Liquidity Contingency Funding Plan

PPSBI LIQUIDITY CONTINGENCY FUNDING PLAN
ADMINISTRATIVE POLICY

1.  PREFACE/RATIONALE

A contingency funding is simply a reserve fund set aside to handle unexpected cash outflows that are outside the range of the usual operating budget.  It is imperative for the Bank to maintain an adequate amount of liquid assets as a protection against a possible loss in the event of emergency situation.  Financial resources may run dry quickly in adverse scenarios, forcing the Bank to look elsewhere for funding.

A contingency funding plan (CFP) addresses the institution’s strategy for handling liquidity crisis.  CFP should serve as the blueprint for meeting its funding needs in a timely manner and at a reasonable cost.  It describes policies and procedures for managing or making up cash flow shortfalls in stress situations.  Having a contingency funding plan can help avoid the need to rely on other entities.

2.  OBJECTIVES

CFP will be for use during a liquidity crisis to enable PPSBI to endure adverse situations.  It is recognized that a part or all businesses face crises at certain points and it is their response to these adversities that determines their long term success, rather more than their results during normal conditions.  Since bank liquidity is very sensitive to negative trends in credit, capital or reputation, spontaneous procedural measures should be readily available in order to address the extraordinary fluctuations in liquidity more effectively and efficiently.

Technically, a CFP is a projection of future cash flows and funding sources of a bank under stressed market scenarios including aggressive asset growth or rapid liability erosion.  To be effective and efficient, it is important that a CFP should represent management’s best estimate on balance sheet and off balance sheet changes and their related effect.  Taking all the measures and drawn procedures, PPSBI’s CFP can safeguard depositor’s, creditor’s and shareholders’ interest.

3.  TYPES OF SCENARIO

In general, scenarios can be classified into two categories:  (1) idiosyncratic (bank-specific) and (2) systematic (market-wide) liquidity.  Idiosyncratic risk refers to scenarios specific to the reporting firm or a small group of banks.  This kind of scenario may vary widely as factors differ on every bank.  Under systematic scenarios, the default occurs in the context of a national or global stress situation. The systematic scenario could typically be defined as the simultaneous unavailability of several markets with widespread concerns about the solvency of financial sector firms and uncertainty about the value of financial assets.  It was also often correlated with the national or global performance.

The distinction between idiosyncratic and systematic scenarios is important;  as it will help us in making decisions as to what kind of approach we will meet the crisis. This will contribute significantly to the overall probability of containing all eventualities.

4.  TIME HORIZON

The time period should also be considered in looking at the different levels of severity for stress scenarios.  It could generally be described in two classifications: a short heightened phase (for instance up to one or two weeks) and a longer time horizon of less severity but more persistent stress (for instance up to one month). In this manner, the Bank can size up and address the stress to the liquidity buffer.

Sustaining the time horizon relatively short seems necessary as it may be difficult for the Bank to define specific assumptions for longer time perspective.  Behavioral reactions of other market factors should be considered in creating long tenured scenarios.  Also, containing a crisis in a longer period may rapidly affect the confidence level of clients and/or investor.  However, it should be noted that shorter horizons might miss out chronic liquidity stresses.

5.  TRIGGERING EVENTS

Despite the fact that the management and staff have the responsibility to utilize good judgment to identify and manage underlying risk factors, PPSBI should also have a set of indicators to aid the process to identify the emergence of increased risk and/or vulnerabilities in its liquidity risk position or potential funding needs.

Early indicators should identify any adverse trend;  create an initial assessment; and potential management action in order to mitigate PPSBI’s exposure to liquidity risk.  Such indicators could be qualitative or quantitative in nature.

