Report cites need for better monitoring of financial sector

The Philippine Institute for Development Studies, research arm of the National Economic and Development Authority (NEDA), said changes should be made in the system of supervision and regulation of the financial sector to effectively monitor corporate frauds or failures.

A report made by Dr. Melanie S. Milo of the PIDS underscored the need to strengthen regulatory capacities for banks and non-banks as the different standards of supervision and financial institutions by the various government agencies have become more problematic recently.

In particular, a number of investment houses and pre-need companies under the supervision of the Securities and Exchange Commission have run into financial difficulties recently.

The insolvencies that resulted particularly in investment houses, finance companies and commercial banks had resulted in the loss of confidence of foreign investors in the Philippine financial market.

Two commercial banks failed in the aftermath of the Asian crisis – Orient Bank in 1998 and Urban Bank in 2000 – as a result of fraud and insider abuse.

The failure to detect problems in Urban Bank’s investment house subsidiary Urbancorp Investments Inc. had been attributed to some lapse in supervision/regulatory oversight that arose from confusion in the proper assignment of regulatory supervision over investment houses between the Bangko Sentral ng Pilipinas and the SEC.

Milo said the consolidation of the financial sector supervision could be a solution to eliminate gaps in regulatory coverage.

"If one looks at the current financial structure, the dominance of universal banks and the introduction of bancassurance clearly indicate that the consolidated financial sector supervision approach would be appropriate for the Philippines. At the very least, it’s something that should be seriously considered," Milo said.

Milo said the problem, lies on how to undertake such a move, considering that the transition from institutional regulation to functional regulation is a complex process and will take time to implement.

Studies show that the estimated time required to merge supervisory agencies is around eight years although the developed countries took considerable less time than that.

"Consolidation can be done gradually and by building on existing structures. Looking at the experience particularly of other countries in the region will prove instructive," Milo said.

Milo said that should the country opt to move to integrated/functional regulation, the question is which entity should be appointed as the lead regulator.

Under the New Central Bank Act, the BSP has to some extent become the de facto ‘super-regulator" of the financial system, with its authority to supervise and examine banks’ subsidiaries and affiliates engaged in allied activities.

As such, she said designating the BSP as the "lead regulator" would make sense because of the dominance of banks. "Another advantage is that it is a relatively more experienced regulator in the financial sector, especially in a deregulated environment. It could then set the standard for the other regulators in the sector. However, it will require high levels of expertise in risk-areas common to all financial service industries," Milo said.

As an alternative solution, Milo said the Philippines can set up a council similar to the Federal Financial Institutions Examination Council of the US composed of the heads of the various regulatory agencies, which was created in 1978 to promote consistency in the examination and supervision of financial institutions.

The US Council primary task was to establish uniform principles and standards and report forms for the examination of financial institutions.

Milo said Australia also set up a similar council in 1992 before it established an integrated prudential regular six years after. The key focus of the Council was the regulation of financial conglomerates and its primary objective was to promote regular, high level liaison among the various financial regulatory agencies.

The SEC, for its part, is pushing for the creation of a single financial regualtor by merging the securities watchdog, BSP and the Insurance Commission (IC).

In a position paper submitted to the House, the SEC said lawmakers should consider moving towards the consolidation of all financial market regulations into a single entity to enhance efficiencies and enforce uniform regulatory standards for the financial markets.

Top securities regulator Lilia R. Bautista said lumping SEC, BSP and IC into a singular entity will tighten government regulation over the financial markets and prevent the duplication of functions.

Bautista said this is not an entirely new idea since other countries like the United Kingdom and Singapore have already established a single regulator as part of efforts to modernize and strengthen their institutions to keep pace with the changes in the financial markets and the economic environment as well.

In the United Kingdom, the superpowerful Financial Services Authority regulates the banking, securities and insurance businesses. The same model was adopted by the Monetary Authority of Singapore this year.

The BSP regulates the banking industry and formulates monetary policy while the SEC supervises the equities market, nonbank financial institutions and corporations.

International studies showed that a regulatory agency which oversees all financial markets in the country would be able to rapidly carry successful ideas from one style of market to another.

Analysts, however, expressed concern about the single financial regulator concept, saying this could do more harm than good to the financial markets. "The most important worry about having a single regulator is the quality of leadership that such a super-agency can obtain. There is a tremendous concentration of power into a few hands in such an agency and this would attract power-seekers to these posts," an analyst said.

The Bankers Association of the Philippines (BAP), the umbrella organization of local commercial banks, said merging SEC, BSP and IC will entail new legislation and amendment of the country’s 1987 Constitution which limits BSP’s regulatory powers to the banking industry.

BAP said the BSP already has its hands full attending to the banking sector’s bad loan problems and governance concerns especially with respect to curbing money laundering. The proposal, if implemented, could weaken the BSP’s supervision of the banking sector.

The SEC and BSP have dual control over some areas and activities of investment houses. Investment houses which are subsidiaries or affiliates of banks are under the BSP because of their direct effect on their parent companies. The BSP has no responsibility over investment houses’ securities regulated activities while commercial paper registration and underwriting is left with the SEC.