Prospects for the Regulation of the Philippine Financial
Sector in the Medium-Term

Ronald Dizon Margallo

23 May 2013

Prospects for the Regulation of the Philippine Financial
Sector in the Medium-Term
A Research Paper Submitted
to the Graduate School of Public Policy,
The University of Tokyo
in partial fulfillment of the requirements
for the Degree
Masters of Public Policy

byRonald Dizon Margallo
Student No. 51-118217

Advisor: Professor Hideaki Shiroyama

23 May 2013

Abstract
This paper evaluates the Philippine financial markets and its regulation with the aim ofrecommending actions in the medium-term. Survey results show that there are five areas thatneed urgent action. These are the legal protection given to examiners and officers, amendment tothe bank secrecy law, regulation of conglomerates, institutionalization of macro-prudential
policy tools, and reinforcement of resources. Based on these concerns, recommendations are
given at the institution and inter-agency levels.

Keywords: Philippine Financial Regulators, Philippine Financial Sector, Financial Sector ForumContents______________________________________________________________________________
Glossary of Termsi______________________________________________________________________________
List of Figures and Tablesii______________________________________________________________________________
Outlineiii______________________________________________________________________________
1. Introduction1______________________________________________________________________________
2. Philippine Financial Environment
1
Banks and NBFIs
1
Stock Market
2
Conglomerates
2_____________________________________________________________________________
3. Financial Regulation in the Philippines
Four Regulators
Financial Sector Forum33
4

4. Online Survey Results and Validation
4
Legal Protection
4
Amendment to the Bank Secrecy Law
5Regulation of Conglomerates
5
Institutionalization of Macro-prudential Tools
6
Reinforcement of Resources6______________________________________________________________________________
5. Policy Recommendations
6
Institution Level (BSP and SEC)
6
Financial Stability Forum Inter-agency Level
7______________________________________________________________________________
6. Concluding Remarks
8______________________________________________________________________________
Bibliography9Glossary of Terms
ASEAN 5
BSP
DBM
FSF
HBN
IC
IMF
NBFI
NCBA
PDIC
PSE
PSEi
RA
ROE
SBN
SEC
SRC
UKB

	
  

Association of Southeast Asian Nations 5
Bangko Sentral ng Pilipinas
Department of Budget and Management
Financial Sector Forum
House Bill Number
Insurance Commission
International Monetary Fund
Non-Bank Financial Institution
New Central Bank Act (Republic Act 7653)
Philippine Deposit Insurance Corporation
Philippine Stock Exchange
Philippine Stock Exchange Composite Index
Republic Act
Return on Equity
Senate Bill Number
Securities and Exchange Commission
Securities and Regulation Code (Republic Act 8799)
Universal and Commercial Banki	  

List of Figures and Tables
Figure 1: Total Assets of Banks and NBFIs as of March 2012
Figure 2: Universal and Commercial Banks
Figure 3: Thrift Banks
Figure 4: Rural and Cooperative Banks
Figure 5: Capital Adequacy Ratio
Figure 6: Return on Equity
Figure 7: Ten Biggest Borrowers as a % of Total Loans of Large Banks
Figure 8: Non-Bank Financial Institutions
Figure 9: No. of Listed Companies in ASEAN 5
Figure 10: ASEAN Stock Prices
Figure 11: Intensity of Use of Macro-Prudential Tools

11
11
11
11
12
12
12
12
13
13
13

Table 1: Financial Regulators in the Philippines 101
Table 2: Information Needed from Other Regulators
Table 3: Bilateral Memorandum of Agreement
Table 4: Scope of Function of FSF Committees
Table 5: Stipulations Concerning Responsibility of its Employees
Table 6: Statutory Protection of Regulators, Selected Countries
Table 7: Chapter 9, Book I of the Administrative Code of 1987
Table 8: Bank Secrecy Law

14
16
18
18
19
20
21
22

	
  

ii	
  

Outline
Section 1 gives a brief background on the importance of coordinated regulation. Section 2
examines the current situation of the financial sector and regulated companies. This is followedby an assessment of Philippine regulatory bodies and the Financial Sector Forum in Section 3.
Then, Section 4 analyzes and validates results of the email survey among middle management of
BSP, SEC, and PDIC. Policy recommendations both at the institution and inter-agency levels arepresented in Section 5. Finally, concluding remarks and areas for further research are discussed
in Sections 6.
	
  

	
  

iii	
  

1. Introduction
Financial regulation plays an important role in ensuring that financial markets work.
It safeguards the integrity of the financial system by putting a stop to serious distortions tocompetition, protecting the essential needs of ordinary people in cases where information iscostly to obtain, and preventing costly market failures (Brunnermeier et al., 2009).
After the financial crisis in 2008, regulators all the more have a great deal ofbalancing between monitoring and regulating in choosing a system that fits best the situation
they are in. Too much emphasis on regulation may be counterproductive and impede therecovery and development of financial markets. On the other hand, actions deemed
insufficient such as relying mainly on monitoring can encourage unhealthy and excessiverisk-taking behavior of firms.
This paper looks into the regulatory regime in the Philippines and evaluates its
effectiveness based on current and future trends of domestic financial markets. It aims topropose actions in the medium-term to enhance the regulation of the Philippine financial
sector. Recommendations focus on two institutions, the Bangko Sentral ng Pilipinas andSecurities and Exchange Commission, and the inter-agency Financial Sector Forum.

