Forum-2nd Issue (updated May 13) · PDF fileI am honored to present the June 2004 issue of the PDIC Forum which ... on the Philippine financial system’s ... an overview of the consolidated

The Cover

Signifying unity and kinship, the bundle represents the convergence of the roles of financial supervisors andtheir common interests in enhancing governance among financial institutions and promoting stability in thesystem amid product innovation and growing competition.

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RICARDO M. TANPresident & Chief Executive OfficerPhilippine Deposit Insurance Corporation

I am honored to present the June 2004 issue of the PDIC Forum which discusses the emergingconcept of integrated financial supervision and encapsulates deposit data/statistics of the Philippinebanking system.

For this issue, the Managing Director of the Financial Services Authority (FSA) of the United Kingdom(UK), Michael Foot, was interviewed electronically for Straight Talk on his views on integrated financialsupervision. Dr. Melanie Milo, Research Fellow from Philippine Institute for Development Studies, provideda digest of her extensive discussion paper on integrated supervision that is now a veritable referencematerial locally on global financial integration. Chairman Lilia Bautista of the Securities and ExchangeCommission presented the local perspective on the Philippine financial system’s bid towards consolidatedsupervision. A reprint of the paper presented by Wonkeun Yang, Sun Eae Chun and Zhigang Xie on “Therole of KDIC in the Korean financial restructuring process” graced the pages of the DI World. Articles byPDIC on “Strengthening deposit insurance system through effective bank supervision” and “Analysis ofdomestic deposits” were highlighted in PDIC Front.

The PDIC Forum represents PDIC’s contribution in providing an avenue for critical and analyticaldiscussions of topics that seek to strengthen depositor confidence and promote stability of the financialsystem.

“PDIC Forum” Trademark Registration Pending @November 2003

PDIC FORUM is published twice a year by the Philippine Deposit Insurance Corporation with editorial office at the Public Affairs Department, G/F PDIC Bldg.,2228 Chino Roces Avenue, 1231 Makati City, Philippines Tel. No: (632) 841-4000 loc. 4047-4049; (632) 841-4051Email address: [email protected]: www.pdic.gov.ph

Editorial BoardChairpersonROSALINDA U. CASIGURAN, Senior Executive Vice President

Vice ChairpersonIMELDA S. SINGZON, Executive Vice President

MembersNOEMI R. JAVIER, Senior Vice President, Management Services Group RESCINA S. BHAGWANI, Vice President, Training and Public Affairs Group VICENTET. DE VILLA III, Assistant Vice President, Insurance Risk Assessment Group

Editor: RESCINA S. BHAGWANI Assistant Editors: AURAMAR D.O. CALBARIO, ISABEL L. PAN-GAVIOLA Writers: JOSE G. VILLARET, JR., ANNALIESE L. ROQUE, CHRISTOPHER G. SUGUITAN, MARY ANN M. SANTILLAN Layout Artist: KATHLEEN PASTORES-VILORIA Coordinators: NIMFA D.CAMUA, CELY E. APOLINARIO, VERONICA C. DIONISIO Circulation: DENNIS H. CONCEPCION, MILET B. SANTOS

5 Integration of financial supervision: The globalexperienceResearch Fellow Melanie Milo, Ph.D., of the Philippine Institutefor Development Studies writes about integrated financialsupervision. Financial systems in both developed and developingcountries have been subject to substantial public regulation.But the system of supervision and regulation must be constantlyassessed and adjusted to keep pace with a rapidly changingfinancial services industry. And in many countries in recent years,that meant moving towards integrated or consolidatedfinancial sector regulation/supervision.

17 Moving towards a unified financial regulationin the PhilippinesSecurities and Exchange Commission Chairperson Lilia R. Bautistaexpounds on integration of financial supervision as a viablealternative in enhancing stability in the Philippine financialsystem.

22 STRAIGHT TALKFSA - UK Managing Director shares his viewson integrated supervision and depositprotectionFinancial Services Authority-United Kingdom (FSA-UK) ManagingDirector Michael Foot recounts the circumstances andeconomic environment that led to the creation of a unifiedregulatory agency to promote stability in the financial systemof United Kingdom.

28 PDIC FRONTStrengthening deposit insurance systemthrough effective bank supervisionThe deposit insurance system can be strengthened by effectivesupervision of banks and related institutions. This article discusseshow financial supervisors like BSP, SEC and IC complement theoperations of PDIC and the directions towards enhancing thiscoordinating framework for better depositor protection.

Analysis of domestic depositsPresents statistics and provides in-depth analysis of deposits ofthe Philippine banking system during the year in review.

36 INDUSTRY SCANStatistics of the Philippine Banking SystemRural Bank Statistics by RegionFinancial Ratios of the Philippine Banking

SystemDomestic Deposit Liabilities by Size of AccountRegional Distribution of Domestic DepositsPercentage Share of Domestic Deposit per

RegionGrowth in Domestic Deposit

Growth in AmountsGrowth in Accounts

Year-on-Year Deposit Movement of SelectedVariables Related to its Growth

Glossary of Terms

52 DI WORLDThe role of KDIC in the Korean financialrestructuring processWonkeun Yang et.al. write about the role of the KDIC in thefinancial restructuring process. When financial crisis sweptthrough East Asia in 1997 and 1998, Korea was among the countrieshit hardest. KDIC played a critical role in restoring stability offinancial institutions.

58 PERSPECTIVESWhat are your views on integrated supervisionof financial institutions?Professionals and industry players share their views on thefeasibility of an integrated supervision of financial institutions.

Integration of Financial Supervision:The global experience

Identifying the appropriate level and form of intervention is a serious challenge to

government. Regulatory efficiency factors in overall economic performance.

Inefficiency results in costs to the community through higher taxes and charges, poor service,

uncompetitive pricing, or slower economic growth. In order to control costs and ensure

effectiveness, regulation has to be placed within a consistent framework. To do this, it is

necessary to establish clearly whatneeds to be regulated and why, aswell as to define the principles foreffective and efficient regulation(Wallis et al 1997). A corollary to thiswould be the identification of theappropriate regulatory structure. Thisis especially true in the financialsector.

Financial systems in bothdeveloped and developing countrieshave typically been subject tosubstantial public regulation. Thebasic rationale for this is that both thepayments system, and publicconfidence in financial institutionsand instruments on which thefinancial system is built, bear thequalities of a public good. Hence, theneed for some governmentintervention to achieve marketenhancing outcomes (Grimes 1999).But the system of supervision andregulation must be constantlyassessed and adjusted to keep pace

with a rapidly-changing financialservices industry. And in manycountries in recent years, includingthe crisis economies in Asia, thatmeant moving towards integratedor consolidated financial sectorregulation/supervision1.

This article gives an overview ofthe consolidated financial sectorregulatory approach and discussessome of the policy issues relating to

restructuring financial sectionregulation and supervision.

Consolidated or unifiedfinancial sector regulation2

A country’s financial regulatorystructure includes the variousagencies in charge of regulating itsfinancial sector and how they areorganized. Technically, there are twomain types of regulatory structure –according to institutional groups andaccording to regulatory functions(Carmichael 2002). Under the former,regulatory agencies are in charge ofspecific categories of financialsector institutions. Under the latter,regulatory agencies are organizedaccording to regulatory functions;that is, according to the underlyingfunctions of regulation in terms ofaddressing the different sources of

* The views expressed here are those of the author and do not represent those of the Philippine Institute for Development Studies or the PhilippineDeposit Insurance Corporation.

1 In its strictest sense, banking regulation refers to the framework of laws and rules that govern banks’ operations, while banking supervision refersto the monitoring of banks’ financial conditions and the enforcement of banking regulation (Spong 1994). This paper follows the practice ofviewing regulation and supervision in a more general sense, and uses the terms interchangeably. It should also be noted that both the oldGeneral Banking Act of 1948 and the new General Banking Law of 2000 defined supervision as including regulation.

2 This section draws on Milo (2002), which contains an extensive discussion of the approach as well as the issues.

PDIC FORUM/JUNE 2004 5

by Melanie Milo, Ph.D., Philippine Institute for Development Studies (PIDS)

6 Integration of financial supervision: The global experience

Table 1. Sources of market failure and their regulatory implications

Source: Dammert (2000).

Market Failure

Anti-competitive behavior

Market misconduct

Asymmetric Information

Systemic Instability

Regulation

Merger, antitrust rules, free entry andexit to markets

Information disclosure, businessconduct, licensing, governance andfiduciary responsibilities, financialstrength

Prudential regulation: entryrequirements, capital requirements,balance sheets restrictions, liquidityrequirements, customer supportschemes (e.g., deposit insurance)

Maintenance of suitablemacroeconomic environment,lender of last resort facility, directregulation of the payments system

Regulatory Institution

Consumer protection or conduct ofbusiness agencies. In some cases, theseare part of other supervisory authorities.

Banking Supervision Authority, SecuritiesCommission, Insurance RegulatoryAuthority. Could all be under oneintegrated authority

Banking Supervision Authority, SecuritiesCommission, Insurance RegulatoryAuthority. Could all be under oneauthority.

Ministry of Finance, Central Bank,Banking Supervision Authority (in manycases part of the Central Bank) andDeposit Insurance Agency. In the caseof an independent Banking SupervisionAuthority, these functions are separated.

market failure. Table 1 presents thefour main sources of market failure inthe financial sector – anti-competitive behavior, marketmisconduct, asymmetric informationand systemic instability – as well as thecorresponding regulations needed toaddress them and the regulatoryinstitutions capable of implementingthem.

Under a pure institutional type ofregulatory structure, a regulatorresponsible for correcting all foursources of market failure is assignedto each institutional group, which isusually defined by the threetraditional financial services sectors –banking, insurance and securities.And under a pure functional type, aseparate regulator is responsible forcorrecting each of the four sourcesof market failure but for allinstitutions that experience thatparticular failure. In practice,regulatory structures around theworld typically involve acombination of these two types(Carmichael 2002). In most

developing countries, for instance,the central bank takes on the variousregulatory functions for the bankingsector, while separate agencies dothe same for the insurance andsecurities sectors.

Recently, significant attentionhas been focused on the structuralaspects of financial regulation,particularly the desirabil ity of aunified regulatory agency – that is,an agency that supervises two ormore of the traditional financialservices sectors. A number ofcountries have adopted thisstructure in recent years. Inparticular, there has been a growingtrend worldwide towardsrestructuring regulatory agenciesalong functional lines, particularlywith respect to prudential regulation.The primary reason has been thetrend towards financial servicesintegration, particularly the rise offinancial conglomerates such asuniversal banks.

Financial services integration orfinancial convergence refers to the

production or distribution of afinancial service traditionallyassociated with one of the threemajor financial sectors by serviceproviders from another sector. Formsof integration includebancassurance, universal bankingand financial conglomerates.Financial services integration alsooccurs through the blurring ofproduct lines because of innovation,which in turn has been facilitated byfinancial deregulation policies andsignificant advances in informationtechnology and telecommunications(Skipper 2000).

Financial services integration,especially the formation ofconglomerates, has challenged thetraditional demarcations betweenfinancial regulatory agencies andhas made industry-specificsupervision inadequate. Thus, it isnow generally accepted by bankingregulators that banking groups orfinancial conglomerates need to besupervised on both a solo andconsolidated basis to take into

account supervisory concerns thatmay be overlooked at the entitylevel (Palmer 2002). In fact,consolidated supervision of bankinggroups is one of the “Core Principlesfor Effective Bank Supervision”identified by the Basle Committee onBanking Supervision (BCBS 1997).

But it should be noted that thereare preconditions for the effectiveimplementation of consolidatedsupervision of banking groups, whichinclude the legal framework,independence of the supervisoryagency and commitment to theprocess. The components ofconsolidated supervision areconsolidation of accounts,quantitative consolidated supervision(includes prudential requirementssuch as capital adequacy, largeexposures and connected lending)and qualitative consolidatedsupervision (includes managementand organizational structure, group-wide business plans and strategiesand consolidated internal controlsand risk management) (MacDonald1998). Thus, it requires a high degreeof coordination, cooperation andharmonization, which is very difficultto achieve because of significantdifferences in the three majorfinancial industries’ regulatoryframeworks. Both regulatory gapsand/or duplication of regulatoryeffort are also very likely under thissetup. A related supervisorychallenge of financial convergence,then, is the need to move tofunctional rather than industry-specific supervision.

Prudential and market conductconcerns that result from financialservices integration includetransparency, contagion, regulatoryarbitrage, conflicts of interest, doubleand multiple gearing; fit and properrequirements; and unregulatedgroup entities (Skipper 2000).Countries are therefore seekingmore effective ways to supervisefinancial conglomerates. On theother hand, smaller countries areseeking ways to achieve economies

of scale in regulation through bettermanagement of regulatory resources(particularly personnel) andinfrastructure support (Mwenda andFleming 2001). Hence, the growingtrend and interest in the unified orintegrated financial sectorregulation/supervision approachboth in developed and developingcountries.

Carmichael (2002) discussed theexperience of nine countries withintegrated regulators - Australia,Canada, Denmark, Japan, Korea,Norway, Singapore, Sweden, and theUnited Kingdom – that compose aninformal grouping called theIntegrated Regulators Group3. Thecriterion that was used as a basis formembership when the group wascreated in 1999 was that the agencybe at least responsible for prudentialregulation of both banks andinsurance companies. While mostgroup members have a wider rangeof responsibil it ies than this, thecombination of responsibilities forbanking and insurance regulationwas taken as a working definition of‘integrated regulation’. In particular,Carmichael (2002) noted the onearea in which there was a highdegree of consensus was in terms ofthe motivation for establishing theintegrated agency, namely: (i)convergence in financial marketsand the need for a more consistentapproach to regulating financialconglomerates; (ii) the need forgreater consistency in theapplication of policy across differentindustries; and (iii) the ability to makemore efficient use of scarce

regulatory resources.On the other hand, there is a

broad range of responsibil it ies,powers, and organizational andoperational structures among themembers of the IntegratedRegulators Group. What they dohave in common is that all majorforms of prudential regulation havebeen brought together under oneroof. Some integrated agencies alsoincluded part or all of marketconduct regulation. Only theMonetary Authority of Singaporecombined these two regulatoryfunctions with systemic stabil ityregulation through oversight of thepayments system and monetarypolicy. Finally, competition policy wasnot incorporated in any of theintegrated agencies. Thus, majority ofthe integrated regulators can beconsidered as differing versions of thefunctional approach to regulationbecause they assign one regulator toeach source of market failure, at leastin principle. The main variation is thatsome go beyond the pure functionalmodel by combining two or more ofthese functional regulators into theintegrated agency.

The most extreme case ofregulatory approach would be thesingle regulator supervisory model,wherein there is only one controlauthority, separated from the centralbank, with responsibility over allfinancial markets and intermediaries,and concerned with all theobjectives of regulation. It isinteresting to note that this modelcharacterized the early stages offinancial system development when

3 Iceland joined the group in 2000.

“Simply changing the structureof regulation cannot guarantee

effective supervision, and integratedregulation per se is not a solution to

regulatory failure.”



Table 2. Countries with a single supervisor, semi-integrated supervisory agencies and multiple supervisors in 2002a

Notes: aSample includes only countries that supervise all the three types of intermediaries (banks, securities firms and insurers).bCountries reported to also be considering adopting partial or full integrated supervision.

Source: de Luna Martínez and Rose (2003).

Single supervisorfor the financial system

1. Austria2. Bahrain3. Bermuda4. Cayman Islands5. Denmark6. Estonia7. Germany8. Gibraltar9. Hungary10. Iceland11. Ireland

12. Japan13. Latvia14. Maldives15. Malta16. Nicaragua17. Norway18. Singapore19. South Korea20. Sweden21. UAE22. UK

Agency supervises 2 types of fin’l intermediaries

Banks & securitiesfirms

23. Dominican Republic24. Finland25. Luxembourg26. Mexicob

27. Switzerland28. Uruguay

Banks & insurers

29. Australia30. Belgium31. Canada32. Colombia33. Ecuador34. El Salvador35. Guatemala36. Kazakhstanb

37. Malaysia38. Peru39. Venezuela

Securities firms& insurers

40. Bolivia41. Chile42. Egypt43. Mauritius44. Slovakiab

45. South Africab

46. Ukraineb

Multiple supervisors(at least 1 each for banks, securities

firms and insurers)

47. Argentina48. Bahamas49. Barbados50. Botswana51. Brazil52. Bulgariab

53. China54. Cyprus55. Egypt56. France57. Greece58. Hong Kong59. India60. Indonesiab

61. Israel

62. Italy63. Jordan64. Lithuania65. Netherlands66. New Zealand67. Panama68. Philippines69. Polandb

70. Portugal71. Russia72. Sloveniab

73. Sri Lanka74. Spain75. Thailand76. Turkey77. USA

the central bank was the onlyregulatory body (Di Giorgio and DiNoia 2001). This explains why theintegrated model is being adopted,for instance, by a number of transitioneconomies in Eastern Europe.

More recently, de Luna Martínezand Rose (2003) also conducted asurvey of 15 developed anddeveloping countries that haveadopted integrated financialsupervision, whether partial or full.Their survey included the developedcountries covered by Carmichael(2002), except Japan, plus Estonia,Hungary, Iceland, Latvia,Luxembourg, Malta and Mexico. Asin the previous survey, the need formore effective and consistentsupervision of financialconglomerates and the need tomaximize economies of scale andscope were the primary reasons forsuch a move. The latter rationale wasespecially true for the smalleconomies included in the surveysuch as Estonia, Iceland, Latvia, andMalta. The decision to adoptintegrated supervision was also made

following a major financial crisis inthree countries – Mexico, South Koreaand Sweden. The latter was also anattempt to minimize gaps in financialregulation and supervision.

The survey also showed that thereare important differences with regardto scope of regulatory andsupervisory powers, although they allreported that they had power overcore supervisory functions such as theconduct of on-site and off-siteexaminations and the imposition offines and penalties for non-compliance with existing laws andregulations. In terms of regulatorypowers, 12 agencies reported thatthey can set prudential rules oncredit, market and liquidity risks, while11 had the power to set accountingand disclosure rules. The survey alsoshowed that ministries of finance andcentral banks continued to play akey role in establishing prudentialregulations, including those on entryrequirements.

Finally, de Luna Martínez andRose (2003) reported the variousobstacles that the 15 countries faced

in the adoption of an integratedsupervisory system. These includedlegal constraints and the need toenact new laws; staffing problemssuch as the demoralization of staffand the departure of experiencedpersonnel; problems and delays inthe integration of IT and otherinfrastructure systems; lack of missionand clarity during the early years ofexistence; and budgetary problems.

At least 46 countries hadadopted unified or integratedsupervision by 2002, with around halfcreating a single regulator for theentire financial sector and the otherhalf merging two of the mainsupervisory authorities (Table 2). Thenumber of countries with singlesupervisors significantly increasedfrom 1996. The additions to this groupof countries are Australia, Estonia,Germany, Iceland, Ireland, Japan,Korea, Malta and the UK. Morecountries are also in the process ofeither adopting or consideringmoving towards partial/full unifiedfinancial services supervision.

With respect to the applicabilityof consolidated financial sectorsupervision to developing countries,the literature cites two key lessons thatthey can learn from the experienceof developed country practitioners(e.g., Abrams and Taylor 2000, Bainand Harper 1999, Briault 1999,Carmichael 2002, de Luna Martínezand Rose 2003, Llewellyn 2001,Mwenda and Fleming 2001, Reddy2001, Skipper 2000, Taylor andFleming 1999). One is that simplychanging the structure of regulationcannot guarantee effectivesupervision, and integratedregulation per se is not a solution toregulatory failure. Correctingregulatory failure requires first andforemost better regulation; that is,setting more appropriate prudentialand market conduct standards,improving surveil lance andstrengthening enforcement.Integrated regulation may helpfacilitate this process, but it cannotcause these changes to occur byitself. Indeed, the countries thatadopted the integrated financialsector supervisory approach did so toenhance the supervisory process.

The second lesson is that there isno single best form of integratedregulatory agency. Unified financialservices supervision has beenadopted differently in manycountries; its application has variedfrom country to country and there isno single right way of introducing orimplementing unified models offinancial services supervision. Factorsthat accounted for the differencesinclude differences in starting points,differences in industry structures anddifferences in objectives.

For instance, Abrams and Taylor(2000) maintained that developingregulatory capacity should precedethe issue of regulatory structure, andthe latter becomes a major concernonly if it will help to achieve theformer. Particularly in manydeveloping and transitioneconomies where banks and hencebanking supervision are central totheir financial systems, unification of

financial sector supervision must notcompromise banking supervisorycapacity or independence.However, they also noted thatchanging the structure of regulationcould help in the elimination of gapsin regulatory coverage. In somecountries that suffered financialcrises, for instance, the presence ofa systematically significantunsupervised group of financialinstitutions was a contributing factor.

The other factor that theyidentified as crucial in assessing theunified model is that the institutionalstructure of regulation should mirrorthe institutional structure of theindustry being regulated. Thus, incountries where the financial systemincludes universal banks or wherebanks are significant players in thesecurities markets, then combiningbanking and securities regulation willbe most appropriate. Combiningbanking and insurance regulation willbe most appropriate in countries withstrong linkages between banks andinsurance companies. Finally,combining the regulation of all threesectors will be most appropriate whendistinctions between differentfinancial intermediaries havebecome blurred or the financialservices industry is composed ofdiversified, multi-activity groups.

Clearly the issue of restructuringfinancial regulatory institutions is acomplex one, and the decision ofwhether or not to integrate financialservices supervision should be takenonly after full consideration of thecircumstances and capacities ofeach individual country. If thedecision to establish a unifiedfinancial regulator is reached, Taylorand Fleming (1999) then cited twocritical issues that need to beaddressed if an integrated agency is

to be successfully established. One,it is important that the transition forthe individual specialized agencies tothe unified agency is managedeffectively. In this context, it is vital todevelop an implementation plan thatwil l dictate the path from thefragmented to the integrated model.Two, once the integrated agency isin place, there is a range ofadministrative and personnel issuesthat must be addressed, which mustbe done in the context of a wellmanaged change program.

While there is some support forconsolidated financial sectorsupervision in developing countries,a more contentious issue is whetherthe unified regulator should beseparate from the central bank. Thelatter, in turn, partly stems from theissue of whether central banks shouldbe (or continue to be) involved inbanking supervision.

Banking supervision and thecentral bank

An earlier survey of the structureof financial regulatory institutions in123 countries as of 1999 (Llewellyn1999, in Llewellyn 2001) showed thatfor 89 countries or over 70 percent ofthe sample, the central bank is still theone responsible for the supervision ofbanks. Furthermore, the mostcommon model of bankingsupervision, which made up around50 percent of sample, is for thecentral bank to supervise only banks.Central bank supervision of bankswas also far more common indeveloping countries than indeveloped countries – 78 percent ofthe developing countries in thesample compared to 35 percent of


A more contentious issue is whetherthe unified regulator should be

separate from the central bank.


Table 3. Location of bank supervision function

Region

Africa

Americas

Asia/Pacific

Europe

OffshoreFinancialCenters

Central Bank Only Central Bank AmongMultiple Supervisors

Central Bank Not a Supervisory Authority

BotswanaBurundiEgyptGambiaGhana

KenyaLesothoMalawiMorocco

NamibiaNigeriaSouth AfricaZambia

Rwanda

BrazilGuatemala

GuyanaJamaica

Argentina BoliviaCanadaChile

HondurasMexicoPanama

PeruEl SalvadorVenezuela

BangladeshBhutanCambodiaChinaIndiaIndonesiaIsraelJordan

KuwaitLebanonMalaysiaMaldivesNepalNew ZealandPhilippinesQatar

Taiwan Australia

CroatiaEstoniaGreeceIrelandItaly

LithuaniaMacedoniaMoldovaNetherlandsPortugal

BelarusCzech RepGermanyHungary

LatviaPolandTurkey

AustriaBelgiumDemnarkFinland

FranceIcelandLiechtensteinLuxembourg

ArubaBahrainCayman Is.Cyprus

MacauMaltaMauritiusOman

Vanuatu GibraltarPuerto Rico

British Virgin Is.Guemsey

Trinidad andTobago

UnitedStates

Saudi ArabiaSingaporeSri LankaTajikistanTongaVietnam

Thailand Japan Korea

RomaniaRussiaSloveniaSpain

SwedenSwitzerlandUnited Kingdom

Western SamoaSeychellesSolomon IslandsSt. Kitts and Nevis

Turks &Caicos Is.

