards, refine contingency arrangements, and limit the impact of shocks on households, firms, and financial institutions.”

“The FSCC aims to proactively address risks through close monitoring, timely information sharing, and robust coordination among its members,” Mr. Remolona added.

The FSCC is an interagency council composed of the BSP, Department of Finance, Securities and Exchange Commission, Insurance Commission, and Philippine Deposit Insurance Corp. It is tasked to monitor and manage systemic risks in the country’s financial system.