2. Philippine Financial Environment
2.1 Banks and NBFIs
Like most Asian countries, the Philippine financial sector is primarily dominated by
the banking sector. Banks operating in the Philippines are clustered into three: universal andcommercial banks, thrift banks, and rural and cooperative banks. They are grouped based on
the size of capitalization and types of banking activities. In 2009, total assets of the threesegments stood at Php7,171.8 billion (Figure 1). All clusters showed a decrease in thenumber of head offices, mostly due to mergers, but posted a net expansion due to the increasein the network of branches (Figures 2 to 4).
Philippine banks as a whole are well capitalized and resilient. Since the beginning of
the 21st century, banks have maintained a capital adequacy ratio above the 8% minimum
requirement (Figure 5). ROE has also stayed positive (Figure 6). Banks remained resilient
amid the Lehman shock. Although ROE decreased significantly in 2008, it jumped back theyear after with rates higher than the pre-Lehman crisis level.
There are two sources of concern about Philippine banks. The first one is theconcentration of loans among big borrowers (Figure 7). In 2009, all 10 largest banks’
exposure to the 10 largest borrowers was at least 10%. Of these 10 UKBs, two had higher
credit risk since 30% of their total loans were provided to big borrowers. A stress test by the
IMF showed that in the case of a failure of one borrower, some of the UKBs would see their
Tier 1 capital wiped out. Failure of more than one of these big borrowers, although thelikelihood is low, would have a severe impact on the capital of major banks, crippling the

	
  

1	
  

banking sector. The other concern is the double exposure of thrift, rural, and cooperativebanks to real estate loans and non-performing assets and restructured loans (IMF, 2010).
In the case of NBFIs, this segment has seen dramatic growth in terms of expansion(Figure 8). Although capitalization of this sector is small compared to banks (Figure 1),
NBFIs such as foreign exchange dealers, money changers, and remittance agents are
expected to continue expanding due to the low startup capital and high demand fromoverseas Filipino workers for remittance and money transfer services.
2.2 Stock Market
On the other hand, the capital market in the Philippines is relatively underdeveloped
compared to the banking sector. The Philippines has the least number of companies listed in
the stock market among ASEAN 5 countries (Figure 9). As of January 2013, the number ofcompanies in the Philippine Stock Exchange is 253. This is lower than the number of listedcompanies in the stock exchanges of Malaysia, Singapore, Thailand, and Indonesia in 2003.
PSE experienced little growth in the past 10 years. The number of publicly traded
companies in the Philippines grew by 7.1% only, which is way below the ASEAN 5’s
average of 25.5%. The net increase in the number of companies listed in PSE was just 18,
whereas Indonesia Stock Exchange and The Stock Exchange of Thailand increased by 133
and 161, respectively.
Recent developments and growing interest in the Philippines are expected to change
the country’s financial landscape. Two major rating companies have upgraded thePhilippines credit rating to investment grade. Fitch Ratings gave the Philippines its first everinvestment-grade credit rating on 27 March 2013, citing improved fiscal management andstrong policy-making framework. S&P followed suit on 02 May 2013, raising its rating of thePhilippines’ long-term foreign currency-denominated rating to BBB- from BB+ with a stable
outlook.
These have contributed to the inflow of hot money and continued bullish performanceof the Philippine Stock Exchange. The PSE witnessed an upward trend in its composite index(Figure 10), echoing regional trends but outperforming Bursa Malaysia and Singapore
Exchange. The main-share PSEi broke the 7,300 mark for the first time in history on 14 May
2013, a day after the Philippines’ midterm election.
2.3 Conglomerates
The global trend of financial deregulation and integration has ushered a new era offinancial conglomerates. These entities provide a wide range of financial services, normallyincorporating insurance and securities activities as well as traditional banking services(Tripartite Group of Bank, Securities, and Insurance Regulators, 1995). In the Philippines,
most UKBs are classified as conglomerates because they have a securities company or
insurance firm as a subsidiary or affiliate.

	
  

2	
  

The emergence of financial conglomerates poses a threat to the stability of thefinancial sector due to five risk factors (Santos and Mullineux, 2009). First, conglomerates
can make it appear that the capital they hold is sufficient to cover the risk exposure of entities
that comprise them through the process of multi-gearing. Second, they are susceptible to two
types of contagion. One is psychological contagion wherein a healthy unit of a conglomerate
is affected by its association with a related unit that has inherent weaknesses. The other isintra-group exposure, or the risk from the transmission of an entity’s weakness to otherentities because of actual linkages such as shared resources and borrowings. Third,
management faces the challenge to coordinate units with different characteristics and risk
profiles and come up with an overall risk profile and subsequent policies. Fourth,conglomerates run the risk of misusing client information across entities and offering
products and services at the expense of customers. Last but not the least, moral hazard in thelender of last resort facility and other guaranty schemes is high for conglomerates that are toointerconnected to fail.

3. Financial Regulation in the Philippines
3.1 Four Regulators
Regulators of the Philippine financial sector are comprised of the Bangko Sentral ng
Pilipinas, Securities and Exchange Commission, Insurance Commission, and, to a certain
extent, Philippine Deposit Insurance Corporation (Table 1). BSP and IC’s predecessors bothcame into existence as independent bodies in 1949. PDIC is the youngest organization, which
was established in the early 1960s, while SEC is the oldest, having been founded prior toWorld War II. All agencies envision becoming on a par with their international peers. They
also put emphasis on promoting the interest of their stakeholders. In addition, BSP, SEC, andIC’s mission statements highlight ensuring the stability of the sectors they regulate. BSP
looks at the macro perspective of its functions while IC, SEC, and PDIC focus on the welfareof the insuring, investing, and depositing public.
Despite the distinct functions and supervised entities of these agencies as mandatedby law, and also their different approaches to regulation, there are overlaps in the executionof their duties. One example is the data needed by an agency from other agencies in the
conduct of regulation (Table 2). Due to confidentiality issues, some data are not readily
available. Examples of which are the current status of individual banks from BSP, capital
shortfalls from SEC, and exposure of insurance companies to banks from IC. Certain
procedures must be observed such as writing a request letter signed by the requesting party’s
head addressed to the other agency’s head. To improve the exchange of information, someregulators entered into bilateral agreements (Table 3). Another example between BSP and
SEC concerns NBFIs. There are currently no clear guidelines on the involvement of the two
agencies in the revocation of primary and secondary licenses to NBFIs. BSP has limited
authority over NBFIs in terms of business registration.

	
  

3	
  

3.2 Financial Sector ForumOn July 5, 2004, BSP, PDIC, and SEC signed a memorandum of agreement that gavebirth to FSF. IC joined shortly thereafter. Agency leaders at that time saw the need for a
formal venue for the four institutions to engage in dialogue and foster cooperation(Buenaventura 2004). This signaled a significant step toward addressing inter-agency
concerns. Under the FSF, issues regarding supervisory responsibilities, information sharing,and protecting the general public from unlawful and unethical business practices ofcompanies are discussed among the four regulators (Guinigundo 2005). FSF has threecommittees based on these three areas (Table 4).
Since its creation, FSF has enabled the four institutions to discuss how to standardize
the supervision of similar activities, minimize overlapping functions, and fill in gaps toreduce regulatory arbitrage while preserving their respective mandates. It has also allowed
setting rules on the disclosure of information (Table 2) and harmonizing reportorial
requirements from supervised entities. Moreover, it empowers the public through its
consumer protection campaigns. At present, FSF convenes on a bi-monthly basis, with top
management of the four agencies as core participants. The three committees serve astechnical working groups in an advisory capacity and submit recommendations for approvalby top management.

