Check all stress points in financial system: BSP exec

“Financial stability is, therefore, more than just the absence of instability or preventing the next crisis. There is a positive side to it, which is to ensure that the financial system continues to be a transformative tool for the public,” she said. (File Photo: Bangko Sentral ng Pilipinas/Facebook)

MANILA — A ranking Bangko Sentral ng Pilipinas (BSP) official on Monday highlighted the need to check all stress points in the financial system since this might eventually affect the real economy.

BSP Deputy Governor Chuchi Fonacier, who delivered the speech of BSP Governor Nestor A. Espenilla Jr. for the two-day inaugural Regional Dialogue on Financial Stability (FS) for ASEAN central banks held at the Philippine International Convention Center (PICC) that started Monday, said financial stability has become a key policy consideration since it not only ensures thriving and well-functioning financial systems but also how the system benefits all financial consumers.

“Financial stability is, therefore, more than just the absence of instability or preventing the next crisis. There is a positive side to it, which is to ensure that the financial system continues to be a transformative tool for the public,” she said.

She explained that Asian authorities were somewhat hesitant to take part in a global reform agenda after the global financial crunch in part because of “distance but more because the underlying factors that nurtured the crisis were an exception rather than the regional norm.”

She also said financial system stability is not new to Asian regulators since “renewed focus on managing banking risks, particularly currency and tenor mismatches” were put in place after the region suffered from the 1997 Asian Financial Crisis (AFC).

She, on the other hand, pointed out that the 2008 global financial crunch was “indeed different”, noting that “it was not the size and speed of the dislocation but rather the fact that it required a more fundamental re-think of risks in the financial system and how we manage them.”

“In effect, it surfaced a lot of things that we did not know but should otherwise know about financial market risks,” she said.

With these developments, Fonacier said two lessons have been learned, first of which is the need to re-assess frameworks and models.

She said that in the past it was believed that “for as long as the macroeconomy was growing and stable, financial market imbalances were only temporary and expectation was that the market would eventually return to the normal state.”

This is not the case anymore, she said, thus the need to re-think since “stress points in the financial market are not simply auxiliary issues” but require regulators’ direct attention.

“These stress points could materially impair the financial market with effects that could eventually spill over into the real economy,” she added.

The second realization is “what makes ‘systems’ interesting is that they are more than the sum of their parts.”

“If our stated policy is to nurture a well-functioning financial system, we therefore need to understand the institutions that we oversee and nature of the interactions within the financial system,” she said.

The BSP official said they are not advocating only one of these two, pointing out that “it remains essential that banks operate in a safe and sound manner.”

“What we now realize, however, is that there are risks that can develop from an interconnected system, even when banks are within established parameters of safety and soundness,” she said.

Thus, “at the very least we can no longer afford the old normal under the previous orthodoxy.”

“We cannot take the financial market as a passive add-on to the macroeconomy. Rather we must view it as one that directly cause systemic risks,” she said, noting that these risks are intrinsic to the financial market because financial choices are interlinked across agents, markets and time.

“The net effect is that when we think of mitigating against systemic risks, we are no longer just focused on the big shocks that can cause extensive harm. Instead, we are more cognizant of shocks which on their own are small and appear independent of each other but could otherwise co-mingle and create systemic risks,” she added.