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This semestral report is prepared pursuant to Section 39(c), Article V of Republic Act No. 7653 (The New Central Bank Act)

by the Office of Supervisory Policy Development, Supervision and Examination Sector, Bangko Sentral ng Pilipinas.

A synopsis of the report is available online at http://www.bsp.gov.ph.

Page Number Glossary of Terms i

Prologue v

The Philippine Financial System: An Assessment 1

The Banking Sector The Philippine Banking System 4

The Non-Bank Financial Institutions Non-Bank Financial Institutions with Quasi-Banking Functions 19 Non-Stock Savings and Loan Associations 22

Trust Operations 25

The Foreign Currency Deposit Unit (FCDU) System 28

Tables

Schedules Schedule 1: Financial Institutions under BSP Supervision/Regulation Schedule 2: Comparative Statement of Condition Schedule 3: Selected Contingent Accounts Schedule 4: Trust and Fund Management Operations Schedule 5: Comparative Statement of Income and Expenses Schedule 6: Non-Bank Financial Institutions

Appendix Appendix 1: Changes in Bank Regulations (January to June 2013)

Table of Contents

Table of Contents

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A. SELECTED ACCOUNTS1. Financial Reporting Package (FRP) is a set of financial statements for prudential reporting purposes

composed of the Balance Sheet, Income Statement and Supporting Schedules. The FRP is primarily designed to align the BSP reportorial requirements with the provisions of the Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) and Basel 2-based Capital Adequacy Framework. It is also designed to meet BSP’s statistical requirements.

2. Total Assets refer to the sum of all net assets, adjusted to net of “Due from Head Office/Branches/Agencies” and “Due to Head Office/Branches/Agencies” of foreign bank branches.

3. Financial Assets (Other than Loans and Receivables) refer to the sum of all investments in financial assets, net of direct equity investments. These include financial assets held for trading (HFT), designated at fair value through profit or loss (DFVPL), available-for-sale (AFS), held-to-maturity (HTM), unquoted debt securities classified as loans (UDSCL) and investments in non-marketable equity securities (INMES).

4. Equity Investments refer to equity investments in subsidiaries, associates and joint ventures.

5. For purposes of computing the average, one period covers 12 months. a. Average assets refer to the sum of total assets as of end of two periods divided by 2.

b. Average capital refers to the sum of total capital accounts as of end of two periods divided by 2.

c. Average earning assets refer to the sum of earning assets as of end of two periods divided by 2.

d. Average interest-bearing liabilities refer to the sum of interest-bearing liabilities as of end of two periods divided by 2.

6. Financial Liabilities Held for Trading (HFT) refer to the sum of derivatives with negative fair value held for trading and liability for short position.

7. Financial Liabilities Designated at Fair Value Through Profit or Loss (DFVPL) refer to financial liabilities that upon initial recognition are designated by the bank at fair value through profit or loss.

8. Unsecured Subordinated Debt (UnSD) refers to the amortized cost of obligations arising from the issuance of unsecured subordinated debt which may be eligible as Tier 2 (supplementary) capital of the bank, subject to certain terms and conditions.

9. Redeemable Preferred Shares refer to preferred shares issued which provides for redemption on a specific date.

10. Total Capital refers to the sum of paid-in capital of locally incorporated banks, assigned capital and the allowable qualified capital component of the net “Due To/Due From Head Office/Branches/Agencies” accounts of branches of foreign banks, other equity instruments, retained earnings and undivided profits, other comprehensive income, and appraisal increment reserves.

11. Earning Assets refer to the sum of due from BSP, due from other banks, financial assets-debt securities (net of allowance), financial assets HFT-derivatives with positive fair value HFT-interest rate contracts (stand-alone and embedded), derivatives with positive fair value HFT-interest rate contracts (stand-alone and embedded) and TLP inclusive of IBL and RRPs (net of allowance).

12. Interest-bearing Liabilities refer to the sum of financial liabilities HFT, financial liabilities at DFVPL, deposit liabilities, bills payable, unsecured subordinated debt, bonds payable, redeemable preferred shares, derivatives with negative fair value held for hedging and finance lease payment payable.

