The strengthening of regional linkages among banks, particularly in Asia, could, in some ways, prove detrimental to the lending system, according to the International Monetary Fund (IMF).
In its most recent financial stability report released just this month, the IMF said the continuously expanding interrelation among the lenders heighten their collective exposure to shocks coming from outside or even within the region.
This growing relatedness may mean that shocks originating outside the region could travel and propagate faster within the region.
The Bangko Sentral ng Pilipinas (BSP) is one with the region in promoting the advancement of the Association of Southeast Asian Nations (Asean) Banking Integration Framework (Abif).
One of the most recent and telling developments prior to achieving the goals of the Abif was the liberalization of the entry of foreign banks that broke down the barriers and lifted the restrictions.
As a result, the BSP received a barrage of applications from Asian banks seeking to operate in the Philippines. Among those banks given permission was the Japan-based Sumitomo Mitsui Banking Corp.
While the regionalization of banking services in Asia may be inevitable, the IMF said this development calls for a strengthening of regional safety nets to address potential shocks in the system.
The IMF recommended the strengthening of the soundness of parent banks as part of a menu of financial reforms preventing such shocks down the line.
This, according to the central bank, can help limit the transmission of negative foreign shocks to affiliated foreign banks operating in different jurisdictions in the region.
The IMF also said that increased cooperation among national regulators and supervisors is key to reconciling banking globalization with any measure of financial stability.
The IMF said regional banking cooperation should not only be isolated in cross-border resolution but also on the the implementation of Basel-approved accounting standards among banks.