FSCC publishes systemic risk crisis management framework
The Financial Stability Coordination Council (FSCC) led by BANGKO SENTRAL ng Pilipinas (BSP) has introduced a framework to identify and manage risks in the financial system through a structured monitoring and evaluation process.
The Systemic Risk Crisis Management (SRCM) framework launched on Monday is intended to enable the FSCC to assess where vulnerabilities lie in the financial system and what interventions should be made to prevent systemic risks or problems faced by any entity that could affect the rest of the economy, to evolve into crises.
“The SRCM is a strategic document that highlights how ongoing tasks contribute to crisis management and identifies initiatives that we believe are needed moving forward. As we develop the tactical plans that underpin this strategic document, the SRCM is therefore a living document that evolves with the market and the needs of its stakeholders,” said BSP Governor Benjamin E. Diokno during the Monday launch.
BSP Senior Deputy Governor and Head of the FSCC Technical Secretariat, Johnny Noe E. Ravalo, said at the launch that the framework is a “decision tree” to help authorities decide whether an event is a material or systemic risk. while preparing to avoid the occurrence of such risks.
“A lot of this is based on preemption. And that’s why we actually do… the macroprudential stress tests, the simulations, before a crisis happens so that we understand what the fallout would look like, who would be affected if a particular company or industry or a shock was happening throughout the system,” Ravalo says.
“There will always be a certain vulnerability which will pull the markets… SRCM’s interest is not to predict. But the interest of the SRCM is to prepare for the next crisis,” he added.
According to the SRCM document, the impact of a disruption on the economy is the “ultimate barometer” to qualify it as systemic.
“Taken from a different perspective, it is not about the magnitude of the initial shock, but rather how the shock can potentially amplify to affect different elements of the wider economy. Going further, the FSCC argues that a “crisis” has arisen or is about to arise if the disruptions caused by systemic risks are likely to have significant socio-economic effects, overall or in certain parts of society,” he said.
The framework describes the procedures to be followed by member agencies of the FSCC in the management of systemic risks.
Currently, the FSCC said it is able to map network links between conglomerates and banks using real data on credit exposures. This network reflects the channels through which risks can be transmitted.
Under the SRCM, if there is a potential systemic risk that is macro-financial and adversely affects the macro-economy, the FSCC should take direct jurisdiction and make “concrete and timely” interventions to stem further deterioration of the situation.
“It should be stated clearly and categorically that the objective is not to prevent the closure of a financial institution, in particular a bank… The task of this SRCM is to establish a monitoring framework for the entire financial system, aware of the interconnections between stakeholders, and having put in place an organized mechanism to manage systemic crises.
The framework also stated that the FSCC should have a systemic risk communication campaign to periodically inform the public about such situations without being alarming, as well as a crisis management team.
A monitoring mechanism is also suggested to help the FSCC understand market behaviors and the interrelationship between companies and industries to help it identify triggers to predict where systemic risk might come from and who would be affected. if an entity should have problems.
The framework also highlighted the need for financial safety nets, including deposit insurance, prudential regulation and resolution mechanisms, to increase market resilience.
As part of SRCM, regulators should require financial market infrastructures to have business continuity plans to show critical dependencies within their functions and between other market entities.
Macroprudential stress tests and stress simulation exercises should also be conducted to detect vulnerabilities in the system. According to the framework, the FSCC has designed a macroprudential stress test that “specifically incorporates a network between firms so that the nexus between private entities and the financial market can be simulated” which is expected to be undertaken soon.
“The analysis of systemic risks is preventive and, as such, the authorities take preventive measures to assess the state of stability. Since complex systems are defined by the evolution of risky behaviors among interconnected participants, analysis must preserve connections while testing how risks are transmitted and amplified,” he said.
The SRCM framework also addresses specific risks that are monitored by the FSCC, such as cyber events amid growing digital transactions and climate-related stability risks.
If systemic risks escalate into a crisis, the FSCC must declare it as such and ensure that this is managed and communicated to stakeholders immediately. Actions to deal with a crisis include policy interventions and the evaluation of their effectiveness in containing the crisis.
Once the immediate shocks of the crisis have been addressed, the FSCC will need to develop an exit strategy from the crisis management protocols to see if the interventions address structural vulnerabilities – meaning they should be retained after the crisis – or only temporary imbalances, meaning they should be unwound.
A post-crisis report should also be prepared and should include recommendations to prevent the crisis from happening again in the future, such as possible adjustments to market protocols, regulations or legislation.
The FSCC is an inter-agency council composed of representatives from the BSP, the Ministry of Finance, the Securities and Exchange Commission, the Insurance Commission, and the Philippine Deposit Insurance Corp.
The Executive Committee of the Board is chaired by the Head of PASB and is composed of senior officials from member agencies. The National Treasurer may also be invited to committee meetings as a special non-voting member. — KB Ta-asan