In 2001, the International Monetary Fund (IMF) conducted a Financial Sector Assessment Program (FSAP) of the Philippines and published its findings in a 2004 Report on the Observance of Standards and Codes (ROSC). The ROSC does not explicitly address the Philippines' overall compliance with the Basel Core Principles, but it does mention that the Central Bank of the Philippines (BSP) is updating its supervisory practices based on the principles set forth by the Basel Committee on Banking Supervision. The report further suggests that, although compliance is very high, major deficiencies still exist in the supervisory and enforcement framework. The BSP's 2006 Annual Report (published in 2007) notes that the BSP continued to undertake measures to align banking practices in the Philippines with international standards. It can therefore be said that the Philippine authorities have exhibited a strong intention to comply. However, the degree to which the Philippines has enacted or implemented the Basel Core Principles cannot be surmised from the reports. The BSP functions as the central bank of the Philippines and is an independent authority. Its functions and responsibilities are stated in the BSP Charter. The results of the IMF's 2006 Article IV Consultation (published in 2007) disclose that, subsequent to the 2001 FSAP, the authorities did undertake several reforms to the banking sector and have revised its risk-based supervision with the intention of implementing Basel II. However, the report also notes that the banks are still plagued with nonperforming assets. In addition, the report recommends that amendments to the BSP Charter addressing the legal protection of supervisors and increasing their sanctioning capabilities over problem banks be passed without further delay.

General Overview

The IMF conducted a FSAP of the Philippines in 2001 and subsequently released its findings in a 2004 ROSC. However, the ROSC does not explicitly address the Philippines compliance with the Basel Core Principles (BCPs). The report commends the Philippines for achieving a very high level of compliance, but cautions that major deficiencies still exist in the supervisory and enforcement framework. The ROSC identify several changes in the regulatory and supervisory framework and notes that the Central Bank of the Philippines (Bangko Sentral ng Pilipinas, or BSP) "is progressively introducing supervisory approaches inspired by the Basel Committee on Banking Supervision" (p. 2). The FIRST Initiative projects' website further indicates that "the BSP has committed to reform and has developed a five-year plan to address weakness within banking supervision to comply with the 25 Core Principles of Banking Supervision." This project was approved in September 2004

The IMF's 2006 Article IV Consultation report (published in 2007) noted that the Philippines authorities have introduced several reforms to the banking sector subsequent to the 2001 FSAP. The report also notes that the BSP plans on adopting risk-based supervision in banks and in turn implement Basel II. The BSP's 2006 Annual Report (published in 2007) indicates that several measures were undertaken to align banking practices in the Philippines with international standards. These include the 2006 issuance of: guidelines as to the implementation of a revised risk-based capital adequacy framework; the adoption of a new Financial Reporting Package; and the strengthening of prudential regulations covering risk management, corporate governance, and transparency.

The BSP's 2006 Annual Report states that the central bank was established in July 1993 as an independent authority, in accordance with the Constitution and the New Central Bank Act of 1993. The powers and functions of the BSP are provided in the BSP's Charter (also called the New Central Bank Act) and the responsibilities of the BSP include supervising and regulating banks and their subsidiaries. According to information provided on the BSP's website the Philippines' banking system consists of universal and commercial banks, thrift banks, rural banks, and cooperative banks. In a 2006 media release, the BSP announced that there were 41 operating universal and commercial banks with 4,277 branches, 84 thrift banks with 1,209 branches, and 754 rural and cooperative banks with 1,305 branches at end-June 2006. The media release also notes that total assets of the banking system was Pesos 4,519 billion for the first semester of 2006 and that the banking system's overall capital adequacy ratio (CAR) was above the above the BSP regulatory requirement of 10 percent. As of 2006, the stock of nonperforming assets (NPAs) is still an issue and progress has been relatively slow according to information provided by the IMF in its 2006 Article IV Consultation report. The IMF recommendations suggest that certain long-overdue amendments to the BSP Charter that address the legal protection of supervisors and increase their sanctioning capabilities over problem banks should be passed without further delay.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

II

The IMF's 2004 ROSC assessed Philippines banking supervision standards against the Basel Core Principles. The report notes that "taken collectively, the central bank and banking laws and the secondary regulations provided by the supervisor constitute an appropriate legal framework" (p. 3). The ROSC does not provide any additional recommendations regarding this Principle. However, according to the 2006 Annual Report of the BSP, the powers and functions of the BSP are provided in the central bank's Charter (also called the New Central Bank Act) and the responsibilities of the BSP include supervising and regulating banks and their subsidiaries . However, there is insufficient information publicly available as to the Philippines compliance with this Principle.

