Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning

 

Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence—especially in cases in which large short-term debts need to be rolled over continuously—is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!, confidence collapses, lenders disappear, and a crisis hits—Carmen Reinhart and Kenneth Rogoff 

In this Issue 

Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning

I. The BSP’s Sixth Cut and the Goldilocks-Sweet Spot Illusion

II. Data-Driven or Dogma-Driven? The Myth of Low-Rate Growth

III. The Pandemic Rescue Template Returns, The MSME Credit Gap

IV. Fintech’s Limits, Financial Concentration: Banking Cartel by Design

V. Treasury Market Plumbing: Who Really Benefits?

VI. Crowding Out: Corporate Issuers in Retreat

VII. The Free Lunch Illusion: Debt and Servicing Costs

VIII. Banks as the Heart of the Economy: Palpitations in the Plumbing

IX. Q2 2025 Bank Profit Plummets on Credit Loss Provisions

X. Conclusion: Goldilocks Faces the Three Bad Bears 

Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning 

The Bangko Sentral ng Pilipinas’ latest rate cut is a "Goldilocks" illusion masking a late-cycle reckoning driven by crowding out, surging leverage, and mounting stress in the financial system 

I. The BSP’s Sixth Cut and the Goldilocks-Sweet Spot Illusion 

Reinforcing its "easing cycle," the Bangko Sentral ng Pilipinas (BSP) cut policy rates last week—the sixth reduction since August 2024. Officials claimed they had reached a “sweet spot” or “Goldilocks level”—a rate neither inflationary nor restrictive to growth, as the Inquirer reported. 

We’ve used “sweet spot” before, but not as a compliment. In our framing, it signals ultra-loose monetary policy—part of a broader “Marcos-nomics stimulus” package that fuses fiscal, monetary, and FX regimes into a GDP-boosting mirage. A rescue narrative sold as reform. 

II. Data-Driven or Dogma-Driven? The Myth of Low-Rate Growth 

The idea that “low rates equal growth” has calcified into public gospel. 

But if that logic holds, why stop at 5%? Why not abolish interest rates altogether—and for good measure, tax 100% of interest income? By that theory, we’d borrow and spend our way to economic utopia. In short: Such (reductio ad absurdum) logic reduces policy to absurdity: prohibit savings, unleash debt, and expect utopia.

Figure 1

The BSP insists its decisions are data-driven. But have they been? Since the 1998 Asian Crisis, rate cuts have been the default posture. 

And since the 2007–2009 Global Financial Crisis, each successive cut has coincided with slowing headline GDP—through the pandemic recession and beyond. The decline was marginal at first, barely noticed. But post-pandemic, the illusion cracked. (Figure 1 upper pane)

A historic rescue package—Php2.3 trillion in injections, rate cuts, RRR reductions, a USD-PHP soft peg, and sweeping relief measures—combined with unprecedented deficit spending, triggered a temporary growth spike. This extraordinary intervention, combined with global reopening, briefly masked structural weaknesses. 

But since 2021, GDP has resumed its downward drift, with the deceleration becoming conspicuous through Q2 2025. Inflation forced the BSP to hike rates, only to restart its easing cycle in 2024. 

So where is the evidence that low rates boost the economy?

III. The Pandemic Rescue Template Returns, The MSME Credit Gap 

Today’s “sweet spot” eerily mirrors the pandemic-era rescue template—minus the direct injections and relief measures. For now. 

Meanwhile, over half the population still self-identifies as borderline or poor (self-rated poverty surveys—SWS and OCTA). 

GDP, as a measure, fails to capture this disconnect—possibly built on flawed inputs, questionable categorization and assumptions, as well as politically convenient calculations. 

Meanwhile, the BSP’s easy money regime and regulatory bias have allowed banks to monopolize the financial system, now accounting for 83% of total financial assets as of Q2 2025. (Figure 1, lower graph) 

Yet MSMEs—the backbone of employment at 67% (as of 2023, DTI)—remain sidelined. 

Ironically, Republic Act No. 9501 mandates banks to lend 10% of their portfolio to MSMEs (8% to micro and small, 2% to medium enterprises).

Figure 2

But compliance has collapsed—from 8.5% in 2010 to just 4.63% in Q1 2025. (Figure 2, topmost image) 

Banks, unable to price risk appropriately, prefer paying penalties over lending to the sector. The result: the credit boom inflating GDP primarily benefits 0.37% of firms—the large enterprises that employ only a third of workers. 

