When will the country ever learn from history of crises in banking?
sector, and found its way into every home and pocket.
Incomes plunged as credit and basic commodities became more expensive. Many lost jobs and businessmen, who got burned, wondered if it will be better to hold on to their funds until things get better. After the crisis broke out, the economy stood still.
To deal with the effects of the crisis, Marcus’ mother had to be separated from him and his baby sister and other members of the family for six months to go to Japan to augment the family income. She left last month.
But other Filipinos are turning to more drastic ways to deal with the crisis, especially those who lost their jobs as a result of corporate distress.
Says Bobby, Marcus’ father: “We have no choice. Everything has changed. We just hope that our government will find a way to avoid more crises coming our way.”
EXPERIENCE
Yet Filipinos are no strangers to crises. In the past century, they have been dealing with one financial crisis after another as the country struggled to grow and keep up with its neighbors.
Experts identify five major financial crises that tormented Filipinos in the last 100 years, but were quick to point out that, by the middle of the century, it is already hard to tell when one crisis started and another ended.
They added there was always at least one crisis every decade in the past century that impeded the growth of the banking system. These were usually rooted in two kinds of problems: foreign exchange difficulties and weaknesses of the banking sector.
The first and only major crisis identified in the prewar Philippine financial sector had everything to do with then fully government- owned Philippine National Bank (PNB).
Paul D. Hutchcroft, in his book Booty Capitalism ( Ateneo de Manila University Press, 1998), noted that five years after PNB was created in 1917, “the government and its currency system was in shambles after the bank’s coffers had been plundered so by landed oligarchs.”
Before PNB was created in 1912, those that dominated the banking system were two British banks ( Chartered Bank of India, China and Australia, and Hongkong and Shanghai Banking Corp.), one American bank (International Banking Corp.), and the Banco Español Filipino de Isabel II (Bank of the Philippine Islands.)
Since the British and American banks were mostly focused on financing foreign trade and the local bank had very limited resources, there was a huge clamor to create “a multipurpose national bank capable of sustaining all the government’s developmental efforts.”
PNB was borne out of this vision, but was eventually plundered thoroughly by “landed oligarchs,” in turn leading to the first major financial crisis in the banking system and the nearbankruptcy of the government, Mr. Hutchcroft noted.
Then World War II struck and very few banks remained open. When the war ended, the government created the Central Bank of the Philippines due to strong clamor from the private sector to create a central monetary authority. But just as the central bank opened its doors for business, the first balance of payments crisis struck the country.
The Philippines was the only Asian country severely destroyed by war that decided to defend the prewar exchange rate of P2:$ 1. Despite the war, import and exchange controls were kept, leading to chronic problems in the country’s balance of payments.
Gabriel C. Singson, former governor of the central bank who rose from the ranks since he started in the 1950s, recalled how tedious it was to maintain the controls.
“There was a time when the black market rate was almost P4 to the dollar while the central bank and its agent banks were selling dollars at P2 to the dollar. And we had to allocate all of these dollars,” he said in an interview.
Eventually, Mr. Singson said the inevitable happened. The central bank’s reserves were depleted, dollar supply dwindled, so the first balance of payments crisis in the country began.
Balance of payments is the record of a country’s transactions with the rest of the world. It shows whether a country is earning enough dollars to pay off its trading partners.
A balance of payments crisis means dollar inflows have dwindled critically and prospects for more dollar earnings have turned dim. The country is forced to obtain external financing or else the rest of the world may no longer transact with it.
Unfortunately, the Philippines is, and always has been, highly import-dependent, whether for consumption or for manufacturing purposes. It could not survive without sufficient dollar inflows.
Throughout the ‘ 50s and ‘60s, the Philippines was always weaving in and out of balance of payments crises. While Congress eventually allowed for “gradual decontrol” of the exchange rate in the early ‘60s — meaning, importers were allowed to sell their foreign exchange receipts in the free market — the exchange rate remained fixed at P3.90 to the dollar, Mr. Singson said.
He said pegging the exchange rate never did the economy any good. By 1970, the government was again grappling with a foreign exchange crisis and the central bank could not service its shortterm debts.
“We had to talk to creditors. We had to go to Washington and it was very difficult ( because) the banks did not even want to talk to us. It was February and it was very cold,” Mr. Singson recalled.
Stories of painful restructuring followed that February trip, Mr. Singson said, and ended with the signing of a circular that allowed the country to have a floating exchange rate.
BANK FAILURES
Then a new crisis preoccupied the government. Banking sector problems started to rear their ugly heads again when two major episodes of bank failure took place in the 1960s.
Republic Bank closed shop in 1964 and the Overseas Bank of Manila in 1968. The bank run on the Overseas Bank of Manila was the first major bank run since the war, says Mr. Hutchcroft in his book.
As with the PNB problem, he said both banks were “gravely weakened by excessive plunder from the related enterprises of the families that owned them.” The difference was that the owners of one knew how to wield political connections successfully and the other did not.
Eventually, Republic Bank was saved and its owner, Pablo R. Roman praised, as a “highly respected member of the banking system.” On the other hand, Overseas Bank of Manila did not reopen until it was sold out to Marcos crony Herminio Disini while its owner, Emerito Ramos, ended up marginalized.
Mr. Hutchcroft pointed out that the tale of the two banks clearly demonstrated what was becoming a major problem in the financial system that could be the cause of more crises in the country: supervision of the banking sector was weak and political maneuverings in the financial system were also central to the sector’s weakness.
To make matters worse, while the debacle in the financial sector was ongoing, Mr. Hutchcroft noted that then President Marcos began his systematic raid of the national treasury in his desire to be reelected. This sparked yet another balance of payments crisis.
While the economy continued to reel from the effects of this crisis, the central bank again saw two major bank failures in the next decade: that of Continental Bank in 1974, and the General Bank and Trust Co. in 1976. It was then that the country saw the worst bank run after the war.
It was not till six years later that the country saw its biggest crisis of all time, ushered in by the Dewey Dee caper and the political turmoil sparked by the assassination of Senator Benigno S. Aquino.
Dewey Dee was a ChineseFilipino textile manufacturer and banker who fled the country on Jan. 9, 1981, leaving behind nearly $85 million in debts and bringing down a total of 16 commercial banks, 12 investment houses and 17 other financial institutions, as well as $ 4 million in postdated checks floating around in Binondo, wrote Mr. Hutchcroft.
“The result was a widespread bank run that eventually led to the closing of two prominent investment houses and to changes in ownership of several banks,” Mr. Hutchcroft wrote in Booty Capitalism.
Needless to say, the financial sector was gripped by panic and terror, holding an extremely heavy bag of $85 million in unpaid debt. The changes brought about by Mr. Dee’s swindle were of far more significance than the reforms the government tried to implement before they happened, Mr. Hutchcroft pointed out.
Jaime Laya, who was appointed governor of the central bank only five days after Mr. Dee fled the country, was faced with the herculean task of restoring confidence in the banking system.