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THERE
are potential risks of a financial crisis arising from
the inadequacy of regulatory oversight over the
activities of financial conglomerates (FCs), mostly
universal banks, operating in the country, a financial
market policy group said Monday.
“Although they offer benefits of economies of scope and
scale, they could generate potentially serious social
costs. Since an FC is a financial institution, it is
exposed to all the problems arising from informational
asymmetry. As a business group, it is also exposed to
all the problems of business groups particularly in
[Asian] economies with opaque ownership, weak corporate
governance and inadequate legal systems,” a statement
from the Asian Shadow Financial Regulatory Committee (ASFRC)
added.
ASFRC,
which counts 19 financial policy experts from 12
countries including the Philippines as members, defines
a financial conglomerate as a group of companies under
common ownership and control and provides significant
services in different financial sectors like banking,
insurance and securities.
On
economies of scope and on scale, while moving for global
market power and leveraging on brand names and
reputation, the experts noted there has been no
conclusive research to prove the supposed social
benefits FCs create, the group added.
On
the contrary, ASFRC said financial conglomeration
presents problems particularly those related to business
groups and those pertaining to financial firms.
As
such, there is an urgent need to integrate the
regulatory structure—when banks, insurance companies and
security companies are integrated into a conglomerate—to
stem the problems of contagion, conflict of interest and
regulatory arbitrage, ASFRC explained.
“Financial conglomerates (FCs) compound the problems
inherent in business groups as well as in financial
firms… they exacerbate the moral hazard as the
conglomerates become “too big to fail.” They exacerbate
the risk of “contagion as problems in a company trigger
a run on another affiliated company,” a few of the
group’s comments noted.
The
creation of a single regulatory watchdog, as done in
South Korea and in Taiwan, as a long-term solution to
strengthen corporate governance, however, may not be
legally feasible now.
“I do
agree for the need for some kind of an integrated
regulatory framework in the Philippines, but it is just
that the Constitution prevents that,” commented Melanie
Milo, senior research fellow at the Philippine Institute
for Development Studies, adding it may need a revision
of the Charter to create such a body.
“But
if we [want to] do it now, the only way is for the
Bangko Sentral ng Pilipinas (BSP) to become the super-
regulator. But that now may not be feasible [since] we
have a fairly strong BSP and a fairly weak nonbank
financial sector [regulatory environment]. Merging the
weak with the strong might create problems,” she added.
“BSP
has been very proactive in regulating these FCs but
there are limits. Some components of the universal banks
are primarily regulated by other bodies like the
Insurance Commission and the Securities and Exchange
Commission, which to me is the weakness. That is the
source of vulnerability, there are no problems yet but
it is a source of vulnerability,” Milo commented.
Among
the policy recommendations ASFRC suggested include the
review of the ownership structure of each financial
conglomerate to ensure that each subsidiary has adequate
capital, empower financial regulators to regulate the
ownership of a bank to guard against effective control
by a party as well as more transparent disclosure
through timely information via financial statements. |