While RA 9501 mandates banks to allocate 10% of their loan portfolio to MSMEs, BSP regulations restrict risk-based pricing—directly through caps on consumer and financing loans (BSP Circular 1133) and indirectly in MSME lending through microfinance rules (Circulars 272, 364, 409, and related issuances).   

Again, unable to fully price in higher default risks, banks often find it cheaper to pay penalties than to comply. 

IV. Fintech’s Limits, Financial Concentration: Banking Cartel by Design 

At the same time, banks are aggressively expanding into consumer credit, while the unbanked majority continues to rely on the informal sector at usurious or punitive rates. 

Fintech e-wallets have gained traction, but they remain mostly transactional platforms. Banks, by contrast, are custodial institutions. Even if convergence is inevitable, bridging the informal credit gap will remain elusive unless rates reflect real distribution and collection risks.

This convergence may democratize leverage—but banks still dominate credit usage, reinforcing a top-heavy system. 

Deepening concentration, paired with price restrictions, resembles a cartel. A BSP-led cartel. 

And the first beneficiaries of this low-rate regime? Large enterprises and monied consumers. 

V. Treasury Market Plumbing: Who Really Benefits? 

And like any cartel, it relies not only on market power but also on control of the pipes—the very plumbing of the financial system, now evident in the Treasury market 

The Bangko Sentral ng Pilipinas has dressed up its latest rate cut as part of a “Goldilocks easing cycle,” but the bond market tells a different story.

Even before the policy shift, the Philippine BVAL Treasury yield curve had been flattening month after month, with long rates falling faster than the front end.  (Figure 2, middle and lower charts) 

That is not a picture of renewed growth but of markets bracing for a slowdown and disinflation. 

The rate cut simply ratified what the curve had preemptively declared: that the economy was softening, and liquidity needed to be recalibrated.

Figure 3

From the Treasury market’s perspective, the real beneficiaries weren’t households or corporates—they were institutional actors navigating a crowded, distorted market. 

Trading volumes at the Philippine Treasury market raced to all-time highs in August, just before and during the cut! (Figure 3, topmost diagram) 

This wasn’t retail exuberance—it was plumbing. 

BSP’s direct and indirect liquidity injections, coupled with foreign inflows chasing carry (data from ADB Online) amid global easing and macro hedges created a bid-heavy environment. The rate cut amplified this dynamic, lubricating government borrowing while sidelining private credit. (Figure 3, middle visual) 

VI. Crowding Out: Corporate Issuers in Retreat 

Meanwhile, the collateral damage is clear: corporate bond issuance has been trending downward, regardless of interest rate levels—both in nominal terms and as a share of local currency debt. (Figure 3, lowest window) 

This is evidence of the crowding-out syndrome, which suggests that BSP easing isn’t reviving private investment—it’s merely accommodating fiscal expansion. 

In the cui bono calculus, the winners of rate cuts are clear: the state, the banks, and foreign macro hedgers. 

The losers? Domestic firms, left behind in a market—where easing no longer means access. 

VII. The Free Lunch Illusion: Debt and Servicing Costs

Figure 4

The deeper reason behind the BSP’s ongoing financial plumbing lies in social democracy’s favorite illusion: the free lunch politics. 

Pandemic-era deficit spending has pushed public debt to historic highs (Php 17.27 trillion in June), and with it, the burden of debt servicing. (Figure 4, topmost chart) 

July’s figures—due next week—may breach Php 17.4 trillion. 

Even with slower amortizations temporarily easing the burden in 2025, interest payments for the first seven months have already set a record.

Rising debt means rising servicing obligations—even at the zero bound. The illusion of cheap debt is just that: an illusion. 

Crowding out isn’t just theoretical. 

It’s visible in the real economy—where MSMEs and half the population (per self-poverty surveys) are squeezed—and in the capital markets, where even the largest firms are feeling the pinch. 

The entropy in financial performance among PSE-listed firms, especially the PSEi 30, underscores that the spillover has reached even the politically privileged class. (see previous discussion—references) 

Monthly returns of the PSEi 30 similarly reflect the waning impact of the BSP’s cumulative easing measures since 2009. (Figure 4, middle image) 

In a world of scarcity, there is no such thing as a permanent free lunch. 

