By LEE C. CHIPONGIAN
The Bangko Sentral ng Pilipinas (BSP) is considering a targeted macro-prudential toolkit such as putting a limit on loan-to-value (LTV) ratio and the debt-to-income (DTI) as part of risk assessments to regularly monitor credit growth.
The BSP, according to the International Monetary Fund (IMF), is amenable to the recommendation of adopting a “more general LTV and DTI approach” in scrutinizing mortgage collateral value limits.
The IMF made the recommendation after suggesting to the BSP to implement timely countercyclical capital buffer (CCyB) which it decided to adopt last December 2018. Basically, the CCyB is a precaution to make sure that banks have enough capital to ensure flow of credit in times of financial stress. It is set at zero percent and subject to upward adjustment to a rate that will be determined by the Monetary Board “when systemic conditions warrant but not to exceed to 2.5 percent.” In the event that an increase to the CCyB is approved, it will be set after one year from its announcement while a decrease will take effect immediately.
In its latest Article IV Consultation Staff Report – which is a set of bilateral discussions held every year as an IMF member country – the IMF said the CCyB as a macro-prudential policy response “should be proactive if risks of and from high credit growth increase again.”
“The BSP should timely activate the CCyB if risks of broad-based rapid credit growth reemerge, develop targeted macro prudential measures, such as LTV and DTI caps, and tighten them if high credit growth risks are more sector-specific for example, in the real estate sector,” said the IMF.
At the moment, the BSP sees no evidence of hard systemic risk to financial stability and that any systemic risk is “low” and these are also limited risks of high credit growth “reemerging.”
In the IMF report, it said the BSP “acknowledged that there was some evidence of a near-credit boom during the period 2017–2018 (but) they highlighted that the assessment was model-dependent and only held in some but not all models presented by staff. They (BSP) also stressed that their baseline projections for credit growth in the next few years are at low two-digit levels, and that they saw limited risks of high credit growth in the near term.”
The IMF further noted that central bank officials “agreed that the mortgage collateral value limits could complemented by a more general LTV and DTI approach.”
The BSP also “shared the view that a timely activation of the CCyB was important for effective, forward-looking systemic financial risk management. This would require judgment, based on a range of identified indicators of excess credit.”
The CCyB since its adoption in December 2018 has not yet been activated. The BSP has also adopted the liquidity and net stable funding ratios, part of Basel III.
“Timely activation of the CCyB should be considered if risks of broad-based rapid credit growth reemerge, while targeted measures would be preferable if such risks are more sector-specific,” said the IMF. “As for the latter, real estate-related risks seem most relevant at the moment. The BSP has indicative sectoral exposure and mortgage collateral value limits at the bank level in its toolkit. To address such sectoral risks, it could also consider introducing LTV and the DTI caps as new instruments.”
They would provide for a more macro-prudential approach that targets the demand for housing-related loans directly and in a timelier fashion,” the IMF said. “Such an approach better captures the market impact of individual financial institutions and the interactions with the real economy and, therefore, more effectively address systemic financial stability risks.”
After the CCyB, the BSP is also set to introduce two other systemic-related measures for managing credit growth, such as debt-to-earnings-of-borrowers’ test (DEBT) and the borrowers’ interconnectedness index (BII).
The DEBT evaluates the debt-servicing capacity of bank borrowers under the stress scenario of higher interest rates and/or a depreciation of the peso. The BII, on the other hand, will determine the systemic importance of a borrower in the banking system based on a defined quantitative measure.
The CCyB, the DEBT and BII are all macroprudential measures to further strengthen the BSP’s credit growth monitoring.