Minsky's Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity Trap

But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances—Ludwig von Mises 

In this issue

Minsky's Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity Trap

I. Introduction: The Banking System’s Wile E. Coyote Moment

II. NPL Benchmarks Unveil Minskyan Fragility and the Wile E. Coyote Moment

III. Diminishing Returns: Policy Stimulus-Backstop Backlash

IV. Banks’ Drift Toward Consumers: Credit Cards and Salary Loans Power NPLs Higher

V. Stagflation Signals and the Death Knell of Benchmark-ism: Labor Frailty Meets Inflation’s Third Leg

VI. The Wile E. Coyote Dynamic in Bank Investments via Available For Sale (AFS) Assets

VII. AFS Surge and Recession-Grade Financial Losses

VIII. Benchmark-ism and the Illusion of Confidence

IX. Velocity or Collapse: The Wile E. Coyote Reckoning

X. BSP’s Tacit Pivot: From Sovereign Risk to Banking Backstop

XI. Conclusion: The Velocity Charade Meets Its Limits 

Minsky's Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity Trap

The Wile E Coyote velocity game—credit expansion, AFS bets, and central bank lifelines—keeps Philippine banks afloat, but the stability it projects is an illusion

I. Introduction: The Banking System’s Wile E. Coyote Moment 

Inquirer.net, September 06, 2025: Bad debts held by the Philippine banking system rose to their highest level in eight months in July, as lenders—facing slimmer margins from declining interest rates—may have leaned more on riskier retail borrowers in search of yield. Latest data from the Bangko Sentral ng Pilipinas showed that nonperforming loans (NPL), or debts overdue by at least 90 days and at risk of default, accounted for 3.40 percent of the industry’s total loan portfolio. That marked the highest share since November 2024, when the NPL ratio stood at 3.54 percent. 

Time and again, we’ve detailed the escalating challenges facing the Philippine banking system—chief among them, its role in financing the government deficit amid elevated rates. 

This has led to record levels of held-to-maturity (HTM) securities, mounting investment losses from mark-to-market exposures, and potentially unpublished credit delinquencies buried in loan accounts. 

Together, these forces have contributed to the system’s entropic liquidity conditions: a slow, grinding erosion of institutional health masked by policy choreography. 

But recent developments take the proverbial cake. While NPLs remain elevated, their apparent ‘containment’ has served as public reassurance—an illusion of stability. 

Beneath that veneer, banks have shifted into a "velocity game" to preserve KPI optics: record-high credit expansion running in tandem with record-high NPLs. 

This statistical kabuki masks growing stress but sets the system on a path to its own Wile E. Coyote moment. 

While this sustains confidence in the short term, the moment loan growth slows, the cliff edge becomes visible—and the entire charade unravels. 

II. NPL Benchmarks Unveil Minskyan Fragility and the Wile E. Coyote Moment

Figure 1

Since the second half of 2022, Philippine banks have seen a structural uptrend in gross nonperforming loans (NPLs), with nominal levels breaching all-time highs by April 2024 and reaching a record Php 535 billion in July 2025. (Figure 1, topmost chart) 

Though the industry’s NPL ratio remains at a deceptively flat at 3.4 percent, this apparent stability is largely the effect of the ‘denominator illusion’: total loan growth (+11 percent) has been fast enough to offset the rise in bad loans.  (Figure 1, middle window) 

This accelerates procyclical risk-taking—banks extend more credit, often to riskier retail borrowers, to maintain headline ratios. 

Neo-Keynesian economist Hyman Minsky famously proposed that financial instability evolves in stages—from hedge finance to speculative finance, and finally to Ponzi finance—where borrowers can no longer generate sufficient cash flows to service debt and must rely on refinancing, rollovers, or asset sales to stay afloat (see references) 

But Minsky’s framework has a counterparty: the lender. 

In the Philippine case, banks have become enablers of this drift. To keep overleveraged firms and households solvent, they must sustain ever-faster credit expansion—rolling over weak loans, extending new ones, and deferring recognition of losses. 

This is the Minskyan drift on the supply side: not just borrower pathology, but lender complicity. 

A banking system whose apparent stability depends on pyramiding credit to increasingly marginal borrowers, refinancing delinquent accounts, and chasing yield into riskier consumer segments—exacerbating the very fragility it was meant to manage. 

The result is a velocity-dependent equilibrium—one that demands constant motion to avoid collapse. 

When the sprint falters or bad debts surge, the NPL ratio will spike—mechanically, inevitably—unveiling the proverbial skeletons long buried beneath the benchmark gloss. 

The system confronts its Wile E. Coyote moment: suspended mid-air, legs still spinning, gravity imminent. Once credit growth slows, the ground disappears—and the fragility long masked by velocity is fully revealed. 

III. Diminishing Returns: Policy Stimulus-Backstop Backlash 

This Minskyan drift is unfolding despite a full-spectrum easing cycle from the Bangko Sentral ng Pilipinas: reserve requirement cuts, interest rate reductions, the USDPHP softpeg regime, doubled deposit insurance, and lingering regulatory relief. 

Layered atop record fiscal stimulus, these measures were designed to cushion the system—but they now reveal diminishing returns. 

The irony is sharp: instead of stabilizing credit dynamics, these policies have parlayed into rising risks—encouraging yield-chasing behavior and masking stress through refinancing. 

And to maintain the illusion of stability, authorities have upped the ante on benchmark-ism—using statistical bellwethers to project ‘resilience’ while embellishing markets to fit the narrative. 

As nominal NPLs climb and consumer credit deepens, the central bank faces an unenviable dilemma: tighten policy and risk triggering defaults, or deploy unprecedented, pandemic-style liquidity injections to preserve appearances even as the system runs out of runway. At the same time, banks themselves may be compelled to conserve liquidity and pull back on credit expansion, exposing the system’s velocity game for what it is. 

Needless to say, whether in response to BSP policy or escalating balance sheet stress, banks may begin pulling back on credit—unveiling the Wile E. Coyote moment, where velocity stalls and gravity takes hold. 

IV. Banks’ Drift Toward Consumers: Credit Cards and Salary Loans Power NPLs Higher 

This fragility is no longer confined to institutional (supply side) exposures—it’s now bleeding into the household sector. 

The banking system’s transformational pivot toward consumer credit—particularly credit card loans—has deepened latent risks, building a larger stock of eventual loan portfolio losses. 

While aggregate nominal consumer loans (including real estate) hit a record high in Q2 2025, non-performing loans also sprinted higher from their December 2022 bottom. Gross consumer NPLs now sit just 4.7% below their Q2 2021 peak. (Figure 1, lowest graph) 

Though recent increases have been broad-based, the lag in consumer credit delinquencies reflects delayed stress transmission—especially in motor vehicle and real estate segments.

