The MSME Credit Black Hole: Failure of the Magna Carta

 

The end cannot justify the means for the simple and obvious reason that the means employed determine the nature of the ends produced—Aldous Huxley 

In this issue:

The MSME Credit Black Hole: Failure of the Magna Carta

I. The Magna Carta: The Policy and Its Promise

II. The Empirical Test

III. Why MSME Lending Became Relatively Less Attractive

IV. When The State Makes The Intended Borrower Less Bankable

V. Where Did the Bank’s Capacity Go?

VI. Why The Architecture Keeps Reproducing Itself

VII. Where The 2026 BSP Relief Cascade Fits

VIII. Conclusion: Three Symptoms, One Structure

The MSME Credit Black Hole: Failure of the Magna Carta 

How a Credit Quota Failed to Change the Architecture of Financial Concentration 

I. The Magna Carta: The Policy and Its Promise 

Enacted in 1991 through Republic Act 6977, the Magna Carta for Small Enterprises was built around a simple structural diagnosis: banks naturally preferred larger, more established borrowers, leaving smaller businesses chronically short of formal credit. Congress tried to override that bias by mandating that banks devote a share of their lending to small enterprises. 

The framework was strengthened in 1997 and expanded again through RA 9501 in 2008, which established the familiar 8% allocation for micro and small enterprises and 2% for medium enterprises, for a combined 10% mandate, backed by penalties for noncompliance. 

The law is the anchor. Whether it worked is an empirical question. 

The data has been answering it for sixteen years. 

II. The Empirical Test

Figure 1

MSMEs account for roughly 99.6% of businesses and about 67% of employment, yet bank lending to the sector has remained stubbornly below the share Congress intended to force into the system. (Figure 1)

Figure 2

MSME lending's share of the banking system's loan portfolio peaked near 8.4% in Q1 2010. It then fell in an almost uninterrupted decline. It kept falling after the quota expired in 2018 and MSME lending ceased to be subject to a mandatory allocation. (Figure 2) 

By Q2 2026, lending to the MSMEs stood at 4.48% of the banking system's portfolio — the second-lowest share on record for the combined micro-small segment — while the medium-enterprise share was at its lowest recorded level. 

The law was intended to redirect bank credit toward the productive base. 

Instead, the banking system progressively moved away from the mandate. 

That matters because it eliminates the easiest explanation for the failure: enforcement. 

Two different enforcement regimes, spanning four presidential administrations, produced essentially the same underlying trajectory. The quota was mandatory and backed by penalties; then the quota expired and compliance became voluntary. Neither regime reversed the decline. 

That consistency is the tell. 

A law that produces the same disappointing outcome under both a penalty-backed mandate and a voluntary regime is not primarily failing because regulators forgot to enforce it. It is failing because the policy is asking legislation to override an incentive structure that keeps making the targeted lending relatively unattractive. 

There is a Goodhart's Law problem here: once the state turns a desired outcome into a compliance target, the target can become the object of the exercise rather than the underlying objective. The Magna Carta could measure whether banks allocated a prescribed share of their portfolio to MSMEs. It could penalize them when they did not. What it could not do was make MSME lending economically as attractive as the alternatives competing for the same balance sheet. 

It measured the allocation. It never changed the incentives producing the allocation. 

And once the quota became the policy instrument, compliance could substitute for reform. The system could satisfy, evade, minimize or eventually abandon the target without resolving the underlying reason banks preferred other borrowers. 

That is why the sixteen-year trajectory matters more than any individual compliance rate. The quota was aimed at the symptom — the share of credit going to MSMEs — while the incentive structure determining that share remained largely intact. 

The question, then, is not why banks ignored the Magna Carta. 

It is why lending to MSMEs kept becoming a worse proposition. 

III. Why MSME Lending Became Relatively Less Attractive 

The banking system's bias against MSMEs did not happen in a vacuum. The risk-adjusted cost of serving them has been shaped by several forces operating simultaneously, and the direction of travel has been remarkably consistent. 

The first is monetary — and inflation is central to it. 

Sustained periods of easy money expand the nominal pool of money and credit moving through the banking system. But nominal credit growth is not the same thing as an expansion of real productive capacity capable of absorbing higher-risk lending. 

For MSMEs, the more immediate problem is volatility. 

Inflation does not simply raise prices. It makes the relationship between costs, revenues and cash flow less predictable. Input costs can move faster than a small business can adjust prices. Working-capital requirements rise. Real purchasing power falls. Customers become more price-sensitive. Margins that were already thin become harder to forecast. 

Large corporations can absorb some of this through scale, purchasing power, pricing power, diversified revenue streams and easier access to financing. 

The typical MSME cannot. 

