Alexander, William E., Tomás J. T. Baliño, and Charles Enoch, 1995, “The Adoption of Indirect Instruments of Monetary Policy,” IMF Occasional Paper 126 (Washington: International Monetary Fund, June).
Escolano, Julio, 1997, “Tax Treatment of Loan Losses of Banks,” in Banking Soundness and Monetary Policy ed. by Charles Enoch and John H. Green (Washington: International Monetary Fund).
Hardy, Daniel C., 1997, “Reserve Requirements and Monetary Management: An Introduction,” in Instruments of Monetary Management. Issues and Country Experiences, ed. by Tomás J. T. Baliño and Lorena M. Zamalloa (Washington: International Monetary Fund).
Lirio, Ricardo P., 1998, “The Central Bank and Non-Bank Financial Intermediaries” in Philippine Financial Almanac 1997/98 (Manila).
Nascimento, Jean-Claude, 1991, “Crisis in the Financial Sector and the Authorities’ Reaction: The Philippines,” in Banking Crises: Cases and Issues ed. by V. Sundararajan and Tomás J. T. Baliño (Washington: International Monetary Fund).
Tan, Edita A., 1993, “Interlocking Directorates of Commercial Banks, Other Financial Institutions and Bon-Financial Corporations,” in Philippine Review of Economics and Business, Vol. XXX, No.1 (Manila: June).
Prepared by Enrique G. de la Piedra.
One small commercial bank, Orient Bank, is now under receivership and is not operating.
See Nellor (1998). After a long period in which interest from foreign currency operations was fully tax exempt, it is now subject only to a 7.5 percent withholding tax (compared with 20 percent in the case of peso deposits). At the same time, profits from the banks1 foreign currency deposit units (FCDU) operations are taxed at a 10 percent preferential rate on gross income, compared to the standard tax rate of 35 percent on net profit from other operations. Also, domestic banking activity is subject to the gross receipts and documentary stamp taxes, while transactions in foreign currency with non residents and with other FCDUs are exempt. Finally, while peso deposits are subject to significant reserve requirements, largely unremunerated, foreign currency deposits are not subject to reserve requirements.
The number of branches that foreign banks are authorized to open cannot exceed six, while their borrowing from head offices cannot exceed US$4 for every US$1 of domestically held capital.
Real estate loans, lending to small businesses, and consumer loans figure more prominently in the portfolio of these banks, compared with bigger banks which tend to have a more diversified portfolio.
Since the start of the current difficulties in the financial sector, one small commercial bank, seven thrift banks, and 18 rural banks have failed; however, the combined size of these banks’ assets is very small—less than 1 percent of the assets of the banking system—and thus their problems have not had any systemic implications.
Property demand in the Philippines was flat during 1989–94, which in turn prevented a boom and subsequent oversupply of real estate projects (the office vacancy rate in Manila by early 1997 was around 2 percent, compared to about 12 percent in Jakarta and Bangkok). At the same time, the prevalence of pre-sold projects helped limit large-scale reliance on bank finance for real estate purposes. In addition, the BSP in 1997 took measures to limit bank lending for real estate projects.
For capital adequacy, the BSP has adopted a net worth-to-risk asset ratio which measures capital in relation to the degree of risk of different categories of assets. The risk weighting methodology includes two weights: zero for highly liquid assets and 100 percent for the remainder of the balance sheet items, i.e., fixed assets, loans, and investments.
The ratio increased further to 13.1 percent in March 1998.
Banking sector reform is a major component of the program supported by the current standby arrangement with the Fund, and the World Bank in December 1998 approved a Banking Sector Reform Loan (BSRL).
Circular 156 of March 19, 1998, BSP, Office of the Governor.
Circular 168 of July 3, 1998, BSP, Office of the Governor.
Monthly installment loans are now to be considered non performing after three months in arrears rather than six, whereas quarterly-installment loans are to be treated as non performing after one quarter in arrears rather than two.
In April 1999, as a measure to encourage new lending by banks, the stock of loans above the end-March 1999 level was exempted from the general loan loss provision.
“CAMEL” stands for Capital, Assets, Management, Earnings, and Liquidity. 17
Supervision and Examination Sector Order 3, of March 6, 1998.
The rating system is now called CAMELS.
Supervision Guidelines No. 98–7, of May 22, 1998.
Supervision and Examination Sector Order No. 10 of November 28, 1997.
Monetary Board decision 553 of April 15, 1998, BSP.
Circular 157 of March 19, 1998.
Monetary Board Resolution 832 of June 10, 1998, BSP.
Circular 161 of March 30, 1998.
Such losses may arise from three sources: uncollateralized overdraft lending to a troubled bank; inability by the BSP to execute the collateral backing emergency loans to banks—in part owing to valuation problems; and the fact that, in the event of insufficient resources, the PDIC has unlimited access to BSP credit.
The list is compiled on the basis of forward- as well as backward-looking indicators.
In principle, no bank can be inspected more than once a year without authorization of the Monetary Board. However, the Monetary Board has granted a blanket authorization to conduct bank inspections on a rolling six-month basis. An amendment to the BSP Act has been proposed to make this authorization permanent.
Circular 176 of September 7, 1998 and Circular 181 of November 15, 1998.
Circular 163 of April 8, 1998 and Implementing Guidelines of September 3, 1998.
See footnote 3 above.
See Hardy (1997) for a discussion of the drawbacks of reserve requirements as an instrument of monetary control.
See Alexander, Baliño and Enoch (1995) for an analysis of the adverse effects of directed credit and other direct instruments of monetary policy.
See Escolano (1997) for an analysis of the tax treatment of loan losses and loan reserves of banks.
Executive Order No. 292, July 1987.
Extendable five times by an additional 30 days each, through Monetary Board Resolution.
The BSP can use two institutional arrangements to oversee operations of banks in trouble that have not yet been closed. A comptroller is named automatically when a bank is granted an emergency loan. However, the powers of the comptroller are very limited, involving only reports to the Monetary Board but without authority to override the decisions of the bank’s board. Conservatorship is a more powerful arrangement, as the conservator has the authority to override the decisions of the bank’s board and management.
Currently, emergency loans are capped at 50 percent of deposits., there is a strong element of moral hazard because a bank in distress has an incentive to increase its deposits by any means possible—and thus further complicate its difficulties—before approaching the BSP for an emergency loan.