More Banks and Non-Banks Bailouts: BSP Grants Regulatory Relief to Portfolios Exposed to COVID-19 and the African Swine Flu!

More Banks and Non-Banks Bailouts: BSP Grants Regulatory Relief to Portfolios Exposed to COVID-19 and the African Swine Flu!

Unknown to most, the Bangko Sentral ng Pilipinas (BSP) has been furtively bailing out the banking and financial system.

From the sharp cuts in Reserve Requirement Ratios in 2018 to 2019, the BSP has embarked on providing a countercyclical buffer, allowing the lowering of capital requirements to banks and non-bank financial institutions pressured by mounting credit delinquencies.

In 2019, not only have the cuts in RRRs been applied to banks but non-bank financials were also beneficiaries of the liquidity injection measures from the BSP.

Regulatory Bailout 2.0: BSP Launches Countercyclical Capital Buffer (CCyB) Intended to Ease Capital Reserves! December 16, 2018

The Insurance Commission has also provided regulatory relief programs to pre-need companies in 2018.

Insurance Commission Launches Regulatory Bailout of Pre-Need Firms, The Twin of Unbridled Fiscal Spending is High Inflation, The Coming Stagflation November 18, 2018

From the BSP (February 26, 2020)

The Bangko Sentral ng Pilipinas (BSP) has made available a grant of regulatory relief to banks and quasi banks (QBs) that have sustained losses due to exposures to borrowers, industries and sectors severely affected by the African Swine Flu (ASF) and the Coronavirus Disease 2019 (Covid 19).

“This is in recognition of the potentially crippling impact of these events on key industries. We believe that the grant of regulatory and rediscounting relief measures is also applicable to financial institutions whose clients have suffered from adverse effects of these crises,” BSP Governor Benjamin E. Diokno said.

The BSP has institutionalized the grant of regulatory relief to banks and QBs impacted by calamities under Circular No. 1071 on the Adoption of Policy Framework on the Grant of Regulatory Relief to Banks/Quasi-Banks Affected by Calamities dated 10 October 2018. While the circular is aimed at providing a framework to systematically grant relief to banks affected by calamities and to support their recovery efforts, its coverage may be extended to the ASF and Covid 19 events even without a declaration of a state of calamity in specific areas of the country.

Temporary regulatory relief measures that may be granted include, among others, staggered booking of allowance for credit losses, non-imposition of penalties on legal reserve deficiencies, and non-recognition of certain defaulted accounts as past due.

Banks that will avail of the relief measures will be evaluated by the BSP on a case-by-case basis.

Under the guise of the ASF and COVID19, the BSP has once again extended bailouts to the financial community!

While the Treasury boom camouflaged mounting liquidity strains on the banking system by handing the industry paper profits, non-bank financials were not as fortunate.

 

Non-Bank Quasi-Banks (NBQB) posted a mild 2.82% loss in the 4Q 2019, an extension of the 3Q’s 3.01% deficit.  With interest income also in the red (-7.32%) in the 4Q, leasing income has become the most significant source of income, accounting for 113.9% of the sector’s operating income!

The 5.31% loss incurred by the financing firms have dragged the sector’s profits down in the 4Q, as investment earnings growth of 16.09%, which was slower than 3Q’s 38.16%, had been unable to offset the former’s shortfall. Financing firms accounted for 91% of the sector’s operating income in the last quarter of 2019.

Such losses have accelerated the sector’s bad assets.

 

Distressed assets of NBQBs jumped by a multi-year high rate of 35.7% in the 4Q to a record Php 11.54 billion! And the data constitutes the declared delinquents.

Thus, the escalating credit woes have sapped up the industry’s cash reserves, which fell by a staggering 29.3% in the 4Q, another milestone! In nominal terms, cash and due from banks fell to Php 28.3 billion, echoing levels of 2014.

With loan and cash in stagnation, the sector’s total assets registered a DEFLATION (-.99%), the first since 2013 (taper tantrum)!

NBQBs were also beneficiaries of the BSP’s debt monetization. In the 3Q, the sector’s net claim on central government intermediated by the BSP ballooned 21% YoY to Php 1.471 billion.

Not only has the BSP been injecting liquidity to the NBQB through the lowering of RRRs, and through acquiring Treasury holdings held by the sector, now to allow the sector to accommodate increasing stress, macroprudential measures are being eased or thrown under the bus.

