Bangko Sentral Highlights Deficiencies in Risk Management Systems of Philippine Banks
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The Bangko Sentral ng Pilipinas (BSP) has identified several deficiencies in the risk management systems and governance processes of some Philippine banks. According to a recent report, these deficiencies could have adverse effects on the safety and soundness of the banks.
Importance of Effective Risk Management Systems
The BSP’s findings highlighted the importance of effective risk management systems, including:
- Internal loss data collection and analysis
- Risk self-assessments
- Business process mappings
- Scenario analysis
These tools are essential in identifying potential operational risks and ensuring the stability of the banking system.
Quantification of Operational Risk Exposures
“We expect banks to adopt more sophisticated tools in identifying and assessing their operational risk exposures,” said a BSP official. “Larger banks, in particular, must quantify their operational risk exposures using models and allocate them to business lines.”
Database Development for Accumulating Operational Loss Data
The report also stressed the importance of database development for accumulating at least five years’ worth of operational risk losses. This will enable banks to analyze loss events and identify control gaps, allowing them to take corrective action.
Defining Appropriate Thresholds for Internal Loss Data Collection
“We encourage banks to define appropriate thresholds for internal loss data collection and ensure that they are reasonable and do not omit any material operational loss event data,” said another BSP official.
Continual Assessment of Operational Risk Exposures
The central bank also emphasized the need for banks to continually assess their operational risk exposures and consider factors such as:
- Expected and unexpected changes to their operating environment
- Actual operational loss events
- Reported external operational losses and incidents
Prioritizing Risk Mitigation and Corrective Actions
Banks were also reminded to prioritize risk mitigation and corrective actions with clear accountabilities, roles, and responsibilities.
Proactive Approach in Managing Operational Risks
The BSP urged banks to take a proactive approach in managing operational risks to ensure the stability of the banking system.
Commitment to Ensuring Safety and Soundness
“We are committed to ensuring the safety and soundness of the banking system,” said BSP Governor Amando Tetangco Jr. “We will continue to monitor banks’ risk management systems and take corrective action where necessary.”
Context: Challenges Facing the Philippine Banking Industry
The report comes as the Philippine banking industry continues to face challenges posed by the global economic downturn and rising competition from non-bank financial institutions.