For depositors’ sake

It has become a common sight in recent years: furious depositors tearfully lamenting on television the sudden loss of their money as a result of the closure of a bank or financial institution.

The latest iteration of this human drama was played out in connection with the demise of the Export and Industry Bank, whose management decided one day that it could no longer bear the burden of day-to-day business and decided to close shop, leaving some 50,000 depositors high and dry.

The reasons for the bank’s closure are, of course, more complicated than that. But to depositors who depend on meager savings to feed their family or send their children to school, no explanation from smooth-talking bankers will suffice. Assurances from Philippine Deposit Insurance Corp. that depositors will “soon” get their money amounting to P500,000 or less are of little comfort. Worse, depositors who have at stake funds above the deposit insurance cap, such as entrepreneurs and corporations, are faced with emergency situations—like being left without resources to meet their obligations to suppliers or to cover their employees’ wages next payday.

There is no shortage of woe to go around. And yet, it does not have to be this way.

Set aside for a moment the reality that Export and Industry Bank’s managers failed miserably in their task of safeguarding their clients’ money and trust. Accept for the sake of argument that they did their best and that the bank’s collapse was beyond their ability to prevent. But even if all these were true, there is still a way—prospectively—to protect bank depositors and their hard-earned money.

For at least two decades now, the Bangko Sentral ng Pilipinas has been asking Congress to grant it powers similar to those of US bank regulators that will allow it to act preemptively against bank failures and prevent the disruption of depositors’ access to their funds.

In a nutshell, US bank regulators, upon observing that a particular bank is having trouble meeting its financial obligations to its creditors, will immediately step in and force the bank’s owners to accept the entry of a “white knight” that will infuse fresh capital into the distressed bank. Thus, if the bank comes dangerously close to a less than liquid state, the regulators can force the owners to sell out to new investors.

Most impressive in this arrangement is the speed with which the solution is executed: The regulator unilaterally convenes a meeting with the bank’s owner and the new investor on a Friday. Examiners and staff are sent in to preserve the bank’s books throughout the weekend. The bank opens—business as usual—on a Monday. It is actually fairly common for depositors not to notice that the ownership of their bank has changed hands in a mere 72 hours (in sharp contrast to the failed three-year effort to find a bank that would rescue Export and Industry Bank). As far as depositors are concerned, their money was never in danger. They could even have withdrawn funds via ATM during the transition weekend. (And the punishment for the bank’s former owners? The value of their stock holdings in the bank drops instantly to zero. They are penalized for failing to safeguard the depositors’ money by being stripped of theirs.)

This is something Philippine bank regulators are still unable to do, despite their best efforts at lobbying Congress for empowerment. Congress’ reason for denying regulators this capability the last time our banking laws were revised was that the BSP could not be trusted with the extraordinary power to strip someone (in this case, a bank’s owner) of his/her rightful property (notwithstanding acts of gross negligence or, worse, fraud that may have been committed in running the bank).

But is this fear warranted? Maybe not. International observers have praised the BSP and its leadership, for example, for being “the only adult in the room” during the direst economic times of the Estrada and Arroyo administrations. If it could be trusted before, perhaps it can be trusted going forward. Without them enjoying this kind of trust, regulatory agencies like the BSP and the PDIC all too often end up acting like coroners and morticians, instead of doctors, in the event of a bank’s demise.

It is inexcusable for lawmakers not to help ensure that bank failures, which occur even in developed countries, will not translate into financial distress for depositors. The anguish felt by depositors is real, their pain more so.