Philippine Markets Newsletter

PH Monday Macro: Philippine banks have the capacity to weather any immediate liquidity crisis

March 20, 2023

The existing concerns that the U.S. is headed for another recession have been exacerbated by the recent news of some U.S. banks collapsing.

Now, panic is rising, making investors wonder if this is a systematic or just an isolated idiosyncratic risk. This is making people around the globe wonder if similar cases can happen in their own nation.

With the collapse of these U.S. banks causing investors and consumers to panic as if a 2008-like financial crisis will happen again, let us take a look at how strong the position of Philippine banks are.

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We covered the recent collapse of some U.S. banks, explaining what happened and what could happen. What is currently occurring in the U.S. is more of a liquidity issue rather than a solvency problem. People are pulling out their deposits at massive amounts, making banks sell their assets at a loss.

This panic could influence other individuals to follow suit and may cause even more banks to face challenges in providing the money. This is because clients’ deposits are used to provide loans and invest in financial securities to make money—the cash is not simply sitting around in banks’ vaults.

Nevertheless, there is a minimum percentage requirement imposed by regulatory bodies that banks need to have in order to avoid over-leveraging and to ensure that the entity is capable of weathering unforeseen events.

This minimum percentage requirement is called the Capital Adequacy Ratio (CAR). It is calculated as the level of available capital in relation to its risk-weighted assets and liabilities.

Internationally, Basel III requires banks to have a minimum CAR level of 8%. A higher ratio lessens the probability of bankruptcy in the event of a debt crisis. This means the bank is safer from being insolvent because as indicated by its higher capacity to absorb potential losses.

In the Philippines, the Bangko Sentral ng Pilipinas (BSP) requires a CAR of 10%. The 2% buffer above international standards is to help avoid or mitigate any financial crisis. For the past decade, Philippine banks’ CAR has maintained a ratio well over the minimum.

As exhibited above, we could observe that Philippine banks’ CAR fluctuated between the range of 14% to 18%, which is double the Basel Accord minimum requirement.

During the 2008 financial crisis, Philippine banks’ CAR was stable, ranging from 14% to 15% levels from Q1 2008 to Q2 2010. After such, it gradually rose to peak levels of 18% in Q3 2012 and Q2 2013.

Subsequently, the figure dropped to 15% in Q1 2014 due to the adoption of the Basel III framework, which excluded the previous Basel II compliant capital instruments that do not have the loss absorbency aspect. After such, the CAR quarter-to-quarter experienced volatility, fading to 14% in Q4 2016 and then rebounding to 15% to 16% levels in Q2 2018, succeeding the Basel III adoption.

The ratio spiked during the pandemic because the ECQ (Enhanced Community Quarantine) muted economic activity and caused banks to shore up funds. Moreover, the BSP lowered the maximum penalty for bank reserve deficiencies to entice banks to use their reserve capital to support economic stimulation. From this, CAR has been in a downward trend inching down a few basis points in the last four quarters.

However, despite CAR declining, it is well above the Philippine and international minimum requirement by 400-600 basis points. Such a cushion suggests that Philippine banks are prepared with sufficient loss absorption and liquidity buffers to withstand any stress in the financial system.

Overall, it is safe to state that with substantial liquidity that is higher than international standards, Philippine banks have the capability to weather an immediate liquidity crisis.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim

Research Director
Philippine Markets Newsletter
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