As Non-Bank Financials Hemorrhaged in the 4Q, Borrowing T-Bills Soared to Plug Liquidity Drought!

As Non-Bank Financials Hemorrhaged in the 4Q, Borrowing T-Bills Soared to Plug Liquidity Drought!

It seems that two diametrically opposed realities exist today: dour statistical facts and ebullient media. What’s going on?

The dilemma faced by banks, not a single media and financial soul ever sees them. But these are published on the BSP’s databank.

Now let me add to the quandaries of the domestic financial industry.

In the 4Q, LOSSES of Non-Bank Quasi Bank (NBQB) or Non-Bank Financials swelled by 14.55% from 10.84% in 3Q and 10.99% in 2Q. (figure 1, upper window)

Both sectors, the investments (-55.65%) and financing (-2.67%), bled with losses of the former rocketing.

Figure 1

While net interest income registered positive growth, the rate of growth has been steadily declining (10% in 4Q18, 12.9% in 3Q18 and 24% in 4Q17). (figure 1, lower window)

On the other hand, non-interest income hemorrhaged (-24.4% in 4Q18, -26.5% in 3Q18 and +4.3% in 4Q17)

By the way, BSP’s data of NBQB’s balance sheet and income statement can be found here and here.

Figure 2

Like her banking contemporary, the industry remains starved of liquidity, as revealed by the sustained decline in the rate of change in cash and due banks (-4.14% in 4Q18, +.6% in 3Q18 and +11.5% in 4Q17) [figure 2, upper window-orange line)

Total Asset growth rate also plunged (+8.17% in 4Q18, +9.57% in 3Q18 and +14.25% in 4Q17). [gray line]

Total Loan portfolio growth eased (+15.68% in 4Q18, +15.12% in 3Q18 and +26.14% in 4Q17). [blue line]

Put differently, productivity from the double-digit rate of credit expansion continues to deteriorate.  The sector has now become entirely dependent on leasing income (105% share of operating income). [figure 2, lower window]

While liquidity may be relatively tight, it is still loose compared to the previous years. The question is what happens when tightness of credit spillover to the economy, thereby affecting the sector’s leasing income?

Putting all eggs in one basket? Mounting concentration risks? Signs of macro stability?

Figure 3

Though the sector’s distressed assets improved last 4Q (17.4% in 4Q18, 21.3% in 3Q18 and +17.9% in 4Q17), it remains elevated.

Distressed assets declined in 2015 when the BSP began its QE operations. Now distressed assets are up even as BSP’s QE is at a record!

So how has the Non-Bank Financials survived the profit and liquidity drought, in spite of the emergency measures by the BSP in place (record low interest rate and record QE)?

The answer is, like her banking peers, they have been ramping up short-term borrowings!

The commencement of NBQB’s borrowing binge has been coincidental with the BSP’s lowering of policy rates to 3% in June 2016 under the cover of implementing a corridor system. 

Don’t forget the ugly 4Q performance hasn’t been an anomaly, the NBQB’s decaying balance sheet has been an ongoing trend since 2013.

Will Panglossian talk successfully exorcize a decaying trend of fundamentals?

Attachments area

Regulatory Bailout 2.0: BSP Launches Countercyclical Capital Buffer (CCyB) Intended to Ease Capital Reserves!

Back when banks were actually subject to market forces and were not explicitly subjected to government capital standards, they held significantly more capital.   In 1900 the average US bank capital ratio was close to 25%, now it’s closer to 5%.  The trend is unmistakable:  the more government has regulated bank capital, the less capital banks have ended up holding—Mark A. Calabria

Regulatory Bailout 2.0: BSP Launches Countercyclical Capital Buffer (CCyB) Intended to Ease Capital Reserves!

Lost in the din of the holiday season and the embellishment of the Philippine financial markets has been the announcement of the Bangko Sentral ng Pilipinas (BSP) to ease capital regulations of the banking system.

From the BSP: (December 13, 2018) [bold added]

The Monetary Board approved the Philippine adoption of the Countercyclical Capital Buffer (CCyB) intended for universal and commercial banks (U/KBs) as well as their subsidiary banks and quasi-banks.

The CCyB will be complied with by the banks using their Common Equity Tier 1 (CET1) capital. During periods of stress, the Monetary Board can lower the CCyB requirement, effectively providing the affected banks with more risk capital to deploy. During periods of continuing expansion, the CCyB may be raised which has the effect of setting aside capital which can be used if difficult times ensue.