1.(2) Operational independence and adequate resources.

II

The IMF's 2004 ROSC notes that "taken collectively, the central bank and banking laws and the secondary regulations provided by the supervisor constitute an appropriate legal framework" (p. 3). However, the report also notes that there have arisen issues with regards to the adequacy of human resources of the BSP and the calibration of the business process of banking supervision, which in turn has been addressed to some degree by the BSP. There is insufficient information publicly available as to the Philippines compliance with this Principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

II

The IMF's 2004 ROSC notes that "taken collectively, the central bank and banking laws and the secondary regulations provided by the supervisor constitute an appropriate legal framework" (p. 3). The ROSC does not provide any additional recommendations regarding this Principle. There is insufficient information publicly available as to the Philippines compliance with this Principle.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

II

The IMF's 2004 ROSC notes that "taken collectively, the central bank and banking laws and the secondary regulations provided by the supervisor constitute an appropriate legal framework" (p. 3). The ROSC also notes that secrecy requirements in the laws sometimes impede the supervisory process as it is legally impossible to require bank officials to reveal the identity of the account holder. The ROSC recommends that the Philippines consider a confidentiality system like the ones found in other developed banking supervisory regimes. However, there is insufficient information publicly available as to the Philippines compliance with this Principle.

1.(5) Legal protection for supervisors.

II

The IMF's 2004 ROSC notes that "taken collectively, the central bank and banking laws and the secondary regulations provided by the supervisor constitute an appropriate legal framework" (p. 3). There is a clause on 'extraordinary diligence' in the National Central Bank Act which is inconsistent with the Administrative Code, and the ROSC recommends that this inconsistency be rectified. A 2005 report by the IMF notes that the BSP is initiating legislative efforts to amend the Central Bank Act to further expand and strengthen the legal protection afforded to BSP personnel (p. 41). However, the IMF's 2006 Article IV Consultation report (published in 2007) indicates that the Philippines Congress has yet to pass the amendment. Therefore, the lack of legal protection for supervisors hinders effective supervisory process over banks that do not comply with regulations. In spite of the above information, however, there is little information publicly available that directly addresses the Philippines compliance with this Principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

II

The IMF's 2004 ROSC recommends that the BSP's information-sharing mechanism should be formalized through Memoranda of Understanding (MoUs). However, there is insufficient information publicly available as to the Philippines compliance with this Principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

II

The IMF's 2004 ROSC states that "permissible activities, the licensing process and the investment criteria are well defined" (p. 3). However, there is insufficient information publicly available as to the Philippines compliance with this Principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

II

The IMF's 2004 ROSC states that "permissible activities, the licensing process, and the investment criteria are well defined" (p. 3). The BSP's 2006 Annual Report (published in 2007) notes that new measures were introduced to further improve corporate governance rules in banks and fit and proper rules for the board of directors of financial institutions.

According to an IMF 2005 report, Circular No. 456 defines the specific duties of the board of directors; defines the audit functions of internal and external auditors; and requires banks to have corporate governance and risk management committees. In spite of the above information there is little information publicly available that addresses the Philippines compliance with this Principle.

4. Authority to review and reject transfer of ownership.

II

According to the IMF's 2004 ROSC, the regulations regarding transfer of ownership and voting rights should be substantially revised, and authorities at the time of the report were in the process of drafting regulations to that effect. However, there is insufficient information publicly available as to the Philippines compliance with this Principle.

