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Fit and Proper Rule in Banking, Not Martial Law

09.12.2000

“The recent policy of the BSP requiring its prior approval in the appointment of bank directors and senior officers is neither a return to martial law nor a violation of corporation law. Congressman Arroyo should be aware of this because he was and is a member of Congress which deliberated the law allowing the principle of fit and proper rule.

“In fact, this principle of fit and proper rule in banking is provided in both the General Banking Act of 1949 (R.A. No. 337)as well as in the General Banking Law of 2000 (R.A. No. 8791).  The law provides the BSP with  powers to prescribe, pass upon, and review the qualifications and disqualifications of individuals elected or appointed as bank directors or officers.  The law also provides the BSP with a power to disqualify those found unfit for positions of bank directors and officers. It also allows the BSP to put in place a screening process that will ensure that an  individual is fit and proper to hold the position of a director or officer of a bank.  

“The objective of these provisions in the law is to ensure that bank management possesses a high degree of integrity and adequate experience, education, training and competence to do the job and afford better protection to depositors and the public in general. We believe that a competent bank management will ensure that the bank will carry out its principal functions in a safe and sound manner.  The fit and proper rule was included in the law to precisely ‘weed out incompetent people from owning or operating a bank’ as a way by which the BSP can curb the proliferation of weak banks.

“The BSP is not prepared to see the proliferation of weak banks on account of weak and incompetent directors and senior officers. The new BSP policy in no way violates the right of shareholders in electing their directors because the policy simply ensures that only those with competence and integrity specifically in banking should be installed.

“Moreover, experience in other countries show that most bank failures, particularly among privately-owned banks, may be traced to poor management.  Poor or incompetent management allows the bank to engage in unsound banking practices.  These unsound banking practices include the acquisition of low-quality assets, excessive risk-taking, fraud, taking of inappropriate risk positions, and failure to detect and resolve the deterioration in existing assets and risk positions. With this view, similar principle of fit and proper rule has been adopted in the US, UK and other central banks and supervisory authorities in Asia. “

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