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Status Report on the Philippine Financial System
Second Semester 1999

The Second Semester Developments: An Assessment

Two major themes dominated the financial system during the second semester of 1999. The first centered on the Y2K Millennium bug threat and the frenzied final preparations to avert it (Box 1). The second, on a lower key but probably more far-reaching in impact, was the stepped-up pace of consolidation in the banking industry as underscored by the announcement of two mega-mergers involving the country’s biggest commercial banks.

All the Y2K preparations were amply rewarded as the Y2K problem turned out to be a big non-event. The banking system along with the rest of the economy smoothly rolled into Year 2000. In sharp contrast, merger fever rapidly gathered momentum as banks reviewed their respective competitive positions and mapped appropriate strategies.

The period also saw the BSP steadfastly introducing further reforms in the financial system. A key initiative was the introduction of an expanded disclosure requirement to promote better market discipline and more transparency (Box 2). The BSP also took concrete step to further improve its supervisory capabilities through adoption of improved systems and techniques aimed at a more forward-looking, comprehensive and risk-oriented approach.

As a major pillar of reform strategy, the BSP sustained its lobbying efforts to expedite the passage of the new General Banking Act that would pave the way for deeper reforms such as the shift to a risk-based capital requirement (Box 3).

The willingness and flexibility of the financial system to adapt to ever-changing challenges was rewarded with solid results. At end-1999 the Philippine financial system stood well-poised to support the financing needs of a rapidly recuperating Philippine economy.

Asset growth of the financial system during the second semester was the highest so far in the post Asian crisis period bolstered by improved credit access, higher deposits and fresh capital from investors. Significantly, asset quality, liquidity and solvency indicators all showed healthy levels or further improvement. The only missing performance element was the recovery of earnings as financial institutions courageously paid the price to achieve a more sound balance sheet.

A significant number of banks and other financial institutions became casualties of the tough environment. However, the system as a whole proved to be quite resilient and a systemic crisis was completely avoided.

Notwithstanding the positive developments in 1999, bigger and more challenging tasks still lie ahead. The re-shaping of the Philippine financial environment has just begun. For both banks and non-bank financial institutions, the demands and challenges will intensify as more competition is introduced and as the public demand higher and higher standards of corporate governance and transparency.

Contrary to some fears, given our starting point, consolidation in the banking industry will not hamper effective competition. The BSP is committed to ensuring that there will always be a more than an adequate number of players to service the public’s need for financial services. Moreover, those entities that can survive both the tough competition as well as more stringent prudential regulations will certainly be robust institutions that can give the best assurance of longer term financial system stability.

But it is not enough to build strong individual financial institutions. There is much work still to be done in the area of developing critical complementary structures. Foremost of these is the development of an efficient domestic capital market that will close a vital missing market. It is a deficiency that has exerted undue pressure and imposed a heavy burden on the banking system in financing economic development.