A look back at the history of Philippines banking reveals a developmental role assigned to the banking system and a common pattern of frailty in the face of adverse shocks. Ceilings on interest rates, interest rate subsidies, and directed lending were intended to enable the banking system to promote economic growth by being the main source of development finance. While the system itself has displayed a flexibility and willingness to undertake reforms, these actions were often in response to, rather than preventive measures against, crises. Genuine reforms have usually come after, not before, crises and in the transition from crisis to stability (and one regulatory regime to a stronger one), the restoration of confidence in financial markets was agonizingly slow. The ensuing contraction in credit and intermediation has usually dragged down the rest of the economy.
The occurrence of the Asian financial crisis has led to a rethinking of how best to strengthen banking systems so as to prevent banking crises, or to reduce banking system vulnerability to crises. There is apparently a greater appreciation for the idea that regulation and supervision must now increasingly focus on the less traditional and conventional methods.
The original impetus for reform in the 1950s and1960s was not the need to respond to crises, but the rapid growth and increasing fragmentation of the banking system. The increasing diversity of financial institutions and services challenged the ability of the central bank to adequately regulate them.
The undeveloped capital adequacy standards for solvency were relevant, but required very simple and rudimentary implementation mechanisms; liquidity was managed by imposing the reserve requirement; and supervision and examination requirements were addressed through simple reporting systems.
In 1972–1973, a Joint International Monetary Fund-Central Bank (IMF-CB) Banking Survey Commission recommended that several amendments be made to the General Banking Act and the Central Bank Act. These amendments were meant to
- realign regulation by function rather than by type of bank.
- consolidate central bank authority over banks.
- Redefine the central bank’s responsibilities to exclude the promotion of economic growth and
- impose restrictions on entry into the banking system, with concomitant efforts to improve the efficiency of existing banks.
Along with the increasing dynamism of the financial sector and the need for more responsive financial structures to address financing needs, the moves toward rationalizing the central bank’s supervision over the banking sector led to increasing pressure to adopt more sophisticated prudential regulatory mechanisms and structures. While banking institutions remained the dominant financial intermediaries, nonbank private and quasi-public financial institutions emerged, constituting an alternative means of intermediation.
In 2004, the banking sector grew by 8.3%, its fastest growth rate in the last seven years. The sector’s growth explains most of the impressive growth of the financial services sector of 8.4%in 2004. In the past two years, banks expanded by an average of 7.5%, a recovery from its sluggish average growth rate of 1.7% between1998 and 2002 after the Asian financial crisis.
Despite its growth in recent years, the financial health of the banking sector remains volatile due to the high levels of non-performing assets in the balance sheets of banks, which have resulted in a slowdown in bank lending. Further, the profitability of Philippines’ banks remains inferior and lags behind other Asian banks. Considering the foregoing, it may be argued therefore that while the sector posted positive growth rates, much remains to be done to strengthen the banks.
