Mario Lamberte, Ph. D.

Karen Tecson

August 2006
 DISCLAIMER

“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of
the United States Agency for International Development (USAID) and the Ateneo de Manila University”.
 Abstract

This study assesses the feasibility of establishing a single supervisory body for the
Philippine financial system. Discussions with four groups of stakeholders, namely
consumers of financial services, financial services providers, financial regulatory
agencies and key policy-making government agencies, reveal varied degrees of
receptiveness but no outright opposition to the proposal. The study discusses
stakeholders' arguments for and apprehensions about regulatory integration.
Researchers propose as a path toward integration coordinating amendments to
charters of financial regulatory agencies; and formalizing the Financial Sector Forum
and including in it the Cooperative Development Authority. Finally, researchers point
out the need to establish an organization aimed at safeguarding the interests of
consumers of financial services, and helping form financial sector reform agenda.
 Executive Summary

There is a need to examine the country’s financial supervisory framework and see
whether it matches the growing complexity of financial markets. This need is evident
when one peruses Philippine financial history which is replete with failures of financial
institutions. Such failures have adversely affected not only many individuals who had
direct exposure to specific financial instruments, but the country in general in terms of
lower economic growth.

The failure of many financial institutions can, to a large extent, be traced to

weaknesses in the supervisory and regulatory framework for the financial system. We
can address these in several ways.

• Formulating the appropriate legal framework. There are proposals to

amend existing laws to improve the supervisory and regulatory environment
for the financial sector.
• Enhancing capacities of supervisory and regulatory agencies. Capacities
of various supervisory agencies need to be enhanced because uneven
capacities invite regulatory arbitrage despite the existence of appropriate
supervisory and regulatory frameworks.
• Coordinating and harmonizing functions of various regulatory agencies.
One laudable attempt by financial regulators is the establishment of the
Financial Sector Forum (FSF) in 2004.

But the issue is how far an informal body such as the FSF can go in addressing many
supervisory and regulatory challenges brought about by the blurring of distinctions
among financial institutions, the emergence of conglomerates, and the circulation of
hybrid financial products produced by individual financial institutions, among others.
Another approach is to unify or integrate supervisory and regulatory functions of
various supervisory institutions and putting them under one roof. This requires
the creation of a single supervisory body.

To assess the feasibility of such a move, four stakeholder groups were identified and
engaged in dialogue – consumers of financial services, private financial institutions,
legislators and key policy-making government agencies, and financial regulators.
Discussions among stakeholders revealed varied degrees of receptiveness to the
idea of forming a single supervisory authority for the financial sector, but no outright
opposition to such a proposal. Consumer representatives support the proposal to
have a single supervisor for the financial system, citing the emergence of financial
conglomerates as the most pressing reason for integration. While financial service
providers agree that integrated regulation is ‘something to shoot for’ given the
increasing complexity of financial markets and instruments, they emphasized the
need to flesh out further the arguments for and against each regulatory approach.
Congressional planning staff and key policy-making government agencies expressed
receptiveness to integration but shared doubts about whether such an initiative would
prosper in the legislature.

While the Insurance Commission wholeheartedly supports the establishment of a

single regulatory body, the Bangko Sentral ng Pilipinas, the Securities and Exchange
Commission and the Philippine Deposit Insurance Corporation prefer to proceed
pragmatically and let the FSF run its course. While this is a ‘waypoint in the
evolutionary path towards integration,’ the BSP argues that the necessity of a single
regulator remains to be seen. Among its apprehensions about integration, the SEC
enumerated legal constraints, misgivings about creating a powerful superbody, and
differences in the nature of banking and financial market regulation. On the other
hand, the Cooperative Development Authority is receptive to integration and inclusion
in the integrated regulatory regime.

Stakeholders voiced the reservation that consolidating all financial supervisory power
in one agency might raise the probability of regulatory capture. Furthermore, the
PDIC’s mandate of assisting failing institutions should be revisited in an integrated
regulatory regime because this might heighten moral hazard. That is, under a single
supervisory body, holders of financial instruments issued by non-bank financial
institutions might assume their investments are accorded the same protection as bank
deposits.

Stakeholders also pointed out some preconditions that must be satisfied before
moving toward a single supervisor regime.

• Overhaul the legal frameworks for all existing supervisory agencies to

allow them to further strengthen their capacities to regulate and supervise
financial institutions and instruments that fall under their respective areas of
responsibility.
• Raise the quality of human resources in regulatory agencies. Key to this
is the adequacy of financial resources of a regulatory agency to train its
existing staff and recruit highly qualified staff. Putting together supervisory
agencies that have substantially different levels of supervisory capacities
could bring down the quality of supervision for the entire financial system,
which is contrary to the objective of having a single regulator. There is some
scope for raising resources to make supervisory agencies financially
independent, but existing laws pose a barrier to the use of such income,
especially for those agencies subject to the Salary Standardization Law.

Based on the findings of the stakeholder analysis, the proposed agenda for reform
consists of two mutually reinforcing elements that aim to strengthen the entire
supervisory structure of the financial system. One involves the set of proposals to
amend the legal frameworks of financial supervisory agencies. These proposals
should now be looked at from the entire financial system’s perspective and must be
coordinated. While the charters recognize the special character of each supervisory
agency, they should include common provisions such as granting supervisory
agencies policy, administrative and financial independence; flexibility to adopt “best
practices” in supervising institutions under their respective jurisdictions and immunity
from suit for fulfilling their mandates; and mandating them to harmonize and enhance
supervisory capacities, share up-to-date information with other supervisory agencies
and cooperate with the FSF.

