The Bangko Sentral ng Pilipinas is not allowed by its charter to open its liquidity facilities to non-bank corporations, BSP Governor Amando Tetangco said yesterday.
The International Monetary Fund (IMF) has suggested that the BSP consider the possibility of expanding access to its facilities to non-banks, securities firms and even non-financial corporations to address possible liquidity shortages.
According to Tetangco, the BSP charter allows access to its lending facilities only to banking institutions that have direct participation in channelling credit.
The IMF’s proposal is detailed in its latest Regional Economic Outlook (REO) which outlines policy options for both fiscal and monetary officials in dealing with the fallout from the financial meltdown in Europe and the US as well as the resulting global economic slowdown.
The BSP has been easing its monetary policies and has even opened a new dollar repurchase facility to ensure that banks would have access to liquidity.
The IMF said the BSP should also consider contingency plans to expand access to non-bank corporations that might have direct exposure to troubled institutions abroad or just having liquidity problems.
“Central banks should also consider reviewing the range of available liquidity instruments, including in foreign currency,” the IMF said. “Expanding the range of acceptable collateral and shifting to a regular auction-type facility for discount lending may help minimize the market stigma attached to emergency funding,” the IMF added.
But Tetangco said the BSP would be unable to do this because it could skew the monetary impact of its facilities.
“One of the important channels of transmission of monetary policy is credit, which is intermediated by banks,” Tetangco explained. The BSP routinely adjusts its facilities to address shifts in liquidity growth in order to meet the government’s inflation target over a two-year horizon.
If these facilities were opened to non-bank corporations that were not under the regulatory authority of the BSP, Tetangco said the impact could diminish the effectiveness of these monetary adjustments.
“Therefore, dealing directly with the non-financial corporate sector will run counter to this provision of law and may undermine this important transmission channel,” Tetangco said.
The IMF’s proposal came on the heels of reports that while Philippine banks have not had any problems managing their exposures to the financial crisis, non-bank corporations do not have the same flexibility and may soon need to raise funds.
With banks generally avoiding exposing themselves to further risks, non-bank corporations will have few options for raising funds especially at a time when the securities market has been hit hard by risk-aversion.
However, the IMF said the BSP would also need to ensure that banks have proper regulatory standards for liquidity risk management, such as through avoiding maturity mismatches, more extreme stress testing, and contingency planning in the event of an extended cut-off in external financing.
The Fund also warned that excessive intervention would create the risk of one-way bets on the exchange rate and greater volatility. Countries like the Philippines where exchange rates have weakened in response to negative terms-of-trade shocks and capital outflows face the added challenge of containing the pass-through of the depreciation on domestic inflation.
“While a case can be made for intervention to smooth excess exchange rate volatility and address possible overshooting, sustained one-sided intervention may backfire, resulting in larger and more disruptive adjustments later,” the IMF said.
Overall, the IMF said greater cross-border collaboration among the relevant authorities would help strengthen monitoring of financial distress overseas. On the other hand, countries whose financial systems are closely interconnected, coordinated policy action would be more effective and help prevent “beggar-thy-neighbor” consequences that would harm other countries.