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Risk Management Innovation: Lessons Learned from Crisis, New Opportunities for Philippine Banks

In the aftermath of the global financial crisis, it has become clear that risk models require a fundamental overhaul to ensure stability and resilience in the financial system. In response, experts have reviewed, corrected, and updated risk models to better measure market risks.

Open-Source Software: A Game-Changer for Small Banks

One significant development is the emergence of open-source software, which has made advanced computational methods accessible to even small banks at a modest cost. This shift from proprietary packages has not only reduced costs but also increased transparency and public scrutiny of risk measurement processes.

Training Personnel: Essential for Effective Risk Management

Another key aspect of effective risk management is training personnel on the use of available software and interpretation of results. While this may require significant investment in human capital, it is essential for ensuring that banks can accurately measure and manage their risks.

Outsourcing Risk Measurement: A Viable Option

The outsourcing of risk measurement to third-party groups or consultants has also become more viable, as long as proper safeguards are in place to protect client confidentiality. This option can be particularly beneficial for small banks that lack the resources to develop their own internal models.

Lessons Learned and Future Directions

In light of these developments, it is crucial that local banks and regulatory bodies, such as the Bangko Sentral ng Pilipinas (BSP), innovate, update, and improve their risk measurement and management processes. By adopting new methods and approaches, Philippine banks can gain a competitive advantage, define their market position and risk profile with greater clarity, and enhance their resilience in the face of future crises.

Regulatory Support

The BSP has already taken steps to advance improvements in current systems by providing more flexible regulatory frameworks and promoting the use of internal models. However, it is essential that both regulators and regulated institutions continue to learn from each other’s experiences and best practices to ensure a robust and resilient financial system.

References

Alexandridis, A., & Hasan, M. S. (2016). Global financial crisis and multiscale systematic risk: Evidence from selected European stock markets. Paper presented at the Financial Econometrics and Empirical Asset Pricing Conference, June 30-July 1, Lancaster, United Kingdom.
Bangko Sentral ng Pilipinas. (2015). Risk-Based Capital Adequacy Framework in the Philippines. Manila, Philippines: BSP.
Bank for International Settlements. (2001). History of the Basel Committee and its membership. Basel, Switzerland: BIS.
Bank for International Settlements. (2011). Basel III: A global regulatory framework for more resilient banks and banking systems. Basel, Switzerland: BIS.
Buenaventura, R. B. (2004). Strong corporate governance - banks’ passport to Basel 2. Speech delivered at the General Membership Meeting Banker’s Institute of the Philippines, July 21, Shangri-La Hotel, Makati City, Philippines.
Guinigundo, D. (2005). The Philippine financial system: Issues and challenges. A paper presented during the BIS Meeting of Deputy Governors from Emerging Market Economies, December 8, Basel, Switzerland.
Hull, J. C. (2015). Risk management and financial institutions. 4th ed. Hoboken, NJ: Wiley Publishing.
Tetangco, A. M., Jr. (2010). Speech delivered at the Foreign Correspondents Association of the Philippines’ Breakfast Forum, November 17, Manila, Philippines.

Contact Information

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