The second element is formalizing the FSF, which means giving it a legal personality
and clear mandates. Although the SEC does not share other stakeholders’ view on
this move, their opposition stems from belief in present MOUs as a sufficient basis for
the FSF, rather than anything intrinsic to formalization. Giving the FSF legal basis will
raise its importance in the agenda of each agency and might expedite the FSF’s
progress toward a single financial supervisor. Researchers propose that the following
functions be included among the mandates of the formalized FSF: to secure much
needed information including high frequency data from member agencies on a timely
manner; act quickly on the information being gathered and analyzed; issue industry-
wide regulations; and monitor actions taken by member agencies with respect to
industry-wide regulations being issued.

As a way of moving the FSF process further, representatives of private financial

institutions suggested that the FSF start experimenting on joint supervision; that is, a
common team drawn from different supervisory agencies could look at a company
whose financial products are being regulated by two or three members of the FSF.
Furthermore, there appears to be consensus to include the Cooperative Development
Authority in the FSF to resolve the long-standing issue of cooperatives engaging in
unsanctioned insurance activities and deposit-taking of non-members.

Researchers recommend presenting the legislative agenda as one package of

reforms intended to improve the stability and efficiency of the financial system, not
just individual sub-sectors. This will address Congress’ concerns that supervisory
agencies are just advancing their own interest in proposing amendments to their
respective charters.

Finally, there is presently no organization that looks after the interest of consumers of
financial services. The formation of such a group is important in coming up with
financial sector reform agenda that balances the interests of the general public,
financial services providers and financial supervisors. The group can also take up the
cudgels of informing and educating the general public about financial institutions
being created, the risk-return profile of new financial instruments being marketed, et
cetera. It is high time to have a group that looks after the interest of consumers of
financial services and actively participates in debates on issues related to
strengthening the country’s financial system.
 List of Acronyms

ADB Asian Development Bank IMF International Monetary Fund

ASEAN Association of Southeast Asian MOA Memorandum of Agreement
Nations
BAP Bankers Association of the MORR Manual of Rules and Regulations
Philippines
BIR Bureau of Internal Revenue MOU Memorandum of Understanding
BSP Bangko Sentral ng Pilipinas NATCCO National Confederation of Cooperatives
BTRCP Bureau of Trade Regulation and NAV Net Asset Value
Consumer Protection
BW Best World Resources Corporation NBFI Non-Bank Financial Institution
CARL Comprehensive Agrarian Reform NBQB Non-Bank Financial Institution with
Law Quasi-Banking Functions
CB-BOL Central Bank-Board of Liquidators NGO Non-Government Organization
CBP Central Bank of the Philippines NPL Non-Performing Loans
CCPW Coalition for Consumer Protection OFW Overseas Filipino Worker
and Welfare
CDA Cooperative Development Authority PCCI Philippine Chamber of Commerce and
Industry
CMDC Capital Market Development PDEx Philippine Dealing and Exchange
Council Corporation
CMDP Capital Market Development Plan PDIC Philippine Deposit Insurance
Corporation
CTB Chamber of Thrift Banks PIDS Philippine Institute for Development
Studies
CTF Common Trust Fund PSE Philippine Stock Exchange
CUP Cooperative Union of the RA Republic Act
Philippines
DOF Department of Finance RBAP Rural Bankers Association of the
Philippines
DOSRI Director/Officer/Shareholder and RBCA Risk-Based Capital Adequacy
other Related Interests
DTI Department of Trade and Industry ROPOA Real Estate and Other Properties
Owned or Acquired
EPRA Economic Policy Reform and SCA Standard Chart of Accounts
Advocacy Project
FGD Focus Group Discussion SEC Securities and Exchange Commission
Finex Financial Executives SME Small and Medium Enterprise
FSF Financial Sector Forum SPV Special Purpose Vehicle
GBL General Banking Law SRC Securities Regulation Code
GDP Gross Domestic Product SSL Salary Standardization Law
GIS General information Sheet SSS Social Security System
GSIS Government Service Insurance TOR Terms of Reference
System
IC Insurance Commission UITF Unit Investment Trust Fund
IHAP Investment House Association of
the Philippines
 Table of Contents

1. Introduction ……………………………………………………………………………………… 1
2. Approach and Methodology ……………………………………………………………………. 2
3. Background Information for Focus Group Discussions 5
3.1 Regulatory and Supervisory Framework for the Financial Sector: Recent
International Developments ……………………………………………………………... 5
3.2 Structure of the Philippine Financial System ……………………………………… 11
3.3 Existing Regulatory and Supervisory Structure for the Financial System ……... 14
3.4 Issues for Consideration …………………………………………………………….. 20
4. Stakeholder Analysis …………………………………………………………………………… 25
4.1 Fragmented vs. Unified Approach to Financial Supervision …………………….. 30
4.2 Scope of Integration of Supervision ………………………………………………... 31
4.3 Preconditions for Moving Toward a Single Regulator Regime ………………….. 32
4.4 Transition Toward a Single Supervisory Agency …………………………………. 32
4.5 Lodging Financial Supervision in the Central Bank ………………………………. 33
5. Conclusions and Recommended Advocacy Agenda and Strategy ……………………….. 34
5.1 Concluding Remarks ………………………………………………………………… 34
5.2 Advocacy Strategy …………………………………………………………………… 36
References ………………………………………………………………………………………….. 39
Annexes …………………………………………………………………………………………….. 41
A. List of Participants in the Stakeholder Analysis ……………………………………………... 41
B. Economies with Single Semi-Integrated and Sectoral Supervisory Agencies, 2004 ……. 45
C. Organization Models for Financial Supervision ……………………………………………… 46
D. Authorized Activities of Various Bank Categories …………………………………………... 50
E. Commercial Banks and their Subsidiaries and Affiliates …………………………………… 51

