House vs. Senate

Major issues in the legislative debate included how many foreign banks would be allowed to enter, their mode of entry, how much capitalization would be required of the new entrants, and how many branches each would be entitled to open up.  The bill enacted by the Senate in April 1994 (SB 1606) was far more restrictive than that earlier passed by the House (HB 8226).  It permitted only six to eight new entrants (rather than leaving the matter up to the Monetary Board, as did the House bill), required $16 million in capitalization (rather than the roughly $5 million required by the House), and sanctioned only six branches for each of the foreign banks, whether existing or new entrant (rather than giving the foreign banks the same privileges as the domestic banks).  As to the mode of entry, SB 1606 hewed closely to the Angara-Roco-Ople version.  First, it disallowed the entry of foreign banks as a wholly-owned and controlled subsidiary incorporated under Philippine laws, which the House version permitted. Second, while HB 8226 allowed foreign banks to own up to 70% of the voting stock of an existing Philippine bank, the Senate version limits foreign ownership to 60% of a bank, whether existing or newly established.  Third, the Senate version restricts the entry of foreign banks to only one mode of entry.  The appropriate section of SB 1606 read:

Sec. 2.  Modes of Entry. – The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any of the following modes: (I) by acquiring, purchasing or owning up to SIXTY PERCENT (60%) of the voting stock of an existing bank; (ii) by investing in up to SIXTY PERCENT (60%) of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking authority: Provided, That a foreign bank may avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or a Philippine corporation may own up to sixty percent (60%) of the voting stock of only one (1) domestic bank or new banking subsidiary.

How the banks positioned themselves in the debate

The major argument of the BAP was that, to ensure a ‘level playing field,’ foreign and domestic banks should have the same minimum capitalization requirements ($27 million for non-unibanks).  On the question of branches, however, they desired a most uneven field: retention of the three-branch limit for foreign banks, thus ensuring that the vast bulk of depositors would remain outside the reach of external competition.  As the debate heated up, the BAP waged a media campaign to weaken the extent of actual liberalization and support the more restrictive Senate bill.

The four foreign banks already in the system—in particular Citibank, by far the largest and most influential of the four—actively supported the less restrictive terms of entry.  It is believed that while these banks would be most directly affected by the entry of new foreign banks, a strong desire for more branches was apparently a stronger consideration.

As the bicameral conference committee convened to reconcile the differences between the two bills, tensions escalated between House and Senate, foreign and domestic banks, avid and reluctant reformers.  After deadlocks among key sponsors, the House and the Senate forged a May 1994 compromise allowing the entry of ten foreign banks and sticking with the Senate’s earlier six-branch restriction on the scope of their operations.  Minimum capitalization of roughly $9 million allowed three branches, and $13.5 million the rights to six.  The new law also provided a second mode of entry for foreign banks: up to 60 percent ownership of a domestically incorporated bank (as compared to the 30% to 40% permissible since the 1970s).  The BAP made no effort to hide its pleasure over the compromise; BAP president Rafael Buenaventura[1] explained that the final law “met [our] standard in terms of balancing the national interest with the country’s need for globalization without making too many unnecessary concessions.”[2]

Twenty-one banks applied for entry and in early 1995 the ‘magic’ ten were selected.  These include Australia and New Zealand (ANZ) Bank, Bangkok Bank, Chemical Bank, Development Bank of Singapore, Deutsche Bank, Fuji Bank, International Commercial Bank of China, Internationale Nederlanden Groep (ING) Bank[3], Korea Exchange Bank, and Bank of Tokyo.  Three of these banks—Chemical, Deutsche, and Tokyo—were not exactly new since they had offshore banking units (OBUs) in the country prior to 1995.  By 1996, all had opened shop—and by the way they did so it was evident that their direct impact on competition would likely be confined to the very top end of the market, which was already competitive.  In general, they established offices on the upper floors of Makati skyscrapers and did not bother with the expense of lobbies or tellers.[4]  In effect, the new banks will compete in the corporate banking and trade financing, segment of the market where there’s already keen competition.  Even Citibank, the only foreign bank that may begin to have the institutional strength to tap a larger segment of the market, shied away from the market’s lower end.  It has yet to complete the six-branch quota since it only has four branches so far—Makati, Greenhills, Libis Citi-Square (the newest branch inaugurated by no less than President Estrada last April 2000), and Cebu.

To be concluded….


[1] Mr. Buenaventura is the current governor of the Bangko Sentral ng Pilipinas (BSP).

[2] Rafael Buenaventura, “At the Forefront of Change,” Fookien Times Philippines Yearbook 1994, p. 180.

[3]When the British merchant bank, Baring Brothers, collapsed due to the uncontrolled trading of a rogue trader, it was acquired by ING.  In the process, ING Philippines also acquired Baring Securities (Philippines).

[4] Of the ten, only the Development Bank of Singapore (DBS) opened more than one branch, presumably to better oversee remittance of foreign exchange by Filipino OCWs in Singapore to relatives in the Philippines.


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