Source: Barth et al (2002).

developed countries. The results ofthis survey are borne out by othersurveys on financial supervisorystructures conducted by the WorldBank and the Office of theComptroller of the Currency (OCC)of the US, which are reported in Barthet al (2002). Table 3 shows thedistribution of developed anddeveloping countries according tothe location of bank supervision alsoas of 1999.

On the issue of whether thecentral bank should be responsiblefor bank supervision, Barth et al(2002) noted that there arereasonable arguments both for andagainst this structural issue in theliterature. In particular, the mainpoint of contention is its impact on

the safety, soundness and systemicstability of the financial system.

As Barth et al (2002: p. 9) noted,arguments for central banksupervision of banks point to theinformational advantage that itaffords the central bank, whichfacilitates its functions:

Because banks are the conduitsthrough which changes in short-term interest rates aretransmitted, the central bankneeds to have accurate andtimely information about thecondition and performance ofbanks as a precondition foreffective conduct of monetarypolicy. In addition, without“hands on” bank supervision

responsibility, the central bankmay take too little account ofconditions in the banking sectorwhen setting monetary policy.Further, the central bank needsto have access to informationon the solvency and liquidity ofbanks in order to exercise itsfunction of lender of last resort.Having such information in atimely manner is especiallycrucial in times of financial crises,and the best way to ensureaccess is by assigning on-goingbanking supervision responsibilityto the central bank. Havingsupervisory power may also aidthe central bank in actingquickly and precisely via thebanking system in time of crisis

[Goodhart and Schoenmaker(1993), Goodhart (1995),Haubrich (1996), Briault (1999),Peek, Rosengren, and Tootle(1999), Abrams and Taylor(2000)].

On the other hand, Barth et al(2002) note that those who argueagainst central bank supervision ofbanks typically cite the resultingconflict of interests between itsmonetary policy function aimed atprice stability and bank supervisionfunction aimed at financial stability.In particular, the central bank “…may pursue a too-loose monetarypolicy in order to avoid adverseeffects on bank earnings and creditquality” (p. 9). The latter, in turn, hasto do with reputation risk, in that bankfailures could adversely affect publicperception of the credibility of thecentral bank’s conduct of monetarypolicy. Thus, monetary policy wouldsuffer, which runs counter to thegenerally accepted view that thecentral bank’s fundamental task is topreserve the value of the currency(Fischer 1997). Removing supervisionfrom central banks would thenstrengthen their anti-inflationcredibility because they can focuson the single objective of pricestability. On the other hand, giventhat the main task of the central bankis to preserve the value of thecurrency, the policy debate has alsofocused on the assignment of other“optional” tasks (including bankingsupervision and regulation) tocentral banks. Finally, those whofavor a separate financialsupervisory agency also argue thatthe lender of last resort functioncombined with the supervisoryfunction can add to the problem ofmoral hazard (Icard 2002). In thiscase, a central bank that isconscious of its reputation as acompetent supervisor would bebiased towards bail-outs and notallowing banks to fail.

Clearly, there are strongconceptual arguments both for andagainst the central bank’s combined

functions of banking supervision andmonetary policy, which can besupported by the diversity of globalexperience. The empirical work thathas been done on this structural issueis still limited. Barth et al (2002) notedseveral studies that support anarrower focus for the central bankthat does not include banksupervision, but the results are far fromconclusive. The general consensus inthe literature so far is that there is no“one right answer”, and that theanswer wil l largely depend oncountry-specific circumstances andcapacities. These include prevailingconditions in the financial system, thepolitical environment, and thepreferences of the public (Haubrich1996). In particular, the effects ofmonetary policy on bankingsupervision and vice versa should beexplicitly examined before a countrydecides on whether to retain orremove bank supervisory duties fromits central bank.

Another key issue that relates tothe central bank’s supervisoryfunction is whether it should superviseother financial service sectors as well,such as securities and insurance.Overall, the arguments in theliterature reviewed by Barth et al(2002) weigh more heavily against itbecause: (i) it will lead to excessiveconcentration of power; (ii) theconflict of interests would be moreextensive; and (iii) it could undulyextend the financial safety net if thecentral bank’s lender of last resortfunction is seen as extending acrossall financial institutions, therebyworsening the moral hazard problem.

Thus, Goodhart (2000)concluded that:

The arguments for separatingbanking supervision from CentralBanks, and placing this within aunified financial supervisoryagency, have becomeincreasingly powerful in recentyears, more particularly indeveloped countries withcomplex financial systems. Theblurring of functional boundaries

has led to a seamless financialsystem; so efficiency suggeststhat a unified financial supervisorshould mark that system. Add inperennial concerns aboutputative conflicts of interest, anda worry whether an(operationally) independentCentral Bank with addedsupervisory functions mightbecome too powerful within ademocratic context, and theresult is a potent cocktail ofreasons for such a change (p.43).

On the other hand, Goodhart(2000: p. 43) also concluded that“…there are much stronger reasonsto believe that the conduct ofbanking supervision will be betterdone under the wing of the CentralBank in less developed countries.”This he attributed to three mainfactors: (i) less complex financialstructures in developing andtransitional countries that tend to relymore on standard commercialbanking; (ii) greater susceptibility tosystemic disturbances, which tightensthe connection between monetarypolicy and supervision includinglender of last resort operations; and(iii) generally better levels of expertise,independence and funding ofcentral banks in developing countriescompared to other agencies.

But he also conceded that thereare differences even amongemerging countries, with somehaving more developed andcomplex financial structures thanothers. For instance, the IMF (2001)also noted that the trend towardconsolidation of bank with nonbankfinancial activities is beginning togain ground in emerging markets,particularly the universal bankingparadigm. Thus, different countriesare again likely to come up withdifferent models. The bottom-line isthat mechanisms for timely sharing ofinformation between regulators ofdifferent institutions, and betweenprudential supervisory and monetaryauthorities are put in place,



4 An extensive discussion of the various institutional arrangements that the governments of the crisis-affected economies established in the lightof the Asian crisis is presented in Milo (2004).

regardless of institutional design(Crockett 2001).

Some points to consider forthe Philippines

Meister (2001; in Barth et al 2002)very rightly emphasized that the “…design of regulatory and supervisoryresponsibilities is one of the mostimportant matters affecting the futurecourse of financial market policy.There is, however, no universally validanswer to the question of how thisshould be done.” Furthermore, henoted that the answer cannot bederived from theory. Unfortunately,there is very little empirical analysisaddressing this issue. Needless to saythat further research is called for inorder to inform the policy debate onfinancial supervisory frameworkissues, and before any countryundertakes to radically change itsfinancial regulatory structure.

In considering what regulatorystructure is appropriate in anintegrated financial world, theunderlying issue is what regulatorystructure minimizes the chances ofgovernment failure in amelioratingmarket imperfections and does somost efficiently (Skipper 2000). Withrespect to consolidation of financialsector supervision, some consensus isbeginning to emerge. However, theliterature is generally cautiousespecially in the application of theapproach to developing countries.That is, each country must conducta full assessment of the pros and cons

of adopting a particular model. Thereis consensus, however, on the keyfactors that need to be consideredin such an assessment. In particular,the l iterature highlighted two:changing the regulatory structuremust be undertaken only if it willmaintain and enhance supervisorycapacity and the effectiveness ofsupervision; and the change in theinstitutional structure of regulationmust reflect the change in the marketstructure.

Making the decision to movetowards a consolidated approach isthe most critical part, but it marks justthe beginning of a complex process.The more difficult part would be howto undertake it, especially withrespect to defining the role of thecentral bank in a consolidatedfinancial supervisory framework. Thus,an explicit institutional analysis, whichtakes into account the characteristicsand capacities of the country’sfinancial system and overall financialsector infrastructure, is needed inorder to come up with a definitiveplan of action and timeframe.

In fact, the critical role ofinstitutions, institutional capacity andinstitution building in the financialsector - both with respect toundertaking reforms to resolve theimmediate problems brought aboutby the crisis and longer run reforms tostrengthen and develop the financialsector – was one of the key lessonsthat emerged from the 1997 Asianfinancial crisis4. In particular, theexperience of the crisis-economieswas fairly consistent: weakinstitutional frameworks, which

included lack of operational skills,qualif ied staff and financialresources, lack of commitment orpolitical discipline, lack ofindependence, and politicalinterference in the agencies thatwere designated or speciallycreated to carry out the reforms,significantly hindered the reformprocess and vise versa. In terms ofinstitutional strengthening forfinancial regulation and supervision,the architecture of financialregulation and supervision itself alsobecame an important area of reformin addition to the enhancement ofprudential regulation and supervisionof banks through the adoption ofinternational standards or “bestpractices”. Looking at their variedexperiences will prove instructive.

Overall, Korea’s experience hasbeen described as “decisive actionswith massive public funds torestructure the financial sector”,which led to the rapid resolution ofthe crisis and enabled banks to beginthe road to recovery. In particular,Korea undertook a majorrestructuring of its f inancialsupervisory framework to supervisethe restructuring process and tocorrect the root causes of the crisisover the longer term. It adopted thesingle regulator supervisory modeland followed a “big bang” approachsimilar to the UK. It established theFinancial Supervisory Commission(FSC) and the Financial SupervisoryService (FSS; the FSC’s executivebody) in April 1998 and in January1999, respectively, upon the passageof legislation consolidating theexisting financial supervisoryauthorities in December 1997. Thismove was motivated by the need tostrengthen prudential regulation inorder to promote financial stability;the proliferation of supervisory grayareas and regulatory gaps, whichallowed financial institutions toengage in regulatory arbitrage; andthe significant growth of nonbanksectors, which was notaccompanied by sufficient

“Integrating non-banking regulatorswith bank regulators could weaken

the regulatory capacity of thelatter if human and financial resources

are limited.”

supervision and prudentialregulation (Bain and Harper 1999).The quick pace of the consolidationprocess was deemed necessary toimmediately restore financialstability following the Asian crisis. Butit should also be noted that thefeasibil ity of a unified financialregulatory body in Korea (and moreso in the UK) was first subjected to in-depth studies and analyses, whichthen formed the basis for theproposed bil l to consolidate allexisting financial supervisoryauthorities.

In May 1999, Indonesia enacteda new Central Bank Act thatconferred upon Bank Indonesia thestatus and position of anindependent state institution. ThisAct also provided for the separationof the bank supervision function fromthe Central Bank through the creationof an independent FinancialSupervisory Authority (FSA) similar toKorea’s FSC/FSS. The FSA wassupposed to be established beforeDecember 31, 2002 (Bapepam 2000).The target date was later moved toJanuary 2004, and then to mid-2005.That Indonesia was not able toreplicate Korea’s experience is notsurprising considering the significantdifference in their initial conditions.The priority of Bank Indonesia (andrightly so) was to develop regulatorycapacity by amending andstrengthening banking regulationand supervision to comply withinternational standards, and torestructure troubled financialinstitutions. Thus, changing theinstitutional structure of regulationwas not the major concern. Doing soin such a short period would havealso been premature givenIndonesia’s very weak institutionalframework. Finally, the merits of afinancial mega-regulator was alsonot fully understood and clearlyestablished. Thus, although the draftlaw on the proposed FSA wassubmitted to Parliament in May 2003,its progress has been blocked byconsiderable debate on its contents

and timing. A gradual approach willbe more prudent and realistic.

Thailand also drafted a new Bankof Thailand Act, which was aimed tostrengthen central bankindependence, and a FinancialInstitutions Act. The FinancialInstitutions Act would have given theBank of Thailand (BOT) the soleresponsibility for supervising financialinstitutions (as opposed to sharing itwith the Ministry of Finance undercurrent laws), and paved the way foruniversal banking in Thailand by alsoempowering the BOT to supervisefinancial subsidiaries andconglomerates on a consolidatedbasis. Specifically, it combined theCommercial Banking Act and the Acton the Undertaking of FinanceBusiness, Securities Business andCredit Foncier Business (BOT 2001). Itshould be noted that problems infinance companies that becameevident in early 1997 were the firstindicators of the Thai financial crisis,which in turn triggered the Asianfinancial crisis. The Act thus aimed toeliminate redundancies anddiscrepancies between different lawsapplicable to different types offinancial institutions thereby creatinga uniform standard of supervisionamong these institutions. However,this Act was subsequently revised dueto strong opposition on its contents.In particular, the proposal to(partially) unify supervision under theBOT was dropped. Instead, the BOTcollaborated with the MOF to draftthe Financial Institutions BusinessesAct to bring Thailand’s bankingsupervisory regime up to

international standards, includingconsolidated supervision of financialconglomerates. At the same time,the BOT also proposed tocollaborate with other regulators,namely the Ministry of Finance,Ministry of Commerce (for theinsurance industry), and Securitiesand Exchange Commission toenhance coordination andinformation sharing amongregulators in order to standardizesupervision of financialconglomerates (BOT 2003). Similar toIndonesia, lack of operational skillsand qualified staff, and politicalinterventions severely hampered theagencies that were designated orcreated to carry out the restructuringand rehabil itation of financialinstitutions after the crisis.

An umbrella approach, in whichseparate regulatory authorities areestablished and coordinated, hadbeen deemed as desirable for Asiandeveloping countries because theytypically do not have sufficientlystrong prudential regulations orbanking sector supervision. In such asituation, integrating nonbankingregulators with bank regulators couldweaken the regulatory capacity ofthe latter if human and financialresources are limited, which could inturn reduce confidence in the overallf inancial system. Furthermore,independent regulatory regimes thatprotect central banks from policyintervention are mostly lacking. Thus,integrating the various regulatorswithout ensuring independence mayweaken the quality and credibility ofthe overall regulatory regime.

Coordination among the differentfinancial regulatory agencies, including the PDIC, particularly withrespect to prudential regulation must

also be strengthened.



Instead, the priority should be thestrengthening of bank regulation,while improving regulatory capacitiesfor nonbanking business (Shirai 2001).Certainly, the cases of Indonesia andThailand bore these out.

With respect to the other crisis-affected economies, Malaysiaalready had a fairly satisfactory bankregulatory framework andinstitutional framework prior to theAsian crisis. Thus, institutionalinfrastructure building was lessemphasized compared to the othercrisis-affected economies. It alsoalready had a partially unifiedfinancial supervisor. Bank NegaraMalaysia, which was established in1959, took over the supervision of theinsurance industry fairly recently in1988, while securities firms continueto be supervised by a specialistagency. Singapore’s pre-crisisregulatory/institutional frameworkwas deemed as very strong, and theMonetary Authority of Singapore(MAS) was actually the firstintegrated supervisor. But it did sogradually. The MAS, which is a fairlyyoung central bank that beganoperations only in 1971, alsoacquired powers to regulate theinsurance industry in 1977 and thesecurities industry in 1984. Both arequite strong and proactiveregulators.

In contrast to Indonesia andThailand, the Philippine bankingsector’s regulatory framework prior tothe crisis was rated fairly well, whichresulted from earlier reforms thatincluded significant improvements inprudential regulation and supervision.Also, an independent central bankwas already in place - the Bangko

Sentral ng Pilipinas (BSP), which wasestablished under the New CentralBank Act enacted in 1993. What theAsian crisis did was to expose theneed to close regulatory gaps thatresulted from the integrated orconglomerated nature of financialinstitutions but with a fragmentedregulatory system in the Philippines.This was demonstrated in the failureof several commercial banks, whichwas l inked to problems in theirinvestment house subsidiaries thatwere in turn inadequately supervised.

The Philippines has had a longhistory of universal banking, whichwas introduced in 1980 and came todominate the Philippine financialsystem. And over the years, thecountry has continued to follow apolicy of despecialization by allowingbanks to further widen their range ofpermissible activities and products,including the recent introduction ofbancassurance in 2002. ThePhilippines also has a long history offinancial innovation as a result ofregulatory arbitrage, both by banksand nonbanks. But such evolution inthe financial services sector was notaccompanied by a similar evolutionin financial regulation and supervisionuntil fairly recently. The BSP hasundertaken steps towardconsolidated supervision of bankinggroups, as well as initiated efforts tocoordinate with other regulatoryagencies. But more needs to bedone.

The priority is also (and should be)the strengthening of bank regulation,particularly the consolidatedsupervision of banking groups, and atthe same time improving regulatorycapacities for nonbanking business.

Coordination and cooperationamong the different financialregulatory agencies, including thePDIC, particularly with respect toprudential regulation must also bestrengthened and institutionalized.Finally, at least one supervisor has tohave comprehensive oversight. Allthese point to the relevance of, andcan serve as interim measures to, theconsolidated financial sectorsupervision approach in the case ofthe Philippines. Preliminary support forthe consolidated financial sectorsupervision approach can be justifiedbased on the primary motivation forthe adoption of this approach, whichis financial services integration orconvergence. This was also the casein Korea, but not in Indonesia orThailand. That being said, the biggerissue is how to undertake thetransition, and that wil l requirecareful study and planning.

The most important task now isto create an awareness,understanding and appreciation ofthe approach among the regulators,the regulated entities andconsumers, as well as policymakersand lawmakers. This point is clearlyillustrated and emphasized in thecase of the UK, which has undertakenthe most complex andcomprehensive integration offinancial regulators to date – itsFinancial Supervisory Authority (FSA)brought under one roof 10 regulatorybodies. In particular, the FSA deemedit important to clearly lay out what itcan and cannot do - that it is not apanacea for all problems in thefinancial sector and it does notremove the consumers’ responsibilityfor their own action. Thus, the FSAembarked on a major educationcampaign to promote publicunderstanding of the financial systemand of the FSA (Thorpe 2002).

Understanding whatconsolidation means and what it canand cannot do must also be coupledwith an assessment of what thecountry needs and what it can andcannot do. The approach’s

The most important task now is tocreate an awareness, understanding and appreciation of the integrated

approach among the regulators.

relevance and how it should beimplemented must be bolstered bymore in-depth studies andinstitutional analyses to take intoaccount the characteristics of thePhilippine financial system and thecapacity to undertake such a reform.These studies can then inform thepolicy debate and, if found relevant,facilitate either the amendment ofthe relevant existing laws or thedrafting and passing of a new law.For instance, it took us years to finallypass the New Central Bank Act andGeneral Banking Law, which arerelatively less contentious. Theexperience of Indonesia andThailand also showed the difficulty ofpassing a law without sufficientunderstanding and appreciation ofthe consolidated approach.

Clearly, the transition frominstitutional regulation to functionalregulation is a complex process. Andthe choice need not be made inextremes of single and multipleregulators because there arepossibil it ies of hybrids andsupplementing arrangements. AsSkipper (2000) pointed out, there issomething to be said for building onexisting structures. Under any system,issues of information exchange andcoordination are inevitable. In thefinal analysis, the regulatoryobjectives, coverage, skil ls,operational effectiveness andcredibil ity are importantconsiderations, and structures remainjust one element of financialregulation (Reddy 2001).

Finally, the need for sustainedcapacity building for financialregulators and supervisors, regardlessof the structure, must be emphasized.Building sustainable institutions taketime. Thus, financial reform must beseen as a continuing process; it doesnot end at discrete changes infinancial policies (including changesin the regulatory structure), whichcould lead to inertia. Financialregulation and supervision thenbecomes a major point for reformonly when problems have alreadyarisen. Because the financial

services sector is very dynamic, thesystem of supervision and regulationmust be constantly assessed andadjusted, not just to keep pace withbut also to anticipate changingneeds. That is the only way for evena financial super-regulator to remaineffective and efficient.

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Sector Supervision. Policy Research WorkingPaper No. 3096, World Bank, WashingtonD.C.

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______ and Schoenmaker, D. (1993).“Institutional Separation BetweenSupervisory and Monetary Agencies.”Financial Markets Group Special PaperNo.52, London School of Economics, April.

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Llewellyn, D. (1999). “Introduction: TheInstitutional Structure of RegulatoryAgencies”, in N. Courtis (ed), How CountriesSupervise their Banks, Insurers and SecuritiesMarkets. Central Banking Publications,London.

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presented at the Alpbach Banking Seminar,29 August 2001, Alpbach.

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Milo, M. (2002). Financial ServicesIntegration and Consolidated Supervision:Some Issues to Consider for the Philippines.PIDS Discussion Paper No. 2002-22. PhilippineInstitute for Development Studies, MakatiCity.

______ (2004). Financial market Reform:Some Lessons from East Asia. Paperpresented at the Fifth Annual GlobalDevelopment Conference, GlobalDevelopment Network, 29 January 2004,New Delhi.

Mwenda, K. and Fleming, A. (2001).International Developments in theOrganizational Structure of FinancialServices Supervision. Paper presented atseminar hosted by the World Bank FinancialSector Vice-Presidency, 20 September2001, World Bank, Washington DC.

Palmer, J. (2002). The Challenge ofConvergence: Revisit ing the CorePropositions in Financial Services Today,


Keynote address at the Asian BankerSummit 2002, 28 February, Singapore.

Peek, J., Rosengren, E. and Tootell, G.(1999). “Is Bank Supervision Central toCentral Banking?” The Quarterly Journal ofEconomics, CXIV(2): 629-653, May.

Reddy, Y. (2001). Issues in ChoosingBetween Single and Multiple Regulatorsof Financial System. Speech delivered atthe Public Policy Workshop, ICRIER, 22 May2001, New Delhi.

Shirai, S. (2001). Searching for NewRegulatory Frameworks for theIntermediate Financial Market Structure inPost-Crisis Asia. Research Paper Series No.24, Asian Development Bank Institute,Tokyo.

Skipper, H. (2000). Financial ServicesIntegration Worldwide: Promises andPitfalls. Organization for EconomicCooperation and Development.

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About the Author

Our guest writer, Melanie Milo, Ph.D., is aresearch fellow of the Philippine Institutefor Development Studies (PIDS). Workingat the PIDS as a research fellow in the lastfour years and as research associate from1995 to 2000, she has authored numerouspolicy and discussion papers on financialsupervision and integration, f inancialsector development and reform,international macroeconomics, anddevelopment economics for the Instituteand delivered some of these papers forvarious local and internationalconferences. Her discussion paper onFinancial Services Integration andConsolidated Supervision: Some Issues toConsider for the Philippines written in 2002has been the take-off point for this article.

Milo has been conferred a Ph. D. inEconomics from the Australian NationalUniversity in Canberra in 2000. Prior to this,she earned her degree in Masters inEconomics of Development and Diplomain Economics of Development from thesame university. She was a cum laudegraduate of the University of thePhil ippines Dil iman with a degree inBachelor of Arts in Economics in 1987.

Moving towards a unifiedfinancial regulation in the Philippines

The integration of financial supervision and regulation has been slowly gaining

prominence in the discourses on macroeconomic fundamentals as a viable alternative

in achieving long-term and continued stability in global financial systems.

In the Phil ippines, ourConstitution provides for thecreation of an independent centralmonetary authority with primaryresponsibil ity over monetary,banking and credit policy;supervision over the banking sectorand regulatory powers, as may beprovided by law, over the operationsof finance companies and otherinstitutions. This would inevitablydictate the shape of the Philippineunified regulator if we do decide tomove towards that goal.

