Financial liberalization in the Philippines

In 1985, financial liberalization was introduced in the Philippines by international financial institutions such as the World Bank, and government control over interest rates was completely eliminated. However, yield rates on bank deposits remained fixed at low rates and, consequently, the amount of domestic savings did not increase much.  Long-term finance likewise remained scarce.  According to many observers, the reason is that financial liberalization in the Philippines did not affect in a significant way the oligopolistic structure of the financial system and therefore had little effect on the market behavior of the major financiers.[1]  Furthermore, because of its administrative weakness and lack of insulation (from vested interests), the government was unable or unwilling to break the banks’ control of the financial system or to institute prudential regulation of and supervision over the banks.

The reforms in the financial system, undertaken in response to the financial institution failures generated by the Dewey Dee financial scandal in 1981[2], actually took the tack of creating large multi-purpose universal banks or the so-called expanded commercial banks (ECBs).  The idea then was to exert greater control of the quasi-banking (read as: money market) activities of non-banks (investment houses, merchant banks, finance companies) by incorporating these same activities under a universal bank’s umbrella.  Of course, the core of a universal was a commercial bank.  To be able to form these universal banks, consolidations, mergers, and the further infusion of foreign equity, were encouraged.  For example, the Ayala-controlled Bank of the Philippines became a universal bank after it formally acquired (from the Ayala Corporation) the Ayala Investment and Development Corporation (AIDC)—the merchant bank with which it long worked very closely.

In effect, the banking reforms adopted in the waning years of the Marcos dictatorship did little to de-monopolize the financial system.  As a consequence, private banks continued to dominate the supply of credit and dictate cost of money.  As government banks either retreated or were privatized, the ‘developmental finance’ paradigm practically disappeared as declared by Central Bank governor Jose B. Fernandez, Jr. in the Business World November 16, 1987 issue.  The fact that Fernandez came from the commercial banking industry explains to a great extent his accommodating attitude to commercial bankers in general, though he applied the screws on several bankers who earned ire of the incumbent president he was serving or his own displeasure, notably Vicente Puyat of Manila Bank[3] and Tomas Aguirre of Banco Filipino. The administration of President Aquino did not change the overall bank-friendly policy since she retained Fernandez as CB governor up to 1990. It will take the administration of President Fidel Ramos to effect serious changes in financial policy.  But President Ramos had to create a new central monetary authority first to replace the ailing Central Bank.  This was accomplished through R.A. 7653, otherwise known as the New Central Bank Act, signed into law by Ramos on June 14, 1993, which established and organized the Bangko Sentral ng Pilipinas (BSP).

To be continued….

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[1] De Dios (1996) however reports that there is healthy dispute as to whether the Philippine banking industry is indeed heavily concentrated.  But he argues that the consequences, not the level of concentration in the banking industry, were of greater import.  For one, average profit margins are higher than average.  Many observers attribute the higher profit margins to banking system concentration that has allowed the exercise of oligopolistic power, or even of collusion (Lamberte 1991 and Tan 1989).

[2] The author was a member of the Investment House Association of the Philippines (IHAP) team that wrote the IHAP paper entitled “Reforming the Philippine Financial System” in response to the aftermath generated by the scandal. Dee was a Chinese businessman who frequented the gaming tables too often and fled the country in January 1981, leaving over $80 million in short-term debt adrift in the money market.  This led to the bankruptcy of three investment houses, which, in turn, forced the Central Bank to orchestrate equity and deposit infusion from government corporations into several private commercial banks.  Apart from Bancom Development Corporation, the Investment and Underwriting Corporation of the Philippines (IUCP)—associated with Marcos crony Herminio Disini, and the Philippine Finance Corporation—associated with another Marcos crony, Ricardo Silverio, were affected.  Among the banks that received government support were International Corporate Bank and the Commercial Bank of Manila (both controlled by Disini), Pilipinas Bank (controlled by Silverio), and Union Bank of the Philippines (associated with Bancom).  A fuller story is supplied by Hutchcroft (1998).

[3] Vicente “Teng” Puyat first flirted with Marcos by inviting the entry of Gregorio “Greggy” Araneta III into the Manila Bank board of directors in 1984.  At the same time, however, Teng was also among the members of the Ayala Avenue business community actively engaged in mounting protests against the dictatorship.  Once President Aquino came to power, Teng had a falling out with the new administration because of the retention of Fernandez as CB governor. When he was excluded from the Cory senatorial line-up he crossed over and joined his former Marcosist allies in the Grand Alliance for Democracy for the 1987 elections.  He lost however and soon after was booted out by Fernandez from the Manila Bank board (Hutchcroft 1998, pp. 190-91).   Thereafter, he was strongly rumored to be supporting the coup attempts of Col. Gringo Honasan against President Aquino.

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