SINCE the global financial crisis of 2008, financial stability has become a permanent concern for economic managers across the globe. In the Philippines the Financial Stability Coordination Council (FSCC or Council) has been constituted to be on the lookout for systemic financial risks.
The Financial Stability Report (FSR) is a publication of the Council of which the Insurance Commission is a member together with the Bangko Sentral ng Pilipinas, the Department of Finance, Philippine Deposit Insurance Corp. and the Securities and Exchange Commission. It is prepared by the Office of Systemic Risk Management of the BSP which is the technical secretariat of the FSCC. It was released for the first time to the general public in August 2018 and will be released to the public annually thereafter. It is designed to be the communication tool of the Council. It is also intended to enhance transparency and promote the adoption of global best practices among the macroprudential regulators such as the Insurance Commission. According to the Bank for International Settlements (BIS), “financial stability reports have become the primary and most efficient means of communication of financial stability risks.”
The FSR (covering 2017) is presented with a thematic approach. According to a statement of the FSCC, “the FSR takes a thematic assessment of the various risks that could pose a challenge to the continued growth of the Philippine economy as well as the resilience of the Philippine financial system.” For the 2017 FSR, it focused “on the impact of globally rising interest rates and weaker currencies against the benchmark US dollar as this relates to the repayment, refinancing and repricing of debt.”
Other countries have issued their FSRs to the public, as well. This would include the United States, United Kingdom, the Eurozone, Australia, New Zealand, Japan and South Korea. In the Asean, FSRs are issued by Indonesia, Malaysia, Singapore and Thailand. The central banks of England, Sweden and Norway published their first FSR around 1996. About 65 countries publish an FSR.
The FSR reports on the FSCC’s “assessment of the overall risks to the financial market.” A recurring theme in the FSCC is the Systemic Risk Review wherein brewing systemic risks are reviewed and evaluated for intervention. Indeed, financial stability is the main agenda. Identifying “systemic risks” and pursuing “financial stability” are complicated tasks, as these terms are, in fact, largely undefined. According to the 2017 FSR, “with financial markets becoming much more complex and interconnected, systemic risks—however defined—could originate from different sources while a seemingly contained market dislocation could still escalate into a full-fledged crisis.”
As correctly pointed out in the FSR, “a key lesson from the crisis is that the interconnectedness of financial market elements can amplify the build up of systemic risks once a shock is introduced,” referring to what is known as a contagion. It could also refer to what is known as “black swans” which has been defined as “events which are impossible to predict yet have catastrophic ramifications.” The theory behind the term was pioneered by Nassim Nicholas Taleb. The term emanated from an old belief that black swans did not exist until shocked Europeans discovered black swans in Australia (“All observed swans are white—hence all swans are white”).
The FSCC has identified five underlying risks that it focuses on: macroeconomic risks, credit risks, market risks, liquidity risks and the eventual contagion risks.
Dennis B. Funa is the current insurance commissioner. Funa was appointed by President Duterte as the new insurance commissioner in December 2016. E-mail: dennisfuna@yahoo.com.
