Bangko Sentral ng Pilipinas (BSP)-led Financial Stability Coordination Council (FSCC), which has just identified the country’s servicing of debts and credit-related risks as red flags to potential systemic issues, is strongly pursuing the signing of a proposed executive order (EO) to empower the inter-agency to intervene when needed to avoid financial system collapse.

BSP Governor Benjamin E. Diokno said the proposed EO has been elevated to Malacanang. The FSCC, in its current form, is only a voluntary inter-agency body composed of the BSP as chair, the Department of Finance, Insurance Commission, Philippine Deposit Insurance Corp. and the Securities and Exchange Commission — but has no actual legal power to intervene.

BSP Governor Benjamin E. Diokno

“Our work embodies cooperation and collaboration but having an EO in place strengthens our institutional arrangements and provides a council a legal personality,” he said Friday when the FSCC, for the first time, released a quarterly “State of Financial Stability” statement.

BSP assistant governor Johnny Noe E. Ravalo of the Office of Systemic Risk Management​ said they have finalized the EO and it is now with Malacanang. “We’re awaiting the decision of the palace with respect to the EO itself,” he said. If the EO is signed by President Duterte, Ravalo said this will grant FSCC the “legal standing and legal authority to pursue financial stability collectively.”

“That (EO) gives us a little bit of leeway on what can be done and how it will be done, so we’ll see what the final version looks like but at this point in time, it’s been elevated and we’re waiting final decision by the palace,” said Ravalo.

In the FSCC statement of the State of Financial Stability in the country, it noted that six of the eleven risk areas they are closely monitoring are “under control” such as risks to monetary policy, risks to fiscal policy, contagion risk, concentration risk, liquidity risk and geo-political risk. However, the risk to servicing debts and credit-related risks are “primary concerns in the financial market today.”

“With a view towards the rest of the year, six risks are assessed to be under control. They are, however, being continuously monitored and will be re-assessed as updated information becomes available,” said Diokno during Friday’s briefing.

Diokno said two other risk facets are still work-in-progress such as cyber security risk and climate change risk. Two other risks such as risks to macroeconomy and risks to valuations are “relatively more elevated as a result of the spillovers from other jurisdictions,” he noted.

“The balance between income and debt is the key downside risk today,” said Diokno. “This has left borrowers vulnerable because their capacity to service their debts has been put at risk.”

Diokno also said COVID-19 “has created similar problems throughout the world and the loss of incomes is the most common scar from this pandemic-cum-recession.”

The BSP and other government financial agencies such as members of the FSCC has intervened to make sure there is adequate liquidity in the financial system and has “back-stopped this with other regulatory relief measures.” But Diokno said the pandemic “is a different crisis and the authorities will not hesitate to think out-of-the-box in order to sustain a well-functioning market.”

At the moment, the FSCC actions including its influence and recommendations are limited only to each of the members’ respective mandates.

According to Ravalo, the FSCC operates on the basis of the existing mandates of each of the member agencies. “There will be instances where it is necessary to intervene into the market on a whole of market basis. So you have really the option of instituting reforms where all of the five agencies issue their own respective guidance or if the EO is to be signed, then the FSCC will then have that authority to issue the guideline itself,” he explained.

“The advantage of having the FSCC do it is that it is encompassing in the sense that it covers all systemic issues rather than within the ambit of the respective mandates of each of the agencies,” added Ravalo. He also said that in each of the mandates – “all of those letter of the law right now talks about particular portions of the financial market, so you’ve got banking, capital markets, insurance and pension, deposit insurance as well. What if systemic risk issue arises from the real economy from particular firms or from borrowings abroad of firms, how then would you address this? Given the existing mandates of financial authorities, the FSCC is broader in that context (and) there could be no overlap, its simpy an augmentation of what we have right now,” said Ravalo.

There have been calls for FSCC to do more defensive strategy on top of its monitoring of systemic risks. The International Monetary Fund said the FSCC should have more influence such as in a “comply-or-explain mechanism” rather than being more focused on risk monitoring.

Source: Manila Bulletin (