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"x x x.
Prudential regulation of banks in Philippines
By Morales & Justiniano
Prudential regulationi Relationship with the prudential regulator
An effective prudential regulator is central to a safe and sound banking system. In the Philippines, that role is fulfilled entirely by the BSP. Section 4 of the GBL expressly states that the 'operations and activities of banks shall be subject to supervision of the Bangko Sentral'. Supervision, as defined in Section 4, not only contemplates the promulgation by the BSP of rules of conduct and standards of operations for banks (now set out in the Manual of Regulations for Banks, as supplemented or modified by the BSP from time to time), but also visitorial powers, that is, the conducting of examinations and investigations of the activities of banks with a view to determining their compliance with those rules and standards, and enforcing prompt and corrective action in cases of breaches of the same. Ultimately, the aim is to ensure the continued solvency and liquidity of banks.
As a rule, the BSP conducts regular investigations of banks not more than once a year. However, the Monetary Board, by an affirmative vote of five members, may order a special examination of a bank. In this regard, the BSP is required to immediately address findings of irregularities or deficiencies. When examining a bank, the BSP also has the authority to examine an enterprise that is wholly or majority owned by the bank.
Under the PDIC Charter, the PDIC can also examine banks once a year with the prior approval of the BSP. To avoid the overlapping of efforts, the PDIC has to 'maximise the efficient use of relevant reports, information and findings of the Bangko Sentral which it shall make available to the [PDIC]'. Under the amendments to the PDIC Charter made by Republic Act No. 10846, if the PDIC has submitted to the Monetary Board a report of examination asking that corrective action be taken against a bank determined by the PDIC to be conducting unsafe and unsound banking practices, and no corrective action is taken by the Monetary Board within 45 days of submission of the report, then the PDIC can, motu proprio, institute the necessary corrective action and thereafter inform the Monetary Board of the action taken.ii Management of banks
The management of a locally incorporated bank (such as a subsidiary of a foreign bank) is vested in a board of directors with five to 15 members, at least two of whom must be independent directors. Foreign nationals may become directors to the extent of the foreign equity in the bank concerned.
The Monetary Board has prescribed the criteria for individuals to be elected as bank directors, in line with the fit and proper rule, to maintain the quality of bank management, and better protect depositors and the public in general. Here, the Monetary Board considers the integrity, experience, education, training and competence of the individual concerned. The election of bank directors must be confirmed by the Monetary Board.
Board meetings may be conducted via teleconferencing or videoconferencing. Accordingly, directors of a bank need not all be physically present in one room to hold a valid meeting. A bank director must, however, participate in at least 50 per cent of all board meetings every year and physically attend at least 25 per cent of all such meetings.
As in other domestic corporations, all corporate powers of a locally incorporated bank are exercised by its board of directors. After the election of the directors, the shareholders can participate in the management of the bank only in certain fundamental matters, such as the amendment of the articles of incorporation or by-laws of the bank, its dissolution, or its merger or consolidation with another bank.
The BSP published the Handbook on Corporate Governance 'to improve corporate governance in the Philippine banking system'. The BSP also issued the rules of procedure on administrative cases involving directors and officers of banks. It is also aligning its rules with international best practices that foster good corporate governance in the banking sector, such as the Principles for Enhancing Corporate Governance promulgated by the Basel Committee on Banking Supervision. In this regard, the BSP has required each bank to appoint a full-time chief compliance officer to manage a compliance system designed to identify and mitigate business risks that may erode the franchise value of the bank.
To protect the funds of the depositors and creditors of banks, the Monetary Board may regulate the payment of compensation, allowances, fees, bonuses, stock options, profit-sharing and fringe benefits to bank directors and officers, in exceptional cases and when circumstances warrant, such as when a bank is under comptrollership or conservatorship, when it is found to be conducting business in an unsafe and unsound manner, or when it is in an unsatisfactory financial condition. Towards this end, the Monetary Board requires that the total amount of unbooked valuation reserves and deferred charges be deducted from the net income of the bank in the event of profit sharing. Further, when the total compensation package (including salaries, allowances, fees and bonuses) of directors and officers is significantly excessive when compared with peer group averages, the Monetary Board may order a reduction of the package to a more reasonable level. It must also be noted that the compensation of directors in general is regulated by Section 30 of the Corporation Code, which mandates that the total annual compensation of directors must not exceed 10 per cent of the bank's net income before tax during the preceding year.