5. Authority to review major acquisitions and investments.

II

The IMF's 2004 ROSC states that "permissible activities, the licensing process and the investment criteria are well defined" (p. 3). However, there is insufficient information publicly available as to the Philippines compliance with this Principle.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

II

In its 2004 ROSC, the IMF notes that the BSP had not yet introduced capital requirements for market risks. However, the report indicates that the BSP "has set capital requirements for credit risks on both a solo and a consolidated basis" (p. 3). A 2004 report from the BSP states that in December 2003, the Central Bank made further amendments to BSP Circular No. 280 that were in accordance with the capital adequacy requirements under the risk-based framework recommended by the Basel Committee. In spite of the above information there is little information publicly available that addresses the Philippines compliance with this Principle.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

II

The IMF's 2004 ROSC identified several shortcomings in the banking sector. In its 2007 Article IV report, however, the IMF indicates that a number of reforms have since been implemented, such as increasing the risk weighting on non-performing loans to 125 percent. However there is insufficient information as to the Philippines compliance with this Principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

II

The IMF's 2006 Article IV Consultation report (published in 2007) noted that, in the past, there were several shortcomings in the banking sector, one of them being the high level of nonperforming assets (NPAs), but that, subsequently, a number of reforms have been implemented, such as increasing the risk weighting on non-performing assets to 150 percent. However there is insufficient information as to the Philippines compliance with this Principle.

9. Prudential limits and management information system on concentration of exposure.

II

The IMF's 2004 ROSC indicates that there is observance of the exposure limits on a solo basis but not on a consolidated basis. The IMF's 2006 Article IV Consultation report (published in 2007) notes that exposure limits have since been introduced, along with strict sanctions for non compliance. However there is insufficient information as to the Philippines compliance with this Principle.

10. Arm's length rule and monitoring for connected lending.

II

The IMF's 2004 ROSC identified major loopholes in the Philippines' connected lending regulations. However, the IMF's 2006 Article IV Consultation report notes that "prudential regulations governing lending to related interests... were expanded in March 2004 to include subsidiaries and affiliates" (p. 22). However there is insufficient information as to the Philippines compliance with this Principle.

11. Policies and procedures for country risk and transfer risk.

II

In the IMF's 2004 ROSC, it was recommended that the BSP "develop and issue guidelines for banks on the adequacy of policies and procedures for country risk" (p. 5). The 2006 Article IV Consultation report (published in 2007) notes that the Philippines intends to gradually implement Basel II and adopt risk-based supervision for banks. However there is insufficient information as to the Philippines compliance with this Principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

II

In its 2004 ROSC, the IMF notes that the BSP had not yet introduced capital requirements for market risks. In a 2005 report, the IMF states that "the central Bank of the Philippines (BSP) issued amendments to its risk-based capital framework to incorporate market risk... and expand coverage to include quasi-banks" (p. 39). The IMF's 2006 Article IV Consultation report (published in 2007) notes that the Philippines intends to gradually implement Basel II and adopt risk-based supervision for banks. However there is insufficient information as to the Philippines compliance with this Principle.

13. Comprehensive risk management processes.

II

The IMF's 2004 ROSC states that "the BSP will have to more systematically apply qualitative standards for banks' risk management systems" (p. 4). The IMF's 2006 Article IV Consultation report (published in 2007) notes that the Philippines intends to gradually implement Basel II and in the process adopt risk-based supervision for banks. According to this report "starting July 2007, banks will be required to implement the standardized approach for credit and operational risks" (p. 22). However there is insufficient information as to the Philippines compliance with this Principle.

14. Adequate internal controls.

II

The IMF's 2004 ROSC states that the "existing standards on internal control should be enhanced and best practices regarding internal audit should be elaborated" (p.4). According to the Fund's 2006 Article IV Consultation report (published in 2007), rules were issued in 2005 to clarify the internal audit function. However there is insufficient information as to the Philippines compliance with this Principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

II

In its 2004 ROSC, the IMF notes that the BSP has measures in place to prevent money laundering in banks. The Fund's 2004 Article IV Consultation report (published in 2005) points to a number of laws and amendments that are in place in order to prevent the financial sector from being used as a conduit of money laundering. Apart from the Anti-Money Laundering Act (as amended), the BSP has issued policy guidelines (Circular No. 436, June 2004) to ensure banks have anti-money laundering checks in place.