A bank does not lend against an entrepreneur's intentions. It lends against the probability that future cash flow will be sufficient to service the debt. When inflation makes that cash flow more volatile, the borrower becomes harder to underwrite even if the business remains viable in the long run. 

So what looks like a growing credit system in peso terms can coexist with a shrinking pool of borrowers whose real cash flows are stable enough to absorb bank debt. 

This is particularly damaging to MSMEs because they are already cash-flow-thin, collateral-poor and less able to hedge against purchasing-power shocks. Inflation therefore does not merely increase their costs. It increases the uncertainty surrounding their ability to repay. 

That uncertainty has a price. 

The second force is the structure of bank pricing itself. 

Large corporations with established balance sheets, collateral, audited accounts and long credit histories can borrow more cheaply than smaller firms. That cheap financing is not merely a passive advantage. It can become a competitive moat: the largest firms can finance expansion, acquire competitors and consolidate market share at a cost of capital that smaller firms cannot match. 

I wrote about one version of this in 2019, when Jollibee's expansion strategy illustrated the Pac-Man financing logic: use financial capacity to swallow competitors and reinforce an already dominant position. 

This is what preferential access to cheap credit looks like when it meets market concentration. 

The third force is regulatory and sits in the banking system's plumbing rather than in any single law or circular. 

Risk-based capital rules and provisioning requirements make the characteristics of the borrower matter to the bank's economics. An opaque, thinly capitalized, informally collateralized and poorly documented small enterprise is a fundamentally different credit exposure from a sovereign security or a large investment-grade corporation with a long financial history. 

A peso lent to a top-tier corporate borrower or placed in sovereign paper does not impose the same capital, monitoring and information costs as a peso lent to an unlisted small enterprise.

That distinction matters enormously when a bank is deciding where to put scarce balance-sheet capacity. 

Then there is the compliance burden. 

AMLC and KYC requirements, licensing, registration, reporting, taxation, labor rules, inspections and the ordinary friction of operating formally all impose fixed or semi-fixed costs. 

For a large corporation, those costs can be distributed across enormous revenues and dedicated administrative departments. For a small business, they consume a much larger share of the resources available to keep the business operating. 

Even wage increases can have asymmetric effects. A higher minimum wage raises labor costs immediately; a small enterprise with thin margins has far less room to absorb that increase than a large corporation with scale, pricing power and easier access to financing. 

None of these regulations individually targets MSMEs. 

That is precisely the point. 

Their combined effect is to make the typical MSME a more expensive and more difficult credit proposition while the alternative available to banks — paying the Magna Carta penalty — remained relatively cheap and predictable. 

Put the channels together and the sixteen-year decline stops looking like simple negligence. It looks increasingly like a rational response to a system in which MSME lending carries higher volatility, higher underwriting costs, higher capital costs and greater uncertainty than lending to the borrowers with the strongest balance sheets. 

IV. When The State Makes The Intended Borrower Less Bankable 

This creates a feedback loop that the Magna Carta itself could not solve. 

But the loop is larger than compliance alone: 

inflation and input-cost volatility → weaker and less predictable cash flow → higher perceived credit risk 

plus 

more compliance costs → higher fixed operating costs → thinner margins → weaker cash flow 

together producing

higher risk and underwriting costs → less attractive MSME borrowers → weaker bank lending → greater dependence on informal or more expensive financing. 

This is the policy contradiction. 

The state mandates banks to lend to MSMEs while simultaneously maintaining conditions that can make those same enterprises more volatile, less liquid and more expensive to underwrite. 

Inflation is particularly important because it can amplify the entire loop. A business operating with thin margins has little room between revenue and costs. When prices, wages, inventory and working-capital requirements become more volatile, that margin becomes harder to defend. A borrower that was marginally bankable in a stable environment can become unbankable when the same business is subjected to repeated cost and cash-flow shocks. 

The bank sees the final balance sheet. 

It does not care that the original policy objective was noble. 

And this is where the Magna Carta's basic design runs into reality. It treats the shortage of MSME credit as if the problem were primarily a bank's willingness to lend. But willingness is downstream of risk, return, capital requirements, transaction costs and the quality and stability of the borrower being presented to the bank. 

This is the old Bastiat problem of the seen and the unseen. 

The quota makes the seen effect obvious: a mandated peso of MSME lending can be counted, reported and celebrated as evidence that the policy is working. What disappears from view is the unseen opportunity cost — what that peso would otherwise have financed, and whether forcing it into a higher-risk borrower actually creates more productive capacity than the alternative use of the bank's balance sheet. 

The same logic sits behind Bastiat's broken-window fallacy. The broken window creates visible spending for the glazier; what remains unseen is what the shopkeeper would have done with the money had he not been forced to replace the glass. 

