The Bangko Sentral ng Pilipinas (BSP) urged the Philippines and other Asian countries to establish a stronger insolvency framework to avoid another financial crisis.
In his remarks during the Ninth Forum on Asian Insolvency Reform, BSP Governor Amando Tetangco Jr. said that “weak insolvency systems” have been identified as one of the key shortcomings of the Asian markets.
Insolvency is the incapacity to pay debts upon the date when they become due in the ordinary course of business.
“The Asian financial crisis of 1997-1998 focused a glaring spotlight on this weakness. Unprecedented expansion fueled speculation that eventually led to a collapse of institutions, compelling governments to step in . . . and putting a drag on economies that took years to shake off,” the BSP governor said.
Tetangco added that in the aftermath of the crisis, many Asian jurisdictions carried out reforms to improve their insolvency mechanisms, but most of the initiatives eventually ended up promoting the pace of restructuring rather than the quality of restructuring.
The widespread financial restructuring that followed resulted in masking underlying long-term weaknesses, he added, citing the United States home mortgage crisis that adversely affected or displaced homeowners in the US, which eventually developed into a global financial crisis
“The lesson is clear: Efficient and effective insolvency systems are necessary in all constituencies, no matter their level of economic development,” the BSP top official said.
Tetangco further said that having a well-developed insolvency law is important for the development of an effective insolvency system, however, countries should make sure that the implementation of the law is “proper, effective and timely.”
Focusing on developing strong institutions that would interpret and implement the laws is also important, he said, noting that a well-developed insolvency law and strong institutional capabilities provide a good foundation for a smoothly functioning insolvency system.
“Among others, we need appropriate accounting and auditing standards; transparent and accountable court systems and better insolvency administrators; enhanced corporate governance in corporations and financial institutions; and effective regulatory oversight,” the BSP governor said.
On the sidelines of the forum, Tetangco said that the BSP has different mechanisms to prevent insolvency in the Philippines.
“From the point of view of the BSP, we really supervise and regulate the banking system. We have implemented a number of reforms, which are essentially aimed at strengthening the banks,” he said.
The BSP governor noted reforms being implemented to banks such as Basel III capital requirement, and reforms on good corporate governance.
“There have been many steps that have been taken and the banks already implemented most of these [reforms]. As you all know Basel III will be coming . . . and we think the banks are prepared for it,” he said.