16. Effective supervisory system consisting of on-site and off-site supervision.

CP

In its 2004 ROSC the IMF notes that the Philippines is largely complaint with this Principle, but cautions that the supervisory approach "is largely compliance based and has to be drastically reoriented towards a more risk-based approach" (p. 4). According to 2006 Article IV Consultation report (published in 2007), the Philippines authorities have introduced several reforms to the banking sector since 2001. The report also notes that the BSP plans on adopting risk-based supervision in banks.

17. Regular contact with bank management and understanding of bank's operations.

CP

In its 2004 ROSC the IMF notes that the Philippines is largely complaint with this Principle, but adds that the supervisory approach "is largely compliance based and has to be drastically reoriented towards a more risk-based approach" (p. 4). The 2006 Article IV Consultation report (published in 2007), states that the Philippines authorities have introduced several reforms to the banking sector since 2001 and that the BSP plans to adopt risk-based supervision in banks.

18. Analytical reports and statistical returns on solo and consolidated basis.

CP

In its 2004 ROSC the IMF notes that the Philippines is largely complaint with this Principle, but adds that the supervisory approach "is largely compliance based and has to be drastically reoriented towards a more risk-based approach" (p. 4). The 2006 Article IV Consultation (published in 2007) states that Philippine authorities have introduced several reforms to the banking sector since 2001, and that the BSP plans to adopt risk-based supervision in banks.

19. Independent validation of supervisory information through on-site examination or external auditors.

CP

The IMF's 2004 ROSC notes that Philippines is largely complaint with this Principle, but adds that the supervisory approach "is largely compliance based and has to be drastically reoriented towards a more risk-based approach" (p. 4). The IMF's 2006 Article IV Consultation report (published in 2007), states that the Philippines authorities have introduced several reforms to the banking sector since the 2001, and notes that the BSP plans to adopt risk-based supervision in banks.

20. Ability to supervise on a consolidated basis.

II

A 2003 report by the Institute of International Bankers states that the reorganization of the supervision and examination sector of the Central Bank of the Philippines (BSP) has enabled the BSP to align their performance of consolidated supervision of banks and their financial subsidiaries or affiliates with Basel Core Principles on Effective Bank Supervision. The BSP's 2006 Annual Report (published in 2007) asserts that "the BSP pursued the full implementation of the consolidated and risk-based supervision framework" (p. 52) However there is insufficient information as to the Philippines compliance with this Principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

II

The IMF's 2006 Article IV Consultation report (published in 2007) states that bank financial statements of banks are now required to follow International Financial Reporting Standards. However there is insufficient information as to Philippine compliance with this Principle.

22. Adequate supervisory measures to ensure timely corrective action.

II

The 2004 IMF ROSC, suggested that the BSP strengthen it Prompt Corrective Action (PCA) program. The IMF's 2006 Article IV Consultation report noted that a new PCA framework was adopted that allowed the BCP to intervene and take timely corrective action prior to significant declines in bank capital and enabled the imposition of sanctions on banks that fail to comply. However there is insufficient information as to the Philippines compliance with this Principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

II

According to the IMF's 2004 ROSC "weaknesses in consolidated supervision can lead to incomplete assessments of the full group network" (p. 5). However there is insufficient information as to the Philippines compliance with this Principle.

24. International exchange of information with other supervisors.

II

According to the IMF's 2004 ROSC "comprehensive and proactive information sharing and cooperation arrangements between the Central Bank of the Philippines (BSP) and its international counterparts (formal and or informal) are not well developed" (p. 5). However there is insufficient information as to the Philippines compliance with this Principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

II

The IMF's 2004 ROSC recommends that the BSP ensure it gets all the information on foreign banks operating in the Philippines by defining a well-established program of cooperation and information sharing with home country supervisors. However there is insufficient information as to the Philippines compliance with this Principle.