Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said that a main lesson from the COVID-19-induced recession is how interlinkages within an economy and across jurisdictions quickly breed systemic risks.
Governor Diokno, who is co-chair of the Regional Consultative Group for Asia of the Financial Stability Board (FSB), shared this insight during the recent Emerging Market and Developing Economies forum arranged by the FSB. He was joined by 60 high ranking officials from 25 jurisdictions and 15 standard-setting bodies at this event.
The Governor expressed relief that the economic fallout of the pandemic, though significant, has not been to the extent that was initially expected. This, he said, was because the authorities responded “early and decisively” to support the continued stability of the domestic financial market amid the pandemic. He also noted that data now provide strong evidence of recovery from the sharp contractions in 2020.
As the recovery takes hold, Governor Diokno suggested that authorities must fully consider socio-economic interlinkages in drafting the path ahead. He noted that the oversight of financial markets has to extend beyond individual institutions and focus instead on how the different stakeholders behave with one another.
Such holistic view is necessary, according to the Governor, because heightened financial integration must mean that “systemic risks – onshore and across borders – will continuously test financial stability.”
“This was the lesson we learned from the 2007 Global Financial Crisis (GFC) and it is as much a lesson today, even though the GFC and COVID-19 are very different shocks,” Governor Diokno pointed out.
Governor Diokno also discussed the so-called “fallacy of composition” where stakeholders naturally maximize opportunities for themselves while the authorities consider what is in the best interest of the system. The fallacy suggests that these two initiatives may not be aligned at times.
Moreover, he said that ensuring the market is liquid is always important, but how this liquidity is distributed within the economy is “arguably as much, if not more, important than the aggregate amount.”
Knowing this distribution, Governor Diokno explained, matters when the authorities start normalizing policies.
Looking ahead, the Governor highlighted the necessity of being prepared for future crisis. He shared that the Financial Stability Coordination Council has been crafting a systemic risk framework as well as undertaking systemic risk stress tests.
Governor Diokno underscored the importance of better communicating risks so that stakeholders can make informed choices.
The forum was held at the premises of the Bank for International Settlements in Basel, Switzerland.