Early indicators may include but not limited to:

a.  Withdrawal of core deposits—Financing ability of the Bank will decrease;  The Bank may suffer irreparable damage because of serious reputation risk, as well as BSP sanctions.  This can also impinge on the Bank’s image by limiting earnings potential;  undermining financial strength or reducing capital base, thus clients will refrain from banking with the Bank triggering massive deposit pull-out.

b.  More rapid growth rate of loan than deposit—Dramatic expansion in credit;  The Bank may have loosened its credit standards.  This is also a sign that economy is improving.  However, this can result to a smaller balance sheet of the Bank.  The Bank may also tend to remove its assets and to hold less capital, which is the bank’s cushion against losses.

c.  Increase in salary loan—Similar to letter b, this can result to a smaller balance sheet of the Bank.  The Bank may also tend to remove its assets and to hold less capital, which is the bank’s cushion against losses.

d.  Lack of counterparty line—Increases liquidity risk.  A party interested in trading an asset cannot do it because nobody in the market wants to trade with the Bank.  This is the effect of a decrease in the credit rating of the Bank.

e.  Rating downgrade—Increase reputational risk, Massive withdrawal from depositors, cannot borrow from other banks.  Higher interest rate due to ebbing market confidence.

f.  All deposits short term—Ample liquidity;  can enable banks to repay some of their high-cost deposits and offset some of the increase in the cost of funds.

g.  Decline in asset priceRelated to letter d.  Increases liquidity risk.  A party interested in trading an asset cannot do it because nobody in the market wants to trade with the Bank.  This is the effect of a decrease in the credit rating of the Bank.

h.  Limited collection from loans—This hampers profitability of the Bank.  This is due to economic slowdown, which resulted to lower production and reduced repayment capacity.

6.  SCENARIOS THAT CAN PRECIPITATE A SYSTEMIC RUN

There can be a systemic run of the banking industry which can be precipitated by the following:

  • Collapse of Major Banks

The collapse of at least the top five (5) banks can trigger a ripple effect that can undermine the whole banking industry.  The top five (5) banks account for more than 60% of the banking industry assets as of June 2009.

  • Global Economic Recession (circa 1980-85 and 2008 to present)

The relapse of Philippines’ economy because of growing pessimism brought about by fiscal mismanagement can trigger widespread economic chaos, which can affect intermediation activities.  Lucky enough for the Philippines, the 2008 global recession did not make a significant dent in the country’s economy.

  • Power Crisis (circa 1990-1992)

The power/energy crisis has grave impact on the economy.  The electric consumption is a surrogate indicator of economic performance to which at least 75% of Philippines’ economy depends.  The power crisis of nation proportion is set to rear its ugly head in the terminus of this decade and it’s now being manifested in the Visayas and Mindanao areas.

  • Currency Crisis (circa 1997-1999)

The currency crisis or the “tom yung” effect that seriously affected South East Asian economies in 1997 as Asian currencies doubly lost their respective values vis-à-vis the US dollar.

  • Coups (circa 1987-1989)

With Philippines’ fragile economy and incipient political democracy, political destabilizing efforts such as military take-over can undermine the economy.  This can stifle growth in investments and affect savings.

  • Force Majeure
    • High Magnitude earthquake in NCR, Region III, IV (due to the tectonic pressure exerted by the Bulacan-Marikina-Laguna Fault Line)

These three (3) regions account for not more than 65% of the country’s GNP.  Massive economic dislocation in these regions could affect RP’s economy, which is the engine of the banking industry.

    • Typhoons Heavy Flooding (La Niña)
    • Drought (El Niño)
    • Tsunami

The above weather phenomena can seriously affect our loan portfolio especially in the regions.  This can pose serious collection problems that can impact on the Bank’s gap profile.

  • Terrorist Attack
    • Pandacan Oil Depot
    • Airport/Sea Ports
    • Bio-terror

The above scenarios can affect Philippines’ investment as an international haven for foreign investors who have the much-needed capital to invest.  The pullout of investments because of the above will trigger massive withdrawals and precipitate unemployment problems and eventually dissavings.

7.  INTERNAL AND EXTERNAL COMMUNICATION FLOW

CFP should be planned by, agreed upon and activated by PPSBI’s Asset and Liabilities Management Committee (ALCO) and/or the LCMC.  Approval of the activation by the Chief Executive Officer (CEO) is necessary.  Upon the activation of LCMC, the nature and direction of information flows should be clearly identified as well as concerned units that will be involved in the activity.  The crisis team and relevant units are called together via call trees. LCMC together with the respective representative of the business sectors are the one authorized to make/take decisions and stipulate how these decisions are communicated and to whom.

In order to maintain confidence, PPSBI may intend to keep the problem from the market and/or media and even internally.  Media, investors, markets and bank personnel would be informed more selectively through the communication director or relationship managers.  However, PPSBI accentuate the importance of giving extensive information with relevant regulators of which members of ALCO would hold frequent and detailed technical interchange meeting.