Philippine branches of foreign banks are bound by the pertinent provisions of the GBL and the Manual of Regulations for Banks, except those providing for (1) the creation, formation, organisation or dissolution of corporations, and (2) the fixing of the relations, liabilities, responsibilities or duties of shareholders, directors or officers of corporations. These excluded matters will be governed by the applicable law in the jurisdiction of the foreign bank. Apart from the aforementioned in items (1) and (2), branches of foreign banks are required to conduct their operations subject to the same standards required of domestic banks. A branch does not have a board of directors. It is usually managed by an individual appointed by the head office, and his or her authority is normally set out in a power of attorney from the head office.iii Regulatory capital and liquidity
Section 34 of the GBL enjoins the BSP to conform the 'minimum ratio which the net worth of a bank must bear to its total risk assets' to 'internationally accepted standards, including those of the Bank of International Settlements relating to risk-based capital requirements'.
In the case of non-compliance by a bank with the prescribed minimum ratio, the Monetary Board may, until that ratio is met or restored by the bank:
limit or prohibit the distribution of net profits by the bank, and require that those profits be used, in full or in part, to increase the capital accounts of the bank;
restrict or prohibit the acquisition of major assets by the bank; and
restrict or prohibit the making of new investments by the bank, with the exception of purchases of readily marketable evidence of indebtedness of the government and the BSP, and other evidence of indebtedness or obligations, the servicing and the repayment of which are fully guaranteed by the government.
Universal and commercial banks are subject to the capital adequacy standards under Basel III. The Basel Committee on Banking Supervision has outlined a staggered implementation of Basel III up to the end of 2018 to allow internationally active banks time to raise capital organically. However, the BSP decided to adopt Basel III-based capital standards in full on 1 January 2014 on a non-staggered basis. This is in recognition of the strong capital position of the Philippine banking industry. Under the rules, the risk capital ratio, expressed as a percentage of qualifying capital to risk-weighted assets, is 10 per cent for solo bases (head office plus branches) and consolidated bases (parent bank plus subsidiary financial allied undertakings, but excluding insurance companies). The Common Equity Tier 1 (CET1) ratio is 6 per cent, while the Tier 1 capital ratio is 7.5 per cent. Moreover, there is a capital conservation buffer of 2.5 per cent, composed of CET1 capital. In addition, the BSP subjects domestically systematically important banks to a higher loss absorbency by requiring them to have a higher share of their balance sheets funded by instruments that increase their resilience as a going concern. To restrict the build-up of leverage, banks must meet a leverage ratio of not less than 5 per cent on both a solo and consolidated basis. Finally, there is a required liquidity coverage ratio, which is the ratio of high-quality liquid assets to total net cash outflows. As a minimum, the stock of liquid assets should enable the bank to withstand significant liquidity shocks that last 30 calendar days, which would give time for corrective actions to be taken by the bank management or the BSP, or by both.
Thrift banks, rural banks and cooperative banks, which are not subsidiaries of universal and commercial banks, are covered by a separate risk-based capital adequacy system labelled by the BSP as the Basel 1.5 framework – a simplified version of Basel II that takes into account the simple operations of those banks.iv Recovery and resolution
Under Section 29 of the New Central Bank Act, the Monetary Board may appoint a conservator for a bank that is in a 'state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors'. The conservator will:
have such powers as the Monetary Board deems necessary to take charge of the assets and liabilities of the bank;
manage the bank or reorganise its management;
collect all monies and debts due to the bank; and
exercise all powers necessary to restore its viability.
The conservator must be competent and knowledgeable in bank operations and management. There is a one-year limit to conservatorship.
The Monetary Board will terminate the conservatorship when the bank can continue to operate on its own. Termination is also an option if the Monetary Board determines that the continuance in business of the bank would involve probable loss to the depositors and other creditors of the bank, in which case Section 30 of the New Central Bank Act would apply.
