The passage of the law R. A. No. 7721, otherwise known as “An Act of Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines” in May 1994, encouraged greater foreign participation in the domestic banking system by allowing foreign banks to operate in the Philippines

FOREIGN BANKSrefers to a bank of banking corporation

formed, organized and existing under any foreign law

entry improves financial intermediation by increasing competition, improving stability and enhancing banking sector efficiency

participate in the domestic banking system by establishing foreign subsidiaries, branches or taking over existing domestic banks and other established foreign banks

MODALITIES OF FOREIGN BANK ENTRY

Foreign bank entry is the process by which foreign banks set up operations in a host country.They adopt a variety of institutional structures (including representative offices, branches, subsidiaries and joint ventures) and these different modes of entry tend to entail varying degrees of commitment to provide banking services to host country markets.

A. REPRESENTATIVE OFFICEServices the needs of their corporate

customers that undertake activities abroadEnables the parent bank and its client to deal

with a variety of commercial and business transactions that relate to foreign market

Handles trade credit operationsAllows the parent bank to engage in banking

activities such arranging international private debt and equity placements between borrowers in the host country and lenders in the source country

Representative Office

Does not handle retail banking operations

Serves as a liaison office which deal directly with the public by promoting and giving information about the services offered by the foreign bank

Does not transact banking business such as deposit-taking , issuance of letters of credit and foreign exchange trading

B. BRANCHIs an overseas office of a bank

incorporated in a foreign countryIs typically involved in the wholesale

deposit and money markets, and arranges loans for both local and foreign agents and deal in the capital markets

Establishment is more costly than a representative office because this mode of entry allows the foreign bank to operate in the local money and capital market

C. BANK SUBSIDIARYIs often used to enter the retail banking

marketsIs separately incorporated from the parent

foreign bank, whose financial commitment to the subsidiary consist of the capital invested

Is allowed to perform the same functions as a domestic bank and enjoys the same privileges and limitations imposed on domestic banks of the same category

Limitations of its operation, subject to SBL, required capitalization

D. ALLIANCE OR JOINT VENTUREIs the preferred mode of foreign bank

entry when foreign bank lacks, but wishes to acquire specific knowledge about domestic banking market condition

Involves taking minority stakes in existing domestic banks and involvement in the management of domestic bank by the foreign bank is normally low

Example is joint venture of a bank and insurance company

FACTORS BEHIND THE INCREASING ROLE OF FOREIGN BANKS IN EMERGING MARKETS Globalization of financial servicesRemoval of barriers to foreign bank

entryWide availability of information

technology

ARGUMENTS FOR FOREIGN BANK ENTRYForeign banks improve quality, pricing,

and availability of financial servicesForeign bank presence increases

amount of funding available to domestic projects by facilitating capital inflows

Foreign bank presence improves financial system infrastructure

ARGUMENTS AGAINST FOREIGN BANK ENTRYForeign banks serve only the most lucrative

domestic markets or customersForeign banks may contribute to instability of

aggregate domestic bank creditFinancial services represent a strategic

industry best controlled by domestic interestsConcerns over multiple challenges to

supervision raised by complex financial institutions active in a number of jurisdiction

Qualification Requirements for Foreign Banks Entry1. FX bank must be widely owned and

publicly listed , unless more than 50% of its capital stock is owned by the government of its country of origin

(widely owned if it has at least 50 stockholders without any stockholder owning more than 15% of its capital stock)

2. FX bank , as of date of application, be among the top 150 banks in the world or the top 5 banks in its country of origin

3. FX bank must be in compliance with capital requirements of its country of origin