8.  REPORTING

The process of measuring the adequate funds for the crisis include robust methods of comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over an specific time horizon.  Cash flows arising from assets, liabilities and off-balance sheet items over an specific time horizon.  Cash flow projections can range from simple spreadsheets to very detailed reports depending upon the complexity of the Bank and its liquidity risk profile under adverse scenarios.  Given the crucial importance the assumption plays in constructing measures of liquidity risk, PPSBI should ensure all information used are reasonable, appropriate and adequately documented.

Sufficient supporting detail coming from business lines and related departments should be regularly provided to enable LCMC/ALCO properly assess the sensitivity of PPSBI during the crisis.  The types of reports and its timing will vary accordingly.  Reportable item may include but are not limited to gap analysis, financial ratios, asset and funding concentration, funding availability, collateral usage, status of contingent funding, cash flow and exception report, if necessary.

9.  SOURCES OF FINANCE

Funding decisions are usually, but not exclusively, taken in view of actual or planned changes in financial assets.  The funding strategy sets out how the Bank intends to remain fully funded at the possible minimum cost consistent with its risk appetite.  A strategy with a broader funding base may entail higher operating and funding costs but through diversity provide more stable and reliable funding.  PPSBI’s CFP will condition liquidity management needs, hence, the risks embedded in the chosen sources of fund/s will translate into risks that the liquidity management will have to address.

PPSBI diversifies the available funding sources in short-, medium-, and long-term.  The necessary diversification also includes correlations between market conditions, limits by counterparty, secured versus unsecured market funding, investment type, currency and geographic market.

Currently, PPSBI also limit its concentration in any one particular funding source or tenor.  Reliant on a single or few funding source may add up on the risk the bank is taking during a crisis.  Timely availability of funds at the right maturities and at a reasonable cost should be properly identified in order to have a brief, future-looking strategy.

9.1  PRIMARY SOURCES OF FUNDING

a.  Cash in Vault (CIV)

PPSBI prefers CIV as its first priority due to its nature.  CIV are readily available at efficient cost and on demand.  Currently, the management is prudently keeping at least 5% of the bank’s assets or approximately PhP300MM in cash to cover cash requirements under normal conditions.  The cash is accessible anytime, which effectively means instantly.

b.  Due from other/local banks

These are the demand and time deposits with other banks and although there is a slight element of risk involved, it is almost considered as cash.

c.  Due from BSP

All deposits (reserve, special and demand) with the BSP are also almost considered very liquid.  However, it should be noted that PPSBI should consider a loss of 60 or 90 days due to reduction of applicable interest rates.

d.  Held for Trading (HFT) Investments

PPSBI can sell HFT investments within a short period of time as classified in its nature.  PPSBI’s HFT averaged at PhP50MM, commensurate to the decrease in deposit level.

e.  Available for Sale (AFS) Financial Assets

Considering the holding period for AFS Financial Assets of 30 days, PPSBI cannot sell AFS instantly.  PPSBI can use it as collateral if it is needed in a much shorter term.  However, selling of AFS should not be put aside as it may be less costly particularly in over 30 days crisis.  Per books, AFS averaged to PhP340MM.

In the event this source is not sufficient, we will consider the following sources below.

9.2  SECONDARY SOURCES OF FUNDING

a.  Rediscounting Window with BSP

This facility is available to banks that want to rediscount their outstanding accounts receivable for additional liquidity.

b.  InterBank Call Loan (IBCL)

Borrowing from the interbank market using available credit lines from different banks aggregating PhP200MM, clean and secured.  However, PPSBI should take into consideration fee costs, adverse changes in clauses and potentially adverse reactions by the funding market should these lines be utilized.

c.  Held to Maturity (HTM) Investments

HTM Investments can either be sold or pledged as collateral.  We need to take into consideration the cost and the probable earnings PPSBI may lose if we intend not to hold until the investments’ maturity.  PPSBI’s government securities held for reserve purposes under HTM category average at PhP840MM.

d.  Unquoted Debt Securities

Unquoted debt securities are classified as standard grade based on the reputation of the counterparty and lack of marketability as compared to quoted securities/investment.  PPSBI may either sell it or pledge it as collateral, however, at a customary value.