The Magna Carta creates its own version of the fallacy. 

It counts the credit it forces into MSMEs. It does not count the allocation it displaces.

That does not mean MSME lending is unproductive. It means that mandating an allocation is not the same thing as demonstrating that the allocation is economically efficient. 

Legislation can change the first-order incentive. 

It cannot repeal the balance sheet. 

V. Where Did the Bank’s Capacity Go? 

The failure becomes more interesting when we stop looking only at what banks did not lend to MSMEs and ask what they did with the capacity instead. 

The answer is visible in the structure of the financial system.

Figure 3

Universal and commercial banks held roughly 93% of the Php 31.3 trillion in total bank resources as of May 2026, while banks themselves accounted for about 83% of the Php 37.64 trillion financial-system total. (Figure 3, upper graph) 

The most recent comparable international measure, the World Bank's five-bank asset concentration ratio, put the top five Philippine banks at 67.3% of total banking assets (as of 2021—this should be larger today). (Figure 3, lower chart) 

This is not a decentralized credit market searching for deserving small borrowers. 

It is a highly concentrated financial system deciding where scarce balance-sheet capacity earns the best risk-adjusted return. 

And a substantial portion has gone into government and large corporate balance sheets.

Figure 4 

Banks' claims on the public sector sit near 30% of M2 and M3 and have grown faster than private credit, while large conglomerates — many operating within ownership structures intertwined with the financial system — absorb another substantial share of bank financing. (Figure 4, upper diagram) 

That produces a sovereign-financial feedback loop: 

government borrowing expands → banks absorb more sovereign exposure → financial institutions become more exposed to fiscal conditions → preserving liquidity and refinancing capacity becomes more important → financial stability and sovereign-market functioning become increasingly important to the system itself. 

This is the sovereign doom loop in domestic form. 

The BSP's 2025 Financial Stability Report puts a number on the other side of this concentration: roughly Php 1.6 trillion, or 22.7% of total conglomerate debt, comes due between 2027 and 2029, while dollar-denominated debt averages 37.6% of that load over the following five years. That is a wall of maturities approaching the same financial system that holds much of the exposure. (Figure 4, lower image) 

Read in isolation, it is a refinancing-risk warning. Read alongside the MSME data, it shows why the system has a powerful institutional preference for preserving the liquidity and refinancing capacity of the large borrowers already embedded in it. 

And it competes for the same financial resources that the Magna Carta was supposed to direct toward smaller productive enterprises. 

The important point is that MSMEs are not simply being denied a fixed quantity of credit. 

They are being denied relative access to a financial system in which other borrowers have structural advantages: greater scale, better collateral, more predictable cash flows, lower transaction costs and, in many cases, greater access to cheap financing. 

Inflation worsens that relative disadvantage because it magnifies the very cash-flow uncertainty that already makes MSMEs harder to lend to. 

That is why the issue is not merely whether banks have enough liquidity. 

It is where the system finds that liquidity easiest and safest to deploy. 

VI. Why The Architecture Keeps Reproducing Itself 

A framework this consistently biased against MSME lending, across four administrations and two enforcement regimes, does not persist by accident. It persists because the institutions responsible for revising it are embedded in the financial system it regulates. 

The BSP Monetary Board's seven seats have been populated by appointees whose careers include senior positions at banks, multinational lenders and major conglomerates. None of this is evidence of wrongdoing; many were appointed precisely for the expertise those careers provide. 

But expertise is not institutionally neutral. 

A regulator whose personnel move between private finance and public regulation brings with them professional networks, assumptions and risk frameworks formed inside the financial system. From a public-choice perspective, those experiences can shape not only what policymakers know, but which problems they perceive as requiring intervention. 

That matters when the same system has spent sixteen years directing capital toward sovereign and large corporate borrowers while MSME lending steadily loses ground. 

This is regulatory capture in its least conspiratorial form. No corruption is required. A revolving door dynamic can reproduce a policy bias simply because the people designing the rules share much of the same institutional worldview as the institutions operating under them. 

And that is before accounting for the influence of the executive branch and broader political incentives. 

VII. Where The 2026 BSP Relief Cascade Fits 

The BSP's five relief measures since April — NPL grace periods, the intragroup credit-risk reform, the pre-positioned CCyB release, the salary-loan maturity extension and the mark-to-market waiver — did not create this problem. (See our Stagflation Part 11 for details) 

They reinforce it. 

The MSME credit decline predates all five measures by more than a decade. What the cascade does is free additional balance-sheet capacity without attaching an MSME condition to it, inside a financial system already structured to favor sovereign and large corporate exposure. 

The measures are therefore an aggravating factor, not the cause. 

