The Bangko Sentral ng Pilipinas (BSP) said it is improving its stress testing exercises to make it more granular to strain each bank’s risks or exposures.

The BSP in a report said it could be crucial to have a more granular review and assessment of the COVID-19 pandemic’s impact on individual banks. “This in turn will help guide any possible supervisory or resolution action,” it said.

The BSP has already made significant changes to the stress testing frameworks or “initial adjustments” as first response to the pandemic last year. But, it added – “(it) would benefit from further refinement.”

In conducting stress test exercises, the BSP said limitations include the quality and extent of granularity of data. “For instance, the information that we initially worked on are not the latest exposures, but we had to use the same just to get an indication of the potential impact of the scenarios that we are running,” said the BSP.

Some of the key challenges in mapping banks’ exposures to the conglomerates since the data available are some “years back” and “do not necessarily address the data requirements sufficient to conduct stress testing exercises.” By conglomerates, the BSP is referring to the top 20 conglomerates’ loans and investments including their subsidiaries and affiliates.

The BSP uses stress test results to assess and manage banks’ potential and current risk exposures especially large lenders and domestic systematically important banks or banks that are too big to fail.

The BSP said stress tests under COVID-19 “can be most effective when authorities (such as the BSP) explain the objectives of these exercises and ensure that they are well-aligned with the way the results will be employed and shared with the banks and the public.”

The BSP, similar with all central banks, employ stress testing excercises to determine a bank’s health in terms of adequate capital and liquidity and the industry’s ability to withstand uncertainties and negative financial shocks.

Results of these stress tests have been as expected since banks are already well-buffered even before the pandemic. “It is quite reassuring to note that capital and liquidity ratios of the banking system remain adequate under stress scenarios simulated in the BSP’s stress test exercises. Likewise, individual bank

ratios generally remain above minimum prudential requirements,” noted the BSP.

The BSP said it has been improving its financial surveillance tools and analysis techniques for “timely and proactive policy measures and supervisory actions relevant to the status or health of the financial system.”

The BSP is also preparing to develop and implement climate change stress testing exercises for banks. “(This is) an acknowledgment that financial institutions are exposed to significant impact from climate change. In particular, climate change could affect banks’ financial conditions through physical risk and transition risk,” it said.

Based on BSP’s stress tests, banks continue to show resilience to credit risk shocks, as well as market risks namely interest rate and foreign exchange risks.

The BSP implements the Uniform Stress Test Exercise and the Real Estate Stress Test, plus several surveillance and early warning systems.

Source: Manila Bulletin (