Rationale and scope ofunified financial regulation

Experience in other countries

Unified financial sectorregulation refers to the establishmentof a single supervisor for the entirefinancial sector or centralizing in oneagency the powers to supervise atleast two of the main financialintermediaries (such as banking withinsurance, banking with securities orsecurities with insurance). As of theend of 2002, 46 countries hadadopted unified regulation, includingUK, Sweden, Norway, Singapore andSouth Korea, among others. With thenumbers increasing faster in recentyears, Estonia, Germany, Ireland andMalta are the recent additions to thegroup of unified regulators.

Unified regulation is not a recentdevelopment. Closer to home, theMonetary Authority of Singaporecombined banking supervision withinsurance and the securities industriesin 1971 and 1984, respectively.Canada and the Scandinaviancountries followed shortly. It was theunification in UK in 1997, which wasgiven extensive media coveragewhen it integrated 9 previouslyseparate regulators at once, thatcaptured worldwide interest in theidea. However, the approach to andthe resulting structures are far fromuniform. A survey of unifiedregulators conducted by the WorldBank (Martinez and Rose, 2003)showed that 29% had a singlesupervisor for the whole financialsystem while 30% have a singlesupervisor for 2 out of 3 types offinancial intermediaries. Theresulting structures have been a mixof institutional and functionaldecisions with the exception of

Australia that chose to adopt apurely functional structure.

Under Australia’s structure,prudential regulation of all institutions(deposit taking, insurance andpension) is conducted by theAustralian Prudential RegulationAuthority (APRA); systemic stabilitythru its influence over monetaryconditions and through oversight ofpayment system is supervised by theReserve Bank of Australia; disclosureand market conduct by theAustralian Securities and InvestmentCommission (ASIC) and competitionbehavior by the AustralianCompetition and ConsumerCommission (ACCC). Systemicstability, competition regulation,conduct of business and prudentialregulation were placed in four (4)institutions.

Rationale for unified financialregulation

Notwithstanding the differencesin scope and resulting institutionalstructure, there appears to becommonality in the reasons for themove to unified regulation. In thesame survey conducted by the WorldBank (Martinez and Rose, 2003), thereason advanced by 93% of therespondents was the “need to bettersupervise a financial system movingtowards universal banking”. This wasclosely followed by the need to“maximize economies of scale and


by Lilia R. Bautista, Chairman, Securities and Exchange Commission

scope” cited by 80% of therespondents, “need to solveproblems resulting from poorcommunication and a lack ofcooperation among existingsupervisory agencies (27%), need tominimize gaps in the regulation andsupervision of financialintermediaries by establishing asingle authority accountable for thesupervision of all financial institutions(20%), need for operationalrestructuring of regulatory agencies(20%), need to overcome otherweaknesses in the overall quality offinancial regulation and supervision(13%).

The rise of financialconglomerates raises difficultproblems for regulatoryeffectiveness with multipleregulators. In particular, there is thedanger that because of afragmented supervision, an over-allrisk assessment of the institution as agroup may not be undertaken.Fragmented supervision alsocreated regulatory gaps that can beexploited by the regulated entitiesand lead to failures similar to whathappened in the case of the UrbanInvestment Corporation.

In addition to the abil ity toregulate financial conglomeratesbetter, unified regulation alsopromotes regulatory efficiency byavoiding duplication in supportinfrastructure; competitiveneutrality that is hampered by the

existence of too many regulatorscharging different costs on theentities that they regulate; and theavoidance of turf wars or simply theremoval of doubts over jurisdictionalquestions that could weakenregulatory effectiveness.

Constraints of unified regulation

The broad agreement on thebenefits of unified regulation has notcompletely removed the argumentsagainst it, however. Some of thedangers being cited are the risk thatthe change process can go off- track,diseconomies of scale typical ofmonopolistic organizations, whichthe unified regulator will be; thelimited synergies - in particular thoseof skills, focus, and culture - of theunified agencies; and the moralhazard problem that is likely to becaused by the perception createdin the public mind that all creditorsof the entities that the unifiedregulator supervises will receiveequal protection. Correspondingly,a number of alternatives to unifiedregulation have been advancedeither as a transition measure to orin place of unified regulation itself.Two of these, the creation of anoversight board and the unificationof support services while having theirown merits, unfortunately, do notsolve the problems arising frommultiple regulation particularly theregulatory gaps, and the differences

in rules and regulations. The third,which is the sharing of facilities withthe Central Bank but with thesupervisory agency separate fromthe latter as practiced in Finland,may not be consistent with ourConstitution.

There are two cautionary noteson unified regulation. First, unifiedregulation, by itself, cannotguarantee effective supervision.Second, unified regulation does notend with the creation of a unifiedregulatory structure. A unifiedregulatory structure cannot solve theweakness of regulation arising fromits inabil ity to address marketfailures. These market failures, whichgave rise to the need for regulationin the first place are anti-competitive behavior, marketmisconduct, asymmetricinformation, and one that is uniqueto the financial system; systemicinability where the sudden loss ofconfidence in some institutions cancause otherwise unrelated andsound institutions to fail. The risk wasdemonstrated during the AsianFinancial Crisis when ‘contagion’along with ‘moral hazard’ becamethe buzzword in the internationalfinancial community. Correctingmarket failures requires betterregulation, which means settingmore appropriate prudential andmarket conduct standards,improving surveil lance andstrengthening enforcement. For thisreason, the Securities and ExchangeCommission continues to focus onstrengthening its regulatorycapabil ity while exploring thepossibility of unified regulation withother regulators. Subsequent to theenactment of the SecuritiesRegulation Code in 2000, SEC trainedits staff in market surveil lancemonitoring and enforcement,created new core operatingdepartments including those formarket regulation, corporationfinance, enforcement, complianceand inspection. Now with ADBassistance, SEC is looking at ways toestablish risk-based capital

18 Moving towards a unified financial regulation in the Philippines

Unified regulation promotesregulatory efficiency by avoiding

duplication in support infrastructure,competitive neutrality and the

avoidance of turf wars or theremoval of doubts over jurisdictional

questions that could weakenregulatory effectiveness.

standards, the futures market andunified regulation.

Unified regulation does not endwith creation of a unified regulatorystructure. In order to achieve itsobjectives, unified regulation must beaccompanied by the developmentof unified regulatory and supervisoryframework for the financial sector, tothe extent possible and as allowed bythe international standards.Otherwise, the unified agency mightsimply become a simple umbrellawith the previously separate agenciescarrying on with their business asbefore, albeit, in one roof. Towardsthis end, International Standardbodies continue with their work inidentifying areas where theharmonization of regulatory andsupervisory practices across differenttypes of financial intermediariesshould be achieved. These cover on-site supervision, off-site monitoringand analysis, consolidatedsupervision, components of capital,minimum capital requirements,licensing requirements, accountingstandards. However, it is notexpected that all rules can beharmonized due in large part to thedifferent regulatory challenges facedin each sector that necessitatedifferent regulatory responses. Forinstance, only modest harmonizationin capital requirements betweenbanks and insurance companies canbe expected. Practically all banksfollow the Basel Capital Accord. Onthe other hand, insurance companiesare required to maintain differenttypes of reserves that vary by countrydepending on the type of risks thatthey may face such as the “future riskreserve” and “catastrophe reserve”in Japan or the ‘policy holderdividends’ and ‘policy reserves’ inKorea.

The prospects for unifiedfinancial regulation in thePhilippines

The idea of unifying ourregulatory agencies has gained

recognition in the Philippines. At thevery least, it is being discussed bythose who would be directly affectedby it; the Bangko Sentral ng Pilipinas(BSP), the Insurance Commission (IC),the SEC and to some extent, thePhil ippine Deposit InsuranceCorporation (PDIC). The overridingconcern among these regulators isthe mismatch between the existingregulatory structure and the structureof the financial industry that eachsupervises. Thus, these variousregulators are faced with financialconglomerates whose separatesupervision leaves too many gaps,regulatory overlaps and in one case,the failure of a financial institutionunder our overlapping supervision.

As of April 2004, the SEC hasregulatory powers over 1,835registered firms, comprising of thefollowing:1. Pre-Need companies 39

Licensed general agentsof pre-need companies 6

2. Transfer Agents 283. Dealers in government

securities 644. Investment Houses

• with quasi-bankinglicense 6

• without quasi activitiesbanking license 30

• underwriting ofsecurities 9

5. Broker – Dealer 1156. Investment companies 297. Issuers of securities 234

8. Issuers of registeredsecurities (Unlisted) 114

Public Company9. PSE 110. Philippine Central

Depository 111. Securities Clearing

Corporation 112. Securities Investor

Protection Fund 113. Fixed Income Exchange 114. Finance Companies 620

TOTAL 1,835

The IC supervises 104 non lifeinsurance companies, 42 l ifeinsurance companies and 42 brokers.

The BSP supervises 7,494 banks(universal and commercial banks,rural and thrift banks) and 11,000 non-bank financial institutions (with andwithout banking or quasi-bankingfunctions). In some cases we haveoverlapping jurisdiction over somecompanies. Surely, something needsto be done!

Financial conglomerates

Universal banks have beenaround us for more than twenty years.They were introduced as early as the1980s as part of our financialliberalization program in order topromote greater efficiency in ourfinancial system. The promotion of


A memorandum of agreement wassigned between the BSP and PDIC to

establish an information exchangeframework to facilitate sharing of

relevant data and enhance theeffectiveness of examination and

monitoring systems.

universal banks continued over theyears through such policies as thewidening of the banks’ permissibleactivities and products, relaxation ofthe line of business restrictions, cross-selling and lately, bancassurance.Another key feature of the Philippinefinancial system is the dominance ofdomestic universal banks, whichaccounted for 64% of total bankingassets and 53% of the total assets ofthe financial system by March 2002.Therefore, the regulation of thefinancial system has to be equally‘home grown’ unlike the case of onedominated by the multinationalcorporations whose conduct, at thevery least, are subject to thedisciplines imposed by the regulatorsin their home countries.

Key issues for unification ofPhilippine regulatoryinstitutions

The constitution provides:

“Sec. 20. The Congress shallestablish an independentCentral Monetary Authority,….xxx. The authority shall providepolicy direction in the areas ofmoney, banking, and credit. Itshall have supervision over theoperations of banks and exercisesuch regulatory powers as maybe provided by law over theoperations of finance companiesand other institutionsperforming similar functions.”

At present, the regulation ofbanks in the Philippines is lodged withthe Central Bank (BSP). Traditionally,as in other jurisdictions, supervisionof banks is done by the Central Bank.As previously stated, theinternational trend is to carve outthe regulation of banks and set upan institution which will regulatebanks with or without all or any of thefollowing: insurance, securities andpension. Singapore, however, is oneof the few exception, which decidedinstead to absorb within its Central

Bank the regulation not only of banksbut securities and insurance as well.In cases where the monetary policyis separate from single regulator,there must be coordination betweenthe Central Bank and the regulator.In case of the Financial ServicesAuthority (FSA) of UK, there is aMemorandum of Understanding(MoU) between the Bank of Englandand the FSA.

Without any constitutionalamendment, if the Philippines willadopt the Singapore model, therewould be a need for legislation toincorporate securities and insurancewithin the Central Bank. This wouldmake the Central Bank a verypowerful body but there would beeconomies of scale and there wouldbe no regulatory arbitrage.

We can also explore thepossibility that the Monetary Boardbe insulated from the day to dayproblems of regulation byspecifically providing that therewould be three (3) Deputy Governorsto handle the three areas of banks,insurance and securities whosedecisions are final and can only beappealed to the courts. This wouldenable the Monetary Board toconcentrate on monetary policiesand set direction over regulatorypolicies. It need not be bothered bythe audit of banks, brokers, listedcompanies and insurancecompanies. The three regulatorsmust be part of the Monetary Boardso that it can be guided in its policyroles.

Needless to say, there could bea constitutional challenge to such aset up on the meaning of“supervision” which is lodged in thecentral monetary authority as awhole. Carefully crafting thelegislation would seem to benecessary to delineate theregulatory aspect and the oversightfunction of the Monetary Board.

Constitutional amendment

The other alternative to clearlydelineate regulatory function and

policy making is to amend theConstitution to carve out theregulation of banks from the CentralMonetary Authority and amend theCentral Bank Act, the SecuritiesRegulation Code and Insurance Actby legislation to come up with a singleregulator.

Transitory measure

While the above policy issues arebeing debated upon, coordinationwith these agencies is a must. SECand BSP have already signed two (2)Memoranda of Understanding and isin the process of crafting another oneon joint audit and reporting. A formalcoordinating machinery is presentlybeen studied by a BSP consultant.

In the same manner, aMemorandum of Agreement (MOA)was also signed between the BSP andPDIC to establish an informationexchange framework to facilitatesharing of relevant data to enhancethe effectiveness of their examinationand monitoring systems. This wasparticularly significant since theGeneral Banking Act of 2000 hasrevoked PDIC’s examination powers.

Under the agreement, a sharedcomputerized database containingall the essential bank data shall becreated and electronicallyaccessible to both institutions aspresently practiced in moredeveloped countries. Theframework shall be implemented intwo stages with the first stagefinalized in November 2002. Thesecond phase, which is still on theplanning stage, shall involve sharingof more sensitive information ondistressed banks, and will engage theformation of joint committees thatwould study ways in enforcingcorrective measures and failureresolution schemes.

Indeed, the road towardsintegrated financial supervision forthe Philippine financial system isfraught with challenges. Issues anconcerns involved should becritically analyzed while meritsshould be carefully explored to

20 Moving towards a unified financial regulation in the Philippines

ensure that this particular reformwould achieve a financial regulatorysystem attuned to best practices inthe supervision of financial servicesin the global market today.

About the Author

Ms. Bautista has been Chairman of theSecurities and Exchange Commission(SEC)since March 2000. Prior to this, she rosefrom Assistant Secretary to ActingSecretary of the Department of Tradeand Industry before she was appointedSenior Undersecretary and Special TradeNegotiator of DTI in 1999. She was alsoAmbassador Extraordinary andPlenipotentiary, Chief of Mission andPermanent Representative of thePhilippines to the United Nations Office,


World Trade Organization, World HealthOrganization, International LaborOrganization and other internationalorganizations in Geneva, Switzerland from1992-1999.

As a former Acting Secretary of DTI, shewas also the Chairman (Ex-Officio) of theBoard of Investments, NationalDevelopment Company, Garments andTexti le Export Board, Phil ippineInternational Trading Corp., ExportProcessing Zone Authority, Center ForInternational Trade Expositions andMissions, Inc., Small and MediumDevelopment Council, and Export andInvestment Development Council. Shealso served as Ex-Officio Member of theMonetary Board - Central Bank of thePhilippines.

She started her government service asLegal Officer of the Office of the President.

Then, she moved on as Hearing Officer ofthe Juvenile and Domestic RelationsCourt of Manila and later, as Chief LegalOfficer and Assistant Director of the Boardof Investments Legal Office.

Prior to joining government service, sheworked as Legal Editor of CorporationTrust Company and Prentice Hall in NewYork.

Chairman Bautista completed her formaleducation with the degrees in Master ofLaws from the University of Michigan (DewittFellow), Masters in Business Administrationand Bachelor of Laws from University of thePhilippines. She took special courses incorporate finance and reorganization inNew York University and in investmentnegotiation in Georgetown University.

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22 FSA-UK Managing Director shares his views on integrated supervision and deposit protection

FSA-UK Managing Directorshares his views on

integrated supervisionand deposit protection

The first stage of reform of financial services regulation in the United Kingdom

took a leap on 20 May 1997 with the creation of Securities and Investments Board (SIB).

This provided the platform for a single financial regulator, the subsequent Financial Services

Authority (FSA). The FSA properly came into being in June 1998, when responsibility for banking

supervision was transferred to the FSA from the Bank of England.

Recognizing FSA’s wide range ofexperiences on financial servicesintegration, PDIC Forum delved intothe details of its creation, supervisoryframework and corporate objectiveswith Michael Foot, Esq., ManagingDirector for Deposit Takers andMarkets Directorate.

Forum: What circumstancestriggered changes in the UK’sfinancial regulatory framework thatled to the creation of the FSA? Whichagencies were involved? Whichagency took the lead, and why wasthis agency chosen as lead?

Michael Foot: In 1997, a newGovernment came into power andalmost immediately did twoconnected things. First, it made thecentral bank (the Bank of England)independently responsible formonetary policy. Shortly afterwards,it announced the creation of acompletely new financial regulatoryagency, the FSA. This was tasked tobring together 8 existing regimes,including the banking supervisiondivision of the Bank of England, intoone new body.

I think there were 3 reasons: (a)financial services in the UK werebecoming increasingly highlyintegrated. For example, banks haddeveloped or bought insurance andsecurities operations and vice versa.Regulators for the separate sectorsmade increasingly little economicsense; (b) there were prospectively

Michael Foot, Esq., Managing Director,Deposit Takers and Markets Directorate,FSA, UK

large economies of scale to exploit.Before the FSA, none of theregulators was of sufficient scale toreap these; and since the FSA wasgiven its own powers, its basic feeshave not risen faster than inflationdespite significant upward salarypressures; (c) the Government felt,as a matter of principle, that eachagency should have just onefunction, to aid accountability. Ifthe Bank of England was to beresponsible for monetary policyanother agency needed to beresponsible for supervision.

Forum: Was the birth of the FSA a puregovernment initiative or was it a resultof a long-drawn policy discussion?

MF: The new Government’s decisionto create a single regulator (in 1997)was not preceded by an extensivepublic discussion. When theChancellor announced his intention(to form the FSA), an interim report waspublished in May 1997, followed by alonger and more detailed reportthree months later which set out thetransition, a more specific timetablefor the new legislation arrangements


and further details of how the FSAwould work.

Forum: Were there explicit informationsharing arrangements betweenauthorities regulating related financialinstitutions that called to periodicdialogues among them to sharemarket intelligence and discussconcerns of mutual interests? Whatwere the parameters of these sharingarrangements? Would an efficientinformation sharing arrangementamong regulatory authorities be aseffective as an FSA?

MF: One of the keys to thesubsequent successful co-operationbetween the FSA, the Bank ofEngland and the Ministry of Finance(HM Treasury) was the fact that asubstantial Memorandum ofUnderstanding was agreed amongthese 3 parties and made publicbefore the actual creation of the FSA.This set out the sphere of responsibilityof each organisation, how they wereto work together and whatinformation they should share. After6 years, there is absolutely no pressurefrom any of the 3 organisations tochange it.

Some of this co-operation would,of course, have been possible hadthe separate regulators remained inbeing. But the fact is that having allthe regulatory information in onebuilding (and integrating all theregulatory staff into one organisation)has helped to ensure that regulatoryinformation is quickly and effectivelyshared.

Forum: What were the primarycriticisms to an integrated financialsupervision for UK and how werethese responded to?

MF: When the FSA was announced,the idea was widely welcomed butsome concerns were expressed,particularly that the new body wouldbe too powerful. It was argued that,in enforcing its rules, the FSA wouldbe the “prosecutor, judge, jury andexecutioner.” To meet this concern,

the Government went to greatlengths to ensure very fullaccountability of the new body and,in particular, that there was acomplex 2-stage enforcementprocess. The second stage of thismeans that any accused firm orindividual can go to a separate legalentity, which is completelyindependent of the FSA and have itscase heard afresh.

The FSA has also, during its life,gone to great lengths to consultopenly about all aspects of its non-enforcement operations too. Thismeans that interested stakeholders(the practitioners who pay for theFSA, consumer groups and others)have the chance to comment onproposed policies and rules in detailin advance.

Forum: What did you mean by “two-stage enforcement process onensuring accountability”? Who is the“separate legal entity”? What is thenature of this entity and who runs it?

MF: The first decision-making body isthe Regulatory DecisionsCommittee (RDC) consisting ofpractitioners and public interestmembers independent of the FSA. Ifthe firm or individual facing action isstill dissatisfied at the end of this first-stage procedure, it or he can

present the case to the secondstage, which is the Financial Services& Markets Tribunal. This is run by theLord Chancellor’s office and it willconsider the case completely afreshunder normal legal process.Relatively few cases get this far.

Forum: What were the legalitiesinvolved in forming a unifiedsupervisor (i.e., amendments ofexisting legislation, drafting of entirelynew legislation, etc.)?

MF: New legislation was required toget the FSA started and it was donein two stages. A very simple Bill wasquickly put through Parliament whichcreated the FSA and allowed it totake over banking supervision andthe functions of one of the otherexisting regulators (the Securities &Investment Board). All the otherregulators agreed that their staff tooshould join the new organisation. Butit was apparent that the FSA couldonly get the necessary powers in itsown name to do what theGovernment wanted it to do afterthe drafting of a major new piece oflegislation replacing/amendingmany existing statutes.

This actually took another 3 anda half years to come into effect. Inthe meantime, a very British, co-operative, solution was adopted in




which the pre-existing regulatorsseconded their staff to the FSA, whoran the organisations from a singlebuilding and with a single structurebut in the name of and according tothe laws governing the existingregulators. I doubt if there is anyother country in the world wheresuch a transitional arrangementcould have been achieved.

Forum: What were the essentialresource requirements in setting upthe FSA? What mechanisms wereinstituted for the initiative toeffectively gain support from thepolicymakers and the financialcommunity?

MF: The early transition years of theFSA coincided with a very stronglabour market for many financialsector staff, which put something ofa strain on the FSA’s ability to recruitand retain staff with the right skill sets.Fortunately, we were not constrainedby Government/public sector payscales and most of the financialservices industry was content to seeus pay more provided we exercisedtight control over costs in aggregateand provided that our regulatoryservices were run efficiently.

We also launched major publicrelations initiatives to get consumersto understand that there were someimmediate benefits for them. Forexample, we brought together 8previously separate complaintssystems into 1, and merged 5separate compensation schemesinto 1. We also began someexperiments on how we supervisedthe larger firms, to give them some ofthe early benefits of a single regulator.

I doubt if there are many now whowould want to go back to the “oldways”.

Forum: What are the main responsi-bilities of FSA in promoting soundnessof financial institutions and stability ofthe financial system? What are themeasures available to FSA to effec-tively carry out these responsibilities?In case of violations of FSA regula-tions, what are the enforcement mea-sures available?

MF: The FSA has 4 statutoryobjectives: to promote marketconfidence, to improve publicawareness of financial issues, toprotect consumers and to fightfinancial crime. Each year, in our Plan& Budget, we set out our priorities forthe next year, in the context of alonger 3 year planning horizon. Wehave a very full range of regulatorytools – proactive and reactive – towork with and where necessary wedo not hesitate to turn toenforcement action. For companies,this can lead to closure or, lessdrastically, significant fines and arequirement to compensateconsumers who have been mis-soldretail products. For individuals, finescan also be levied and in moreserious cases the individual can bebarred from some/all f inancialservices for years or even for life. Allof this, as I said earlier, is subject tovery considerable legal protection;to take away someone’s professionallivelihood is something one couldnever do lightly.

Forum: What were the majordifficulties and challenges

encountered by FSA when it startedoperations such as market reaction,response from institutions beingregulated?

MF: Six years after it first started andtwo and a half years since it gainedits full powers, I think the existence ofthe FSA is accepted and generallywelcomed. Different groups andtypes of firms have different agendasin their dealings with us. For example,the larger firms have typically foundthe creation of a single regulatormakes it much easier for them to dobusiness with us, as we are essentiallya “one-stop shop”. Some smallerfirms, in contrast, probably regret thepassing of what they may haveregarded as a regulatory regimemore sympathetic to their aspirations.I think overseas regulators alsowelcome the one-stop shop that isthe FSA and certainly, in an era whenmuch new financial legislation comesout of the UK’s membership of theEuropean Union, it is very helpful tohave the scale to represent Britishinterests in EU, to help prepare thislegislation.

Forum: How does the FSA supervisedeposit-taking financial institutionsgiven the diverse nature of businessand ownership structures?