Under Section 30, the Monetary Board may summarily forbid a bank from doing business and designate the PDIC as a receiver of the bank if that bank 'has insufficient realisable assets, as determined by the Bangko Sentral, to meet its liabilities'. The appointment of a receiver is also warranted without prior hearing in the event that the Monetary Board finds that a bank is unable to pay its liabilities as they become due in the ordinary course of business; cannot continue in business without involving probable losses to its depositors or creditors; or has wilfully violated a final BSP cease-and-desist order involving acts or transactions that amount to fraud or dissipation of bank assets.
The receiver must determine, as soon as possible but not later than 90 days after the takeover, whether the bank may be rehabilitated or otherwise placed in a condition that would permit it to resume business with safety to its depositors and other creditors, and the general public. Any such determination for the resumption of business is subject to prior Monetary Board approval. In the event that the receiver determines that the bank cannot be rehabilitated or permitted to resume business, the Monetary Board will notify the board of directors of the bank accordingly, and instruct the receiver to liquidate the bank. The receiver will then file an ex parte petition in court for assistance in the liquidation of the bank pursuant to a liquidation plan adopted by the PDIC for general application to all closed banks and convert the assets of the bank to money, disposing of the same to creditors and other parties, for the purpose of paying the debts of the bank in accordance with the rules on concurrence and preference of credits under the Civil Code of the Philippines, and institute actions to collect and recover accounts and assets of, or defend any action against, the bank.
The actions of the Monetary Board taken under Section 30 of the New Central Bank Act are final and executory, and may not be restrained or set aside by a court, save on petition for certiorari on the ground that the action in question was in excess of jurisdiction or done with such grave abuse of discretion as to amount to lack or excess of jurisdiction.
Under the amended PDIC Charter, a bank ordered to be closed by the Monetary Board will no longer be rehabilitated. The PDIC, as the designated receiver, will proceed with the takeover and liquidation of the closed bank, without the consent of the stockholders, board of directors, depositors and the other creditors of the closed bank.
x x x."
Prudential regulationi Relationship with the prudential regulator
An effective prudential regulator is central to a safe and sound banking system. In the Philippines, that role is fulfilled entirely by the BSP. Section 4 of the GBL expressly states that the 'operations and activities of banks shall be subject to supervision of the Bangko Sentral'. Supervision, as defined in Section 4, not only contemplates the promulgation by the BSP of rules of conduct and standards of operations for banks (now set out in the Manual of Regulations for Banks, as supplemented or modified by the BSP from time to time), but also visitorial powers, that is, the conducting of examinations and investigations of the activities of banks with a view to determining their compliance with those rules and standards, and enforcing prompt and corrective action in cases of breaches of the same. Ultimately, the aim is to ensure the continued solvency and liquidity of banks.
As a rule, the BSP conducts regular investigations of banks not more than once a year. However, the Monetary Board, by an affirmative vote of five members, may order a special examination of a bank. In this regard, the BSP is required to immediately address findings of irregularities or deficiencies. When examining a bank, the BSP also has the authority to examine an enterprise that is wholly or majority owned by the bank.
Under the PDIC Charter, the PDIC can also examine banks once a year with the prior approval of the BSP. To avoid the overlapping of efforts, the PDIC has to 'maximise the efficient use of relevant reports, information and findings of the Bangko Sentral which it shall make available to the [PDIC]'. Under the amendments to the PDIC Charter made by Republic Act No. 10846, if the PDIC has submitted to the Monetary Board a report of examination asking that corrective action be taken against a bank determined by the PDIC to be conducting unsafe and unsound banking practices, and no corrective action is taken by the Monetary Board within 45 days of submission of the report, then the PDIC can, motu proprio, institute the necessary corrective action and thereafter inform the Monetary Board of the action taken.ii Management of banks
The management of a locally incorporated bank (such as a subsidiary of a foreign bank) is vested in a board of directors with five to 15 members, at least two of whom must be independent directors. Foreign nationals may become directors to the extent of the foreign equity in the bank concerned.