Box 1. Memorandum of Agreement Establishing the Financial Sector Forum ……………… 23

Tables

1. Arguments in Favor and Against Integrated Supervision ………………………….……….. 8

2. Pros and Cons of Integrating Monetary Policy-Making and Prudential Supervision
Functions at the Central Bank ……………………………………………………………………. 9
3. Structure and Size of the Financial Systems in Southeast Asia, 2005 ………….………… 11
4. Financial Activities of ASEAN-4, 2006 ………………………………………………………... 13
5. Stakeholder Positions on a Timetabled Switch from Fragmented Supervision to Single
Supervisory Body …………………………………………………………………………………... 26
6. Summary of Findings and Recommendations of the Focus Group Discussions ………… 27

Figures

1. Stakeholders Groups of the Financial System ………………………………………………. 4

2. Philippine Corporations’ Sources of Finance Before & After the 1997 Financial Crisis …. 13
1. Introduction

During the roundtable discussion of the Ateneo-EPRA Project with the Bangko Sentral
ng Pilipinas (BSP), Securities and Exchange Commission (SEC) and Insurance
Commission (IC) held on 24 August 2005, the participants raised the idea of
harmonizing or integrating the functions of these three financial supervisory agencies to
allow for more effective and efficient regulation of the financial sector by eliminating
regulatory arbitrage. Indeed, this was not the first time that this issue was raised in a
forum. The specific issues being debated have earlier been articulated in several papers
published by the Philippine Deposit Insurance Corporation (PDIC) and the Philippine
Institute for Development Studies (PIDS). 1 During the Senators’ workshop held in
October 2004, the Capital Market Development Council (CMDC) presented a legislative
wish list and the “Consolidated Regulator Act” was the 15th in that list. During the same
workshop, Lamberte, Pasadilla and Milo of PIDS presented a legislative agenda which
included, among others, overhauling the supervisory and regulatory architecture of the
financial system. Most recently, no less than the Bangko Sentral ng Pilipinas (BSP)
Governor Amando Tetangco, Jr. tried to reignite the debate on this issue by stating:2

“The central bank is open to setting up an integrated regulatory body —

composed of officials from the central bank, the Insurance Commission (IC), and
the Securities and Exchange Commission (SEC) — that will supervise the
activities of financial conglomerate.”

He added that:

“…an integrated body can be formed quickly by merely formalizing an existing

3
‘Financial Sector Forum’ composed of the BSP, IC and SEC.”

The statement, coming from the BSP Governor himself, clearly reflects the need to take
a closer look at the country’s financial supervisory framework and see whether it
matches the growing complexity of the country’s financial markets. In doing so,
stakeholders must be given a forum so that they can voice out their assessment of the
situation and contribute to the reshaping of the country’s supervisory structure for the
financial system. This is the main purpose of conducting a stakeholder analysis.

The terms of reference (TOR) prepared by EPRA calls for a study consisting of in-depth
discussions and analyses of stakeholders, their preferences, influence, and positions,
and how the political and bargaining dynamics of such initiative will influence the policy
outcome. In particular, the study should define stakeholders who affect and will be
affected by this policy initiative. Further, the report shall evaluate the policy stance and
vested interests of each stakeholder, relative power/leadership of each stakeholder in
influencing the policy outcome, the importance each stakeholder attaches to the policy

This study is made possible by the support of the American people through the United States Agency for
International Development (USAID). The contents of this report are the sole responsibility of the authors and
do not necessarily reflect the views of the USAID or the United States Government.
1
See Bautista (2004); Milo (2002, 2005); and Lamberte (2004).
2
These quotes were taken from the BUSINESS WORLD, 8 February 2007.
3
The Financial Sector Forum is described below.

1
initiative; and determine those stakeholders which support or oppose the policy initiative.
After assessing the factors above, the study should then:

a) provide a backgrounder on the existing set-up and its structure;

b) determine whose interests are served by the present structure;
c) map the “alliances” or “coalitions” among the stakeholders and distribution of
power among them;
d) analyze the bargaining or political dynamics of implementing the policy initiative
e) predict if key stakeholders are willing to shift their positions;
f) assess level of consensus and identify possible losers and winners;
g) estimate the effect of different initial stakeholder positions on the likelihood of
success of the initiative; and if possible,
h) determine the impact of such an initiative on the interactions among stakeholders
and on the Philippine financial structure.

The next section presents the team’s approach and methodology in addressing the TOR.
Section 3 presents the background information the team prepared for the focus group
discussions while section 4 discusses the results of the focus group discussions. The
last section makes concluding remarks that directly relate to the TOR and suggests an
advocacy strategy for carrying reforms to strengthen the supervision of the country’s
financial institutions and markets.

2. Approach and Methodology

To implement the TOR for this task, the team divided the stakeholders into four groups,
namely:

a) regulatory and supervisory agencies;

b) regulated financial institutions;
c) consumers of financial services; and
d) key government agencies.

Although the TOR mentioned only three financial supervisory agencies, namely, BSP,
SEC and IC, the team included the Philippine Deposit Insurance Commission (PDIC) for
two reasons. First, the amendments to the PDIC charter that took effect in August 2004
have reinstated its powers to examine banks. Second, it is a member of the Financial
Sector Forum described below. The team also included the Cooperative Development
Authority (CDA) because it is now in the process of strengthening its capacity to
supervise and regulate financial cooperatives. The financial cooperatives are growing in
number and resources, and pretty soon issues on overlapping functions and regulatory
gaps and arbitrage will arise.4

The regulated financial institutions are represented by formal associations of financial

institutions such as the Bankers Association of the Philippines (BAP), Investment House
Association of the Philippines (IHAP), Financial Executives (Finex), Rural Bankers
Association of the Philippines (RBAP), Chamber of Thrift Banks (CTB), Philippine

4
There is a great number of community-based financial cooperatives whose financial resources and
clientele are much larger than thrift banks or rural banks operating in the same localities and are intensely
competing with banks.

2
Brokers Association, Philippine Insurance Association, Philippine Association of Pre-
Need Plans, National Confederation of Cooperatives (NATCCO) and Cooperative Union
of the Philippines (CUP).

