Are Philippine domestic commercial banks procyclical or anticyclical?: A study on bank credit risk management policy and the business cycle

• Main Authors: Cheng, Andrea Therese, Cu, Darlene Cindy, Ong, Maria Beatrice, Ong, Rachel Marie
• Format: text
• Language: English
• Published: Animo Repository 2009
• Online Access: https://animorepository.dlsu.edu.ph/etd_honors/355
• Institution: De La Salle University

In the light of recent financial crisis, we recognize the importance of determining Philippine domestic commercial banks provisioning behavior. While an overall prudent behavior would be indicative of good fundamentals for domestic commercial banks, an imprudent behavior would necessitate greater BSP regulations in order to avoid liquidity problems. As such, we seek to identify the determinants of provisioning on both a macroeconomic and bank-specific scale. More specifically, we wish to determine banks provisioning response to the business cycle. An anticyclical provisioning means that banks have sufficient cover for periods of economic downturns. It also prevents second round worsening effects on the macroeconomy. Using both the panel data estimation and the Arellano-Bond dynamic panel methodology, we find that Philippine domestic commercial banks are anticyclical as provisioning increases in periods of favorable economic activity. Moreover, provisioning response to other macroeconomic and bank-specific determinants, such as interest rate spread and bank inefficiency, also indicates prudent risk management. Though imprudent in some aspects, Philippine domestic commercial banks are generally prudent in their credit risk management.