Markets must be regulated - Tetangco

If there is anything to be learned from the financial market meltdown in the US, it is that markets could not be left unregulated, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said over the weekend.

Tetangco has just returned from Washington to attend the annual assembly of the International Monetary Fund (IMF) and the World Bank (WB), where he also met with other central bankers and financial authorities.

The ongoing crisis demonstrated that even mature markets were prey to the same pitfalls as emerging ones even if they often apply more stringent standards and were capable of complex early-warning systems to detect emerging systemic crisis.

But Tetangco said the aversion towards market regulation could be eased if these regulations could be crafted so that they would make markets work instead of restricting them.

“An important lesson to be learned in this crisis is that regulation and markets can and should co-exist,” he said. “The trick is to craft regulation that would make the markets work.”

The US crisis is largely viewed as a regulatory failure, with lose credit practices that allowed banks to sell housing mortgages even to buyers with shady credit histories.

The complex mechanism that allowed financial institutions to securitize these unstable housing mortgages eventually led to the downfall of the world’s largest banks and the carnage was far from over, with economic recession looming over the horizon.

But the Philippines has been tagged as having one of the more resilient economies in the world with a banking system made sturdy by the 1997 crisis so that it was expected to weather the current crisis well.

“We are now reaping the benefits of the banking reforms we had instituted over the past few years, including consolidated supervision, promotion of disclosure and transparency,” Tetangco said.

According to Tetangco, the bank balance sheets were stronger now than they have been since the Asian crisis, with the industry’s non-performing loans ratio returning to pre-1997 levels.

Tetangco also pointed out that the capital level of the industry was well above regulatory requirement, with asset growth in double digit levels.

“In the Philippines, we have implemented coordinated supervision of the different components of the financial sector through the Financial Sector Forum,” Tetangco said.

The central bank chief said the FSF had been a useful platform for regulatory coordination to ensure consistency across regulatory agencies and address any possible gaps in the overall regulatory framework.

More than anything, Tetangco said this forum had been critical in removing loopholes that could cause instability in the financial system over time.

The forum convenes the BSP, the Insurance Commission, Securities and Exchange Commission and the Philippine Deposit Insurance Corp to discuss policies.

“We continue to keep the dialogue to ensure that our regulations are consistent and appropriate to our growth and development objectives,” he said.