‘PH banks ready for AEC, millennials’

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Tetangco confident banks can tackle regulatory, technological challenges
The Philippine banking industry is well prepared to tackle the challenges ranging from the Asean financial integration in 2020 to the rise of technology-dependent ‘millennials,’ the central bank governor said.

“The Philippine boat may not be the large vessel of other jurisdictions but the fact that we have been able to steer through the turbulent and uncertain waters of the last decade is itself the testament of our resolve and our strength as a market,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. told last week’s Philippine International Banking Convention.

The local banking industry—described as being in a “position of strength” ahead of the Association of Southeast Asian Nations’ plan for financial sector integration in 2020—is said to be continuing to adapt in terms of a wide range of activities, from regulatory to even technological.

Tetangco noted that the latter, in particular, is now deeply integrated with today’s banking experience.


“Those of us in Generation X may find that to be a contradiction in terms because we grew up not equating ‘service’ with ‘gadgets.’ Yet, this is precisely the world of the ‘millennials’ who capture thoughts and experiences in gigabytes,” he said.

Over the counter withdrawals now run in parallel to online banking services where the speed of transactions is limited only by bandwidth. Automated teller machines are no longer just cash dispensers, and the widespread use of e-money means that payment systems can clear and settle transactions without wallet-to-wallet transfers, he said.

“Yes, ladies and gentlemen, this is the banking landscape of today and our banks have, by and large, redirected their attention to these facets,” Tetangco said.

The BSP, for its part, has drawn up rules to address the challenges posed by technology. Tetangco said Circular 854, which adjusted the minimum capital levels required of banks, was a recognition that banking has moved on from the folders and filing cabinets of old to the systems and interfaces of today.

An information technology risk management framework under Circulars 808 and 859 was also established for the industry to be governed by appropriate standards, he added.

To instill continued credit discipline, Circular 855 provides for credit risk management practices that, among others, de-emphasize reliance on collateral and nurture verifiable credit underwriting decisions.

To protect the consumer, the Consumer Protection Framework under Circular 857 sets expectations on the behavior and actions of covered institutions.

“All these matter because our own demographic profile points to half of the population at younger than 25 years old, precisely the millennials,” Tetangco said.

Looking forward, Philippine banks need to establish what their comparative advantages are onshore to be able to compete in the broader Asean offshore market, the BSP governor said.

“This issue becomes even more significant in light of the passage in 2014 of legislation (Republic Act 10641) which fully liberalized our domestic banking system, allowing for 100 percent foreign ownership of our banks,” he said.

With this, Tetangco said banks have been enlarging their domestic footprint—constructing brick and mortar branches outside of the greater metropolis, creating “other banking offices,” which are scaled-down bank operations, and capitalizing on e-banking technology.

“As we scan the horizon, the waters may appear to be relatively calm for us now, but there are shifts in the currents. We have to be able to adapt to the market flows and we cannot make the mistake of being oblivious to the under-currents,” he said.

Regulators, Tetangco said, have learned to adjust to global “surprises”—China’s devaluation of the renminbi and market reactions to the prospect of a Fed rate hike were cited—as these underscore the deep integration of the global financial markets.

He noted the adoption of inflation targeting in 2002 as the framework for monetary policy formulation, and most recently the announcement that an interest rate corridor would now be used.

“We have also consciously crafted market-based banking regulations consistent with the evolving international reform agenda. This has created an operating environment that encourages our banks to innovate while being conscious of risks,” Tetangco said.

Mainstream indicators, he said, bolster the case of a strong Philippine banking industry. He noted that total resources of universal and commercial banks —which dominate the industry—grew by 11.6% between 2010 and June 2015. Their July NPL ratio was at 1.9% and their capital adequacy ratio was at 15.1%, “with stress test results confirming that there is enough capital buffer in the event of extreme shocks”.

Last week, conference focused on the industry’s prospects under the planned Asean Economic Community, set for a formal launch by the end of this year. Tetangco noted that the year-end deadline would not be a “switch-on” as integration efforts have been unfolding since 2008.

Under the overall integration blueprint, the Asean Financial Integration Framework will be implemented in 2020.

Asean’s diverse nature, the central bank chief said, indicates opportunities in niche markets, differing needs and pockets of expertise.

“The peculiar diversity of Asean ensures that banks across the 10 jurisdictions will have a role to play,” Tetangco said, adding: “his also ensures that the gains from regional banking integration will not only accrue to the biggest of Asean banks.”

“That said, competition creates fluidity and the possibility of external shocks is a constant. As we scan the horizon, the waters may appear to be relatively calm for us now, but there are shifts in the currents. We have to be able to adapt to the market flows and we cannot make the mistake of being oblivious to the under-currents.”

Asean, which counts 10 members including the Philippines, is forecast to be the fourth largest economy in the world by 2050.

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