RETAIL BANKING | Roxanne Uy, Philippines

8 business philosophies that BSP Governor Amando Tetangco, Jr. lived by during his 12-year term

He also reveals 3 key achievements of the Bangko Sentral ng Pilipinas under his supervision.

Being the only person to have been appointed to serve for two terms, Amando Tetangco, Jr. has been the governor of Bangko Sentral ng Pilipinas (BSP) since 2005. Over the course of his career, Tetangco has managed to work towards delivering mandates of manageable inflation, a stable banking system, and inroads to financial inclusion. He has been recognized internationally as one of the best central bankers.

His term will conclude on July 2017, and on his last year as the governor, Asian Banking and Finance interviewed him to know more about his take on the latest trends and challenges in the country's banking industry, his achievements, future plans, and the philosophies he lives by as he helms the BSP.

ABF: What do you consider as your biggest achievements so far as the BSP Governor?
The biggest achievement for any agency head is to see the agency effectively fulfil its mandate. In the case of the BSP, the biggest achievement is its development into a good governance-based institution delivering the mandates of manageable inflation, stable banking system, and inroads to financial inclusion.

Keeping inflation manageable. The BSP has strengthened the inflation targeting (IT) framework of monetary policy, which entails thoughtful econometric modelling and forecasting, grounded market surveillance, and sound judgement. Since we’ve become more adept at IT, we have also become more effective in keeping prices low and stable.

Following the global oil crisis in 2008, inflation has consistently been kept below the official ceiling set by the BSP even as economic growth rates stayed robust, averaging 6.2% from 2010–2015.

The BSP continues to improve the conduct of monetary policy. In June of this year, we launched the Interest Rate Corridor (IRC) system, under which the key policy rate and the rates imposed on other liquidity facilities of the BSP were tweaked so that the gap between the ceiling and the floor becomes narrower. The tighter “corridor” is seen to better influence money market rates to move closer to the BSP policy rate, thereby making the BSP more effective at managing liquidity in the economy.

Also, the BSP has strengthened its policy communication, such as through media and stakeholder briefings, as well as issuances of inflation reports. This has helped better anchor inflation expectations of the public.

Helping ensure stability of the banking system. The BSP has adopted a risk-based approach to bank supervision. With it, the BSP does not only look at headline compliance with capitalisation requirements, but also at how banks conduct business. The idea is to give banks the freedom to engage in more lending and investment activities, but make sure they have the tools to keep their risk exposures manageable.

We have separate guidelines for managing operational, credit, information technology, liquidity, and market risks. Also, we have issued rules on good corporate governance, such as fit-and-proper rules for hiring bank executives, transparency rules in relation to products offered to customers, and rules covering DOSRI (directors, officers, stockholders, and related interests).

We have likewise adopted the capital requirements and other components of Basel 3, including the liquidity coverage ratio, the leverage ratio, and the capital requirements for domestic systemically important banks (or D-SIBs).

The regulations put in place are, in principle, in line with international standards, but at the same time take into account peculiarities of the domestic environment.

The BSP likewise has strengthened its ties with other financial regulators to ensure there are no regulatory gaps in the country’s financial system. We chair the Financial Sector Forum (FSF) and the Financial Stability Coordination Council (FSCC), which are also composed of other financial regulators in the country.

We are pleased to note that the Philippine banking sector has developed into one of the most resilient in the world. Capitalisation of our banks has stayed well above the 10-percent minimum regulatory requirement, settling at an average of 16.4% on consolidated basis for universal and commercial banks (UKBs) as of September 2015. Loans continue to be healthy, with the outstanding loans of UKBs growing by 14.8% year-on-year to P5.15 trillion, even as their exposure to bad debts are kept minimal at a mere 1.7% as of end-March 2016.

Making the financial system more inclusive. Allowing more Filipinos to save, invest, and borrow for productive uses, as well as send and receive payments in a secure and efficient manner is a major goal for the BSP. And so in 2000, microfinance became a flagship program of the BSP. Banks were made to adopt appropriate credit risk management practices commensurate to their size, scale, and complexity.

At the same time, we reduced documentary requirements and allowed cash flow- and character-based lending, as well as high-frequency amortisations to improve credit access. We balanced those with demanding timely loan reviews and loss provisioning, as well as with a mechanism for unregulated microfinance institutions to formalise into banks.