MF: Our prudential supervision ofdeposit-taking firms has in somesenses changed relatively little sincethe Bank of England had responsibilityfor it in 1998. We are, however, muchbetter able now to reflect the realitythat, for retail-facing groups – banksor insurance companies – the biggestsingle risk to their capital position is


major recession. Even then, the total“hit” to deposit protection was onlyabout US$150 million and all of thathas subsequently been paid back tothe scheme, by virtue of successfulliquidation of the banks concerned.

Forum: Please elaborate on how thedeposit protection scheme wasimplemented during those recessionyears and how it was funded? Howwere the depositors reimbursed andwho took charge of liquidating thebanks?

MF: The pre-1998 banking depositprotection scheme under the DepositProtecion Board (DPB) was initiallyfunded through small upfrontpayment by each bank. Anyadditional funds required was raisedby way of a levy on each authorizedbank. The DPB calculated the amountof money to which each depositorwas entitled and paid the money out.

reputational damage from mis-selling products to consumers. Suchmis-sell ing can lead to verysubstantial compensation paymentsbeing necessary. One helpful factorhas been that the UK has for a longtime required banks and (to use anAmerican term) mutual thrifts tohave considerably more capital thanrequired by the relevantinternational (usually Basel)standard.

Forum: How are depositors in UKprotected from bank failures?

MF: These high capital standards plusour encouragement of goodmanagement and business practiceshave produced a UK banking sectorthat is very strong in terms of bothcapital and liquidity. The lastsignificant banking failures that led toany call on the deposit protectionscheme came in 1991-92 during a

What is the Financial Services Compensation Scheme?

The Financial Services CompensationScheme (FSCS) acts as the fund of last resortfor customers of authorised finance sectorfirms. The Scheme’s primary aim is to provideprotection for private individuals and smallbusinesses. FSCS can pay compensation if anauthorised firm is unable, or likely to beunable, to pay claims against it, usuallybecause it has gone out of business or isinsolvent. Firms are authorised to trade infinancial services in the UK by the regulator,the Financial Services Authority (FSA).

FSCS is an independent organisation,funded by authorised firms, and coversinvestments, deposits and insurance. Theexistence of FSCS promotes financial stabilityby lessening the risk of a single failuretriggering a wider loss of confidence in thatsector, or the market generally.

FSCS was created under the FinancialServices and Markets Act 2000 (FSMA), andbecame operational on 1 December 2001.At that t ime it replaced five exist ing

compensation schemes1 and the assets andliabilities of the preexisting schemes weretransferred to FSCS. FSCS also assumedresponsibility for any outstanding claims.

Deposit protection

FSCS provides protection for customers ofdeposit-taking firms, being banks, buildingsocieties and credit unions. The Scheme istriggered when an authorised deposit-takingfirm goes out of business. This would happen,for example, if it is subject to an insolvencyaction, such as liquidation or administration, orwhen the FSA concludes that the firm is unableto repay its depositors or is likely to be unableto do so.

Compensation limits

The maximum levels of compensation forbank deposits payable under FSCS’ rules are:

£31,700 (100% of first £2,000 and 90% of the next£33,000), for the total of a claimant’s depositswith that firm. Deposits in all currencies arecovered.

How we are funded

FSCS is funded by levies on the financialservices industry and operates on a ‘pay-as-you-go’ basis. Levies are raised to cover theprojected costs of the Scheme in a financialyear, a process that is normally undertakenonce every financial year. Further levies canbe raised if compensation payments exceedthose anticipated or if there is a major newdefault in that financial year. Under its rules,a limit to the amount FSCS can levy in anyone financial year for accepting deposits is0.3% of protected deposits (cumulative).

* FSCS covers banking, insurance andinvestments.

It also took responsibility forreclaiming funds as the liquidator ofeach bank did his work, and returningthe money to the banks who hadcontributed to the levy. The DPBthough did not take any responsibilityfor the liquidation itself.

Forum: What is the Financial ServicesCompensation Scheme, and howdoes it work?

MF: The Financial ServicesCompensation Scheme (FSCS) is a100% owned subsidiary of the FSA.The FSA has control over theappointment of senior staff and itsbudget but in operational terms it isgenuinely independent. Its creationbrought together separate sectoralschemes for banking, insurance, andinvestments and the basis on whichcompensation is provided sti l lreflects some of that history.

In general, the philosophy of




compensation in the UK is that thesmall, less well-informed consumersmost needed protection but thatmoral hazard needs to be avoided.By that I mean that there should notbe 100% compensation to, forexample, a depositor who putssavings into a bank paying very highinterest rates, because the fact ofthose high interest rates shouldclearly indicate that risk is greaterthan normal.

Forum: Under what condition/s wasthe Financial Services CompensationScheme (FSCS) created? How was itorganized and funded? What is itsrelationship to the FSA?

MF: So far as the banks wereconcerned, the creation of the FSCSdid not create any significantchanges, other than that it operatedunder the umbrella of the singlescheme. As to its relationship with theFSA, it is a subsidiary of the FSA andthe FSA is responsible forappointments to the FSCS Board onterms which secure theirindependence in the operation of itsfunctions. We at FSA also approveits budget and jurisdictional rules.

Forum: How does the amountcovered by your deposit protectionscheme compare to the averagedeposit in banks in the UK?

MF: During the last “big” bank failurewhich the DPB was involved in 1991,over 80% of all deposit insuranceclaimants had deposits of less than£20,000. That sum would now beequal to over £30,000 in present dayprices. Of course, by value, thesedeposits of less than £20,000accounted for less than 10% of all theBCCI claimants’ deposits. The theoryis very much that deposit protectionis primarily for the smaller retaildepositor.

Until December 2001, thecompensation for bank deposits was90% of the first £20,000.

From 1 December 2001 onwards,it has been 100% of the first £2,000

and then 90% of the next £33,000.Throughout the period, the amountsfor bank deposit compensation havebeen different from those forpersonal investment or insurancecompensation.

The basic theory behind thefigures for banks is:a) that the depositor must take

some interest in the soundness ofthe bank he/she puts money into.Consequently, except wherestated in (b) below, 100%compensation would not beappropriate because it wouldincentivise depositors to chasehigh interest rates being offeredwithout any downside if the bankfails. 90% minimum compensationwas established in 1995 by EUDirective. Before that, the UKfigure had been 75% of the first£20,000

b) however, 100% compensationdoes seem fairer for a depositorin some circumstances. If thebank fails the day after adepositor’s salary cheque hasgone into his/her account, it canhardly be said that the depositorhas been chasing high interestrates. The 100% band of £2,000could be taken as a roughmeasure of the average nationalmonthly salary. A FamilyResources Survey in 1996/1997also showed that over 50% of allfamilies had less than £1,500 ofsavings (excluding life assuranceor funded pension arrangements),which meant that a figure of£2,000 would fully protect manypeople.

Forum: What are the benefits gainedfrom an integrated financialsupervision framework? Hasintegration attained its desiredresults?

MF: Building a successful singleregulator from so many componentswas never going to be an easy orquick task and the Government has,from time to time, also added to thelist of regulatory tasks for the FSA. For

example, we are going to becomeresponsible in the next year forregulating insurance and residentialmortgage brokering, in the processperhaps tripling the number of firmswe authorise.

We have managed to producea number of significantimprovements in regulatorytechniques. We have takenadvantage of numerous economiesof scale. We are well on the way tolonger-term aims such as providing amore user-friendly service topractitioners and other key stake-holders. But I am under no illusionthat it will take some years morebefore we can say that the processof integration is complete.Nevertheless, as I have mentionedalready, very few would wish to goback to what we previously had.

Forum: What are the remaininghurdles for FSA, if any?

MF: Looking forward, perhaps thebiggest single hurdle we still have tosurmount is to get better publicunderstanding of what regulators canand can’t do. We tried to make clearfrom the outset that we couldn’t andshouldn’t promise a no-failureregime. But, while politicians and themedia applaud that in theory, theclosure of any financial firm – if it isfollowed by some loss orinconvenience to consumers – tendsto lead to criticism of the regulator.We expect to be criticised when thisis justified and very happy to havespotlights shone into the way wework and what we have done inparticular cases. (For example, therehave been 3 separate formalenquiries into the closure to newbusiness of one significant l ifeassurance company.) But, we stillhave to get across to people thesimple truth that the existence of theregulator does not take away all risk.

Forum: What important lessons couldbe drawn from the UK experience bycountries considering integratedfinancial supervision?


MF: We have never said that the UKmodel was one that other countriesshould follow. And we recognise thatthere are features of the UK (such asthe fact that most of the financialservice sector is concentrated inLondon) that has helped thecreation of the FSA. But I think themain lessons I would draw are: (a)that it requires a committed seniorexecutive who have a clear visionof what they are trying to achieveand the ability to get support for thatfrom their staff and from key outsidestakeholders; (b) that it mustn’tinvolve a “take-over” by one of theexisting regulators of the others butthe creation of a genuinely neworganisation; (c) there are no “quickfixes” and that it will take years toget all the potential benefits fromthe new organisation.

Forum: For countries like thePhilippines, whose financial system isregulated by separate authoritieseach responsible for a specific typeof institution, what critical areas mustbe looked into before adopting anintegrated approach to financialregulation?

MF: It is a fact that the regulators ofdifferent kinds of financial servicecompany tend to speak different“languages”. This is particularly clearif you contrast banking regulatorsand insurance regulators. When theycome together in one organisation,this can cause major confusion. Inour case, it led to the creation ofwhat is effectively a new language– we call it ARROW, which stands forAdvanced Risk RecognitionOperating Framework. This has givenus a common way of identifying riskswherever they arise in the financialsector, of prioritising them, allocatingresources and monitoring theresulting risk mitigation processes.

It would have helped our ownintegration if we had known moreabout each of the individualregulator’s methods of regulationbefore we came together. That –and mutual trust – are keynotes forsuccessful integration!

(Mr. Michael Foot graciously agreed tobe interviewed electronically for this issuethrough the kind assistance of Mr. NigelBromage, former official of the Bank ofEngland. - Ed’s Note)

Mr. Michael Foot is Managing Director,Deposit Takers and Markets Directorateat the Financial Services Authority (FSA),United Kingdom. He was appointed on 1June 1998.

Before the creation of the FSA, Mr. Footworked at the Bank of England. He joinedthe Bank of England in 1969 as an economist.He worked in the gilt-edged market (1981-83), the domestic money market (1983-85)and as Alternate Director for the UK at theIMF in Washington (1985-87). He was Headof Foreign Exchange Division (1988-90), andHead of European Division (1990-93). Mr.Foot was appointed Head of BankingSupervision Division in 1993, and becameDeputy Director, Supervision & Surveillancein July 1994. Mr. Foot was appointedExecutive Director effective 1 March 1996.

Mr. Foot was educated at Latymer UpperSchool, London, at Pembroke College,Cambridge (MA Economics), and at YaleUniversity, USA (MA). He is a Fellow of theChartered Institute of Bankers. He has writtena number of articles on monetary policy andmonetary history. He was awarded theCompanion of the British Empire (C.B.E.) forservices to financial regulation in the 2003New Year’s Honours List.

Mr. Foot, who was born in 1946, is marriedwith one son and two daughters. Forrecreation he enjoys choral singing andtennis.


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Strengthening deposit insurance systemthrough effective bank supervision

Banking remains one of the most supervised industries in the world due to its

critical role in the economy. Banking institutions provide primary sources of credit

for businesses to finance economic activities especially in developing countries. Banks also

act as agents in the payment and settlement system, facilitating financial transactions. The

ineffectiveness of banks in these roles can seriously disrupt flow of funds and result in losses,

thus impeding economic growth.Hence, bank regulation is critical tocheck bank’s fidelity to their fiduciaryobligations, thereby maintaining thestabil ity and soundness in thebanking system.

The liberalization of financialmarkets and advancements intechnology have changed bankingservices and practices, leading toincreased risk of failure.Liberalization has reduced barriers tocompetition, driving banks tocontinually develop products andservices more responsive to clientneeds, and to enhance and keep upwith best practices of industryleaders. However, the same marketforces may also lead to undesirableresults as competition drives banksinto innovating and developing newproducts with unclear attendantrisks. A growing concern inconglomerates is that of ownershipstructure of financial institutionsbecoming more inter-related. Theconnection of securities andinsurance firms to performance ofrelated banks is also manifested inthe blurring distinction of theirrespective product lines. There isnow a rise of hybrids and/orconvergence of products that usedto be associated with a particulartype of financial institution (e.g.mortgages for banking, annuities for

insurance and mutual funds forsecurities).

The risks are compounded bytechnological advancements thattransmit effects of adverse shocks atpotentially greater speed. These risksrequire close supervision tosafeguard against institutionalfailures arising from risks taken bybank officers/owners or marketfailures where many or large financialinstitutions fail, either throughmismanagement, fraud, poorbusiness judgment or severeeconomic stress.

Regulation is necessary for thebanking industry because of thefiduciary nature of the business, asdepositors entrust their funds tobanks. Since these depositors maynot have the capacity to monitorbanks to ensure safety of their funds,they rely largely on the supervisorsto perform this function on theirbehalf, and take corrective action

when warranted. Effective banksupervision thereby increases publicconfidence in banks, reduces theincentives of depositors to withdrawfunds and minimizes the likelihood ofbank failures.

Framework for banksupervision

The Bangko Sentral ng Pilipinas(BSP) supervises Philippine bankswith the aim of promoting andmaintaining a stable and efficientbanking and financial system that isglobally competitive, dynamic andresponsive to the demands of adeveloping economy. The BSP isauthorized to supervise and exerciseregulatory powers over theoperations not only of banks but alsoof finance companies and non-bankfinancial institutions performing

28 Strengthening deposit insurance system through effective bank supervision

Effective bank supervision therebyincreases public confidence in banks,

reduces the incentives of depositors towithdraw funds and minimizes the

likehood of bank failures.


quasi-banking functions1. Thisauthority is extended to subsidiariesand affiliates of banks and quasi-banks, including non-all iedenterprises controlled by banks.

The Monetary Board (MB)exercises the powers and functionsof the BSP. The MB issues rules andregulations it considers necessary forthe effective discharge ofresponsibilities of the BSP. In relationto bank supervision, it decides on thecourses of action to be taken onbanks which ranges from institutingcorrective and disciplinary measuresto closure and liquidation.

Cognizant of the integration ofproducts and services of securitiesand insurance firms with banks, BSPhas been working closely with thesupervisors of these institutions forthe strength of the entire financialsystem. The Securities and ExchangeCommission (SEC) is the maingovernment agency mandated toformulate policies on issuesconcerning the securities market. Italso supervises the securities marketcomprised of the stock exchange,clearing agencies, brokers,investment houses, financingcompanies and mutual funds. On theother hand, the InsuranceCommission (IC) supervises allinsurance companies that are notowned by government. Similar to thepowers of the BSP and the SEC, itformulates policies for the insuranceindustry.

Requirements of depositinsurance system

As a financial safety net player,it is the interest of Philippine DepositInsurance Corporation (PDIC) toprotect depositors from theconsequences associated with bank

failures and to sustain publicconfidence in the banking system byproviding a formal mechanism toresolve bank failures. It is essentialfor PDIC to monitor the condition ofits member banks to be able to assessand manage risks posed to theDeposit Insurance Fund (DIF). Thedeposit insurance scheme is oftenmisconstrued as the best defenseagainst bank failures. In reality, goodcorporate governance validated byeffective bank supervision keepsbank failures away.

PDIC relies heavily on the BSP’seffectiveness as supervisor ofmember banks. The reports receivedfrom banks are sourced mainly fromBSP, enhanced by informationderived from BSP reports ofexamination. In absence of authorityto either assess the bank’s conditionon-site or require information fromthe bank and its affi l iates andsubsidiaries, PDIC uses informationfrom BSP in its off-site analyses. BSPassesses bank performance andcondition through on-site inspectionof bank’s books and its r iskmanagement procedures, guardingagainst unsafe and unsoundpractices. The PDIC uses all theseavailable information on individualbank condition from the BSP2 andother available sources to assess therisk posed to the DIF. When risks are

significant, PDIC coordinates withBSP in trying to resolve the problem.

Given all these availableinformation, all member banks arerisk-rated by PDIC. Based on theseratings, PDIC determines theadequacy of the DIF. In some cases,problem banks that pose significantand imminent risk to the DIF becomesubject of BSP-PDIC resolution teams.

Although bank failures areinevitable, these are minimizedthrough prompt corrective actionstaken by the bank supervisor at thefirst signs of problems within the bank.With the timely information gatheredfrom both on-site examination andoff-site monitoring, BSP is alerted tochanges in the performance andcondition of banks allowing them toplan for appropriate intervention.

Mechanism for bank failureresolution

In cases of i l l iquidity, BSPprovides several windows to banksfor emergency assistance. But if theproblem is more serious like capitalinadequacy, BSP’s primary responsewould be to require the bank ownersto sign a memorandum ofunderstanding (MOU) to commit toa capital build-up plan within a


1 A company engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of depositsubstitutes for purpose of re-lending or purchasing of receivables and other obligations.

2 While PDIC works more closely with the BSP relative to the other agencies by virtue of its institutional focus, information and regulatory action fromboth SEC and IC can help improve the quality of BSP’s analyses of bank’s condition by its own regulation of non-bank financial institutions or certaintransactions that are nevertheless bank-related. In the case of SEC, it defines the rules regarding issuance of securities by all corporations,including banks. In particular, the SEC keeps a record of securities issued, and information pertaining to such securities that are made availablefor public inspection. It may also audit the financial statements, assets and other information of a firm applying for registration of its securitieswhenever it deems that the same is necessary to insure full disclosure and therefore protect the interest of the investors and the public in general.

PDIC supports the formation of amultilateral coordinating framework

for cross-sector consolidated risk-basedsupervision of all financial institutions

that will enhance the analysis of bankperformance and condition.


30 Strengthening deposit insurance system through effective bank supervision

specific period of time. The successof instituting a capital restorationplan is driven by the capability of thesupervisor to closely monitor andenforce MOU as agreed upon.

In cases of violations of bankingregulations, BSP sanctions erringbanks with measures that includefines, restrictions of bankingactivities, or withdrawal of accessto BSP’s credit facilities and evenimprisonment for the responsiblebank officers. BSP may also issuecease-and-desist orders in case ofunsafe-and-unsound bankingpractices.

Upon determination that adistressed bank is vital to thecommunity or essential inmaintaining financial stability, PDICcan help in the rehabilitation of adistressed bank upon favorableevaluation of a proposal. In suchcase, financial assistance (FA), whichmay come in the form of loan,deposit placement, purchase ofassets, or assumption of liabilities,may be extended to the distressedbank or its acquirer provided thatbank’s owners should equitablypartake in the cost of rehabilitation.The FA contains various conditionswhich may include infusion of freshcapital, share divestment,commitment to performancetargets, rectification of errors,change of management team,assignment of PDIC consultants andif necessary, nomination of membersof the board. When opting torehabilitate a bank, PDIC worksclosely with BSP to determine theextent and mode of FA. The amountof assistance granted to the bank isrelated to the extent of the financialproblem, but the cost to PDIC of suchassistance cannot be more than thecost of closing the bank.

As a final measure whenrehabil itation is unlikely anddepositors’ interest are seriouslyjeopardized, the MB may orderclosure of a bank automaticallyplacing it under receivership of thePDIC.

Based on findings on bank

condition, MB may order closure of adistressed bank. The grounds forclosure include (a) inability to payliabilities as they become due in theordinary course of business, (b) hasinsufficient realizable assets to meetliabilities, (c) cannot continue inbusiness without involving probablelosses to depositors or creditors, or(d) has willfully violated a cease anddesist order that has become final.When a bank is ordered closed, PDICtakes over and commencespayment of insured deposit claims assoon as records are verified andconsolidated. The capability of PDICto service claims of insureddepositors depends largely on thequality of the bank’s records forprocessing and reconciliation. Inmany cases in the past, records ofclosed banks were found inaccurateand inadequate seriously delayingclaims settlement.

As receiver, PDIC will likewisedetermine within 90 days whetherthe institution may be rehabilitatedto resume business with safety to itsdepositors, creditors and the generalpublic or whether it should beliquidated.

PDIC makes a determination thatthe bank should be liquidated whenthere is no apparent viable plan forrehabilitation. After notice of MB’sconcurrence to such determination,PDIC files a petition for assistance inthe liquidation of the affairs of thebank with the proper regional trialcourt (RTC). PDIC seeks the approvalof the court in the distribution of theassets to the creditors/claimants ofthe closed bank.

Directions in enhancingbank supervision

To fill in information gaps thatcan be gathered from existingsources, PDIC entered into amemorandum of agreement (MOA)with the BSP to share more recentfinancial and non-financial data of

banks, examination reports, periodicoutput reports and early warningindicators. Both also agree to shareinformation that would indicateperformance weaknesses ofindividual banks, as measured byspecified indicators, as soon as suchinformation is available. Discussionsare also underway for the draft of asecond MOA that involves provisionson additional information coverageand formation of specific jointcommittees for problem banksrequiring special supervisoryattention.

PDIC supports the formation of amultilateral coordinating frameworkfor cross-sector consolidated risk-based supervision of all financialinstitutions that will enhance theanalysis of bank performance andcondition. The BSP, SEC, IC and PDICwill comprise the Financial SectorForum (FSF), a body that wouldoperate on the basis of consensusand moral suasion among memberagencies. The FSF will facilitateinformation exchange amongagencies subject to provisions ofexisting charters and laws, andcoordination of regulatory activitiesand policies to address gaps in thesupervisory oversight process. Asenvisioned, the FSF’s activities willbe principally the identification andresolution of systemic issues,harmonization of cross-sectorsupervision methodology, regulatorypolicy coordination, reporting,information exchange anddissemination, and consumerprotection and education. The MOAis set for execution by the memberagencies in July 2004.

PDIC has also proposed therestoration of its authority toexamine member banks, for thepurpose of validating findings onproblem banks as basis forformulating necessary correctiveactions. Such authority will enablePDIC to minimize the disruptiveeffects of bank failures andeffectively manage its risk exposure.This proposal is one of the


amendments in the PDIC charterrecently ratified by both Houses ofCongress.

Conclusion

Recognizing the emergingsynergies among banks and otherfinancial institutions, Philippine banksupervision is evolving to improvethe nature and speed of its responseto address the twin necessities ofstrengthening banks and promotingfinancial stability. PDIC is constantlyimproving its effectiveness despitehindrances to managementof insurance risks for thegreater protection of depositors.

As PDIC’s authority and resourcesare limited by existing laws, thedeposit insurance system isenhanced through heightenedcooperation and coordination withthe supervisors of financialinstitutions.

References

Abrams, Richard K. and Michael W. Taylor.2000. “Issues in the Unification of FinancialSector Supervision, “ IMF Working Paper.

Crockett, Andrew. 2003. “InternationalStandard Setting in Financial Supervision,”BIS lecture, Cass Business School, CityUniversity, London.

Milo, Melanie. 2002. “Financial ServicesIntegration and Consolidated Supervision:Some Issues for the Phil ippines,” PIDSDiscussion Paper Series No. 2002-22.

Nolle, Daniel E. 2003. “The Structure, Scope,and Independence of Bank Supervision: AnInternational Comparison,” QuarterlyJournal, Volume 22(1), US Office of theComptroller of the Currency.

* Written by Jose G. Villaret, Jr., Officer-in-Charge/Assistant DepartmentManager and Anna Liese L. Roque,Research Specialist, ResearchDepartment.



32 Analysis of domestic deposits

Analysis of domestic deposits

Overview

Deposits in the Philippine banking industry continued to grow although at a slower

pace as the economy exhibited a tapered growth in nominal terms in 2003. Total

domestic deposits reached P2.46 trillion as of December 2003 up by 5.0% or P116.1 billion from

P2.34 trillion in December 2002.

