Bank liberalization under Ramos, serious this time around

The Ramos administration, in addition to creating a new monetary authority, also pushed for a substantial program of banking liberalization.  Concretely, this meant allowing the entry of new banks (domestic and foreign) and easing branching privileges for these same banks.  Pressures for opening up the industry can be traced to the 1988 World Bank report, which argued that “the strong domestic banks should not feel forever insulated from competition.”[1]  But initial response was essentially limited to the Central Bank’s March 1989 declaration that purported to remove restrictions on new commercial bank licenses[2] and reorient other key aspects of supervisory policy.

This display of reformist zeal, however, was probably meant to have more impact on the release of the first tranche of the World Bank’s financial sector adjustment loan than on the financial sector itself.  No new banking licenses were granted until Central Bank governor Jose Cuisia’s term began in 1990—and then only up to two savings banks (Family Savings Bank and Philippine Savings Bank), which were allowed to upgrade themselves to commercial banks.  In fact, no genuinely new players were allowed into the system until 1994.  Under Cuisia, the only real progress toward liberalization was the loosening of previously tight restrictions on the opening of new branches.[3]  The broader reform initiative of the late years of President Corazon Aquino’s regime was the ‘New Economic Program’ launched by finance secretary Jesus Estanislao in 1990.  While it included a by-now pro-forma denunciation of the cartel-type practices of banks, no serious challenge to the banking sector was attempted.  In fact, even the central element of the Estanislao program—tariff reform—was thwarted by import-substitution-industrialization (ISI) interests (Hutchcroft 1998).

By 1992, a combination of international and domestic factors promoted much greater momentum toward a wide-reaching program of economic liberalization.  The administration of President Fidel V. Ramos displayed new understanding of the country’s place in the world economy, and a clear sense of its weakness in competing effectively in the international and regional arenas.  This new momentum was manifested by a significant degree of liberalization of foreign exchange, foreign investment, and trade; as well as a major challenge to the cartels and monopolies in telecommunications and inter-island shipping.  In time, Ramos’ advisers and other advocates of liberalization trained their sights on the banking sector.

Even before Ramos assumed the presidency in mid-1992, the Central Bank was seriously mulling over plans to liberalize the banking sector by allowing the entry of new players.  A senior CB official, Mercedes Suleik (1992, p. 15) wrote in the CB Review: “the Central Bank is reviewing the restrictive policy on the entry of foreign banks in the Philippines with a view to recommending to Congress liberalization of these statuary restrictions in line with the overall policy of encouraging foreign investments.”  By law, foreign banks are not authorized to operate in the Philippines with the exception of foreign bank branches already operating when the General Banking Act took effect in 1949.  The same law also provided that at least 70% of the voting equity of banks organized under Philippine law must be owned by Filipino citizens.  Furthermore, the four foreign banks were prohibited from opening new branches within the Philippines, barred from accepting deposits from government, and could rarely avail of the CB rediscount facility.

In an address before the European Chamber of Commerce of the Philippines (ECCP) in March 1992, CB Governor Cuisia informed the European businessmen that “the Central Bank supports moves to liberalize the entry of foreign banks which, with their large capital base and established track record, can contribute to a stronger and more efficient banking system” (CB Review April 1992, p. 2).

Liberalization efforts were assisted by earlier disruption in the cordial relations that had long existed within the banking industry.  In particular, the introduction of automated teller machines (ATMs)[4] in the late 1980s encouraged growing tensions between the stronger domestic banks and the foreign banks.[5]  While the domestic banks were rapidly expanding their share of the lower end of the deposit market (where funds could be obtained at generally negative real interest rates[6]), the foreign banks were restricted to three branches and forced to raise funds at the upper end of the deposit market (at much higher, positive real rates of interest).  In response to these limitations, Citibank publicized in 1991 a careful analysis of the large intermediation spreads earned by Philippine-based banks.  While high reserve requirements and other regulatory factors partially accounted for the big spread, Citibank economists asserted that “oligopolistic market power” was also very much to blame.  They further declared that banks with greatest access to regular deposits (the largest domestic banks) were enjoying “excessive profit margins,” and should begin paying savers positive real rates of return (with “risk premium for keeping their savings in the Philippines”).  Their analysis concluded by urging that the overall system be “gradually deregulated” and opened to new entrants.  In a letter of response, the president of the Bankers Association of the Philippines (BAP)[7] made clear that Citibank’s public break with the ranks was not appreciated[8] ( Hutchcroft 1998, pp. 213-4).

As momentum for liberalization gathered steam over the next two years, the BAP eventually adopted the approach of supporting reform in general terms but curbing it as much as possible in its specifics.  This became most apparent in 1993, when the Ramos administration proposed its major initiative for the banking sector: allowing more foreign banks to establish wholly-owned operations in the country.  The number of banks enjoying such privileges was restricted to four—Citibank, Bank of America, Chartered Bank, and Hong-Kong & Shanghai Bank—in the late 1940s.

As debate over the entry of more foreign banks shaped up in late 1993 and early 1994, the key question was not whether the reform would take place but how.  On one side of the debate were those favoring more liberal terms of entry: Ramos and his key advisers (particularly national security adviser Jose Almonte), the House of Representatives (in general very supportive of Ramos’ economic liberalization program), the four foreign banks, multilateral institutions, and the US government.  The side seeking to restrict the terms of entry was led by the BAP, which relied in turn on vital assistance from key allies in the Senate.

To be continued….


[1] World Bank, Philippine Financial System (1988), vi.

[2] On May 16, 1989, the Central Bank issued CB Circular 1200 which lifted the moratorium on the establishment of new banks.

[3] Central Bank Circular 1281, dated April 15, 1991, provided many more branch licenses through an auction process.  Rural banks were also given the privilege of nationwide branching under Circular 1280 dated the same day.  An even more permissive policy was instituted in 1993, when branch licenses became available to any bank satisfying certain minimum capital requirements.

[4] The operation of ATMs was allowed, subject to certain regulations specified in CB Circular 1286, dated May 23, 1991.

[5] Up until the passage of the Bank Liberalization Law of 1994, only four foreign banks were given CB licenses to undertake full commercial banking operations in the Philippines.  They were Bank of America, Citibank, Hong Kong & Shanghai Bank, and the Standard Chartered Bank.  In 1977, other foreign banks were allowed to establish presence and operate in the Philippines but only as offshore banking units (OBUs).  As OBUs, these banks can only conduct offshore banking business—acceptance of deposits from non-Philippine residents and lending to non-residents and to Philippine banks and the Central Bank of the Philippines, as well as other government agencies as authorized by the CB. Later on, these OBUs were allowed to negotiate incoming export letters of credit (LCs) and to provide full foreign exchange services for all foreign currency non-trade remittances (Suleik 1992).

[6] When the interest rates that banks pay to their depositors are lower than the prevailing inflation rates, real interest rates are negative or are below zero.  When real interest rates are negative, the bank depositor would be better off spending or using his cash elsewhere rather than depositing the same in the bank.

[7] All the commercial banks, domestic and foreign, including Citibank were members of the Bankers Association of the Philippines (BAP).

[8] Citibank study, “Bank Intermediation Spreads,” unpublished manuscript, n.d. [1991?]; Letter from Xavier P. Loinaz, president of the BAP (and the Bank of the Philippine Islands), to William Ferguson, Citibank vice president, Febuary 1, 1991.


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