VIII. Banks as the Heart of the Economy: Palpitations in the Plumbing 

If the government is the brain of the political economy, banks are its heart. And the pulse is showing increasing signs of palpitations.

The banking system’s books reveal the scale of the plumbing, most visible in the record-high net claims on central government (NCoCG) held by the banking system and Other Financial Corporations (OFCs). 

Bank NCoCG surged 7.5% YoY to an all-time high Php 5.591 trillion in Q2 2025, pushing Held-to-Maturity (HTM) assets up 1.8% YoY to a milestone Php 4.075 trillion. (Figure 4, lowest graph)

Figure 5 

OFCs saw an even sharper jump—14.7% in Q1 to a record Php 2.7 trillion! (Figure 5, topmost diagram) 

According to the BSP, OFCs are composed of non-money market investment funds, other financial intermediaries (excluding insurance corporations and pension funds), financial auxiliaries, captive financial institutions and money lenders, insurance corporations, and pension funds. 

Yet despite these massive reallocations—and even with banks drawing a staggering Php 189 billion from their freed-up reserves (Claims on Other Depository Corporations) after March’s RRR cut—liquidity remains tight. (Also discussed last August, see references) (Figure 5, middle chart) 

Cash reserves continue to decline. Though cash-to-deposit ratios bounced in June from May’s all-time low, the trend remains downward—accelerating even as RRR rates fall to 5%. (Figure 5, lowest image) 

Liquid assets-to-deposit ratios have slumped to levels last seen in May 2020, effectively nullifying the supposed benefits of the BSP’s Php 2.3 trillion pandemic-era injections. 

This strain is now reflected in bank stocks and the financial index—dragging down the PSE and the PSEi 30. 

Goldilocks, eh? 

After the rate cut, the BSP immediately floated the possibility of a third RRR reduction—“probably not that soon.” Highly doubtful. Odds are it lands in Q4 2025 or Q1 2026. 

But even if the BSP dismantles the Reserve Requirement entirely, unless it confronts the root cause—the Keynesian dogma that credit-financed spending is a growth elixir—the downtrend will persist. 

At zero RRR, the central bank will run out of excuses. And the risk of bank runs will amplify.

IX. Q2 2025 Bank Profit Plummets on Credit Loss Provisions

Figure 6 

The toll on banks is already visible—profits are unraveling. From +10.96% in Q1 to -1.96% in Q2.  (Figure 6, upper visual) 

The culprit? 

Losses on financial assets—driven by surging provisions for credit losses, which ballooned 89.7% to Php 43.78 billion in Q2. That’s pandemic-recession territory—December 2020. (Figure 6, lower graph) 

X. Conclusion: Goldilocks Faces the Three Bad Bears 

The cat is out of the bag. 

The “stimulative effect” is a political smokescreen—designed to rescue banks and the elite network tethered to them. It’s also a justification for continued deficit spending and the rising debt service that comes with it. 

But “sweet spots” don’t last. They decay—subject to the law of diminishing returns. 

Paradoxically, under the Goldilocks fairy tale, there were three bears. In our case: three ‘bad’ bears:

• Crowding out and malinvestments
• Surging systemic leverage
• Benchmark-ism to sanitize worsening fundamentals 

Even the Bank for International Settlements has quietly replaced Philippine real estate pricing bellwethers with BSP’s version—one that paints booming prices over record vacancies. 

Nonetheless, the bears are already in the house. The porridge is cold. And the bedtime story is over. What remains is the reckoning—and the question of who’s prepared to face it without the comfort of fairy tales 

All signs point to a late-stage business cycle in motion. 

___

references 

Prudent Investor Newsletters, Q2–1H Debt-Fueled PSEi 30 Performance Disconnects from GDP—What Could Go Wrong, August 24, 2025 Substack 

Prudent Investor Newsletters, Philippine Banks: June’s Financial Losses and Liquidity Strains Expose Late-Cycle Fragility, August 17, 2025 Substack

 

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design

 

When you net out all the assets and liabilities in the economy, the only thing that remains is our stock of productive investments, inventions, education, organizational structures, and unconsumed natural resources. Those are the basis of our national wealth—Dr. John P. Hussman 

In this issue 

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design

I. Reform as Spectacle: Bastiat’s Warning and the Mask of Inclusion

II. What is Seen: Promises of Efficiency and Modernization

III. The Unseen: How CMEPA Undermines the Socio-Political Economy

Theme 1: Taxing Savings, Undermining Capital Formation

Theme 2: Systemic Financial Risks and Policy Incoherence

Theme 3: Fiscal Extraction, the Wealth Effect and the Political Economy

Theme 4: Institutional and Socio-Political Deterioration

IV. Conclusion: CMEPA—A Wolf in Sheep’s Clothing: Behavioral Reprogramming and the Unseen Costs of Reform 

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design 

A wolf in sheep’s clothing: A policy not only distorting capital markets but reprogramming society toward short-termism, volatility, and fragility. 