Glossary of Terms

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13. Liquid Assets refer to the sum of cash and due from banks and other financial assets (net of allowance for credit losses).

14. Total Operating Income refers to the sum of net interest income and non-interest income.

15. Net Interest Income refers to the difference between interest income, provision for losses on accrued interest income from financial assets and interest expense.

16. Provision for Losses on Accrued Interest Income from Financial Assets refers to the impairment loss on accrued interest income from loans and other financial assets, net of equity securities, charged against current operations.

17. Non-Interest Income refers to the sum of dividend income, fee-based income (including income from fiduciary activities), trading income, foreign exchange profits, profits from sale/derecognition of non-trading financial assets and liabilities, profits from sale/derecognition of non-financial assets, profits on financial assets and liabilities DFVPL, profits on fair value adjustment in hedge accounting and other non-interest income.

18. Dividend Income refers to cash dividends earned on equity securities held as HFT, DFVPL, AFS and INMES.

19. Fee-based Income refers to the sum of income from payment services, intermediation services, custodianship, underwriting and securities dealership, securitization activities, fiduciary activities and other fee-based income.

20. Trading Income refers to the sum of realized gains/(losses) from sale/redemption, and unrealized gains/ (losses) from marking-to-market of HFT financial assets, and realized gains/(losses) from foreign exchange transactions.

21. Non-Interest Expenses refer to the sum of compensation and fringe benefits, taxes and licenses, other administrative expenses, depreciation and amortization, impairment losses and provisions.

22. Losses or Recoveries on Financial Assets refer to the sum of provision for credit losses on loans and receivables and other financial assets, bad debts written-off and recovery on charged-off assets.

23. Income Tax Expense refers to provision for income tax.

24. Net Profit or Loss refers to the difference of total operating income and non-interest expenses, plus/(less) the recoveries/ (losses) on financial assets, share in the profit/(loss) of unconsolidated subsidiaries, associates, joint ventures and minority interest in profit/(loss) of subsidiaries.

25. Non-Performing Loans (NPL) refer to past due loan accounts whose principal and/or interest is unpaid for 30 days or more after due date. This applies to loans payable in lump sum and in quarterly, semi-annual or annual installments, including: the outstanding balance of loans payable in monthly installments when three or more installments are in arrears; the outstanding balance of loans payable in daily, weekly or semi-monthly installments when the total amount of arrearages reaches 10 percent of the total loan receivable balance; and restructured loans which do not meet the requirements to be treated as performing loans under existing rules and regulations, including all items in litigation. Effective January 2013, Circular No. 772 dated 16 October 2012 removed the exclusion of loans qualified as loss from NPL classification for the reporting of gross NPLs and the ratio of gross NPLs to gross TLP. The complementary concepts of net NPLs (gross NPLs less specific allowance for credit losses on TLP) and the ratio of net NPLs to gross TLP were also introduced.

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26. Real and Other Properties Acquired (ROPA) refer to real and other properties, other than those used for banking purposes or held for investment, acquired by the bank in settlement of loans through foreclosure or dacion in payment and/or for other reasons, whose carrying amount will be recovered principally through a sale transaction.

27. Non-Performing Assets (NPA) refer to the sum of NPL and ROPA, gross. Effective March 2003, NPAs exclude performing sales contract receivables, which met certain requirements under Circular No. 380.Based on the new FRP framework provided for under Circular No. 512 dated 3 February 2006 and effective on 31 December 2006, NPA should also include non-current assets held for sale.

28. Distressed Assets refer to the sum of NPLs, ROPA, gross, non-current assets held for sale and performing restructured loans replacing the current restructured loans.

29. Gross Assets refer to total assets plus allowance for credit losses on loans; allowance for credit losses on sales contract receivables (SCR); and allowance for losses on ROPA. For purposes of computing the NPA ratio where gross assets serve as the denominator, allowance for equity investments is excluded. Said allowance refers to the cumulative amount of impairment loss incurred on equity investments in subsidiaries, associates and joint ventures which shall be accounted for in accordence with PAS 36.

