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   Sponsored by the Third World Studies Center,
   College of Social Sciences  & Philosophy,
   University of the Philippines,
       Claro M. Recto Hall
       February 5, 2001

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First of all, I like to thank the Third World Studies Center and the Action for Economic Reforms, Miriam and Men, for inviting me to this joint "forum on the crisis the banking sector underwent under the last administration and the corresponding lessons and areas of reform that it has highlighted." I was told that you want to take this opportunity to know more about PDIC’s plans to protect the banking system and the interest of bank depositors. You also hope that this forum can help you define a policy agenda for the new administration.

Thanks too for addressing this invitation to me still as President of PDIC. You anticipated that perhaps due to my resignation, which many people said was timely, I will be asked to stay on - as the reason for my resignation has disappeared. As a watch dog and lobby group, at least you have anticipated how the present administration would act on my resignation. I believe I can publicly say that I am happy to have been asked to stay on by Secretary Romulo. As I said to my predecessor, Mr. Ernest Leung, who is one of our reactors this afternoon, I still have unfinished business that I like to see take deeper roots at PDIC and the banking sector. I have singled out five of them for this afternoon and I hope they can help you define your policy agenda.

Firstly, I would like to see through our PDIC charter change. Congressman Oscar Moreno is one of our proponents trying to get our examination powers back. He himself felt it was repealed without sufficient discussions and it could be debated why it was taken up in a different law, the General Banking Act of 2000 when PDIC has its own charter. The solution to the issue raised by the congressman who pushed for the repeal should have been not to completely remove our powers. He could have achieved the same purpose if we were instead mandated to closely coordinate our examination activities with BSP to avoid duplications.

There are many other important changes we have recommended in the charter. These include:

  1. doubling our insurance coverage from P100T to P200T while keeping our insurance premium at 1/5 of 1%;
  2. defining more clearly what acceptable split-deposits are, (splitting of deposits has been a loop hole to break the system by limiting deposits to within the insured amount of P100T);
  3. giving PDIC more teeth to criminally prosecute erring owners, managers and accomplices.

Congressman Moreno advised us that since this Congress is adjourning in a few days, we have to unfortunately re-file our amendments in the next Congress. While this will cause a delay, this could be a blessing in disguise, for then we can refine and address more issues such as the need for government to have the option to take over weak banks from unreasonable owners before they run down the bank completely. We can also address issues related to money laundering, such as the lifting of the secrecy of deposits, the creation of fictitious deposit accounts, the need for authenticated identification before an account is opened, etc. I am sure you have read that our country was last week reinstated in the top 12 countries for money laundering havens, an international list that we would not like to be in. As I said to the French economic attache who came over to visit me to reassess if there were any improvements, we have not really done more than the anti-money laundering circular that BSP issued mid last year. The suppression of the opening of the second envelope did not help at all either. For us to be de-listed we really need to get regulators, at least BSP and PDIC, to have the power to pry open deposit accounts. We can explicitly agree that this power will not be used by BIR and will be used only to precisely avoid the situations of the Jose Velardes, to deter money laundering. As I have mentioned to a number of congressmen, at least PDIC as an insurer of deposits should have the right to see what it is insuring. If bank staff can keep deposit information confidential, we in PDIC and BSP can also keep these deposit information confidential.





Secondly, I like to see the shift by regulators of emphasis from compliance audit to risk management review. Compliance audit is important to help instill discipline, but compliance is more focused on what have been done. Are the loan documents in order? Is the Single Borrowers Limit observed? Are there abuses on DOSRI loans? On the other hand, risk management review is an art to anticipate what could happen to the bank. The focus is to analyze the various risks the owners and managers are leading the bank to, such as the kind of credit and investment risks they take, and the quality of their decision making process - all within the context of their financial strength and the expectations in the economy. Then we can take prompt corrective action. This brings up the situation of Clarissa Ocampo, and many bankers who have bravely testified in the impeachment process. I do not want to remove even a notch of honor we have bestowed on Clarissa and the other witnesses. However, I was telling Ernest that she should have blown the whistle much earlier - the moment the fictitious account was opened. This would not have been the case with my Trust Officer when I was the president of a commercial bank. But as Ernest said, perhaps it was because of the social and even political context she found herself in, with the owner and chairman, George Go, and with the President of the Philippines himself that she had to wait until the impeachment process.

What then is the solution to most of our problems in the banking sector? Governance!!! With proper governance, we can maintain a stable banking system that in turn leads to the protection of depositors. It is governance at a higher level of ethical and moral standards - across the board, from directors to managers to rank and file. The banking business is the most regulated industry. It is not only regulated with laws and circulars. It is closely supervised and examined. We do not really need addition laws to plug loop-holes or to open up records. What we need is for the owners and managers of banks to operate their business based on the spirit rather than the letter of the law. Was not the letter of the law for technical reasons that which suppressed the opening of the second envelope? The spirit of the law calls for transparency and fairness. It solicits a response from each of us to do away with the illegal and immoral. It requires a response from each one of us to make a decision in favor of the many rather than the few.