Figure 2

Crucially, the share of consumer loans to banks’ total loan portfolio (net of interbank) reached an all-time high of 22.34% in Q2 2025. Year-on-year growth in consumer NPLs has accelerated from single digits in 2024 to double digits in the last two quarters. (Figure 2 topmost pane)  

As noted earlier, surging NPLs have accompanied blistering growth in credit card loans—both hitting record highs in Q2. (Figure 2, middle image) 

But it’s not just credit cards: salary loan NPLs also spiked to a record, juxtaposed against all-time high disbursements. (Figure 2, lowest graph)

Figure 3

Strikingly, even as bank lending hits new highs, consumer real estate NPLs have climbed over the past two quarters. This uptick comes despite previously stable delinquency rates—a counterintuitive anomaly given the record and near-record vacancy levels observed in Q1 and Q2 2025, potentially a product of sustained refinancing. (Figure 3, topmost diagram)  

These pressures are permeating into the demand side of the economy—further evidence of a consumer squeezed by inflation, debt, and the slow erosion of repayment capacity. 

Taken together, weak household balance sheets, rising camouflaged NPLs, and a slowing economy raise systemic risks that extend well beyond macro fundamentals—threatening institutional health and reaching deep into the financial sector’s core, even as headline growth continues to mask the underlying fragility. 

V. Stagflation Signals and the Death Knell of Benchmark-ism: Labor Frailty Meets Inflation’s Third Leg 

Credit risk pressures should intensify with the July labor market data, which unexpectedly exposes the labor market’s underlying frailty. 

The unemployment rate (5.33%) and unemployed population (2.59 million) surged to pandemic-era highs (August 2022: 5.3%, 2.681 million), while the labor participation rate fell to 60.7%—slightly above July 2023’s 60.1%. (Figure 3 middle and lowest images) 

Stunningly, despite a 1.51% YoY increase in population, the non-labor force swelled to 31.45 million, the highest level since at least 2021. 

Combined, the unemployed and non-labor force accounted for a staggering 42.5% of the 15-and-above population in July 2025—a July 2023 high. 

Ironically, authorities amusingly blamed the weather. 

For banks, a looming storm is brewing: fragile household balance sheets, concealed loan delinquencies, and a deteriorating labor market set the stage for increased NPL formation in Q3 2025, with potentially systemic consequences

Figure 4

There’s more. 

Authorities also reported that despite rice price controls and the 20-peso rollout, headline CPI jumped to 1.5% in August—exposing the likely anomalous 0.9% dip in July. More concerning is the CORE CPI breakout, rising from 2.3% to 2.7%, the highest since December 2024. (Figure 4, topmost visual) 

Historically, a negative spread—where CORE CPI exceeds headline—has signaled cyclical bottoms for headline inflation. 

History rhymes. Peak CPI in October 2018 marked the launchpad for the record run in gross NPLs, which climaxed in October 2021 before slowing. (Figure 4, second to the highest image) 

Likewise, February 2023’s peak CPI became the springboard for the recent all-time highs in gross NPLs—records now eclipsed or obscured by the Wile E. Coyote velocity game. 

The pattern is clear: Each cycle shows how households use credit to bridge spending power losses during inflation surges, only to leave borrowers delinquent in its wake. 

The fatal cocktail of surging unemployment and a potential third leg of the inflation cycle—stagflation—could be the coup de grâce for NPL benchmark-ism. The illusion of resilience may not survive the next impact. 

VI. The Wile E. Coyote Dynamic in Bank Investments via Available For Sale (AFS) Assets 

There’s another aspect we’ve barely touched—yet it has become a critical factor in the banking system’s health challenges, now showing symptoms of the Wile E. Coyote dynamic: investment assets. 

First, the distribution of bank assets reveals a transformational shift—from safeguarding liquidity to an entrenched addiction to leverage. This seismic rebalancing is evident in the rising share of investments and, more recently, the rebound in loan activity, both at the expense of cash reserves. (Figure 4, second to the lowest graph) 

Since the BSP’s historic rescue during the pandemic recession, the cash share of bank assets has plunged to an all-time low of 6.93% as of July 2025. 

Second, as we’ve repeatedly noted, the pandemic-level fiscal deficit has driven the banking system’s net claim on central government (NCoCG) to a record Php 5.547 trillion (up 7.12% last July). This is mirrored in Held-to-Maturity (HTM) assets, which rose 2.15% to a record Php 4.1 trillion. Today’s deficit is not just a macro concern—it’s manifesting as a liquidity squeeze across the banking system. And that’s before accounting for the adverse effects of crowding out. (Figure 4 lowest graph) 

Third, the very investments that carried the banking system through the pandemic—buoyed by the historic BSP cash injections—have now become a source of friction. 

The need for sustained liquidity from the BSP to keep asset prices afloat has morphed into a Trojan Horse for inflation and a fuel source for increasingly speculative risk-taking engagements. 

To stave off asset deflation, the BSP must inject liquidity—primarily via bank credit expansion—yet this comes at the cost of spiking inflation risk.

Figure 5

This dynamic is most evident in Available-for-Sale (AFS) assets, which now constitute 41% of gross financial assets, fast catching up to HTMs at 52%. (Figure 5, topmost window) 

VII. AFS Surge and Recession-Grade Financial Losses 

The record build-up of AFS assets has heightened exposure to mark-to-market shocks, transmitting valuation swings directly into capital accounts and investor sentiment. 

The impact is already visible: In Q2, Philippine banks suffered an income contraction of (-) 1.96%, driven largely by a surge in losses on financial assets totaling Php 43.782 billion—the largest since December 2020, at the height of the pandemic recession. Let it be clear, these are recession-grade losses. (Figure 5, middle chart) 

With fixed income rates falling and bond prices rallying, the source of these losses becomes clear by elimination: deteriorating equity positions and bad debt. This is reinforced by the all-time high in banks’ allowance for credit losses (ACL)—a supposed buffer against rising delinquencies that signals institutional awareness of latent stress. (Figure 5, lowest diagram) 

Yet, like NPLs, these record ACLs are statistically suppressed by spitfire loan growth.

VIII. Benchmark-ism and the Illusion of Confidence

Figure 6

Nonetheless, this structural shift helps explain the growing correlation between AFS trends and the PSE Financial Index. (Figure 6, topmost window) 

In this light, banks—alongside Other Financial Corporations (OFCs)—may well represent a Philippine version of the stock market “National Team”: pursuing benchmark-ism or, perhaps, reticently tasked with pumping member-bank share prices within the Financial Index to choreograph market confidence. 