4. Online Survey Results and Validation
An online survey was conducted among department and group heads at BSP, SEC,
and PDIC at the beginning of May 2013. The survey questionnaire is composed of two parts
with four open-ended questions each. The survey’s first part focuses on SWOT analysis andenhancement of regulatory functions of individual institutions. The second part touches on
the interaction among the four regulators and ways to improve coordination efforts. A total of
16 respondents who have an average of 20 years in service participated in the survey andshared their insights. Based on their answers, areas that need urgent action in the medium
term concern legal protection given to examiners and officers, amendment to the banksecrecy law, regulation of conglomerates, institutionalization of macro-prudential policy
tools, and reinforcement of resources.
4.1 Legal Protection
Passages pertaining to the legal risk faced by examiners and officers are found in
Section 16, Article II of NCBA and Section 6, Chapter 2 of SRC (Table 5). The stipulation“exercise extraordinary diligence” makes BSP and SEC employees overly cautious in theperformance of their duties. Employees are most at risk when they attempt to enforce laws,
impose sanctions or penalties, or to take control of a troubled institution (Delston andCampbell, 2006). Being held liable for doing their job can put pressure on examiners to
downplay their findings. Red flags that point to misconduct, albeit crucial to the assessmentof a company’s financial status, may be omitted from the report on examination to avoid
court litigations. This poses not only a reputational risk for BSP and SEC if they fail to takeproper action against erring entities but also a threat to the stability of the financial market.

	
  

4	
  

BSP and SEC employees are more vulnerable to suits compared to their peers (Table
6). Statutory protection of government employees in countries such as the U.S., U.K., andJapan shows that employees of financial regulators are liable for damages caused willfully or
through negligence. However, they have no liability if their actions are done in good faith.
They do not have to worry about performing duties with extraordinary diligence.
Recent examples that show the susceptibility of regulators in the Philippines to legal
suits are the foreclosure of two banks, Urban Bank and Export and Industry Bank. Urban
Bank had a unilateral declaration of a bank holiday in April 2000. BSP then put Urban Bank
under receivership, launched an investigation, and uncovered irregularities. The former
president of Urban Bank filed administrative complaints against six BSP officials for alleged
gross neglect of duty (BSP, 2004). Shareholders of Export and Industry Bank, on the other
hand, filed a case against PDIC for indecent haste and grave abuse of discretion amounting tolack or excess of jurisdiction in the liquidation (Dumlao, 2013).
According to the Philippine Senate website, there are three Senate bills that propose
amendments to the NCBA. Two of these bills replaced Section 16 of NCBA with Sections 38
and 39, Chapter 9, Book I of the Revised Administrative Code of 1987 (Table 7). If
approved, all BSP personnel shall be on equal footing with their peers at PDIC. They would
be held liable for willful or negligent acts, and not for failing to exercise extraordinary
diligence. Both bills were filed in July 2010. The latest Senate bill, SBN 2742 in 2011, has
Section 16 of NCBA intact. Four bills with similar proposals for Section 16 were also
introduced in the House of Representatives beginning July 2010. The latest bill, HBN 6205
in 2012, had no amendments to Section 16. All bills never went past the relevantCommittees.
4.2 Amendment to the Bank Secrecy Law
On the other hand, there are three RAs that prohibit concerned Philippine regulatorsfrom looking into deposit accounts at their discretion (Table 8). Provisions in these RAs put abarrier to the investigation of fraudulent transactions that are coursed through deposit
accounts. These encourage companies and individuals alike to engage in unsafe and unsoundbanking practices and crimes such as evading tax and hiding of proceeds of corruption.
Proposed amendments to RA 1405 or the Secrecy of Bank Deposits Law and NCBA
are not sufficient to enable regulators detect all irregularities hidden in deposit accounttransactions. HBN2370 in 2010 addresses the issuance of bouncing checks only. SBN 2767
in 2011 proposes to exempt from bank secrecy government officials only. SBN 2742 andHBN 6205 do not have amendments to Section 25, Article IV of NCBA, thereby denying
investigative reach to BSP.
4.3 Regulation of Conglomerates
A bullish outlook on the Philippines increases investor confidence but it can also
compound the risk-taking behavior of companies. Four strands that explain pro-cyclicality in

	
  

5	
  

the case of banks and financial conglomerates are the financial-instability hypothesis, disastermyopia, herd behavior, and principal-agent problem between shareholders and managers.
(Fernandez de Liz and Herrero, 2009). The increasing role of technology in financial markets
further amplifies and complicates the situation. This increases systemic risk and, if leftunchecked, may cause turmoil in the financial sector.
4.4 Institutionalization of Macro-prudential Tools
A cross-country regression analysis has found that macro-prudential tools may help
dampen procyclicality (Lim et al., 2011). In the Asia Pacific region, monetary authorities in
10 of 13 countries surveyed have started using macro-prudential tools in varying intensities
to reduce systemic risk (Figure 11). BSP could benefit from such tools especially now that
the Philippines’ booming economy is vulnerable to procyclicality. It can learn from similar
emerging economies, which have financial markets that are less developed and banks thatusually dominate relatively small financial sectors, about how to use extensively macroprudential tools to address market failures. BSP can explore using multiple instruments suchas caps on the loan-to-value ratio and dynamic provisioning to address the high debt
exposure of UKBs and thrift, rural, and cooperative banks.
4.5 Reinforcement of Resources
SEC respondents have raised two budgetary issues in their organization. Based on the
respondents’ sentiment, there is a compensation mismatch. This is a major reason why
morale is low and employee turnover rate is high at SEC. By virtue of Sections 4 and 7,
Chapter II of SRC, SEC has the mandate to have its compensation plan similar to that ofother financial institutions in the Philippines such as BSP. However, unlike BSP, it needs to
get its budget approved by the Department of Budget and Management. As a result of therestriction on its compensation plan, SEC has an insufficient workforce and thus a limited
work plan. It is also unable to promote institutional knowledge due to the high number ofpeople leaving the organization for better opportunities in the private sector. In addition, thelow budget allocation and provisions imposed by DBM on its earnings have limited SEC’s
capacity to implement monitoring activities. Although it is the country’s sole corporate
watchdog, SEC lacks a surveillance system to effectively monitor the market. With poor
intelligence monitoring, institutions doing unauthorized banking transactions can get off
scot-free.