30. Allowance on NPAs refers to the sum of allowance for credit losses on loans, allowance for credit losses on SCR, allowance for losses on ROPA.

31. Non-Current Assets Held for Sale refer to ROPAs that are available for immediate sale in their present condition subject only to terms that are usual and customary for sales of such assets and the sale must be highly probable.

32. Sales Contract Receivable (SCR) refers to the amortized cost of assets acquired in settlement of loans through foreclosure or dacion in payment and subsequently sold on installment basis whereby the title to the said property is transferred to the buyers only upon full payment of the agreed selling price.

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B. FINANCIAL AND OTHER RATIOS 1. Capital adequacy ratio (CAR) refers to the ratio of capital to risk weighted assets computed in

accordance with the risk-based capital adequacy framework that took into account credit risks effective 1 July 2001 under BSP Circular No. 280 dated 29 March 2001. Under BSP Circular No. 360 dated 3 December 2002, which took effect on 1 July 2003, the computation of CAR for universal and commercial banks incorporates market risks in addition to credit risks. Under Circular No. 538 dated 4 August 2006, which took effect on 1 July 2007, the computation of CAR for universal and commercial banks incorporate operational risk in addition to credit and market risks.

2. Cost-to-Income ratio refers to the ratio of non-interest expenses to total operating income.

3. Density ratio refers to the ratio of the total number of domestic banking offices to the total number of cities/municipalities in the Philippines.

4. Distressed assets ratio refers to the ratio of distressed assets to total loans (gross of allowance for probable losses), inclusive of interbank loans, plus ROPA (gross of allowance for losses).

5. Earning asset yield refers to the ratio of interest income to average earning assets.

6. Funding cost refers to the ratio of interest expenses to average interest-bearing liabilities.

7. Interest spread refers to the difference between earning asset yield and funding cost.

8. Liquid assets ratio refers to the ratio of liquid assets to total deposit liabilities.

9. Net interest margin refers to the ratio of net interest income to average earning assets.

10. NPA coverage ratio refers to the ratio of allowance on NPAs to total NPAs.

11. NPA ratio refers to the ratio of NPAs to total assets, gross of allowance for credit losses.

12. NPL coverage ratio refers to the ratio of allowance for credit losses on loans to total NPLs.

13. NPL ratio refers to the ratio of NPLs to total loans (gross of allowance for credit losses), inclusive of interbank loans.

14. Population-to-banking offices ratio (Customer Ratio) refers to the ratio of the total population to the total number of domestic banking offices.

15. Return on assets (ROA) refers to the ratio of net profit or loss to average assets.

16. Return on equity (ROE) refers to the ratio of net profit or loss to average capital.

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The Status Report on the Philippine Financial System is a semestral report prepared by the Office of Supervisory Policy Development, Supervision and Examination Sector, Bangko Sentral ng Pilipinas (BSP), to be submitted by the Governor to the President and the Congress, pursuant to Section 39 (c), Article V of Republic Act No. 7653 or The New Central Bank Act. This report is basically culled from the various periodic reports submitted by BSP supervised/regulated institutions to the Supervisory Data Center, Supervision and Examination Sector. At end-June 2013, BSP supervised/regulated financial institutions consisted of 683 banks with 8,860 branches and other offices, 6,319 non-bank financial institutions (NBFIs) with 11,529 branches and four offshore banking units (OBUs). (Schedule 1) Effective 3 July 1998, the supervision and regulation of the BSP over non-banking entities were turned over to the Securities and Exchange Commission (SEC) for corporations and partnerships, and to the Department of Trade and Industry (DTI) for single proprietorships, in accordance with Section 130 of Republic Act No. 7653, except the following: non-banks with quasi-banking functions and/or with trust licenses, non-banks which are subsidiaries/affiliates of banks and quasi-banks, non-stock savings and loan associations and pawnshops.