In the event this source is still not sufficient, we will consider the following sources below.

9.3  OTHER SOURCES OF FUNDING

a.  Bond/Debt Offering

Also called supplementary capital, this equity is deemed to raise funds to support the Bank’s programs and expand the Bank’s capital adequacy ratio.  It is subject to various conditions, general loan loss reserves, long-term subordinated debt and cumulative or redeemable preferred options.

b.  Equipments and ROPA

These properties may be sold based on their appraised value, however, PPSBI consider this action as arduous as property selling is very difficult to do.  PPSBI may consider discounts or markdown if really needed.

c.  Emergency Liquidity Assistance (ELA) from BSP/PDIC

PPSBI can avail emergency loan with the BSP under BSP Circular No. 517 which shall be secured by first class collaterals like assets and securities that have relatively stable and definable value.  It will include assets maturing within one year or less and with complete documentation.

d.  Issues of shares by infusing fresh capitalization from the National Government or Foreign Investor (if feasible)

Fresh cash infusion can lessen fear ratio and improve CAR.  It may help the bank to maintain its operations as it restructures or reforms.  This is mitigate structural liquidity gap that is harder to match through treasury or portfolio management.

10. OTHER ALTERNATIVES FOR CONTROLLING/MITIGATING THE CRISIS EFFECT

a.  Displaying Peso Notes and Coins

PPSBI can ride on this demonstration effect strategy to assuage clients that the Bank has sufficient cash reserves and forestall the run

b.  Offering high deposit rates to prevent withdrawals

PPSBI can offer higher than market rates for continued patronage of its deposit services.  This measure can stem the tide of withdrawal and mitigate liquidity risk by countering deposit termination with interest rate cure.

c.  Temporarily suspending credit or lending activities

PPSBI must temporarily suspend its credit activity to plug the hole under asset side liquidity flows until such time that liquidity normalizes.

d.  Lowering ATM limit

Adjusting ATM cash limit will lengthen PPSBI’s cash cycle.  This action can stretch the Bank’s cash reserves.

e.  Shortening of Branch Banking Operations

Minimizing tellering activity can reduce withdrawal transactions and prevent snowballing effect in a limited sense.

f.  Right-sizing/Outsourcing of non-critical functions

Reduction-in-force of its non-critical and non-essential functions can generate significant savings in manpower and other operating expenses.

g.  Rehabilitating/Re-organizing the Institution

PPSBI can merge with other government financial institutions to create a bigger and better bank with a wider mandate and more solid funding base that can truly compete in the industry.

h.  Infusing Fresh Capital from National Government (NG) or Outside Investors (if feasible)

Fresh cash infusion can lessen fear ratio and improve CAR.  This will mitigate structural liquidity gap that is harder to match through treasury or portfolio management.

i.  Increased services for depositors

Personalized services and convenience and better services may be one of the best and most cost effective ways for PPSBI to fend off competitors and maintain a stable and loyal base of customers.

j.  Develop new deposit products

This can attract depositors and can strengthen PPSBI’s base of depositors and match the services provided by other institutions.

k.  Use more alternative funds

PPSBI, in order to use more of its alternative funds must develop policies, strategies that address the potentially greater volatility and higher cost of these instruments.

l.  Lend on a more selective basis

This can result in better credit quality and higher net interest margins and loan demand increases.

m.  Sell and participate bank loans

This can free the balance sheet of PPSBI, help control its risk exposures and meet needs of major borrowers.

n.  Change asset mix

This means more efficient cash management, smaller securities portfolio and fewer government funds sold.

o.  Legislative changes

This could be in the form of greater deposit insurance coverage or authority to pay interest on demand deposits.

p.  Refraining from Credit Activities

Holding credit activity can plug the asset side liquidity problem and this the Bank can focus on its liability side liquidity flows.

q.  Channeling of Monies to GS Investments

In times of crisis, Government tends to hike yields such as the Jobo Bills in early 1980’s and the Cash Management Bills of the 1990’s.  Higher returns in safer investments is a better alternative.