Patterns of coordinated price actions—post-lunch ‘afternoon delight’ rallies and pre-closing pumps—can often be traced back to these actors. 

Whether by design or silent coordination, the optics are unmistakable. 

IX. Velocity or Collapse: The Wile E. Coyote Reckoning 

The implication is stark: even as banks expanded their AFS portfolios —ostensibly for liquidity and yield, they deepened their exposure to volatility and credit deterioration. 

Equity-linked losses began bleeding into financial statements, and provisioning behavior revealed a system bracing for impact. 

The liquidity strain was hiding in plain sight—concealed by statistical optics and benchmark histrionics.

Compounding this is the shadow of large corporate exposures—most notably San Miguel Corporation, whose Q2 profits were largely driven by asset transfers, shielding its Minskyan Ponzi-finance model of fragility 

For instance, if banks hold AFS equity stakes or debt instruments linked to SMC, any deterioration in valuation or repayment capacity would surface as mark-to-market losses or provisioning spikes. 

Alas, like Wile E. Coyote, banks now require another velocity game—pumping financial assets higher to sustain investment optics. 

Without it, they risk compounding their liquidity dilemma into a full-blown solvency issue.

X. BSP’s Tacit Pivot: From Sovereign Risk to Banking Backstop 

The drain in the banking system’s cash reserves appears to be accelerating. 

Following June’s 11.35% jump (+Php 224.78 billion), July posted a 12.8% contraction (–Php 281.87 billion), fully offsetting gains of June, and partly last May (+Php 66.11 billion). Nonetheless, cash and due from banks at Php 1.923 trillion fell to its lowest level since at least 2014. 

And July’s slump signifies a continuum of long-term trend. However, from the slomo erosion, the depletion appears to be intensifying. 

So, despite interim growth bounce of deposits and financial assets, net (excluding equities), the cash-due banks to deposit and liquid-assets-to-deposit ratios resume their respective waterfalls.  In July, cash to deposit ratio slipped to all-time lows, while liquid assets-to-deposit fell to pre-pandemic March 2020 lows! (Figure 6, middle chart) 

Ironically, July’s massive cash drain coincided with the implementation of CMEPA. 

Importantly, banks drew a massive Php 189 billion from the central bank’s coffers as shown by the BSP’s claims on other depository corporations (ODC). (Figure 6, lowest diagram) 

This wasn’t a routine liquidity operation—it was a balance sheet pivot, redirecting support away from direct government exposure and toward the banking sector itself. The implication is clear: the system is leaning harder on central bank liquidity to offset deepening reserve depletion.

Figure 7

By shrinking its net claims on the central government (NCoCG) while expanding its claims on ODCs, the central bank has effectively told the Treasury to park its funds at BSP, while opening its own balance sheet wider to banks. This reduces BSP’s exposure to sovereign credit, but leaves banks more dependent on central bank lifelines to cover liquidity shortfalls. (Figure 7, topmost visual)  

In practice, this means banks are now forced into a double bind. On one hand, they must absorb more government securities and expand credit to keep up the optics of balance-sheet strength. 

On the other, they rely more heavily on BSP’s injections to plug holes in cash reserves. This rebalancing masks systemic strain—liquidity looks managed on paper, but the underlying dependence on continuous velocity (credit growth, AFS positioning, and central bank drawdowns) signals fragility. 

Far more crucial, what emerges is a structural shift: the BSP’s balance sheet is less about backstopping fiscal deficits and more about propping up the banking system. Yet this is not a permanent fix—if banks stumble in their velocity game or government borrowing intensifies, the pressure could quickly return in the form of crowding-out, valuation losses, and even solvency fears. In short, the pivot may buy time, but it also deepens the Wile E. Coyote dilemma: run faster, or fall.

With the BSP pivoting towards a backstop, bank borrowing growth decelerated to 8.9% YoY or fell by 14% MoM in July to Php Php 1.58 trillion—about 17% down from the record Php 1.907 trillion last March 2025. (Figure 7, middle image) 

This deceleration underscores the limits of the velocity game: even with central bank support, banks are struggling to sustain credit expansion without exposing themselves to deeper asset and funding risks. 

XI. Conclusion: The Velocity Charade Meets Its Limits 

The deepening Wile E. Coyote dynamic—where velocity props up optics of loans and investments—is unsustainable. (Figure 7, lowest cartoon) 

Surging NPLs and rising latent loan losses belie the façade of credit expansion. 

Accelerated exposure to AFS assets injects mark-to-market volatility, while HTMs tie banks to the unsparing race of public debt. 

There is no free lunch. Policy-induced fragility is no longer theoretical—it is compounding and irreducible to benchmark-ism or statistical optics. 

The illusion of managed liquidity is cracking. Each policy lifeline buys time—but only deepens the fall if velocity fails. 

Yet banks and the political economy have locked themselves in a fatal trap:

• Deposit rebuilding is punished by state policy,
• Recapitalization is constrained by fiscal exhaustion,
• Capital markets are dominated by overleveraged elites,
•  Hedge finance is crowded out by Ponzi rollovers,
• Tax and savings reform is politically dead under “free lunch” populism 

In short: a trap within an inescapable trap. 

___

References: 

Hyman P. Minsky, The Financial Instability Hypothesis, The Jerome Levy Economics Institute of Bard College, May 1992 

Prudent Investor Newsletter Substack Archives: 

-Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning August 31, 2025 (substack) 

-Philippine Banks: June’s Financial Losses and Liquidity Strains Expose Late-Cycle Fragility August 7, 2025 (substack) 

-Liquidity Under Pressure: Philippine Banks Struggle in Q1 2025 Amid a Looming Fiscal Storm May 18, 2025 (substack) 

-BSP’s Fourth Rate Cut: Who Benefits, and at What Cost? April 13, 2025 (substack) 

CMEPA 

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback July 27, 2025 (substack)

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design July 20,2025 (substack) 

  

Philippine Banks: June’s Financial Losses and Liquidity Strains Expose Late-Cycle Fragility

Debt-fueled booms all too often provide false affirmation of a government’s poli­cies, a financial institution’s ability to make outsized profits, or a country’s standard of living. Most of these booms end badly—Carmen Reinhart and Kenneth Rogoff 

Philippine Banks: June’s Financial Losses and Liquidity Strains Expose Late-Cycle Fragility 

In this issue: 

Part 1: Earnings Erosion and the Mask of Stability

1.A NPLs Fall, But Provisions Rise: A Tale of Two Signals

1.B Philippine Bank’s Profit Growth Falters: Q2 Deficit Breaks the Streak

1.C Universal and Commercial Banks Lead the Weakness; PSE Listed Banks Echo the Slowdown