Consumers of financial services are currently not represented by any association. 5

Existing consumer groups such as the Coalition for Consumer Protection and Welfare
focus on non-financial services issues such as quality of the goods delivered, actual
specification of the products vis-à-vis what has been advertised, fraud, among others.
There have been some associations of consumers of financial services that were formed,
but these were temporary and were very institution-specific such as coalitions of
depositors of failed banks and a coalition of pre-need plan holders of a particular pre-
need company. Identifying consumer associations and NGOs that might have interest in
the welfare of consumers of financial services was indeed a great challenge to the team.
In the absence of organized groups of consumers of financial services, the team
considered the Philippine Chamber of Commerce and Industries (PCCI) whose
members are bank borrowers and/or issuers of securities. The team also approached
several consumer associations and sounded off to them if the issues to be discussed in
the focus group discussions would be of interest to their members. Three groups
responded positively and attended the focus group discussion.

The fourth group consists of key government agencies that have interest in or whose
functions will interface with the proposed harmonization or integration of the functions of
financial supervisory agencies. These include: Congress because it might be requested
to pass a bill to reform the supervisory structure of the financial system; the Department
of Finance because it plays a key role in promoting the development of capital markets
and presently has supervision over financial supervisory agencies, except the BSP; the
Bureau of Internal Revenue because of tax arbitrage issues; and the Department of
Trade and Industry because of consumer protection issues.6

The team prepared a background paper which reviews literature on the issues related to
the adoption of a single financial supervisor, the structure of the Philippine financial
system compared to those of neighboring countries, and the country’s present
supervisory and regulatory structure. The paper also presented emerging issues that
the team thought must be considered during the focus group discussions. This
background paper along with guide questions relevant to each of the four groups of
stakeholders were circulated to the participants of the focus group discussions.

The team employed ‘systems thinking’ as a framework in conducting the stakeholder

analysis. This framework entails studying the interactions of stakeholders and other
elements in the financial system, which is depicted below. Figure 1 identifies key
constituents of the system and their representatives, who will be engaged in the analysis.
As mentioned, the key stakeholders were grouped into four, namely: regulatory
agencies; financial institutions; final consumers of financial services; and key
government agencies including Congress. The stakeholder analysis paid greater

5
In Viet Nam, there exists a Viet Nam Financial Investors Association. Members include investors, policy
makers, and related financial advisers, who discuss and build mechanisms to enhance the attractiveness of
the capital market. Its main role is to protect the interest of investors in the capital market. For instance, it
lobbied for the increase in the share of foreign ownership in a securities firm from 30 percent to 49 percent
and to eventually eliminate such limit.
6
The Bureau of Trade Regulation and Consumer Protection (BTRCP) is under the DTI.

3
attention to interactions among financial supervisory agencies in view of possible
overlaps of their functions that unduly burden financial institutions and investors and
existence of regulatory gaps in the face of the blurring of distinctions among financial
institutions, emergence of financial conglomerates and rapid financial innovations that
unwittingly expose financial institutions and investors to new types of financial risks.

Figure 1

Regulate firms, receive

Provide financial services,
feedback from financial
clients, and for some Regulators Financial pay taxes, and comply
Institutions with regulations
regulatory agencies, report
to government BSP, SEC,
PDIC, IC, Examples: IHAP,
CDA Finex, BAP, RBAP,
Congress and Coops, Chamber of
other Thrift Banks
Government
agencies: DOF,
BIR, DTI

Consumers of
financial
services:

investors, savers,
insuring people,
and debt issuers

‘Consume’ financial services,

pay taxes and provide
feedback to private firms,
regulators and government.

The focus group discussions were expected to uncover current patterns of interaction,
areas of conflict and coordination problems that would allow the research team to gauge
each party’s receptiveness to different financial supervisory structures.

4
The team conducted four focus group discussions, one for each group of stakeholders
and one general workshop to present the preliminary findings of the study and allow
interactions among the four groups of stakeholders. Since none from the SEC attended
the final workshop, the team conducted a special interview with the SEC Chairperson to
seek her views regarding issues that had been discussed and consensus reached
during the final workshop. Aside from these five activities, EPRA conducted a peer
review session in which the team’s preliminary findings were presented to and reviewed
by peers in the academic community. 7 Although most of the key members of the
Financial Sector Forum attended the focus group discussions and the final workshop,
the team planned to meet with the Forum members as a group, but this did not
materialize due to the inability to find a common time for all the identified participants
and the research team.

3. Background Information for Focus Group Discussions8

The debate on the issues regarding harmonization or integration of functions of financial

regulatory agencies has been influenced by both external and internal developments.
Regarding external environment, there has been a worldwide trend towards having a
unified or single financial supervisory structure as a way of harmonizing and integrating
all functions of various supervisory authorities. As regards internal factors, liberalization
of the financial sector that has led to the blurring of distinctions among financial
institutions and has encouraged rapid financial innovations has made overlapping
functions among financial regulatory agencies more glaring and at the same time has
created regulatory gaps which had been cited as the cause of the failure of some
financial institutions.

This section first reviews international trends and issues with respect to the adoption of a
single supervisory body for the financial sector. This is followed by discussions of the
structure of the Philippine financial system, the country’s existing financial regulatory and
supervisory structure and major issues for consideration in the focus group discussions.

3.1. Regulatory and Supervisory Framework for the Financial Sector: Recent
International Developments9

3.1.1. Guiding principles

In designing a supervisory and regulatory framework for the financial system, the
following three guiding principles must be taken into consideration:10

7
See Annex A for the list of participants in these activities. Presentation materials used during these
sessions are presented in a separate report.
8
The contents in this section have been revised and updated to take into account comments of the
participants of the four FGDs, final workshop and the peer review session.
9
Throughout the paper, one encounters two key words, “regulation” and “supervision”. Regulation means
the establishment of specific rules of behavior while supervision includes not only issuance of rules but also
overseeing to ascertain that rules are complied with, investigating or examining to determine whether an
institution is conducting its business on a sound financial basis, and inquiring into the solvency and liquidity
of the institution. In this paper, these two terms are interchangeable unless otherwise specified.
10
Lumpkin (2002).

