‘Seamless transition’ for bank closures eyed

MANILA, Philippines – The Philippine Deposit Insurance Corp. (PDIC) is proposing what it calls “a seamless transition” from bank closure to liquidation thus eliminating the 90-day period of rehabilitation after bank closure.

PDIC president Jose C. Nograles said that bank rehabilitation should take place during the prompt and corrective action (PCA) period when the bank is still in operation, and not after closure. The outright liquidation of banks ordered closed by the Monetary Board (MB) is part of the package of measures PDIC is endorsing as amendments to the Bangko Sentral ng PIlipinas (BSP) charter.

Sen. Eduardo J. Angara, principal sponsor of the Senate bill amending the BSP Charter, has adopted the PDIC-proposed seamless transition provision, among other proposals, as part of the committee report of the Committee on Banks, Financial Institutions and Currencies in the Senate. The BSP Charter amendment is currently undergoing second reading at the Senate.

The same proposal was adopted by the House committee on banks and financial intermediaries, which is chaired by Rep. Jaime Lopez.

Other deposit insurance systems such as those of Canada, Malaysia, Mexico, Taiwan, and Brazil do not provide rehabilitation options for closed banks. The Malaysian system allows bank problems to be resolved during the prompt corrective action (PCA) stage.

In Taiwan and Mexico, for example, closed banks are no longer eligible for rehabilitation. In Brazil, it is much stricter because apart from keeping closed banks closed, owners of closed banks are forbidden to open a new bank.

Nograles said that PCA is the period to correct the deficiencies of a bank. Bank rehabilitation is part of strengthening efforts to help banks attain viability. Hence, bank rehabilitation should be made at the point of PCA and not after bank closure.

PDIC data showed that of the 81 banks ordered closed by the MB from 2005 to September 2009, 27 applied for rehabilitation but none were found to be viable for rehabilitation.

Nograles said that the outright liquidation of closed banks will save the PDIC, the banking industry, and the depositors precious time. He said that without the mandatory rehabilitation option after bank closure, PDIC can quickly undertake three modes of liquidation such as 1) purchase of assets and assumption of liabilities (P&A), 2) organize a bridge bank and 3) outright sale of the closed bank’s assets (liquidation). The third mode is currently being implemented by PDIC after the 90-day receivership period. PDIC is also pushing for the authority to organize a bridge bank under the proposed amendments of the BSP Charter.

He said that three modes of liquidation mentioned above are being implemented by the Canada Deposit Insurance Corporation and other mature deposit insurance systems while the bridge bank authority is practiced by the US Federal Deposit Insurance Corporation, Korea and Japan.

Under the present system, a bank found in early stages of distress and non-compliance with standard conditions and ratings is placed under PCA. When all options have failed, the bank is ordered closed by the MB and is placed under the receivership of PDIC.

However, PDIC may still accept rehabilitation proposals during the 90-day receivership period, most of which come from previous owners and stockholders of the closed banks. In case of third party investors, the concurrence of the bank’s stockholders is required.

“Ironically, these stockholders had earlier failed to comply with the remedial measures under the PCA agreement and failed to keep their banks afloat prior to closure by the MB,” Nograles said. –(The Philippine Star)