That distinction matters because blaming the latest relief package would turn a sixteen-year structural failure into a story about five recent policy decisions. The evidence says otherwise: the same allocation bias was operating long before the current relief cycle existed. 

VIII. Conclusion: Three Symptoms, One Structure 

Declining MSME lending, banking-system concentration and rising financial fragility are not separate failures. 

They are symptoms of the same architecture. 

The Magna Carta tried to force banks to allocate more credit toward the country's 1.24 million MSMEs. But the monetary, regulatory and institutional structure surrounding the banking system kept making sovereign and large-corporate lending more attractive. 

The law could impose a quota. 

It could not repeal the incentives determining where banks wanted to put their balance sheets. 

For sixteen years, those incentives won. 

That is why the Magna Carta did not merely fail to achieve its target. 

It created the appearance of a financial system deliberately making room for the small productive economy while leaving the underlying allocation of capital largely untouched. 

The quota could be measured. Compliance has been reported. The policy could point to a statutory commitment to MSMEs. 

But underneath the paperwork, the balance sheet kept moving in the other direction. 

The result was not a redistribution of financial power toward the many. It was a regulatory façade over an increasingly concentrated allocation of credit. 

And that is the deeper failure of the Magna Carta: It did not change the architecture that favored the few. It gave that architecture a quota, and called it reform.

USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress

 

The pretended solicitude for the nation’s welfare, for the public in general, and for the poor ignorant masses in particular was a mere blind. The governments wanted inflation and credit expansion, they wanted booms and easy money—Ludwig von Mises

In this issue:

USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress

I. USDPHP Record, BSP Rate Cuts, and Banking-Fiscal Fragility

II. Strong US Dollar Narrative Debunked

III. BSP’s Easing Cycle, Data vs. Narrative

IV. Cui Bono? (Redux)

V. More Energy Bailouts: Prime Infrastructure-First Gen’s Batangas Energy Buy-in Deal

VI. Political Redistribution: Consumers to Subsidize Debt-Heavy, Elite-Owned Renewables

VII. Averch–Johnson Trap and Public Choice Theory in Action

VIII. Elite Debt vs. Counterparty Exposure, Bank Centralization of Financial Assets

IX. Bank Liquidity Strains Beneath the Surface

X. The Wile E. Coyote Illusion of Stability, Bank’s Strategic Drift to Consumer Lending

XI. Keynesian Malinvestment and Policy Distortions

XII. AFS Losses and HTM Fragility

XIII. Banks Compound the Crowding Out Dynamics

XIV. The Biggest Borrower Is the State

XV. Public Revenues Are Collapsing

XVI. A Budget as Bailout

XVII. The Sovereign–FX–Savings Doom Loop

VIII. Conclusion: The Real Story: Bailouts Everywhere

XIX. Encore: From “Manageable Deficit” to Crisis Trigger 

Notice: This will likely be my last post of 2025 unless something interesting comes up. Have a safe, relaxing, and enjoyable holiday season! 🎄🎅

USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress 

From peso weakness to systemic unraveling: energy and fiscal bailouts, malinvestment, and the illusion of stability. 

I. USDPHP Record, BSP Rate Cuts, and Banking-Fiscal Fragility 

On December 9, the USDPHP surged to a new record high—its third all-time highs since crossing the BSP’s 59-level “Maginot Line” on October 28. Yet despite the historic print, the pair has traded within an unusually narrow range—depicting active BSP intervention to suppress volatility 

This suppression of volatility has continued to date, with USDPHP retreating to the 58 level. The pair closed at 58.7 on December 19, roughly 0.9% below the record high of 59.22. 

Media outlets swiftly attributed the move to expectations of a BSP rate cut. Others defaulted to the familiar refrain of a “strong dollar.” 

II. Strong US Dollar Narrative Debunked 

Let us address the latter first. 

On the day the peso set a new record low, the US dollar weakened against 24 of the 28 currency pairs tracked by Exante Data. The Philippine peso stood out as one of only four Asian outliers—during a week when Asian FX broadly strengthened.

Figure 1

Moreover, the USDPHP has been on a steady ascent since May 2025, while the dollar index (DXY) peaked in September and has since shown signs of exhaustion. There is zero empirical basis to attribute this peso collapse to dollar strength. (Figure 1, topmost pane) 

But attribution often follows convenience—particularly when political patrons prefer comforting narratives. 

III. BSP’s Easing Cycle, Data vs. Narrative 

Now back to the first premise: interest rates as tinder to the USDPHP fire. 

Two days after the peso hit its latest record, the BSP announced its fifth policy rate cut of 2025 on December 11, the eighth since the easing cycle began in August 2024. This was accompanied by two reserve requirement (RRR) cuts—in September 2024 and March 2025—the latter bundled with a doubling of deposit insurance coverage. 

