(Concluded from last week)
Manila, Philippines – LAST week, I discussed how the Bangko Sentral ng Pilipinas acts as the supervisor and regulator of financial institutions such as banks, quasi-banks, trust entities, savings and loan associations, and pawnshops.
I also enumerated the ways in which the BSP exercises its supervisory powers: 1) Issuance of Rules; 2) Examination and Investigation; 3) Prompt Corrective Action; and 4) Resolution.
Through its Issuance of Rules, the BSP sets policy directions and issues instructions to banks and other supervised institutions through memorandums and circulars.
Examination and Investigation involves regular and special investigation of BSP-supervised institutions.
In this concluding article, I will describe briefly the two other methods by which the BSP exercises its supervisory powers.
A third method is through Prompt Corrective Action. Banks with composite CAMELS rating of 2 are initiated into a Prompt Corrective Action (PCA) framework. CAMELS, as we explained earlier, is an acronym which stands for six components which bank examiners look at very closely: C-apital adequacy; A-sset quality; M-anagement quality; E-arnings; L-iquidity; and S-ensitivity to Market Risk).
A bank under PCA is obligated to sign a time-bound Memorandum of Agreement with the Bangko Sentral in which the bank commits to address the deficiencies noted in the examination. For example, a bank, whose adjusted capitalization has fallen below the required minimum, must commit to immediately inject capital to make up for the shortfall.
Banks under PCA either successfully comply with their commitments or they don’t. Successful compliance enables the bank concerned to “graduate” or exit from PCA. Failure of PCA, on the other hand, could eventually lead to receivership unless a Strategic Third Party Investor “STPI” or “white knight” is able to assume the assets and liabilities of the beleaguered bank.
The last method which the BSP uses is Resolution.
The first step in the resolution process is receivership. The bank is immediately prohibited from engaging in banking activities anywhere in the Philippines. The Philippine Deposit Insurance Corporation (PDIC) simultaneously takes over the bank premises to secure bank records.
During the receivership period, PDIC, in accordance with its mandate, pays depositors with insured deposits, i.e., R500,000 or lower. The PDIC then determines, usually within a period of 90 days from closure, whether it is still possible to allow the bank to resume operations with safety to its depositors.
Resumption of operations is still possible with the entry of a “white knight.” Should re-opening prove to be impossible, the PDIC recommends to the Monetary Board the liquidation of the bank. This is the second and final step of the resolution process. During liquidation, the residual assets of the bank are disposed of and the proceeds are paid pro-rata to the preferred creditors and eventually the uninsured depositors.
That said, we would like to emphasize that the Philippine banking system is very strong and stable. With the exception of a few which are closely watched by the BSP, Philippine banks are adequately capitalized, well-managed, profitable, and are efficiently performing their roles as mobilizers and lenders of funds which fuel the growth of our economy.
Note: The foregoing article will also appear in the author’s forthcoming book — Central Banking for Every Juan and Maria.
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