Prudent regulations saved Philippine banking system
Believers of the six-decade old system, however, noted that deregulation was to be blamed for the crisis, which they said could not be likened to what the world faced 80 years ago.
Jacques Polak, the last known surviving delegate to the Bretton Woods conference in 1944, said the focus should be on finding consensus on global regulations and supervision of financial markets, as well as giving emerging market economies a bigger stake in the IMF and World Bank.
Learning from a painful contagion that gripped it a decade ago, Asia was not entirely caught off-guard as the US credit crisis unfolded. The Bangko Sentral ng Pilipinas (BSP) was one of the pioneers in implementing the Basel 2 accord — a framework that compelled banks to shore up capital as buffer against risks — and the first in the region to impose a risk-weighting on its own sovereign debts, Rizal Commercial Banking Corp. senior vice-president Marcelo E. Ayes pointed out.
The stricter capital rules of Basel 2, implemented in July last year, kept banks’ risk appetite in check and forced lenders to trim their soured loans as keeping them in lenders’ books meant a costly capital cover.
Bad loans now represent around 4% of the industry’s outstanding loans, a stark drop from the nearly 19% ratio recorded in the aftermath of the Asian financial crisis in 1997.
The same Basel 2 framework required Philippine banks to set aside provisions for possible losses from risky investments so that when America’s storied investment banks including Lehman Brothers collapsed in September, those with exposure still saw their balance sheets relatively unscathed.
“The early move of the BSP to introduce the Basel 2 initiative, which meant raising capital and improving risk management — that’s what saved us. The banks were well-capitalized. So even in the period of turmoil in the US , we’re expanding our loan portfolio,” Mr. Ayes said.
“Also, the initiatives of the central bank in terms of providing liquidity requirements to Philippine banks ahead helped. Although it didn’t provide blanket guarantees, we’re outsmarting the crisis because of the adequate capitalization and the credit policies in place,” he added.
“Fortunately, our local banking system is sound. We’re well-regulated. The BSP has learned a lot from 1997 and we adhere to the Basel 2 standards. We’re ahead of the curve,” said Teodoro K. Limcaoco, president of BPI Capital Corp.
Still, experts believe the worst is not yet over. The impending global economic downturn in 2009 would be the real test to the resilience of Asia’s financial system, the Asian Development Bank had said in its December Economic Monitor Review.
Asterio L. Favis, Jr., Sterling Bank treasurer, noted that the global slump could hurt the pockets of Filipinos working abroad, which has been a growing market for domestic banks’ home mortgage business.
“It’s too early to tell that we’re spared. We don’t know yet the full story because it’s still unfolding,” he said.
“In terms of derivatives, because of prudent regulations, banks did not expose themselves unduly. There was some exposure but not enough that the capital was severely at risk,” Mr. Favis pointed out.
“Now, the banks here have their own mortgage portfolios — that’s what banks should be careful about because as we know, a lot of real estate was marketed to Filipinos abroad, where their capacity to pay may be affected. People will feel it in 2009.”
Paul Joseph M. Garcia, chief investment officer of Dutch financial giant ING’s Philippine unit, expects credit growth to slacken next year, putting pressure on banks’ earnings.
“Credit growth is a very important factor in economic growth for next year. This year, we saw loan growth growing in high double digits of around 18% to 20%. In 2009, our expectations will be much more modest, maybe single-digit loan growth levels,” he said.