Why this aggressive easing? 

Like a religious incantation, the establishment rationalized BSP’s actions as growth stimulus. As the Inquirer noted, the BSP acted "as concerns about weakening economic growth outweighed the risks of peso depreciation." 

The BSP claims data-dependence. But has it examined its own history? 

Instead of catalyzing growth, repeated easing cycles have coincided with GDP deceleration— from 2012–2019, and again during the post-pandemic banking system rescue from Q2 2021 onward, even after interim rate hikes. (Figure 1, middle window) 

The much-cited “flood control” episode only emerged in Q3 2025, long after the damage was done. 

So the question remains: cui bono? 

IV. Cui Bono? (Redux) 

Certainly not MSMEs. 

The beneficiaries are balance-sheet-heavy incumbents with preferential access to credit, regulatory relief, and FX protection. 

Bank compliance rates for MSME lending fell to historic lows in Q3 2025 as headline GDP slowed to pandemic levels. (Figure 1, lowest chart) 

The post–Global Financial Crisis easing playbook produced the same result: banks found it cheaper to pay penalties than lend to MSMEs. 

Most tellingly, the BSP removed the MSME lending compliance data from its website last week. 

And why now?

Because the data exposes the failure of both the Magna Carta for MSMEs and the BSP’s easing doctrine: liquidity was created, but it never reached the productive economy—the transmission channel broke down. 

This is not a failure of transparency. 

The peso is not reacting to rate cuts as stimulus. It is repricing a regime in which monetary easing now functions as fiscal accommodation and elite stabilization—diverting and diminishing productive credit. 

Removing an indicator does not eliminate the risk factor—it merely eliminates early-warning signaling 

And elite debt is one of the central forces driving this policy response. 

V. More Energy Bailouts: Prime Infrastructure-First Gen’s Batangas Energy Buy-in Deal 

As we have previously noted: “In the first nine months of 2025, the 26 non‑bank members of the elite PSEi 30 added Php 603.149 billion in debt—a growth rate of 11.22%, pushing their total to an all‑time high of Php 5.979 trillion. This was the second fastest pace after 2022.” (see reference, PSEi 30 Q3 and 9M 2025 Performance, November) 

And that’s just the PSEi 30. 

Financial fragility has intensified to the point that authorities have begun instituting explicit and implicit bailout measures. 

The regulatory relief via the suspension and forgiveness of real property taxes (RPTs) for independent power producers (IPPs) provided circumstantial—but powerful—evidence that the SMC–AEV–Meralco triangle was not an isolated deal, but part of a phased continuum: transactional camouflage, regulatory condonation, financial backstopping—ultimately leading to either socialization or forced liberalization. (see reference, Oligarchic Bailout—December) 

Crucially, the asset-transfer phenomenon in the energy sector is not confined to the SMC–AEV–MER axis. (see reference Inside the SMC–Meralco–AEV Energy Deal—November) 

Prime Infrastructure, controlled by tycoon Enrique Razon, acquired 60% of Lopez owned First Gen’s Batangas assets for Php50 billion. This occurred alongside broader liquidity-raising measures by the Lopez Group, including the sale of roughly 30,000 square meters of its ABS-CBN headquarters in Quezon City for Php 6.24 billion, and the termination of the ABS-CBN–TV5 partnership due to financial disagreements. 

VI. Political Redistribution: Consumers to Subsidize Debt-Heavy, Elite-Owned Renewables 

At the same time, regulatory support has extended beyond asset transfers. 

The Energy Regulatory Commission (ERC) approved the collection of the Green Energy Auction Allowance (GEA-All) on top of the existing Feed-in Tariff Allowance (FIT-All), explicitly allowing renewable developers to recover costs directly from consumers. These mechanisms institutionalize tariff pass-throughs as balance-sheet support.

Figure 2

Aggregate data underscore the scale of the problem. As of 9M 2025, the combined debt of major listed renewable firms—AP, ACEN, FGEN, CREC, SPNEC, and ALTER—surged from Php Php490.1 billion in 2024 to Php 682.2 billion in 2025, a 39.2% increase! (Figure 2, topmost table) 

The sharpest percentage increases came from SPNEC, ALTER, and CREC. 

Taken together, debt is the common thread now binding the Philippine energy sector’s restructuring. 

Beyond the SMC–AEV–Meralco triangle, leverage stress is visible across ownership groups. First Gen’s heavy debt load, the Lopez Group’s asset disposals, and Prime Infrastructure’s acquisition of operating assets all point to balance-sheet defense rather than expansion. These are not growth reallocations but late-cycle capital triage. 

