FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in the Philippines

• Bangko Sentral ng Pilipinas (BSP)

FRSGlobal in the Philippines

Philippine GDP grew just under 1% in 2009 but is projected to rebound in 2010 as the second-fastest growing economy among the Asean 5.

The economy weathered the 2008-09 global recession better than its regional peers due to:

• Minimal exposure to securities issued by troubled global financial institutions
• Lower dependence on exports
• Relatively resilient domestic consumption, supported by large remittances from four-to five-million overseas Filipino workers
• A growing business process outsourcing industry

However, despite this growth, poverty worsened due to the rate of population growth and inequitable distribution of income. MACAPAGAL-ARROYO prevented a fiscal crisis by pushing for new revenue measures and, until recently, tightening expenditures to address the government's yawning budget deficit and to reduce high debt and debt service ratios. But the government abandoned its 2008 balanced-budget goal in order to help the economy weather the global financial and economic storm.

The Philippines must maintain the reform momentum in order to catch up with regional competitors, boost trade, alleviate poverty, and improve employment opportunities and infrastructure. Inadequate tax revenues could limit the government's ability to address these issues.

Regulatory Environment — Philippines

Financial

Balance sheet reporting
Balance sheet reporting provides information on financial statement positions and is required by Bangko Sentral NG Philipinas (BSP) on a monthly and semi annual basis. Under this type of reporting all banks in the Philippines are required to submit reports on position of assets and liabilities in the Philippines.

Income statement
Banks are required to submit a report to BSP on a monthly and semi annual basis stating the different sources through which income is earned by the bank.

Quarterly balance sheet statistics reporting
Banks in the Philippines provide a list of statistical data from the balance sheet to BSP on a quarterly basis to analyse the financial position of banks.

Prudential

Capital adequacy reporting
This type of reporting is mainly concerned with risk incurred by banks and is centred around risk reporting. BSP uses the Basel II framework to calculate capital adequacy requirements. Capital adequacy reporting collects the information on credit risk and operating risk of the bank.

Liquidity reporting
The liquidity position of the bank, maturity profile and selected data for stress testing is needed to be reported to BSP on an ad-hoc basis to analyse the positions of banks in the country and to minimise the risk of counterparty exposure.

Transactional (Operational)

Securities transactions reporting
Banks need to submit a report on Government securities and bond transactions, Government securities held and foreign portfolio investments to BSP on a weekly basis and reports on undelivered securities on a quarterly basis.

Foreign exchange reporting
Banks in the Philippines need to submit a report on the money market transactions, CRPF (Currency Rate Risk Protection Program) transactions with the central bank on a daily basis to BSP.

Asset & Liability Management (ALM)

ALM is being embraced as more than just a tool to monitor and manage interest rate risk in banking books. It is a process for managing balance sheets against other risks that affect earnings and portfolio valuations of banks, shifts in customer behaviour, future balance sheet growth and impact of business strategies (pricing, hedging, growth and planning).

In light of the recent financial crisis, firms of all shapes and sizes are re-evaluating their ALM model. In order to earn an adequate return, the need to assess and mitigate the adverse value and income impact of changes in the market has become even more vital.

So how do different types of financial institutions manage their ALM requirements today?

Large, tier 1 firms typically develop their ALM systems in-house; a luxury few smaller firms can’t afford. These systems typically include sophisticated and finely tuned functionality for Value exposure, Value at risk, Dynamic simulation, Earnings at risk and Treasury view.

In the past, smaller firms have found solutions for meeting ALM requirements to be over-complicated, difficult to integrate with incumbent systems, resource-dependent and cost-prohibitive. For these reasons they have resorted to using alternative methods such as spreadsheets or independent consultants, neither of which is ideal.

Until now the sheer cost of developing and supporting an in-house ALM system has been prohibitive to smaller firms but the need to have accurate visibility into the future position of the firm is critical.

Our heritage and in-depth knowledge of market have enabled the configuration of our solution to be so flexible that it meets the needs of ALL firms; from those with highly complex derivatives to those with a vanilla approach.