 

ANNEX A.  STRESS SCENARIOS, EFFECTS AND ACTION PLAN

STRESS SCENARIO 1:  WITHDRAWAL OF CORE DEPOSITS

Core deposits are the deposits made in a bank’s natural demographic market.  These are commonly used as a measure of a bank’s success in attracting funds through traditional banking channels.  It consists of the Bank’s regular bank customer base.  It is also the most stable and least costly source of funding for banks.

With the massive withdrawal of core deposits, financing ability of the Bank will decrease.  It may suffer irreparable damage because of serious reputation risk, as well as BSP sanctions.  This can also impinge on the Bank’s image by limiting earnings potential, undermining financial strength or reducing capital base, thus clients will refrain from banking with the Bank.

Triggering Point and Action Plan

As of September 30, 2011, PPSBI has Demand Deposits of P3.1B  and Regular Savings of P1.5B and P1.53B core deposits (30% Demand Deposits and 40% Regular Savings).

If the withdrawal of core deposit reaches 40% or P0.612 B in the 1st week, the Bank can use the total of cash, cash and other cash items (COCI) and due from BSP and resident bank (P0.491 B) and 17.90% of interbank call loans receivable (P0.676 B).  If it continues to decrease by another 35% or P0.536 B in the 2nd week, the Bank can use 96.58% of the remaining interbank call loans receivable (P0.555 B).  If it continues to decrease by another 25% or P0.383 B in the 3rd week, the Bank can use the remaining balance of interbank call loans receivable (P0.019 B) and can sell 96.55% of Available for Sale (AFS) investments (P0.377 B).

The Bank can also do the following:

a.  The Bank can sell or securitize parts of the Bank’s loan portfolio and supplement traditional funding sources with variety of new but potentially stable and less expensive funding instruments.

b.  The Bank can also develop new deposit products and raise credit standards while doing the above action plan for each triggering point.

STRESS SCENARIO 2.  LESS THAN 10% CAPITAL ADEQUACY RATIO (CAR)

Capital adequacy ratio is a measure of bank’s capital.  It is also known as capital to risk weighted assets ratio (CRAR).  This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.

Bangko Sentral ng Pilipinas (BSP) require banks to have a car of at least 10%.  Less than 10% CAR means the Bank has a lesser cushion against losses thus making the Bank more prone to bank failure.  It also indicates lesser protection for depositors and lesser stability of the Bank.  This can increase reputational risk triggering decreases in deposits (Stress Scenario 1) and decreases in loans and loan collections.

Formula for CAR:

Capital Adequacy Ratio (CAR) = (Tier 1 capital + Tier 2 capital) / Risk weighted assets

Or

Capital Adequacy Ratio (CAR) =  Total Qualifying Capital/Risk weighted assets

Where:

Tier 1 capital is the core measure of a bank’s financial strength.  It is composed of core capital, i.e., common stock, retained earnings and non-redeemable non-cumulative preferred stock.

Tier 2 capital, also known as supplementary capital is composed of undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt.

Total Qualifying Capital (TQC) is the total of TIER 1 and TIER 2 capital.

Risk weighted assets (RWA) is a bank’s assets or off-balance sheet exposures, weighted according to risk.  It is composed of ROPA and total loans.

Triggering Points and Action Plan

As of September 30, 2011, PPSBI has CAR of 14.91% (TIER 1 capital = P0.381 B, TIER 2 capital = P0.025 B, TQC = P0.407 B and RWA = P2.738 B (ROPA = P0.518 B and Loans = P2.22 B)).  The following are the triggering points and action plan for Stress Scenario 2:

1.  CAR decreased to 11% three months from September 30, 2011 – The Bank’s CAR will decrease to 11% if:

a.  TQC decreased by 26.04% = Decrease in TQC by 26.04% may be a result of a decrease in retained earnings by 26.53%.  A decrease in retained earnings is a result of an increase in NPL ratio by 35.25% and increase in provisioning, write offs and other expenses by 35.37%.

b.  RWA increased by 35.14% = increase in RWA may be a result of an increase in ROPA by 6.65% and increase in loans by 28.49%.