The Prime Infra–First Gen transaction fits the same pattern seen elsewhere: risk is being relocated, not resolved. Mature energy assets migrate toward entities best positioned to manage regulatory and political risk, while leverage remains embedded in the system. Market discipline is deferred, price discovery suppressed, and time is bought—without reducing aggregate debt exposure and systemic malinvestments

These are not M&A events. These are distressed-asset reallocations under sovereign protection. 

Renewables exhibit the same logic through a different channel. 

VII. Averch–Johnson Trap and Public Choice Theory in Action 

Under FIT-All and GEA-All, tariff pass-throughs convert private leverage into consumer-backed cash flows. 

This is the Averch–Johnson trap in practice: capital intensity and debt are rewarded, inefficiency is preserved, and default risk is implicitly backstopped—reaffirming public choice theory in action: concentrated benefits, dispersed costs; privatized gains, socialized losses. 

Firms such as SPGEN, ALTER, and ACEN are not anomalies. They are rational actors responding to a regulatory regime that socializes balance-sheet stress through electricity prices. 

All these said, asset transfers in conventional power and tariff-embedded support for renewables show that the sector is no longer allocating capital for efficiency or growth. It is preserving leverage. Whether through strategic transactions or regulatory pass-throughs, losses are being deferred and dispersed—into consumers, banks, and ultimately the sovereign—confirming that the energy sector has entered a late-cycle rescue phase rather than a genuine transition. 

In the Philippines, ESG is not a financing premium—it has become a political guarantee of revenue recovery. 

In essence, these bailouts are not energy policy. They are rent-seeking protectionism.  

VIII. Elite Debt vs. Counterparty Exposure, Bank Centralization of Financial Assets 

But elite debt isn’t the only problem. 

For every borrower is a creditor—a counterparty. And banks are heavily exposed. 

Total financial resources (TFR) rose 6.76% to Php 35.311 trillion, with bank assets expanding faster at 7.2% to Php29.21 trillion last October. (Figure 2, middle image) 

Both sit at the second-highest nominal levels on record. Banks now hold 82.74% of TFR, and universal/commercial banks (UCs) account for 76.8% of that. UC banks make up 92.87% of total bank assets. 

The Bank-UC share of TFR has risen steadily since 2007—and the pandemic recession accelerated that centralization trend. 

Fundamentally, bank centralization of financial assets means:

• They dominate credit allocation and distribution.
• They generate and circulate most liquidity and money supply.
• In a low-volume, savings-deprived system, they are the dominant players in capital markets (stocks and bonds).
• They command the financial-intermediation process. 

A BSP-driven concentration of financial assets therefore escalates concentration risk. Yet almost no mainstream analysts address this. 

IX. Bank Liquidity Strains Beneath the Surface 

Even less is said about the intensifying liquidity strains in the banking system. 

Despite supposedly “manageable” NPLs, banks’ cash-to-deposit ratio hit all-time lows last October. Liquid assets-to-deposits plunged to 47.44%— a level last seen during the March 2020 pandemic outbreak—essentially erasing the BSP’s historic Php 2.3 trillion liquidity injection. (Figure 2, lowest graph) 

This signals that tightening bank cash reserves mirrors tightening corporate liquidity. 

And the pressures are not just from the elite portfolios—they span bank operating structure. 

X. The Wile E. Coyote Illusion of Stability, Bank’s Strategic Drift to Consumer Lending

Figure 3

NPL ratios have been propped up by a Wile E. Coyote velocity race: NPLs are near all-time highs, but their growth is masked by faster loan expansion. The 3.33% gross NPL ratio in October reflects gross NPL growth of 2.43% YoY versus 10.7% TLP growth. As long as credit velocity outruns impairment, the illusion of stability persists. (Figure 3, topmost visual) 

Yet NPLs also remain strangely “stable” even as GDP momentum breaks and unemployment rises—an inversion of normal credit dynamics. In a normal cycle, deteriorating growth and labor markets should push impairments higher; the fact that they don’t suggests suppression, rollover refinancing, and delayed recognition rather than genuine asset quality. 

Consumer credit cards illustrate the spiral—receivables at Php 1.094 trillion, NPLs at Php 52.72 billion, both at record highs. (Figure 3, middle diagram) 

Since 2020, the BSP’s rate cap and the recession pushed banks toward a consumer-credit model—where consumer credit growth now outpaces production loans. That dynamic amplifies inflation: too much money chasing too few goods. 

The consumer-loan share of UC lending (ex-real estate) hit a record 13.73% in October, while production loans fell to 86.27%—an all-time low. (Figure 3, lowest chart) 

XI. Keynesian Malinvestment and Policy Distortions 

This reflects Keynesian stimulus ideology—the belief that consumers can borrow and spend their way to prosperity. Its Achilles heel is the disregard for balance sheets and malinvestment risks. 