5
 (a) The framework must ensure the safety of the financial system as a whole
and at the same time allow other objectives of supervision to be attained
efficiently and effectively.
(b) The framework must allow flexibility and adaptability both to changes in
the business practices of regulated entities and in the structure of the
financial system.
(c) The framework must minimize, if not eliminate, competitive distortions.

These guiding principles do not prescribe a particular supervisory model. In fact, one
cannot claim today of having found an ideal supervisory model for the financial system of
all countries, whether developed or developing. However, whatever supervisory model a
country follows, that model is expected to adhere to these guiding principles.

3.1.2. Existing supervisory models and status

There are three major supervisory models being adopted by countries today. At one end
of the spectrum is a fragmented or multiple agency regulatory and supervisory structure
in which a supervisory agency is responsible for regulating and supervising a sub-sector
of the financial system. The main sub-sectors are banking, insurance and securities. In
some countries, the pension and mutual fund system is considered a separate major
sub-sector of the financial system. Thirty-three (33) countries in a sample of 84
including the Philippines have adopted this model.11 At the other end of the spectrum is
the single regulatory and supervisory structure in which only one agency is responsible
for regulating and supervising all financial institutions. Thirty-one (31) countries have
adopted this model. In between are supervisory structures that empower one agency to
regulate and supervise two sub-sectors of the financial system. More specifically, 5
countries have one agency supervising banks and securities firms; 8 countries have an
agency supervising banks and insurers; and 7 countries have one agency supervising
securities firms and insurers. It is worthwhile to note that each of these supervisory
structures can be found in both developed and developing economies, suggesting that a
country’s stage of development is not associated with any particular model. One can
perhaps push the argument forward by saying that the degree of economic development
of a country or size of its economy is not a barrier to the adoption of a single supervisory
structure for its financial system provided there are strong economic reasons for doing
so.

Almost all countries in the last two decades have exerted efforts to improve the
effectiveness and efficiency of regulating and supervising financial institutions. Some
have done it without changing their supervisory framework while others have done it
together with a change in their supervisory framework. In other words, it is not necessary
to change a country’s supervisory in order to improve the effectiveness and efficiency of
its supervisory bodies. What can be observed though is that there has been a clear trend
towards having a single supervisory structure for the financial system, with the number
of countries adopting a single supervisory framework for their financial systems growing
rapidly in recent years. Demaestri and Sourrouille (2003) have identified three waves:
the first wave which happened in the late 1980s and early 1990s relates to the Nordic
countries and Canada; the second wave which occurred in the late 1990s includes the
United Kingdom and Australia; and the third wave which is more recent includes some
Eastern European countries, Germany and the Netherlands.

11
See Annex B.

6
In East Asia alone, Japan, South Korea and China had recently adopted a single
supervisor for the financial system, thus joining Singapore which has had a single
supervisor since the mid-1980s. Malaysia has a single supervisory agency for banks
and insurance companies. Indonesia passed a law in 1999 to establish a single
supervisory body for its financial system but has not yet implemented it up to the present
time. Thailand made the same attempt with the House of Representatives passing a
draft law in 2001 to unify the regulatory and supervisory agencies for various financial
sub-sectors but had recently decided not to pursue such reform. Taiwan is also in the
process of reforming its financial supervisory framework and now has a draft bill for the
creation of a single supervisor for its financial system. Other regions of the world have
taken a serious look at the possibility of adopting a single supervisory body for the
financial systems. More specifically, the Euro Zone, Sub-Saharan Africa, Latin America
and the Caribbean have debated this issue and have also come up with concrete
proposals for moving toward a single supervisory regime for their financial systems.12

It is to be noted that none of the countries that started with a single supervisory agency
or later adopted one in recent years has ever moved back toward the fragmented model.
The opposite direction has always been the case. This trend will likely continue in the
future, and the creation of an informal Integrated Regulation Group comprising ten
countries, namely, Australia, Canada, Denmark, Iceland, Japan, Korea, Norway,
Singapore, Sweden and the United Kingdom, can perhaps encourage and facilitate that
process.13 This group meets annually to exchange notes and experiences in regulating
and supervising financial institutions under their jurisdictions.14

3.1.3. Approaches in shifting toward a single financial supervisory regime

How did countries move toward a single supervisory structure for their financial
systems? Demaestri and Guerrero (2003) have observed two approaches. In earlier
cases such as those in Scandinavian countries, the decisions to move toward a single
supervisory structure for their financial systems were part of an evolutionary process.
For most recent cases, however, such as those of the United Kingdom, Australia and
Canada, the reform was implemented after holding a debate on the advantages and
disadvantages of having a single supervisory agency for all financial institutions. In this
approach, the resolve of the government to unify the financial regulatory agencies
weighed more heavily than the views of the affected supervisory agencies in effecting
such a move.

The rationale for adopting a single regulatory and supervisory structure varies from
country to country. However, the two common driving forces are the emergence of
conglomerates and the blurring of distinctions among financial institutions brought about
by financial liberalization. There were situations where financial crisis played a
significant role, as in the case of some Asian countries mentioned above. In Europe,
Sweden and Denmark moved to a single financial supervisory regime partly in response
to banking crises.15 These crises emerged because the supervisory regime had not

12
See Di Giorgio and Di Noia (2001), Quintyn and Taylor (2007), and Demaestri and Guerrero (2003).
13
The requirement for membership in this club is that the country’s supervisory agency must be responsible
for prudential regulation of at least both banks and insurance companies.
14
Lee (undated).
15
Demaestri and Guerrero (2003).

