Debt watcher S&P Global upgraded the Philippine banking sector’s credit rating by a notch, citing the expected significant improvement in the country’s regulatory environment following the signing into law of the New Central Bank Act.
In a report released last month, S&P said it raised the Philippines’ Banking Industry Country Risk Assessment (BICRA) score from “6” to “5,” owing to the favorable provisions of the newly signed law.
BICRA scores range from 1 to 10, with 10 reflecting assessment of highest risk.
The announcement came weeks after President Rodrigo Duterte signed Republic Act No. 11211 (RA No. 11211), the New Central Bank Act, which is a landmark policy reform that took years of deliberation in Congress.
“We view these amendments as a positive step toward greater independence [of] and more effective implementation of prudent policies and measures [by the Bangko Sentral ng Pilipinas],” S&P said.
RA No. 11211 affirms and strengthens existing frameworks and practices of the BSP in carrying out its supervision mandate.
It supports the application of risk-based principles in allocating examination resources and in setting out capital requirements in banks.
The BSP has long shifted to the risk-based approach to supervision and has crafted policies that are not only commensurate to the risk exposures of its supervised financial institutions but are also suited to domestic conditions.
The new law now provides a legal anchor to said approach.
The other highlights of the law include the legal protection given to BSP officials in the exercise of the central bank’s regulatory role, as well as the prohibition for lower courts to issue restraining orders to the BSP.
These provisions address the long-standing problem of vulnerability of the BSP and its officials to law suits filed by either erring or weak banks that are penalized or ordered closed by the BSP.
Notwithstanding said limitation in the past, the BSP has established an enforcement framework that promotes consistent handling of supervisory issues including closure of banks.
S&P said that with the new law, the BSP can better fulfill its mandate of promoting a sound financial system.
Another highlight of the new law is the expansion of the BSP’s regulatory coverage to include monetary service businesses, credit granting businesses, and payment system.
These are consistent with ongoing initiatives of the BSP along with other government agencies to promptly address emerging threats posed by entities outside the banking system.
“We believe the expansion of coverage of institutions under BSP supervision… bolsters BSP’s position to address potential risks arising from the interconnectedness of entities in the financial system,” S&P said.
Also, the new law allows the BSP to issue its own debt securities, which, according to S&P, enhances the ability of the BSP to manage liquidity in the economy.
The law likewise increases the capitalization of the BSP from P50 billion to P200 billion.
Commenting on the upgrade of the Philippine banking industry’s credit rating by S&P, Deputy Governor ChuchiFonacier, who heads the BSP’s financial supervision sector, said: We are pleased to learn about the quick recognition by S&P of the significant benefits of the New Central Bank Act, which the BSP deems as an important game-changing policy reform.”
“The law, which unleashes a new and more progressive era of financial sector supervision in the country, further enhances the ability of the BSP to serve as a pillar of strength for the Philippine economy,” Fonacier added.
Meantime, on top of the favorable regulatory development, S&P said the Philippine banking system is expected to withstand various risks—such as currency volatility and higher interest rates, among others—given sufficient capitalization and strong domestic franchise that supports growing deposit base.