New BSP rules to curb shadow banking

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The central bank is determined to strengthen its regulatory oversight of non-bank financial institutions contributing to the growth of shadow banking in the Philippines, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Nestor Espenilla Jr. told journalists over the weekend.

At the Economic Journalists Association of the Philippines-San Miguel Corp. Business Journalism Seminar held in Tagaytay, Espenilla said an area of growing concern for regulators is the expansion and diversification of activities of non-bank financial institutions.

“We have to worry about non-bank financial institutions, because an unintended consequence of strengthening oversight over the formal banking system is the potential enlargement of the shadows or shadow banking–and the shadows can happen in the non-bank context, be that in real estate, in payment services, etc.,” Espenilla explained.

Shadow banking in broad term refers non-banks performing lending functions or banks performing services not covered by regulatory oversight. Shadow banking includes risky investment products, private lending between individuals, and pawnshops.


Espenilla said in the coming months, the public would notice growing intensity in the BSP’s focus on activity in the shadows.

“Yes, there are upcoming circulars. One that is almost cooked is the comprehensive updating of our regulations on pawnshops,” he added.

The BSP official stressed that pawnshops have evolved beyond traditional operations, noting that a significant amount of pawnshop business is currently being derived from remittance activity and other kinds of cross-selling activities.

“You may not realize it, but pawnshops today are the number one distributors of micro insurance – more than banks, and they are competing with traditional insurance agents. What can pawnshops do today? They do remittances, in addition of course to traditional loans, they do insurance, some even do money changing,” he said.

With a more complicated business, he pointed out, the law governing pawnshops must be refreshed since it was created decades ago.

“Our pawnshop law is based on a presidential decree that was issued by the martial law regime, but it is being implemented under BSP regulations,” he said.

“We are going to issue another refresh that will cover the situation of pawnshops now,” he added.

Espenilla further said the BSP is also upgrading regulations covering non-stock savings and loans associations.

“They are focused on certain types of markets–military, police, teachers–these are sensitive markets,” he said.

Finally, Espenilla said that the BSP would also look into the regulations pertaining to real estate lending.

“For example, developers actually extend credit to buyers of real estate, and that can be a possible fuel for an unsustainable asset boom. We actually don’t regulate real estate so we have to partner with other agencies,” he said.

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