Politicians are helpless in the face of the crisis they have conjured up. They cannot recommend any way out except more inflation or, as they call it now, reflation. Economic life is to be 'cranked up again' by new bank credits (that is, by additional 'circulation' credit) as the moderates demand, or by the issue of fresh government paper money, which is the more radical programme—Ludwig von Mises
In this Issue:
Total Financial Resources Zoom to Record Levels on Universal-Commercial Bank Centralization
I. Bank Centralization Fuels Historic Growth of Total Financial Resources:
II. A Money-Supply or Liquidity Powered GDP
III. Bank Assets: Intensifying "Doom Loop" Mechanics via Bank-Government Quid Pro Quo
IV. Banking Model Shift to Consumer Lending Should Reinforce the Inflation Cycle and Twin Deficits
V. Mounting Funding Risks and the Rising Risks of a Black Swan Event
Total Financial Resources Zoom to Record Levels on Universal-Commercial Bank Centralization
Fueled by BSP policies, UC banks have powered Philippine Total Financial Resources to all-time highs on a centralization process. Less appreciated has been the mounting risks from it.
I. Bank Centralization Fuels Historic Growth of Total Financial Resources
Figure 1
The Philippines' Total Financial Resources growth rate jumped by 8.7% last November to a record Php 30.28 trillion. Bank resources also expanded by a brisk 9.6% to an all-time high of Php 25.13 trillion. (Figure 1, topmost window)
Since March 2023, this data set includes digital banks.
Though the mainstream would call almost anything with a positive numerical sign a "sound" macro, there's more than meets the eye.
First, as a share of the total, bank resources represent a record 83%. The sector's pie broke out of the 78-80% range in 2015. Its uptrend reaccelerated in the 4Q of 2022.
Essentially, banks have been outgrowing all other sectors. In the process, it has been monopolizing the financial system.
Second, the centralization of the financial system by the banking system comes at the cost of non-banks and the capital markets. Non-bank financials comprise BSP-supervised financial institutions, the Social Security System, the Government Service Insurance System, and private insurance companies. Excluded from it are BSP's resources.
As evidence, the trading volume at the PSE peaked coincidentally with the trough of the bank's share of total financial resources in 2012-2013. Ever since this turning point, both moved in diametric directions: bank share of assets shifted to an uptrend while PSE volume drifted down. (Figure 1, middle chart)
Third, Universal Banks have become the most dominant sector among the banking categories—as the share of thrift and rural/cooperatives decline. (Figure 1, lowest graph)
Figure 2
Centralization also involved intrabank activities as UC banks became the dominant sector in lending. (Figure 2, topmost diagram)
The banking industry has been mandated to allocate credit to the Micro, Small, and Medium enterprises and the agricultural sectors, which shows the inherent bias for lending to elite firms.
Fourth, the data showcases asymmetric monetary policies—headline rate hikes in the face of loose financial conditions. Or, BSP tightening in name only.
When the BSP raised rates in Q2 2018-Q2 2019, the sector's share of the total resources fell. Today, accompanying the BSP's interest rates at multi-year highs have been the bank's unprecedented stranglehold of financial resources.
Fifth, since banks have been centralizing the financial system, the sector has morphed into a "too big to fail" institution. Or, centralization leads to heightened concentration (systemic) risk.
The Php 2.2 trillion liquidity injections in 2020-21 explain the increasing fragility of the Philippine financial system from its overreliance on a few entities to carry the financial load.
II. A Money-Supply or Liquidity Powered GDP
Lastly, the increasing importance of the money supply to the GDP highlights such structural transitions of the bank and financial system. (Figure 2, middle chart)
Money supply growth to GDP (M2 and M3) has topped 50% in 2013 and accelerated to a record over 70% in 2020 and has drifted slightly below it since.
Since inflation is always and everywhere a monetary phenomenon, the outgrowth of money supply (liquidity) has anchored the foundations of the CPI.
That said, financial Resources, balance sheets of the banks and the BSP, and money supply to the GDP dispel and debunk the popular notion that inflation is supply-side driven and "transitory."
On the other hand, the deepening dependence of the economy on bank and BSP asset expansion magnifies the inflation cycle.
If anything, the centralization of the nation's finances should resonate with the directional path and risks of the economy.
If the Philippine Statistical Authority's (PSA) survey 2021 data on all establishments is accurate, then large companies have become the primary drivers of the Philippine economy. A few companies (1.42% share) hold the largest chunk of employment (51%), compensation (62%), revenues (49.4%), and eCommerce businesses (80%). (Figure 2, lowest table)
The monetary, administrative, and regulatory regimes of the past and present have helped recalibrate the economy's paradigm—at the expense of the SMEs.
Despite the "high" GDP numbers, the cumulative "trickle-down" policies continue to weigh on the population. For instance, the SWS year-end survey pointed to "47% of Filipino families feel poor in 4Q of 2023."
Hence, GDP numbers represent the conditions of elite firms and the government than the general population.
Haven't you noticed that many appointees of the current administration are associated with the elites? Whose interest are they going to protect?
III. Bank Assets: Intensifying "Doom Loop" Mechanics via Bank-Government Quid Pro Quo
The banking system’s distribution of assets has manifested the ongoing structural changes.