Our ALM solution provides a comprehensive range of capabilities that cover the following areas:

• Value exposure / market risk (static)
  For a consistent and comprehensive assessment of the adverse value impact of changes in market risk factors based on common pricing models using gap analysis and analytical/numerical stress testing analysis
• Value at risk / market risk (static)
  To calculate the loss potential of a specific portfolio or the total balance sheet over a given time horizon and confidence level
• Dynamic simulation (“what if” NII analysis)
  To assess and manage income, using a dynamically modelled balance sheet and market environment
• Earnings at risk (interest rate models)
  To calculate the potential to lose income, and to value it in a dynamically modelled balance sheet and market environment
• Treasury view
  To assess the exposure and risk position of Treasury, using the risk management techniques applied by the firm

And for the smaller firm

Our rich ALM solution offers a functionally that require immediate return on investment by taking a ‘compact’ approach with risk management features that absorb complexity. Along with evaluating a mismatch between assets and liabilities, our ALM solution also manages risks arising due to liquidity and interest rate in banking books.

With our ALM solution firms can:

• Quantify the value impact of interest rate changes over the total balance sheet based on regulatory requirements
• Conduct stress testing / value impact of any risk factor change over the total balance sheet
• Benefit from robust processes with audit ability and traceability, reverse processing from results to initial input using modelling (strategies & scenarios)
• Meet processing times / frequency of analysis and reduce manual work
• View Balance Sheet value impacts from interest rate moves in terms of sensitivity, liquidity and margin
• Utilise a simple financial analysis framework
• Make use of a flexible reporting tool and standard export to standard formats (Excel, PDF, HTML, XML)

FRSGlobal 6-step process for ALM

Basel II

The Bangko Sentral ng Philipinas (BSP) revised the Risk Based Capital Adequacy Framework as per the international standards set by the Banks for International Settlements (BIS) commonly known as Basel II.

The minimum capital requirements and disclosure requirements under Pillar 1 and 3 came into effect from July 1, 2007. To set the guidelines on bank’s Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review Process, the BSP issued a circular on January 15, 2009 effective as of January 1, 2011. The guidelines set by the BSP are applicable to all universal and commercial banks (u/KBs) and their subsidiaries and quasi-banks on both solo and consolidated basis.

A pilot run for the revised risk based capital adequacy framework for stand-alone thrift banks, rural banks and co-operative banks started in mid December 2010 until December 31, 2011 and will come into effect from January 1, 2012.

Our solution provides a sophisticated Basel II module with the ability to calculate the capital charge for credit risk, market risk and operational risk. It can be used as an independent stand alone solution or in combination with our other reporting and risk management solutions assisting banks to meet regulatory requirements and improve their performance over risk.

IFRS

Philippines Financial Reporting Standards (PFRS) 9 is a local application of International Financial Reporting Standards (IFRS) 9.

The implementation of PFRS is scheduled in 3 phases – the first phase the modifications projected by the International Accounting Standard Board (IASB) to replace the International Accounting Standards (IAS) 39 Financial Instruments: Recognition and Measurement. Phase 2 and 3 deals with the amortization cost and impairment of financial assets and hedge accounting.

Implementation of PFRS 9 Is mandatory from January 1, 2013 and entities are permitted to adopt the standards on or after January 1, 2010.

The aim of PFRS 9 is to improve and simplify the classification and measurement of financial instruments. It classifies and subsequently measures financial assets at either amortized cost or fair value on the basis of

1. The entities business model for managing the financial assets
2. The contractual cash flow characteristics of the financial assets

The PFRS 9 helps the users to understand the risks and the likely cash flows from the financial assets.

The banks/financial institutions who are planning a early adoption of the set standards need to follow the below prudential rules

1. Approval by the entities board of directors or equivalent governing body and
2. Submission of prescribed reporting requirements such as the one-time report on initial application of PFRS 9.

Our IFRS solution enables classification of financial instruments and calculation of valuations using appropriate fair values or amortised costs. It also supports several methods for testing and estimating impairment as required by IAS 39. .

Read more about the FRSGlobal IFRS solution here.

Liquidity Risk Management

Banks are interested in going beyond simple static financial ratios and gap reports as the measures of their liquidity risk. Since the Basel Committee on Banking Supervision issued its final paper on ‘Principles for Sound Liquidity Risk Management and Supervision’ banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheet. By modelling their liquidity contingency plans against such scenarios, a measure of the bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of the bank’s plan against such crisis.