1.D Income Breakdown: Lending Boom Masks Structural Risk

1.E CMEPA’s Gambit: Taxing Time Deposits to Diversify Bank Income

1.F The Real Culprit: Exploding Losses on Financial Assets

1.G San Miguel’s Share Plunge: A Canary in the Credit Mine? Beneath the Surface: Banks Signal Stress

1.H The NPL Illusion: Velocity Masks Vulnerability

1.I Benchmark Kabuki: When Benchmark-ism Meets Market Reality

Part 2: Liquidity Strains and the Architecture of Intervention

2.A Behind the RRR Cuts: Extraordinary Bank Dependence on BSP

2.B RRR Infusions: Liquidity Metrics Rebound; Weak Money Creation Amid Record Deficit Spending

2.C Rising Borrowings Reinforce Funding Strains, Crowding Out Intensifies, Record HTM Assets

2.D Divergence: Bank Profits, GDP and the PSE’s Financial Index; Market Concentration

2.E OFCs and the Financial Index: A Coordinated Lift?

2.F Triple Liquidity Drain; Rescue Template Risks: Inflation, Stagflation, Crisis; Fiscal Reflex: Keynesian Response Looms

2.G Finale: Classic Symptoms of Late-Cycle Fragility 

Philippine Banks: June’s Financial Losses and Liquidity Strains Expose Late-Cycle Fragility 

From earnings erosion to monetary theatrics, June’s data shows a banking system caught in late-cycle strain.

Part 1: Earnings Erosion and the Mask of Stability 

1.A NPLs Fall, But Provisions Rise: A Tale of Two Signals 

Inquirer.net August Bad loans in the Philippine banking system fell to a three-month low in June, helped by the central bank’s ongoing interest rate cuts, which could ease debt servicing burden. However, lenders remain cautious and have increased their provisions to cover possible credit losses. Latest data from the Bangko Sentral ng Pilipinas (BSP) showed nonperforming loans (NPL), or debts that are 90 days late on a payment and at risk of default, cornered 3.34 percent of the local banking industry’s total lending portfolio. That figure, called the gross NPL ratio, was the lowest since March 2025, when the ratio stood at 3.30 percent. 

But the NPL ratio masks a deeper tension: gross NPLs rose 5.5% year-on-year to Php 530.29 billion, while total loans expanded 10.93% to Php 15.88 trillion. The ratio fell not because bad loans shrank, but because credit growth outpaced them. 

Loan loss reserves rose 5.5% to Php 505.91 billion, and the NPL coverage ratio ticked up to 95.4%. Past due loans climbed 9.17% to Php 670.5 billion, and restructured loans rose 6.27%. Provisioning for credit losses ballooned to Php 84.19 billion in 1H 2025, with Php 43.78 billion booked in Q2 alone—the largest since Q4 2020’s pandemic-era spike. 

So, while the establishment cites falling NPL ratios to reassure the public, banks are quietly bracing for defaults and valuation hits—likely tied to large corporate exposures. The provisioning surge is a tacit admission: risk is rising, even if it hasn’t yet surfaced in headline metrics.

1.B Philippine Bank’s Profit Growth Falters: Q2 Deficit Breaks the Streak

Figure 1

Philippine banks posted their first quarterly profit contraction in Q2 2025, down -1.96% YoY—a sharp reversal from Q1’s 10.64% growth and Q2 2024’s 5.21%. This marks the first decline since Q3 2023’s -11.75%. (Figure 1, upper window) 

Even more telling, since the BSP’s historic rescue of the banking system in Q2 2021, net profit growth has been trending downward. Peso profits etched a record in Q1 2025, but fell in Q2. 

The Q2 slump dragged down 1H performance: bank profit growth slipped to 4.14%, compared to 2H 2024’s 9.77%, though slightly higher than 1H 2024’s 4.1%. 

1.C Universal and Commercial Banks Lead the Weakness; PSE Listed Banks Echo the Slowdown 

Earnings growth of universal-commercial (UC) banks sank from 8.6% in Q1 2025 to a -2.11% deficit in Q2. 

UC bank profits grew 6.33% in Q2 2024. Still, UC banks eked out a 3.1% gain in 1H 2025 versus 5.3% in the same period last year. UC banks accounted for 93.1% of total banking system profits in 1H 2025—underscoring their dominance or concentration but also their vulnerability. 

PSE listed banks partially echoed BSP data. (Figure 1, Lower Table) 

Aggregate earnings growth for all listed banks hit 6.08% in Q2 and 6.77% in 1H—down from 10.43% and 9.95% in the same periods last year. The top three banks in the PSEi 30 (BDO, BPI, MBT) reported combined earnings growth of 4.3% in Q2 and 5.31% in 1H 2025, substantially lower compared to 13.71% and 15.4% in 2024. 

The discrepancy between BSP and listed bank data likely stems from government, foreign, and unlisted UC banks—whose performance may be masking broader stress. 

1.D Income Breakdown: Lending Boom Masks Structural Risk 

What explains the sharp profit downturn?

Figure 2

Net interest income rose 11.74% in Q2, while non-interest income increased 14.7%—slightly higher than Q1’s 11.7% and 14.5%, respectively. However, net interest income was lower than Q2 2024’s 14.74%, while non-interest income rebounded from -5.71% in the same period. (Figure 2, topmost chart) 

In 1H 2025, net interest income grew 11.7%, and non-interest income rose 14.6%, compared to 15.53% and -8.83% in 1H 2024. Net interest income now accounts for 82.5% of total bank profits—a fresh high, reflecting the lending boom regardless of BSP’s rate levels. 

This share has reversed course since 2013, rising from ~60% to 77% by end-2024—driven by BSP’s easy money policy and historic pandemic-era rescue efforts. Banks’ income structure resembles a Pareto distribution: highly concentrated, and extremely susceptible to duration and credit risks. 

BSP’s easing cycle has not only failed to improve banks’ core business, but actively contributed to its decay.

1.E CMEPA’s Gambit: Taxing Time Deposits to Diversify Bank Income 

The government’s response has been the Capital Market Efficiency Promotion Act (CMEPA). CMEPA, effective July 2025, imposes a flat 20% final withholding tax on all deposit interest income, including long-term placements. 

By taxing time deposits, policymakers aim to push savers into capital markets, boosting bank non-interest income through fees, trading, and commissions. But in reality, this is financial engineering. (Figure 2, middle graph) 

With weak household savings and low financial literacy, deposit outflows will likely shrink banks’ funding base rather than diversify their revenues. 

It would increase time preferences, leading the public to needlessly take risks or gamble—further eroding savings. 

