Countries of the Eurozone agreed last Thursday to begin steps towards a banking union. This is an important development in restoring financial stability to this problematic region.
It will take many more years to correct the deficiencies that caused the debt and fiscal crises now plaguing the Eurozone. Profound structural reforms will have to be done. Eventually, the countries using the euro should strive towards a fiscal union, to harmonize policies and reduce the moral hazards the present arrangement presents.
A banking union is, however, a substantial achievement. It will create a common regulatory framework for all the banks in the Eurozone and strengthen the role of the European Central Bank. This will prevent the current unevenness and disparities in banking regulation that is one of the sources of the prevailing financial instability in the European region.
If the countries of the Eurozone want to continue sharing a common currency, they will have to harmonize the regulatory structures underpinning that common currency. The case where, for instance, a country like Greece could get away for so long with lax fiscal management and yet borrow at the same Euro rate as Germany must never happen again.
Old-line nationalists will, no doubt, oppose a banking and, eventually, a fiscal union. They think this is an infringement on an independent country’s sovereignty. The realities of modern financial integration, however, require drastic rethinking of old ideas about sovereignty.
Days before the Eurozone decided in a banking union, US Fed chairman Ben Bernanke surprised the financial world by adopting a policy linking interest rate decisions to the unemployment rate. What this means, in practice, is that interest rates will be raised only when the employment situation improves.
This, too, is a radical departure from old thinking about monetary policy. It goes beyond linking policy rates to aggregate growth rates and now considers weighing the quality of growth in terms of employment generation.
Bernanke’s policy is not without its critics. Those critics believe the policy overemphasizes the importance of monetary policies over other economic considerations such as structural constraints on employment generation.
The debate over the efficacy of monetary policy and the quality of economic growth is a complex one and will likely continue for some time to come. The point, however, is that more and more people appreciate the importance of monetary policy in shaping growth.
In our own case, for instance, the surprising growth surge we saw draws largely from the precise calibration of interest rate policy done by the Bangko Sentral ng Pilipinas (BSP) and the Monetary Board. The 7.1% growth we saw in the third quarter might be overstated because it represents year-on-year growth over a really bad third quarter figure last year (due principally to a misguided embargo on public sector expenditure). The growth figure is impressive, nevertheless, and is to a large extent due to the Monetary Board’s lowering of policy rates.
This week, the BSP indicated the historic low interest rate regime will be maintained for a longer period. That will be the single most important factor driving our economic expansion.
Strong
A low interest rate regime will be meaningless if the domestic banking system is weak, if it is unable to efficiently lend to enterprises that will, for their part, produce the economic growth.
The good news here is that our private banks are strong, helped by the consolidation we saw the past few years. Our private banks have been able to increase their lending and fuel economic expansion.
As a case in point, Security Bank Corporation (SBC) was recently named the strongest Philippine bank by Asian Banker 500. SBC was also listed among the world’s leading banks by The Banker, the widely respected banking magazine put out by The Financial Times of London.
The accolades are well grounded. For 2011, SBC earned P6.7 billion, representing a return on equity (ROE) of 25%. That is more than double the domestic banking industry’s average ROE of 12.14%. This bank’s return on asset (ROA) of 3.5% is likewise more than double the banking industry’s average of 1.46%.
For the same year, SBC ranked first on ROA among 500 banks across the Asia Pacific region. This is according to a study done by Asian Banker 500.
SBC’s remarkable 2011 performance has been sustained through the first three quarters of this year. It is well on track to exceeding its earnings for the previous year. Its annualized ROE is at 31%, again more than double the industry average of 15%.
Although SBC is not among the country’s largest banks, it has been actively involved in several large deals: the P16B secondary offerings of San Miguel Corporation; the $220 million loan facility for Team Energy; the P11.5B corporate notes of MTD Manila Expressways; and the P11B corporate notes of the South Luzon Tollways Corporation. In addition, SBC participated as joint deal manager for government’s record P323.5B peso bond swap.
Most important for our domestic economy, SBC sustained a loan growth of 24% through 2011. These loans went to infrastructure, energy, retail, real estate and mining projects — the main drivers of our country’s economic expansion.
One might say a nation’s economy can only be as strong as its banking system, the sector that consolidates capital and finances investments.
As the countries of the Eurozone try to shore up their banking system to restore robust economic growth in this mature region, we should be assured that our own banking system has been competently run and regulated at the highest standards.