Central Bank isn't just about banks

I don’t know why, when we talk of the Central Bank, we immediately associate it more with commercial banking. True, the Bangko Sentral is the designated regulator of the commercial banks. But that is just one of its functions. That may not even be its most important function.

Indeed, there are instances when a country’s Central Bank is not responsible for regulating commercial and other retail banks. It may not even be ideal for the Central Bank to have day-to-day hands-on supervision of bank operations.

In the UK, for instance, Financial Services Authority (FSA) is the regulator of all providers of financial services. On the other hand, the Bank of England, or that country’s Central Bank, sets interest rates to keep inflation low, issues banknotes and works to maintain a stable financial system.

In the light of the financial crisis, there had been growing debates on which system is better suited to address systemic risks that lead to problems like what the world is now continuing to face. For example, an economic website says it is difficult to say that the US Fed performed better than the Bank of England because it had regulatory powers over some financial institutions.

It had been pointed out that other countries, like Canada, managed to avoid contagion from the United States. Yet, the central bank in Canada has never been a banking supervisor. Australia, which also showed a good performance in this crisis, the central bank lost banking supervision to the prudential regulator at almost exactly the same time as the FSA was created.

These thoughts came to mind last Tuesday as I listened to BSP Governor Say Tetangco giving his remarks on the state of the Philippine economy before the Tuesday Club. Gov Say gave an impressive report of how our monetary authorities at the BSP managed to navigate the dangerous waters of the world economic crisis so that in his words, “the Philippines is entering 2011 from a position of strength.”

It occurred to me that Gov Say is due to complete his five-year term of office this year. I have been hearing reports that some commercial bankers about to retire from their banks are aspiring to take his place, to cap their careers (as if the Filipino people owes them this).

As Gov Say went into the details of what they had done and what to reasonably expect this year, I made a comment to Dax Lucas of the Inquirer that it would be a pity to have Gov Say, an economist, replaced by a mere commercial banker. Dax said he agreed.

I realize that economists, including those who were in control of Central Banks when the financial crisis erupted, have a lot of explaining to do. But even in the case of Ben Bernanke, I think the world is extremely lucky to have him, an expert in depression economics, at the helm of the Fed when the crisis struck. He had been studying this area all his professional life. He had more of the intellectual tools to handle the crisis better than almost anyone else on the scene.

The thing is… it seems in the light of what we had just seen, it would be better for a country’s Central Bank to be in the hands of an economist who has a better grasp of the economy’s big picture. A former commercial banker would have a narrower perspective and would be going through a steep learning curve on the technical aspects of Central Banking.

Ensuring an economy’s financial stability involves more than making sure commercial banks follow the rules on how much capital they should have, who they can lend to and how much. Much more is involved as Gov Say’s report indicated:

“Despite the occurrence of the El Niño phenomenon in early 2010, inflation remained subdued. Headline inflation averaged 3.8 percent in the first 11 months of 2010, well within the Government’s target range of 3.5-5.5 percent for the year.

“Prudent monetary policy contributed to price stability. The benign inflation environment afforded the BSP the flexibility to keep policy rates steady since July 2009. The overnight reverse repurchase (RRP) rate was maintained at four percent, thereby preserving the cumulative 200-basis-point reduction in policy interest rates that was implemented in response to the global financial crisis. Nonetheless, given stable domestic financial conditions, the BSP started a paced unwinding of its monetary easing measures in the first quarter of 2010.

“Our external payments position continued to be strong. For the first 11 months of 2010, our balance of payments position showed an unprecedented surplus of US$13.2 billion, boosted by sustained influx of overseas Filipinos’ remittances, receipts from BPO services, sustained export growth, and surging capital flows. 

“As a result, the international reserves climbed to new highs, providing strong coverage for both imports and short-term external debt. The gross international reserves (GIR) stood at $60.6 billion as of end-November 2010, considerably higher than the end-2009 level of $44.2 billion. The end-November GIR level could cover close to 11 months worth of imports of goods and services and is equivalent to 11 times the country’s short-term external debt based on original maturity and six times based on residual maturity, thus providing a strong cushion against external shocks.

“The country’s debt service capacity also remained comfortable, with the debt service ratio dropping to 7.9 percent in end-September 2010 from 8.7 percent in end-September 2009. This was in spite of the increase in the external debt of the Philippines to $59.8 billion as of end-September 2010 from the $54.7 billion posted in end-September 2009.

“The peso has maintained its relative competitiveness. Effective management of foreign exchange inflows by the BSP has allowed the peso to remain relatively stable, with the peso volatility well within the middle of the range of volatilities of currencies in our region.

“The banking system continued to be stable and remained effective in intermediating credit to the productive sectors of the economy. Deposits, lending, and profitability posted healthy growth rates in the first six months of 2010. Average capital adequacy ratio at 15.23 percent was also comfortably higher than the BSP’s 10 percent minimum requirement, while non-performing loans remained generally low at just over three percent of total loans.”

I want to share a portion of a transcript of an interview of Howard Davies, director of the London School of Economics and a former deputy governor of the Bank of England. He was interviewed on VOX, a research based policy analysis and commentary website about a book he had just co-authored on “Banking on the Future: The Fall and Rise of Central Banking”. He was asked: what are the characteristics of an ideal governor?

“I think that you need to be these days an excellent macro economist. You need similarly to be someone who has a feel for and an instinct for financial markets. Those two are by no means always go together. Thirdly I think you need someone who does have an interest in management or at least an interest in structuring management below them so that they do manage an efficient ship. You need someone who has a very international outlook because we know that no financial system is an island. You do need to be able to understand the interconnections. And you need increasingly to be a good communicator.”

I get the impression that most of the folks who cover the BSP and the banking sector agree that Gov Say and his equally competent deputy, the economist Diwa Guinigundo have done a marvelous job in a period rocked by a worldwide crisis.The Governor had been named in the A-list in an annual survey of the world’s Central Bank governors for successive years by New York-based Global Finance magazine. Putting the reins of the BSP in the hands of a retiring domestic commercial banker at this time is selling the country short, even if we close our eyes to potential conflict of interest inherent in such an appointment.

Gov Say almost didn’t get appointed the first time around. I know for a fact that some very influential politicians were pushing for a couple of former commercial bankers. But give credit to Ate Glue for saying no to these politicians and appointed a career Central Banker because the BSP is certainly beyond politics.

For a job well done, Gov Say deserves an encore. Hopefully, the appointing authority, P-Noy, recognizes the professionalism and devotion to duty of Gov Say and gives him five more years.

Confidential

This one’s from Artemio Tipon.

A young boy asks his Dad, “What is the difference between confident and confidential?”

Dad says, “You are my son, I’m confident about that.

Your friend over there, is also my son, that’s confidential.”

Boo Chanco’s e-mail address is [email protected]