5. Policy Recommendations
It is said that crisis preparedness is best done at times of prosperity. The Philippines isin a good position to take measures to capitalize on its initial economic and structural reformgains. Financial regulators have responded accordingly by taking several steps toward
effective regulation such as the creation of FSF. However, there are still necessary changes tostrengthen their role in ensuring sound and healthy financial markets. The following
recommendations aim to improve enforcement of regulations, response time, andcoordination in the medium term in the institution and inter-agency levels.

	
  

6	
  

5.1 Institution levela. Protect examiners from suits (BSP and SEC). BSP should pursue the necessary
amendments to the NCBA. Sections 38 and 39, Chapter 9, Book I of the Revised
Administrative Code of 1987 are appropriate replacements to the extraordinary
diligence clause. Ideally, BSP targets approval before the end of the incumbent
President’s term in 2016. The uncertainty of a change in leadership in 2016 may dragout the discussion on the importance of the changes in the NCBA. Since what
happens in the legislative procedure is beyond BSP’s control, BSP could workthrough other channels such as gaining explicit support from the Executive Branch.
SEC should also start lobbying for similar changes in the SRC. In the meantime, both
regulators should continue providing legal assistance to their officers and examiners.
b. Persuade the Legislative Branch to amend the Bank Secrecy Law (BSP and SEC). RA
1405, which was approved in 1955, must be revised to be more responsive to theneeds of modern day regulation. BSP and SEC ideally should use its discretion toaccess bank deposits in the performance of its mandate. However, this is unlikely tohappen considering the fate of bills that propose amendments to the NCBA. BSP and
SEC could instead bring forward to Congress amendments to RA 1405 that would
enable them to extend their investigative reach specifically to erring banks, NBFIs,
and corporations.
c. Explore adapting macro-prudential tools (BSP). The most recent financial stability
assessment of the Philippines shows that risks for Philippine banks are manageable(IMF, 2010). However, to be better prepared for procyclicality, BSP should consider
introducing macro-prudential tools such as caps on the loan-to-value ratio anddynamic provisioning.
d. Focus on monitoring and promote third-party regulation of NBFIs (BSP). In as muchas NBFIs are distinct from banks, the approach to supervising them should not be a
replication of the well-established approach for the banking sector. What works forbanks may not be true for the expanding NBFI segment. The risk associated with
NBFIs is relatively small but the cost of regulation is relatively high. BSP could
instead focus on strengthening consumer awareness to engage the public in regulating
NBFIs.
e. Improve resource allocation and enhance workforce capability (SEC). Revitalizing
SEC has its benefits in connection to the liberalization and development of capital
markets. Capacity building takes precedence over opening up the capital markets
because liberalization not accompanied by regulatory reforms properly sequenced
results in imbalances (Claessens et al., 2010). DBM should recognize SEC’s mandate
and realize that a strong and well-funded Commission can translate to the stability
and development of capital markets. Given its budget constraint, SEC in themeantime can tap international organizations for knowledge transfer and employee
training.

	
  

7	
  

5.2 Financial Sector Forum levela. Prioritize inter-agency supervision of conglomerates at the operational level. The
next step that FSF can take is to form a team composed of employees from concerned
FSF-members that conducts risk-based examination of conglomerates. This not only
further reduces redundancy from simply sharing information but also improves
coordination among examiners. It also builds institutional knowledge on the
supervision of activities of conglomerates at the operational level and serves as inputs
to crisis contingency plans.
b. Encourage feasibility studies on regulation set-up. In line with the goal of being on apar with counterparts and improving responsiveness to the fast-paced dynamics of thefinancial sector, the FSF Committee on Supervision Methodology and Regulatory
Policy Coordination can also be tasked to study the advantages of changing thecurrent regulation set-up. Possible areas of research would be merging theSupervision and Examination Sector of BSP and IC to form a Financial Services
Agency-type of organization, merging BSP and IC, and transferring the supervision
of NBFIs to SEC.

6. Concluding Remarks
The Philippine financial sector is in an exciting phase. Banks are lending more andexpanding more. NBFIs are branching out. The stock market experiences unprecedented
record increases in the PSEi. This positive atmosphere and growth is expected to continue inthe coming years alongside the overall positive outlook on the Philippine economy.
To reduce procyclicality and ensure that systemic risk is held in check, financial
regulators need to initiate changes. Enhancing enforcement is on top of the list. There is aneed to improve the statutory protection of employees and investigative reach. There is also aneed to enhance regulation of conglomerates such as forming an inter-agency examinationteam at the operational level.
A possible area for future research would be conducting a survey with a larger sample
size that represents all job levels in the four regulators. This survey can be designed in such a
way that it measures the awareness of employees, from staff to management level, on theimportance of coordination with counterparts in other regulatory bodies and at the same timegather information on improving the dynamics of the FSF.

	
  