7
been able catch up with the growing sophistication of the market incited by financial
liberalization.

3.1.4. Arguments in favor and against a single financial supervisory model

Before moving to a single regulatory and supervisory regime, however, it is important to

know and understand the arguments in favor and against such a model. These are
summarized in Table 1. Regulatory arbitrage undermines both efficiency and soundness
of the financial system, and integrating various supervisory agencies into one
supervisory body that is responsible for all types of financial institutions applying the
same set of rules to the same financial instruments and activities can address regulatory
arbitrage. The single supervisory agency can also realize economies of scale and scope
and can greatly facilitate of exchange of vital information across various departments or
units without being constrained by certain laws related to exchange and use of vital
information. There are disadvantages, however, such as undermining effectiveness of
supervision due to lack of appreciation of special characteristics of certain financial
institutions or markets.

Table 1. Arguments in Favor and Against Integrated Supervision

In Favor Against

• Facilitates the supervision of financial • If objectives not clearly specified, may be

conglomerates on a consolidated basis. less effective than sectoral supervisors

• The merger process may result in lower

• Allows better monitoring of issues affecting supervisory effectiveness during transition
the entire financial system, as well as rapid period and possibly beyond.
policy responses.
• It may undermine the overall effectiveness
• Allows the development and implementation of supervision by not recognizing the
of a unified approach of regulation and unique characteristics of the banking,
supervision across the entire financial securities and insurance industries.
system, reducing regulatory arbitrage.
• If objectives not clearly communicated,
• Strengthens accountability of supervisors. possibility to extend moral hazard
problems across the whole financial sector
• Easier to eliminate duplicities and turf wars
• Process of integration may lead to
• Maximizes economies of scale and scope, politically or special interest motivated
contributing to a better use of resources. changes in supervisory framework

• There are other schemes to achieve

prompt information sharing and
collaboration among existing agencies.

• May not work in certain countries and may

be more suited for developed financial
systems.

• Gains in terms of economies of scale may

not be significant.

Sources: De Luna-Martinez, J. and Rose, T. (2003) and Cihak, M. and R. Podpiera (2006).

8
3.1.5. The central bank as a single financial regulator and supervisor

A country’s central bank is a significant player in the domestic financial system. The
question therefore is whether prudential regulation function should also be lodged at the
central bank. In this case, the central bank has both monetary policy-making and
prudential regulation functions. Again, it is important to know and understand the
advantages and disadvantages of centralizing such functions at the central bank. These
are summarized in Table 2. Having a single institution that acts both as the lender of
last resort and supervisor of all financial institutions could make the moral hazard
problem more pronounced because both owners and clients of a failing non-bank
financial institution might expect to have the same access to the central bank’s
emergency window and be bailed out. It is to be noted that the general trend that can be
observed from the experiences of those countries that have moved toward a single
supervisory regime is toward separating the prudential regulation function from the
monetary policy-making function and lodging the former under a separate, independent
agency.

Table 2. Pros and Cons of Integrating Monetary Policy-Making

and Prudential Supervision Functions at the
Central Bank

Pros
! Some information synergies between
monetary policy and prudential
regulation functions
! Economies of scale between financial
institutions supervision and other
functions of the central bank
! An independent and resource-
endowed central bank protects
financial institutions supervision from
political pressures
Source: This a summary of the major points discussed in Demaestri and Guerrero (2003).
Cons
! Conflicts between monetary policy and
prudential regulation goals
! Moral hazard issue can be more
serious
! Failures of financial institutions may
undermine the credibility of the central
bank as a monetary policy-making
body
! Concentration of power in an
independent, unelected body

3.1.6. Organizational models for a single financial supervisor

In moving toward a single supervisory regime for the financial sector, one must grapple
with the issue of how best to organize the supervisory agency. A single supervisory
agency has three elements: it covers all sectors of the financial market, the major ones
of which are banking sector, insurance sector, securities market, and pension system;
pursues certain objectives, that is, addressing specific market failures such as
asymmetric information, anti-competitive behavior of key players and market
misconduct; and performs important functions such as overseeing the financial
infrastructure (e.g., payments system), performing prudential oversight and overseeing
market conduct of financial institutions. There can therefore be various ways of
organizing a single supervisory agency that incorporates all the three major elements.
Lumpkin (2002) has presented four possible organizational models that can be adopted.
These are:

(a) Integrated financial supervisory authority with sectoral oversight;

(b) Financial supervisory authority with sectoral supervision;

9
 (c) Financial supervisory authority with supervision by objectives; and
(d) Financial supervisory authority with functional supervision.

The detailed organizational structures of these models are shown in Annex C.1 to C.4.
Not one of these models can be considered superior to the other three, but the criteria
for choosing one over other models should include, among others, feasibility, cost
effectiveness, transparency and accountability.

3.1.7. Independence of the supervisory authority

The supervisory authority, whether under a fragmented or unified supervisory regime,

must have both policy and financial autonomy. Policy autonomy requires, among others,
setting a fixed term for heads or members of the board of a regulatory agency with strict
rules of removal and being able to issue policies and regulations consistent with their
agency’s legal mandates and enforce them without seeking prior clearance from another
government body. Such policy and regulatory actions as well as enforcement of such
policies and regulations should be transparent to ensure the accountability of regulators.
Financial autonomy is important so that the regulatory authority can assemble a
competitive compensation package for its staff, develop and fund training programs to
build its capacity and deploy sufficient amount of resources to activities directly related to
its mandates. In most jurisdictions that have supervisory authorities separate from their
central banks, income from licensing and examination fees is used to fund activities of
the regulatory agency without having to seek budgetary allocation from Congress
annually, which can be a tedious process and can undermine the independence of the
supervisory authority.

