Too big to fail, Pinoy-style

Ben D. Kritz

Ben D. Kritz

Although it was not surprising that it was drowned out by the tiresome noise about what passes for current events here, there was at least one piece of very good news yesterday: Banks considered systemically important to the economy will be required to increase their minimum Common Equity Tier 1 (CET1) ratio under the new guidelines issued by the Monetary Board of the central bank.

Not quite as exciting as tales of corruption, chaos, and dead hookers, is it? That’s understandable, because the topic is not something most people can wrap their heads around, and something that could prevent a disaster never makes for quite as colorful copy as a disaster that actually happens. But it is important, and has more relevance to the country as a whole than most headlines.

What it means is that the BSP has taken some concrete steps to prevent the sort of economic calamity that happened in the US and Europe a few years ago: Philippine financial institutions that fall into the dubious category of “too big to fail” will be identified, and then required to follow a stringent set of standards to ensure that they have sufficient resources to avoid failing in the first place.

In plain language, what the central bank will be doing over the next several months is conducting an assessment of how critical each bank is to the domestic economy. Essentially, the BSP will be determining what the potential damage to the overall economy could be if the bank hypothetically failed, and depending on the severity of that potential damage, the bank will be assigned to one of three “buckets” (the BSP’s term for it) or risk categories, each of which has correspondingly higher requirements for financial reserves the bank must maintain. If the bank does not comply with the requirements within the timeframe provided for it to do so, it will “be subject to constraints in the distribution of [its]income,” meaning that it will not be restricted in paying dividends and bonuses to its shareholders and managers and, instead, be obliged to use those profits to shore up its reserves first.

The basic idea is not the BSP’s—“bankers” and “imagination” are two things that often do not mix well—but rather guidelines established by the Basel III global prudential reform agreements; the specific details of how to categorize Philippine financial institutions and carry out the program, however, are the BSP’s own, and the central bank deserves a thumbs-up for putting it into motion, and sooner than many other countries’ monetary authorities.

The only two parts of the scheme that may be a little questionable are the proviso that the designation of “D-SIBs” (Domestic systemically important banks) will be a confidential matter between the banks and the BSP, and the long timeframe—about three and a half years—provided for full implementation of the new requirements. The BSP explained that not publicizing which banks are designated as “D-SIBs” is intended to prevent moral hazards, which makes sense from an ethical perspective but might not play well to the public politically. In terms of the schedule of implementation, the BSP intends to identify and inform the banks in question by the middle of next year, then implement a ladderized schedule for those banks that have not already met the new requirements at the beginning of 2017, with the requirements to be fully enforced from the beginning of 2019. Because rearranging capital to meet the standards will, for most banks, involve manipulating their stock shares to some extent, the time is probably necessary; it does, however, leave a rather large window for an unforeseen crisis to emerge.

Even so, the reality is that most of the Philippines’ large banks that are likely to become “D-SIBs” are in healthy financial shape at the moment and are probably not too far from meeting the new requirements already, so “hoping for the best”— an approach to problem-solving that is rarely recommended—is probably not unreasonable this time. The BSP has done a fairly good job so far; I’d trust them on this one.

* * *

On the opposite side of the trust spectrum, Energy Secretary Jericho Petilla and his childishly stubborn boss and partymate B.S. Aquino must be chewing the carpet right about now, after one of Petilla’s own subordinates blithely contradicted his hysterical warnings of looming power shortages next summer if President Aquino was not given carte blanche to contract emergency power generators. Assistant Director Irma Esconde of the Energy department’s Industry Power Management Bureau informed the Congressional committee debating the “emergency powers” request from Malacañang that, quite in contrast to Petilla’s claims of an electric power deficit of up to 1,400MW (the figure changes almost every time he opens his mouth), the worst-case scenario is a reserve supply deficit of about 31MW, provided that a moderate amount of supply from big enterprises with their own generating capacity under the so-called Interruptible Load Program (ILP) can be expected.

As a result of this revelation, the House of Representatives now appears inclined to grant Aquino emergency powers only to the extent that allows the reimbursement of ILP participants, a scheme that would only cost about P400 million, instead of the P6 billion Petilla and the President were requesting.

Whether or not the widely believed rumors that Petilla and Aquino intended to use the funds made available under an emergency powers arrangement to shore up the campaign finances of the Liberal Party are true, the outcome of Tuesday’s hearing should be more than enough just cause to immediately remove Petilla from his post. Even if we pretend there was no political ulterior motive to it, his lobbying for emergency powers is tantamount to an admission that he is incapable of carrying out his responsibilities—even more so now, since the management of the ILP is something that could be done within the normal purview of the DOE without any sort of special authority being given to the president.

Of course, the phrases “I must ask for your resignation” or “you’re fired” do not exist in the Aquino vocabulary, and LP stalwart Petilla, a Leyte native, is desperately needed by the ruling party to try to salvage some support in his home province, where the names of anyone associated with the current Administration have become curse words thanks to their ham-handed response to last year’s Typhoon Yolanda. So unfortunately, we will probably have to endure Petilla’s incompetence for a while longer.

The biggest tragedy in that is not that the country can expect unreliable and expensive electricity for as long as he occupies his office—we’re already used to it, after all—but that it’s officials like him who encourage the hope among Filipino voters that the next administration will be as vindictive as the current one, and find some reason to toss him and his similarly-errant colleagues in jail at the first opportunity. That does not make for a healthy political or social atmosphere, especially this far ahead of the next election, and not now when there are so many basic governance issues to be resolved. Jericho Petilla needs to muster at least a shred of professional dignity and do his part to serve the country by stepping aside for someone who actually can.


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  1. Yes its very important but dont tell the masses which banks are at risk or they might move their money. We know the very rich would always be informed before a bank went bust so they could get their money out but keep the normal people in the dark, its laughable, its like the bank secrecy law, its good for rich people so have it only for dollar accounts, but its not good for normal people with a peso account. Will this country ever be open to its people, i doubt it, the elite want to keep it this way, as i say you flips get what you deserve. They take you for fools & you just accept it.

  2. thinking naughty only. ano kaya kung i-sabotahe ng mga galamay ng kkk ang mga power gens para magkaroon ng power shortage sa summer ng 2015 para mapatotohanan ang babala ni aquino at petilla??

    • I dont think Pnoy will like that idea since the Aquinos will be known in Philippine history as a queen & prince of darkness.

  3. Edgar G. Festin on

    You have again pinpointed what is essential for Philippine sustainability. And you remind everybody that if the Philippines is one of the GDP growth performers it is thanks basically to the GREAT work the Bangko Sentral has been doing — and of course thanks most of all to the OFWs whose remittances make BSP one of the most solid in the world.
    And your words about the need for DOE Sec. Petilla to step aside jibes with those of The Times editorial today and the columns of Dr. Tapang, your paper’s nationalist scientist and of Mr. Makabenta.
    Congratulations, Mr. (Dr.?) Ben Kritz. Please continue writing these columns that are among the really most enlightening and instructive in the Philippines.

  4. Not quite as exciting as tales of corruption, chaos, and dead hookers, is it? …. hahaha sweet punch line