The Monetary Board has prescribed the criteria for individuals to be elected as bank directors, in line with the fit and proper rule, to maintain the quality of bank management, and better protect depositors and the public in general. Here, the Monetary Board considers the integrity, experience, education, training and competence of the individual concerned. The election of bank directors must be confirmed by the Monetary Board.
Board meetings may be conducted via teleconferencing or videoconferencing. Accordingly, directors of a bank need not all be physically present in one room to hold a valid meeting. A bank director must, however, participate in at least 50 per cent of all board meetings every year and physically attend at least 25 per cent of all such meetings.
As in other domestic corporations, all corporate powers of a locally incorporated bank are exercised by its board of directors. After the election of the directors, the shareholders can participate in the management of the bank only in certain fundamental matters, such as the amendment of the articles of incorporation or by-laws of the bank, its dissolution, or its merger or consolidation with another bank.
The BSP published the Handbook on Corporate Governance 'to improve corporate governance in the Philippine banking system'. The BSP also issued the rules of procedure on administrative cases involving directors and officers of banks. It is also aligning its rules with international best practices that foster good corporate governance in the banking sector, such as the Principles for Enhancing Corporate Governance promulgated by the Basel Committee on Banking Supervision. In this regard, the BSP has required each bank to appoint a full-time chief compliance officer to manage a compliance system designed to identify and mitigate business risks that may erode the franchise value of the bank.
To protect the funds of the depositors and creditors of banks, the Monetary Board may regulate the payment of compensation, allowances, fees, bonuses, stock options, profit-sharing and fringe benefits to bank directors and officers, in exceptional cases and when circumstances warrant, such as when a bank is under comptrollership or conservatorship, when it is found to be conducting business in an unsafe and unsound manner, or when it is in an unsatisfactory financial condition. Towards this end, the Monetary Board requires that the total amount of unbooked valuation reserves and deferred charges be deducted from the net income of the bank in the event of profit sharing. Further, when the total compensation package (including salaries, allowances, fees and bonuses) of directors and officers is significantly excessive when compared with peer group averages, the Monetary Board may order a reduction of the package to a more reasonable level. It must also be noted that the compensation of directors in general is regulated by Section 30 of the Corporation Code, which mandates that the total annual compensation of directors must not exceed 10 per cent of the bank's net income before tax during the preceding year.
Philippine branches of foreign banks are bound by the pertinent provisions of the GBL and the Manual of Regulations for Banks, except those providing for (1) the creation, formation, organisation or dissolution of corporations, and (2) the fixing of the relations, liabilities, responsibilities or duties of shareholders, directors or officers of corporations. These excluded matters will be governed by the applicable law in the jurisdiction of the foreign bank. Apart from the aforementioned in items (1) and (2), branches of foreign banks are required to conduct their operations subject to the same standards required of domestic banks. A branch does not have a board of directors. It is usually managed by an individual appointed by the head office, and his or her authority is normally set out in a power of attorney from the head office.iii Regulatory capital and liquidity
Section 34 of the GBL enjoins the BSP to conform the 'minimum ratio which the net worth of a bank must bear to its total risk assets' to 'internationally accepted standards, including those of the Bank of International Settlements relating to risk-based capital requirements'.
In the case of non-compliance by a bank with the prescribed minimum ratio, the Monetary Board may, until that ratio is met or restored by the bank:
limit or prohibit the distribution of net profits by the bank, and require that those profits be used, in full or in part, to increase the capital accounts of the bank;
restrict or prohibit the acquisition of major assets by the bank; and
restrict or prohibit the making of new investments by the bank, with the exception of purchases of readily marketable evidence of indebtedness of the government and the BSP, and other evidence of indebtedness or obligations, the servicing and the repayment of which are fully guaranteed by the government.