Immediate solutions:

  1. Utilize 4.45% of unused deposits (P2.38 B)
  2. Collect 35.25% of NPL
  3. Increase retained earnings by selling 6.9% of AFS (P0.377 B)

2.  CAR decreased to 10% four months from September 30, 2011 – The Bank’s CAR will decrease to 10% if:

a.  TQC decreased by additional 8.97% = Additional decrease in TQC may be a result of an additional decrease in retained earnings by 8.33%, an additional increase in NPL ratio by 9.83% and additional increase in provisioning, write offs and other expenses by 9.46%.

b.  RWA decreased by additional 5.41% = increase in RWA may be a result of an additional increase in ROPA by 1.03% and additional increase in loans by 4.38%.

Immediate solutions:

  1. Utilize additional 0.62% of remaining unused deposits (P2.247 B)
  2. Collect additional 5.38% of NPL
  3. Provide additional increase in retained earnings by selling 0.85% of remaining AFS (P0.345 B)

Aside from the immediate action plans listed above, the Bank can also:

1.  Raise capital by using an underwriting firm.  It offers shares of new bank to investors on one of two bases:  either as a “commitment” or as “best efforts.”  The commitment method requires the underwriter to sell a fixed number of shares, frequently at a fixed price.  If investors fail to purchase the required amount of stock, the underwriter remains obligated to buy the remaining shares.  The best efforts method, on the other hand, does not require the underwriting firm to buy unsubscribed stock.

Raising of capital can also be done by seeking funds from mother company, other financial institutions and community developmental banks.

2.  Borrow from BSP/PDIC and other banks

3.  Develop new deposit products and raise credit standards.  This can help the Bank make better risk taking choices

Source:  Bankwide FRP September 2011, NPL Report for September 2011

 

APPENDIX
PHILIPPINE POSTAL SAVINGS BANK, INC.
LIQUIDITY CONTINGENCY PLAN

SCOPE

To establish an action plan to manage a stressed situation created by risk exposures, vulnerabilities in the system and unusual, disturbing developments related to banking industry.

PROGRAM’S OBJECTIVE

To provide a framework within which an effective response to a liquidity crisis can be managed.

Liquidity crisis is defined as a condition that arises from a sudden weakening of the perceived safety and credibility of the Bank, resulting in substantial hindrance in its operations and financial condition.

PHASE 1 – IMPEDING CRISIS

1.  Liquidity Crisis Management Committee (LCMC) Team

a.  Chairman – President & CEO

b.  Vice Chairman – RMC Chairman (Board Member)

c.  Member – Treasury Group Head

d.  Member – Corporate Operations Group (COG) Head

e.  Member – Support Services Group (SSG) / Branch Banking Group (BBG) Head

f.  Member – Office of the General Counsel (OGC) Head

g.  Member – Risk Officer

h.  Member – Compliance Officer

i.  Member – Information and Communication Technology Group (ICTG) Head

j.  Communication Director – Corporate Planning (Corplan) Head

 

2.  Action Points

2.1  Investigate the underlying cause of the crisis to establish:

  • Identify triggering event/s
  • Duration of crisis
  • Remedial action to avoid the crisis, agree any external/internal communications statement

Responsibility

LCMC Team

2.2  Advise respective Business Unit Heads and cancel leave commitments of key personnel

Chief Executive Officer

2.3  Review liquid and market assets portfolio by availability and marketability

Head of the Treasury Group

2.4  Require standard monitoring report that should be forwarded routinely;  establish frequency of when these report should be submitted

LCMC and ALCO through Group/Department Heads

2.5  Preparation of liquidation strategy and creation of back-up plan whenever the prioritized line becomes unavailable

 ALCO

PHASE 2 – CRISIS SITUATION

1.  Communication

Convene emergency ALCO meeting to review the crisis; agree content of any external/internal statements; delegate tasks and areas of responsibilities.

 

 

Chief Executive Officer

The ALCO and LCMC should be immediately informed of any developments with the on-going crisis;  assessment of various offices and department of PPSBI

Risk Officer, COG and
SSG/BBG Head

Provide general, ongoing guidance on communicating with major deposit customers and other sources of funding, internal staff and the press

 ALCO/LCMC through the Communication Director

Inform the Bangko Sentral ng Pilipinas (BSP) of the crisis and proposed remedial action, if deemed necessary

Chief Executive Officer through the Head of the Treasury Group

Brief Traders and other related personnel in the Treasury Group

Head of the Treasury Group

Brief Relationship Managers, Branch Managers and related key personnel

COG and SSG/BBG Head

2.  Assessment and Action

Confirm the liquid and market asset portfolio for initial selective liquidation.

