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Last
month the chairman of the House Committee on Banks and
Financial Institutions wrote the Bangko Sentral ng
Pilipinas (BSP) and the Rural Bankers Association of the
Philippines (RBAP) for their views on House Bill
3827—“An Act Suspending the Required Capital Adequacy
Ratio Prescribed by the Bangko Sentral ng Pilipinas to
All Rural Banks for a Period of Two (2) Years.”
Attached
to the chairman’s letter was an explanatory note from
the bill’s three sponsors.
Here are
key paragraphs from that note:
“The
urgency of the measure is necessitated by present
economic conditions in the countryside, which, with the
convergence of other factors, may promote an environment
so vulnerable to economic opportunists, the predatory
activities of criminal elements, or a breakdown of peace
and order.”
Holy
cow!
“Due to
the slowdown in agricultural productivity, banking
incomes have fallen due to the inability of borrowers to
service their loans. Yet, all rural banks have to comply
with regulatory standards that impose levels of capital
that have to be maintained at all times or suffer
penalties for non-compliance. At a time when general
conditions do not allow their clients to comply with
loan obligations, rural banks are doubly hit; if they
want to continue doing business, they have to manage to
extend credit, but doing so would expose them to
noncompliance by loan recipients, which could further
lower or dissipate their asset base. In order to remain
viable, therefore, these banks would have to resort to
conservative measures, including imposing very
conservative conditions for loan takeouts, which would
be more injurious to their clientele.”
Ouch!
“No
matter how difficult conditions will become, it would be
unwise to withhold credit to rural entrepreneurs and the
public at large. Certainly, funds cannot be withdrawn
from circulation, money should in fact be placed into
the hands of people to spur spending and growth. As
barometers of the state of the economy in rural areas,
rural banks play a crucial role; coming to their aid at
this time is therefore urgent and necessary.”
Hallelujah!
I
expected RBAP to break out the champagne. Instead, RBAP
said “thanks, but no thank you” to the suspension of
capital adequacy ratio (CAR).
RBAP’s
president debunked the premise that the rural-banking
industry is in crisis.
“The
rural-banking sector in the Philippines today is strong
and poised to get stronger,” he wrote.
Then he
explained why the committee should not mess with CAR.
“[It] is
the bedrock of prudential regulation. It serves to
protect depositors and promote the stability and
efficiency of the financial system. The proposed
suspension of the CAR, while temporary, may create an
environment for an erosion of this bedrock; it may
unintentionally open a window for behaviors posing moral
hazard detrimental to the rural-banking sector as a
whole. This, the suspension of CAR, may well be a
setback for the increasingly improving and growing
rural-banking sector.”
Finally,
he suggested other ways the committee could help: reduce
the sector’s “disproportionate share of the regulatory
burden,” allow limited foreign ownership in rural banks
and make access to IT structure affordable.
The BSP,
for its part, lectured on liquidity and solvency:
“The
proposed prudential safeguard contained in House Bill
3827 for banks to just maintain a ‘condition of
liquidity adequate to protect the interest of depositors
and creditors’ does not address the solvency issue and
cannot, therefore, be relied upon to adequately protect
depositors and creditors in the long run. Liquidity and
solvency are two different things. While the former
ensures that on a regular basis the bank is able to meet
the withdrawals of its depositors and pay its
obligations as they fall due, the latter ensures that
the value of the bank’s assets are at least equal to its
liabilities, plus a sufficient buffer for contingencies.
A liquid but insolvent bank means that it only survives
because of the continued flow of deposits and borrowings
that ultimately cannot be paid. And the longer such a
situation is allowed to persist, the bigger the
potential hit for the public when the music finally
stops.”
It seems
undercapitalized rural banks lending money taken from
depositors and creditors lured by outrageous interest
rates are the intended beneficiaries of House Bill 3827.
The bill will legalize “behaviors posing moral
hazard.”
The BSP
tried to place a number of undercapitalized but
munificent rural banks under receivership, but the rural
banks, acting in concert, were able to stymie the BSP
with a temporary restraining order (TRO) from a Manila
Regional Trial Court and a Court of Appeals division
taking its sweet time on the BSP’s urgent appeal for a
reversal of the TRO.
“Those
rural banks, already enjoying the protection of the
courts, might also get their meal ticket from the
Batasan,” observed an apprehensive depositor.
“They
must have a Lucky Angel coin,” I said, referring to a
300-year-old talisman from France.
“Well,
it’s that or an angel with coin,” he snorted.
Or
both.
Buencamino is a fellow of Action for Economic Reforms (www.aer.ph). |