Likewise, the supervision and regulation over building and loan associations were transferred to the Home Guarantee Corporation (HGC) effective 7 February 2002, in accordance with Section 94 of Republic Act No. 8791 (The General Banking Law of 2000). Finally, pursuant to Circular No. 512 dated 3 February 2006, as amended by Circular No. 644 dated 10 February 2009, and in line with the adoption of the Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards (PAS), the BSP amended the Manual of Accounts and the BSP reportorial requirements consisting of the Consolidated Statement of Condition (CSOC), Consolidated Statement of Income and Expenses (CSIE) and their supporting schedules with the issuance of Circular No. 108 dated 9 May 1996, as amended, for universal and commercial banks, Circular No. 270 dated 19 December 2000, as amended, for thrift banks, and Circular No. 249 dated 26 June 2000, as amended, for rural and cooperative banks, prescribing a new and amplified Financial Reporting Package (FRP). The FRP is designed to align the Manual of Accounts and the BSP reportorial requirements with the provisions of the PFRS/PAS.

Prologue

1

System Assessm

ent

The Philippine Financial System: An Assessment

Specific key performance indicators of the banking system showed not only steady but robust growths in assets (16.2 percent), loans (12.1 percent), deposit liabilities (18.3 percent) and capital (17.9 percent). Asset quality and solvency ratios were back from their pre-1997 Asian Financial Crisis levels. Banks also sustained their profitability with 60.4 percent expansion in non-interest income supported by strong gains on improved investor sentiment and improved market conditions.

In the same vein, the non-bank sector1 registered positive performance during the review period as a beneficial consequence of upbeat domestic economic activity and dynamic financial system. On the whole, both banks and non-bank financial institutions operated on a sound and stable manner with higher core earnings.

On the external front, there was a notable improvement in the global macroeconomic conditions. In April 2013, the International Monetary Fund (IMF) issued a global growth forecast of 3.25 percent for 2013 and 4 percent in 2014 due to the timely resolution of two global financial stability threats: Euro collapse and the US economy plunging on a ‘fiscal cliff’. The May 2013 Bernanke announcement on the Fed’s unwinding of its accommodative monetary policy stance and his assessment of the current state of the US economy created some furor and market volatilities around the globe but overall impact has been muted on account of coordinated policy responses across jurisdictions to restructure the global financial system and pursue the necessary reforms.

On the domestic front, the Philippine economy performed on solid footing with the country’s gross domestic product (GDP) rising to 7.6 percent in the first half of 2013 and surpassing regional growth including that of China despite the series of flooding and natural disasters2 that occurred during the review period. The growth was supported by strong capital formation and infrastructure-related spending. Moreover, solid external position, manageable inflationary pressures, stronger domestic currency and low interest environment were sturdy backers to

provide a calm macroeconomic environment, keep market speculations in check and sustain the favorable investor confidence. Investment grade ratings from Fitch and Standard & Poor’s last 02 May 2013 and 27 March 2013, respectively, provided the much deserved third party validation of continuing efforts of local policymakers to pursue meaningful financial sector reforms.

In particular, the first semester of 2013 ended with the banking system posting sustained growths in assets, loans, deposit liabilities and capital accounts. Asset quality and solvency indicators continued to improve and fared better than the international standard. Banks also registered a positive bottom line as net profit grew by 60.6 percent to P97.7 billion for the first semester of 2013 from P60.8 billion same period last year.

Other Bangko Sentral ng Pilipinas (BSP) supervised financial institutions likewise provided a commendable performance during the same period. Selected performance indicators pointed to stronger balance sheets and sustained profitability.

Beyond proven track record and positive results though, the pirouette of market uncertainties and emerging regulatory architecture of the global financial services industry post-2008 Global Financial Crisis call for a more calibrated set of reforms to mitigate financial sector imbalances and systemic buildup of risks.

