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Despite the recession and rate hike shocks, PH banks are believed to be resilient.

The majority of Philippine banks are still resilient to the effects of rising interest rates and a potential recession, but smaller ones require policy assistance because of their susceptibility to shocks, according to the Asean+3 Macroeconomic Research Office (AMRO).

The regional macroeconomic surveillance agency said in a commentary released on Thursday that the majority of the 17 local banks it tested under stress will continue to be resilient to shocks.

The statement read, “A few small and medium-sized banks may be exposed to shocks, given their weaker capital adequacy ratios, despite the Philippine banking industry being very resilient against the shocks.”

The stress test’s findings indicated that banks’ baseline non-performing loan (NPL) ratios would be around 2.93 percent and 16.56 percent, respectively.

NPL ratio is predicted to rise to 4.04 percent while CAR would fall to 16.05 percent when the recession shock is taken into account.

It also demonstrated that one bank failed the examination.

NPL ratio is anticipated to be about 3.24 percent, while CAR will rise to 16.40 percent in terms of interest rate shock.

NPL ratio will be approximately 4.46 percent for combined shock, while CAR will decrease to 15.85 percent. Also failing the test was a bank.

The Bangko Sentral ng Pilipinas (BSP), according to the statement, has designated banks that are deemed to be strategically significant in order to manage any systemic risks in the local banking sector.

“Small- and medium-sized banks, on the other hand, require more focus because they have generally weaker balance sheets and fewer buffers, making them less shock-resistant.

Therefore, by offering recommendations and help for their recovery and potential resolution, the BSP can take into account enhancing the resilience of small and medium-sized banks, it said.

Additionally, certain banks are focused on particular industries like trade and tourism, making them more susceptible to shocks.

The central bank “may offer help in drafting a recovery and resolution strategy for small and medium-sized banks,” according to the comments.

According to the report, liquidity and financial resources like the ability to engage in environmentally friendly and sustainable projects will support the smaller banks.

Policies that will assist financial institutions in absorbing potential losses and enabling adequate provisioning are further potential aids to the banks.

The BSP could “stand ready to apply regulations on those banks, such as by boosting retained earnings and restricting dividend payout, to maintain a higher capital adequacy ratio until pandemic-related risks pass,” it said.

The significance of enhancing a credit bureau’s function was also mentioned by AMRO in order to “improve banks’ capacity to carry out a thorough assessment of leverage.”

The stress-test results demonstrate that the Philippine banking system is very resilient to shocks, but more policies are needed to support small and medium-sized banks and improve the banking sector’s risk assessment and management, it was concluded.

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