Financial conglomerates and domestic systemically important banks (D-SIBs) are more vulnerable to reputational risks such as negative publicity, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.

Diokno said D-SIBs, particularly within “mixed interest” conglomerates, are expected to take extra precaution in managing any hits to its credibility. D-SIBs or “too big to fail” financial institutions, are banks whose distress or disorderly failure would cause significant disruptions to the wider financial system and the economy.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno (MB file)

Diokno said regardless of bank category, whether D-SIBs or not, reputational risks should be prioritized by the board of directors and senior management because these risks “may threaten financial interests and brand value of a bank or any financial institution.”

“For banks that are part of financial or mixed interest conglomerates they are expected to be mindful of any actions of the entities within the group that may adversely affect the bank’s reputation,” added Diokno. “They must be vigilant on possible external reputational events affecting any members of the group that may have a dominate affect on the bank’s reputation.”

The International Monetary Fund (IMF) said it is a concern that majority of D-SIBs are controlled or part of conglomerate structures or “wider groups of non-regulated parent companies and affiliates with non-banking activities” to which BSP has no power of supervision.

The IMF also said the BSP needs to strengthen its ability to scrutinize the impact of “mixed conglomerate structures” on D-SIBs. However the BSP has told the IMF that regulating groups of conglomerates or conglomerates with “mixed interest” in both financial and non-financial sectors is very challenging.

Limitations on BSP’s enforcement powers also impair its ability to fully protect the bank from the actions of parent companies and affiliates, said the IMF. 

The BSP issued Circular No. 1114 in April for the guidance of BSP supervised financial institutions (BSFIs) on the identification, assessment, and management of reputational risks commensurate to their size, nature, complexity of operations, overall risk profile and systemic importance. Reputational risk are risk to a BSFIs’ earnings, capital, and liquidity coming from the negative perception of its customers, shareholders, investors, and employees, market analysts, the media, and other stakeholders such as regulators and other government agencies. These negative views can adversely affect a BSFI’s ability to maintain existing business relationships, establish new businesses or partnerships, or its access to sources of funding. 

Before the issuance of the circular, D-SIBs already adopt a reputational risk management framework because reputational risks are covered in the existing BSP governance of the risk management guidelines. “It is also among the risks that banks are expected to assess as to the materiality and be considered in their internal capital adequacy assessment process or the ICAAP including the recovery plan of a D-SIB,” said Diokno.

The new guidelines highlight how reputational risk is closely linked to other risk exposures such as credit, market, liquidity, and operational risks, such that it can result from or may trigger other risks. Reputational damage could also cause a contagion.

But Diokno said the reputational risk management guidelines afford banks with the “flexibility to design their reputational risks management function and to enhance their existing framework to ensure full alignment with the expectation of prudential requirements under the circular.”

 “Overall, the recently issued guidelines aim at further strengthening the framework adopted by supervised financial institutions, both D-SIBs and non-DSIBs alike. The guidelines emphasized the importance of managing reputational risks and the need for enhanced consciousness on their sources and impact of their reputational crisis,” said Diokno.

Unlike some Asian central banks, the BSP has yet to publicly identify D-SIBs. The BSP initially listed 14 banks but were not named. There are 46 universal and commercial banks.

The BSP checks and supervises financial conglomerates as chair of the Financial Sector Forum (FSF). It has adopted the Tripartite Group definition of financial conglomerates since there is no Philippine law or regulation to define financial conglomerates when it first began to monitor these groups which are “any group of companies under common control whose exclusive or predominant activities consist of providing significant services in at least two different financial sectors such as in banking, securities, and insurance.” 

The IMF has recommended for FSF to strengthen its sectoral supervision, appoint the BSP as the lead supervisor of financial conglomerates and conduct more frequent and comprehensive risk-assessment of financial conglomerates.


Source: Manila Bulletin (https://mb.com.ph/2021/06/09/d-sibs-more-exposed-to-reputational-risk-bsp/?utm_source=rss&utm_medium=rss&utm_campaign=d-sibs-more-exposed-to-reputational-risk-bsp)