SEC, BSP urged to jointly examine dually regulated firms

The Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP) are being urged to conduct a joint onsite examination of dually regulated entities to ensure an effective and efficient supervision of the financial sector.

SEC Chairperson Lilia R. Bautista said the Asian Development Bank has underscored the need for the SEC and BSP to conduct joint inspections of non-bank subsidiaries and affiliates licensed to engage in capital market activities to ensure that regulatory gaps do not occur.

To make this possible, Bautista said the SEC and BSP would have to amend a memorandum of understanding signed in July to outline cooperative arrangements to more efficiently share supervisory responsibilities and information for those entities that fall under the jurisdiction of both agencies.

The ADB said that with the BSP moving toward consolidated supervision, it would be appropriate to amend the MOU to provide for joint inspections between BSP and SEC in respect to dually-regulated entities to minimize cost of supervision and standardize the regulatory and operational reports filed with both agencies.

The SEC and BSP have dual control over some areas and activities of investment houses. Investment houses which are subsidiaries or affiliates of banks are under the BSP because of their direct effect on their parent companies. The BSP has no responsibility over investment houses’ securities regulated activities while commercial paper registration and underwriting is left with the SEC.

Under the current system, examination of a banking group is conducted separately without any coordination by the BSP’s Supervision and Examination Department and the SEC’s Markets Regulation Department.

The risks of a fragmented regulatory system, particularly the presence of regulatory gaps and absence of coordination between regulatory agencies, became evident with the failure of Urban Bank in 2000.

The failure of Urban Bank was attributed to problems in its investment house subsidiary, Urbancorp Investment Inc. Urban Bank was one of the smallest commercial banks before it was downgraded to a thrift bank last March 2000 because it was unable to meet the new capitalization requirement.

Urbancorp operated as an investment house without quasi-banking functions and engaged in trust operations. Owing to a significant real estate exposure, the company suffered liquidity problems, forcing its investors to preterminate their holdings.

Urban Bank, in turn, suffered heavy withdrawals due to the loss of public confidence following its downgrade and the pretermination of Urbancorp.’s placements.

Failure to detect problems in Urbancop has been attributed to some lapse in supervisory oversight, which in turn arose from confusion in the proper assignment of regulatory function over investment houses between the BSP and the SEC.

Noting the string of failures in several investment houses, the BSP has shifted to a coordinated approach and consolidated supervision of banks. It has reorganized its Supervision Examining Sector to upgrade its supervisory capacity given the increasing complexity of the banking group’s organizational structure and business activities.

BSP’s efforts to move towards consolidated supervision of banking groups and towards a coordinated approach to supervising financial conglomerates are in line with the core principles identified by the Basle Committee on Banking Supervision in 1997.

The Philippine Institute for Development Studies, research arm of the National Economic and Development Authority (NEDA), said changes should be made in the system of supervision and regulation of the financial sector to effectively monitor corporate frauds or failures.

Economist Melanie S. Milo said the insolvencies that resulted particularly in investment houses, finance companies and commercial banks had resulted in the loss of confidence of foreign investors in the Philippine financial market.

Apart from Urban Bank, Orient Bank also failed in the aftermath of the Asian crisis as a result of fraud and mismanagement.

Milo said the consolidation of the financial sector supervision could be a solution to eliminate gaps in regulatory coverage.

She said should the country opt to move to integrated/functional regulation, the question is which entity should be appointed as the lead regulator.

Under the New Central Bank Act, the BSP has to some extent become the de facto "super-regulator" of the financial system, with its authority to supervise and examine banks’ subsidiaries and affiliates engaged in allied activities.

As such, she said designating the BSP as the "lead regulator" would make sense because of the dominance of banks. "Another advantage is that it is a relatively more experienced regulator in the financial sector, especially in a deregulated environment. It could then set the standard for the other regulators in the sector. However, it will require high levels of expertise in risk-areas common to all financial service industries," Milo said.

As an alternative solution, Milo said the Philippines can set up a council similar to the Federal Financial Institutions Examination Council of the US composed of the heads of the various regulatory agencies, which was created in 1978 to promote consistency in the examination and supervision of financial institutions.