RP banks remain weak - ADB study

The country's banking system remains weak despite various reforms implemented previously by monetary authorities, according to an Asian Development Bank (ADB) report.

"Despite earlier reform efforts, weaknesses remain in the Philippine banking system," the ADB's Asia Recovery Report (ARR) said.

At the same time, the ADB is pushing for the repeal of the Bank Secrecy Law. "The reluctance to repeal the Banking Secrecy Law remains a serious impediment to strengthening bank supervision," it said.

The report also pointed out that the prudential regulations and supervision are still some way short of international best practices.

"The momentum in reforms needs to be continued and enhanced in the areas of prudential standards, disclosure, supervision, and bank exit and resolution procedures," it said. "This requires not only strengthening the regulatory framework, but also ensuring compliance and enforcement".

The ADB report noted the monetary authorities' current effort to review and come up with regulations that would further strengthen the financial system.

"In response to these weaknesses, regulations are currently being revised to make them at least as strict as the Basle recommendations and supervisory capacities are being gradually strengthened," it said.

The ADB report also noted that up to now, there have been no specific new measures taken to handle distress.

"The existing legal framework for handling insolvency cases is a major constraint to expeditious debt restructuring and settlement," it said.

In reviewing the impact of the regional financial crisis on the country's financial system, the ADB report said when the peso fell in 1997, the Philippine authorities responded by extending liquidity to the banking system.

It said while the non-performing loan (NPL) ratio has increased significantly, reaching 15 percent of total loans at its peak in late 1999, this is much smaller than the peak ratios observed elsewhere.

"While there is genuine concern about the level of NPLs, the Bangko Sentral ng Pilipinas, the country's central bank, is not about to undertake any general measures to resolve them," it said.

Instead, it said banks themselves will have to work on improving the quality of their asset portfolios. "This has led to some consolidation activity in the banking sector," it added.

Overall, it said the Philippine case is somewhat different. "As in the other economies, there had been a period of financial liberalization prior to the crisis. But this had been accompanied by a concerted effort to strengthen regulation and supervision following earlier banking sector difficulties. The property and financial sectors were overheated, but not so severely as in the other affected countries," it noted.