Growth in deposits was evidentin all major groups of accountsaccording to size of depositbalances (see Table 3 in page 33).This showed a favorable trend froma developmental perspectiveindicating increasing savings acrossall income groups. However, the bulkof volume change in depositamount came from accounts withlarge balances, or from the bigdepositors i.e., institutional/corporate and affluent individuals.Such denoted sustained preferenceof big depositors to maintain theirlevels of liquidity.

Across bank types, depositexpansion was widespread asconsolidated deposits ofcommercial, thrift and rural banks, allposted growth. Deposit growth washighest in thrift banks at 14.0%; asignificant improvement comparedto the 7.7% growth posted in 2002.The favorable deposit trend amongthrift banks could be attributed tothe growth of small and mediumsized industries, which enjoyedsubstantial support from thegovernment during the year.Meanwhile, deposit growth in ruralbanks at 13.7% was likely boosted bythe improved rural incomes as theagriculture sector performed well in2003. Among commercial banks,deposits went up by 4.0%, with a

large portion of the incrementtraced to higher dollar deposits ofresidents and non-residents.

Commercial banks

Commercial banks continued todominate the banking industry in

terms of resources and banking units.As of December 2003, domesticdeposits in commercial banksreached P2.20 trillion up by 4.0% fromP2.11 tri l l ion in 2002. Expandedcommercial banks and specializedgovernment banks recorded lowergrowth compared to previous year’s.Non-expanded commercial banksbounced back from a contraction of

Chart 1. Annual Growth Rates of Gross Domestic Product (GDP)at Current Prices and Deposits in Philippine Banks

14.0%

1999

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%2000 2001 2002 2003

Gro

wth

Rat

e

11.7%

12.7%

9.5% 9.5%

8.4%9.2% 9.2%

5.7%

6.9%

5.0%

GDP

Total Deposits


15.5% in 2002 toa growth of 11.6%in 2003. Onthe other hand,c o n s o l i d a t e ddeposits in foreignbanks continuedto drop by 1.4% in2003.

Around two-thirds of theincrement indeposits incommercial bankswas attributed togrowth in foreign currencydeposits (FCDs), which grewby 4.0% in dollar terms, or 8.6%in peso terms. This largelysprang from higherrevaluation of foreigncurrency deposits as thepeso-dollar exchange rateadjusted from P53.3:$1 in2002 to P55.5:$1 in 2003.Foreign currency depositsalso increased in terms ofvolume stemming largelyfrom higher OFWremittances.

Among peso deposits,time deposits led the growthas it surged by 37.1%compared to the 12.4% in2002. The increase wasaccompanied by anexpansion of 3.9% in numberof deposit accounts. On theother hand, savings depositscontracted in terms of


Table 1. Distribution and Deposit Growth by Commercial Bank Type

Bank Type

Commercial Banks (KBs)Expanded KBsNon-Expanded KBsForeign BanksSpecialized Gov’t Banks

Amount in Billion Pesos

2001

Percentage Share toTotal Growth Rate

1,980.61,307.5

185.6300.3187.3

2002

2,112.01,444.6

156.8296.6214.1

2003

2,196.51,506.0

175.0292.6222.9

2001 2002 2003

100%66.0%

9.4%15.2%

9.5%

100%68.4%

7.4%14.0%10.1%

100%68.6%

8.0%13.3%10.1%

2001-2002 2002-2003

6.6%10.5%

-15.5%-1.2%14.3%

4.0%4.2%

11.6%-1.4%4.1%

Table 2. Contribution of Foreign Currency Deposits (FCDs) to Increase in Total Deposits inCommercial Banks

LevelsTotal Deposits (in PHP)FCDs (in PHP)FCDs (in USD)

IncrementTotal Deposits (in PHP)FCDs (in PHP)

Due to revaluation a/

Due to change in level b/

Shares to Total Deposit IncrementFCDs (in PHP)

Due to revaluation a/

Due to change in level b/

Amounts in Million Pesos 2001

1,980,642656,825

12,707

91,358(17,170)

22,976(40,146)

-18.8%25.1%

-43.9%

2002

2,112,040665,096

12,489

131,3988,271

19,874(11,603)

6.3%15.1%-8.8%

2003

2,196,455722,201

12,992

84,41557,10529,12527,980

67.6%34.5%33.1%

a/ Computed as [Previous year’s deposits in USD x (current year’s exchange rate - previous year’sexchange rate)]

b/ Computed as [Current year’s exchange rate x (current year’s deposits in USD - previous year’s depositsin USD)]

Table 3. Distribution and Deposit Growth in Commercial Banks by Account Type

Deposit Types

TotalDemandSavingsTimeForeign Currency Deposits


2001

Share to Total Growth Rate

1,980.6207.1

1,033.882.9

656.8

2002

2,112.0262.7

1,091.093.2

665.1

2003

2,196.5284.0

1,062.5127.7722.2

2001 2002 2003

100%10.5%52.2%

4.2%33.2%

100%12.4%51.7%

4.4%31.5%

100%12.9%48.4%

5.8%32.9%

2001-2002 2002-2003

6.6%26.9%

5.5%12.4%

1.3%

4.0%8.1%

-2.6%37.1%

8.6%


34 Analysis of domestic deposits

Rural banks

Deposit in rural banks increasedby 13.7% as total amounts climbedfrom P54.7 billion in 2002 to P62.2bil l ion in 2003. The favorableperformance of the agriculturesector appeared to have liftedconsolidated deposits in rural banks.However, deposit growth was notbroad-based. Growth in depositswas mostly limited to the biggestrural banks with asset sizes greaterthan P160 million and those rangingfrom P40 to P80 million. The closureof 10 rural banks in 2003 contributedto the decline in deposits in ruralbank groups with assets less than P40million and between P80 million toP160 million.

Deposit growth in rural bankswas boosted by positive trends in allaccount types both in terms ofaccounts and amounts. Time

amount and number of accounts,which hinted at the probability thatsome savings accounts wereconsolidated with or converted totime deposits to earn relativelyhigher interest. The number ofdemand deposit accounts alsodeclined by 1.8% but increased interms of amount by 8.1%.

Thrift banks

From 2002 to 2003, thrift banksregistered the highest depositgrowth among bank types at 14.0%or an increase from P172.8 billion toP197.0 billion. Deposits in PrivateDevelopment Banks (PDBs) andSavings and Loan Associations(SLAs) reverted to positive growth,while Savings and Mortgage Banks(SMBs) and Micro-Finance Banks bothsustained increasing deposit levels.

Time deposits led the growthamong deposit types at 36.9%, whichwas partly driven by a correspondingincrease in number of time depositaccounts specifically those withbalances over P200,000. Despitereduction in number of depositaccounts, savings deposits sti l lcomprised the bulk of total depositsand recorded the most notableimprovement in deposit growth interms of amount at 10.0% in 2003 from1.3% in the past year. The reductionin number of savings accounts wastraced to accounts with relativelysmall balances, which was similar tothe trend in commercial banks, andmight have been consolidated withor converted to time deposits toearn higher interest. Growth ofdemand deposits decelerated at22.6% compared to the 37.4% postedin 2002. Foreign currency depositsalso registered a 20.0% growth duringthe year.

Table 5. Distribution and Deposit Growth in Thrift Banks by Account Type

Deposit Types

TotalDemandSavingsTimeForeign Currency Deposits


2001


160.58.9

126.68.6

16.4

2002

172.812.2

128.312.419.9

2003

197.015.0

141.117.023.8

2001 2002 2003

100%5.5%

78.9%5.4%

10.2%

100%7.1%

74.2%7.2%

11.5%

100%7.6%

71.7%8.6%

12.1%

2001-2002 2002-2003

7.7%37.4%

1.3%44.0%21.4%

14.0%22.6%10.0%36.9%20.0%

Table 4. Distribution and Deposit Growth by Thrift Bank Type

Bank Type

Thrift BanksSavings & Mortgage BanksPrivate Development BanksSavings & Loan AssociationsMicro-Finance Oriented Banks a/


2001


160.5118.8

33.58.20.0

2002

172.8136.1

28.78.00.0

2003

197.0151.7

36.48.80.0

2001 2002 2003

100%74.0%20.9%

5.1%0.01%

100%78.8%16.6%

4.6%0.02%

100%77.0%18.5%

4.5%0.02%

2001-2002 2002-2003

7.7%14.6%

-14.4%-2.3%

164.8%

14.0%11.5%27.1%10.1%44.5%

a/ Deposit amounts are less than one hundred million pesos (P100M)


1 Forecast based on historical trend of deposits.2 Government forecasts the 91-day T-bill rate in 2004 to range between 7.5% to 8.5% which is higher compared to the actual rate recorded in 2003

at 6.0%, while interest rates on lending and deposits are also expected to rise.3 Based on official forecast, inflation rate is expected to hover from 4.0% to 5.0% in 2004. This is higher compared to the actual inflation rate recorded

in 2003 at 3.1%.

Table 6. Distribution and Deposit Growth in Rural Bank Group

ClassificationPer Asset Size

in Million Pesos

Rural Banks< P20> P20 to P40> P40 to P80> P80 to P160> P160


2001


46.91.22.56.59.9

26.8

2002

54.71.02.76.3

11.733.0

2003

62.20.82.56.9

11.140.9

2001 2002 2003

100%2.6%5.4%

13.9%21.1%57.1%

100%1.9%4.9%

11.6%21.3%60.4%

100%1.3%4.1%

11.1%17.8%65.7%

2001-2002 2002-2003

16.6%-15.5%

4.6%-3.0%17.7%23.1%

13.7%-19.8%

-4.6%9.1%

-5.0%23.7%

Table 7. Distribution and Deposit Growth in Rural Banks by Account Type

Deposit Types

TotalDemandSavingsTime


2001


47.10.8

29.217.1

2002

54.71.0

36.417.3

2003

62.21.3

42.418.4

2001 2002 2003

100%1.7%

62.0%36.2%

100%1.9%

66.5%31.6%

100%2.2%

68.2%29.6%

2001-2002 2002-2003

16.3%27.9%24.7%

1.4%

13.7%29.9%16.6%

6.5%


deposits rose by 6.5% compared tothe growth of 1.4% recorded in theprevious year specifically amongaccounts with larger balances.Savings deposits grew across alldeposit ranges, both in terms ofaccounts and amounts, hencerecorded a 16.6% growth. Demanddeposits registered the highestgrowth rate in terms of amount andaccounts among other deposit typesat 29.9% and 14.6%, respectively,which may have arisen from a lowerbase.

Prospects

Based on PDIC estimates,deposits in member banks areexpected to grow by 7% in 20041

given prevailing economic trendsand policies, and barring globalshocks. As banks aim to expandtheir deposit base, competition forfunds shall continue exertingpressure to raise interest rates2 ondeposits with expectations of higherinflation rate3 thereby keepingdeposits attractive relative to other

financial saving alternatives.Deposits may also be driven up byincreased confidence in bankinginstitutions upon enactment of thePDIC bil l seeking to raise themaximum deposit insurancecoverage from P100,000 to P250,000per depositor.

* Written by Christopher G. Suguitan,Supervising Research Specialist andMary Ann M. Santillan, ResearchSpecialist, Research Department.

IIIIIndustryndustryndustryndustryndustry SSSSScancancancancan

36 Industry Scan

Overview

In our pursuit to provide followers of banking - from apprentices to seasoned

analysts - with banking and deposit information derived from the performance of our

mandates, to the extent that same can be legitimately disclosed to the public, we present in

the following pages our bank statistics as of December 31, 2003. The statistics offer an overview

of the current banking industry profileand performance from whichconclusions may be drawn. This canalso serve as springboard for furtherresearch. This issue contains selectedbalance sheet and incomestatement accounts and keyperformance ratios for the PhilippineBanking System, further broken downinto Commercial, Thrift and RuralBanks. Current data summarized inbar graphs showing various capital,asset quality, earnings and liquidityindicators are also included.

Aside from the financial data,statistics on bank deposits,particularly as to size of domesticdeposit accounts are also provided.The same are disaggregated intotype of deposit (e.g., demand,savings, time and foreign currencydeposits), amount (clusters rangingfrom below P15,000 to over P200,000)and geographic distribution amongthe country’s 17 regions. The tablesand figures presented are as follows:

A. Tables1. Statistics of the Philippine Banking

System (PBS)A. Commercial Banks (KB)

a.1 Expanded KBs (EKB)a.2 Non-Expanded KBs (NEKB)a.3 Foreign Banksa.4 Specialized Government

Banks (SGB)B. Thrift Banks (TB)

b.1 Savings & Mortgage Banks(SMB)

b.2 Private DevelopmentBanks (PDB)

b.3 Savings & LoanAssociation (SLA)

b.4 Micro Finance OrientedBanks (MFO)

C. Rural Banks (RB)c.1 Cooperative Banksc.2 Regular & MFOs

2. Rural Bank Statistics by Region3. Domestic Deposit by Size of

AccountsA. Philippine Banking SystemB. Commercial BanksC. Thrift BanksD. Rural Banks

4. Regional Distribution of DomesticDepositsA. Philippine Banking System

B. Commercial BanksC. Thrift BanksD. Rural Banks

5. Percentage Share of DomesticDeposits Per Region

B. Figures1. Selected Financial Ratios of the

Philippine Banking System2. Growth in Domestic Deposit

Amounts in line graph for PBS, KBs,TBs and RBs from Dec-end 1995 toDec-end 2003

3. Growth in Domestic DepositAccounts in line graph for PBS,KBs, TBs and RBs from Dec-end1995 to Dec-end 2003

4. Year-on-Year Deposit Movementwith Selected Variables Related toits Growth from Dec-end 1998 toDec-end 2003A. Philippine Banking SystemB. Commercial BanksC. Thrift BanksD. Rural Banks

C. Glossary of Terms

CaveatThe material provided herewith presents data obtained from financial reports submitted periodically by banks in

compliance with existing regulations of the Philippine Deposit Insurance Corporation (PDIC). Submitted reports whichare subjected to an internal process of system validating financial disclosures, are the responsibility of banks’ Boardand management.

In cases of non-submission of a report by a bank for the current period, the bank’s most recent available report ofthe same type is used in the generation of industry statistics (please see notes on unsubmitted reports on page 51.)As a result of this methodology, there may be discrepancies when comparing the same account entry against differentstatistics generated by the PDIC sourced from different types of reports. Certain discrepancies with statistics of otherregulatory agencies mainly attributed to timing differences in data generation and frequency in accessing datasources may as well arise. Other details and/or explanation provided in the material should also be noted as thesemay contain important information on how the figures were derived or whether there were any procedural refinementsapplied to the data.

For further queries and information, please contact the Officer-in-Charge of the Bank Performance MonitoringDepartment at telephone numbers (632) 841-4206, 841-4208 and 841-4000 locals 4211 to 4213, by fax at (632) 812-4116and 813-3815, by e-mail at [email protected] or write to PDIC 2228 Chino Roces Ave., Makati City 1231, Philippines.Other relevant banking industry data may also be accessed on-line at www.pdic.gov.ph lodged under Bank Statistics.

Table 1Statistics of the Philippine Banking System (PBS)

As of December 31, 2003 (Amounts in Million Pesos)

Source: Consolidated Statement of Condition and Consolidated Statement of Income & Expenses.Note: SGB refers to Specialized Gov’t Banks (Land Bank of the Philippines, Development Bank of the Philippines and Al-Amanah Islamic Investment Bank

which are considered Commercial Banks.)Zero (0) means value is less than five hundred thousand (500T)


AccountsCOMMERCIAL BANKS (KB) THRIFT BANKS (TB) RURAL BANKS (RB) GRAND

TOTALEKB Non -EKB

Foreign SGB Total SMB PDB SLA MFO Total Coops Regular& MFO

Total

STATEMENT OF CONDITION

Quick AssetsGross LoansInterest Earning AssetsRisk AssetsRisk Weighted AssetsNon-Performing LoansROPOANon-Performing AssetsTotal Restructured LoansCurrent Restructured LoansNon-Performing Restructured LoansGross Problematic AssetLoan Loss ProvisionTotal AllowanceTOTAL ASSETSTotal DepositsTotal BorrowingsTOTAL LIABILITIESCapital for Capital to Risk Asset RatioQualifying CapitalCapital for NPL, NPA & GPA to Capital RatioBOOKED CAPITAL

INCOME AND EXPENSESInterest IncomeInterest ExpenseNet Interest IncomeOther Operating IncomeOther Operating ExpenseProvisions for Loan LossesNet Operating IncomeNon-Operating IncomeNet Income Before TaxNet Income After Tax

RATIOS (In Percentage)Capital to Risk AssetsRisk-Based Capital Adequacy RatioNon-Performing Loans to CapitalNon-Performing Assets to CapitalGross Problematic Assets to CapitalNon-Performing Loans to Gross LoansNon-Performing Assets to Total Assets+Total Allow.Loan Loss Provision to Non-Performing LoansGross Loans to Total Assets+Total Allow.Quick Assets to Total AssetsReturn on EquityReturn on AssetsNet Interest MarginOperating Expense to Operating IncomeOperating Expense excl. Provisions to Operating IncomeNon-Operating Income to Net Income Before TaxQuick Assets to Total DepositsGross Loans to Total DepositsNo. of PDIC Member Banks

648,2371,129,8341,544,5121,725,3441,184,763193,167145,783342,32492,18352,482

39,700

398,70294,756

105,1142,129,8521,519,217168,9391,853,774200,194

173,726308,927

276,079

100,78057,26743,51243,58059,99412,37114,72816,28831,01624,687

11.614.7

62.5

110.8

129.1

17.1

15.3

49.1

50.6

30.4

9.11.22.9

83.1

68.9

52.5

42.7

74.4

12

87,342123,408180,982204,602152,664

23,29624,07447,416

9,4396,421

3,019

54,80912,89913,912

259,362175,020

35,801225,754

26,972

27,44641,119

33,608

15,2198,4146,8054,3827,7191,5081,960

1882,1481,940

13.218.0

56.7

115.3

133.3

18.9

17.4

55.4

45.2

33.7

5.90.84.0

82.5

69.0

8.8

49.9

70.5

8

189,649293,746462,858399,590294,219

15,8922,116

18,1585,1523,081

2,072

21,30016,00916,454

494,839292,571

23,374419,31171,082

73,22187,787

75,528

31,34913,44617,90311,84516,793

3,4529,503

98710,490

8,152

17.824.9

18.1

20.7

24.3

5.4

3.6

100.7

57.5

38.3

11.01.73.9

68.1

56.4

9.4

64.8

100.4

19

167,818219,243352,760265,563209,220

32,84821,15254,06727,52917,864

9,664

72,54023,64225,817

415,524223,026123,246374,563

37,768

39,13163,751

40,962

26,5788,418

18,1605,017

15,0584,5383,581

4854,0663,872

14.218.7

51.5

84.8

113.8

15.0

12.3

72.0

49.7

40.4

9.60.95.2

84.6

65.0

11.9

75.2

98.3

3

1,093,0461,766,2312,541,1122,595,0981,840,865

265,203193,125461,965134,303

79,848

54,455

547,350147,307161,297

3,299,5772,209,834

351,3602,873,401

336,017

313,524501,585

426,176

173,92687,54686,38064,82499,56321,86929,77217,94847,72038,652

12.917.0

52.9

92.1

109.1

15.0

13.3

55.5

51.0

33.1

9.31.23.5

80.3

65.8

37.6

49.5

79.9

42

50,151122,694155,298162,206126,834

13,52515,53929,370

1,9411,601

340

31,3535,4896,297

200,464151,690

8,357169,090

26,115

27,99533,018

31,374

15,7446,7608,9842,723

10,1701,438

98352450203

16.122.1

41.0

89.0

95.0

11.0

14.2

40.6

59.3

25.0

0.60.16.0

99.2

86.9

78.1

33.1

80.9

31

11,55231,22535,49247,87541,696

5,6728,206

13,9621,8701,454

416

17,4722,5172,781

59,01736,41512,08752,250

4,547

4,3287,404

6,768

3,8062,6951,111

7782,406

69-585340

-246-326

9.510.4

76.6

188.6

236.0

18.2

22.6

44.4

50.5

19.6

-4.7-0.63.4

131.0

127.4

-138.2

31.7

85.7

29

4,6325,2668,564

10,41910,059

8842,3273,290

9149

43

3,441351389

14,5688,8131,985

11,3953,057

2,7523,457

3,173

992527466247795

23-105

65-40-73

29.327.4

25.6

95.2

99.5

16.8

22.0

39.7

35.2

31.8

-2.3-0.55.5

114.7

111.6

-165.2

52.6

59.8

30

65151187175169

160

16--

-

161212

2604859

114140

142153

147

704

662577113032

80.383.9

10.7

10.8

10.8

10.8

6.0

74.9

55.4

25.1

1.20.8

40.496.6

84.6

5.9

136.2

315.3

2

66,401159,335199,541220,675178,758

20,09726,07246,639

3,9023,104

799

52,2828,3699,479

274,310196,965

22,488232,848

33,858

35,21644,032

41,462

20,6139,986

10,6273,772

13,4471,541

-589757168-194

15.319.7

45.6

105.9

118.7

12.6

16.4

41.6

56.1

24.2

-0.5-0.15.5

104.1

93.4

450.2

33.7

80.9

92

1,0304,1804,4385,1365,136

499244743124111

14

856225229

5,6613,2801,1214,719

912

9121,159

943

692356336299504

1611416

130129

17.817.8

43.1

64.1

73.8

11.9

12.6

45.0

71.0

18.2

14.52.37.9

82.1

79.5

12.1

31.4

127.4

44

21,27351,85462,02574,14274,142

6,1467,153

13,299658495

163

13,8092,5152,708

84,09358,950

7,00970,69113,086

13,08615,827

13,402

9,3993,8275,5712,4416,654

1641,194

3981,5931,351

17.617.6

38.8

84.0

87.3

11.9

15.3

40.9

59.7

25.3

10.51.79.6

85.1

83.0

25.0

36.1

88.0

719

22,30356,03466,46379,27879,278

6,6467,396

14,042782606

176

14,6652,7392,937

89,75462,230

8,12975,41013,998

13,99816,986

14,345

10,0904,1835,9072,7397,158

1801,308

4141,7221,480

17.717.7

39.1

82.7

86.3

11.9

15.1

41.2

60.5

24.8

10.81.79.5

84.9

82.8

24.0

35.8

90.0

763

1,181,7501,981,6012,807,1162,895,0522,098,901

291,946226,593522,646138,988

83,557

55,430

614,297158,416173,713

3,663,6412,469,029

381,9783,181,659

383,873

362,739562,602

481,982

204,629101,715102,914

71,336120,169

23,59030,49119,11949,61039,938

13.317.3

51.9

92.9

109.2

14.7

13.6

54.3

51.6

32.3

8.41.13.8

82.5

69.0

38.5

47.9

80.3

897

38 Industry Scan

Table 2Rural Bank Statistics by RegionAs of December 31, 2003 (Amounts in Million Pesos)

Source: Consolidated Statement of Condition and Consolidated Statement of Income & Expenses.Zero (0) means value is less than five hundred thousand (500T)

AccountsNCR

STATEMENT OF CONDITION

Quick AssetsGross LoansInterest Earning AssetsRisk AssetsNon-Performing LoansROPOANon-Performing AssetsTotal Restructured LoansCurrent Restructured LoansNon-Performing Restructured LoansGross Problematic AssetLoan Loss ProvisionTotal AllowanceTOTAL ASSETSTotal DepositsTotal BorrowingsTOTAL LIABILITIESCapital for Capital to Risk Asset RatioCapital for NPL, NPA & GPA to Capital RatioBOOKED CAPITAL

INCOME AND EXPENSESInterest IncomeInterest ExpenseNet Interest IncomeOther Operating IncomeOther Operating ExpenseProvision for Loan LossesNet Operating IncomeNon-Operating IncomeNet Income Before TaxNet Income After Tax