Or, instead of reducing fragility, CMEPA risks layering volatile market income on top of an already over-concentrated interest income model. 

We’ve previously addressed CMEPA—refer to earlier posts for context (see below) 

1.F The Real Culprit: Exploding Losses on Financial Assets 

Beyond this structural weakness, the real culprit behind the downturn was losses on financial assets. 

In Q2 2025, banks posted Php 43.78 billion in losses—the largest since the pandemic recession in Q4 2020—driven by Php 49.3 billion in provisions for credit losses!  (Figure 2, lowest image) 

For 1H 2025, losses ballooned 64% to Php 73.6 billion, with provisions reaching Php 84.19 billion. 

Once again, this provisioning surge is a tacit admission: while officials cite falling NPL ratios, banks themselves are bracing for valuation hits and potential defaults, likely tied to concentrated corporate exposures. 

1.G San Miguel’s Share Plunge: A Canary in the Credit Mine? Beneath the Surface: Banks Signal Stress

Figure 3

Could this be linked to the recent collapse in San Miguel [PSE: SMC] shares? 

SMC plunged 14.54% WoW (Week on Week) as of August 15th, compounding its YTD losses to 35.4%. (Figure 3, upper diagram) 

And this share waterfall happened before its Q2 17Q 2025 release, which showed debt slipping slightly from Php 1.511 trillion in Q1 to Php 1.504 trillion in 1H—suggesting that the intensifying selloff may have been driven by deeper concerns. (Figure 3, lower visual) 

SMC’s Q2 (17Q) report reveals increasingly opaque cash generation, aggressive financial engineering, and unclear asset quality and debt servicing capacity. 

Yet, paradoxically, Treasury yields softened across the curve—hinting at either covert BSP intervention through its institutional cartel, a dangerous underestimation of contagion risk, or market complacency—a lull before the credit repricing storm. 

If SMC’s debt is marked at par or held to maturity, deterioration in its credit profile wouldn’t show up as market losses—but would require provisioning. This provisioning surge is a tacit admission: banks are seeing heightened risk, even if it’s not yet reflected in NPL ratios or market pricing. 

We saw this coming. Prior breakdowns on SMC are archived below. 

Of course, this SMC–banking sector inference linkage still requires corroborating evidence or forensic validation—time will tell.

Still, one thing is clear: banks are exhibiting mounting stress—underscoring the BSP’s resolve to intensify its easing cycle through rate cuts, RRR reductions, deposit insurance hikes, and a soft USDPHP peg. The ‘Marcos-nomics’ debt-financed deficit spending adds fiscal fuel to this monetary response. 

1.H The NPL Illusion: Velocity Masks Vulnerability

Figure 4

NPLs can be a deceptive measure of bank health. Residual regulatory reliefs from the pandemic era may still distort classifications, and the ratio itself reflects the relative velocity of bad loans versus credit expansion. 

Both gross NPLs and total loans hit record highs in peso terms in June—Php 530.29 billion and Php 15.88 trillion, respectively—but credit growth outpaced defaults, keeping the NPL ratio artificially low at 3.34%. (Figure 4, topmost pane) 

The logic is simple: to suppress the NPL ratio, loan velocity must accelerate faster than the accumulation of bad debt. Once credit expansion stalls, the entire kabuki collapses—and latent systemic stress will surface. 

1.I Benchmark Kabuki: When Benchmark-ism Meets Market Reality 

This is where benchmark-ism hits the road—and skids. The system’s metrics, once propped up by interventionist theatrics, are now showing signs of exhaustion. 

These are not isolated anomalies, but worsening symptoms of prior rescues—now overrun by the law of diminishing returns. 

And yet, the response is more of the same: fresh interventions to mask the decay of earlier ones. Theatrics, once effective at shaping perception, are now being challenged by markets that no longer play along. 

The system’s health doesn’t hinge on ratios—it hinges on velocity. Velocity of credit, of confidence, of liquidity. When that velocity falters, the metrics unravel. 

And beneath the unraveling lies a fragility that no benchmark can disguise. 

Part 2: Liquidity Strains and the Architecture of Intervention

2.A Behind the RRR Cuts: Extraordinary Bank Dependence on BSP 

There are few signs that the public grasps the magnitude of developments unfolding in Philippine banks. 

The aggregate 450 basis point Reserve Requirement Ratio (RRR) cuts in October 2024 and March 2025 mark the most aggressive liquidity release in BSP history—surpassing even its pandemic-era response. (Figure 4, middle chart) 

Unlike previous easing cycles (2018–2019, 2020), where banks barely tapped BSP liquidity, the current drawdown has been dramatic. 

As of July, banks had pulled Php 463 billion since October 2024 from the BSP (Claims on Other Depository Corporations)—Php 84.6 billion since March and Php 189.2 billion in June. Notably, 40.9% of the Php 463 billion liquidity drawdown occurred in July alone. 

This surge coincides with mounting losses on financial assets and record peso NPLs—masked by rapid credit expansion, which may be a euphemism for refinancing deteriorating debt. Banks’ lending to bad borrowers to prevent NPL classification is a familiar maneuver. 

When banks incur significant financial losses—whether from rising NPLs, credit impairments, or mark-to-market declines—the immediate impact is not just weaker earnings but a widening hole in their funding structure. The December 2020 episode, when the system booked its largest financial losses, highlighted how such shocks create a liquidity vacuum: instead of recycling liquidity through lending and market channels, banks are forced to patch internal shortfalls, draining capital buffers and eroding interbank trust. 

Into this vacuum steps the BSP. Reserve requirement cuts, while framed as policy easing, have functioned less as a growth stimulus and more as a liquidity lifeline. By drawing on their balances with the BSP, banks convert regulatory reserves into working liquidity—filling gaps left by financial losses. The outcome is growing dependence on central bank support: what appears as easing is in fact the manifestation of extraordinary support, with liquidity migrating from market sources to the BSP’s balance sheet. 

This hidden dependence underscores how financial repression has hollowed out market-based liquidity, leaving the BSP as the primary lender of first resort 

2.B RRR Infusions: Liquidity Metrics Rebound; Weak Money Creation Amid Record Deficit Spending

The liquidity drawdown has filtered into banks’ cash positions. As of June, peso cash reserves rebounded—though still down 19.8% year-on-year. Cash-to-deposit ratios rose from 9.87% in May to 10.67% in June, while liquid assets-to-deposits climbed from 47.29% to 49.24%. (Figure 4, lowest image)

Figure 5

RRR-driven cash infusions also lifted deposits. Total deposit growth rebounded from 4.96% in May to 5.91% in June, led by peso deposits (3.96% to 6.3%) and supported by FX deposits (4.42% to 6.8%). (Figure 5, topmost graph) 

Yet paradoxically, despite a 10.9% expansion in Total Loan Portfolio and ODC drawdown, deposits only managed modest growth—suggesting a liquidity black hole. CMEPA’s impact may deepen this imbalance. 

