WB cautions on mergers in banking sector

The World Bank has cautioned that the prevailing merger and consolidation trend in the Philippine banking sector will not always lead to good results.

"While the banking sector consolidation may create economies of scale, technology and regulatory oversight, it also increases the scale of potential distress resolution should one of the larger institutions deteriorate," the World Bank said in its latest Asian quarterly report said.

The BSP has encouraged banks, particularly those undercapitalized, to merge with one another to cope up with the stiff competition in the banking industry.

Despite this, the World Bank said the country's monetary authorities have been quick to place a mechanism to monitor the impact on merging financial institutions.

"The BSP (Bangko Sentral ng Pilipinas) has stepped up its monitoring of bank groups on a consolidated basis and strengthened early warning systems to detect banking weaknesses," it said.

It also noted that the central bank has taken a number of measures to strengthen banking supervision in the last year.

These measures, it said, include: drawing up a systemic contingency plan, issuing further guidelines for prompt corrective action; stepping up on-site inspections, improving coordination between the BSP and the Philippine Deposit Insurance Corp. (PDIC) in resolving distressed banks; and strengthening oversight of market risk in addition to credit risk.

The World Bank also took note of the fact that BSP and PDIC have taken measures to improve legal protection of their staff from unwarranted lawsuits in the performance of their official duties.

Over the past two years, the authorities have encouraged consolidation through suasion, higher minimum capital and provisioning requirements and moratoria on bank branching and upgrading licenses.

The BSP is currently assessing the effects of these policies on the mergers that have occurred between PCIBank and Equitable Banking Corp; Bank of the Philippine Islands and Far East Bank and Trust Co.; and Asian Bank with Pilipinas Bank, and the acquisition by Metrobank of two smaller banks.

According to the World Bank, there have been measures taken by the BSP to increase transparency in the banking system.

Since December 1999, the World Bank noted that all banks, whether listed or not, have been required to meet tighter disclosure requirements that were introduced earlier only for listed banks. These include public disclosure of the volume of non-performing loans and of connected lending DOSRI (directors, officers, stockholders and related interests).

In addition, it noted that following an apparent change in control of the Philippine National Bank (PNB) without adequate public information about the true beneficial ownership of the bank, BSP is drawing up measures to strengthen disclosure requirements on beneficial ownership of all banks.

Nevertheless, the World Bank said Philippine banks have weathered the regional crisis relatively well, due to stronger pre-crisis capital positions and lower corporate leverage vis-a-vis neighboring countries.