I. Reform as Spectacle: From Rhetoric to Repercussion—CMEPA Through Bastiat’s Eyes 

All legislation arrives adorned in rhetoric—its presentation aimed to evoke public trust and collective good. Much like Potemkin villages, reforms such as CMEPA appear to serve Jeremy Bentham’s ‘greater good,’ yet beneath the façade lies the concealed agenda of entrenched interests. 

Echoing Frédéric Bastiat’s indispensable insight, we must learn to discern between what is seen and what is unseen. 

"The entire difference between a bad and a good Economist is apparent here. A bad one relies on the visible effect while the good one takes account both of the effect one can see and of those one must foresee. 

However, the difference between these is huge, for it almost always happens that when the immediate consequence is favorable the later consequences are disastrous, and vice versa. From which it follows that a bad Economist will pursue a small current benefit that is followed by a large disadvantage in the future, while a true Economist will pursue a large benefit in the future at the risk of suffering a small disadvantage immediately" (Bastiat, 1850) [bold added] 

With this lens, we examine the Capital Markets Efficiency Promotion Act (CMEPA)—Republic Act No. 12214, enacted on May 29, 2025, effective July 1. 

II. What is Seen: Promises of Efficiency and Modernization 

CMEPA has been billed as a modernization effort to deepen financial markets and enhance participation. Its measures include:

• A flat 20% tax on passive income, including interest from long-term deposits and peso bonds
• Reduced stock transaction tax (STT) to 0.1%
• Expanded definition of “securities” to widen taxable instruments
• Removal of exemptions for GOCCs and long-term depositors, while retaining perks for FCDUs and lottery bettors 

Portrayed as a reform designed to streamline taxation and deepen the capital markets, CMEPA hides a more troubling reality beneath its glitter. It reveals a policy that taxes the foundations of financial stability and long-term capital formation. While it reduces transaction taxes and simplifies some rates, its deeper impact is a radical shift in how the Philippine state attempts to influence public mindset and choices—how it allocates risk, treats saving, and commandeers private resources. 

III. The Unseen: How CMEPA Undermines the Socio-Political Economy 

This critique identifies several thematic consequences: 

Theme 1: Taxing Savings, Undermining Capital Formation

Figure/Table 1

1 Flattening Tax Across All Maturities 

The new 20% final withholding tax (FWT) rate now applies across all maturities, including long-term deposits and investment instruments previously exempted. (Figure/Table 1) 

Retail savers and retirees, dependent on deposit-based income, now face disincentives for capital preservation. Long-term financial instruments lose their privileged status, undermining capital formation. 

2 Financial Repression by Design

By taxing time deposits, foreign currency deposits, and peso-denominated long-term instruments, CMEPA imposes a de facto penalty on saving. Rather than encouraging financial inclusion or stability, it aligns with financial repression tactics: using policy tools to channel private savings toward public financing. 

Moreover, savings and capital are diverted from productive sectors to fund fiscal deficits, choking investment and inviting misallocation. 

3 Regressive Impact on Small Savers 

The uniform tax rate applies regardless of investor profile. Small savers and retirees lose disproportionately. Meanwhile, the wealthy retain flexibility—shifting funds offshore or into tax-exempt alternatives. 

4 Deepening the Savings-Investment Divide 

CMEPA taxes the engine of investment—savings—while encouraging speculative behavior. As domestic savings weaken, investment becomes more reliant on volatile international capital flows and risky leveraging, heightening systemic vulnerability. 

Theme 2: Systemic Financial Risks and Policy Incoherence 

5 Balance Sheet Mismatches 

CMEPA induces short-term liabilities against long-term assets, eroding liquidity buffers. Banks stretch to meet Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) thresholds while chasing yield in speculative sectors—real estate, retail, accommodation, construction. 