RATIOS (In Percentage)Capital to Risk AssetsNon-Performing Loans to CapitalNon-Performing Assets to CapitalGross Problematic Assets to CapitalNon-Performing Loans to Gross LoansNon-Performing Assets to Total Assets+Total Allow.Loan Loss Provision to Non-Performing LoansGross Loans to Total Assets+Total AllowanceQuick Assets to Total AssetsReturn on EquityReturn on AssetsNet Interest MarginOperating Expense to Operating IncomeOperating Expense excl. Provisions to Operating IncomeNon-Operating Income to Net Income Before TaxQuick Assets to Total DepositsGross Loans to Total Deposits

No. of PDIC Member Banks

1,6404,8955,9196,830

159567726155119

36

845120126

7,7565,918

3396,904

819

947

852

871459412170559

1113748766

12.016.8

76.6

89.2

3.3

9.2

75.1

62.1

21.1

7.91.08.0

97.8

95.9

85.2

27.7

82.7

27

Regions1 2 3 4-A 4-B 5 6 7 8 9 10 11 12 CAR ARMM CARAGA

1,5984,7605,1956,342

762510

1,2724437

7

1,309225241

7,0975,329

4586,209

881

1,126

889

675320355209519

440195954

13.967.7

113.0

116.2

16.0

17.3

29.6

64.9

22.5

6.30.87.2

92.9

92.1

31.9

30.0

89.3

68

9112,9173,1354,034

5014099114837

11

948166180

4,4352,516

8623,754

680

861

682

529242287200407

1070219174

16.958.3

105.8

110.1

17.2

19.7

33.2

63.2

20.5

11.21.79.6

85.6

83.5

22.8

36.2

115.9

33

3,5799,493

11,28313,590

1,0301,3272,356

11382

31

2,440352374

15,19710,302

1,71712,753

2,408

2,792

2,444

1,558671888439

1,07022

23574

309290

17.736.9

84.4

87.4

10.8

15.1

34.2

61.0

23.6

12.42.08.4

82.3

80.6

23.9

34.7

92.1

103

6,19311,73514,91418,859

1,7432,9374,681

6942

26

4,729586624

21,68816,504

1,04318,405

3,176

3,807

3,283

2,099969

1,130560

1,49030

170133303271

16.845.8

123.0

124.2

14.9

21.0

33.6

52.6

28.6

8.71.27.7

89.9

88.2

43.8

37.5

71.1

144

6591,2941,5751,851

187112299

43

1

3037881

2,0841,433

1461,681

401

482

403

245103142

59160

437

54240

21.738.9

62.0

62.7

14.5

13.8

41.7

59.8

31.6

10.32.09.4

81.5

79.6

11.9

45.9

90.3

27

5643,3183,3613,985

295246541

9995

4

638146152

4,2952,916

6183,732

552

709

563

504287217

98287

1414

61918

13.841.6

76.3

90.1

8.9

12.2

49.6

74.6

13.1

3.30.47.0

95.7

91.2

29.4

19.3

113.8

51

8402,9142,9773,507

428154582

3322

11

608204214

3,9352,751

3703,368

547

769

567

470194276137366

1136

64237

15.655.7

75.7

79.1

14.7

14.0

47.7

70.2

21.3

6.81.09.9

91.3

88.6

14.8

30.5

105.9

77

1,7643,0384,0814,796

410335745

207

13

752212234

5,5404,216

2284,709

809

1,049

831

629277353141448

639246346

16.939.1

71.0

71.7

13.5

12.9

51.7

52.6

31.8

5.80.99.8

92.1

90.8

38.3

41.8

72.1

57

439890

1,1391,174

8922

1124342

1

1537578

1,359867168

1,106249

329

253

16354

10937

1133

301

3127

21.227.2

34.0

46.7

10.1

7.8

83.5

62.0

32.3

10.92.2

10.579.6

77.3

3.0

50.6

102.6

27

266967

1,1011,168

593291

20

1

924043

1,284657241

1,004279

323

280

16448

11645

1252

351

3632

23.918.4

28.3

28.4

6.1

6.9

68.0

72.9

20.7

12.02.7

11.678.5

77.5

4.0

40.5

147.3

16

1,2323,0583,6194,143

373281654

4937

13

691226257

4,6592,050

8423,1891,415

1,672

1,470

690169522164487

17181

20201159

34.122.3

39.1

41.4

12.2

13.3

60.7

62.2

26.5

11.13.5

14.673.5

71.0

9.8

60.1

149.1

47

1,2132,0332,8853,096

94129224

5945

14

2698796

3,6972,623

2143,154

522

619

542

481100381146349

16162

11173135

16.815.3

36.1

43.4

4.6

5.9

92.4

53.6

32.8

25.13.9

14.269.3

66.3

6.6

46.2

77.5

22

4091,4561,6181,859

166129295

1212

1

3086977

2,0751,256

2541,664

401

481

412

28672

21488

2284

70138362

21.634.6

61.4

64.2

11.4

13.7

41.5

67.7

19.7

16.03.3

14.976.8

75.3

16.1

32.6

116.0

22

18899699

314--

-

466

11046217535

40

35

173

158

1139-

99

35.18.2

9.5

9.5

3.7

3.3

169.9

76.5

15.9

28.19.4

18.860.8

47.5

0.00

38.1

192.0

4

GRANDTOTAL

4712,2092,2962,612

215105320

2721

6

3419095

2,9471,711

5292,415

518

615

532

542170371183413

19123

5128120

19.834.9

52.0

55.3

9.7

10.5

42.0

72.6

16.0

25.74.4

17.577.8

74.4

4.2

27.6

129.1

19

22,30356,03466,46379,278

6,6467,396

14,042782606

176

14,6652,7392,937

89,75462,230

8,12975,41013,998

16,986

14,345

10,0904,1835,9072,7397,158

1801,308

4141,7221,480

17.739.1

82.7

86.3

11.9

15.1

41.2

60.5

24.8

10.81.79.5

84.9

82.8

24.0

35.8

90.0

763

508968

1,2691,333

128102230

66

0

2355659

1,5951,134

811,287

307

366

307

16645

12057

1284

451

4542

23.035.0

62.8

64.4

13.2

13.9

43.3

58.5

31.8

14.22.8

10.274.7

72.5

1.3

44.8

85.4

19

ERRATUM: Table 2 on Rural Banks Statistics by Region, page 22 under Industry Scan Section of Vol. 1. (December 2003),No. 1 should have read “Amounts in Billion Pesos” instead of “Amounts in Million Pesos”.

Figure 1Selected Financial Ratios of the Philippine Banking System (in %)

(as of December 31, 2003)


110

80

50

20

-10NPL toGrossLoans

LLP to NPL

NPA toTotal

Assets +Total

Allow.

Tot.Allow to

NPA

QuickAssetRatio

Returnon

Equity

Returnon

Assets

NetInterestMargin

Oper.Efficiency

Ratio

Oper.Efficiency

w/oProv

NPL toCapital

NPA toCapital

PBS

KB

TB

RB

14.73

15.02

12.61

11.86

54.26

55.54

41.64

41.22

13.62

13.35

16.43

15.15

33.24

34.92

20.32

20.92

47.86

49.46

33.71

35.84

8.44

9.26

-0.46

10.78

1.12

1.20

-0.07

1.73

3.78

3.50

5.54

9.45

82.50

80.31

104.09

84.87

68.96

65.85

93.39

82.79

51.89

52.87

45.64

39.12

92.90

92.10

105.92

82.67

Source: Consolidated Statement of Condition and Consolidated Statement of Income & Expenses.

40 Industry Scan

Table 3Domestic Deposit Liabilities by Size of AccountAs of December 31, 2003(Amounts in Million Pesos)

Source : Consolidated Report on Deposit Liabilities by Size of Account.Note: Domestic deposits excludes deposits in overseas branches of Philippine banks.

A. PHILIPPINE BANKING SYSTEM

B. COMMERCIAL BANKS

P 15,000 & Below

P 15,000.01 - P 40,000

P 40,000.01 - P 60,000

P 60,000.01 - P 80,000

P 80,000.01 - P 100,000

P 100,000.01 - P 125,000

P 125,000.01 - P 150,000

P 150,000.01 - P 200,000

Over P 200,000

Total

DEPOSIT SIZE

13,310,273

1,577,345

650,456

367,054

495,226

368,206

187,919

234,906

1,183,808

18,375,193

36,721

39,819

32,144

25,320

45,103

40,561

25,808

40,667

1,910,312

2,196,455

981,493

182,133

68,744

44,582

32,163

32,055

22,723

32,561

154,946

1,551,400

3,851

4,613

3,394

3,095

2,882

3,582

3,112

5,644

253,852

284,024

12,057,596

1,248,820

435,154

244,628

181,868

255,421

106,278

144,123

633,089

15,306,977

30,710

30,860

21,128

16,785

16,359

27,731

14,463

24,664

879,786

1,062,487

42,170

37,001

69,687

16,092

94,831

13,039

7,303

13,009

79,477

372,609

299

949

3,584

1,108

9,353

1,437

1,022

2,422

107,569

127,743

229,014

109,391

76,871

61,752

186,364

67,691

51,615

45,213

316,296

1,144,207

1,860

3,398

4,038

4,333

16,509

7,810

7,212

7,936

669,105

722,201

TOTAL DEPOSITSDEMAND/

NOW DEPOSITS SAVINGS DEPOSITS TIME DEPOSITS FCDs

Account Amount Account Amount Account Amount Account Amount Account Amount% to TotalAccount

72.4%

8.6%

3.5%

2.0%

2.7%

2.0%

1.0%

1.3%

6.4%

100.0%

1.7%

1.8%

1.5%

1.2%

2.1%

1.8%

1.2%

1.9%

87.0%

100.0%

% to TotalAmount

DEPOSIT SIZE

P 15,000 & Below

P 15,000.01 - P 40,000

P 40,000.01 - P 60,000

P 60,000.01 - P 80,000

P 80,000.01 - P 100,000

P 100,000.01 - P 125,000

P 125,000.01 - P 150,000

P 150,000.01 - P 200,000

Over P 200,000

Total

19,756,860

2,000,560

816,821

466,383

639,759

465,934

222,861

284,214

1,362,842

26,016,234

47,371

50,178

40,410

32,295

58,734

51,135

30,608

49,380

2,095,522

2,455,634

1,282,190

212,993

78,891

50,627

36,254

35,897

25,502

35,988

167,465

1,925,807

4,768

5,382

3,892

3,513

3,248

4,012

3,491

6,238

265,792

300,336

18,112,762

1,602,865

553,901

307,584

252,446

329,071

131,006

176,457

755,368

22,221,460

40,006

39,448

26,944

21,112

22,929

35,670

17,846

30,266

1,011,860

1,246,082

118,078

69,441

102,886

26,761

153,796

29,677

13,097

21,678

105,631

641,045

677

1,790

5,308

1,855

15,125

3,233

1,834

4,034

129,336

163,193

243,830

115,261

81,143

81,411

197,263

71,289

53,256

50,091

334,378

1,227,922

1,919

3,558

4,266

5,815

17,432

8,220

7,438

8,842

688,533

746,023

TOTAL DEPOSITS DEMAND/NOW DEPOSITS SAVINGS DEPOSITS TIME DEPOSITS FCDs

Account Amount Account Amount Account Amount Account Amount Account Amount% to TotalAmount

% to TotalAccount

75.9%

7.7%

3.1%

1.8%

2.5%

1.8%

0.9%

1.1%

5.2%

100.0%

1.9%

2.0%

1.6%

1.3%

2.4%

2.1%

1.2%

2.0%

85.3%

100.0%

Table 3Domestic Deposit Liabilities by Size of Account (cont.)

As of December 31, 2003(Amounts in Million Pesos)

Source : Consolidated Report on Deposit Liabilities by Size of Account.Notes: Domestic deposits exclude deposits in overseas branches of Philippine banks.

No recorded Foreign Currency Deposits (FCDs) for Rural Banks.

C. THRIFT BANKS

D. RURAL BANKS


P 15,000 & Below

P 15,000.01 - P 40,000

P 40,000.01 - P 60,000

P 60,000.01 - P 80,000

P 80,000.01 - P 100,000

P 100,000.01 - P 125,000

P 125,000.01 - P 150,000

P 150,000.01 - P 200,000

Over P 200,000

Total

DEPOSIT SIZE

2,003,846

218,229

92,451

63,376

65,505

57,160

21,227

31,720

132,952

2,686,466

4,789

5,387

4,627

4,489

6,057

6,197

2,912

5,609

156,899

196,965

217,020

26,382

8,848

5,327

3,636

3,392

2,455

3,017

11,321

281,398

695

661

436

369

325

381

335

523

11,243

14,966

1,740,123

176,937

63,454

35,102

36,596

46,995

15,500

20,798

91,710

2,227,215

3,882

4,327

3,113

2,411

3,396

5,060

2,122

3,599

113,235

141,145

31,887

9,040

15,877

3,288

14,374

3,175

1,631

3,027

11,839

94,138

153

239

849

227

1,413

346

229

581

12,994

17,031

14,816

5,870

4,272

19,659

10,899

3,598

1,641

4,878

18,082

83,715

59

160

229

1,482

923

410

226

906

19,428

23,822


Account Amount Account Amount Account Amount Account Amount Account Amount% to TotalAccount

74.6%

8.1%

3.4%

2.4%

2.4%

2.1%

0.8%

1.2%

4.9%

100.0%

% to TotalAmount

2.4%

2.7%

2.3%

2.3%

3.1%

3.1%

1.5%

2.8%

79.7%

100.0%

P 15,000 & below

P 15,000.01 - P 40,000

P 40,000.01 - P 60,000

P 60,000.01 - P 80,000

P 80,000.01 - P 100,000

P 100,000.01 - P 125,000

P 125,000.01 - P 150,000

P 150,000.01 - P 200,000

Over P 200,000

Total

DEPOSIT SIZE

4,442,741

204,986

73,914

35,953

79,028

40,568

13,715

17,588

46,082

4,954,575

5,861

4,972

3,640

2,486

7,574

4,377

1,888

3,104

28,311

62,214

83,677

4.478

1,299

718

455

450

324

410

1,198

93,009

222

108

62

50

41

49

44

71

698

1,345

4,315,043

177,108

55,293

27,854

33,982

26,655

9,228

11,536

30,569

4,687,268

5,414

4,262

2,703

1,916

3,174

2,879

1,261

2,002

18,839

42,450

44,021

23,400

17,322

7,381

44,591

13,463

4,163

5,642

14,315

174,298

226

602

875

521

4,359

1,449

583

1,031

8,774

18,419

TOTAL DEPOSITS DEMAND/NOW DEPOSITS SAVINGS DEPOSITS TIME DEPOSITS

Account Amount Account Amount Account Amount Account Amount% to TotalAccount

89.7%

4.1%

1.5%

0.7%

1.6%

0.8%

0.3%

0.4%

0.9%

100.0%

% to TotalAmount

9.4%

8.0%

5.9%

4.0%

12.2%

7.0%

3.0%

5.0%

45.5%

100.0%

42 Industry Scan

Table 4Regional Distribution of Domestic DepositsAs of December 31, 2003(Amounts in Million Pesos)

Source: Report on Breakdown of Deposit Liabilities by Type (BDL) submitted by member banks.Notes: Domestic deposits exclude deposits in overseas branches of Philippine banks.

Banking offices refer to Head Offices, Branches, Money Shops, Extension Offices and Saving Agencies of banks as reported.


AREANo. of

BankingOffices

TOTAL NCR

City of ManilaCity of MuntinlupaKalookan CityLas Piñas CityMakati CityMalabon CityMandaluyong CityMarikina CityNavotasParañaque CityPasay CityPasig CityPaterosQuezon CitySan JuanTaguigValenzuela City

TOTALPROVINCIAL

(Regions)123

4-A4-B56789

101112

CARARMM

CARAGA

TOTAL PHILIPPINES

570828863

38836

1035620

13178

15211

627881953

2,565

4,786

364198785

1,146118214387481123110241236161105

1998

7,351

9,895,103 1,642,812 1,031,432 190,780 7,823,795 737,907 297,479 107,057 742,397 607,068

1,802,527283,137326,562223,524

2,286,667115,915521,789195,556

52,928447,330385,404538,761

45,7322,180,084

247,35381,827

160,007

16,056,473 812,661 893,565 109,588 14,333,134 507,946 344,214 56,191 485,560 138,936

1,184,433578,823

2,249,3923,612,596

383,610747,856

1,364,8231,566,988

497,351461,356890,139858,983657,059446,271

80,379476,414

25,951,576 2,455,473 1,924,997 300,369 22,156,929 1,245,853 641,693 163,247 1,227,957 746,004

303,15332,44243,15813,442

673,65312,54463,10114,028

4,20342,64136,14972,930

1,946247,916

62,8013,440

15,265

51,14621,680

120,525168,614

18,70831,44677,173

130,39720,77726,42837,95647,87424,20822,185

2,23711,306

196,53928,95634,81721,739

240,59711,00942,77217,399

6,22346,64727,15062,871

3,002232,871

38,9523,236

16,652

30,3454,6074,2621,744

75,142938

6,4921,629

5485,4844,092

13,353253

33,4095,805

7581,919

1,425,521226,352264,705183,113

1,676,74496,103

449,340160,392

44,202365,672338,207432,903

40,4871,753,797

161,28176,208

128,768

164,48413,53427,380

8,423205,687

8,47634,097

8,8102,860

21,18221,75635,817

1,244147,585

25,5501,6619,360

43,8058,3187,9903,805

126,4022,1584,0486,189

5487,5414,997

13,359898

47,07814,687

2775,379

21,1294,4433,179

63341,287

8691,297

938173

1,7901,3013,509

11314,97110,272

461,108

136,66219,51119,05014,867

242,9246,645

25,62911,5761,955

27,47015,05029,628

1,345146,338

32,4332,1069,208

87,1959,8588,3372,642

351,5382,261

21,2162,651

62314,185

8,99920,251

33551,95221,174

9742,878

43,93126,001

131,537192,066

15,55846,25588,870

108,20125,25725,48449,49657,25936,25621,373

4,77321,248

5,8263,231

13,08218,903

2,1445,133

10,25016,957

4,3373,9837,5777,7224,3953,038

3742,638

1,061,763531,409

1,963,6193,233,433

358,721669,818

1,197,6991,349,456

455,240417,321809,679765,846595,838402,013

74,555446,724

34,05414,96875,398

102,48613,94520,40351,77169,97013,30417,69323,94929,82916,33115,152

1,6297,064

33,8768,312

60,90672,591

4,51015,80128,49046,084

7,6278,159

13,83514,66817,379

6,616606

4,754

3,6361,0038,560

11,343755

1,9733,805

14,0511,0611,8292,1973,202

990955

92740

44,86313,10193,330

114,5064,821

15,98249,76463,247

9,22710,39217,12921,210

7,58616,269

4453,688

7,6312,478

23,48635,883

1,8633,937

11,34729,419

2,0752,9234,2347,1222,4933,040

142864


Account Amount Account Amount Account Amount Account Amount Account Amount

Table 4Regional Distribution of Domestic Deposits (cont.)



Banking offices refer to Head Offices, Branches, Money Shops, Extension Offices and Saving Agencies of banks as reported.

B. COMMERCIAL BANKS

AREANo. of

BankingOffices

TOTAL NCR


TOTALPROVINCIAL

(Regions)123

4-A4-B56789101112

CARARMM

CARAGA

TOTAL PHILIPPINES

1,992 8,502,295 1,511,933 875,170 180,703 6,706,762 647,827 233,529 94,219 686,834 589,184

469566836

31729863816

1096298

5487

661139

2,180

14369

327437

3996

221254

7177

116134

90541438

4,172

1,617,686225,009278,930172,062

2,026,177100,495489,576149,592

46,477378,647347,300418,022

21,1601,830,991

210,27757,904

131,990

283,65627,28438,097

9,853638,645

11,25560,91911,2083,894

37,84434,01163,379

1,240217,358

56,6193,165

13,505

173,13521,83228,94815,201

214,4439,670

38,06513,464

5,37138,79023,04950,719

1,833191,050

33,1912,692

13,717

28,9904,1844,0721,460

72,942842

6,2621,426

5144,9623,948

12,541200

30,4155,400

7351,810

1,277,367181,077225,984142,054

1,462,15682,986

423,350123,756

38,766311,740306,190335,365

18,1571,482,427

135,00752,842

107,538

149,87310,29823,555

5,864180,397

7,54732,497

7,0422,637

18,32520,24129,536

760127,806

21,8491,4138,186

37,9175,5836,6872,154

115,7971,9863,5432,106

4774,1353,9485,267

8129,22311,668

2642,693

19,6423,8352,734

37039,018

7571,212

338142

1,2151,1612,419

511,5388,971

43819

129,26716,51717,31112,653

233,7815,853

24,61810,266

1,86323,98214,11326,671

1,089128,291

30,4112,1068,042

85,1518,9677,7372,158

346,2882,109

20,9492,402

60113,341

8,66218,884

27547,60020,398

9742,689

9,876,964 684,658 676,809 103,379 8,603,675 414,728 139,107 33,534 457,373 133,016

736,541350,165

1,369,2471,996,580

157,567432,905

1,022,7561,092,623

357,583362,356500,148524,193428,501297,155

67,417181,227

41,58218,72095,181

126,26016,56226,67271,054

115,16919,10725,04634,06042,81722,20818,822

2,1299,270

34,39521,90289,258

122,80011,72539,51379,41682,94824,06923,93239,85743,60329,10016,880

4,77312,638

5,4593,191

11,93016,839

2,0494,9669,983

16,2124,3093,8797,3057,1514,2422,917

3742,573

645,725311,027

1,173,4821,755,032

140,173372,726879,750920,809319,811322,270436,938452,538387,424261,237

61,623163,110

27,52412,44657,09071,74712,36016,90547,59658,29511,99716,65421,02526,77714,84412,556

1,5245,387

13,9884,230

18,23517,775

1,1434,846

15,21427,931

4,5155,8686,7907,7504,6003,855

5761,791

1,501612

3,7144,211

311906

2,42511,868

7311,6061,6022,257

672582

90446

42,43313,00688,272

100,9734,526

15,82048,37660,935

9,18810,28616,56320,302

7,37715,183

4453,688

7,0982,470

22,44733,463

1,8423,895

11,05028,795

2,0702,9074,1276,6312,4502,767

142864

18,379,259 2,196,591 1,551,979 284,082 15,310,437 1,062,555 372,636 127,753 1,144,207 722,201

TOTAL DEPOSITSDEMAND/

NOW DEPOSITS SAVINGS DEPOSITS TIME DEPOSITS FCDs



44 Industry Scan

Table 4Regional Distribution of Domestic Deposits (cont.)As of December 31, 2003(Amounts in Million Pesos)


Banking offices refer to Head Offices, Branches, Money Shops, Extension Offices and Saving Agencies of banks as reported.No recorded Foreign Currency Deposits (FCDs) for Rural Banks.

