Phl banking system stronger after crisis

MANILA, Philippines - Nearly 20 years after the 1997 Asian Financial Crisis ravaged the country’s economy, the Philippine banking system now stands on stronger and firmer ground, thanks to the sweeping systemic reforms instituted by the Bangko Sentral ng Pilipinas (BSP).

BSP Deputy Governor Nestor Espenilla Jr., in an interview with The STAR, highlighted the crucial role of the banking system in restoring and reinforcing confidence in the Philippine economy.

“Everything else fails if the banking system is weak and dysfunctional. In Europe where many banks are stressed, credit does not flow and that results in economic slowdown. But when banks stop lending, and the economy doesn’t grow, banks get weaker still. It’s a vicious cycle.” Espenilla said.

As the head of the central bank’s Supervision and Examination Sector, Espenilla is the man responsible for disciplining banks and non-bank financial institutions under BSP supervision.

“The banking system is much stronger now. It has gained the confidence of the general public as well as of investors,” he said.

He cited as an example the sustained healthy growth of deposits and the recent P60 billion stock rights offering of BDO Unibank Inc., the largest ever capital raising transaction in the local market.

Espenilla, the regulator who cracks the whip on erring banks to ensure they toe the line, said the industry landscape wasn’t like this before.

“We learned from the various problems and setbacks that the country has encountered over the last 20 years. Although the success of the banking system did not happen overnight, I can say that our experiences continue to inform the regulatory reform process. Our current banking system is significantly stronger, bigger and better due to the BSP’s responsiveness and willingness to plug any remaining regulatory gaps,” he said.

Espenilla observed the typical problem among banks with dominant owners is conflict of interest. He notes, for example, that this can manifest in sweetheart loan and asset sale transactions involving related parties.

To address such conflicts of interest and promote better bank behavior, the BSP tightened the regulatory framework and also implemented a capacity-building program for its bank supervisors so they can perform their duties more effectively.

“We implemented a new training system. We also recruited new people and allowed others to take early retirement. It was a re-boot. New examiners now have to go through a three-and-a-half to four-year comprehensive training program to better prepare them for risk-based supervision and properly engage the banks,” Espenilla explained.

The BSP’s shift to a risk-based supervisory framework focuses on assessing the ability of banks to comprehensively manage the various risks of the banking business. It also seeks to promote responsible bank behavior and benchmark that against internationally accepted standards of safety and soundness.

Mere paper compliance is no longer good enough. Other complementary reforms include requiring high governance standards from the board of directors and bank senior management, the strengthening of the compliance framework, as well as the enactment of reforms to upgrade the management of risks – risks related to credit, market, operations, and information technology, among others.

In short, the BSP became much more exacting with its regulated institutions – particularly the banks – in order to better protect the public.

The BSP’s hard-fought reforms are paying off. Evidence of the Philippine banking system’s improved position can be seen in a number of indicators including the country’s sustained strong credit growth and in the fact that the non-performing loans ratio has been steadily declining and is now at historic low levels.

“That tells you something about the quality of the loan portfolio and the ability to underwrite credits. In the US and Europe where many banks are distressed, they don’t want to lend and that weakens the economy,” he added.

This, of course, is due to the synergy of initiatives from various sectors of government, and to the tireless efforts of public servants like Espenilla.