Financial economists urge halt in state bail-out of troubled financial institutions

Continued government absorption of losses, excessive safety nets and other interventions, which bailout financial institutions without operational or systematic reforms, serve to reward and foster inappropriate risk taking.

That was the position taken by Eric Manes, senior financial economist of the Asian Development Bank (ADB) during a recent forum held at the Asian Institute of Management (AIM).

Manes was referring to the aftermath of the 1997 Asian financial crisis, which resulted in most Asian financial institutions including that of the Philippines to shoulder huge non-performing loans (NPLs) and assets.

To a certain extent, both the country’s private and state-run financial institutions were forced to bare the brunt inevitably forcing the economy to a near standstill. Growth rates remained at a poor four percent while Asian neighbors recorded double-digit growth rates.

Another factor mentioned was the prevalence of state ownership of financial institutions "which pursue political or social objectives" resulting in the use of deposits to finance quasi-fiscal activities "and impose hidden taxes on the public."

That is clear in the case of the Land Bank of the Philippines (LBP), the Development Bank of the Philippines (DBP), the Social Security System (SSS), the Government Services and Insurance System (GSIS), and the Philippine National Bank (PNB) when it was still under state management.

"Despite the acceptance that bureaucrats make for bad bankers, 40 percent of the world population lives in countries in which the majority of bank assets are under state control," the ADB financial economist lamented.

One of the immediate reactions to the impact of the financial crisis, was excessive reliance on capital adequacy as a risk mitigation measure.

AIM Prof. Victor S. Limlingan called banks as "fragile institutions" masking its "fragility through a façade of financial strength and stability." But when crunch time comes, they turn to the Bangko Sentral ng Pilipinas (BSP) and the Philippine Deposit and Insurance Corp. (PDIC) as "the last resort."

That is true in the case of the PNB, the United Coconut Planters Bank (UCPB), and the Equitable PCI Bank. As of end 2001, the PDIC has extended financial assistance to banks amounting to nearly P26 billion.

Limlingan said that the country’s banking system is in a dilemna. While most Asian governments have raised funds to bail-out its distressed banking system, the country’s monetary authorities could not raise enough to acquire the system’s NPLs.

It was forced to shell-out funds when major commercial banks were sinking and authorities could not afford a loss in bank client’s confidence. That is clear in the earlier mentioned banks.

The national government passed the special purpose vehicle (SPV) law but it remained a mere piece of legislation since it was perceived favoring the buyer of bad assets rather than protecting the country’s banking system.