‘We are confident Tetangco
and his team would be able to meet the challenge.’
We’ll take the word of
Bangko Sentral Gov. Armando Tetangco that the local banking system is
fundamentally sound and capable of riding out the current turmoil in the United
States. The direct exposure of local banks in the failed US financial in
institution is a negligible fraction of their risk assets. And even if they have
to write off their foreign exposure, their capitalization is enough to absorb
the losses. Their bottom line will, of course, take a hit but that’s how the
game is played.
(In the event of global financial meltdown, the local banking
system will, needless to say, collapse along with that of the rest of the world.
But we don’t see the global capitalist order imploding any time soon. And if in,
fact, it does collapse, not one country will be spared, except perhaps a
socialist paradise like North Korea.)
We are too engrossed in the drama unfolding in the United
States that we have somehow forgotten the fact that the Philippine financial
system is markedly different from that of the US. Even in the latter country,
the commercial banks – that is, your plain vanilla deposit-taking firms which,
in turn, lend out money to corporate borrowers and households – apparently
remain well-positioned to weather the storm. Practically, all the failed
institutions in the news are investments banks, that is, that class of financial
institutions which are beyond the reach of federal banking regulators as to how
to invest their assets. These are the firms which packaged all those high-flying
"basura" investment instruments and traded the same for their own accounts.
Let’s take a look at the local banking system. Sure, the big
banks are officially considered universal banks, that is, they are allowed to
engage in both merchant and investment banking. Unlike in the United States,
however, the local banks are tightly regulated so much their assets must be kept
in cash, parked with the BSP or placed in Treasury IOUs. So much may be lent out
as loans. And only so much may be invested in equities of non-banking related
businesses. They are allowed to invest in high-risk instruments but only to
hedge them from the volatility of, say, the foreign exchange market.
This is not to say the local banks are bomb-proof. But if
some of them goes belly up, it would be for reasons not directly related to the
soured placements in the United States. The banks, in anticipation of tightening
of global credit, are starting to clean up their balance sheets. Some have
already closed their lending window to a few wobbly conglomerates, particularly
those which are heavily indebted to foreign lenders. Some are also trying to
bring down their exposure in businesses with illiquid assets.
The worst that could happen is a system-wide fear of lending
even among the banks themselves. But the crisis, if it would come, would be in
the nature of a liquidity problem.
We are confident Tetangco and his team, which has an institutionalized memory
of the 1980s foreign crisis and the 1997 regional financial shock, would be able
to meet the challenge.