Now, over 170 banks deliver microfinance services to nearly 1.5 million micro entrepreneurs. Outstanding loans to these micro entrepreneurs are at P11.3 billion, a 333% increase from the 2002 levels of P2.6 billion. Also, micro entrepreneurs have accumulated savings, which now stand at around P4.5 Billion.

A parallel effort is engagement with stakeholders. The BSP, together with 14 other concerned government agencies and several private sector entities, are involved with the National Strategy for Financial Inclusion (NSFI), which spells out strategies to improve the reach of financial products and services. Also, the BSP engages state-owned banks, local government units, and cooperatives in the implementation of the Credit Surety Fund (CSF) program, under which funds are pooled to serve as guarantee to bank loans applied for by micro and small enterprises.

Another initiative is the National Retail Payments System (NRPS), which defines high-level policies, standards, and governance principles covering retail payment operations and infrastructure to promote a cash-lite economy and to boost growth.

Lastly, we stepped up efforts toward financial literacy and consumer protection. Our Economic and Financial Learning Center (EFLC) and Financial Consumer Protection Department (FCPD) conduct education programs on savings and investments, as well as on strategies to guard against financial fraud. FCDP likewise formulates policies and standards on consumer protection for compliance of BSP-regulated entities.

ABF: What are your key business philosophies?
There are quite a number of business philosophies that I find useful as “captain of the ship” that is the BSP. But for the purposes of this interview, I can cite eight that are closest to heart.

First is commitment to mandate. The journey to any major goal is often rough and complex, and sometimes can push a traveller to take easy routes and deviate from his course, thus failing to reach his intended destination.

In the case of the BSP, staying committed to its mandates sometimes entails execution of tough and unpopular initiatives and policies. We go through such difficulties, nonetheless, inspired by the fact that the realisation of our mandates ultimately benefits average Filipinos.

Second is expertise in the tools of trade. The BSP’s tasks of maintaining price and financial stability, as well as putting in place an efficient payments and settlement system, are complex. These tasks require proper and timely use of equally complex yet potent tools.

In the effective delivery of the BSP’s mandates, in-depth familiarity with and expertise in the use of available tools, for me, are indispensable.

Third is delegation and trust in co-workers. I believe in the saying that two heads are better than one. Teamwork is always the best strategy for situations that call for solving complex problems.

The BSP is fortunate to have a great pool of talent, aided in part by its training programs and knowledge management system. Given its crucial role in the economy, the BSP ought to maximise its rich human resources as it navigates toward its mandates.

Fourth is human resource development. How well an organisation performs is dictated by the individual performances of its people. And so in the BSP, we invest in the development of our people such as through various training programs and scholarships.

Fifth is internal communication and external coordination. Internally, a strong knowledge management system and enterprise-wide communication policy are being implemented and continually refined in the bank.

The BSP constantly engages its domestic stakeholders, such as through conduct of industry surveys and consultations, gathering of feedback and issuance of reports on matters concerning central banking.

We also actively engage in policy dialogue with our counterparts in other jurisdictions as well as multilateral agencies like the IMF, BIS and the WB.

Such activities have allowed the BSP to enhance the conduct of monetary policy, to issue relevant banking regulations, and to gather support from other institutions in pursuit of its objectives.

Sixth is compliance with laws and regulations. Given the fiduciary role of banks, they are expected to observe extraordinary diligence in the delivery of their service, such as by complying with rules and regulations governing their industry.

And the BSP, as their regulator, has to exemplify the highest standards of governance. Part of this is compliance with the letter and the spirit of pertinent laws and regulations.

Seventh is inclusivity. The BSP does not operate in a vacuum. To be a truly relevant institution, its work should have concrete benefits for the majority. As such, its conduct of monetary policy and bank supervision should not remain abstract, but should be meaningful for ordinary Filipinos.

This is the reason why financial inclusion – which entails efforts to make financial products and services accessible to more people, more so the marginalised – has been a major part of the BSP’s core functions.

Last is having a strong moral and internal compass, essentially integrity. As one goes through his day-to-day tasks, I believe that listening to and being guided by sound principles bring about meaning to the accomplishment of one’s goals.

ABF: What three goals are you focused on this year?
The BSP has its hands full this year with a wide range of initiatives, but to name just three, I will cite the following: (1) ensuring that the BSP’s mechanisms for surveillance of banks and other supervised institutions are up to date (2) ensuring that the BSP effectively engages stakeholders, and (3) that the BSP, as an organisation, is well positioned to overcome challenges.

