The History of Philippine Financial System

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BSP Releases Report on the Philippine Financial System for the First Semester of 2011 11.03.2011
The Bangko Sentral ng Pilipinas (BSP) recently released the Status Report on the Philippine Financial System for the first semester of 2011.  The report provides an account of the performance of the banking system and other financial institutions such as non-banks with quasi-banking functions, non-stock savings and loan associations, offshore banks, and trust entities under BSP supervision.  Also included in the report are box articles on the upgrading of banking system’s compliance with international standards on financial reporting and bank capital and recent regulatory issuances on the phased lifting of branching restriction and the general governance principles and standards for banks and their related NGOs/foundations engaged in retail microfinance. The report is submitted to the President and the Congress, in compliance with Section 39 (c), Article V of the New Central Bank Act (R.A. No. 7653). Following are the highlights of the report.

Overall Assessment
The seeds of earlier reforms nurtured by the currently improving macroeconomic environment and global investor sentiment to the Philippine sovereign continue to bear fruit as the Philippine financial system sustained its growth spurt for the first semester of 2011 amidst global economic slowdown. Key performance indicators for the first half of 2011 showed the sustained strength of banks’ core balance sheet accounts: steady asset expansion, double-digit credit growth, stable funding base, ample liquidity, continuing improvement in overall asset quality and above standard solvency ratios and healthy bottom lines. Other Bangko Sentral ng Pilipinas (BSP) supervised financial institutions followed the same growth trajectory on fertile operating environment. Moving forward, policymakers and market players have to continue in tilling closely together to keep the soil rich with financial reforms and innovations crucial for the sustained growth and stability of the Philippine financial system. In order to maintain market confidence, enhance transparency in financial transactions and mitigate systemic liquidity risks, the BSP has been upgrading the banking system’s compliance with international standards and best practices following the early adoption of PFRS 9 and the Basel III conditions for non-common equity capital instruments. The BSP is further promoting financial stability through periodic stress tests, industry consolidation and closure of weak financial institutions.  These compactions may be painful but necessary in order to further enrich the soil and allow the rest of the fruit-bearing seeds of reform to bloom over the medium-term. Another area that merits careful consideration is keeping the delivery of banking services fully attuned to the needs and demands of the market.  Notably, e-banking technologies have yet to take deeper roots as an alternative service delivery channel compared to the established brick-and-mortar physical presence of bank branches in terms of promoting greater financial access and inclusiveness in the Philippines. In response to recent market dynamics, the BSP has implemented the two-phased liberalization of bank branching in eight restricted areas of Metro Manila to promote further competition in the delivery of banking services. Meanwhile, the prevailing weaknesses in Western financial systems and global investors’ search for higher yield led to stronger capital flows into emerging markets including the Philippines. These inflows, if left unattended, are like couch grasses that could result to speculative investments in the domestic currency and financial markets.  Integral to the liberalization of its foreign exchange framework, the BSP now allows the regular banking units of thrift banks (TBs) to invest in readily marketable foreign currency-denominated debt instruments. The relaxations in foreign exchange regulations coupled with...
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