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BSP gives banks more leeway in financial market activities

By Des Ferriols
The Philippine Star 09/05/2006

The Bangko Sentral ng Pilipinas (BSP) has issued two major guidelines giving banks full control and accountability of their market and liquidity risks as the industry gears up for full compliance with the Basel II Convention.

Under the new guidelines, the BSP said it is not particularly concerned with the level of risks that financial institutions assume but they should have the ability and resources to manage these risks.

“Therefore, the BSP will not restrict the level of risks assumed by financial institution (FI) or the scope of its financial market activities so long as it is authorized to engage in such activities,” the BSP said in the statement of policy.

Moreover, the BSP said it also expected FIs to understand as well as to measure, monitor and control such risks. FIs were also required to adopt risk management practices whose sophistication and effectiveness were commensurate to the risk being monitored and controlled.

“(Finally, FIs) are expected to maintain capital commensurate with the risk exposure assumed,” the BSP said.

BSP’s Monetary Board approved the new guidelines on market risk management for financial institutions under its jurisdiction which said that FIs would have to convince the BSP that its risk exposures were not excessive relative to their capital or that the risk assumed was well-managed.

“If the BSP determines (otherwise), the BSP will direct the FI to reduce its exposure to an appropriate level or strengthen its risk management systems,” the guidelines said.

The BSP said it would evaluate FIs’ market risks based on the major sources of risk exposure and the complexity and level of risks posted by the assets, liabilities and off-balance sheet activities of the institutions.

On the other hand, the BSP defined liquidity risks as the current and prospective risk to earnings or capital arising from an FI’s inability to meet its obligations when they come due without incurring unacceptable losses or costs.

The BSP said liquidity risks include the inability to manage unplanned decreases or changes in funding sources as well as the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.