BSP Governor Nestor A. Espenilla Jr. noted that “the CCyB expands our toolkit for systemic risk management and is specifically designed to provide a steadying hand to counter the common occurrence of boom-and-bust periodswithin the financial cycle.”

The CCyB is set initially at a buffer of zero percent. This is in line with global practice. It also suggests that the Monetary Board does not see the ongoing build-up of credit as an imminent risk that would otherwise require an increase in the capital position of banks. The buffer, however, will be continuously reviewed by the BSP. Banks will be given a lead time of 12 months in the event that the CCyB buffer is raised. However, when the buffer is reduced, it takes effect immediately.

Designed to “counter the common occurrence of boom-and-bust periods”, the BSP essentially admitted that “boom-and-bust periods within the financial cycle” exists!

Financial bubbles, even from the BSP perspective, exists!!!

And though the BSP denies “the ongoing build-up of credit as an imminent risk”, it has taken up measures to ease capital buffers by “providing the affected banks with more risk capital”.

Or in times of stress, the BSP’s initial steps to bailout the banking system would be to lower its capital buffer/reserve requirements!

Such resonates with the Financial Stability Coordinating Council’s conclusion in its FSR report…

While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner

Pieces of the jigsaw puzzle are falling into place!

And here’s the thing.

No banks would publicly admit that they are undergoing stress. If they do, they become prone to runs.

The CCyB, thus, has been engineered as part of the BSP’s legal framework to conduct the bank bailouts in reticence or away from public scrutiny.

What would affected banks do with the release of more risk capital?

Whether the banks use such capital to do more lending or to conduct financing of its operations, well, the short answer is to provide liquidity to a bank in stress!

Figure 1

Ever since the banking system shifted to put almost all its egg in the loan portfolio, the industry’s most liquid assets continue to drain. In 2018, this phenomenon has only accelerated. [See figure 1]

The BSP’s data on the Banking System’s balance sheet and income statement can be found here and here.

Though the BSP admitted to the “occurrence of boom-and-bust periods”, it doesn’t address the possible sources here of the banking stress, except “build-up of credit”.

Why would there be a disproportionate amount of a “build-up of credit” that raises systemic risks enough for the BSP to launch CCyB?

And given the current operating conditions of the banking system, regulatory relief would translate to even more mounting “build-up of credit” in the face of less capital!

And as further proof that money printing is the only thing central banks know, the BSP ceased increasing or kept policy rates as is this week!

Figure 2

And the result? Yields of long term bonds started to creep higher!

What has been the striking is the stunning collapse in the spread between the 20-year and 6-month, 1- and 2-year notes!

The fixed income markets have been facing considerable stress!

Figure 3

And despite the stunning “compelled” serial orchestrated pushing up of the national equity index and on PSYEi 30 banks, shares of non-PSYEi 30 banks of the Bank index have barely joined the shindig! [Charts: Why the Janus-Faced Banking Stocks? PSEi Banks Versus The Rest November 26, 2018]

The question is why?

Outside mainstream ken, this would be the second major bailout by authorities channeled through the easing of the regulatory regime. In this 2nd case, again, banks would be allowed to ABSORB more risks than necessary by scaling down its capital reserves.

Again, why?

Great “boom” stuff, no?

The first regulatory bailout/relief was implemented by the Insurance Commission on Pre-Need Firms [See Insurance Commission Launches Regulatory Bailout of Pre-Need Firms, The Twin of Unbridled Fiscal Spending is High Inflation, The Coming StagflationNovember 18, 2018]

Figure 4

The reasons behind such regulatory bailout/relief reinforced by the 3Q performance of Non-Bank Quasi Banks (NBQB)

-Continuing Profit Drought (published Net income after taxes: -10.8% 3Q, -11% 2Q and -6.6% 1Q)

-Persisting Liquidity Drain (published cash and due banks: +.6% 3Q, -.8% 2Q and -1.6%) and

-Rising Distressed assets (21.3% 3Q, 20.7% 2Q and 21.2% 1Q)

Distressed assets are defined as NPLs plus ROPOA (Real and Other Properties Owned and Acquired), gross and restructured loans, current

Pls find the BSP’s Non-Banking Quasi Banks (NSQB) balance sheet and income statement here and here

These measures do little but to postpone and aggravate systemic maladjustments.