Buencamino writes political commentaries for Action for Economic Reforms, where he is a fellow. This article was published in the Business Mirror on September 3, 2008, page A6.

Last month, the Chairman of the House Committee on Banks and Financial Intermediaries wrote the Bangko Sentral ng Pilipinas (BSP) and the Rural Bankers Association of the Philippines (RBAP) for their views on House Bill 3827 – “ An Act Suspending the Required Capital Adequacy Ratio Prescribed by the Bangko Sentral ng Pilipinas to All Rural Banks for a Period of Two (2) Years.”

Attached to the Chairman’s letter was an Explanatory Note from the bill’s three sponsors.

Here are key paragraphs from that Note:

“The urgency of the measure is necessitated by present economic conditions in the countryside, which, with the convergence of other factors, may promote an environment so vulnerable to economic opportunists, the predatory activities of criminal elements, or a breakdown of peace and order.”

Holy cow!

“Due to the slowdown in agricultural productivity, banking incomes have fallen due to the inability of borrowers to service their loans. Yet, all rural banks have to comply with regulatory standards that impose levels of capital that have to be maintained at all times or suffer penalties for non-compliance. At a time when general conditions do not allow their clients to comply with loan obligations, rural banks are doubly hit, if they want to continue doing business, they have to manage to extend credit but doing so would expose them to non-compliance by loan recipients which could further lower or dissipate their asset base. In order to remain viable therefore, these banks would have to resort to conservative measures, including imposing very conservative conditions for loan takeouts, which would be more injurious to their clientele.”


“No matter how difficult conditions will become, it would be unwise to withhold credit to rural entrepreneurs and the public at large. Certainly funds cannot be withdrawn from circulation, money should in fact be placed into the hands of people to spur spending and growth. As barometers of the state of the economy in rural areas, rural banks play a crucial role; coming to their aid at this time is therefore urgent and necessary.”


I expected RBAP to break out the champagne.  Instead, RBAP said “thanks but no thank you” to the suspension of capital adequacy ratio (CAR).

RBAP’s president debunked the premise that the rural banking industry is in crisis.

“The rural banking sector in the Philippines today is strong and poised to get stronger,” he wrote.

Then he explained why the Committee should not mess with CAR.

“[It] is the bedrock of prudential regulation. It serves to protect depositors and promote the stability and efficiency of the financial system. The proposed suspension of the CAR, while temporary, may create an environment for an erosion of this bedrock; it may unintentionally open a window for behaviors posing moral hazard detrimental to the rural banking sector as a whole. This, the suspension of CAR, may well be a set back for the increasingly improving and growing rural banking sector.”

Finally, he suggested other ways the Committee could help: reduce the sector’s “disproportionate share of the regulatory burden,” allow limited foreign ownership in rural banks, and make access to IT structure affordable.

The BSP, for its part, lectured on liquidity and solvency:

“The proposed prudential safeguard contained in House Bill 3827 for banks to just maintain a ‘condition of liquidity adequate to protect the interest of depositors and creditors’ does not address the solvency issue and cannot therefore be relied upon to adequately protect depositors and creditors in the long run. Liquidity and solvency are two different things. While the former ensures that on a regular basis the bank is able to meet the withdrawals of its depositors and pay its obligations as they fall due, the latter ensures that the value of the bank’s assets are at least equal to its liabilities plus a sufficient buffer for contingencies. A liquid but insolvent bank means that it only survives because of continued flow of deposits and borrowings that ultimately cannot be paid. And the longer such a situation is allowed to persist, the bigger the potential hit for the public when the music finally stops.”

It seems undercapitalized rural banks lending money taken from depositors and creditors lured by outrageous interest rates are the intended beneficiaries of House Bill 3827. The bill will legalize “behaviors posing moral hazard.”

The BSP tried to place a number of undercapitalized but munificent rural banks under receivership but the rural banks, acting in concert, were able to stymie the BSP with a Temporary Restraining Order (TRO) from a Manila Regional Trial Court and a Court of Appeals division taking its sweet time on the BSP’s urgent appeal for a reversal of the TRO.

“Those rural banks, already enjoying the protection of the courts, might also get their meal ticket from the Batasan,” observed an apprehensive depositor.

“They must have a Lucky Angel coin,” I said, referring to a three-hundred year-old talisman from France.

“Well, it’s that or an angel with coin,” he snorted.

Or both.