Edward Frydle and Kenneth Kang, 2008, Impact and Lessons from the Global Financial Turmoil, Japan: Selected Issues, Chapter I, July (Washington: International Monetary Fund).
International Monetary Fund, 2008, “Implication of the Global Financial Crisis for Asia’s Outlook,” Chapter II, Regional Economic Outlook forthcoming (Washington: International Monetary Fund).
International Monetary Fund, 2002, Detailed Assessment of the Observance of the Financial Sector Standards and Codes, Financial Sector Assessment Program: Philippines, July (Washington: International Monetary Fund).
Reserve Bank of India, Discussion Paper on Prompt Corrective Action, Department of Banking Supervision Central Office, Policy Planning Division (rbidocs.rbi.org.in/rdocs/Publications/PDFs/14690.pdf)
Prepared by Jack Joo Ree.
In fact, the PSE demonstrated substantially stronger correlation than Asian peers with U.S. stock indices until September 2008.
The Philippines adopts universal bank system where banks are allowed to fully own both financial and nonfinancial allied enterprises. This reduces banks’ incentive to participate in portfolio equity as a minority shareholder in nonallied cooperates, which tend to be closely held. Banking law (RA 8791) sets 50 percent of net worth limit on total equity investment. However, the limit generally leaves plentiful slacks.
The average maturity of peso-denominated government bond is about 19 years.
All of the exposures are assumed to be marked to market.
Before the BSP’s temporary relaxation of the asset cover rule, banks making unrealized losses on the FDCU assets were required to immediately transfer eligible foreign currency assets from regular banking unit (RBU) to FCDU as credit (due to RBU – FDCU/EFDCU unrealized losses recognized in profit or loss and in equity; this account is not subject to asset cover requirement.). Thus, mark-to-market losses on ROPs and CLNs either shrank the dollar liquidity surplus or widened the dollar liquidity deficit of a bank.
This figure is based on BSP’s survey of counterparty exposure as of September 30, 2008. It did not include exposure to Citigroup though. Citibank Philippines branch’s total asset amounts to P 200 or 4 percent of total banking system asset. Hence, the overall exposure to distressed global banks must have been much larger if Citigroup exposure were accounted for.
Each bank took advantage of the BSP’s accounting relief (option to reclassify mark-to-market assets to held-to-maturity at predated transfer price) to a different degree. For example, third quarter trading account profit can be a reflection of larger reclassification rather than better trading desk performance.
This exception has no foundation in IFSR. IFSR requires that all financial instruments that are derivatives or have an embedded derivative be classified as Fair Value through Profit and Loss (FVTPL) and measured at fair value. And the IAS39 amendment specifically prohibits the reclassification of anything that is classified as FVTPL
All other hybrid financial assets (other than CLNs) may be reclassified into the AFS/HTM/UDSCL only after bifurcating the embedded derivative from the host instrument and booking the derivatives under Derivatives with Positive/Negative Fair Value. Only the remaining host contract will be reclassified using predating.
Philippine Accounting Standard (PAS) has largely converged the IFRS, particularly in terms of stringency of the tainting rules. The tainting rule effectively prohibits reversal of reclassification decision, as any security sold from the HTM will trigger a forced reclassification of all HTM securities to AFS.
Market participants noted that they did not favor hedging strategy using derivatives (e.g., CDX). A key reason is their concern on reported earning volatility, which can occur when securities in AFS is matched with derivatives, which must be classified as FVTPL. Further, market liquidity of hedging instruments may grow very thin in a one-way market.
As many banks are adopting standardized framework for market risk calculation, rather than an internal VAR model, rise in sovereign spread volatility will not result in automatic adjustment of regulatory capital. Hence, a proactive supervisory review will be needed on capital adequacy to tighten the alignment between economic and regulatory capital.
Investors in UITFs participate in a share of net asset values (NAVs) of the investment pool, which are marked to market daily. Disclosure and competency rules are in place, so that investors ideally understand that the fund’s invest performance are fully passed through to them. The UITFs are not allowed to take leverage. As such, redemptions are made by drawing on liquidity reserve of the fund or by liquidating portion of the asset portfolio.
In general, practices such as “ever greening” and delayed recognition of asset impairment can significantly inflate income, current year profits, and capital.
The audited net assets of the Philippine Deposit Insurance Corporation (PDIC) are relatively low at 1 ½ percent of system deposits (P 49 billion; end-2006). Moreover, premiums are uniformly capped at 0.2 percent of the insured amount, irrespective of risk profiles of banks.