(Article published in the Aug 19, 2002 issue of TODAY, Business Section)Banking is no longer the fun it used to be. Time was being a good banker simply meant strictly following the 9-12-3 rule: You accept deposits at no more than 9 percent; you give out loans at no less than 12 percent; and you daily hit the golf course at 3:00 p.m. Today, not even considering the freak transformation of a tax scam whistle-blower into a money laundering suspect, recent legislation and regulatory issuances, not to mention a hostile economic environment, have made working in a bank as critical piloting a jumbo commercial airplane through stormy weather at zero visibility.
Early this month, the
Bangko Sentral, in implementation of Section 56 of the General Banking Law of 2002, issued
Circular 341 issuing the guidelines on determining whether a bank is conducting business
in an unsafe or unsound manner. The word "guidelines" understates the import of
the issuance if it is understood to mean that the new rules are no more than moral
imperatives and exhortations to do good; the second of the two-section circular lists a
whole slew of administrative and criminal sanctions, ranging from a mere order to cease
and desist from a particular activity, to fines not exceeding P30,000 per day, and to
criminal prosecution, for acts which, though not violative of law or regulation,
nevertheless jeopardize the bank and the banking system. Instead of being merely a set of
guidelines, Circular 341 should be taken as seriously the judicial process
injunction, "fail not under penalty of law".
The requirement that banks conduct business in a safe and sound manner is, of course, not new. Under the old General Banking Act, the then Central Bank was to see to it that a bank or any institution under its supervision was "conducting its business on a sound financial basis" (Sec. 2-D, Republic Act 337). Later, the Bangko Sentral Charter empowered the monetary board to impose administrative sanctions and institute criminal prosecutions on banks, their officers and directors, for "conducting business in an unsafe and unsound manner". But it was the new General Banking Law of 2002 that took pains to spell out the circumstances that may be considered by the Monetary Board in determining whether a bank is not in compliance with that standard broad standard set by law (Section 56, RA 8791).
Section 1 of Circular 341 gives fair warning on what would precipitate monetary board action relative to a banks conduct of its business: the matter may be brought to its attention either upon report of the head of the supervising or examining department based on findings in an examination, or upon a complaint. The monetary board will then consider all the relevant facts and analyze the impact of an activity on the banks operations and financial condition, particularly on its capital position, asset condition, management, earnings posture and liquidity positionthe same five areas of concern that are the targets of the CAMELS rating system the BSP presently employs in its yearly examination of banks.
Section 1 of Circular 341 then proceeds to enumerate what acts or omissions, not otherwise prohibited by law, will raise the red flag of unsafe or unsound banking activity. At first glance, it seems that Section 1 of the circular is no more than a reiteration of some generalities already mentioned in four subparagraphs of Section 56 of RA 8791. Among these are acts or omissions that cause or may cause material loss, damage, or abnormal risk or danger to the safety, liquidity or solvency of the bank or its depositors, creditors, investors, stockholders or even to the BSP or the general public; those that cause undue injury to or unwarranted benefits, advantage or preference to the bank in a directors or officers acts of manifest partiality, evident bad faith or gross inexcusable negligence; and those contracts or transactions, echoing the dreaded standard applicable to public servants, "manifestly and grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby".
But in fact, those seeking a more detailed road map will find their fill in Annex A of the circular. Annex A makes a list of twenty one activities which may be considered unsafe or unsound. The circular concedes, though, that those listed "are not irrebuttably presumed to be unsafe and unsound", meaning that a bank still has the chance of proving that its particular activity, though falling under the description in the list, is nevertheless justified. At the same time, the circular warns that the listing is not exclusive no application here of the lawyers favorite, inclusio unius est exclusio alteriusand that "the Monetary Board may consider any other acts/omissions as unsafe or unsound practice."
The first four refer to operating under conditions which are not good for any business entity, whether a financial institution or not, such as (a) having policies and practices detrimental to the enterprise or which jeopardize the safety of funds of their stakeholders; (b) inadequate in capital and reserves in relation to kind and quality of assets; (c) producing a deficit in net operating income; and (d) serious lack of liquidity as tested against its liability structure. Elsewhere, are also operational inadequacies, such as, lack of internal controls, officers lending upon beyond their authorities, failure to limit, control and document contingent liabilities, and failure to keep accurate and updated books and records.
Other acts that can be called as suspects are driven by the specific character of financial intermediaries. Thus, considered unsafe and unsound are speculative and hazardous investment policies, paying cash dividends in excess of what is warranted by their capital positions, earnings capacity and assets quality, too much reliance on large, high-interest or volatile deposits/borrowing, and too great a dependence on letters of credit issued by the bank or accepted collateral to loan advanced.
The sale and purchase of participations in loans, which when properly conducted meet the legitimate needs of banks, are in the center of the regulatory concern due to the recent abuses perpetrated both here and abroad. Accordingly, acts that are likely to be considered unsafe and unsound are (a) excessive amounts of loan participation sold; (b) paying interest on participations without advising participating institution that the course of interest was not from the borrower; and (c) selling participation without disclosing to the purchasers of those participations material, nonpublic information known to the bank.
Evocative of recent bank closures are the (a) instances of hazardous lending and lax collection policies and practices, e.g. excessive loans adversely classified, completey documented, DOSRI-like loans, failure to diversify the loan portfolio mix, and SBL-like violations, (b) excessive volume of nonearning assets on addition to pst due or non-performing loans; and (c) continued and flagrant violation of laws, rules, regulations or written agreements between the institution and Bangko Sentral. Rounding up the list is the basket item: ?any action likely to cause insolvency or substantioal dissipation of assets or earnings of the institution or likely to seriously weaken its condition or otherwise seriously prejudice the interest of its depositors/investors/clients.?
It is tempting to characterize Circular 341 as an over-reaction of our BSP to the recent bank failures, such as the Urban Bank debacle, the Unitrust Bank fiasco, and the closure of smaller other banks such as the All Asia Bank. A quick check at the internet, however, will show similar listings of unsafe and unsound banking practice by other banking authorities. Visit, for instance, the website of the Oklahoma State bank Department and go to its statement of Unsafe and Unsound Banking Practice (www.state.ok.us/~osbd/Banks/Statues/unsound.htm). The statement of Oklahoma?s banking authority has an uncanny similarity to the listing in the Annex of Circular 341. Except for three items which are recognizably of local concern, namely (a) ?excessive reliance on large, high-interest or volatile deposits/borrowings?, (b) ?failure to make provisions for an adequate reserve for possible loan losses?, (c) ? excessive volume or non-earning assets?, the list unsafe and unsound banking practice in the Annex of Circular 341 is the same as the listing in the Oklahoma Statement.
All these shows that regulators here and abroad are bent on making sure that banks behave themselves in a manner consistent with the fiduciary nature of their business. The fund in banking and just had been jettisoned in favor of stakeholder-depositor, clients, investors, and public at large-protection. Banking had become too vital to the economy, national as well as global, to be left in the hands of the easy-going bankers of yerteryears.