Late but still useful move

One of the vital engines that propel our country’s economic growth is of course the banking industry. If this government is really sincere in working for a prosperous Philippines as P-Noy avowed during the traditional 114th Independence day “vin d’honneur” in Malacañang, it should be as much concerned with the stability of the banking system as with cleaning the government. And this is not only about maintaining the secrecy of the foreign and local currency deposits that is now being allegedly undermined by a growing demand for government officials from P-Noy down, to sign “waivers” of such secrecy, in the aftermath of the historic impeachment of the Supreme Court Chief Justice. It is more about the seemingly surreptitious and sudden closures of banks which undoubtedly have more damaging and lasting repercussions on the economy.

The most alarming aspect in these bank closures is that the government agencies mainly involved in the banking industry, particularly the Bangko Sentral ng Pilipinas (BSP) and the Philippine Deposit Insurance Corporation (PDIC), appear to be not up to par in doing their jobs.

In the case of BSP for instance, people know that it is the primary government agency charged with seeing to it that banks are viable and will not eventually fold up. Hence it has both the power and the duty to conduct regular audits and to examine bank books. Yet despite such power and responsibility, bank closures still happen.

On the other hand, it is also of common knowledge that PDIC usually steps in only after a bank goes under because of unsound banking practices that the BSP fails to detect, despite its supposedly close supervision. In short, its role is to clean up the undetected mess by paying off the insured deposits of P500,000 or less and liquidating the bank assets to settle deposits beyond P500,000 and other bank liabilities. Yet after doing its job, many depositors are still left holding empty bags.

 Obviously, as the BSP and the PDIC carry out their specific legal mandate, they sometimes fail to see or completely miss their more important overall function of preventing the peoples’ loss of trust and confidence in the banking industry. They have not done enough to prevent that loss of confidence which is very vital in the stability of the banking industry. And this is very evident in the abrupt closure of Export and Industry Bank (EIB) only last April 29, 2012.

By any standard EIB is a big commercial bank with an authorized capital of P7.5 billion of which P4.73 billion has been paid up mostly by foreign investors and local businessmen, particularly Alfredo Yao who is one of the major single shareholders contributing 6.35% of the capital. It has 50 branches nationwide and 47 ATMs with over P15 billion deposits coming from 50,053 depositors. With such capital and seemingly robust operation, nobody really expected that it would suddenly collapse. As it is turned out however, signs of bleeding were already present as early as September 2011. But there were no concrete moves on the part of BSP to stop the bleeding.

Obviously the BSP thought that it would be more prudent not to give depositors any inkling on its moves to stop the bleeding in order to prevent a bank run and inevitable closure. Unfortunately, the closure still occurred.

The most unfortunate part in this sorry episode is that the closure could have really been prevented. As early as July 31, 2009, EIB and Banco de Oro (BDO) had entered into an agreement that would fully protect EIB’s depositors and their estimated P15 billion deposits. Under the agreement BDO will acquire selected EIB assets and assume all of its deposit liabilities. This agreement could have been implemented immediately to prevent the dreaded closure. But the two agencies imposed other requirements before approving the deal. Then finally in March 2010, the two agencies approved the agreement when the two banks agreed to all the conditions imposed.

But the transaction was again delayed for several months because PDIC and BSP mystifyingly required an updated due diligence review. By April 2011, the transaction was again approved. But before the documentation between the two banks could be completed, EIB was again embroiled in a case brought by the group of businessman William Gatchalian against E-Securities, sister company of EIB. The Gatchalian group wanted to execute on EIB a judgment rendered against E-Securities only. This prompted BDO to impose the resolution of that case as a closing condition for the completion of the transaction. Thus time ran out on EIB and BSP closed it down on April 29, 2012 when liabilities exceeded assets.

At this stage, after more than 45 days, PDIC as receiver has no rehabilitation plan for EIB yet. It has 90 days to do so. While it confirmed that BDO has again submitted a proposal to rehabilitate EIB “with certain conditions,” PDIC has not yet acted on the proposal and depositors are still left in the dark. What it is doing now is merely settling the insured deposits which amounts to only P4 billion of the total P15 billion deposits. This uncertainty is further eroding the peoples’ confidence in the banking industry. Furthermore, it is already causing so much harm and damage to depositors composed mostly of medium size businessmen now undergoing financial crisis, senior citizen-retirees who are at a loss as to where they could get money for medicines and daily expenses. Even some school’s money are locked in. PDIC has to move fast.

In fact, P-Noy should personally look into this fiasco already to expedite the rehabilitation, especially in this case where closure could have been avoided. The government should help the citizen-depositors. In the US, during the time that JP Morgan or Citibank were on the verge of closure, the government immediately took steps to save the banks and thus prevented closure. So there is more urgency for P-Noy government to immediately rehabilitate EIB after it failed to prevent its closure. The BDO proposal should be accepted already. Or it is quite complicated government banks or financial institutions, like Land Bank or DBP should assist in the rehabilitation. P-Noy and his administration should realize that the monies involved here are “patriotic monies” which will never move out of the country, unlike the billions of dollars of foreign investments that P-Noy recently bagged which are temporarily parked only and will be withdrawn when conditions become unfavorable.

It would be good for the BSP and the PDIC to also dig deeper on the real reason for the bank closure especially when news reports say that one of the major shareholders of the bank still continue to operate a savings bank and his airline company is even embarking on an aggressive expansion program. He seems to be least affected by the closure unlike the depositors.

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