 

Head of the Treasury Group as approved by ALCO

Delegation of responsibilities and authorities;  specifications for carrying out assigned tasks within their respective offices and departments (reporting lines);  designation of one or more personnel to serve as backups

Chief Executive Officer through respective Group/Department Heads

Approach BSP for rediscounting window

Head of the Treasury Group

Assess the level of interbank borrowing capacity and raise funds to meet liquidity from the most reliable sources.

Head of the Treasury Group

Closely monitor and assess withdrawal pattern

Branch Managers through the SSG Head, reporting under the Head of the Treasury Group

No early redemption of deposits without specific approval of CEO and Head of the Treasury Group

COG and SSG/BBG Head

Assess overall loan portfolio.  Make sure there are no incremental drawdowns.  Activate plan to recall or seek repayment from customers.

COG and SSG/BBG Head

Selling HTM investments

Head of the Treasury Group

Assessment of other sources of funding, if primary and secondary options failed to support PPSBI’s liquidity needs

LCMC/ALCO particularly the Chief Executive Officer, Head of the Treasury Group and OGC Head

2.10  Checking compliance with the approved liquidity plan, law and other regulatory institution

Compliance Officer, OGC Head and Chief Executive Officer

2.11  Approval of exceptions report which indicate any prompt action that violate provisions of the contingency plan but nevertheless prudent under the circumstances

2.12
  Decide when a problem  situation has been resolved and the contingency plan be deactivated

Chief Executive Officer from the recommendation of the ALCO or LCMC

 

Chief Executive Officer from the recommendation of the ALCO and LCMC

2.13  Review the concluded crisis and take into consideration all factors not covered in the existing risk management framework (i.e. internal control structure and parameter, measurement of liquidity needs, exception reporting etc.)

LCMC, ALCO and Risk Officer

TRIGGERING EVENTS

SCENARIOS THAT CAN LEAD TO A BREACH IN THE MAXIMUM CUMULATIVE OUTFLOW (MCO) LIMIT AS WELL AS THE CONTINGENCY MEASURES ATTENDANT TO EACH SPECIFIC EVENT ARE ENUMERATED BELOW:

Reputation Risk

This can happen when PPSB is mired with socio-political or financial scandals that can affect its image.  This can be precipitated with perceived political or financial anomalies concerning bank officials and its board of directors.

Bank’s Capital Adequacy Ratio (CAR) Registering Below BSP Prescribed Level of ten percent (10%)

CAR of less than 10% is technically undercapitalized, which can trigger massive client migration to other banks with higher CAR.  It is one of the fundamental measures of financial strength that BSP takes into consideration.

Fund Withdrawals of High-Networth Corporate Clients

As of October 2012, high-networth corporate clients comprising less than seventy (70) accounts with balances not lower than P10M account for fifty nine percent (59%) of the Bank’s total deposit liabilities.  Likewise, at least sixty five percent (65%) of the total deposit came from local government agencies.  The skewedness of our deposit profile will prove the Bank’s dependence on high cost deposits.

Revolutions/Coups

Political upheavals such as revolutions and military coups will bring about social unrest and tumult that can devastate the economy and its populace.  The need for being liquid during this time is high and therefore massive withdrawals are not remote, hence, should be anticipated.

Top Management Reorganization

The Bank’s reorganization, especially political accommodation for senior management positions, can undermine efficiency and effectiveness of the Bank’s performance and as such, financial stability and performance of the institution is compromised.

In the event of continued liquidity gaps despite the contingency measures mentioned above, the situation can have the following impact to the Bank:

Severe Reputation Risk

  • Nonperforming Assets (NPAs) in excess of 50%
  • CAR less than 10%
  • Negative ROE

The Bank may suffer irreparable damage because of serious reputation risk, as well as BSP sanctions should the above occur.  Said events will seriously impinge on the Bank’s image by limiting earning potential, undermining financial strength or reducing capital base, thus clients will refrain from banking with the Bank triggering massive deposit pull-out.

Sustained/continued long queue of withdrawals from clients in all branches

This can have serious demonstration effect that can snow ball and wipe out the Bank’s cash reserves in a short time making withdrawals difficult to service once the MCO limit is breached.