8	
  

References
Batino, C. and C. Yap. 2013. Philippine Stocks. Peso, Bonds Advance After S&P Rating
Upgrade. Bloomberg.
Bangko Sentral ng Pilipinas. 2004. CA Clears BSP Governor, Other BSP Officers Re Urban
Bank Case; Suspension Order Lifted. BSP Media Releases.
Brunnermeier, M. et al. 2009. The Fundamental Principles of Financial Regulation. Geneva
Reports on the World Economy 11.
Buenaventura, R. 2004. FSF: Strengthening the Philippine Financial System. SpeechArchives, Bangko Sentral ng Pilipinas.
Claessens, S. et al. 2010. Lessons and Policy Implications from the Global Financial Crisis.
IMF Working Paper WP/10/44.
De Lis, F. and A. Herrero. 2009. The Spanish Approach: Dynamic Provisioning and Other
Tools. BBVA Working Papers No. 0903.
Delton, R. 1999. Statutory Protection of Banking Supervisors. World Bank.
Delston, R. and A. Campbell. 2006. To Protect or Not Protect, That Is the Question:
Statutory Protections for Financial Supervisor – How to Promote Financial Stability
Enacting the Right Laws. Seminar on Current Developments in Monetary and Financial
Law. Washington, D.C.
Dumlao, D. 2013. Former Export Bank Exec Claims PDIC Charge ‘False, Baseless.’
Philippine Daily Inquirer.
Dumlao, D. 2013. PH Stock Index Breaches 7,300 for the First Time in History. Philippine
Daily Inquirer.
Guinigundo, D. 2005. The Philippine Financial System: Issues and Challenges. BIS
Meeting of Deputy Governors from Emerging Market Economies, Basel, Switzerland.
International Monetary Fund. 2010. Philippines: Financial Stability System Stability Report
Assessment Update. IMF Country Report No. 10/90.
Lim, C. et al. 2011. Macroprudential Policy: What Instruments and How to Use Them?
Lessons from Country Experiences. IMF Working Paper WP/11/238.
Remo, M. 2012. BSP Bank Audit Does Not Cover Records of Deposit Accounts. Philippine
Daily Inquirer.
Santos, T. and A. Mullineux. 2009. The Supervision of Financial Conglomerates in the

	
  

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Philippines. Bangko Sentral Review 2009.
Tripartite Group of Bank, Securities, and Insurance Regulators. 1995. The Supervision of
Financial Conglomerates.
Wassener, B. and F. Whaley. 2013. Philippines Gets Investment-Grade Credit Rating. The
New York Times.

	
  

10	
  

Figures and Tables
Figure	
  1:	
  Total	  Assets	
  of	
  Banks	
  and	
  NBFIs	
  	
  as	
  of	
  March	  2012	
  (in	
  Billions	
  of	
  Pesos)	
  Figure	
  2:	
  Universal	
  and	  Commercial	
  Banks	  60	
  Thrift	  Banks	  Php605.6	
  	
  8.24%	
  Universal	
  and	
  Commercial	
  Banks	
  Php6,378.4	
  	
  86.80%	
  

45	
  

50	
  

Rural	
  and	  Cooperative	  Banks	
  Php187.8	
  2.56%	  

	
  5,200	
  	
  

52	
  

120	
  

112	
  

100	
  

	
  1,360	
  	
  

	
  39	
  	
  

	
  5,000	
  	
  
	
  38	
  	
  

	
  38	
  	
  

	
  38	
  	
  

	
  38	
  	
  

	
  38	
  	
  

	
  37	
  	
  

Non-­‐Bank	  Financial	
  Institutions	  	
  Php176.6	
  2.40%	  

	  4,800	  	
  	
  4,600	  	
  	
  4,819	
  	
  

20	
  
	
  4,274	  	  	
  4,205	  	  	
  4,276	
  	  	
  4,223	
  	  	
  4,254	  	  	
  4,287	  	  	
  4,277	  	  	
  4,274	  	  	
  4,237	
  	  	
  4,366	
  	  	
  4,482	
  	  	
  4,643	
  	  	
  4,400	  	
  	
  4,200	  	
  	
  4,000	
  	
  

0	
  

	
  3,800	
  	
  
1999	
   2000	
   2001	
   2002	
   2003	
   2004	
   2005	
   2006	
   2007	
   2008	
   2009	
   2010	
   2011	
   Sep	
  
2012	
  

Other	  OfLices	
  

Head	
  OfLice	
  

104	
  

94	
  

92	
  

87	
  

84	
  

	
  84	
  	
  

	
  82	
  	
  

	
  77	
  	
  

Figure	
  4:	
  Rural	
  and	
  Cooperative	  Banks	
  

	
  73	
  	
  

	
  73	
  	
  

	
  71	
  	
  

	
  69	
  	
  

	
  1,420	
  	
   	
  1,476	
  	
  

40	
  
20	
  
0	
  

	
  1,600	
  	
  

900	
  

	
  1,400	
  	
  

800	
  

	
  1,200	
  	
  

700	
  

Other	  OfLices	
  

807	
  

790	
  

781	
  

776	
  

765	
  

764	
  

754	
   	
  739	  	
   	
  727	  	
  

	  2,500	
  	
  	
  703	  	
   	
  674	  	
  

	  647	  	
  

	
  617	  	
   	
  599	  	
   	
  2,000	
  	
  

600	
  

	
  1,000	  	
  	
  1,500	
  	
  

500	
  

	
  800	
  	
  

400	
  

	
  600	
  	
  

300	
  

	
  400	
  	
  

200	
  

	
  200	
  	
  

100	
  

	
  -­‐	
  	
  	
  	
  

0	
  

	
  2,093	  	
   	
  2,131	  	
   	
  2,085	  	   	
  2,129	  	  	
  1,406	  	
   	
  1,445	  	  	
  1,239	  	
   	
  1,305	  	
   	
  1,336	
  	
  	
  1,082	  	   	
  1,123	
  	
   	
  1,133	
  	
   	
  1,135	
  	
   	
  1,156	
  	
  Other	  OfLices	
  

Head	
  OfLice	  Source: BSP

11	
  

	
  1,000	  	
  	
  500	  	  
	  -­‐	
  	
  	
  	
  

1999	
   2000	
   2001	
   2002	
   2003	
   2004	
   2005	
   2006	
   2007	
   2008	
   2009	
   2010	
   2011	
   Sep	
  
2012	
  

1999	
   2000	
   2001	
   2002	
   2003	
   2004	
   2005	
   2006	
   2007	
   2008	
   2009	
   2010	
   2011	
   Sep	
  
2012	
  

	
  

41	
  

	
  4,991	
  	
  

10	
  

	
  1,345	  	  	
  1,279	  	
   	
  1,247	
  	  	
  1,260	
  	  	
  1,184	
  	
   	
  1,185	  	   	
  1,193	  	
   	
  1,209	  	
   	
  1,238	  	
   	
  1,254	  	
   	
  1,219	
  	
  Source: BSP

42	
  Source: BSP

80	
  
60	
  

42	
  

30	
  

Figure	  3:	
  Thrift	  Banks	
  
118	
  

42	
  

40	
  

Source: BSP

140	
  

44	
  

Head	
  OfLice	  Figure	  5:	
  Capital	  Adequacy	
  Ratio	
  (%)	
  
