Banks’ exposures to failed US firms at P70.5B — IMF

Published by rudy Date posted on February 19, 2009

The International Monetary Fund (IMF) estimated the combined exposure of local banks to troubled American financial institutions at $1.5 billion or P70.5 billion, comprising 13 percent of their combined equity but it said banks at the moment “on average” are well capitalized and are expected to withstand the losses.

“The exposure to failed and distressed global financial institutions is limited. As of end-September 2008, direct exposures to Lehman Brothers stood at $350 million or three percent of equity,” the IMF said in its recent assessment on the country that it released yesterday.

“Combined exposure to Lehman Brothers and 10 other distressed major global financial institutions amounted to $1.5 billion or 13 percent of equity. Banks are, however, exposed to market risks through their large holdings of debt securities and credit linked notes,” it added.

Along with the new estimate, the IMF sharply slashed the country’s growth projections to 2.9 percent from a previous estimate of a 4.4 percent expansion as a result of “strong head winds” from a global economic crisis that would result in a drop in demand for local products and reduced remittances from Filipinos working abroad.

“Recent changes in domestic interest rates and in sovereign spreads have led to mark-to-market losses. Nonetheless, the banking system remains on average well-capitalized,” according to the IMF report.

The IMF said for the BSP to limit the fallout from the global financial crisis, it should continue to monitor closely the banking sector and maintain supervisory vigilance. “While regulatory forbearance, including the relaxation of mark-to-market accounting rules, has provided banks with temporary relief, (the IMF) emphasized the importance of maintaining transparency regarding banks’ financial positions,” it said.

The IMF noted that the prompt corrective action (PCA) framework to address financial sector vulnerability was broadly appropriate, but added it saw scope for improvement, including stepped-up surveillance of off-balance sheet activities.

“The BSP should be given legal authority to disclose enforcement actions when disclosure does not undermine market confidence, and the BSP’s charter should be amended to strengthen the legal protection of bank supervisors,” it said.

The IMF called in general for setting in place a more rules-based PCA framework over the medium term, with some of its officials emphasizing the need to maintain flexibility to deal with specific situations.

The IMF said inflation targeting has helped anchor inflation expectations and urged the authorities to cut interest rates if inflation expectations continue to fall.

The inflation rate eased to 7.1 percent in January, the lowest rate in 10 months, from eight percent in December.

Newly-installed IMF resident representative Dennis Botman, meanwhile, said the scale back in the country’s growth projection was relatively smaller compared to its neighbors “owing to relatively robust domestic demand and a more muted impact of the crisis on net exports.”

The slashed forecast, however, if well below the recent projection of New York-based Moody’s Investor Service of a 3.3 percent expansion this year.

Continuing strains in global financial markets could lead to further losses on banks’ security holdings, reduce the availability of external financing, and raise risks related to banks’ off-balance sheet activities, the IMF said in the report. –Ruben Hortelano, Daily Tribune

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