"There has been a sea change in that thinking."
"There has been a sea change in that thinking."
Anyone who is reasonably knowledgeable about monetary policymaking in this country during the last half-century is bound to have discerned the turnaround that took place last week in central-bank thinking about commercial bank bigness. Indeed, it is tempting to speak of a sea change in that thinking.
Consider the monetary policymaking milieu at the start of the decade of the ’70s. The Philippine commercial banking industry was a cluttered place, with few big, well-capitalized banks and to many medium-sized and small banks with weak capital bases. Because of their weak capitalization, some banks were unable to withstand the rise and fall by the wayside and the recurrent economic downturns revealed serious fissures in the structures of many banks.
In the face of such an industry structure, CB (Central Bank of the Philippines), the forerunner of today’s BSP (Bangko Sentral ng Pilipinas), put in place a policy of industry consolidation intended to restructure commercial banking into an industry composed of significantly fewer but better-capitalized components. This was to be achieved principally through mergers to encourage—nay, compel—mergers, the minimum equity requirement of commercial banks was progressively increased, to the point where the major stockholders of the medium-sized and small banks ended up having to choose between infusing more capital with their banks, merge their banks with other banks, or sell their holdings. To the disappointment of the CB—to which mergers had been the preferred outcome—many of the banks opted to infuse capital into their banks sufficient to meet the new minimum capitalization levels.
As an incentive to the banks to merge, the CB threw in the concept of universal banking, under which commercial banks would now be allowed to engage in previously prohibited areas such as insurance, warehousing and stock brokerage. Universal banking was very attractive to the bankers, and one by one the commercial banks fulfilled the financial and other capabilities required of universal banks. Thus were created the banking instructions with interests spanning the entire range of financial activities—from commercial banking to the other activities allied therewith.
The 1970s and 1980s were the heyday of the concept of bigness in banking, with the CB leading the charge with its mantra of “Bigness in banking is good for the economy.” The CB policy can be adjudged a success, for fewer bank runs occurred, and more strongly capitalized commercial banks emerged in the ensuing decades. The process was greatly helped by the tiered capital increases required of the world’s banks by the Basel Accords.
Now consider the action taken by the Monetary Board during its most recent meeting. That action—embodied in a set of rules—has effectively replaced the “Banks must be big” policy that has guided Philippine commercial banking during the last five decades wth a policy that may be best expressed as “Banks must be big but not so big that their failure will pose a grave threat to the economy.” Stated differently, commercial banks must not become too big to fail.
In the wake of last week’s policy-setting meeting, the Monetary Board in effect established a new category of commercial banks—“domestic” systematically important banks. In its post-meeting statement, the Monetary Board announced that it had approved a new framework for dealing with such banks. The framework will contain provisions intended to “discourage banks from moving into the so-called too-big-to-fail category.”
The potentially too-big-to-fail banks will be required to increase their capital, with the required additional capital set at BSP-adjudged “loss absorbency” capabilities. More than that, the big banks will be made “subject to a more intensive supervisory approach and will be required to adopt a concrete and acceptable recovery plan that will address the risks they pose to the financial system and to the real economy.”
As can be seen, this country’s monetary policymaking has moved, in the second decade of the 21st century, from the realm of “Bank bigness is good” to that of “Bank bigness is good only as long as risks are not posed to the financial system and to the real economy.”
With the 2008 world financial crisis in mind, such a move makes eminently good sense.