Without proper governance, we will continue to see what we have uncovered in closed banks, illegal and immoral acts performed by owners and managers. Beyond fictitious names, there are unrecorded deposits and fictitious loans used to siphon funds for the personal benefit of owners and/or managers. There are deposits created to pay creditors through PDIC’s insurance cover. There are missing promissory notes and mortgage documents as we take over. The closed banks literally turned out to be piggy banks of the owners and/or managers. We see bankers avoiding their basic fiduciary role in managing other people’s money. When the going gets rough, they insist that their relationship with depositors is that of a debtor/creditor. We do not want these people to get away with these criminal acts. We created a bank fraud department at PDIC that investigates these types of cases. And we have the political will to bring erring bankers to justice. Many have asked if we have jailed any banker yet. I only know of a brother and sister team in Bicol who are both serving their terms in jail. Many are still out there in their dignified suits; eating in white table-cloth restaurants in Makati. Just to give you a perspective, we took over 24 closed banks with a total insured deposit of P3.3 Billion in 2000. And there were more than P9 Billion that were not insured, mostly Urban Bank’s which amounted to about P8 Billion.

Thirdly, I like to see a corporate culture change take deeper roots at PDIC. We want our employees to understand and believe the value of public service, and the dignity of a public servant. Like many other government agencies, we have been exempted from the Salary Standardization Law. So we enjoy very competitive salaries vis-a-vis the private sector. I have said to my colleagues at PDIC, we will not be multi-millionaires but we can earn enough to live a decent life and comfortably maintain a family. The challenge is for us to learn to live within our means. Along this line, we recently dismissed an employee for extorting money from depositors of closed banks and have elevated his case to the Ombudsman.

Fourthly, I like to see the re-engineering of the whole organization. We recently received administrative autonomy from Malacanang, subject only to our board and DOF’s approval. This will give us more flexibility to organize ourselves more effectively. In the past we had to work within at least an eight-year old Department of Budget and Management approved plantilla. As we re-engineer, we hope that we can liquidate closed banks faster so we can distribute to insured depositors and creditors sooner.


Fifthly, I like to see PDIC as a more effective deposit insurance agency in the performance of its role as a financial safety net of the banking system, complementing the role of BSP. Because of the exigencies of times, given the state of our developing economy, PDIC has been involved mainly as the mandatory receiver and liquidators of banks closed by the Monetary Board. While we are swarmed with 388 closed banks, we have three other functions. The obvious one is as insurer of deposits. We are likewise a supervisor and regulator of the system, except that these powers were somehow clipped as I mentioned above. Lastly, PDIC can extend financial assistance to banks who are in danger of closing or whose presence are essential in a community or essential to maintain financial stability in the economy. Even in just the banking sector there are just too many things to do, too many problems to solve. We cannot be a solution to all of them. But we can complement, and we closely coordinate and we have very close relationship with BSP to make sure that our banking system remains sound and stable, an important foundation for economic growth.

We have been criticized on the financial assistance we extended to PNB. Obviously, it has not been easy for the public to distinguish between the legitimate needs of the bank and Lucio Tan who we all know was openly closely associated with President Estrada. I have been asked many times and I have said, for the believer, no further explanation is needed. But for the unbeliever, no explanation will even be sufficient. You ask in this forum, how can we protect the banking system? Let me put forward the following facts. PNB is the 5th biggest bank in the Philippines. It has about 7.5% of total assets and total deposits of the system. It has a total deposit of about P140 B, insured deposits of P42 B. It has 324 branches and 2 MM depositors. It is in the category of what is internationally accepted as "too big to fail". Some analysts in the academe have said that helping PNB produces moral hazard. Unfortunately, monetary managers like us are the ones with our heads on the chopping block to absorb the consequences in the event of a PNB closure. We can easily be accused either way. But we have taken the position to support rather than to allow a systemic risk to happen. Even from these numbers I mentioned, we see that deposits are more than shareholders equity, P140B of deposits vs. a nominal P20B of equity, a 7:1 ratio. And as experienced in any bank closures, the disruption in people’s lives can be castrastrophic and traumatic, not only among depositors but also among borrowers whose business could be disrupted by the closure. In the case of PNB, some say that the remittance scheme of OCWs could also be much affected.

Let me now conclude this talk. I have briefly discussed 5 unfinished business at PDIC that I believe will significantly institute reforms in our banking system leading to better protection of depositors. The reforms we need are not in the structure of the banking system but in the people who are in the system, both the regulators and the regulatees. We do not need more laws to institute reforms. Banking is the most regulated business not only here but in other countries as well. We have more than enough regulations. What we need is a change of heart, for owners and managers to will operate their business based on the spirit of the law rather than on the letter of the law. It boils down into one word: Governance.

We have many problems to tackle to make our country a better place to live in. But we have to accept that we cannot be a solution to all the problems. Each of us should just concentrate on our sphere of influence, no matter how small we think it is. Like I never realized that the singular act I did when I resigned on Jan. 17 added up providentially to separate acts which cascaded to our victory at EDSA. I also share the observation that EDSA DOS was the mass action of the youth, which was not the case in 1986. For this reason, I have categorically said that reforms will happen and will be more lasting this time around. It will be you, the young who will make sure that the future is better for you and your children and your children’s children. Jose Rizal is right. "Ang kabataan ang pagasa ng bayan sapagkat sa kanila ang kinabukasan!!!"