20.0	
  
18.0	
  
16.0	
  

15.6	
  

16.9	
  

17.5	
  

18.4	
  

17.7	
  

Figure	
  6:	
  Return	
  on	
  Equity	
  (%)	
  

17.6	
  
15.7	
  

14.7	
  

14.9	
  

16.0	
  

12.2	
   12.1	
  

14.0	
  

16.7	
  

10.6	
   10.8	
  

12.0	
  

14.0	
  
10.0	
  

8.0	
  

8.0	
  

6.0	
  

6.0	
  

7.1	
  

6.9	
  

5.8	
  
3.2	
  

4.0	
  

4.0	
  

8.8	
  

8.5	
  

10.0	
  

12.0	
  

10.8	
  

2.0	
  

2.0	
  
0.0	
  

0.0	
  

2001	
   2002	
   2003	
   2004	
   2005	
   2006	
   2007	
   2008	
   2009	
   2010	
   2011	  Source: Philippines IMF Article IV Consultation for 2005, 2008, and 20132001	
   2002	
   2003	
   2004	
   2005	
   2006	
   2007	
   2008	
   2009	
   2010	
   2011	  Source: Philippines IMF Article IV Consultation for 2005, 2008, and 2013	  	
  Figure	
  7:	
  Ten	
  Biggest	  Borrowers	
  as	
  a	
  %	
  of	
  Total	
  Loans	  of	
  Large	  Banks

Figure	
  8:	
  Non-­‐Bank	  Financial	
  Institutions	  	
  12,000	
  	  	
  10,000	
  	  	
  7,730	
  	
  	
  8,000	  	
  	
  5,165	
  	   	
  5,253	
  	   	
  5,381	  	
  	
  6,000	  	
  	
  5,647	
  	   	
  5,879	  	  	
  6,204	  	
   	
  6,262	  	   	
  6,380	
  	
   	
  6,439	  	
   	
  6,450	
  	
   	
  6,504	  	
  	
  4,000	  	
  	
  2,000	  	
  	
  3,738	  	  	
  4,128	  	  	
  4,444	  	  	
  4,959	
  	  	
  5,353	
  	  	
  5,696	  	  	
  6,234	
  	  	
  6,832	
  	  	
  7,263	  	  	
  8,159	
  	  	
  8,626	
  	  	
  9,366	
  	  	
  6,575	
  	
   	
  6,449	
  	  	
  10,427	
  	   	
  10,874	
  	  	  -­‐	
  	
  

1999	
   2000	
   2001	
   2002	
   2003	
   2004	
   2005	
   2006	
   2007	
   2008	
   2009	
   2010	
   2011	
   Sep	  2012	
  Other	  OfLices	
  

Head	
  OfLice	  Source: IMF
Source: Philippines IMF Article IV Consultation for 2005, 2008, and 2013

	
  

12	
  

Figure	  9:	
  No.	  of	
  Listed	  Companies	
  in	
  ASEAN	
  5	
  	
  919	  	
  300.0	  

	
  866	  	
  

	  776	  	
  250.0	  

	
  559	  	
  
	
  398	  	
  

	
  384	  	
  	
  392	  	
  

	  330	  	
  

	  161	  	
  150.0	  

	
  253	  	
  	
  235	  	
  100.0	  

	  133	
  	
  

	
  53	
  	
  
Bursa	  Malaysia	
  200.0	  

	
  463	
  	
  

50.0	
  

	
  18	
  	
  
Singapore	
  Exchange	  The	
  Stock	
  Exchange	
  of	
  Thailand	
  Indonesia	
  Stock	
   Philippine	
  Stock	
  Exchange	
  Exchange	
  1-­‐Jan-­‐2013	  1-­‐Jan-­‐2003	
  Difference	  Source: World Federation of Exchanges

0.0	
  

Philippines	
  Source: Bloomberg	
  Figure 11: Intensity of Use of Macro-Prudential Tools

Source: IMF	
  Jan-­‐06	  Apr-­‐06	
  Jul-­‐06	
  Oct-­‐06	
  Jan-­‐07	
  Apr-­‐07	
  Jul-­‐07	
  Oct-­‐07	
  Jan-­‐08	
  Apr-­‐08	
  Jul-­‐08	
  Oct-­‐08	
  Jan-­‐09	  Apr-­‐09	
  Jul-­‐09	
  Oct-­‐09	
  Jan-­‐10	
  Apr-­‐10	
  Jul-­‐10	
  Oct-­‐10	
  Jan-­‐11	  Apr-­‐11	
  Jul-­‐11	
  Oct-­‐11	
  Jan-­‐12	
  Apr-­‐12	
  Jul-­‐12	
  Oct-­‐12	
  Jan-­‐13	  Apr-­‐13	
  	
  1,000	  	
  	
  900	  	
  
	  800	  	
  
	  700	  	
  
	  600	  	
  
	  500	  	
  
	  400	  	
  
	  300	  	
  
	  200	  	
  
	  100	  	  
	  -­‐	  	
  Figure	  10:	
  ASEAN	
  5	
  Stock	
  Prices	
  (Index	  June	  1,	
  2007	
  =	
  100)	
  13	
  Indonesia	  Malaysia	
  Thailand	
  Singapore	
  Table 1: Financial Regulators in the Philippines 101 (1 of 2)
Bangko Sentral ng
Pilipinas
3 July 1993

Securities and Exchange
Commission
26 October 1936

Insurance Commission
3 January 1949

Philippine Deposit Insurance
Corporation
22 June 1963

Malate, Manila

Mandaluyong City

Ermita, Manila

Makati City

Incumbent
Head

Amando M. Tetangco, Jr.
(Governor)

Teresita J. Herbosa(Chairperson)

Emmanuel F. Dooc(Commissioner)

Valentin A. Araneta(President)

Details

Took over from the Central
Bank of the Philippines,
which was established on 3
January 1949

Abolished during theJapanese occupation but
reactivated in 1947, directly
under the Office of the
President

Referred to as the Office of
the Insurance Commission
prior to being an independent
office in 1949

Attached to the Department of
Finance, co-regulator of banks
and receiver and liquidator ofclosed banks

