Truth has to be repeated constantly, because Error also is being preached all the time, and not just by a few, but by the multitude. In the Press and Encyclopaedias, in Schools and Universities, everywhere Error holds sway, feeling happy and comfortable in the knowledge of having Majority on its side― John Wolfgang Goethe
In this issue
Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle
Section I — Universal-Commercial Bank Credit Is Stalling Despite BSP’s Aggressive Easing
Section II—Banks Are Reallocating, Liquidity Is Recycling, Not Financing Growth
Section III — BSP Is Accommodating Outcomes, Not Steering the Cycle
Conclusion: Accommodation as Policy, Crisis as Outcome
Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle
Inflation optics, soft-peg constraints, and the mounting cost of balance-sheet preservation.
Section I — Universal-Commercial Bank Credit Is Stalling Despite BSP’s Aggressive Easing
Interest rate cuts have become the by-phrase of the local financial community.
Authorities continue to signal sustained monetary loosening as economic stimulus, while establishment economists and legacy media have rationalized financial easing—and the resulting rally in the PSEi 30—as a necessary catalyst for market recovery. Ironically, the same narrative also attributes the peso’s record weakness to this easing cycle.
Either the mainstream genuinely believes that peso depreciation and economic recovery naturally go hand in hand, or market relationships are being selectively blurred or fudged to justify coordinated equity-market pumps.
Recent BSP releases—including the Universal and Commercial (UC) Bank’s November Loans Outstanding, the November Depository Corporations Survey, the November Philippine Bank’s Balance Sheet and Selected Performance Indicators, and the December central bank survey (MAS) indicators—tell a more troubling story beneath the liquidity narrative.
Since late 2024, the BSP has pursued an extended easing cycle combining aggressive reserve-requirement reductions and repeated policy rate cuts, alongside financial backstops such as the doubling of deposit insurance coverage.
Reserve requirements for UC banks were slashed from 9.5% to 7.0% in late 2024, and further to 5.0% by March 2025, amounting to a 450-basis-point liquidity release. Over the same period, successive rate cuts brought the policy rate down to 4.5% by December 2025.
This accommodative stance unfolded against the backdrop of lingering pandemic-era fiscal deficits, whose credibility was further strained by the flood-control corruption controversy that erupted in Q3 2025.
Yet despite persistent easing signals, private credit growth failed to re-accelerate.
Figure 1
Universal bank lending peaked in January 2025 and slowed again by November, with both production loans and consumer credit losing momentum. (Figure 1, topmost window)
UC banks reported a marked deceleration in November 2025, with total loan growth at around 10.7%, the slowest pace since late 2024. This was driven by weakening production loan growth (about 9.0%), while consumer credit, though still elevated in nominal terms, cooled to roughly 23%, its slowest expansion since late 2023. (Figure 1, middle image)
This slowdown is striking given the macro backdrop: post-4% Q3 GDP growth, moderating inflation, and near-full employment—conditions that should, in theory, have reinforced credit demand.
Instead, while lending momentum faded, monetary liquidity continued to expand. M1 growth (cash in circulation and transferable deposits) remained positive at just over 7% in November, extending its uptrend even as credit creation slowed. (Figure 1, lowest graph)
Figure 2
At the same time, deposit liabilities grew by only about 7.3%, continuing to underperform loan growth and reinforcing the underlying imbalance. (Figure 2, topmost visual)
Taken together—slowing production and consumer loans, lagging deposit growth, and rising transactional liquidity—the evidence suggests that monetary easing is no longer transmitting into productive credit formation.
Rather than catalyzing real investment, it appears to be inflating balance sheets and leverage, heightening systemic fragility without delivering commensurate real-economy gains.
That is not all.
Section II—Banks Are Reallocating, Liquidity Is Recycling, Not Financing Growth
In the BSP’s December central bank survey, currency issuance not only surged to a record Php 3.2 trillion, but its year-on-year YoY growth accelerated to about 17–18%, surpassing the 2018 spike and ranking as the third-highest on record, behind only 2008 and 2020. (Figure 2 middle image)
Notably, 2018 coincided with the BSP’s baptismal phase of its reserve-requirement (RRR) easing cycle, while 2008 (Great Financial Crisis) and 2020 (Pandemic recession) were both periods marked by domestic economic stress and volatility spikes of the USDPHP.