The Philippine financial system, supported by the strong performance of the banking system, remained strong and healthy in the first half of 2013. The banking system, which accounted for 80 percent of total resources of the financial system and the domestic economy’s main source of credit, performed beyond market expectations with a double-digit asset growth of 16.2 percent. Positive macroeconomic news from abroad and improved investor sentiment in the domestic market buoyed bank earnings during the period as net profit rose by 60.6 percent to P97.7 billion from P60.8 billion posted same period last year. By virtue of its strong underlying fundamentals, it is currently the only banking system out of the 65 Moody’s-rated banking systems in the world that earned a positive outlook from the international credit watcher for the next 12-18 months.

___________________________

1Using non-bank financial institutions under the effective supervision of Bangko

Sentral as proxies. Specifically, these refer to non-banks with quasi-banking functions

and/or with trust licenses; non-banks which are affiliates or subsidiaries of banks and

quasi-banks; non-stock savings and loan associations; and pawnshops.

2These include flooding in Palawan (January 4), South Cotabato (January 7), Surigao

del Norte (January 17), Davao City (January 20), Mindanao (January 21), Agusan del

Sur (February 28), Quezon City (March 24); landslides in Mt. Diwalwal, Compostela

Valley (February 23), Mati City (February 26), Davao del Norte (June 12); earthquakes

in Metro Manila (5.3 on April 4), Cebu (4.1 on May 12) and nationwide (5.6 on June

1); tornado in Bulacan (April 27), South Cotabato (May 24) and Cebu (June 19);

Mayon Volcano eruption (May 7); and tropical storm Gorio (international code name,

Rumbia, on June 29) that battered Eastern Samar and nearby provinces (Source:

www.ndrrmc.gov.ph).

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Toward this end, the BSP has started with its development of macroprudential tools (Box Article 1) to mitigate financial imbalances. These include the rationalization of operations for liquidity absorption through the BSP’s Special Deposit Account (SDA) facility, the imposition of higher risk weights for non-deliverable forwards (NDFs) to curb speculation on the peso and expansion of monitoring framework for real estate exposures of banks.

Lingering fragilities in advanced markets similarly led to strong foreign capital flows to emerging markets such as the Philippines. In response to this challenge, the BSP pursued the sixth phase of reforms to the foreign exchange (FX) framework (Circular No. 794 dated 18 April 2013). Salient features of said reforms include the (1) increase in the amount of FX from US$60 thousand to US$120 thousand that may be sold over-the-counter (OTC) by authorized banks and FX corporations to residents without documentation for services transactions; (2) increase in the amount of FX that may be purchased using unspent pesos of departing non-resident tourists or balikbayan3 without need to show proofs of previous sale of FX for pesos from US$5 thousand to US$10 thousand; (3) permission of onshore peso receipts of non-residents from residents for services rendered, peso receipts representing salary/allowance/other benefit of onshore expatriates with contracts of less than one year and onshore peso funds of foreign students enrolled in the Philippines and non-resident Filipinos as funding for onshore peso accounts of non-residents; and (4) inclusion of offshore FX-denominated global funds or mutual funds and unit investment trust funds, FX intercompany loans of resident enterprises to their offshore parent companies and subsidiaries with an original tenor of at least 1 year, real property abroad including condominium units, debt securities issued offshore by both resident and non-residents that are in local banks’ asset inventory and equity securities issued by residents that are listed abroad as allowable forms of investment for Philippine residents that may be funded with FX to be purchased from authorized banks and their FX corporations.

Freer flow of capital is further expected by 2015 as the country joins the ASEAN Economic Community (AEC), which is envisioned to come into fruition after years of constant dialogue and cooperative arrangements among ASEAN member states4. Central to the AEC is the ASEAN Financial Integration Framework (AFIF) that calls for capital account liberalization, financial services liberalization and banking integration, capital market development and harmonized payment and settlement system. The ASEAN Banking Integration Framework (ABIF), in particular, envisages a larger role by the banking sector in facilitating intra-regional trade and investment though the enhanced presence of qualified ASEAN banks (QAB) from each member state within the ASEAN community by 2020. Toward this end, the BSP actively participates in international forums and regional dialogues to prepare the domestic financial system for regional integration. Parallel to

this, the BSP is working with concerned stakeholders to improve its package of commitments in commercial banking, participating in rounds of review for the ABIF guidelines, pursuing further reforms of the banking sector to strengthen domestic banks as qualified ASEAN banks (QAB), and will be closely coordinating with both houses of Congress for the amendment of key legislations that may pose some restrictions in the provision of banking services: Foreign Banks Law (Republic Act No. 7721), General Banking Law of 2000 (Republic Act No. 8791), Financing Company Act (Republic Act No. 8556), Thrift Banks Act (Republic Act No. 7906), Offshore Banking Act (Presidential Decree No. 1034) and Pawnshops Regulation Act (Presidential Decree No. 114).

