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Making Banks Worthy of Your Trust

(Article published in the Sep 2, 2002 issue of TODAY, Business Section)

Last week, the Bangko Sentral ng Pilipinas, in what appears to be the beginning of renewed efforts to further upgrade the quality of trust services in the country, issued Circular 348 that effectively raised the threshold for entering the trust business in the Philippines. Getting a license to engage in trust business, which had long ago ceased to be easy, is now even more difficult. Bigger capital, better performance, stricter systems, greater commitment to good governance are now required of those who would be trustees.

The matter-of-fact tenor of the introductory paragraph belies the import of the circular. It said that it was amending (simply amending, not even revising), the provisions of the subsections (mind you, just the subsections, not the entire section) of Section X404 of the Manual of Regulations for Banks. But the amendments themselves are far-reaching in consequence. Obviously culled from the lessons of the recent debacle that was Urban Bank, then headed by Arsenio "Archit" Bartolome, who has been recently reported in the broad sheets as about to deploy his financial acumen on the business of insurance, the changes give current trustors and their beneficiaries a lot to be thankful for. With the proper follow-through in terms of implementation and complementary issuances in the near future, Circular 348 promises to minimize, if not altogether eliminate, the pain and anguish suffered by the hapless victims of the Urban Bank’s and Urbancorp’s handling of their fiduciary responsibilities.


The first reform target was the applicant bank’s capital. The minimum capital required was slightly increased. Since their required capital has been recently raised by previous circulars, the minimum was not raised for universal banks, commercial banks and branches of foreign banks. Thrift banks, however, must have a minimum of P650 million, and all banks, must comply with whatever minimum capital may be required by the Monetary Board in the future. Those presently with a trust license but do not have the minimum capital that is or may be required cannot declare any dividend, unless they carry to surplus at least 50% of their net income from all operations since the last preceding dividend until they shall have complied with the minimum.

In addition to complying with the minimum, the capital of the bank must meet a new standard. Its’ risk-based capital adequacy ratio must not be lower than twelve percent at the time of the filing of the application.

Bigger and better capital, of course, means stronger capability to withstand (though not necessarily an airtight insurance against) the vagaries of business and market sentiments, like the heavy withdrawals blamed by former Urban Bank President Teodoro Borlongan on the negative perception of the market when for failure to meet the increase in capital requirements, the bank decided, in a short span of time, to down grade itself from universal bank to commercial bank, and then further down to a holding company with a thrift bank subsidiary. Had Urban Bank the amount and quality of capital required now of applicants for a trust license, it most likely would not have had to close its own door to its own depositors and investors.

Secondly, banks must now show not just a so-so, but instead, a good track record. The bank’s operation during the preceding calendar year and for the period immediately preceding the date of application must have been profitable. No Worldcom, Xerox, Quest, and other type of Corporate American number massaging, please. And none of the home-grown variety, called the float, either. The bank must not have float items outstanding for more than sixty (60) calendar days in the "Due From/to Head Office/Branches/Other Offices" accounts and the "Due from Bangko Sentral" account exceeding one percent of the total resources as of the date of application.

Moreover, the bank, whose business boils down to borrowing and lending, must itself be a good lender and borrower. For instance, it must show that, as a good lender, it maintains adequate provisions for probable losses commensurate to the quality of its assets portfolio but not lower than the required valuation reserves as determined by the Bangko Sentral. It must also show that, as a good borrower, it has no past due obligations with the Bangko Sentral or with any government financial institution.

Furthermore, it must show that it was not remiss in meeting the banking prudential standards of banking regulations but was instead habitually in compliance. Whereas, under the old rules, an applicant must show that it had "continuously complied with its net worth to risk assets ratio, liquidity floor, and ceilings on DOSRI loans for the last sixty days immediately preceding the date of the application", the new period for meeting these benchmarks is now "the last two preceding examinations". Since a bank is regularly examined only one a year, that more or less translates into two years. In addition, specific focus is also given to compliance with the single borrower’s limit, and investment in bank premises and other fixed assets. One can almost see the circular pointing to Urban Bank huge building at the corner of ever-flooding Buendia and Pasong Tamo, Urban Bank’s holdings in Fort Bonifacio, and its lendings to Puerto Azul and similar companies, as what a bank ought not to amass or be saddled with it wanted to be a true fiduciary.

The applicant bank must show that meeting these standards is not by sheer chance. It must have an established risk management system appropriate to its operations characterized by clear delineation of responsibility for risk management, adequate risk measurement systems, appropriately structured risk limits, effective internal controls and complete, timely and efficient risk reporting system.

By way of an over-all show of good performance, the bank must have had a CAMELS (an acronym for six-way test of Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Changes against which all banks are not rated) rating of at least 3 in the last regular examination, with management rating of not lower than 3 and that it is a member in good standing of the Philippine Deposit Insurance Corporation.

Finally, the applicant bank must show a very strong commitment to good corporate governance. It must have already elected in its Board, at least two independent directors and every member of the board of directors must have attended the special seminar on good governance conducted by the Bangko Sentral itself or any of its accredited seminar providers. The application for a trust license must be accompanied by a certified true copy the resolution of bank authorizing the application and a certification by the bank president, or similarly ranked official that the bank has complied with all the conditions and prerequisites for the issuance trust license. These last two, innocuous as they may seem, are really, as those who have already realized the serious fiduciary responsibilities of their being directors know, meant to lay the basis for making the members of the board responsible for the performance of the trust department that will be set up. No longer can the members of the board escape the blame for the failure of the bank’s trust department, as some members of Urban Bank Board tried to do, by simply claiming that they were not made aware of what was going on in the bank.

[All told, these new rules, which are in addition to those already in the subsections of Section X401 of the Manual of Regulations for Banks, move the players in the trust industry in the Philippines closer to achieving their objective of being worthy managers of other people’s resources. Philippine trust clients, no matter how wealthy, do not have money to lose. Over the years, the profile of most trust clients has changed from the holders of inherited wealth to savers and investors of wages and profits earned through painful personal sacrifices. The Bangko Sentral is keenly aware of its own duty to maintain an environment that safeguards those hard won gains and Circular 348 is just one of many more to come, intended to do just that]*.