Banks have now wagered not only on elites but a widening consumer base—including subprime borrowers. And because participation in consumer credit remains limited, concentration keeps rising. 

Pandemic-era regulatory relief still suppresses benchmark NPL recognition.

XII. AFS Losses and HTM Fragility 

Simultaneously, banks accelerated balance-sheet leverage through Available-for-Sale (AFS) assets—another velocity game.

Figure 4

Losses in financial assets have slowed earnings. AFS exposure surged from 3Q 2023 to today, closing the gap with Held-to-Maturity (HTM). As of October, AFS and HTM made up 41.04% and 51.21% of financial assets, respectively. (Figure 4, topmost diagram) 

Financial-asset losses climbed from Php 16.94 B (1Q 2023) to Php 41.45 B (3Q 2025), which capped profit growth—banks earned just 2.5% more in 3Q 2025. (Figure 4, middle image) 

HTMs act as hidden NPLs and suppressed mark-to-market losses, worsening liquidity drought. Cash ratios peaked in 2013 and have declined ever since—mirroring the rise of HTM.

It’s no coincidence that record-high HTMs accompany the surge in banks’ net claims on central government (NCoCG). In October, NCoCG hit Php5.663 T (2nd-highest on record), and HTMs reached Php4.022 T (also near a record). (Figure 4, lowest graphs) 

Siloed government securities—rationalized under "Basel compliance"—combined with NPL overhang (consumer and likely under-reported production) and asset losses help explain slowing deposit growth. 

Velocity masking is inherently pro-cyclical. When velocity slows, NPL truth appears—all at once 

XIII. Banks Compound the Crowding Out Dynamics 

Banks are now forced to compete with elites and the government for scarce household savings.

Figure 5

Bank bonds and bills payable stood at Php1. 548 trillion in October 2025, down 3.44% YoY but still hovering near record highs. (Figure 5, topmost pane) 

To meet FX requirements and even assist the BSP in propping up Gross International Reserves (GIR), banks have increasingly tapped global capital markets. BSP data show the banking system’s external debt rose 0.3% to $28.97 billion in Q3 2025—its third‑highest level. BDO itself raised US$500 million through five‑year fixed‑rate senior notes in November 2025. (Figure 5, middle graph) 

Meanwhile, BSP’s Net Foreign Assets climbed 2.12% YoY, driven by a 26.3% surge in Other Deposits Corporation (ODC) FX assets—a growth spiral over the last three months that underscores a rapid FX-liquidity build-up outside deposit funding and a scramble for offshore liquidity. 

When banks become the transmission channel for fiscal deficits, corporate rescues, consumer support, and green‑subsidy pipelines, the endgame isn’t stability—it is deposit fragility, duration risk (asset‑liability mismatch), and the erosion of market discipline. These are the seeds of a balance sheet crisis, with BSP backstops looming ominously over a weak peso. 

XIV. The Biggest Borrower Is the State 

The biggest borrowers are not only the elites and the banks—the government itself stands at the center. 

Last September, the Bureau of Treasury signaled that public debt would ease toward year-end through scheduled amortizations and a slowdown in issuance. 

We warned that without genuine spending restraint; any dip would be a temporary statistical blip. 

And so it was. After two months of declines, public debt surged 9.6% YoY to Php 17.562 trillion in October—just Php1 billion shy of July’s record Php17.563 trillion. Local borrowings climbed 10.6%, outpacing external debt growth of 7.53%. 

Why would debt slow when deficit spending remains unchecked? 

XV. Public Revenues Are Collapsing 

Authorities and media largely ignored the mechanics behind October’s seasonal surplus (Php 11.154 billion), driven by a reporting artifact (the shift from monthly to quarterly VAT). 

They fixated on the headline numbers: a spending dip linked to the flood-control scandal, and 6.64% shrinkage in collections. 

The bigger picture was ignored: BIR’s 1.02% growth was its weakest since December 2023; Bureau of Customs fell 4.5%; non‑tax revenues collapsed 53.3% 

The 10-month numbers confirm structural decay: revenue growth slid to 1.13%, the weakest since 2020. Tax revenue growth of 7.45% is also at post-pandemic lows. BIR’s 9.6% is a four-year trough; BoC’s 0.9% has drifted toward contraction; non-tax revenues collapsed 36.7%—the weakest since at least 2009. 

