IMF presses government to amend BSP charter

The International Monetary Fund (IMF) is pressing for amendments in the charter of the Bangko Sentral ng Pilipinas (BSP) to strengthen its regulatory powers over Philippine banks.

IMF deputy managing director Agustin Carstens visited the country last week and held meetings with Philippine authorities, including President Arroyo, Senate President Franklin Drilon and House Speaker Jose de Venecia.

"I was encouraged to hear of current initiatives to advance financial sector reforms in the Philippines," Carstens said. "I particularly look forward to the passage of the amendments to the BSP charter that will strengthen the legal protection for bank supervisors."

Carstens said the IMF welcomed the progress made so far with the Arroyo administration’s economic reform agenda. However, he stressed these reforms would have to be completed.

"The completion of these reforms will be crucial for reducing vulnerabilities and initiating a virtuous investment-growth cycle," Carstens said.

The IMF has been pressing the government to amend the BSP charter, specifically where it was weak in the protection of bank supervisors dealing with problematic banks.

The BSP is considered one of the most vulnerable central banks in the world, being unable to close down problematic banks unless they voluntarily declare a bank holiday.

Under current rules, the BSP is not even able to declare a bank insolvent unless management agrees to its evaluation and assessment.

The hurdle for insolvency itself is also deemed unusually difficult after the Supreme Court ruled that the assessment of a bank’s asset be based on the realizable value of its assets.

The IMF earlier said if Congress is too worried in allowing the BSP to close down troubled banks, monetary authorities should at least have the power to write down the value of their equity.

The proposal was first floated during the consultation between monetary officials and the IMF mission during the recent post-program monitoring (PPM) in June last year.

BSP sources said the IMF acknowledged the difficulty of convincing Congress to give the BSP enough regulatory powers to address the failure of chronically-ill banking institutions that could not be closed down.

According to a BSP official, allowing the BSP to write down the value of bank equity would at least compel troubled banks to address their inadequacies and undertake measures to prevent the Monetary Board from writing down their equity.

The IMF has been pushing the government to put more teeth in the BSP charter and allow monetary officials to close down troubled banks that are too problematic to be rescued.

However, closing down banks have proven traumatic for the BSP as its officials have been repeatedly brought to court for taking action against collapsing banks.

"If giving the BSP the power to close banks is too drastic, the IMF figured there must be alternatives that would still be strong enough to force banks to get their acts together or close on their own," the official said.

Banks usually defer writing down their equity value even when infested with non-performing assets that should otherwise be written off.

The idea, according to the official, is to allow the BSP to evaluate the asset quality of the bank and reflect this on the value of their equity after all bad assets have been considered and all investments have been marked to market to reflect their true value.

"The BSP should be allowed to force banks to write off bad assets and investments," the official said.

However, the official pointed out that even this would not be enough if BSP officials are not protected from recrimination by sulking bankers, like in the case of Urban Bank which declared a bank holiday and ended up suing the BSP for closing it down.

The courts ultimately sided with the BSP all the way to the Supreme Court but the official said the litigation proved traumatic for BSP examiners.

"BSP examiners still need protection," the BSP official said. "Of course the BSP as an institution should not be exempt from suit but BSP officials should have some degree of protection from recrimination and legal intimidation."