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Compliance Risks Lurk in Philippine Banking System

The Philippine banking system, despite its dynamic nature and dominance in the country’s financial landscape, is not immune to compliance risks that could potentially threaten its stability.

Assets and Credit

According to a recent report, the total assets of the banking system amount to 126 percent of GDP, with bank credit hovering at just over 50 percent of GDP. Moreover, banks are heavily reliant on non-financial corporates (NFCs) for their lending activities, which creates a web of interlinkages between financial institutions and corporate borrowers.

Concerns and Risks

This reliance raises concerns about potential conflicts of interest and regulatory capture. Additionally, the limited depth and breadth of the financial system increases the reliance on traditional banking channels, making it more vulnerable to compliance risks.

Financial Inclusion

Despite its relatively small size, the Philippine banking system is still grappling with challenges in providing access to finance for individuals. Only a third of adults have formal bank accounts, leaving many without access to credit or other financial services.

Fintech Ecosystem

Meanwhile, non-bank financial institutions and capital markets, particularly bond markets, are significantly less developed than banks. The report highlights the nascent state of the fintech ecosystem in the Philippines, which is expected to play a crucial role in deepening financial inclusion and expanding access to finance for underserved segments of the population.

Regulatory Gaps

However, the absence of robust regulatory frameworks and inadequate supervisory oversight create an environment conducive to non-compliance. Regulators must take proactive steps to address these gaps and ensure that banks are equipped to manage compliance risks effectively.

Conclusion

The report concludes that the Philippine banking system is at risk of being exposed to compliance risks unless regulators take decisive action to strengthen supervision, enhance transparency, and promote financial inclusion. It is essential for regulators to prioritize the development of a robust regulatory framework to mitigate these risks and ensure the stability of the banking system.