Despite record deficit spending in 1H 2025, BSP currency issuance/currency in circulation growth slowed from 9% in June to 8.1% in July, after peaking at 14.7% in May during election spending. Substantial money creation has not translated into higher CPI or GDP, and the slowdown suggests a growing demand problem. (Figure 5, middle diagram) 

Even with July’s massive ODC drawdown, BSP’s cash in circulation suggests a financial cesspool has been absorbing liquidity—offsetting whatever expansionary efforts are underway. 

2.C Rising Borrowings Reinforce Funding Strains, Crowding Out Intensifies, Record HTM Assets 

After a brief slowdown in May, bank borrowings surged anew by 24% in June to Php 1.85 trillion, nearing the March record of Php 1.91 trillion. Escalating liquidity strains are pushing banks to increase funding from capital markets. (Figure 5, lowest pane) 

This intensifies the crowding-out effect, as banks compete with the government and private sector for access to public savings.

Figure 6

Meanwhile, as predicted, record-high public debt has translated to greater bank financing of government via Net Claims on the Central Government, showing up in banks’ record-high Held-to-Maturity (HTM) assets. HTM assets have become a prime contributor to tightening liquidity strains in the banking system. (Figure 6, topmost graph) 

2.D Divergence: Bank Profits, GDP and the PSE’s Financial Index; Market Concentration 

Despite slowing profit growth, the PSE’s Financial Index—composed of 7 banks (BDO, BPI, MBT, CBC, AUB, PNB, SECB) plus the PSE—hit a historic high in Q1 2025, before dipping slightly in Q2. (Figure 6, middle visual)

Meanwhile, the sector’s real GDP partially echoed profits, reinforcing the case of a downturn. 

Financial GDP dropped sharply from 6.9% in Q1 2025 and 8% in Q2 2024 to 5.6% in Q2 2025. It accounted for 10.4% of national GDP in Q2, down from the all-time high of 11.7% in Q1—signaling deeper financialization of the economy. (Figure 6, lowest chart)

Figure 7

Bank GDP slowed to 3.7% in Q2 from 4.9% in Q1 2025, far below the 10.2% growth of Q2 2024. Since Q1 2015, bank GDP has averaged nearly half (49.9%) of the sector’s GDP. (Figure 7, topmost window) 

Thanks to the BSP’s historic rescue, the free-float market cap weight of the top three banks (BDO, BPI, MBT) in the PSEi 30 rose from 12.76% in August 2020 to 24.37% by mid-April 2025. As of August 15, their share stood at 21.8%, rising to 23.2% when CBC is included. (Figure 7, middle chart) 

This concentration has cushioned the PSEi 30 from broader declines—suggesting possible non-market interventions in bank share prices, while amplifying concentration risk. 

2.E OFCs and the Financial Index: A Coordinated Lift? 

BSP data on Other Financial Corporations (OFCs) reveals a dovetailing of ODC activity with the Financial Index. OFCs—comprising non-money market funds, financial auxiliaries, insurance firms, pension funds, and money lenders—appear to be accumulating bank shares, possibly at BSP’s implicit behest. 

In Q1 2024, BSP noted: "the sector’s claims on depository corporations rose amid the increase in its deposits with banks and holdings of bank-issued equity shares." 

This suggests a coordinated effort to prop up bank share prices—masking underlying stress. (Figure 7, lowest graph) 

Once a bear market strikes key bank shares and the financial index, losses will add to liquidity stress. Economic reality will eventually expose the choreography propping up both the PSEi 30 and banks. 

2.F Triple Liquidity Drain; Rescue Template Risks: Inflation, Stagflation, Crisis; Fiscal Reflex: Keynesian Response Looms 

In short, three sources of liquidity strain now pressure Philippine banks:

• Record holdings of Held-to-Maturity assets
• Rising Financial losses
• All-time high non-performing loans 

If BSP resorts to its 2020–2021 pandemic rescue template, expect the USDPHP to soar, inflation to spike, and rates to rise—ushering in stagflation or even possibly a debt crisis. 

With the private sector under duress from mounting bad credit, authorities—guided by top-down Keynesian ideology—are likely to resort to fiscal stimulus to boost GDP and ramp up revenue efforts. 

2.G Finale: Classic Symptoms of Late-Cycle Fragility 

The Philippine banking system is showing unmistakable signs of late-cycle fragility.

Velocity-dependent metrics are poised to unravel once credit growth stalls. Liquidity dependence is paraded as resilience. Market support mechanisms blur price discovery. Policy reflexes recycle past interventions while ignoring structural cracks. 

Losses are being papered over with liquidity, fiscal deficits are substituting for private demand, and the veneer of stability rests on central bank backstops. This choreography cannot hold indefinitely. If current trajectories persist, the risks are stark: stagflation, currency instability, and a potential debt spiral. 

The metrics are clear. The real story lies in the erosion of velocity and the quiet migration from market discipline to state lifelines. What appears resilient today may be revealed tomorrow as fragility sustained on borrowed time. 

As the saying goes: we live in interesting times. 

____

Prudent Investor Newsletter Archives: 

1 San Miguel

• Is San Miguel’s Ever-Growing Debt the "Sword of Damocles" Hanging over the Philippine Economy and the PSE? December 02, 2024 (substack)
• Escalating Systemic Risk: As Cash Reserves Plummeted, San Miguel’s 9M Debt Zoomed to an Astonishing Php 1.405 TRILLION! November 20, 2023 (substack)

Just among the many…

2 CMEPA

• The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback July 27, 2025 (substack)
• The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design July 20,2025 (substack) 

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch

 

The ultimate cause, therefore, of the phenomenon of wave after wave of economic ups and downs is ideological in character. The cycles will not disappear so long as people believe that the rate of interest may be reduced, not through the accumulation of capital, but by banking policy—Ludwig von Mises 

In this issue

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch

I. Policy Easing in Question: Credit Concentration and Economic Disparity

II. Elite Concentration: The Moody's Warning and Its Missing Pieces

III. Why the Elite Bias? Financial Regulation, Market Concentration and Underlying Incentives

IV. Market Rebellion: When Reality Defies Policy

V. The Banking System Under Stress: Evidence of a Rescue Operation

A. Liquidity Deterioration Despite RRR Cuts

B. Cash Crunch Intensifies

C. Deposit Growth Slowdown

D. Loan Portfolio Dynamics: Warning Signs Emerge

E. Investment Portfolio Under Pressure

F. The Liquidity Drain: Government's Role

G. Monetary Aggregates: Emerging Disconnection

H. Banking Sector Adjustments: Borrowings and Repos

I.  The NPL Question: Are We Seeing the Full Picture?

J. The Crowding Out Effect

VI. Conclusion: The Inevitable Reckoning 

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch 

Despite easing measures, liquidity has tightened, markets have diverged, and systemic risks have deepened across the Philippine banking system. 