Universal and commercial banks are subject to the capital adequacy standards under Basel III. The Basel Committee on Banking Supervision has outlined a staggered implementation of Basel III up to the end of 2018 to allow internationally active banks time to raise capital organically. However, the BSP decided to adopt Basel III-based capital standards in full on 1 January 2014 on a non-staggered basis. This is in recognition of the strong capital position of the Philippine banking industry. Under the rules, the risk capital ratio, expressed as a percentage of qualifying capital to risk-weighted assets, is 10 per cent for solo bases (head office plus branches) and consolidated bases (parent bank plus subsidiary financial allied undertakings, but excluding insurance companies). The Common Equity Tier 1 (CET1) ratio is 6 per cent, while the Tier 1 capital ratio is 7.5 per cent. Moreover, there is a capital conservation buffer of 2.5 per cent, composed of CET1 capital. In addition, the BSP subjects domestically systematically important banks to a higher loss absorbency by requiring them to have a higher share of their balance sheets funded by instruments that increase their resilience as a going concern. To restrict the build-up of leverage, banks must meet a leverage ratio of not less than 5 per cent on both a solo and consolidated basis. Finally, there is a required liquidity coverage ratio, which is the ratio of high-quality liquid assets to total net cash outflows. As a minimum, the stock of liquid assets should enable the bank to withstand significant liquidity shocks that last 30 calendar days, which would give time for corrective actions to be taken by the bank management or the BSP, or by both.
Thrift banks, rural banks and cooperative banks, which are not subsidiaries of universal and commercial banks, are covered by a separate risk-based capital adequacy system labelled by the BSP as the Basel 1.5 framework – a simplified version of Basel II that takes into account the simple operations of those banks.iv Recovery and resolution
Under Section 29 of the New Central Bank Act, the Monetary Board may appoint a conservator for a bank that is in a 'state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors'. The conservator will:
have such powers as the Monetary Board deems necessary to take charge of the assets and liabilities of the bank;
manage the bank or reorganise its management;
collect all monies and debts due to the bank; and
exercise all powers necessary to restore its viability.
The conservator must be competent and knowledgeable in bank operations and management. There is a one-year limit to conservatorship.
The Monetary Board will terminate the conservatorship when the bank can continue to operate on its own. Termination is also an option if the Monetary Board determines that the continuance in business of the bank would involve probable loss to the depositors and other creditors of the bank, in which case Section 30 of the New Central Bank Act would apply.
Under Section 30, the Monetary Board may summarily forbid a bank from doing business and designate the PDIC as a receiver of the bank if that bank 'has insufficient realisable assets, as determined by the Bangko Sentral, to meet its liabilities'. The appointment of a receiver is also warranted without prior hearing in the event that the Monetary Board finds that a bank is unable to pay its liabilities as they become due in the ordinary course of business; cannot continue in business without involving probable losses to its depositors or creditors; or has wilfully violated a final BSP cease-and-desist order involving acts or transactions that amount to fraud or dissipation of bank assets.
The receiver must determine, as soon as possible but not later than 90 days after the takeover, whether the bank may be rehabilitated or otherwise placed in a condition that would permit it to resume business with safety to its depositors and other creditors, and the general public. Any such determination for the resumption of business is subject to prior Monetary Board approval. In the event that the receiver determines that the bank cannot be rehabilitated or permitted to resume business, the Monetary Board will notify the board of directors of the bank accordingly, and instruct the receiver to liquidate the bank. The receiver will then file an ex parte petition in court for assistance in the liquidation of the bank pursuant to a liquidation plan adopted by the PDIC for general application to all closed banks and convert the assets of the bank to money, disposing of the same to creditors and other parties, for the purpose of paying the debts of the bank in accordance with the rules on concurrence and preference of credits under the Civil Code of the Philippines, and institute actions to collect and recover accounts and assets of, or defend any action against, the bank.
The actions of the Monetary Board taken under Section 30 of the New Central Bank Act are final and executory, and may not be restrained or set aside by a court, save on petition for certiorari on the ground that the action in question was in excess of jurisdiction or done with such grave abuse of discretion as to amount to lack or excess of jurisdiction.
Under the amended PDIC Charter, a bank ordered to be closed by the Monetary Board will no longer be rehabilitated. The PDIC, as the designated receiver, will proceed with the takeover and liquidation of the closed bank, without the consent of the stockholders, board of directors, depositors and the other creditors of the closed bank.
x x x."