History may not repeat—but does it rhyme?
This liquidity surge, which should be further reflected in the December Depository Corporations Survey, likely contributed to the January-effect euphoria in the PSE, reinforcing asset (equity) price inflation even as credit growth slowed.
Crucially, this marginal liquidity growth is not coming from private lending.
Instead, net claims on the central government (NCoCG) held by banks surged to a record Php 5.89 trillion, up roughly 11% year-on-year, the fastest pace since mid-2024.
At the same time, the BSP’s own NCoCG rebounded to around Php 760 billion—its highest nominal level since March 2025, largely due to a sharp decline in liabilities to the national government—despite falling nearly 20% YoY. (Figure 2, lowest chart)
This decline most plausibly reflects a drawdown of government deposits at the BSP or reduced sterilization vis-à-vis the Treasury, mechanically releasing base money into the financial system. While debt repayment is a theoretical alternative, the persistence of record public debt levels as of November (Php 17.562 trillion) makes that explanation unlikely.
Despite falling Treasury yields—which have reduced banks’ mark-to-market losses and should have eased balance-sheet pressures—banks continued to accumulate sovereign exposure.
Figure 3
Held-to-Maturity (HTM) securities climbed to a record Php 4.08 trillion in November, underscoring a significant reallocation into government paper. HTMs now account for roughly 70% of banks’ net claims on the central government. (Figure 3, topmost window)
Banks have also escalated on investments. After a brief pullback in September from unprecedented highs, Available-for-Sale (AFS) securities rebounded by over 7% to Php 3.30 trillion, approaching HTM levels and reinforcing the portfolio shift away from private credit. (Figure 3, middle diagram)
Yet despite record nominal credit, aggressive securities accumulation, and abundant liquidity, bank liquidity metrics continue to deteriorate. (Figure 3, lowest graph)
- Liquid assets-to-deposits fell to about 47%, near pre-easing and pandemic-era lows, effectively erasing the BSP’s 2020-21 emergency liquidity buffers.
- Cash-to-deposits dropped to roughly 9.7% in November, the second-lowest level on record.
Figure 4
While banks have reduced bills payable, bond payables continued to rise, lifting total borrowings to around Php 1.5 trillion, down from the Php 1.906 trillion March 2025 peak but still elevated. (Figure 4, topmost window)
Liquidity management has increasingly shifted inward: interbank lending surged to a record Php 502 billion, alongside repo transactions exceeding Php 100 billion, signaling intensive liquidity recycling within the banking system. (Figure 4, middle image)
Taken together, these figures point to a clear pattern.
Banks are reallocating balance sheets toward sovereign absorption, liquidity management, and interbank cushioning—not expanding productive credit. The BSP, in turn, appears less to be steering outcomes than accommodating them, validating financial system preferences rather than redirecting capital toward growth.
Section III — BSP Is Accommodating Outcomes, Not Steering the Cycle
The BSP’s recent policy trajectory reveals a central bank anchored less to credit conditions or balance-sheet health than to inflation optics and system accommodation.
Reserve-requirement cuts and successive policy-rate reductions have consistently followed periods of CPI deceleration, even amid deteriorating bank liquidity metrics, balance sheets increasingly tilted toward sovereign absorption, and liquidity being recycled within the financial system rather than funding productive expansion. (Figure 4, lowest chart)
Monetary easing, in this context, has been CPI-conditioned rather than cycle-stabilizing.
CPI, therefore, becomes highly politicized and susceptible to the policy agendas of political leadership.
Why this persistence?
While the BSP’s inflation-targeting framework does not explicitly target asset prices, it cannot ignore collateral values in a bank-dominated financial system.
Falling collateral values threaten capital adequacy, impair credit transmission, and raise systemic stress. Policy calibration therefore prioritizes preventing balance-sheet rupture, even when that means sustaining distortions and postponing adjustment.
Figure 5
This implicit bias toward continuity has encouraged banks to manage imbalances rather than resolve them—through accounting optics, ratio management, and asset reclassification.