I. Policy Easing in Question: Credit Concentration and Economic Disparity 

The BSP implemented the next phase of its ‘easing cycle’—now comprising four policy rate cuts and two reductions in the reserve requirement ratio (RRR)—complemented by the doubling of deposit insurance coverage. 

The question is: to whose benefit? 

Is it the general economy? 

Bank loans to MSMEs, which are supposedly a target of inclusive growth, require a lending mandate and still accounted for only 4.9% of the banking system’s total loan portfolio as of Q4 2024. This is despite the fact that, according to the Department of Trade and Industry (DTI), MSMEs represented 99.6% of total enterprises and employed 66.97% of the workforce in 2023. 

In contrast, loans to PSEi 30 non-financial corporations reached Php 5.87 trillion in Q1 2025—equivalent to 17% of the country’s total financial resources. 

Public borrowing has also surged to an all-time high of Php 16.752 trillion as of April. 

Taken together, total systemic leverage—defined as the sum of bank loans and government debt—reached a record Php 30.825 trillion, or approximately 116% of nominal 2024 GDP. 

While bank operations have expanded, fueled by consumer debt, only a minority of Filipinos—those classified as “banked” in the BSP’s financial inclusion survey—reap the benefits. The majority remain excluded from the financial system, limiting the broader economic impact of the BSP’s policies. 

The reliance on consumer debt to drive bank growth further concentrates financial resources among a privileged few. 

II. Elite Concentration: The Moody's Warning and Its Missing Pieces 

On June 21, 2025, Inquirer.net cited Moody’s Ratings: 

"In a commentary, Moody’s Ratings said that while conglomerate shareholders have helped boost the balance sheet and loan portfolio of banks by providing capital and corporate lending opportunities, such a tight relationship also increases related-party risks. The global debt watcher also noted how Philippine companies remain highly dependent on banks for funding in the absence of a deep capital market. This, Moody’s said, could become a problem for lenders if corporate borrowers were to struggle to pay their debts during moments of economic downturn." (bold added) 

Moody’s commentary touches on contagion risks in a downturn but fails to elaborate on an equally pressing issue: the structural instability caused by deepening credit dependency and growing concentration risks. These may not only emerge during a downturn—they may be the very triggers of one. 

The creditor-borrower interdependence between banks and elite-owned corporations reflects a tightly coupled system where benefits, risks, and vulnerabilities are shared. It’s a fallacy to assume one side enjoys the gains while the other bears the risks. 

As J. Paul Getty aptly put it: 

"If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem." 

In practice, this means banks are more likely to continue lending to credit-stressed conglomerates than force defaults, further entrenching financial fragility. 

What’s missing in most mainstream commentary is the causal question: Why have lending ties deepened so disproportionately between banks and elite-owned firms, rather than being broadly distributed across the economy?

The answer lies in institutional incentives rooted in the political regime. 

As discussed in 2019, the BSP’s trickle-down easy money regime played a key role in enabling Jollibee’s “Pacman strategy”—a debt-financed spree of horizontal expansion through competitor acquisitions. 

III. Why the Elite Bias? Financial Regulation, Market Concentration and Underlying Incentives 

Moreover, regulatory actions appear to favor elite interests. 

On June 17, 2025, ABS-CBN reported: 

"In a statement, the SEC said the licenses [of over 400 lending companies] were revoked for failing to file their audited financial statements, general information sheet, director or trustee compensation report, and director or trustee appraisal or performance report and the standards or criteria for the assessment." 

Could this reflect regulatory overreach aimed at eliminating competition favoring elite-controlled financial institutions? Is the SEC becoming a tacit ‘hatchet man’ serving oligopolistic interests via arbitrary technicalities? 

Philippine banks—particularly Universal Commercial banks—now control a staggering 82.64% of the financial system’s total resources and 77.08% of all financial assets (as of April 2025). 

Aside from BSP liquidity and bureaucratic advantages, political factors such as ‘regulatory capture’ and the ‘revolving door’ politics further entrench elite power. 

Many senior officials at the BSP and across the government are former bank executives, billionaires and their appointees, or close associates. Thus, instead of striving for the Benthamite utilitarian principle of “greatest good for the greatest number,” agencies may instead pursue policies aligned with powerful vested interests. 

This brings us back to the rate cuts: while framed as pro-growth, they largely serve to ease the cost of servicing a mountain of debt owed by government, conglomerates, and elite-controlled banks. 

Figure 1 

However, its impact on average Filipinos remains negligible, with official statistics increasingly revealing the diminishing returns of these policies. 

The BSP’s rate and RRR cuts, coming amid a surge in UC bank lending, risk undermining GDP momentum (Figure 1) 

IV. Market Rebellion: When Reality Defies Policy 

Even markets appear to be revolting against the BSP's policies!

Figure 2

Despite plunging Consumer Price Index (CPI) figures, Treasury bill rates, which should reflect the BSP's actions, have barely followed the easing cycle. (Figure 2, topmost window) 

Yields of Philippine bonds (10, 20, and 25 years) have been rising since October 2024 reinforcing the 2020 uptrend! (Figure 2, middle image) 

Inflation risks continue to be manifested by the bearish steepening slope of the Philippine Treasury yield curve. (Figure 2, lower graph)

Figure 3

Additionally, the USD/PHP exchange rate sharply rebounded even before the BSP announcement. (Figure 3, topmost diagram) 

Treasury yields and the USD/PHP have fundamentally ignored the government's CPI data and the BSP's easing policies. 

Importantly, elevated T-bill rates likely reflect liquidity pressures, while rising bond yields signal mounting fiscal concerns combined with rising inflation risks. 

Strikingly, because Treasury bond yields remain elevated despite declining CPI, the average monthly bank lending rates remain close to recent highs despite the BSP's easing measures! (Figure 3, middle chart) 

While this developing divergence has been ignored or glossed over by the consensus, it highlights a worrisome imbalance that authorities seem to be masking through various forms of interventions or "benchmark-ism" channeled through market manipulation, price controls, and statistical inflation. 