Legal
Mandate andPowersThe New Central Bank Act
of 1993 or RA 7653,
General Banking Law of2000 or RA 8791

Securities Regulation Code or RA 275, Insurance Act or RA
RA 8799, Presidential Decree 2427 (as amended)
No. 902-A (as amended),
Corporation Code, Investment
Houses Law, Financing
Company Act, and otherexisting laws

Philippine Deposit Insurance
Act or RA 3591 (as amended)

Supervised
Entities

Banks and NBFIs such as
quasi-banks, financial allied
subsidiaries and affiliates(except insurancecompanies), non-stocksavings and loan
associations, pawnshops

Insurance and reinsurancecompanies, insurance brokers,
mutual benefit associations,pre-need companies

Banks, but only with the role asa deposit insurer

Year
Established
Headquarters

	
  

14	
  

Investment houses, financing
companies, securities dealers

Table 1: Financial Regulators in the Philippines 101 (2 of 2)

VisionMissionBangko Sentral ng
Pilipinas
The BSP aims to be aworld-class monetary
authority and a catalyst for a
globally competitive
economy and financial
system that delivers a highquality of life among
Filipinos

BSP is committed topromote and maintain pricestability and provide
proactive leadership inbringing about a strong
financial system conducive
to a balanced andsustainable growth of theeconomy. Towards this end,
it shall conduct soundmonetary policy andeffective supervision overfinancial institutions under
its jurisdiction.

Securities and Exchange
Commission
We foresee that, by December
31, 2012, the Securities andExchange Commission shallhave implemented systems
and procedures and capacity
building measures that will
enable it to raise the level ofcompetitiveness of thebusiness community, andprotect the interests of theinvesting public.
To strengthen the corporate
and capital market
infrastructure of thePhilippines, and to maintain aregulatory system, based oninternational best standards
and practices, that promotes
the interests of investors in a
free, fair and competitiveenvironment.

Insurance Commission
By 2020, as Regulator, weshall provide an opportunity
for every Filipino to secure
insurance protection and weshall observe practices at parwith regional and global
standards.

We are committed to protect
the interest and welfare of theinsuring public and to develop
and strengthen the insurance
industry.

Philippine Deposit Insurance
Corporation
We will be a world-classorganization in depositor
protection.

We exist to provide permanentand continuing deposit
insurance coverage for thedepositing public. We shall:
1. exercise complementarysupervision of banks
2. adopt responsive resolution
methods
3. ensure prompt settlement of
insured deposits and4. apply efficient managementof receivership and liquidation
functions

Source: Santos and Mullineux (2009) for entries under supervised entities and latest available data from respective agencies for the rest

	
  

15	
  

Table 2: Information Needed from Other Regulators (1 of 2)
From BSP
1.
2.

3.

To BSP

4.
5.

6.

7.

	
  

From SEC
From PDIC
Revocation of corporate
1. List and assessment oflicenses of supervised
external auditors of closed
institutions
banks
List of accredited external
2. Misstatements noted byauditors and violations of
PDIC upon assumption ofcovered external audit
receivership as against
practitioners
submitted prudential
Observed violations ofreports/financial statements
dually-regulated entities
3. Reports on examination ofand subsidiaries andbanks under receivershipaffiliates of banks
Observed exercise ofbanking function by nonBSP regulated entities
Corporate profile ofborrowers of financial
institutions and non-bankrelated companies of banks
Audited financial reports of
SEC-regulated entities with
substantive loans frombanks
Information such as capital
shortfalls on banks’subsidiaries that deal withsecurities

16	
  

1.

2.
3.
4.
5.

6.

7.

From IC
List of accredited external
auditors and violations ofcovered external audit
practitioners
Observed violations in thepractice of bancassurance(i.e., bank insurance model)
Observed violations bybank subsidiaries/ affiliates
regulated by the IC
Observed exercise ofbanking function by nonBSP regulated entities
Information such as capital
shortfalls on banks’subsidiaries that deal withinsurance
Information onrequirements forapplication of banks as
insurance brokers under the
micro-finance program
Information on IC
initiatives to spearhead theadoption of standards on
corporate governance andfinancial reportingTo PDIC

To SEC

Table 2: Information Needed from Other Regulators (2 of 2)
From BSP
1. Information on the
resolution of a listed
distressed bank
2. Information on banks andindividuals which involve
financial fraud and scams

From SEC

From PDIC
1. Information on banks andindividuals which involve
financial fraud and scams

1. Pre-licensing information
2. Banking and Industry
Information (e.g. Banking
Industry Statistics andReports, Individual Bank
Data and, Early Warning
Indicators, Status of banks
under Prompt Corrective
Action1. General Reports (e.g.
General Information Sheet,
Annual Audited Financial
Statements)

Source: Email survey

	
  

17	
  

From IC
1. Information on insurancecompanies and individuals
which involve financial
fraud and scams
2. Information on investors
that would help in theregulation of listed
insurance companies
1. Exposure of insurancecompany to banks

Table 3: Bilateral Memorandum of Agreement
Parties Involved
Date
BSP and PDIC
12 November
2002
BSP and PDIC
11 October
2005
BSP and SEC
21 January
2013

Agreement
Exchange of data and information relevant to thesupervision and/or regulation of banks
Information and reports on bank examination findings
Information, data, and reports shared between the two
agencies

Source: Email survey

Table 4: Scope of Function of FSF Committees
Committee
Supervision
Methodology
and Regulatory
PolicyCoordination

Reporting,Informationand Exchange
andDissemination

ConsumerProtection and
Education

Scope
1. Market intelligences on market players and systemic issues;
2. Compliance and enforcement of regulations on illegal activities;
3. Cross-sector consolidated supervision;
4. Prompt Corrective Action techniques;
5. Work of external auditors;
6. Policy development;
7. Policy coordination;
8. Corporate governance; and9. Issues arising from bilateral agreements
1. Harmonization of regulatory reporting requirements;
2. Database management;
3. Data exchange system between agencies;
4. BSP loan database;
5. Positive credit information system;
6. Effective dissemination of industry data and statistics;
7. Transparency through permitted disclosures to the public;
8. Capacity building for agencies; and9. Issues arising from bilateral agreements
1. Information dissemination for consumers as to which agency grants
licenses for certain financial activities and the roles of different
supervisors;
2. Identification of unethical practices and illegal activities used in selling
financial products;
3. Development and implementation of consumer protection programs;
4. Consumer empowerment; and5. Issues arising from bilateral agreements

