The First Semester Developments: An Assessment
The Philippine financial system remained stable and poised to support a moderate economic recovery during the first half of 1999 despite the lingering effects of the Asian financial crisis and other disturbances. Significantly, its susceptibility to internal and external pressures was further reduced through the concerted efforts of all members of the financial services community and the Bangko Sentral.
Overall Condition. The system exhibited a generally stronger financial condition as of end-June 1999 as evidenced by the levels and trends of selected major accounts (Figure 1). Its underlying strength was also manifested by the avoidance of a systemic fallout notwithstanding closure of some banks and the existence of several entities with operational deficiency.
Figure 1. Comparative Levels of Selected Accounts of the Philippine Financial Systems
Operations in the first half of 1999 resulted in a modest expansion of assets, a trimmed but better quality loan and investment portfolio, limited exposure to potentially distressed top corporate borrowers, a manageable level of non-performing assets, increased loan loss provisioning and relatively improved profitability.
These attributes earned for the system a moderately lower risk profile compared to its neighbors. No substantial government expenditure was needed for the re-capitalization of problem banks as what happened in the case of Korea and Thailand. Philippine banks also exhibited the lowest ratio of non-performing loans among the casualties and near-casualties of the regional financial crisis (Figure 2).
Figure 2. Comparative Non-Performing Loans (NPLs) of Selected Asian Countries
*/ Actual, as of June 1999
Source: Study by the Int’l. Fixed Income Research Group of Chase (May 1999)
Industry participants actively implemented measures to safeguard the system’s soundness. Financial institutions absorbed increased costs associated with stricter classification of loan accounts and higher provisioning requirements. They also cooperated in improving disclosures and in aligning business practices toward internationally accepted norms. They enhanced their solvency and liquidity positions through continuous capital deepening and a more cautious stance in their lending and investing operations. Chartering and branching activities were steadily pursued, albeit at a slower pace due to the weaker economic environment and more stringent application of approved guidelines. This made them well placed to benefit from the expected pick-up in demand attendant to the resumption of production activities.
The Bangko Sentral, on its part, pursued the implementation of financial reforms through legislative proposals and the issuance of additional prudential guidelines and regulations (Appendix 1). The proposed amendments to the General Banking Act and to The New Central Bank Act should lead to the further strengthening of the legislative framework.
Specific prudential actions begun in the past continued to be undertaken within the context of existing banking laws. These included:
- prompting senior management to take full responsibility for the establishment of the first line of defense;
- adopting as a general principle the timely exit of problem banks;
- limiting bank entry only to viable entities meeting the prudential entry criteria;
- prescribing capital adequacy ratios as well as ceilings on credit extension to selected industries and/or family/business groups;
- adopting sound accounting rules in the preparation of financial statements, inclusive of those relating to classification of loan accounts, loan loss provisioning and loan restructuring;
- compelling external auditors to report adverse findings;
- expanding banks’ responsibilities for disclosure;
- adopting a ladder approach in the imposition of corrective and punitive measures on erring banks; and
- providing supervisors with the necessary training and logistical support to perform risk-based examination.
Industry Structure. The structure of the Philippine financial system remained basically segmented. Universal banks remained the lead industry players although there were many niche players.
Domestic commercial banks maintained its dominance in the financial system, accounting for 71.8% of total resources. The total share of foreign commercial bank branches and subsidiaries was contained at 11.6%. This is well within the 30% (of the banking system’s total resources) ceiling provided for under existing law. Thrift banks and non-banks had almost equal shares of 7.1% and 7.6%, respectively. The balance (1.9%) was accounted for by rural banks.
Small-sized rural banks accounted for the most number of head offices among the banking institutions (Schedule 1). Among non-bank financial intermediaries, pawnshops had the largest number of offices.
Industry Outlook. Business prospects for Philippine financial institutions appear to be relatively better compared to their Asian counterparts given the progress in implementing financial reforms and the positive economic outlook.
The thrust of financial reforms continue to be geared towards strengthening the legal and supervisory framework for financial institutions operating in the Philippines. To this end, there will be further refinement of prudential regulations and closer monitoring of all supervised and regulated entities.
The pending legislative proposals are aimed at:
- providing the legal basis for the consolidated supervision of banks;
- enhancing the legal powers of supervisors in the conduct of full on-site examination as well as in the implementation of corrective and punitive actions;
- providing legal protection to supervisors in the conduct of their duties;
- speeding up the resolution of problem banks;
- raising fines and penalties for non-compliance with prescribed prudential requirements;
- clarifying conditions for access to the central bank’s lender-of-last-resort facility;
- limiting equity investments of banks;
- liberalizing foreign ownership of banks; and
- facilitating adoption of Basle capital adequacy guidelines.
On the other hand, the strengthening of prudential requirements should lead to more competent bank management, greater transparency, reduced moral hazard, and more effective bank regulation and supervision.
In line with the policy of creating bigger-sized and better-managed institutions, progressive capital build-up and the encouragement of mergers and consolidations will be pursued.
These measures shall be supported by a ladder approach in the imposition of corrective and punitive actions on erring financial institutions. The prompt corrective action(s) should nip in the bud any abnormal trend so that the weakness of one institution would not be passed on to another bank or to the financial system as a whole.
The combined effects of these moves should: (i) promote a sound, stable and globally competitive financial system anchored on prudent risk management practices; and (ii) make more remote the occurrence of a systemic fallout, barring any unforeseen/adverse developments.