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April 24, 2024

Philippine banks more responsive to policy decisions

Monetary policy changes in the Philippines are expected to have a greater impact on the credit activities of local banks, especially with the growing competition from foreign bank branches, according to a discussion paper from the Bangko Sentral ng Pilipinas (BSP) Research Academy.

The paper, authored by Laura Britt-Fermo and Neil Fidelle Lomibao, highlights the implications of central bank regulations and market structures on policy outcomes.

The BSP said that as bank concentration increases over time, along with the influx of foreign bank branches and affiliates, monetary policy could exert more influence through the credit channel, particularly via domestic banks. The paper underscores the importance of the monetary authority being well-informed on how to effectively utilize this influence through bank credit and lending rates in the transmission channel.

The BSP has been one of the most proactive central banks in the region, raising benchmark interest rates by 450 basis points (bps) since May 2022 to combat inflation and stabilize the peso. The Monetary Board increased borrowing costs by 350 bps in 2022, followed by another 100 bps in the subsequent year, bringing the target reverse repurchase (RRP) rate to 6.5%, its highest level in 16 years.

The report also indicates that domestic banks are more sensitive to changes in policy rates compared to foreign bank branches, as the latter have access to additional funds from parent companies. The BSP’s research academy found that domestic banks are more responsive to monetary policy, bank characteristics, and inflation, while foreign banks are more influenced by real GDP growth.

Foreign bank branches in the Philippines base their funding allocations on the macroeconomic fundamentals of the countries where their parent companies operate. Their decision-making process for loan pricing and fund allocation mirrors that of international investment banks, relying heavily on macroeconomic data.

The report notes that the global financial crisis exposed the vulnerabilities of foreign banks to the weaknesses of their parent companies, prompting scrutiny of the impact of bank branches on monetary policy choices and transmission mechanisms in emerging markets like the Philippines.

The recent increase in foreign ownership limits on local banks in the Philippines adds to the relevance of examining these dynamics. The Philippine bank liberalization law, effective since 2015, removed the 60% foreign ownership limits on local banks, attracting interest from banks in Asia, Europe, and the Middle East.

Despite this, some foreign banks opted to exit the Philippine market due to global uncertainties. In April 2021, Citigroup, Inc. announced the sale of its consumer banking business in the Philippines and other Asia-Pacific markets, while Dutch bank ING Bank N.V. also left the Philippine retail banking market in 2022, although it will maintain its wholesale banking unit and global shared service operations in the country.


Local banks in the Philippines are expected to be more affected by monetary policy changes compared to foreign bank branches, with recent policy adjustments by the Bangko Sentral ng Pilipinas aimed at influencing credit channels, particularly through domestic banks, amid increased competition from foreign banks.