By Melissa Luz T. Lopez, March 26 2019; Business World

Image Credit to Business World

THE CENTRAL BANK plans to roll out by next year new tools to better monitor lending to the volatile real property sector, according to a senior official of the Bangko Sentral ng Pilipinas (BSP).

A March 19 BSP working paper outlined three new measures designed to tighten watch on banks’ real estate loans.

Titled: “Have Domestic Prudential Policies Been Effective: Insights from Bank-Level Property Loan Data,” the paper found that tighter prudential policies have been effective in tempering growth of new home loans handed out by domestic banks.

The central bank has tightened rules on banks’ real estate exposure as it sought to temper rapid credit growth, which some debt raters have flagged as a possible sign of an overheating economy.

Central bank officials have noted sustained strong demand for commercial and living space in the Philippines, rendering property price increases reasonable and allaying fears of a bubble.

An asset bubble forms due to a perceived rising demand in housing units that drive developers to build more, and is said to “burst” as demand stagnates, leading to an abrupt drop in property prices that could jolt the banking system.

The study, written by Veronica B. Bayangos and Jeremy L. De Jesus, noted the need to build a banking sector resilience index, which is expected to provide a more accurate measure of a bank’s strength. Two other tools are also proposed: a composite vulnerability index of banks, alongside the use of high-frequency and market-based metrics to assess the resilience of the banking sector.

Sought for comment, BSP Deputy Governor Chuchi G. Fonacier said the new index is already in the works.

“The construction of the banking sector resilience index will start this year and is expected to be rolled out next year. We have started construction of the vulnerability index for cross-border risks, we should be able to work on the other risks this year. We expect this to be rolled out also next year,” Ms. Fonacier said in a mobile phone message.

“These are both part of our surveillance tools that will serve as indicators to emerging risks and vulnerabilities of the banking system.”

According to the study: “Market-based indicators are quantitative tools that can be used to gauge the market’s assessment of the resilience of the Philippine banking system.”

“These indicators are based on information from financial markets and are thus timely, reflect expectations of future performance of the banking system and will offer good comparability across countries and through time,” it said.

The BSP currently limits a bank’s real estate exposure to 20% of its total loan portfolio.