Non-performing and related risks (e.g. loan loss provision) are contained not by deleveraging, but by supporting numerator growth (total loan portfolio—TLP—or bank credit growth) relative to denominators, a classic Wile E. Coyote velocity dynamic: balance sheets continue running forward, suspended by liquidity and policy accommodation, even as underlying fundamentals weaken. (Figure 5, top and middle panes)
The same dynamic appears on the BSP’s external balance sheet. While net foreign assets (NFA) remain elevated, their support increasingly comes from valuation and financing effects rather than organic FX inflows.
- Rising global gold prices mechanically lift reserve valuations without expanding usable foreign-exchange buffers. (Figure 5, lowest graph)
- National government external borrowing routed through the BSP temporarily bolsters NFA, but these gains are liability-mirrored, not earned.
- Bank borrowings similarly augment liquidity while obscuring underlying fragility.
Figure 6
More revealing than the level of NFA is its slowing rate of accumulation, which coincides with persistent USDPHP pressure. (Figure 6, topmost visual)
This deceleration signals that the BSP’s capacity to manage the exchange rate is increasingly constrained by the very accommodations it sustains.
Peso dynamics, therefore, are not incidental. Under the BSP’s soft-peg regime, exchange-rate management remains a direct but tacit policy objective, subordinated to liquidity preservation, fiscal dominance, and bailout imperatives. (Figure 6, lowest chart)
Rather than defending a fixed level, the BSP has been compelled to tolerate managed depreciation, balancing currency weakness against the need to sustain domestic liquidity and support a political economy defined by a widening savings-investment gap.
USDPHP hit a record 59.46 last week amid declining volume and suppressed volatility, highlighting trade constraints and the footprint of BSP intervention.
This trade-off is most visible in energy and utility pricing—not through import dependence, but through bailout architecture. Producer subsidies, RPT reliefs, administered pricing, and government-nudged implicit M&A arrangements suppress inflation pass-through while deepening balance-sheet entanglement between the state, the financial system, and regulated corporates.
CPI relief is achieved, but only by displacing risk elsewhere in the system.
- In this sense, the regime exemplifies Goodhart’s Law: by targeting CPI, other signals—credit quality, liquidity resilience, capital discipline—are progressively distorted.
- It also reflects a Heisenberg Uncertainty-style policy problem: intervention alters the system it seeks to stabilize, most visibly in leverage-dependent sectors and currency dynamics.
Sustained FX intervention further amplifies this fragility, increasing the risk that adjustment, when it arrives, will be sharper and more volatile.
Viewed together, the pattern is consistent. The BSP is not directing capital toward productive expansion nor pre-empting cyclical deterioration. It is validating outcomes shaped by asset inflation, fiscal dominance, bailout logic, and inflation optics, accommodating systemic constraints in ways that systematically favor incumbents.
The public is offered stability in appearance, while adjustment is deferred—quietly, repeatedly, and at growing long-term cost.
Conclusion: Accommodation as Policy, Crisis as Outcome
The evidence presented does not describe policy error in the conventional sense. It reflects the unintended consequences of an institutional regime constraint operating within a political-economic framework that systematically privileges incumbent interests.
The BSP and the bank-dominated financial system operate under conditions where inflation optics, fiscal dominance, bailout dependencies, and soft-peg maintenance sharply limit genuine counter-cyclical control. Within this structure, discretion is less about steering the cycle than accommodating existing balance-sheet vulnerabilities.
What is sold as stimulus is largely balance-sheet preservation; what is promoted as stability is increasingly liquidity- and valuation-driven; and what appears as growth is often internal transactional recycling rather than productive expansion.
In such a regime, monetary policy does not fail abruptly — it erodes gradually, until markets, balance sheets, or external constraints force destabilizing adjustments.
The risk is not that the peso weakens, or that interest rates are “too low,” but that accumulated distortions increase the likelihood that eventual correction becomes more volatile, less controllable, and more socially costly.
This is not an argument about intent or competence. It is an argument about incentives, institutional constraints, and the limits of accommodation once gravity reasserts itself.
Where political-ideological rigidity suppresses reform, crisis ceases to be an accident and becomes the logical endgame.