FX funding stability worsens as offshore placements rise, increasing currency mismatch risk for entities with dollar-denominated obligations. 

This weakens the stability of the banking system. 

6 Weaker Bank Profitability and Liquidity 

Banks face tighter net interest margins, especially as liabilities are taxed while fixed-yield assets remain unchanged. Asset durations can’t adjust as quickly as funding costs, intensifying balance sheet compression undermining liquidity. 

Combined with BSP’s RRR cuts and other easing, this suggests rising liquidity stress rather than financial deepening.

Figure 2

The weakened deposit base—as revealed by the downtrend in the growth of deposit liabilities—partly explains the doubling of deposit insurance in March, a reactive gesture to rising liquidity risk. Notably, the slowdown appears to have accelerated in 2025. (Figure 2)

Figure 3

But it is not just deposits: the decline in cash and liquid assets—as shown by falling cash-to-deposit and liquid assets-to-deposit ratios—highlights the mounting fragility of bank conditions. (Figure 3)

Figure 4

The law compounds the fragile cash position of Philippine banks, redistributing liquidity into riskier corners of the balance sheet. 

7 Systemic Leverage Risk 

Taxing interest income inflates debt servicing costs, worsening liquidity stress across sectors already burdened with leverage. The gap between savings returns and borrowing costs widens, deepening household and corporate fragility. 

8 Undermining Financial Deepening 

Instead of encouraging broader access to financial instruments, the reform may drive savers toward informal systems, offshore accounts, or speculative assets—increasing volatility and disintermediation. 

9 Incoherence with Monetary Policy 

When interest income is taxed heavily, monetary policy transmission weakens. A rate hike meant to incentivize saving may be neutralized by post-tax returns that remain unattractive. This creates friction between fiscal and monetary authorities. 

10 Disincentivizing Long-Term Domestic Funding 

Removing exemptions from long-duration peso instruments weakens the domestic funding base. The government may respond by issuing shorter-tenor bonds, amplifying rollover risk—particularly amid widening deficits. 

Theme 3: Fiscal Extraction, the Wealth Effect and the Political Economy 

11 From Market-Based to Tax-Based Government Financing

Figure 5

CMEPA shifts the state's financing strategy from indirect borrowing (via banks' net claims on government) to direct taxation of interest income. This reduces the role of market-based funding and deepens reliance on financial repression. (Figure 5)

Philippine banks have long underwritten the government’s historic deficit spending. But with deposits eroding and liquidity thinning, can CMEPA’s pivot toward direct taxation rebalance this dynamic—or will banks be forced to sustain an inflationary financing regime they may no longer afford?

12 Crowding Out, Capital Misallocation, and Short-Termism

Taxing savings redirects capital from private to public use. Outside of government, the investment community is pushed toward velocity over duration, incentivizing speculative short-term returns rather than productive long-term investments. This leads to boom-bust cycles that consume capital and savings, ultimately lowering the standard of living for the average citizen. 

13 Reform Signals to Mask Fiscal Strain

CMEPA is marketed as efficiency reform, but its primary effect is increased revenue extraction. This is fiscalism masquerading as modernization—a stealth tax hike under the guise of pro-market policy. 

14 Wealth-Effect Ideology and Speculative Diversion 

DOF claims that CMEPA will "diversify income sources," implicitly inviting or encouraging ordinary Filipinos to engage in asset (stock and real estate) speculation. 

The BSP’s inflated real estate index, as discussed last week, aligns perfectly with this narrative. 

Yet if savings have weakened, with what are people supposed to speculate? 

In essence, the law encourages speculative behavior over productive undertakings—gambling on the trickle-down “easy money”-fueled wealth effect to stimulate growth. 

Theme 4: Institutional and Socio-Political Deterioration 

15 Favoring Non-Depository Institutions and Digital Control 

With capital markets shallow, the government’s pivot appears aimed at stock and real estate price inflation to support GDP optics. 

But there might be more to this: could the erosion of savings-based intermediation serve as a stepping-stone—or perhaps a gauntlet—to the advent of a Central Bank Digital Currency (CBDC) regime? 

16 Widening Inequality 

As savings erode and productive investment slows, the burden of taxation and financial volatility falls hardest on low- and middle-income households. Elites with offshore access or alternative vehicles thrive—amplifying the wealth gap. 