Figure 3
The decline in the share of cash signifies a symptom. (Figure 3, topmost chart)
The bank's cash reserves declined by 2.6% in November, while investment and loans expanded by 9.6% and 9.4%, respectively.
Despite the recent record injections and unprecedented relief measures, the deterioration in the bank liquidity trend continues. The BSP’s November data reinforced the declining trend of the banking system’s liquidity metrics (cash-to-deposits and liquid assets-to-deposits). (Figure 3, middle graph)
Since the pandemic, banks focused on investment assets as the growth of their loan segment stalled.
That's because banks and the financial system have become the primary financiers of the government, as manifested by their net claims on the central government (NCoCG).
The growth of NCoCG has outpaced government spending, which implies two things: aside from government debt refinancing, banks have been acquiring government securities for collateral purposes in collaboration with the BSP's liquidity operations. (Figure 3, lower window)
Government debt refinancing most likely includes amortization of the unsustainable military pension, which authorities have called for drastic reforms.
Figure 4
As a side note, due to the drop in the sector's liabilities to the government, the BSP's NCoCG nearly doubled month on month last December but was down 2.13% YoY. (Figure 4, topmost chart)
It comes as no surprise that the bank NCoCG has resonated with the historic growth of the industry's Held-to-Maturity (HTM) holdings despite the recent easing of treasury yields. (Figure 4, middle window)
November HTMs represent 150.5% of bank cash reserves, 22% of deposit liabilities, and 16.4% of total assets.
HTMs signify a means to disguise mark-to-market losses.
Once again, the BSP-led FINANCIAL STABILITY COORDINATION COUNCIL admitted to this in their Financial Stability Report 2017: (bold original)
Banks face marked-to-market (MtM) losses from rising interest rates. Higher market rates affect trading since existing holders of tradable securities are taking MtM losses as a result. While some banks have resorted to reclassifying their available-for-sale (AFS) securities into held-to-maturity (HTM), some PHP845.8 billion in AFS (as of end-March 2018) are still subject to MtM losses. Furthermore, the shift to HTM would take away market liquidity since these securities could no longer be traded prior to their maturity.
Banks have likewise recently suffered unparalleled losses as the banking system's record financial assets reached new highs. But with the recent rally in Philippine Treasuries, accumulated loss improved last November, down by almost half from Php 111.5 billion to Php 68.23 billion in October. (Figure 4, lowest pane)
As the banking and financial industries hoard or stockpile government securities to boost their assets, their credit profile increasingly depends on the latter's credit ratings.
Markdowns on public credit ratings should reflect on the banking sector.
These dynamics resonate with Europe's banking "doom loop" mechanics.
IV. Banking Model Shift to Consumer Lending Should Reinforce the Inflation Cycle and Twin Deficits
Another principal change in the banking system has been the dramatic shift to consumer lending at the expense of the supply side.
Figure 5
Bank lending to consumers continues to eclipse production loans. Total Bank's consumer credit expanded 24.4% against the 5.9% of supply-side loans last November. As such, the consumer share of total loans continues to carve historic highs. These loans exclude consumer real estate exposures. (Figure 5, topmost and middle charts)
While this indicates financing and promoting demand in the face of slower local production, this points to two critical outcomes: higher inflation and the reinforcement of the record trend in trade deficits.
So, aside from maintaining fiscal deficits to juice up the GDP and churn out government securities for BSP-Bank liquidity operations, the bank's business model transformation toward consumers galvanizes trade deficits, which should reinforce the "twin deficits" that extrapolate to increased demand for foreign savings.
In the event that global monetary conditions tighten, this would be a problem for the banks.
V. Mounting Funding Risks and the Rising Risks of a Black Swan Event
Lastly, with deposit YoY growth in a downtrend, banks have increasingly depended on capital markets, repos, and the BSP for funding.
Higher rates should have attracted the excess liquidity into deposits, which has barely been the case. (Figure 5, lowest graph)
Figure 6
In this case, banks have relied on record borrowing from capital markets, presently dominated by short-term issuances of bills, increased repos, and BSP securities transactions with the BSP. (Figure 6)
Liquidity injections by the BSP (currently via short-term instruments) have helped UC banks and the banking system predominate the nation's financial resources while entrenching the inflation cycle—which the establishment attributes to the supply side.
Ironically, the government sees "shrinkflation" as legal, even as these are mainly reactions to SRPs and price controls—a tacit admission of its policy failure.
Also, increasing dependence on short-term liquidity also exhibits rising liquidity risks in the financial system, currently camouflaged by various interventions via the marketplace (e.g., USD-Peso), regulatory regime (e.g., relief measures), monetary (e.g., credit card subsidies), and establishment communications channels.
Further, increased reliance on capital markets for bank funding translates to higher financing costs and amplified competition with the government and the non-bank/finance private sector for access to domestic and foreign savings—which extrapolates to magnified pressure on interest rates.
In the end, a financial Black Swan event (unexpected, low probability, and high impact), which could signify the failure to appreciate evolving risks, lurks in the shadows.
However, in the shadows of the pandemic response, historic liquidity injections, aggressive easing of monetary policies, and unparalleled relief measures will likely constitute the blueprint of the forthcoming bailout of the industry—at the cost of higher inflation and the fall of the peso.
Such signifies the intertemporal repercussions of the BSP’s inflationary "boom-bust" policies.