Beyond the Basel III risk-based capital reform agenda, a broad set of reforms to foster the greater stability of the financial system was instituted during the semester in review. This entails the revision of banks’ cross-selling framework (Circular No. 801 dated 27 June 2013), trust rating and compliance rating systems. The BSP likewise fortified the monitoring of compliance with the Truth in Lending Act (Republic Act No. 3765, as amended) of its supervised financial institutions to protect financial consumers.

On capital market reforms, works are underway for OTC derivatives reforms, financial market infrastructure (FMI) and establishment of acceptable yield curve. All of these are embodied under the Capital Development Blueprint, 2011-2016 developed through various consultations with concerned regulators.

The country’s archipelagic landscape provides challenges and opportunities in the provision of much needed financial services particularly in remote rural areas. In response, the BSP continues to be responsive by building on its financial inclusion agenda through reforms in the provision of innovative financial products and services i.e., micro deposit, housing microfinance and microinsurance, expansion of financial access with e-banking technologies and active presence in international forums on financial inclusion. In 2013, the BSP hosted the 2013 Microcredit Summit: Partnership Against Poverty in the Philippines as part of its continuing efforts to promote greater financial access and inclusive growth.

Summing up, the Philippine financial system provided another stellar performance this semester on sound macroeconomic fundamentals and sustained implementation of deep-ranging reforms. Risks arising from ever-changing market conditions and emerging regulatory architecture resulting from broad-based structural reforms pursued in the aftermath of the 2008 Global Financial Crisis may warrant careful monitoring, proactive supervisory response and calibrated reform implementation.

___________________________

3Returning overseas Filipinos4Refers to Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar,

Philippines, Singapore, Thailand, and Vietnam.

3

System Assessm

ent

To ensure continued financial stability, the BSP utilizes prudential measures to temper, if not prevent, the buildup of excesses in the financial system. Recent measures toward this end include the: (1) rationalization of operations for liquidity absorption through the BSP’s Special Deposit Account (SDA) facility and the (2) implementation of macroprudential measure for handling non-deliverable forwards (NDFs) involving the Philippine Peso.

Rationalization of BSP’s SDA Facility

The SDA facility is primarily a monetary policy instrument deployed by the BSP to help manage excess liquidity in the financial system. It was made available to banks since 1998. Trust entities and trust departments of banks were subsequently given access to the facility in 2007, enhancing BSP’s capability to absorb liquidity from the financial system.

The rationalization of the SDA facility is in line with the BSP’s continuing efforts to fine-tune its monetary policy instruments with the view of achieving greater flexibility in conducting monetary operations while ensuring adequate liquidity for economic activity. As a prudential measure, the BSP conducts continuous monitoring and assessment of its monetary policy toolkit. In the case of the SDA facility, it has been observed that SDA placements have been rising at an unprecedented rate since 2010a. A large portion of aggregate SDA placements came from trust departments/entities and foreign banks’ branches and subsidiaries that are funded mostly by Due to Head Office/Branches Abroad. Trust assets accounted for 35.3 percent of total system-wide assetsb as of end-June 2013 from 40.8 percent a year ago. The proportion of aggregate SDA placements of trust entities at 53.9 percent of total deposit liabilities of the banking system was 7.8 percentage points lower than year ago’s 61.7 percent. Based on this, the BSP issued a memorandumc in 2012 advising all banks and trust departments/entities which are counterparties in the SDA Facility of the BSP to guard against using the SDA Facility for opportunistic investment activities funded from non-resident sources.