C. THRIFT BANKS

AREANo. of

BankingOffices

TOTAL NCR


TOTALPROVINCIAL

(Regions)123

4-A4-B56789

101112

CARARMM

CARAGA

TOTAL PHILIPPINES

10120182068

616113

201635

4138

21-

11

508

773

388

159270

222844

10277

3328

912

-6

1,281

1,233,872 126,189 151,925 10,017 978,043 87,357 48,341 10,930 55,563 17,884

184,84149,75439,88339,821

255,46814,26729,46730,357

3,65662,70038,10483,681

6,432336,979

36,429-

22,033

1,454,830 71,004 130,361 4,947 1,250,182 53,992 46,100 6,146 28,187 5,919

80,37521,718

245,480458,354

57,37088,18860,015

230,42316,51710,51365,96055,00517,29634,035

-13,581

2,688,702 197,193 282,286 14,964 2,228,225 141,349 94,441 17,077 83,750 23,803

19,4975,0004,9643,084

34,0361,2681,9362,285

2914,4632,1388,439

44630,493

6,135-

1,714

4,174629

14,71725,051

7431,9423,330

11,145695670

2,0922,751

6582,179

-229

23,4046,5035,8625,726

26,0921,3394,4273,280

8527,7944,101

11,378876

41,7645,714

-2,813

1,355420191279

2,20096

228194

34520144803

502,991

404-

108

148,15438,07631,23031,155

210,59911,97223,80724,964

2,64250,26632,01767,396

5,041259,522

25,681-

15,521

14,6103,1433,7642,162

24,714909

1,3851,642

2052,6861,5165,797

28719,739

3,654-

1,143

5,8882,1811,052

7269,634

164222803

701,1521,0491,950

25917,646

3,012-

2,533

1,487546410159

1,87211155

20131

413140471

473,4111,301

-275

7,3952,9941,7392,2149,143

7921,0111,310

923,488

9372,957

25618,047

2,022-

1,166

2,044891600484

5,250152267248

21844337

1,36761

4,352776

-189

6,5091,930

21,78747,424

3,1896,0296,750

17,3381,0201,0145,6585,3922,0393,744

-538

28614

9261,767

91162247683

2599

199246

87105

-9

69,41518,783

202,061382,414

53,63380,20250,117

206,25815,407

9,29959,09547,30514,76228,401

-13,030

3,001553

10,99518,831

6041,5282,4219,054

657552

1,7281,725

4571,670

-217

2,021910

16,57414,983

2531,7951,7604,515

5194

6411,400

286804

-13

35453

1,7572,034

26210365785

73

59290

72130

-2

2,43095

5,05813,533

295162

1,3882,312

39106566908209

1,086--

5339

1,0392,420

2142

297624

516

107490

42273

--



Table 4Regional Distribution of Domestic Deposits (cont.)



Banking offices refer to Head Offices, Branches, Money Shops, Extension Offices and Saving Agencies of banks as reported.No recorded Foreign Currency Deposits (FCDs) for Rural Banks.Zero (0) means value is less than five hundred thousand (500T).

D. RURAL BANKS


AREANo. of

BankingOffices

TOTAL NCR


TOTALPROVINCIAL

(Regions)123

4-A4-B56789

101112

CARARMM

CARAGA

TOTAL PHILIPPINES

-627311712-

1922183

65

1,833

183121299439

5790

122125

452692746239

554

1,898

158,936 4,690 4,337 60 138,990 2,723 15,609 1,907

-8,3747,749

11,6415,0221,1532,746

15,6072,7955,983

-37,05818,14012,114

64723,923

5,984

4,724,679 56,998 86,395 1,262 4,479,277 39,226 159,007 16,510

367,517206,940634,665

1,157,662168,673226,763282,052243,942123,251

88,487324,031279,785211,262115,08112,962

281,606

4,883,615 61,689 90,732 1,322 4,618,267 41,949 174,616 18,417

-158

97505973

21246535

18334

-1,111

2606547

27446

5,3912,332

10,62717,303

1,4042,8322,7894,082

975712

1,8052,3061,3421,185

1081,807

-621

7812

62-

280655

-63

-774293

5747

544122

-4050-19-2-9230

231

-7,1997,4919,9043,9891,1452,183

11,6722,7943,666

-30,14217,28911,848

59323,366

5,709

-9362

397576

20214126

18170

-484196

4047

24832

-554251925971

8283

3,2801

2,254-

6,142558209

713

153

-6135

103397

130

4000

162-

6186122

03

14

3,0272,169

20,49221,842

644713

2,7047,915

168538

3,9818,2645,117

749-

8,072

8126

226296

35

2063

35

73325

6616

-55

346,623201,599588,076

1,095,987164,915216,890267,832222,389120,022

85,752313,646266,003193,652112,37512,932

270,584

3,5291,9697,312

11,908981

1,9701,7542,621

650488

1,1961,3271,030

926106

1,460

17,8673,172

26,09739,833

3,1149,160

11,51613,638

3,0612,1976,4045,518

12,4931,957

302,950

1,781337

3,0895,098

419857

1,0151,398

322219536655246243

2292

TOTAL DEPOSITS DEMAND/NOW DEPOSITS SAVINGS DEPOSITS TIME DEPOSITS

Account Amount Account Amount Account Amount Account Amount

The Philippine Archipelago

46 Industry Scan

BATANES

CORDILLERA ADMINISTRATIVE REGION (CAR)

ILOCOSNORTE

ILOCOSSUR

LA UNION

BEN

GUET

APAYAO

ABRAKALINGA

MT.PROVINCE

IFUGAO

CAGAYAN

ISAB

ELA

NUEVA VIZCAYA

QUIRIN

O

AURORAPANGASINAN

NUEVAECIJA

TARLACZAMBALES

PAMPANGABULACAN

BATAAN

CAVITE

RIZAL

QUEZONLAGUNA

BATANGAS

CAMARINES NORTE

CAMARINES

SURCATANDUANES

ALBAY

SORSOGON

MASBATE

MARINDUQUE

MINDORO ORIENTALMINDORO

OCCIDENTAL

PALAWAN

ROMBLONWESTERN

SAMAR

NORTHERN SAMAR

EASTERN SAMAR

BILIRAN

LEYTE

SOUTHERN LEYTE SURIGAO DEL

NORTE

AKLAN

ANTIQUE

CAPIZ

ILOILO

NEGROS OCCIDENTAL

NEGROS ORIENTAL

CEBU

BOHOL

AGUSANDEL NORTE

SURIGAO DEL SUR

AGUSAN

DEL SUR

DAVAO ORIENTAL

COMPOSTELA VALLEY

DAVAODEL NORTE

DAVAO DEL SUR

SIQUIJORMISAMIS

ORIENTAL

BUKIDNON

MISAMIS OCCIDENTAL

LANAO

DEL NORTE

LANAODEL SUR

MAGUINDANAO

NORTH COTABATO

SOUTH COTABATO

SARANGANI

SULTAN KUDARAT

ZAMBOANGA DEL NORTE

ZAMBOANGA DEL SUR

ZAMBOANGA SIBUGAY

BASILAN

SULU

TAWI-TAWI

GUIMARAS

NCR

SuluSea

South ChinaSea

CAGAYAN VALLEY(Region II)

ILOCOS REGION(Region I)

CENTRAL LUZON(Region III) CALABARZON

(Region IV-A)

BICOL REGION(Region V)

EASTERN VISAYAS (Region VIII)

CARAGA

NATIONAL CAPITAL REGION (NCR)

MIMAROPA(Region IV-B)

WESTERN VISAYAS(Region VI)

CENTRAL VISAYAS(Region VII)

AUTONOMOUS REGION OF

MUSLIMMINDANAO

(ARMM) SOCCSKSARGEN(Region XII)

ZAMBOANGA PENINSULA(Region IX)

PhilippineSea

NORTHERN MINDANAO(Region X)

DAVAO REGION(Region XI)

BATANES

CORDILLERA ADMINISTRATIVE REGION (CAR)

ILOCOSNORTE

ILOCOSSUR

LA UNION

BEN

GUET

APAYAO

ABRAKALINGA

MT.PROVINCE

IFUGAO

CAGAYAN

ISAB

ELA

NUEVA VIZCAYA

QUIRIN

O

AURORAPANGASINAN

NUEVAECIJA

TARLACZAMBALES

PAMPANGABULACAN

BATAAN

CAVITE

RIZAL

QUEZONLAGUNA

BATANGAS

CAMARINES NORTE

CAMARINES

SURCATANDUANES

ALBAY

SORSOGON

MASBATE

MARINDUQUE

MINDORO ORIENTALMINDORO

OCCIDENTAL

PALAWAN

ROMBLONWESTERN

SAMAR

NORTHERN SAMAR

EASTERN SAMAR

BILIRAN

LEYTE

SOUTHERN LEYTE SURIGAO DEL

NORTE

AKLAN

ANTIQUE

CAPIZ

ILOILO

NEGROS OCCIDENTAL

NEGROS ORIENTAL

CEBU

BOHOL

AGUSANDEL NORTE

SURIGAO DEL SUR

AGUSAN

DEL SUR

DAVAO ORIENTAL

COMPOSTELA VALLEY

DAVAODEL NORTE

DAVAO DEL SUR

SIQUIJORMISAMIS

ORIENTAL

BUKIDNON

MISAMIS OCCIDENTAL

LANAO

DEL NORTE

LANAODEL SUR

MAGUINDANAO

NORTH COTABATO

SOUTH COTABATO

SARANGANI

SULTAN KUDARAT

ZAMBOANGA DEL NORTE

ZAMBOANGA DEL SUR

ZAMBOANGA SIBUGAY

BASILAN

SULU

TAWI-TAWI

GUIMARAS

NCR

SuluSea

South ChinaSea

CAGAYAN VALLEY(Region II)

ILOCOS REGION(Region I)

CENTRAL LUZON(Region III) CALABARZON

(Region IV-A)

BICOL REGION(Region V)

EASTERN VISAYAS (Region VIII)

CARAGA

NATIONAL CAPITAL REGION (NCR)

MIMAROPA(Region IV-B)

WESTERN VISAYAS(Region VI)

CENTRAL VISAYAS(Region VII)

AUTONOMOUS REGION OF

MUSLIMMINDANAO

(ARMM) SOCCSKSARGEN(Region XII)

ZAMBOANGA PENINSULA(Region IX)

PhilippineSea

NORTHERN MINDANAO(Region X)

DAVAO REGION(Region XI)


Region BankType

No. ofOffices Amount

(In Millions)A

% toIndustry

Accounts(In Absolute Figure)

B

Average Size(In Millions)

C=A/B

% Share InRegion

KBTBRB

Sub-Total

Deposit

KBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-TotalKBTBRB

Sub-Total

NCR

I

II

III

IV-A

IV-B

V

VI

VII

VIII

IX

X

XI

XII

ARMM

TOTAL

1,99250865

2,56514338

183364698

121198327159299785437270439

1,146392257118962890

21422144

12238725410212548171745

123777261101163392

2411342874

23690962

161541239

10514-5193865498

1,511,933126,189

4,6901,642,812

41,5824,1745,391

51,14718,720

6292,332

21,68195,18114,71710,627

120,525126,260

25,05117,303

168,61416,562

7431,404

18,70926,672

1,9422,832

31,44671,054

3,3302,789

77,173115,169

11,1454,082

130,39619,107

695975

20,77725,046

670712

26,42834,060

2,0921,805

37,95742,817

2,7512,306

47,87422,208

6581,342

24,20818,822

2,1791,185

22,1862,129

-108

2,2379,270

2291,807

11,3062,455,476

61.65.10.2

66.91.70.20.22.10.8

*0.10.93.90.60.44.95.11.00.76.80.7

*0.10.81.10.10.11.32.90.10.13.14.70.50.25.40.8

**

0.81.0

**

1.01.40.10.11.61.70.10.11.90.9

*0.11.00.80.1

*0.90.1

-*

0.10.4

*0.10.5

100.0

8,502,2951,233,872

158,9369,895,103

736,54180,375

367,5171,184,433

350,16521,718

206,940578,823

1,369,247245,480634,665

2,249,3921,996,580

458,3541,157,6623,612,596

157,56757,370

168,673383,610432,905

88,188226,763747,856

1,022,75660,015

282,0521,364,8231,092,623

230,423243,942

1,566,988357,583

16,517123,251497,351362,356

10,51388,487

461,356500,148

65,960324,031890,139524,193

55,005279,785858,983428,501

17,296211,262657,059297,155

34,035115,081446,271

67,417-

12,96280,379

181,22713,581

281,606476,414

25,951,576

0.180.100.030.170.060.050.010.040.050.030.010.040.070.060.020.050.060.050.010.05

88.54.07.5

100.084.8

6.29.0

100.092.1

4.33.6

100.088.3

8.53.1

100.092.0

3.34.7

100.094.8

2.52.7

100.089.7

5.54.8

100.089.4

5.74.8

100.091.7

2.75.5

100.084.8

9.85.3

100.095.2

-4.8

100.082.0

2.016.0

100.0

0.110.010.010.050.060.020.010.040.070.060.010.060.110.050.020.080.050.040.010.040.070.060.010.060.070.030.010.040.080.050.010.060.050.040.010.040.060.060.010.050.03

-0.010.030.050.020.010.020.09

92.07.70.3

100.081.3

8.210.5

100.086.3

2.910.8

100.079.012.2

8.8100.0

74.914.910.3

100.0

Table 5Percentage Share of Domestic Deposit per Region

As of December 31, 2003

Source: Report on Breakdown of Deposit Liabilities by Type (BDL) submitted by member banks.Notes: *Signifies insignificant deposit amount relative to total domestic deposit.

CAR

CARAGA

7,351

48 Industry Scan

Figure 2Growth in Amounts (in %)

Figure 3Growth in Accounts (in %)

PBSK B

R B

TB

Dec-1995 Dec-1996 Dec-1997 Dec-1998 Dec-1999 Dec-2000 Dec-2001 Dec-2002 Dec-200326.7925.2242.5133.56

26.8326.2032.6228.28

28.9931.0312.0220.47

4.865.64

-2.801.64

9.2510.33

0.11-4.27

9.229.286.41

16.48

5.664.84

14.3613.81

6.926.637.67

16.32

4.964.00

14.0113.67

PBSKBTBRB

45.00

35.00

25.00

15.00

5.00

-5.00

PBS

TB

K B

R B

Dec-1995 Dec-1996 Dec-1997 Dec-1998 Dec-1999 Dec-2000 Dec-2001 Dec-2002 Dec-20032.024.01

-2.721.77

1.546.33

-12.603.28

10.4715.54-0.685.34

3.817.49

-12.205.89

1.034.11

-9.02-2.09

1.673.65

-10.052.65

8.1210.77-0.233.28

2.303.08

-3.952.88

-4.13-6.40-1.573.73

PBSKBTBRB

16.00

10.00

4.00

-2.00

-8.00

-14.00

Source : Consolidated Report on Domestic Deposit Liabilities by Size of Account.

Growth in Domestic Deposit

Figure 4Year-on-Year Deposit Movement with Selected Variables Related to its Growth


B. COMMERCIAL BANKS

Source : Consolidated Report on Domestic Deposit Liabilities by Size of Account and Report on Breakdown of Deposit Liabilities by Type (BDL) for number(#) of banking offices.

Notes: Domestic deposits excludes deposits in overseas branches of Philippine banks.Banking offices refer to Head Offices, Branches, Money Shops, Extension Offices and Saving Agencies of banks as reported.


Total DepositsPeso Denominated Dep.FCDU Peso Equiv.US$ Value of FCDUBSP Guiding Fx Ref. RateDerived Int. Rate (%)# of Bkg. Off.Tot. Dep. to Bkg. Offc.

1,566.88985.15581.7414.8639.157.69

4,0860.38

1,728.781,130.48598.3014.8540.305.72

4,1840.41

1,889.281,215.29674.0013.4849.995.70

4,1200.46

1,980.641,323.82656.8312.7151.695.75

4,1750.47

2,112.041,446.94665.1012.4953.253.42

4,1280.51

2,196.461,474.25722.2012.9955.593.224,1720.53

Dec-1998 Dec-1999 Dec-2000 Dec-2001 Dec-2002 Dec-2003

2,200

1,650

1,100

550

Dom

estic

Dep

osits

(in

Billi

on P

esos

)

63% 65% 64% 67% 69% 67%

37% 35% 36% 33% 31% 33%

Total DepositsPeso Denominated Dep.FCDU Peso Equiv.US$ Value of FCDUBSP Guiding Fx Ref. RateDerived Int. Rate (%)# of Bkg. OfficesTot. Dep. to Bkg. Offc.


1,735.671,145.79589.8815.0739.158.08

7,5150.23

1,896.131,289.96606.1715.0440.306.00

7,5920.25

2,070.941,384.14686.8013.7449.995.877,4020.28

2,188.151,514.97673.1813.0251.695.927,4020.30

2,339.541,654.59684.9512.8653.253.60

7,2930.32

2,455.631,709.61746.0213.4255.593.39

7,3510.33

Dom

estic

Dep

osits

(in

Billi

on P

esos

)2,500

2,000

1,500

1,000

500

66% 68% 67% 69% 71% 70%

34% 32% 33% 31% 29% 30%

50 Industry Scan

Figure 4Year-on-Year Deposit Movement with Selected Variables Related to its Growth (cont.)

C. THRIFT BANKS

D. RURAL BANKS

Source : Consolidated Report on Domestic Deposit Liabilities by Size of Account and Report on Breakdown of Deposit Liabilities by Type (BDL) for number(#) of banking offices.

Notes: No recorded Foreign Currency Deposits (FCDs) for Rural Banks.Domestic deposits excludes deposits in overseas branches of Philippine banks.Banking offices refer to Head Offices, Branches, Money Shops, Extension Offices and Saving Agencies of banks as reported.

Peso Denom. Dep.Derived Int. Rate (%)# of Bkg. Off.Tot. Dep. to Bkg. Offc.

37.0810.381,9440.02

35.499.54

1,9040.02

41.348.62

1,9040.02

47.058.19

1,8950.02

54.737.01

1,8950.03

62.216.05

1,8980.03


63

52

41

30Dom

estic

Dep

osits

(in

Billi

on P

esos

)

Total DepositsPeso Denominated Dep.FCDU Peso Equiv.US$ Value of FCDUBSP Guiding Fx Ref. RateDerived Int. Rate (%)# of Bkg. Off.Tot. Dep. to Bkg. Offc.

131.71123.56

8.140.21

39.1511.961,4850.09

131.86123.99

7.870.20

40.308.48

1,5040.09

140.31127.5112.800.26

49.997.27

1,3780.10

160.46144.1116.350.32

51.697.57

1,3320.12

172.77152.9219.850.37

53.254.80

1,2700.14

196.96173.1423.820.4355.594.571,2810.15


Dom

estic

Dep

osits

(in

Billi

on P

esos

)

200

150

100

50

94% 94% 91% 90% 89% 88%

6% 6% 9% 10% 11% 12%

IIIIIndustryndustryndustryndustryndustry SSSSScancancancancan

Glossary of TermsSelected Accounts

1. Quick Assets. Highly liquid assetscomposed of Cash on Hand, Checks& Other Cash Items, Due from BSP,Due from Banks, Due from PhilippineClearing House Corporation (PCHC),Trading Account Securities (TAS,Equity & Investments), Available forSale Securities (ASS) and Investmentin Bonds and Other Debt Instruments(IBODI). For Rural Banks (RBs), QuickAssets is composed of Cash on Hand,Checks & Other Cash Items, Due fromBSP, Due from Banks and IBODI.

2. Interest Earning Assets. Assets whichgenerate interest income, such asDue from BSP, Due from PCHC, Duefrom Banks, TAS, ASS, IBODI andCurrent Loans. For RBs, InterestEarning Assets consist of Due from BSP,Due from Banks, IBODI and CurrentLoans.

3. Non-Performing Loans (NPL).Defined under BSP Circular No. 202dated 5/27/99 which includescertain Restructured Loans classifiedas Non-Performing, as amended byCircular No. 248 dtd 6/26/00 &Circular No. 351 dtd 9/19/02.

4. Non- Performing Assets (NPA).NPL, ROPOA (Real PropertiesOwned or Acquired) and Non-Performing Sales ContractReceivables.

5. Gross Problematic Assets (GPA).NPL, ROPOA (Gross) and CurrentRestructured Loans.

6. Loan Loss Provision (LLP). Thesum of Specific and General LoanLoss Provision.

7. Total Allowance. LLP,Allowance for Probable Losses onROPOA and on Sales ContractReceivable.

Selected Ratios

8. Risk Assets Ratio (RAR). Capitaldivided by Risk Assets. Capital isBooked Capital net of AppraisalIncrement Reserves, Net UnrealizedGain on Securities Available for Sale(SAS), Deferred Income Tax,Goodwill and Unsecured DOSRI. RiskAssets is Total Assets net of Non-RiskAssets, Goodwill, Unsecured DOSRIand Accumulated Market Gain onprivate issuances (i.e. UnderwritingDebt & Equity Securities Purchased,ASS excluding Accumulated MarketGain on ASS-Government).

(Non-Risk Assets. Cash on Hand, Duefrom BSP, Due from PCHC, TASInvestments, ASS-Government,IBODI-Government, Bank Premisesand Deferred Income Tax).

9. Risk Based Capital Adequacy Ratio(RBCAR). Qualifying Capital dividedby Risk Weighted Assets reported bybanks and as defined under BSP

Circular No. 280. Due to unavailabilityof data for RBs, Capital to Risk Assetswas used to represent RBCAR.

10. NPL to Capital. NPL is defined undernote #3. Capital is inclusive of TotalAllowance as defined under note #7net of Appraisal Increment Reserves,Net Unrealized Gain on SAS,Deferred Income Tax, and Goodwill.

11. NPA to Capital. NPA is defined under#4. Capital is defined under note#10.

12. GPA to Capital. GPA is definedunder #5. Capital is defined undernote #10.

13. Return on Equity (ROE). Net IncomeAfter Tax (NIAT) divided by AverageEquity. For Non-Year-end period,Income & Expense Accounts areAnnualized in relation to BalanceSheet Accounts. Average BalanceSheet Accounts is the sum of Currentand Previous Period divided by 2.

14. Return on Asset (ROA). NIAT dividedby Average Total Assets.

15. Net Interest Margin (NIM). NetInterest Income divided by AverageInterest Earning Assets as definedunder note #2.

16. Operating Efficiency. Computed bydividing the sum of Other OperatingExpenses and Provision Expense bythe sum of Net Interest Income andOther Operating Income.

17. Non-Operating Income (Non-OI) toNet Income Before Tax (NIBT).Measures level of reliance to non-recurring, extra-ordinary income ingenerating revenues. These non-operating income are generallyrealized from the disposal/sale ofROPOA.

18. Derived Interest Rate. Computed bydividing Interest Expense on Depositby Average Deposit.

No. of Unsubmitted ReportsAs of December 31, 2003Reference Period

Bank TypeType of Report

C - 16 BDL

CommercialBanksSub - Total

-

-

-

-

Thrift Banks

Sub - Total

1

1

1

1

Rural Banks

NCRRegion 1Region 2Region 3Region 4ARegion 4BRegion 5Region 6Region 7Region 8Region 9Region 10Region 11Region 12CARARMMCARAGA

Sub - total

Grand total

---226342112--111

26

-21-635521--

113---

39

27 40

SOC

-

-

1

1

---22612--12---1

-17

18

SIE

-

-

1

1

---456221123---1-

27

28

RBCAR

-

-

2

2

1417

10559841432212

69

71


DIDIDIDIDI WWWWWorldorldorldorldorld

52 The role of KDIC in the Korean financial restructuring process

The role of KDIC in the Koreanfinancial restructuring process

Financial crisis swept through East Asian countries in 1997 and 1998 and Korea

was among the countries hardest hit. Currencies and equity prices plummeted,

economic growth turned into recession, with wealth eroded, and jobs lost.

The origin of the problems inKorea emanated from theintervening policies of thegovernment, providing loans tochaebols at low interest rates.Compounding matters further werethe presumption that the governmentstood behind all banks, and thatlarge corporations were “too big tofail”, exacerbating a moral hazardproblem. Such practices reducedthe managerial effectiveness incommercial banking and promptedthe bank managers to engage inmore risky lending behavior.

Although the extent to whicheach Asian country was affected bythe crisis differs from each other, wecan observe a common trait in thatfinancial industry was deregulatedand opened without securing amature financial infrastructure. Inthese countries, lending was directedby government, while supervisionand legal infrastructure were poorlyimplemented. Credit culture in whichlenders and investors makejudgments based on independentcredit assessments was absent.Moreover implicit deposit insuranceschemes allowed financial institutionsto engage in excessive risk-taking.