Source: Email survey

	
  

18	
  

Table 5: Stipulations Concerning Responsibility of Employees
SectionSection
16, Article
II of
NCBA

Section 6,
Chapter 2of SRC

Section 9
of RA3591 or
PDIC
Charter

Stipulation“Members of the Monetary Board, officials, examiners…who willfully violate
this Act or who are guilty of negligence, abuses or acts of malfeasance or
misfeasance or fail to exercise extraordinary diligence in the performance of his
duties shall be held liable for any loss or injury suffered by the Bangko Sentral
or other banking institutions as a result of such violation, negligence, abuse,
malfeasance, misfeasance or failure to exercise extraordinary diligence.”(underscore supplied)“The Commissioners, officers and employees of the Commission who willfully
violate this Code or who are guilty of negligence, abuse or acts of malfeasanceor fail to exercise extraordinary diligence in the performance of their duties
shall be held liable for any loss or injury suffered by the Commission or otherinstitutions as a result of such violation, negligence, abuse, malfeasance, or
failure to exercise extraordinary diligence.”(underscore supplied)“Unless the actions of the Corporation or any of its officers and employees arefound to be in willful violation of this Act, performed in bad faith, with malice
and/or gross negligence, the Corporation, its directors, officers, employees andagents are held free and harmless to the fullest extent permitted by law from any
liability, and they shall be indemnified for any and all liabilities, losses, claims,
demands, damages, deficiencies, costs and expenses of whatsoever kind andnature that may arise in connection with the performance of their functions,
without prejudice to any criminal liability under existing laws. (As added by
R.A. 9576, 29 April 2009)”(underscore supplied)

Source: Chan Robles Virtual Law Library

	
  

19	
  

Table 6: Statutory Protection of Regulators, Selected Countries
Institutions
Financial Services
Agency, Bank of Japan,
Securities and Exchange
SurveillanceCommission (Japan)

Statutory Protection
Article 1 of Government Compensation Law:
“Should any public officials of either national or municipal
government for the exercise of public authority cause damages toa third party illegally on purpose or by negligence in theperformance of their duties, the national or municipal government
shall be liable for the damages to the third party.
Under the first paragraph, if the officials have acted on purpose or
by gross negligence, the national or municipal government may
have a claim for the expenses due to the said liability to the said
officials.”

Prudential Regulation
Authority, Bank ofEngland (UK)

Section 88, Part 6 of Financial Services Act 2012:Federal Reserve System,
Securities and Exchange
Commission, Federal
Deposit Insurance
Corporation (US)28 USC 2680 of Federal Tort Claims Act:

“Neither the investigator appointed under section 84 nor a person
appointed to conduct an investigation on the investigator’s behalf
under section 87(8) is to be liable in damages for anything done oromitted in the discharge, or purported discharge, of functions inrelation to the investigation of a complaint.”“Any claim based upon an act or omission of an employee of theGovernment, exercising due care, in the execution of a statute or
regulation, whether or not such statute or regulation be valid, orbased upon the exercise or performance or the failure to exercise
or perform a discretionary function or duty on the part of a federal
agency or an employee of the Government, whether or not thediscretion involved be abused.”

Source: World Bank and Bank of England Prudential Regulation Authority

	
  

20	
  

Table 7: Chapter 9, Book I of the Administrative Code of 1987
SectionSection 38. Liability ofSuperior Officers.

Stipulation“(1) A public officer shall not be civilly liable for acts done in theperformance of his official duties, unless there is a clear showingof bad faith, malice or gross negligence.
(2) Any public officer who, without just cause, neglects toperform a duty within a period fixed by law or regulation, or
within a reasonable period if none is fixed, shall be liable fordamages to the private party concerned without prejudice to suchother liability as may be prescribed by law.
(3) A head of a department or a superior officer shall not be
civilly liable for the wrongful acts, omissions of duty, negligence,or misfeasance of his subordinates, unless he has actuallyauthorized by written order the specific act or misconduct
complained of.”

Section 39. Liability ofSubordinate Officers“No subordinate officer or employee shall be civilly liable for acts
done by him in good faith in the performance of his duties.
However, he shall be liable for willful or negligent acts done by
him which are contrary to law, morals, public policy and good
customs even if he acted under orders or instructions of his
superiors.”

Source: Chan Robles Virtual Law Library

	
  

21	
  

Table 8: Bank Secrecy Law
Republic Act
Section 2 of RA 1405 or
the Secrecy of Bank
Deposits Law

Stipulation“All deposits of whatever nature with banks or banking
institutions in the Philippines including investments in bonds
issued by the Government of the Philippines, its politicalsubdivisions and its instrumentalities, are hereby considered as ofan absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official,bureau or office, except upon written permission of the depositor,
or in cases of impeachment, or upon order of a competent court incases of bribery or dereliction of duty of public officials, or incases where the money deposited or invested is the subject matterof the litigation.”(underscore supplied)

Section 2 of RA 6426 or
the Foreign Currency
Deposit Act“Any person, natural or juridical, may in accordance with theprovisions of this Act, deposit with such Philippine banks in goodstanding, as may, upon application, be designated by the Central
Bank for the purpose, foreign currencies which are acceptable aspart of the international reserve, except those which are requiredby the Central Bank to be surrendered in accordance with theprovisions of Republic Act Numbered two hundred sixty-five.”

Section 25, Article IV,
RA 7653 or the New
Central Bank Act“The department heads and the examiners of the supervising
and/or examining departments are hereby authorized to administer
oaths to any director, officer, or employee of any institution under
their respective supervision or subject to their examination and tocompel the presentation of all books, documents, papers orrecords necessary in their judgment to ascertain the facts relative
to the true condition of any institution as well as the books andrecords of persons and entities relative to or in connection withthe operations, activities or transactions of the institution under
examination, subject to the provision of existing laws protecting
or safeguarding the secrecy or confidentiality of bank deposits aswell as investments of private persons, natural or juridical, in debt
instruments issued by the Government.”(underscore supplied)

Source: Chan Robles Virtual Law Library and Philippine Daily Inquirer	
  

	
  

	
  

22