Banks back new BSP rule on capital inflow

MANILA, Philippines - Banks are amenable to the new capital inflow measure unveiled by the Bangko Sentral ng Pilipinas (BSP) on Wednesday which is likely to impact on their profits, an official of the organization of big banks said.

“After everything was considered, setting the cap at the historical and actual outstanding was deemed to be okay,” said Antonio Moncupa Jr. chairman of the Open Market Committee of the Bankers Association of the Philippines (BAP), in an e-mail late Wednesday.

“We trust that the BSP always has the interest of the broad economy and the stability of the banking industry in mind in setting its policy,” he added.

Last Wednesday, the central bank announced a limit on the amount of non-deliverable forwards (NDF) local and foreign banks in the country may hold, in a bid to temper capital inflows. Limits were set at 20 percent of capital for domestic lenders and 100 percent for their foreign counterparts.

NDFs are short-term currency contracts which allow the holder to book profits by settling the difference between the contracted exchange rate and the prevailing rate at time of maturity. BSP has said investors are using NDF in “speculating” that the peso will appreciate further in the future.

Moncupa, who is also president and chief executive officer of Eastwest Banking Corp., agreed the new measure may impact on banks’ foreign exchange earnings or those gained by hedging against peso-dollar volatility.

In the long run however, benefits far outweigh the costs, he claimed.

“The conclusion on profits is not really that simple. As we have seen in the late ‘90s, during the Asian financial crisis, unmitigated NDFs resulted in extreme volatility when the inflows suddenly became outflows,” Moncupa explained.

“The resulting chaos and economic dislocations resulted in high interest rates, loan defaults, and a weakening of the industry’s balance sheet and consequently, poor earnings,” he said.

The BAP, after talks with the BSP, “also respects” the decision of the authorities, Moncupa said, as they have a clearer picture of what are the risks present on the ground.

The central bank has been worried about the influx of foreign inflows in the country as they may result into asset bubble formation, and, at this early, has already caused the peso to strengthen by more than six percent against the dollar.

A strong peso, which yesterday opened at 41.16 to a dollar, trims the value of dollar export earnings, remittances from overseas Filipinos, and profits of business process outsourcing entities.

“The BSP is in command of data which no one else has. Their agenda is much bigger than any bank,” Moncupa said.

At the end of the day, Moncupa said the NDF cap is not targeted against the banks. “The premise of course is the cap will minimize speculative flow but not curtail real investments.  And we think that is the end objective of the BSP,” he explained.