Reforming the financial sector as

a way of overcoming crisis in Koreacan be characterized as setting upan advanced financial infrastructurelaying ground for the marketmechanisms to work. Insolvent bankswere either closed or merged withcredit unions, mutual savings &finance companies and otherfinancial institutions. Bad loans weretransferred to asset managementcompanies. Prudential andsupervisory regulatory device was setup.

Meanwhile, the onset of crisisgave rise to many decisions andevents that had major impact on therole of the Korean Deposit InsuranceCorporation (KDIC). Prior to June1996, Korea was void of an explicit

bank deposit insurance system.Instead, the government implicitlyguaranteed depositors in the eventof a failure. However, as the fiercecompetition under the highlyliberalized financial environment wasexpected to cause the failure ofindividual financial institution, thegovernment enacted the DepositorProtection Act in December 1995,and KDIC was established in 1996.KDIC contributed to financial marketstability by protecting depositors andproviding financial support during therestructuring and resolution process offinancial institutions.

An effective rescue andprotection system including an exitprocedure for insolvent financial

Reforming the financial sector as away of overcoming crisis in Korea can be characterized as setting up anadvanced financial infrastructure laying

ground for the market mechanisms to work.

Printed with permission. Paper presented by Wonkeun Yang, Executive Director, KDIC; Sun Eae Chun, Senior Economist, KDIC; and Zhigang Xie, Professor,Shanghai University of Finance and Economics at the 13th KDIC International Financial Symposium, 25 October 2002, “Overcoming Financial Crisis:Financial Reforms in Asia”. http://kdic.or.ko/english/annual_report/files/2002_1_2(session1).doc


institutions is needed to beestablished. Explicit depositinsurance scheme is one of the safetynet mechanisms, which couldminimize the adverse effects of failureof financial institutions.

The importance of a depositinsurance system as one of the safetynet pil lar is understood anddemonstrated by the fact that 68countries explicitly operate sometype of deposit insurance system. Thepopularity of deposit insurancescheme has also been spread todeveloping and newly-industrializedcountries, partly in response to therecent wave of banking andfinancial crises which has sweptacross the world since the 1980s.

There is a growing recognition,however, that the potential costs ofutilizing an inappropriately-designedDIS can be extremely high (Garcia1996). Some even question thewisdom of adopting any form ofdeposit insurance arguing that thenet benefits are likely to be negativeespecially in respect of developingcountries with a poor publicinfrastructure. However, anappropriately-designed scheme,complemented by a sound legalframework, a sound accountingregime, and a robust system ofbanking regulation and supervision islikely to be beneficial for society(Demirguc-Kunt and Detragiache2000).

Korea created its own depositinsurer, KDIC, as a part of preparatory

measure prior to the liberalization offinancial industry.

Korean experienceThe origins and outbreak of the Koreafinancial crisis in 1997

Korea’s model of developmentworked remarkably well over asustained period of time, producingan enviable record of developmentand poverty alleviation. However, asKorea advanced and had becomemore integrated with the globaleconomy, the government-andchaebol-led system had not beensustainable (Chopra et al 2001). Briefillustration of origins and outbreak ofKorean financial crisis is as follows.

The cause of the 1997 crisis canbe traced back to structuralweaknesses inherent in the Koreaneconomy. The government-ledindustrialization economic growthstrategy fostered unbridled growth ofchaebols by channeling thecountry’s household savings to fundcapacity growth. By 1997, the Koreaneconomy became highly dependenton the performance of severalcorporations, which in turn, came torely heavily on bankrolling theiroperations of domestic banks. Thehigh debt-to-equity ratios of thechaebols together with their lowprofitability made them particularlyvulnerable to swings in their cash flow.

The soundness of the entirebanking system became dependentupon fortunes and misfortunes of thechaebols. Before the crisis, theprofitability of Korean banks was lowdue to factors such as poor assetquality, regulated interest rates andcompetition for deposits as well asoverlooking aspects in asset-liabilitymanagement. Compoundingmatters further was the assumptionthat the government stood behind allbanks, and that large corporationswere “too big to fail,” exacerbatinga moral hazard problem alreadyprevalent in the industry. Also,regulatory and supervisory tools werenot in place at the time of financialmarket liberalization, which causedbanks to incur excessive risks withoutsufficient capital base to withstandsystemic shocks. Inadequateaccounting rules, lenient prudentialstandards and supervisoryforbearance also contributed toinefficiencies of the financial system.

Beginning early 1997, anunprecedented number of highly-leveraged chaebols went intobankruptcy which dampenedinvestor confidence, both domesticand foreign. Records show an abruptoutflow of short-term capital betweenSeptember and November 1997. Arefusal to roll over loans triggered adepreciation of the Won and droveKorea to the brink of default. Then,the IMF came up with a rescuepackage, but demanded thatimmediate structural adjustments beadopted in the financial sector.

Role of KDIC during financialrestructuring process

The onset of the crisis gave riseto many decisions and events thathad a major impact on the role ofKDIC. At the height of the crisis, themost immediate need was to restorestability of the financial system. KDICadopted a temporary blanketdeposit insurance policy for a limited

The importance of a deposit insurance system as one of the safety net

players is understood anddemonstrated by the fact that 68 countries expressively operate some

type of deposit insurance system.




term of three years, in mid-November 1997. The guarantees notonly included deposit liabilities ofbanks and their foreign currencyobligations, but also some of their trustdepartment l iabil it ies, those ofmerchant banks, and premiums paidto insurance companies. The effortsto reassure domestic creditors via theblanket deposit insurance was largelysuccessful and major bank runs wereavoided. Also, the segregateddeposit insurance agencies of thenon-bank financial institutions wereconsolidated under the KDICumbrella in 1998.

The next step was to restore thesolvency of the financial system.Priority was given to the insolventmerchant banks and commercialbanks according to greatest systemicimportance. Once these institutionswere dealt with, attention shifted tothe specialized and developmentbanks and non-bank financialinstitutions.

The first element of this processwas to distinguish unviable institutionsfrom weak but viable institutions. Thisinvolved a systemic evaluation ofcredit institutions, merchant banks,commercial banks, and specializedand development banks. Fornonviable institutions, exitstrategies such as mergers, sales, orliquidation were developed andapplied. For viable institutions,rehabil itation plans specifyingdetailed measures to achieveminimum capital adequacy and torestructure operations wererequired. Failure to comply with theperformance targets triggeredprompt corrective actionprocedures, including suspensionand eventual closures.

A necessary ingredient in thefinancial sector restructuringprocess has been the large

1 The Korean crisis was a result of mismanagement of companies and banks, not on poor macroeconomic fundamentals. However, previous criseselsewhere were largely balance of payments crises. Analysts and policy-makers looked for similar weaknesses in Korea and found few of the signs ofa classic external crisis.

2 From January 1998 to June 2001, the amount of DIF bonds issued by KDIC reached 66.6 trillion Won. By 1999 yearend, KDIC issued 43.0 trillion Wonin DIF bonds for the first round of funding. The second round of DIF bond issuance resumed after December 2000 when the National Assemblyapproved the procurement of an additional 40.0 trillion Won. The terms of issuance featured primarily floating rate notes (“FRN”). In the interestsof minimizing risks, 67.4% or 29.0 trillion Won from a total of 43.0 trillion Won in DIF bonds was issued in the form of FRN. However, as financial marketsstabilized and interest rates fell, DIF bonds issued with FRN declined considerably.

injection of public funds. With thecrisis unpredicted1 and the scale ofthe problem so huge, anastronomical sum of money wasrequired for restructuring the entirefinancial sector so as to deter entryof any investor that did not have thebacking of the government.

Government had moralresponsibility in clearing up the NPLproblem and a major role in creatingpolicy directives to extend“cooperative” loans to the chaebol(Chung 2000). The government wasaverse to the idea that a number ofKorean citizens will lose their deposits.

By 1999 yearend, 64 trillion Wonin public funds raised through theissuance of bonds was depleted. Itthen became clear that raisingadditional public funds wasinevitable with additional costestimated at 50 trillion Won. By 2000yearend, the National Assemblyapproved 40 trillion Won to financefurther reform efforts while 10 trillionWon will be raised through assetrecoveries. Mobilization of additionalpublic funds assured the market ofthe government’s commitment tocomplete the financial sectorrestructuring and stabilizing the

markets.As of end, June 2002, the gross

infusion of public funds amounted to156.7 trillion Won. When brokendown by funding sources, bondissuance by KDIC2 and KAMCOamounted to 102.1 tri l l ion Won,recovered funds amounted to 32.2tri l l ion Won, and public moneyamounted to 20.9 trillion Won.

KDIC is charged withrecapitalization of financialinstitutions, loss coverage, anddepositor protection while bad loanswere transferred to KAMCO. Brokendown, the public funds infusion is asfollows:

1. 60.2 trillion Won was usedfor equity participation infinancial institutions

2. 42.9 tril l ion Won used forcapital contribution anddeposit payoff

3. 14.9 trillion Won was used forassets purchase, and

4. 38.7 trillion Won was used forNPL acquisition.

The use of public funds has beensubjected to strict criteria to minimizemoral hazard. Once the systemstabilized, the use of public funds wasmade conditional on approved

Table 1. Breakdown of Public Funds Used

(Nov. 1997-June2002, Unit: KRW trillion)

BondIssuance

RecoveredFund

Public Money

Total

42.2

3.9

14.1

60.2

15.2

1.2

-

16.4

20.0

6.0

0.5

26.5

4.2

4.4

6.3

14.9

20.5

16.7

1.5

38.7

102.1

32.2

22.4

156.7

EquityParticipation

CapitalContribution

DepositPayoffs

AssetsPurchase

NPLPurchase Total

Source: White Paper, August 2002, MOFE


rehabilitation plans. When publicfund is infused loss-sharing isachieved by a capital reductionfor shareholders replacement ordamage claims for themanagement, loss of depositbeyond the protection limit fordepositors, and reduction ofemployees and branches forfinancial institutions.

In the case of recapitalizationof financial institutions taken overby the government, theshareholder equity has beendiluted to avoid moral hazard.Shareholders’ capital should bewritten off against losses and theircontrol surrendered before anygovernment assistance is providedboth for equity reasons and toimprove the incentive structure.Share capital is intended to be atrisk, and was explicitly acceptedwhen invested in return for expectedfuture profits. Further, if shareholdersare protected, bank shareholders ingeneral, both current and future, willhave less incentive to ensureprudent management; this wouldfoster future losses and repeatedgovernment rescues.

Borrowers foundnegligent are heldaccountable and aresubject to scrutinyt h r o u g hinvestigation. As ofJune 2002,i n v e s t i g a t i o n scommenced toidentify causes ofinsolvency. Amongthese, were: 4,369executives andmanagers of 306financial institutionswho faced claims fordamages andi n d e m n i f i c a t i o n ;1,159 billion Won from4,404 cases of assetsowned by the obligorsresponsible for theinsolvency wereplaced under

provisional attachment to maximizethe recovery of the assets.

By adhering to the principle,accountabil ity can be clearlydefined, and through suchexperience, market players come toregulate themselves as watchdogsmaking sure the prudence offinancial institutions are preserved.In addition, the non-market businesspractices of the past are expectedto voluntari ly correct itself withshareholders proactively exercisingtheir rights and depositors carefullyassessing the quality of prospectivefinancial institution. This will lead

institutions to strictly monitor their riskassessment and managementactivities.

The role of KDIC, during thefinancial restructuring process hasbeen broadened in recovery andpost public fund management.Under the governing statutes of theSpecial Act enacted at the end of2000, the execution of an MOU is arequirement if KDIC is to support aninsolvent financial institution. TheMOU sets clear and concrete goalsconcerning capital adequacy,productivity, and profitability on aquarterly basis, as well as stipulations


Table 2. Status of Damage Claim Suits Filed by KDIC(As of the end of June 2002 No., 100 million won)

No. ofInstitutions

No. ofDefendants

ClaimAmount

6

45

299

4

39

75

13

169

1,564

22

149

2,632

80

859

4,300

307

4,369

12,241

Banks SecuritiesCompanies

InsuranceCompanies

MerchantBanks MSFCs

CreditUnions TOTAL

182

3,108

3,371

Table 3. Financial Institution Layoff Status(Unit: No. of persons)

Banks2)

Merchant Banks

Securities Companies

ITCs

Insurance Companies

Leasing Companies

Mutual Savings &Finance Companies

Credit Unions

TOTAL

144,121

3,587

27,586

5,875

83,152

1,548

9,975

30,122

305,966

101,778

1,353

22,610

3,689

64,894

1,336

7,971

2,775

206,406

97,736

912

32,051

3,352

61,745

985

6,610

26,313

229,704

92,560

5902)

36,708

1,243

53,902

979

5,781

24,424

216,187

92,560

594

36,682

1,308

54,970

979

5,781

24,109

216,983

-35.8

-83.4

33.0

-77.7

-33.9

-36.8

-42.0

-20.0

-29.1

End of1997(A)

End of1998

End of1999

End of2000

End ofMar. 2001

(B)

ReductionStatus(B-A)

Change(%)

-51,561

-2,993

9,096

-4,567

-28,182

-569

-4,194

-6,013

-88,983

Source: White Paper, August 2001,MOFE



regarding therestructuring plans.By setting thepenalty terms fornon-compl iancewith agreed terms,m a n a g e m e n tdirectives aregeared towardsm a x i m i z i n gshareholder value.The KDIC monitorsMOU compliancequarterly andreports result to thePublic FundO v e r s i g h tCommittee.3

The role KDICplays in managingbankruptcy estate isa natural extension of its role as adeposit insurer with an incentive tomaximize recovery of its funds. Underthe Special Act, KDIC or KDICemployees are appointedbankruptcy trustees.4 The SpecialAct also expanded the range ofinvestigation from the financialinstitution to include defaultcorporations, in addition to financialinstitutions.

Estimating the costs of financialrestructuring is an evolving exercisebecause loss recognition is still takingplace. The net costs will only beknown after the losses are realized inthe process of selling assets acquiredin the restructuring process such asNPLs, equity, and other assets. As ofJune 2002, 49.8 trillion Won wasrecovered by way of divestitures inequity positions and assetdispositions.

KDIC recovered 15.7 trillion Won

through sales in equity, asset salesand exercising calls on loans, whileKAMCO recovered 27.6 trillion wonprimarily through NPL sales, issuanceof asset-backed securities, andforeclosure auctions.

To minimize the burden of thefinancial restructuring, the recoveryof public funds should be maximizedthrough effective recovery efforts.However some losses are inevitable.Losses associated with the financialrestructuring process can be borne,in general, by a combination oftaxpayers and agents linked to thetroubled bank. In allocating the lossamong these groups, the mostequitable distribution possible shouldbe ensured within the constraint ofensuring a stable and efficientfinancial system.

The present value of the publicfund losses associated with the

financial restructuring process hasbeen estimated to be 69.4 trillionWon as of the end of March 2002(MOFE 2002).5&6 The financial sectorbeing the beneficiaries of the publicfund infusion, is proposed to bear asmuch as possible within theresources of financial industrypermit, and then the rest of theburden be borne by the nationaltreasury. Accordingly, the financialsector is recommended to bear 20tri l l ion Won by being levied anadditional 0.1% of the total insureddeposits as a special depositinsurance premium each year overa period of 25 years, while thegovernment (taxpayers) will bear therest of the burden at 49 trillion Won.

Prudential and regulatorymeasures introduced so far haveaddressed a wide range of concerns,including strengthening prompt

3 Currently, a total of 13 financial institutions has been counter-parties to MOUs with KDIC, including those in effect before the enactment of theSpecial Act.

4 Approximately 200 companies that have filed for bankruptcy procedures prior to the enactment of the Special Act were required to apply thisprovision retroactively.

5 These are calculated by subtracting the KDIC and KAMCO held assets from the liabilities of both institutions. For objective valuation, a private-sector oriented task force made up of an assessment committee and working level departments was established for the valuation of the KDIC andKAMCO held assets. For the KDIC held equities, the averages of the values calculated by accounting firms and securities companies have beenused as optimistic and pessimistic values, respectively. For bankruptcy related debentures, the recoverable amount calculation was differentiateddepending on the credits’ characteristics such as existence of collateral or interest reimbursements.

6 Among the total losses estimated, 67 trillion Won was incurred by KDIC and was calculated by subtracting 0.4 trillion Won of reserve funds earmarkedfor reimbursement and 17.4 trillion Won of expected recovery through sales of equity and bankruptcy dividends from the 84.8 trillion Won, KDIC’stotal outstanding liabilities.

Table 4. Recovery of Public Funds(As of the end of June, 2002, 100 million won)

Source: White Paper, June 2002, MOFE

KDIC

KAMCO

Governments

Total

44,602

Recovering Methods

Equity Disposition AssetSale

Dividends onBankruptcy

Call of loans Total

Type

37,239 74,788 1,151 157,780

InternationalBidding

Issuanceof ABS

16,016 41,406

Sales toAMC &

CRC

IndividualLoan Sale,Foreclosure& Recovery

Recoveryfrom

DaewooLoan

Recourses &Cancella-

tion

Total

87,389 17,012 96,518 275,934

Equity Disposition Disposition of Subordinate debts

12,474 52,053

498,241

64,527

17,593


corrective action (PCA), loanclassif ication and provisioningstandards, capital adequacy,accounting and disclosurestandards.

For almost all f inancialinstitutions, the PCA system waseither significantly implemented andstrengthened or newly establishedby June 1998. The most importantindicator in the PCA system is theBank for International Setllements(BIS) capital adequacy ratio forbanks, the operational net capitalratio for securities companies, andthe solvency margin ratio forinsurance companies.

The assessment accuracy ofcapital adequacy was improved bystrengthening revision of the loanclassification standards7, provisionrequirements8, and accountingprinciples. The introduction at theend of 1999 of loan classification andprovisioning based on “forward-looking criteria” (FLC) which takesinto account the capacity ofborrowers to service all obligationsrather than focusing on delinquencycriteria, was especially noteworthy.The newly adopted FLC wouldevaluate the insolvent assets based

on international standards, and thePCA would determine an institutionto be insolvent and facil itateappropriate resolution activity. Asthese mechanisms areimplemented, financial institutionswill be encouraged to exert theirinsolvency prevention efforts whileswiftly resolving insolvent institutionsto prevent it from impacting thewhole system.

As a result of introduction ofunified disclosure standards forfinancial institutions in October 1998,all financial institutions are nowsubject to the new disclosure system.This new system stipulates a regulardisclosure to be made twice a yearand strengthens the level of penaltyfor false or dishonest disclosure.Concurrently, by publicly andtransparently announcingperformance statistics such as NPLratios, BIS ratios and performance ofdividend paying products,depositors and investors are giventhe benefit of choosing a prudentinstitution of their choice.

From July 2000, mark to marketaccounting has been introduced,including new funds invested in ITCs,and on all traded securities and

7 In accordance with international practices, loans in arrears of 3 months or more are now classified as substandard or below, and loans in arrearsof 1 to 3 months as precautionary loans. As a consequence, most of the emergency loans made to technically bankrupt companies are nowreclassified as substandard loans instead of precautionary loans.

8 The provision requirement for precautionary loans have been raised from 1% to 2%. Provision requirements were newly introduced for commercialpapers (CP), guaranteed bills, and privately placed bonds belonging to trust accounts.

derivative positions other than forhedging assets valued at historicalcost. In addition, significant effortshave been made to improvefinancial institutions’ CAMEL system.For commercial banks, r iskevaluation and sensitivity to marketrisk have been added to the existinglist.

Another important contributingfactor to the health of banks includesthe advancement of managementpractices such as decision-makingprocedure. Damage claims for themanagement of the financialinstitutions by KDIC makes boardmembers realize their responsibility indecision-making. Employment ofoutside directors should becontinuously encouraged whilestrengthening the ethical andqualification standards of outsidedirector candidates.

References:

Chopra Ajai, Kenneth Kang, Meral Karasulu,Hong Lian, Henry Ma, and Anthony Richards,“From Crisis to Recovery in Korea: Strategy,Achievements, and Lessons,” IMF WorkingPaper WP/01/154, 2001

Chung Unchan, “The “IMF Crisis”: TheKorean Economy in Need of FurtherRestructuring,” Conference Proceedings inFinancial Restructuring: Lessons from ThreeEast Asian Countries, Korea Institute ofFinance, August, 2000

Demirgiic-Kunt and Enrica Detragiache,“Does Deposit Insurance Increase BankingSystem Stability?” Working Paper 2247,World Bank, April 2000

Garcia Gillian, “Deposit Insurance: obtain-ing the benefits and avoiding the pitfalls,”IMF Working Paper No. 96/82, 1996

KDIC contributed in financial marketstability by protecting depositors andproviding financial support during therestructuring and resolution process

of financial institutions.


PPPPPerspectiveserspectiveserspectiveserspectiveserspectives

58 What are your views on integrated supervision of financial institutions?

What are your views on integratedsupervision of financial institutions?

Provided that is endowed with sufficient mandate for transparency, accountability, monitoring and analysis, asingle financial supervision authority may improve financial regulation and perhaps avert future crisis. The systemicnature of the Asian crisis suggests that had separate authorities for corporations & the banking sector been ableto show and process market information about corporate liabilities and thus, banking assets more effectively, theseverity of the problem might have been reduced. - Renato Reside, Ph.D., UP School of Economics

I dont think this is the time to consider an integrated supervision of financial institutions in the country. Whicheverthat body will be, it will have awesome powers and can even, by the policies it will enunciate, redefine thefinancial institutions makeup of the economy. This has to be properly studied. As it is now, each supervisory authority( i. e. BSP, SEC and OIC and to some extent DOF ) needs to focus its meager resources to cope with their respectiveareas of supervision. Before an attempt at integrated supervision can be made therefore, a proper infrastructureshould be in place, including the right people to man the job, appropriate training, streamlined rules and procedures,etc.

In other countries, the trend is that Bank supervision is split between those who actually do the supervision/examination and those who receive and process bank reports and/or craft policies. In China for example, a bankreports to the China Banking Regulatory Commission (CBRC) for supervision and examination, the Peoples’ Bank ofChina (PBOC) for policies and reports and the State Administration for Foreign Exchange (SAFE) for the forexregulations. And this is just a bank!

The present policy of the BSP for consolidated supervision of banks is a more rational approach to supervisionrather than the proposed integrated supervision. - Carmelita R. Araneta, Banker

I hope that integrated supervision can help eradicate pyramiding and such scams as MultiTel. That measureshould address illegal financial products in the market today and why a lot of people are being lured to invest theirhard-earned money without being properly guided and informed. - Mai Mai Abengoza, Staff, Committee onAppropriations, House of Representatives

Bank supervision should provide check and balance so I am not sure about integrating process and functionsinto one agency. To protect depositors, bank supervision should implement complete transparency in the conductof bank transactions, no ifs and no buts. It should also make sure bankers who go against the law and cheat depositorsare brought to court to suffer the consequences of their illegal actions. - Gil Sombilla, cutflower businessman,Candelaria, Quezon

In these uncertain times, the need for a stronger bank supervision program becomes even more important toensure that our financial institutions safely manage their operations to be able to provide fair and equitableservices to their clients. I am in favor of integrating supervision if it is able to improve monitoring of banks.

Through a better system of monitoring, i.e., regular on-site inspections and reviews of bank performance, well-established procedures can be put in place so that troubles are immediately identified and promptly addressed.Periodic audit of transactions should likewise be conducted to arrest possible anomalies and malversation. Thisway, bank runs can be averted and the interest of depositors are better insured and protected. - Raquel J. Aranilla,Public Relations Officer IV, LIVECOR

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