Transfer of Sizeable Deposits to the Other Banks

The transfer of deposits to the other banks can decrease core deposit level affecting further the Bank’s structural gap.

At this point, the Bank can do the following contingency measures:

Availing Emergency Liquidity Assistance (ELA) from BSP/PDIC

The Bank can avail liquidity assistance with BSP and/or PDIC with its ROPA as collateral.

Infusing Fresh Capital from National Government (NG) or Outside Investors (if feasible)

Fresh cash infusion can lessen fear ratio and improve CAR.  This will mitigate structural liquidity gap that is harder to match through treasury or portfolio management.

Right-sizing/Outsourcing of Non-critical Functions

Reduction-in-force of its non-critical and non-essential functions can generate significant savings in manpower and other operating expenses.

Rehabilitating/Re-organization the Institution

The Bank can merge with other government financial institutions to create a bigger and better Bank with a wider mandate and a more solid funding base that can truly compete in the industry.

The scenarios mentioned above may be isolated to the Bank only and may not necessarily be true at the same time to other banks in the industry.

SCENARIOS THAT CAN PRECIPITATE A SYSTEMATIC RUN AND THE CONTINGENCY MEASURES THAT CAN BE ADOPTED:

There can be a systematic run of the banking industry which can be precipitated by the following:

Collapse of Major Banks

The collapse of at least the top five (5) banks can trigger a ripple effect that can undermine the whole banking industry.  The top five (5) banks account for more than 60% of the banking industry assets as of June 2009.

Global Economic Recession (circa 1980-85 and 2008 to present)

The relapse of Philippines’ economy because of growing pessimism brought about by fiscal mismanagement can trigger widespread economic chaos, which can affect intermediation activities.  Lucky enough for the Philippines, the 2008 global recession did not make a significant dent in the country’s economy.

Power Crisis(circa 1990-1992)

The power/energy crisis has grave impact on the economy.  The electric consumption is a surrogate indicator of economic performance to which at least 75% of Philippines’ economy depends.  The power crisis of national proportion is set to rear its ugly head in the terminus of this decade and it’s now being manifested in the Visayas and Mindanao areas.

Currency Crisis(circa 1997-1999)

The currency crisis or the “tom yung” effect that seriously affected South East Asian economies in 1997 as Asian currencies doubly lost their respective values vis-à-vis the US dollar.

Coups(circa 1987-1989)

With the Philippines’ fragile economy and incipient political democracy, political destabilizing efforts such as military take-over can undermine the economy.  This can stifle growth in investments and affect savings.

Force Majeure

  • High Magnitude earthquake in NCR, Region III, IV (due to the tectonic pressure exerted by the Bulacan-Marikina-Laguna Fault Line)

These three (3) regions account for not more than 65% of the country’s GNP.  Massive economic dislocation in these regions could affect RP’s economy, which is the engine of the banking industry.

  • Typhoons Heavy Flooding (La Niña)
  • Drought (El Niño)
  • Tsunami

The above weather phenomena can seriously affect our loan portfolio especially in the regions.  This can pose serious collection problems that can impact on the Bank’s gap profile.

Terrorist Attack

  • Pandacan Oil Depot
  • Airport/Sea Ports
  • Bio-terror

The above scenarios can affect Philippines’ investment as an international haven for foreign investors who have the much-needed capital to invest.  The pullout of investments because of the above will trigger massive withdrawals and precipitate unemployment problems and eventually dissaving.

To mitigate the effect of such a scenario, the Bank should adopt the following emergency measures in this extraordinary and extreme solution:

Lowering of ATM Limit

Adjusting ATM cash limit will lengthen the Bank’s cash cycle.  This can stretch the Bank’s cash reserves.

Shortening of Branch Banking Operations

Minimizing tellering activity can reduce transactions and prevent snowballing effect in a limited sense.

Refraining from Credit Activities

Holding credit activity can plug the asset side liquidity problem and thus the Bank can focus on its liability side liquidity flows.

Channeling of Monies to GS Investments

In times of crisis, Government tends to hike yields such as the Jobo Bills in early 1980’s and the Cash Management Bills of the 1990’s.  Higher returns in safer investments is a better alternative. 

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