3.1.8. Risks in moving toward a single financial supervisory authority

Moving toward a single financial regulatory regime is not going to be like taking a walk in
the park. There are risks involved in undertaking such a process. Existing literature has
cited many, but the most important ones are the following:

(a) Some politicians will use the opportunity to push through the creation of a
single supervisor quickly whether or not it is optimal for the country’s
financial system just to gain some political points.
(b) The crafted legal framework might not give the single supervisory agency
clear objectives.
(c) Intrusion of interest groups in the process could produce conflicting
objectives for the supervisory authority.
(d) Subsequent legislations could produce a “Christmas tree” effect, that is, a
number of heterogeneous objectives to be fulfilled by the regulatory
agency might grow progressively and some of them could conflict with the
main objectives of financial regulation and supervision.
(e) It could lead to loss of key staff, thus lowering the effectiveness of the
supervisory agency as happened in Korea during the initial years of its
single financial supervisory authority.
(f) Cultural clashes among staff that come from various regulatory agencies
could undermine the effectiveness of the supervisory authority.
(g) Technical process of supervision can be mismanaged and the supervisor
will not be paying attention to developments in the financial sector.

10
 3.1.9. Evaluation results of countries adopting a single supervisory model

Studies that evaluate the effectiveness of the single financial supervisory framework are
scarce simply because most of those that have adopted this framework came into being
only in recent years. In revisiting the short experience of the United Kingdom’s Financial
Services Authority, Briault (2002) concluded that:

“a promising start has been made in responding to market developments; in

achieving economies of scale and scope; in creating a unified approach to
standard-setting, authorization, supervision, enforcement and consumer
education; in introducing risk-based regulation on a consistent basis across firms
and markets; and in working collectively with the Bank of England and the
Treasury to maintain financial stability.”

One recent analytical study on this issue was done by !ihák and Podpiera (2006).
Results of their empirical analysis led them to the following conclusions:

(a) Countries with integrated supervisory agencies enjoy greater consistency

in quality of supervision across supervised institutions.
(b) Whether the integrated supervision is located inside or outside the central
bank does not appear to have a significant impact on the quality of
supervision.
(c) Integrating supervision does not seem to be associated with significant
reduction of supervisory staff.

In sum, their findings strengthen the argument for the adoption of a single financial
regulatory framework. Their results, however, do not decisively put the issue to rest.
More studies using different methodologies with more data points need to be done to
confirm their results.

3.2. Structure of the Philippine Financial System

A safe and sound, efficient and rapidly growing financial system is needed to support the
development of the economy. Although the Philippine financial system has developed
quite rapidly in the last decade, financial indicators shown in Table 3 indicate that its
development has lagged far behind those in other countries in Southeast Asia, except
Indonesia in the case of bank assets, and People’s Republic of China (PRC) and
Indonesia in the case of equity market capitalization and bonds outstanding.

Table 3. Structure and Size of the Financial Systems in Southeast Asia, 2005
(% of GDP)

Economy Bank Assets Equity Market Bonds Outstanding

Capitalization
People’s Republic of 163.1 17.8 24.4
China (PRC)
Hong Kong, China 444.6 593.6 46.6
Indonesia 49.8 28.9 19.6
Republic of Korea 93.5 91.2 76.2
Malaysia 159.4 138.0 88.0
The Philippines 63.2 40.4 36.7

11
Singapore 185.4 220.4 68.2
Thailand 103.6 70.1 40.8
Source: ADB (November 2006).

In his study, Takayasu (2007) showed that the Philippines’ top three banks had the
second lowest average asset size in East Asia, and the total assets of institutional
investors, which in the Philippines consist of state and private pension entities, mutual
funds, pre-need plans, were the smallest in the region. While these studies do not make
the Philippines look good, they however indicate the large potentials of the country’s
financial system for growth.

Financial institutions can be broadly categorized into banks and non-bank financial
institutions (NBFIs). Banks refer to entities engaged in the lending of funds obtained in
the form of deposits from the public while NBFIs specialize in producing financial
products and services but are not allowed to receive deposits. Cooperatives with
savings and credit functions belong to the NBFI category because they do not mobilize
deposits from the general public.

There are various types of banks in the country with different authorized functions as
provided for in their respective laws. Universal banks perform the most number of
authorized functions while rural banks have the least (Refer to Annex D). NBFIs include
investment houses, which underwrite securities, provide fee-based services and act as
intermediaries in the money market and are governed by the Investment Houses Law;
investment companies, which are mutual fund companies and are governed by
Investment Company Act; pre-need companies, which offer pre-need plans such as
education plans, life plans and pension plans and are governed by rules issued by the
Securities and Exchange Commission; financing companies, which engage in leasing
and consumer finance and are governed by the Financing Company Act of 1978;
insurance companies, which provide life and non-life insurance policies and are
governed by the Insurance Code; credit cooperatives with savings and credit functions
accept deposits from and lend only to their members and are governed by the
Cooperative Code; pawnshops, which accept articles of personal property in exchange
for loan of money and are governed by Presidential Decree No. 114; lending investors,
which lend money to borrowers with or without collateral using their own funds and are
governed by rules issued previously by the Central Bank but currently by the Department
of Trade and Industry.

Like most developing economies, the Philippine economy is still heavily dependent on
banks for resource mobilization and corporate financing. As shown in Figure 2 below,
Philippine corporations have relied heavily on bank loans for financing before and after
the East Asian financial crisis. Rough estimates suggest that bank loans account for 94
percent to 98 percent of Philippine corporations’ external financing, whereas corporate
bonds and commercial papers account for only 1 percent. Moreover, banks and their
subsidiaries and affiliates such as investment houses, insurance companies and finance
companies play a big role in other markets as intermediaries and/or investors. Banks’
main source of funds is deposits, which stood at Php3.8 trillion as of December 2006 or
63 percent of GDP.