It has also been noted that an increasing proportion of assets of trust entities remained parked at the facility instead of being intermediated or invested in the capital market. To encourage redirecting of funds to more productive investments, the Monetary Board (MB) further reduced the interest rates on the SDA facility by 50 basis points to 2.0 percent across all tenorsd. The current benign inflation environment and robust growth prospects provided the BSP with the flexibility to adjust the SDA rates. The MB also decided to limit the access to the SDA facility by banks and trust departments/entitiese. Beginning on 1 January 2014, placements of trust departments/entities in the SDA facility shall consist only of funds from trust accounts allowed under existing regulations. Under the new rules, only unit investment trust funds (UITFs) shall be allowed to access the SDA facility, which are pooled funds. Other fiduciary business including agency accounts and investment management activities shall not be allowed to access the SDA facility. Moreover, trust departments/entities shall not allow the creation/utilization of any other trust accounts whose purpose is to merely access the SDA facility.

Meanwhile, other fiduciary business including agency accounts and investment management activities (IMA) shall no longer have access to the said facility. To facilitate orderly transition, all SDA placements other than those allowed under the revised rules

shall be reduced by at least 30 percent by end-July 2013 (relative to the outstanding balance as of 31 March 2013). The remaining balance shall be phased out by end-November 2013.

Treatment of NDFs Involving the Philippine Peso

In recognition of the inherent risks involved in NDF transactions and to help mitigate the potential buildup of systemic risks, the BSP has intensified its monitoring stance with the issuance of guidelinesf on handling Peso NDF exposures.

Prudential limits

The BSP has set limits on the amount of NDF exposures by banks since August 2012 (first prudential limit). A bank’s total gross exposures to all forms of Peso NDF transactions, i.e. the sum of sales and purchases for both onshore and offshore transactions, shall be limited to a fixed percentage of the bank’s capital base. The said limit is 20 percent of unimpaired capital for domestic banks while foreign bank branches shall have a limit equal to 100 percent of their unimpaired capital.

The prudential limits took effect on 26 March 2013 (effectivity date of Circular No. 790). However, banks with NDF position in excess of the NDF exposure limits as of 26 March 2013 are given two months transition period to comply within the prescribed limits. Meanwhile, banks that are already within the prescribed limits upon the effectivity of the circular are no longer allowed to go over their NDF exposure limits during the two-month transitory period. The transition period applies only to those banks with excess limits as of 26 March 2013.

Licensing requirement

A bank must secure a Type 2 derivatives license before it can act as a dealer and/or broker of any NDF contract. To guard against excessive risk-taking and ensure that adequate risk measures are in place, banks must continuously comply with the requirements on risk disclosure and client suitability as specified in Appendix 25 (Risk Management Guidelines for Derivatives) and Appendix 26 (Sales and Marketing Guidelines for Derivatives) of the Manual of Regulations for Banks (MORB).

A bank duly authorized to transact in and has outstanding exposures of NDF contracts but subsequently found to be in breach of the licensing requirement and the provisions in Appendices 25 and 26 of the MORB shall immediately be prohibited from entering into further NDF transactions. The erring bank shall be required to present, within 5 banking days, to the appropriate unit of the Supervision and Examination Sector (SES) a formal plan that will remedy the cited deficiencies and achieve the plan’s objectives within a reasonable period. If the remedial plan is deemed unacceptable by the appropriate unit of the SES, the bank shall be directed to close all of its outstanding positions within two months.

______________aBSP Economic and Financial Statistics – Monetary Authorities Survey bIncludes assets of banks without trust licensecMemorandum No. M-2013-034 dated 13 July 2012dThe decision to further reduce the SDA rates was made during the MB meeting held on 25 April 2013. In its meeting on 12 September 2013, the MB decided to keep the SDA rate at 2.0 percent across all tenors.eMemorandum No. M-2013-021 dated 17 May 2013fCircular No. 790 dated 6 March 2013

Recent Macroprudential Measures to Enhance Financial Stability

Box Article 1