The Philippine STAR 09/19/2006
The Monetary Board (MB) of the Bangko Sentral ng Pilipinas (BSP) has approved two new circulars on how financial institutions (FIs) should manage market and liquidity risks, including interest rate risk. The guidelines are formulated to ensure that FIs have sufficient knowledge and skills to understand and effectively manage market and liquidity risks. These emphasize that the level of risk exposures undertaken by FIs and the proper management of these risks are primarily the responsibility of the FIs.
“The principles set forth in these guidelines shall be used (by the BSP) in determining the adequacy and effectiveness of an FI’s (market and liquidity) risk management process, the level and trend of (these) risk exposure(s) and adequacy of capital relative to exposure(s),” the circulars said.
The statement of policy states that “the level of (market and liquidity) risks assumed by an FI is not necessarily a concern, so long as the FI has the ability to effectively manage the risk(s). The BSP will not restrict the level of risk assumed by an FI, or the scope of its financial market activities so long as the FI is authorized to engage in such activities and that the institution (a) understands, measures, monitors and controls the risk assumed, (b) adopts risk management practices whose sophistication and effectiveness are commensurate to the risk being monitored and controlled, and, (c) maintains capital commensurate with the risk exposure assumed. It may be noted that the issuances take the form of principles-based guidelines on market and liquidity risk management.
The order is consistent with the guidelines on supervision by risk set forth under BSP Circular 510 issued February 2006. The adoption of the guidelines communicates the BSP’s implementation of the risk-based approach to supervision (RBS), which promotes the adoption of a principles-based regulatory framework, rather than a prescriptive approach to supervision.
The principles-based guidelines allow more flexibility since markets rapidly develop, often ahead of changes to the regulatory framework.
For example, the circulars provide that the BSP is aware of the increasing diversity of financial products and that industry techniques for measuring and managing (market and liquidity risks) are continuously evolving. As such, the guidelines are intended for general application; specific application will depend to some extent on the size, complexity, and range of activities undertaken by individual financial institutions. The RBS is a continuous and dynamic process that focuses on assessing risk exposures and quality of risk management practices and allocating supervisory resources on areas that are identified as high risk.
In particular, the market and liquidity risk guidelines provide that if the BSP determines that an FI’s risk exposures are excessive relative to the FI’s capital, or that the risk assumed is not well managed, the BSP will direct the FI to reduce its exposure to an appropriate level and/or strengthen its risk management systems.
“Although the guidelines are not strictly Basel 2 to conform with institutional arrangements and operating realities in the Philippines, the principles outlined are consistent with Basel 2 principles and international best practices,” the BSP said.