Urban Bank collapse not systemic - Merrill Lynch

The collapse of Urban Bank does not constitute a systematic risk to the country's banking industry, although it warrants some tightening in the trust operations of banks, according to the latest assessment made by US investment bank Merrill Lynch.

"(W)e do not believe that the troubled loans brokered by investment houses or on occasion, by trust departments of banks, constitute a systemic risk to the banking sector. The major banks did not involve themselves with selling low grade IOUs to their trust clients," it said in a brief paper dated April 27, 2000.

"Hot spots that could trigger a bigger risk include continuing uncertainties over the ownership of Philippine National Bank and trust operations of banks. We expect the BSP (Bangko Sentral ng Pilipinas) to tighten supervision of trust operations," it added.

Merrill Lynch said that while it is not yet clear what caused the heavy withdrawals at Urban Bank which forced its owners to declare a bank holiday on April 25, its depositors may have been unnerved by the trust business of the bank. It was reported that Urban's trust department has exposure to the property sector, particularly in the debt papers issued by small real estate firms.

Right after Urban Bank was closed, two other commercial banks namely International Exchange Bank and Philippine Bank of Communications, suffered heavy withdrawals late last week. The BSP quickly infused liquidity into these banks and the situation returned to normal this week.

The Urban Bank, however, has charged the mindset of depositors who said they would be putting their funds in bigger banks as these are deemed safer than smaller banks.

"Most likely, depositors would seek relatively safer havens at the pain of lower yields. If this happens, it should benefit big banks as cash parked in IOUs of low grade companies would shift towards government securities or time deposits with more reputable banks," Merrill Lynch said.

Other analysts said the collapse of Urban Bank, which was also traced to reports it wanted to downgrade its license from a commercial bank to a thrift bank, served as a wake-up call to other banks that failed to meet the higher capital requirement of the BSP.

"There is now a stigma attached to downgrading of bank licenses. So I think merger with other smaller banks or with bigger banks would be a better option," an analyst from a foreign bank said. "This is a wake-up call for smaller banks to consolidate."