17 Capital Consumption and the Attack on Private Property 

CMEPA’s redistributive logic undermines the sanctity of private property. Through financial repression, taxation, and inflation, it transforms capital into consumption, violating the very principles of long-term economic development. 

18 Behavioral Reprogramming Toward Short-Termism 

CMEPA reorients household and institutional incentives by elevating time preferences, nudging actors toward short-term consumption and speculative tendencies. The long-term result encompasses not only economic and financial dimensions, but also social, political, and cultural shifts away from prudence. 

19 Increased State Power and Erosion of Economic and Civil Liberties

The flattening of tax treatment and the reallocation of savings toward the state reassert the growing dominance of the government over economic life. As household and institutional financial autonomy is curtailed, this fiscal centralization represents a creeping erosion of civil liberties. This is not merely fiscal policy—by asserting greater command over private savings and reducing the role of banks and savers in capital allocation, the CMEPA accelerates the centralization of economic control. 

20 Desperation, Not Reform 

Beneath the reformist language lies the scent of desperation. As government spending outpaces revenues and "free lunch" policies proliferate, the state appears increasingly willing to extract resources wherever possible, even at the cost of long-term economic damage. 

CMEPA may be seen less as a policy of modernization and more as a pretext to justify a broader power grab for control over the nation’s remaining financial surpluses. Such fiscal maneuvers reveal a growing reliance on coercive tools to finance political programs and preserve power.

IV. Conclusion: CMEPA—A Wolf in Sheep’s Clothing: Behavioral Reprogramming and the Unseen Costs of Reform 

CMEPA is not neutral. 

It is policy with intent—velocity over virtue, spectacle over substance. Beneath its reformist gloss lies a deliberate reordering of incentives: a behavioral reprogramming that elevates time preference across households, businesses, banks, and the state itself. 

The ramifications are profound. As savings erode, the economy pivots toward a spend-and-speculate framework, exposing malinvestments and shortening planning horizons. Bank balance sheets tilt toward short-duration, high-risk assets. Businesses recalibrate toward immediacy, while regulatory structures and political priorities—including education—subtly shift to accommodate the new paradigm: favoring current events over historical depth, short-term fixes over long-term resilience. 

As immediacy becomes institutionalized, political incentives may shift as well—gravitating toward authoritarian tendencies, where centralized authority and executive expedience increasingly replace civic pluralism. 

This drift accelerates leverage and volatility. Coupled with BSP’s easy money, fiscal splurging, deepening economic concentration, the entrenching of the “build and they will come” paradigm, benchmark-ism, and the subtle embrace of a war economy—where economic centralization and speculative asset inflation substitute for organic growth—the system veers toward the bust phase of a boom-bust cycle. 

CMEPA, dressed in reformist language, delivers structural inversion through a reordering of incentives—substituting short-term economic activity for long-term capital formation. It penalizes saving, rewards speculation, and manufactures stability to perform confidence. Its impact is philosophical as much as economic: undermining the sanctity of private property and sabotaging the long-term architecture of capital. 

As Ludwig von Mises warned: 

Saving, capital accumulation, is the agency that has transformed step-by-step the awkward search for food on the part of savage cave dwellers into the modern ways of industry. The pacemakers of this evolution were the ideas that created the institutional framework within which capital accumulation was rendered safe by the principle of private ownership of the means of production. Every step forward on the way toward prosperity is the effect of saving. The most ingenious technological inventions would be practically useless if the capital goods required for their utilization had not been accumulated by saving. (Mises, 1956) 

The unseen consequences of policy often outweigh the visible promises, as Bastiat warned us. 

CMEPA’s structural tax changes reprogram public incentives in ways that may appear benign, but will likely unleash instability, fragility, and misallocation—outcomes not immediately visible, but deeply consequential. 

Unless reversed, CMEPA’s legacy will be one of hollowed market and social institutions, increased fragility of public governance, and ultimately, social unraveling—where the erosion of savings and stability gives way to volatility, inequality, and the breakdown of trust in both economic and civic life. 

CMEPA is a wolf in sheep’s clothing. 

____

References: 

Frédéric Bastiat What is Seen and What is Not Seen, or Political Economy in One Lesson [July 1850], https://oll.libertyfund.org/ 

Ludwig von Mises, The ANTI-CAPITALISTIC MENTALITY, p 39, D. VAN NOSTRAND COMPANY (Canada), LTD 1956, Mises Institute 2008, Mises.org

 

 

 

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.