‘Financial regulators’ in robes

The peso is tumbling once again to a near all-time lows versus the dollar, breaching the major psychological barrier of 55:1, even as the news of the central bank governor’s suspension further weighed down the prevailing negative sentiment on the economy.

The market is reacting to a ludicrous situation where the judiciary is seen as meddling in the affairs of the country’s monetary authority.

In a recent ruling, the Court of Appeals has asserted that the central bank governor together with several other BSP officials exercised gross neglect of duty for ordering the closure of Urban Bank and its subsidiaries Urbancorp Development Bank (UDB) and Urbancorp Investment Inc. (UII)

Immediately after its closure, then Urban Bank president Teddy Borlongan filed the complaint with the Ombudsman but failed to have BSP Governor Rafael Buenaventura suspended. Borlongan brought his case to the civil courts, and apparently is scoring some points with the recent CA decision.

Flashback To Urban Bank Closure

Meanwhile, it would be interesting to recall the events that happened three years ago, April 26, 2000 to be exact, when Urban Bank declared a bank holiday supposedly "to preserve its assets" after experiencing abnormally high withdrawals that caused liquidity problems.

Immediately the day after, to Urban Bank’s surprise, a team from the Philippine Deposit Insurance Corp.’s designated receiver swooped down on the bank premises and started sealing vaults, drawers and filing cabinets.

Urban Bank cried foul, citing that the closure was rather hasty and bereft of due process. The BSP’s Monetary Board said the swift, decisive move was meant to protect thousands of depositors against abuse.

The closure of Urban Bank is undoubtedly one of the biggest bank failures in the Philippines. Prior to declaring a bank holiday, Urban Bank was withdrawing heavily from other banks to service huge withdrawals in its investment house, UII. Over the three-month period until before it closed, Urban Bank was a net borrower in the inter-bank market, chalking over P5 billion in liabilities.

Internally Or Externally Induced Failure

Regulators declared that bank officials were remiss on their fiduciary responsibilities when nearly P3 billion worth of receivables of UII was transferred to the bank in exchange for cash. Most of these were receivables from realty firms that had soured and had been renewed many times over.

Right after the monetary bank closure order, Borlongan complained that Urban Bank’s financial problem was a simple liquidity problem exacerbated by a jittery financial market resulting from the BW Resources scam and rumors that Urban Bank was planning to downgrade from a commercial bank into a thrift bank.

Regulators, however, countered that the cause of Urban Bank’s demise could be traced to the informal relationship of the bank and its investment house, so much so that when UII allowed its investors to pre-terminate placements, it was the Urban Bank’s deposits that serviced the investment house withdrawals.

Furthermore, investigations by the BSP showed that prior to the bank holiday, relatives of Borlongan and Urban Bank chairman Archit Bartolome were able to withdraw millions from the bank and the investment house. Nothing legally wrong, but definitely left a bad taste in the mouth.

Subsequent due diligence by Export and Industry Bank, which took over the Urban Bank a year later, confirmed that the capital-to-risk assets ratio was way below the minimum required by regulators. Likewise, the statutory unimpaired capital as of March 31, 2001 was negative.

Protecting Depositors

What’s wrong with closing a bank immediately after a bank holiday? If the objective was to protect depositors from possible pillages of owners and officers whose objective was to save their skin and those of their kin when the ship starts to sink, the BSP did well to immediately order the bank’s closure.

On a long bank holiday, there is a risk that depositors‚ interest could be prejudiced. Loan accounts may disappear, promissory notes forged, or bank records tampered. Opportunities abound for lots of hocus-pocus.

Depositors who patiently waited to see Urban Bank re-open under "white knight" Export and Industry Bank are definitely thankful that their hard-earned money was kept safe.

The Business Of Regulation

Government regulatory bodies, such as the country’s central bank, have the primordial duty to protect the good of the general public. If existing regulations are not appropriate or adequate, then improvements in the rules and procedures have to be made.

On the other hand, government officials in expediting their mandates are primarily accountable to the people of the Philippines if elected or to the President of the country if appointed. If there is any irregularity in the pursuit of their functions, appropriate mechanisms in place are supposed to check, correct and punish any wrongdoing.

If there is none, or is inadequate, the legislative system should provide for it. This is the underlying principle in public governance.

Confusion, disarray, instability and uncertainties result when another branch of government encroaches on an area where it has no technical expertise. As shown by the reaction of the market on the recent CA decision on the Urban Bank case, financial regulators in robes are apparently not welcome.

What Next?

After the Oakwood incident, the Buenaventura suspension and the Jose Pidal allegations, what next? Still wondering why the peso is sinking fast and investors’ confidence is at its lowest level?

Health Card Issues On TV

"Isyung kalakalan at iba pa" on IBC-13 News (4:30 pm and 10:30 pm, Monday to Friday) ends this week the presentation of issues related to health management organizations or HMOs. With increasing number of HMOs in financial difficulties, complaints from health cardholders are mounting. There is concern that the situation may mirror what happened to plan-holders who were not able to avail of benefits as some pre-need companies hastily closed with insufficient reserve to back up obligations. Watch it.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected] . If you wish to view the previous columns or telecasts of "Isyung Kalakalan at iba pa," you may visit my website at http://bizlinks.linkedge.biz.