V. The Banking System Under Stress: Evidence of a Rescue Operation 

We have been constantly monitoring the banking system and can only conclude that the BSP easing cycle appears to be a dramatic effort to rescue the banking system. 

A. Liquidity Deterioration Despite RRR Cuts 

Astonishingly, within a month after the RRR cuts, bank liquidity conditions deteriorated further: 

·         Cash and Due Banks-to-Deposit Ratio dropped from 10.37% in March to 9.68% in April—a milestone low

·         Liquid Assets-to-Deposit Ratio plunged from 49.5% in March to 48.3% in April—its lowest level since March 2020 

Liquid assets consist of the sum of cash and due banks plus Net Financial assets (net of equity investments). Fundamentally, both indicators show the extinguishment of the BSP's historic pandemic recession stimulus. (Figure 3, lowest window) 

B. Cash Crunch Intensifies

Figure 4

Year-over-year change of Cash and Due Banks crashed by 24.75% to Php 1.914 trillion—its lowest level since at least 2014. Despite the Php 429.4 billion of bank funds released to the banking system from the October 2024 and March 2025 RRR cuts, bank liquidity has been draining rapidly. (Figure 4, topmost visual) 

C. Deposit Growth Slowdown 

The liquidity crunch in the banking system appears to be spreading. 

The sharp slowdown has been manifested through deposit liabilities, where year-over-year growth decelerated from 5.42% in March to 4.04% in April due to materially slowing peso and foreign exchange deposits, which grew by 5.9% and 3.23% in March to 4.6% and 1.6% in April respectively. (Figure 4, middle image) 

D. Loan Portfolio Dynamics: Warning Signs Emerge 

Led by Universal-Commercial banks, growth of the banking system's total loan portfolio slowed from 12.6% in March to 12.2% in April. UC banks posted a deceleration from 12.36% year-over-year growth in March to 11.85% in April. 

However, the banking system's balance sheet revealed a unmistakable divergence: the rapid deceleration  of loan growth. Growth of the Total Loan Portfolio (TLP), inclusive of interbank lending (IBL) and Reverse Repurchase (RRP) agreements, plunged from 14.5% in March to 10.21% in April, reaching Php 14.845 trillion. (Figure 4, lowest graph) 

This dramatic drop in TLP growth contributed significantly to the steep decline in deposit growth. 

E. Investment Portfolio Under Pressure

Figure 5

Banks' total investments have likewise materially slowed, easing from 11.95% in March to 8.84% in April. While Held-to-Maturity (HTM) securities growth slowed 0.58% month-over-month, they were up 0.98% year-over-year. 

Held-for-Trading (HFT) assets posted the largest growth drop, from 79% in March to 25% in April. 

Meanwhile, accumulated market losses eased from Php 21 billion in March to Php 19.6 billion in May. (Figure 5, topmost graph) 

Rising bond yields should continue to pressure bank trading assets, with emphasis on HTMs, which accounted for 52.7% of Gross Financial Assets in May. 

A widening fiscal deficit will likely prompt banks to increase support for government treasury issuances—creating a feedback loop that should contribute to rising bond yields. 

F. The Liquidity Drain: Government's Role 

Part of the liquidity pressures stem from the BSP's reduction in its net claims on the central government (NCoCG) as it wound down pandemic-era financing. 

Simultaneously, the recent buildup in government deposits at the BSP—reflecting the Treasury's record borrowing—has further absorbed liquidity from the banking system. (Figure 5, middle image) 

G. Monetary Aggregates: Emerging Disconnection 

Despite the BSP's easing measures, emerging pressures on bank lending and investment assets, manifested through a cash drain and slowing deposits, have resulted in a sharp decrease in the net asset growth of the Philippine banking system. Year-over-year growth of net assets slackened from 7.8% in April to 5.5% in May. (Figure 5, lowest chart) 

Figure 6

Interestingly, despite the cash-in-circulation boost related to May's midterm election spending—which hit a growth rate of 15.4% in April (an all-time high in peso terms), just slightly off the 15.5% recorded during the 2022 Presidential elections—M3 growth sharply slowed from 6.2% in March to 5.8% in April and has diverged from cash growth since December 2024. (Figure 6, topmost window) 

The sharp decline in M2 growth—from 6.6% in April to 6.0% in May—reflecting the drastic slowdown in savings and time deposits from 5.5% and 7.6% in April to 4.5% and 5.8% in May respectively, demonstrates the spillover effects of the liquidity crunch experienced by the Philippine banking system. 

H. Banking Sector Adjustments: Borrowings and Repos 

Nonetheless, probably because of the RRR cuts, aggregate year-over-year growth of bank borrowings decreased steeply from 40.3% to 16.93% over the same period. (Figure 6, middle graph) 

Likely drawing from cash reserves and the infusion from RRR cuts, bills payable fell from Php 1.328 trillion to Php 941.6 billion, while bonds rose from Php 578.8 billion to Php 616.744 billion. (Figure 6, lowest diagram) 

Banks' reverse repo transactions with the BSP plunged by 51.22% while increasing 30.8% with other banks. 

As we recently tweeted, banks appear to have resumed their flurry of borrowing activity in the capital markets this June. 

I.  The NPL Question: Are We Seeing the Full Picture? 

While credit delinquencies expressed via Non-Performing Loans (NPLs) have recently been marginally higher in May, the ongoing liquidity crunch cannot be directly attributed to them—unless the BSP and banks have been massively understating these figures, which we suspect they are. 

J. The Crowding Out Effect 

Bank borrowings from capital markets amplify the "crowding-out effect" amid growing competition between government debt and elite conglomerates' credit needs. 

The government’s significant role in the financial system further complicates this dynamic, as it absorbs liquidity through record borrowing. 

Or, it would be incomplete to examine banks' relationships with elite-owned corporations without acknowledging the government's significant role in the financial system. 

VI. Conclusion: The Inevitable Reckoning 

The deepening divergent performance between markets and government policies highlights not only the tension between markets and statistics but, more importantly, the progressing friction between economic and financial policies and the underlying economy. 

Is the consensus bereft of understanding, or are they attempting to bury the logical precept that greater concentration of credit activities leads to higher counterparty and contagion risks? Will this Overton Window prevent the inevitable reckoning? 

The evidence suggests that the BSP's easing cycle, rather than supporting broad-based economic growth, primarily serves to maintain the stability of an increasingly fragile financial system that disproportionately benefits elite interests. 

With authorities reporting May’s fiscal conditions last week (to be discussed in the next issue), we may soon witness how this divergence could trigger significant volatility or even systemic instability 

The question is not whether this system is sustainable—the data clearly indicates it is not—but rather how long political and regulatory interventions can delay the inevitable correction, and at what cost to the broader Philippine economy.