Ensuring up-to-date surveillance mechanisms allows the BSP to effectively address risks to the stability of the financial system, even with unpredictable and complex challenges. For instance, the BSP has developed liquidity forecasting models that feed into the newly launched Monetary Operations System (MOS). The MOS is a web-based electronic platform that enables counterparties to participate in the BSP’s new auction-type deposit facilities under our newly-adopted open market operations framework, the Interest Rate Corridor System.

With its liquidity-forecasting tools, complemented by the MOS, the BSP is able to better manage liquidity in the economy, consistent with its mandate of price stability.
Meantime, the BSP likewise has various tools to better supervise the banking sector, consistent with its financial-system stability mandate. We already have a suite of stress tests to cover the traditional market and credit risks; we also developed the Real Estate Stress Test (REST), which measures the banks’ ability to absorb shocks from write-offs in their real estate exposures.

To help us better appreciate the movements of prices in the real estate sector, we also just recently released the Residential Real Estate Price Index (RREPI). The RREPI is one more tool that BSP can use to help flag to us potential packets of asset bubble formation.

The BSP has several other tools for surveillance. Other examples include (1) the Early Warning Systems (EWS) on currency crisis, which uses select macroeconomic indicators to determine probability of a currency crisis; (2) the Philippine Financial Stress Index (PFSI), which uses data on bonds, foreign exchange, and equities market to determine stress in the financial system; (3) the Confidence Indices (CIs) for the business sector and for consumers, which show the level of confidence on the economy of households and enterprises; (4) the Senior Loan Officers Survey, which tracks bank lending trends; and (5) the Business Cycle Analysis, which indicates turning points of economic activity from expansion to contraction and vice versa.

Our monitoring tools help us in decision making, such as in our ongoing preparation for the potential impact of Fed normalisation.

The BSP is closely monitoring signals from and actions to be taken by the Federal Reserve, among a host of other external and domestic factors, in deciding the appropriate stance of monetary policy in the Philippines.

While the Philippines has so far exhibited resilience to external shocks, there is no room for complacency. Aided by our surveillance tools, closely monitoring all developments here and abroad that may have impact on our price and financial stability, as well as implementing in a timely manner the appropriate policies, will help keep the Philippines resilient to challenges.

Effective engagement of stakeholders. The BSP continues to strengthen ties with stakeholders. On the domestic front, our bank supervision committee regularly meets with 15 industry organisations. This allows the BSP to solicit inputs for rationalisation, if needed, of existing regulations and for crafting of new policies.

The BSP likewise actively engages other financial regulators in pursuit of maintaining stability of the financial system, such as by its chairmanships of the previously mentioned FSF and FSCC. The BSP is also tapping more local government units and other entities for the expansion of the previously mentioned CSF program to more provinces, cities, and municipalities nationwide for enhancement of credit access.

At the same time, we are reaching out to more Filipino households and overseas-Filipinos through the conduct of more financial literacy programs by the BSP’s Economic and Financial Learning Center (EFLC) and the Financial Consumer Protection Department (FCPD).

On the external front, the BSP actively participates and holds chairmanship positions in international fora, such as the Steering Committee of the Alliance for Financial Inclusion, Bank for International Settlements’ Asian Consultative Council, Financial Stability Board Regional Consultative Group for Asia, and the BIS Meeting of Governors from Small Open Economies. Also, as Governor, I represent the country in various organisations, such as the Executive Meeting of East Asia and Pacific Central Banks (EMEAP) and South East Asia Central Banks (SEACEN). The BSP is also represented in the IMF, the World Bank, and the ADB.

We benefit from a continued exchange of ideas, sharing of competencies, and strengthening of linkages with external stakeholders.

Ensuring the BSP is well positioned to overcome challenges. To overcome challenges, the BSP invests in staff development. We have just rolled out a knowledge management portal, which allows easier knowledge sharing within the organisation. Also, we continue to offer development opportunities to our staff, such as in-house and external training, as well as scholarships.

The BSP aims to develop the management skills of its employees to go hand-in-hand with their technical skills. Our staff development programs address a common problem among technical institutions like any central bank, that of overlooking the need for management skills development.

With its wide range of initiatives on surveillance, stakeholder engagement, and human resource development, the BSP is well positioned to continue effectively carrying its mandates of price stability and financial system stability, as well as achieving a more efficient payments and settlements system.

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