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HSBC bites the Bullet

(Article published in the Jul 2, 2008 issue of Manila Standard Today)  

Tomorrow, 03 July, the Bangko Sentral ng Pilipinas (BSP) celebrates the 15th anniversary of its establishment pursuant to R.A. No. 7653 as the country’s constitutionally mandated central monetary authority.  Prior to the BSP, it was the Central Bank of the Philippines (CB), under R.A. No. 265 that performed the function, among others, of supervising the banking system. 

The change is not a mere substitution of name, nor just of initials, nor even of mere language. The BSP is not the same CB with a different collar.  What R.A. NO. 7653 brought about in the supervision of banks in the Philippines was a paradigm shift: from legal compliance to risk management.  Hence, in line with the Basel Accords, the ability of a banks’ capital to meet the risks of  its trade has always been one of BSP’s central concerns.

Time was when the capital of foreign banks doing business in the Philippines through its branches was considered to be of no concern to the local banking supervisor.  After all, in addition to the capital that foreign banks were required to assign, remit to the country the amount fixed by law, convert to pesos, and use in the Philippine operations, the head office of the foreign banks fully guarantee the prompt payment of all liabilities of the their branches in the Philippines. 

Those days of complacency, I believe, are ending.  The global economic downturn is impacting severely on the balance sheet of major foreign banks.  Now it is a legitimate question to ask whether (and, if so, how) foreign banks with branches in the Philippines can really make good that guarantee that was required by law, General Banking Law, Section 75, when they came into the country to do business.
 










     

The response must be credible; otherwise, the commitment of support from the head office could be, at the end of the day, no more than a mere paper guarantee.  The response, too, need to be specific to each foreign bank.  Different banks respond differently to the same problem.  A problem in point is the individualized response of the banks to the demise of the SIV, or the structured investment vehicle.

The different SIV scenarios are instructive because the three oldest foreign banks in the Philippines doing business here through branches were confronted by SIV’s unlamented approaching demise.  American Citigroup is said to have managed at least seven, namely, Beta Finance, Centauri Corporation, Dorada Finance, Five Finance Corporation, Sedna Finance, Vetra Finance and Zela Finance. The British banks,  HSBC and Standard Chartered Bank, are said to have managed at least four, to wit, HSBC’s Asscher Finance and Cullinan Finance, and Standard Chartered Bank’s Whistlejacket and White Pine Corp., the latter merged with the former in June last year.

Last week, this column described how Standard Chartered Bank handled its SIV problem: in summary, it walked away. On 31 January this year, Standard Chartered Bank announced that it would take Whistlejacket’s $7.15 billion assets into its balance sheet.  But less than two weeks later, the fund went into receivership. There were motions to try to give the receiver some liquidity.  But the program never got off the ground. 

There is some hardnosed logic for that attitude.  As my Jesuit teacher once justified a similar disappearing act of someone under similar pressure, “he who fights and runs away, lives to fight another day.”  Bruce Packard, an analyst at Pali International, “…I don’t think people have an issue with Standard Chartered’s management.  People do understand that there is inherent uncertainty with SIVs and they trust management to do what they can with whatever funding position they are presented with.”

My last information, from the net, is that Whistlejacket is waiting in line for Goldman Sachs’ attention which is likely after the latter has completed its restructuring of Cheyne Finance Standard Chartered’s 2007 financials meanwhile indicate the bank’s strong capital position.  Indeed, the showing of the bank’s running heels to the abandoned holders of Whistlejacket notes, to whom the bank owes no legal responsibility, reassures Philippine depositors and lenders to the bank’s Manila branch that Standard Chartered Bank’s balance sheet was not afted by Whistlejacket’s terminal illness.

HSBC, the other British bank, was second only to Citigroup in SIV assets managed and it took a stance different from Standard Chartered’s.  At the start of its SIV adventure, it, too, like its smaller British colleague, HSBC had began promising names for its SIVs.  “Asscher” evokes the romance associated with Asscher brothers, Abraham and Joseph, who developed a style of cutting of diamond in 1902: square emerald cut with cropped corners.  The Asscher diamond was featured in Sex and the City and is said to be used often in celebrity engagement rings. “Cullinan” is the surname of the diamond owner of the mine where the largest rough gem-quality diamond, known as the Star of Africa, was found.  Both names thus indicate value and toughness.

It was with toughness that HSBC decided to take up into its own balance sheet the assets of its two SIVs, amounting to about $45 billion.  HSBC made the decision in November 2007 even as the American banks, with the not too hidden support of the US Treasury, were grappling with the idea of a Super SIV to absorb the universe of failing SIVs.  It was the first bank to do so.

HSBC did not buy the assets of the SIVs.  Instead it created a new one.  Investors in the two failing SIVs were given the option of exchanging their holdings for debt to be issued by a new company, this time to be backed by loans from HSBC.  In effect, the new company is able to buy time (its notes being paid out when they become due by the maturing assets of the former SIVs  and bridge money to be borrowed from HSBC, should it become necessary) in the hope that the crisis too, like all things, will pass.

With such restructuring, HSBC used its balance sheet’s scale and strength to reassure the investors in its SIVs, preventing a fire sale of the SIVs’ assets that would have triggered actual losses. Good times, it is hoped, will some sooner rather than later.

But at some point, the piper must be paid.  And the question remains, the SIVs having been effectively been absorbed by  HSBC’s head office balance sheet, HSBC will nevertheless have strength to back its legal guarantee to pay all the liabilities of its Philippine branch. 

Citigroup too in effect absorbed its seven SIVs into its balance sheet.  That story needs a separate telling later. For now, at any rate, on the occasion of the BSP’s 15th Anniversary, it would be good for the foreign banks with branches in the Philippines to also quietly hand the Governor, in addition to their felicitations, a reaffirmation of their commitment to live up to their obligation under Section 75 of the General Banking Law.  In effect give firm assurance that they willing to put their money where their months are.

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