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FINANCIAL SECTOR REFORM, CAPITAL MARKET DEVELOPMENT AND THE TRUST INDUSTRY

GOV. RAFAEL B. BUENAVENTURA
Bangko Sentral ng Pilipinas

 

INTRODUCTION

    Distinguished officers and members of the Trust Officers Association of the Philippines (TOAP), colleagues, guests, ladies and gentlemen, good evening.

    It gives me great pleasure to be invited to this year’s General Membership Assembly of the TOAP. It has been almost three years now since the economy was subjected to the adverse impact of the regional financial turmoil in Asia. We have responded to the challenge with appropriate adjustments in macroeconomic policy and a wave of reforms in the financial system. Tonight’s gathering is an appropriate venue to reflect on what has been done to improve the financial system and the role of the trust industry in the ongoing reform process

REFORMS IN THE BANKING SECTOR

    At the outset of the crisis in 1997, one of our priorities was to continue and accelerate the reform measures to strengthen the domestic financial system.   An underlying principle in the reform effort was the improvement of corporate governance in the banking system.  Good bank governance is essential for an efficient financial system and healthy financial institutions.  In fact, acute weaknesses in corporate control have been blamed for the rush of economically unsound investments that eventually contributed to the propagation of the Asian financial debacle. BSP efforts to promote good corporate governance during the crisis centered on encouraging disclosure practices, improving the quality of bank management, aligning prudential measures with international standards and upgrading the supervisory capacity of the BSP. Allow me briefly to expound on them

    Transparency and disclosure are primary concerns in improving bank governance.  By providing more data to the market, accountability is increased and protection against abuses of discretion is established.  To encourage transparency, new BSP regulations now require the inclusion of detailed information on non-performing loans and other risk assets, loan-loss reserves, return on equity and insider (DOSRI) loans in the banks’ quarterly disclosures

    Quality management is also a key element of good corporate governance. A responsible and effective management is the first line of defense in ensuring that banking institutions remain under sound financial footing. To help improve the quality of bank management, the BSP formulated guidelines for the duties and responsibilities of the board of directors of banks. Furthermore, the election or appointment of directors and officers of commercial banks and thrift banks with the rank of senior vice-president and above is subject to Monetary Board (MB) confirmation. If after evaluation the MB finds grounds for disqualification, the concerned officer may be removed from office even after his assumption of the post.

    The BSP likewise pursued a wide-array of policy changes that sought to improve the regulatory standards governing banking activities. These regulatory changes covered the definition of non-performing loans, loan classification system and amount of loan loss provisioning.

    The BSP also worked towards upgrading its supervisory capacity. First, the BSP switched to a forward-looking and risk-based framework for bank supervision. This supervisory method is more dynamic than the purely compliance-based and checklist-driven approach. Second, BSP personnel are being trained and their skills upgraded through various bank supervision seminars and constant dialogue with local and foreign financial institutions. Third, the BSP has begun adopting consolidated supervision of financial conglomerates in order to better assess bank risks. The inclusion of subsidiaries and affiliates in the bank examination process should provide a more complete profile of the risk exposure of banks.   Fourth, to further enhance the BSP’s ability to anticipate and manage weaknesses in the banking industry, a system of risk ratings for banks has been introduced.

    Also a first-generation early-warning system for commercial banks has been started to facilitate the evaluation of bank solvency. At the macro level, the BSP is also finalizing a set of leading indicators to detect future currency and financial crises.

    On hindsight, these policy responses have contributed significantly in making the banking system more resilient and stronger. This resilience of the banking sector, in turn, was part of the underlying strength of the Philippines in being able to avoid severe economic disruptions during the Asian crisis

    However, the reform process remains a work in progress. The BSP intends to continue with the reform effort  with its priorities embodied in the amendments to the General Banking Act and the New Central Bank Act. Overall, these amendments aim to further strengthen our regulatory oversight, raise prudential standards to international norms, foster greater competition and enhance the supervisory capability and independence of the Bangko Sental.
 

 

THE BSP AND THE CAPITAL MARKET

    While the banking system continues to be a key sector in the economy, the Asian crisis also taught us that over-reliance on bank loans for financing can limit the expansion of an economy. Long-term investments, needed for sustained growth, require long-term financing to enhance their viability. A well-developed capital market addresses this problem by providing an alternative source for long-term funds. We are all aware of the challenges currently facing the capital market—a long-term yield curve has to be reinforced, market infrastructure has to be put in place, taxation issues have to be resolved and credit rating capability has to be strengthened

    The BSP has always been a strong proponent of the development of the DOMESTIC capital market. However, BSP’s role in this initiative is less direct compared to that in the development of the banking system. BSP has two main roles to play: one is to ensure the soundness and stability of financial institutions which serve as conduits for capital market transactions and two, is to help provide the appropriate macroeconomic environment conducive to the development of the market.

    Having discussed banking sector reforms, let me now focus on the BSP’s role in fostering a stable macroeconomic environment conducive to capital market growth. By focusing on its primary mandate of price stability, the BSP generates what is perhaps the most basic incentive that inspires investor confidence in the market. Through monetary prudence, helped by improvements in weather conditions, inflation exhibited a steady downtrend in 1999. From a high of 11. 5 percent in January 1999, it steadily declined to 4. 3 percent in December 1999, bringing the full year average to 6. 6 percent.  For the first two months of this year inflation continued to remain low with an average of 2. 8 percent

    The decline in inflation and the relative stability in the foreign exchange market provided the BSP with some flexibility in substantially bringing down its key policy rates and adjusting reserve requirements downward. These facilitated the appropriate adjustments in the price of credit that eventually benefited activities in the capital market.
 

       

ROLE OF THE TRUST INDUSTRY IN THE REFORM PROCESS

    The trust industry can also play a major role in the drive to make the banking sector stronger and to further deepen the domestic capital market.

    To help enhance corporate governance, the trust industry can assume the role of catalyst that can put pressure on issuers of debt instruments to adopt appropriate corporate structures and sound business practices.

    Let me also encourage The trust units to observe good governance practices themselves. Management must have adequate expertise and experience and must be of high integrity.   Risk management systems and effective internal and external audit must also be in place.

    As a major player in the capital market, the active participation of trust units in the trading of securities can contribute to the development of secondary markets for long-term securities. To be sure, government has to address various concerns regarding the development of secondary markets—depth and variety of securities, reliable and efficient payments and settlement system and credit rating agencies, to cite a few. However, it is eventually the market-making activities of investors, including trust units that will ensure the growth of capital markets

CONCLUDING REMARKS

    In closing, let me emphasize that the BSP is deeply committed to continuing the reform of the financial system and the development of the capital market.   However, this endeavor is a multi-dimensional task that government alone cannot hope to accomplish. A collective action involving the active participation of the private sector, including the trust industry, is needed. Let me conclude my remarks tonight by inviting everyone to join this task.

    Thank you and good evening.

 

         

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