A narrow decline in the fiscal deficit (Php1.106 trillion—third-largest on record) provides no comfort. With two months remaining, the deficit can surpass 2022’s Php1.112 trillion and approach 2021’s Php1.203 trillion—entirely dependent on tax performance. (Figure 5, lowest visual) 

Since GDP drives revenues, these numbers reaffirm the dynamic: slowing growth, rising unemployment, yet oddly “stable” NPLs—a contradiction sustained by velocity illusions. 

Expenditure growth may remain muted by political scandal, but revenue weakness is decisive. 

XVI. Debt and Debt Servicing Is Crowding Out Everything Else 

Record public debt now drives record servicing. As of October, Php1.935 trillion in debt payments has nearly breached the Php2.02-trillion 2024 record—a gap of barely 4.3% with two months to go. 

The identity is mechanical: (as discussed last August, see reference)

• More debt → more servicing → less for everything else
• Public and private spending are crowded out
• Revenue cannot keep pace with amortization
• FX depreciation and inflation risks accelerate
• Higher taxes become inevitable

This process is becoming more apparent by the month. 

XVI. A Budget as Bailout 

Yet ideology prevails. Despite weakening revenues and slowing nominal GDP, Congress has passed a record Php 6.793‑trillion 2026 budget. 

Figure 6 

The headline implies “just” a 7.4% increase from 2025, but because spending targets for 2025 were revised downward, the 2026 expansion is far larger once fully implemented. (Figure 6, topmost window) 

The cut to DPWH—politically expedient after a corruption uproar—was simply reallocated to entities like PhilHealth. No discipline, just reshuffling. 

Record spending in the face of a deteriorating economy is not stimulus—it is a fiscal bailout in progress. 

XVII. The Sovereign–FX–Savings Doom Loop 

An economy with an extreme savings-investment gap and a quasi-‘soft peg’ to the USD must fund deficits externally. Public sector foreign debt reached USD 90.6 billion in Q3—up 11.7% YoY, with a record 61% share of the total. (Figure 6, middle image) 

Every peso the state cannot fund through revenue must be sourced from bank balance sheets—through deposits, government securities, or offshore borrowing. The sovereign becomes a debtor to the banking system, and the banks become debtors to households. That is the sovereign–bank–household doom loop. 

This external financing occurs despite a stretched fiscal capacity: the Q3 deficit-to-GDP ratio of 6.63% was the fourth-widest on record, achieved at the expense of households via  intensifying financial repression and crowding-out. (Figure 6, lowest chart) 

Despite mainstream optimism about “manageable” fiscal health, current dynamics risk unraveling into fiscal shock. 

Monetary loosening—locally and globally—is masking fragility. When that cover fades, the peso absorbs the shock. 

VIII. Conclusion: The Real Story: Bailouts Everywhere 

While the public fixates on the corruption scandal, bailouts continue in real time—implicit and explicit, fiscal and regulatory. 

• The SMC–AEV–Meralco and Prime Infra–First Gen transactions are political rescue operations transferring assets among leveraged elites. 
• Direct relief has been delivered through taxpayer-funded suspensions (e.g., Real Property Taxes for IPPs) and electricity price hikes to sustain overleveraged “green” portfolios. 
• Record fiscal outlays shift resources toward the state, elite firms, and banks. 
• BSP’s easing cycle provides the monetary channel to accommodate the whole structure. 

This is not reform—it is redistribution upward. 

The great economist Frédéric Bastiat’s "legal plunder" describes the mechanism; Acemoglu-Robinson’s extractive institutions describe the outcome: enrichment of incumbents, depletion of the real economy, and accumulation of malinvestment. 

A fourth fault line left to be discussed: The Philippine real estate bubble. 

XIX. Encore: From “Manageable Deficit” to Crisis Trigger

2025 already saw GDP pull the rug out from under the institutional optimists. 

The next phase is simpler:

• Rising debt
• Weakening revenues
• Record spending
• External borrowing
• Peso strain
• Price pressures
• Monetary accommodation
• Banking-system transmission

This is how sovereign balance-sheet stress becomes a macro-financial shock.

The question is no longer whether debt climbs. 

It is whether the system can finance it without a solvency event. 

Will 2026 be the year national finances follow Ernest Hemingway’s arc—gradually, then suddenly? 

And when the adjustment comes, does the peso simply slip past 60—or does something in the system fracture before it gets there?

Because the endgame of fiscal ochlocratic social democracy isn’t fairness—it’s insolvency masked as compassion. 

_____

References: 

Prudent Investor Newsletter, PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth, Substack, November 30, 2025 

Prudent Investor Newsletter, The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy, Substack, December 7, 2025 

Prudent Investor Newsletter,  Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23,2025 

Prudent Investor Newsletters, June 2025 Deficit: A Countdown to Fiscal Shock, Substack, Substack, August 3, 2025