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Corporate trustees should answer to
only one government agency


(Article published in the October 28, 2000 issue of TODAY, Opinion Today Section)

The Urban Bank war has just began and the battles now raging on several fronts are a far cry from the genteel way of bankers. Shortly after Urban Bank, Inc. was placed under PDIC receivership and Urbancorp Investments, Inc., under the care of an interim receiver by the Securities and Exchange Commission, top officials of both institutions became respondents of criminal complaints filed with the Department of Justice, their names in the hold-order list of the Bureau of Immigration.

Early cases were for estafa and falsification due to the allegedly unauthorized pre-termination on April 25, 2000 (a) of a Php 5 million placement of the spouses Francisco and Aurora Eizmendi and (b) of a Php 1 million investment of Lilibeth Victoria Fajardo from Urban Bank. Bank officials denied culpability and assured complainants that their proceeds were theirs for the taking, if only they were willing to accept. A side skirmish was started when three employees of Urban Bank who were interviewed by BSP lawyers in the course of gathering facts about the pre-terminations filed cases before the Ombudsman for grave coercion and misconduct against their interrogators and neglect of duty against those who received the Urban employee’s complaints.

The Eizmendi and Fajardo complaints were followed by the case filed on September 11, 2000 of four counts of estafa in relation to Presidential Decreee No. 1689, on economic sabotage, for the admitted transfer from Urbancorp Investment Inc. to Urban Bank of the Php 2.8 billion loans characterized by the BSP and the PDIC as garbage and trash receivables. In defense, Arsenio M. Bartolome III maintained that as mere chairman of the Board he was not involved in the day-to-day activities of the Bank; Teodoro C. Borlongan admitted he who authorized the transfer. Both officials belied the accusation that the loans were garbage and trash and claimed that the loans had good collateral. The BSP and the PDIC immediately retorted with a detailed listing of the previous restructurings of the loans due to the borrowers’ inability to pay and their past due status when the transfer was made.

The conflict spilled out to Congress when House Representative Michael Defensor delivered a privilege speech, under legislative immunity, calling the closure of Urban Bank as "whimsical, irrational, irresponsible action" and demanding the resignation of the Governor of the Bangko Sentral. The matter is now to be heard by the House Committee on Good Government.

Business associations, such as the Bankers Association of the Philippines, the Management Association of the Philippines, the Financial Executives Institute of the Philippines and the Federation of Bank Depositors of the Philippines, were said to have thrown their support for Urban Bank and urged the BSP to hasten its reopening. Shortly thereafter, however, the papers promptly reported the Bankers Association of the Philippines and Management Association of the Philippines to have disclaimed the positions attributed to them.

The BSP, or its part, responded to media criticism and circulating derrogatory e-mails with its own press statement. Urban Bank itself, the BSP said, admitted its inability to pay its liabilities as they became due in the ordinary course of business when it declared a bank holiday. That was sufficient legal basis, under Section 30 of the new General Banking Law, for putting Urban Bank under receivership. The postponements of the reopening, the BSP further explained, is due to the complications of merging four institutions into one, the Bank of Commerce, which was the white knight that had won the bid for the right to rescue the bank in distress.

Far be it for me to join the noisy fray which, judging from the recent Banco Filipino war, promises to long and hard fought. What I would like to do, instead, is call attention to the structural faults running through the foundations of the country’s trust industry that were exposed by the mere fact that the Urban Bank fiasco occurred. These weaknesses must be addressed and resolved if the trust industry, presently dominated by banks and investment houses, is to successfully convince the public that, despite the Urban Bank fiasco, money is safe under a trust.

The first major structural weakness stems from the fact that the trust function is granted to entities which not banking institutions, resulting in an ambiguity as to the responsible government supervisor. Urbancorp is admitted, by Urban Bank officials, to have been the source of the questioned receivables sold to Urban Bank. It is an investment house, not a bank. It did not have quasi-banking functions. It was, as such, under the oversight of the Securities and Exchange Commission. However, because it had a trust license, it was also under the oversight of the Bangko Sentral insofar as its trust operations were concerned.

While ordinarily a corporate entity may engage without much difficulty in various businesses supervised by different government agencies, provided the activities are within its purpose clause, the business of financial intermediation, which is the heart and soul of both an investment house and a trust entity, is so intertwined and convergent that the services of one are hardly distinguishable from the services of the other. This enables a non-bank financial institution with a trust license, to play the game of regulatory arbitrage, by booking transactions in books of one or the other department, depending on whether the advantage lies. For instance, borrowers who do pass the strict standards of trust lending or who have reached the limits of the single issuer limit of common trust funds (which is the retail fund generation tool of trust departments), may be accommodated in the investment house’s own lending. A band aid solution to this regulatory imbalance is for the BSP and the SEC to issue coordinated regulations But how is a conflict of policies, to be resolved? In the case of Urban Bank, for instance, what would have happened if the BSP-approved approach to the reopening of Urban Bank, which is to consider both Urban Bank and Urbancorp Investments, Inc. as unified operation, was not acceptable to the SEC which is legally concerned with Urbancorp Investments, Inc. only?

I submit that entities performing trust functions should be subjected to supervision and regulation only of the Bangko Sentral for all its operations. This was in effect the rule in the ‘60s and prior years when the trust license was granted, with the exception of The Philippine Trust Company, which was initially organized as a trust corporation, to a banking institution. In effect, that placed all the businesses of corporate trustees under the then Central Bank only. This was changed when the investment houses (except those with quasi-banking licenses) were placed under the supervision of the SEC by the new Central Bank Act (R.A. NO. 7653). Subsequently, with the passage of the Finance Company Act (R.A. No. 8556), finance companies which are under the SEC were eligible for the trust license. The new General Banking Law (R.A. No. 8791), by changing the nomenclature from "trust corporation" to "trust entity" completed the liberalization by permitting the grant of the trust license even to entities which are not primarily financial institutions. Congress, we believe, should take a second look at its present policy and reconsider the wisdom behind the old rule that unified the supervision and regulation of trust entities under the single responsibility of the Bangko Sentral. Centralizing the oversight of institutions dealing with money to the central monetary authority not only eliminates the temptation to do regulatory arbitrage but also facilitates the cleaning up process when a disaster like Urban Bank occurs.










         

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