Rethinking the Philippine Financial Market Regulatory Model for Market-Based Credit Intermediation

Abstract

The Philippines was one of the first countries in Asia to embark on a series of reforms which targeted capital market development and financial liberalization in the 1980s. It was very much on its way towards international financial integration when the 1997 Asian Financial Crisis (AFC) tempered this development. As a consequence, commercial banking assets still account for a majority of the total financial assets in the Philippines and traditional bank lending remains the primary mode of financing. However, change is coming. Estimation reveals that the country needs approximately US$110 billion to cover its infrastructure needs between 2013 and 2020. While the public sector can still be counted on to provide a lion’s share of this funding need, a tight fiscal space prevents it from solely fulfilling the investment target. As stricter banking regulations have raised the cost of borrowing and shrunk availability of capital in some cases due to borrower limits, the urgency brought by this infrastructure financing gap has given rise to calls to shift towards market-based credit intermediation. However, as local banks move into this space as a result of government reforms, new risks could possibly arise which the present framework of the institutional separation between banks and securities regulation might be ill-equipped to deal with. The purpose of this paper is to assess the capacity of Philippine financial regulators to cope with new risks as the country shifts from bank-based credit intermediation to a market-based one. Specifically, this paper shall attempt to answer whether the traditional separation between banking and securities regulation will still work under a changing financial landscape or whether there will be a need to shift towards a goal-oriented or functional model of financial regulation? This problem is not only relevant in the Philippine context but is also important for other developing countries which are attempting similar reforms.