Felipe M Medalla: Chronicling the evolution of Philippine banking laws
Speech by Mr Felipe M Medalla, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the launch of the legal book "Banking Laws of the
Philippines - Annotated", Manila, 25 May 2023.
* * *
Chief Justice Alexander Gesmundo; Senator Mark Villar, who is a great supporter of the
economic team and really patient in answering all the questions from his fellow
senators; representatives from the academe; all the important people from the judiciary,
both from the past and present; our friends from the banking community; guests; and
magandang hapon po
BSP [Bangko Sentral ng Pilipinas] colleagues, . Thank you for
taking the time to join us today.
I would like to start by saying that, as an economist, the speech of Chief Justice
[Alexander Gesmundo] should be required reading for anyone who eventually gets a
degree in economics-even at the bachelor's level. Sometimes, people misinterpret
Adam Smith when they say "invisible hand." It is as though self-interest, by itself, is
guided by an invisible hand so that self-interest and efficiency in the economy are
automatically reconciled. But as the speech of the Chief Justice shows, it is a far, far
much more complex relationship than that.
Indeed, a relatively new field in economics is law and economics. Of course, one way to
understand law and economics is to read opposite books. One of my favorite books is
Lawlessness and Economics, and it shows exactly what happens when you have
lawlessness. [For example,] suppose that instead of the entire [global] economy trading
among each other, what will happen is that you deal only with a small circle of trust
because you know the law will not be followed. Therefore, you always rely on your
blood relatives; [you] always rely on your connections. Therefore, the ability of the
economy to get the best from everyone, to get scale economies, is severely limited.
Clearly, the reason self-interest is good for society is that there are rules, beliefs, and
values that prevent self-interest from going haywire. In other words, no society can
progress without those institutions. Indeed, Nobel Prize winner Douglass North won his
Nobel Prize on that claim: that institutions explain why some countries are poor and
some are rich. When he was lecturing, he was asked, "How do societies get 'there' [a
desired stage in development]?" His answer was, "I do not know. What I know is that
some societies are 'there.'" They are based on rules. Contracts are, by and large,
enforced. Therefore, investments take a longer time horizon, precisely because of the
belief that no matter how long the period of time of the contract is, it is [will remain]
effective. In other words, free markets without the necessary support of institutions that
reconcile self-interest with the overall social good are really inadequate for development.
That is why, I think, the speech of the Chief Justice should be required reading for every
BSP employee.
The evolution of banking laws and central banking powers: banking
as public trust and equipping regulators with the necessary tools
Having been a member of the Monetary Board for nearly 11 years-to be exact, 11 years
and a little bit less than 11 months-I have seen firsthand rapid changes [in banking law].
I am moving to the fact that a very special part of the law is banking laws. In fact, I tell
my banking friends, "This means being more loyal to depositors than the owner. After
all, the [bank] owner, for every peso that you [the bank] will invest or lend, the owner
owns no more than 20 percent. The depositors own 80 percent of what is being lent
out."
In a sense, a banker is almost like a public servant. He is taking care of the people's
money. That is why it is very important that banking laws give regulators great cover
when they do their jobs.
For instance, we [the central bank] received new powers to borrow from the public. I will
explain why that is important. There were times when there was so much money
flowing into the country that the only way to prevent excessive appreciation of the peso
was for the central bank to borrow money when it buys foreign exchange (forex).
Because if we were to print money to buy forex, the very act of buying forex will create
too much money in the system. In the past, we were not allowed to borrow from the
public. The most recent revision of the law now allows us to do that. This has allowed
us to refine our monetary tools.
We also strengthened regulations for the institutions that we regulate.
And as was already pointed out by the Chief Justice, we saw rapid changes in digital
payments. But any progress has a dark side. With digital payments, [there is a risk that]
the bank runs are more efficient as shown by the Silicon Valley Bank. It was gone; the
money [deposits] was gone in less than 24 hours because people were withdrawing
their money digitally. Bad rumors also spread faster.
Capturing rapid changes: lessons from the past, compass to the
future
It is important to chronicle these changes [in banking laws] to see where we have come
from and to chart where we will go.
Our book, Banking Laws of the Philippines - Annotated , is the fourth legal book
published by the BSP. This publication consolidates and updates the inaugural series to
incorporate recently enacted laws, such as the National Payment Systems Act, the
Financial Institutions Strategic Transfer Act, and the Financial Products and Services
Consumer Protection Act. Just keeping up with these is not easy. That is why it is very
important that a good book covers all of these.
This latest publication builds on the annotation of three essential books on the country's
banking laws between 2010 and 2012, namely the New Central Bank Act, the General
Banking Law, and other special laws, collectively known as the "First Series Books."
Thank you very much, Chief Justice [Gesmundo], for coming and for lecturing us-giving
us an even picture not just of banking laws but of laws in general-that rules and beliefs
are extremely important for a progressive and inclusive society.
We are also pleased to announce our collaboration with Rex Bookstore, which is
marketing and distributing this book. The book is also available online so you do not
have to buy it physically. But I am old enough; I need a physical book so I can fold and
mark the pages that I like.
Clarity, compliance, and comprehension: book objectives and aims
As the BSP engages in legal and regulatory activities, the many benefits of developing
and consolidating such references cannot be understated.
First, they aid in attaining regulatory clarity because regulations are hard to predict.
That, again, is a source of friction. Consequently, with clarity comes better compliance.
Legal literature helps stakeholders correctly interpret laws, strengthening adherence
and accountability.
Another advantage is providing a historical record of legislative changes, facilitating the
study of policy shifts and regulatory trends in the country's banking system.
Closing message
In closing, let me thank everyone involved in this project from developing the content to
getting it out to print, especially Senior Assistant Governor and General Counsel Elmore
Capule who oversaw this project from conceptualization to completion.
Congratulations to the authors and members of the book team for helping the public
gain a better understanding and appreciation of central banking and the work that we
do.
Maraming salamat po, at magandang gabi!