12
 Figure 2. Philippine Corporations’ Sources of Finance
Before and After the 1997 Financial Crisis16

The country’s financial institutions offer various types of financial products and services,
many of which have been developed in the recent past as a result of financial sector
liberalization and deregulation. Unlike in the past when savings deposits offered by
banks were almost homogeneous, today there are various types of savings deposits
available to depositors. Foreign currency savings instruments have become popular
savings instruments among foreign exchange earners, like exporters and overseas
Filipino workers (OFWs). Some banks have deposit products that have insurance
features.

Corporate bonds hardly exist in the Philippines. What is considered long-term corporate
securities are commercial papers with a maturity period of more than one year issued by
the country’s prime financial and non-financial corporate entities. As shown in Table 4,
the outstanding value of bonds of the financial and non-financial institutions is the
smallest among ASEAN-4. Some firms raise funds from the capital market through
initial public offerings. However, between February 2006 and April 2007, only 6 firms
made initial public offerings with total offerings amounting to only Php28.3 billion. As of
May 2007, there were only 241 companies listed in the Philippine Stock Exchange.

Table 4. Financial Activities of ASEAN-4, 2006

(% of GDP)
Country Bond Markets Current
Bank Value of
Credits Government Corporate Financial Total Stocks
Bonds Bonds Institutions
Indonesia 50.5 21.9 1.5 1.1 24.6 34.4
Philippines 47.3 40.6 0.1 0.2 40.9 42.4
Malaysia 134.5 42.4 39.3 22.1 103.8 146.9
Thailand 117.1 25.0 16.7 12.5 54.1 71.2
Source: Okuda and Mieno (2007).

16
This is based on Lamberte et al (2000).

13
While the scope for investing in the equities market is very limited, especially for small
investors, mutual funds are slowly developing in the country, providing investors with
investment alternatives other than bank deposits. Currently, there are 7 balanced funds,
21 bond funds, 7 equity funds, 1 index fund and 2 money market funds managed by
investment companies. One latest addition to traditional financial products is the unit
investment trust fund (UITF), which is a BSP-approved instrument wherein investments
of various investors are pooled together and treated as a single fund. Banks have
developed various types of UITFs that cater to different investors that accept various
levels of risks and returns. These are in essence similar to mutual fund products
mentioned above.17 Examples of UITF products are the fixed-income fund, the equity
fund and the balanced fund.

3.3. Existing Regulatory and Supervisory Structure for the Financial System

The Philippines has followed a fragmented approach in the regulation and supervision of
financial institutions. The five key supervisory institutions are the Bangko Sentral ng
Pilipinas, the Securities and Exchange Commission, the Insurance Commission, the
Philippine Deposit Insurance Corporation and the Cooperative Development Authority.
As will be pointed out below, there are proposals to amend the legal frameworks for
these supervisory authorities to enhance the effectiveness of regulation and supervision
of financial institutions and markets.

3.3.1. Bangko Sentral ng Pilipinas

The legal and institutional framework that guides central bank actions in the country was
formulated in 1948 with the passage of Republic Act No. 265 that created the Central
Bank of the Philippines (CBP). In 1972, 56 provisions out of the original 142 provisions
were amended, suggesting that indeed it was time for a massive overhaul of the CBP in
view of the structural changes occurring in the economy, in general, and in the financial
system, in particular. In 1993, the New Central Bank Act (Republic Act No. 7653) was
passed, creating a new central bank known as the Bangko Sentral ng Pilipinas (BSP)
and transforming the old CBP into the Central Bank Board of Liquidators (CB-BOL).

Like its predecessor, BSP performs two major functions: it conducts monetary policy and,
at the same time, regulates and supervises banks and non-bank financial institutions.
However, there are major differences. BSP is an independent central monetary
authority, enjoying policy, administrative and financial autonomy. It is governed by the
Monetary Board, which is composed of seven full-time members including the Governor
and a representative from the government, all of whom are appointed by the President

17
A unit investment trust fund or UITF is a banking product that replaced common trust funds (CTFs). It is
managed by the offering bank's treasury department or group. A mutual fund, on the other hand, is offered
by an investment company and managed independently by an appointed fund manager, which may or may
not be related to the investment company. For mutual funds that are open-ended, the investment company
stands ready to buy at the prevailing net asset value (NAV). For close-ended mutual funds, it must be
tradable in an organized securities exchange. That is not the case for UITFs. One redeems her investment
at its prevailing NAV from the issuing bank.

14
for a term of six years. Moreover, the Act emphasizes BSP’s regulation and supervision
of banks and non-bank financial institutions with quasi-banking functions (or quasi-
banks) by phasing out its regulatory powers over the operations of finance companies,
non-bank financial institutions without quasi-banking functions and institutions
performing similar functions, and transferring the same to the Securities and Exchange
Commission.18

The passage of the General Banking Law (GBL) in 2000 has strengthened further the
framework for regulating and supervising banks. For instance, the GBL enjoins the
Monetary Board to adopt internationally accepted standards in determining risk-based
capital adequacy of banks. Thus, it is no longer enough for banks to identify, quantify
and manage risks but that their owners must be ready to inject extra capital to cover
additional risks they want to take. The GBL has also broadened and strengthened the
authority of the Monetary Board to prescribe, pass upon and review the qualifications
and disqualifications of individuals elected or appointed bank directors or officers and
disqualify those found unfit. In the past, the “fit-and proper rule” was hardly given any
importance in the selection of board of directors or officers of banks. Under the new law,
the Monetary Board is mandated to constantly monitor the performance of bank directors
and officers to ensure that the latter make prudent decisions for their banks. It can
disqualify, suspend or remove any bank director or officer who commits or omits an act
which renders him unfit for the position.

The BSP is currently upgrading its human resources through training and recruitment of
highly qualified personnel. Since BSP is able to earn its own income and the
compensation of its professional staff is not subject to the Salary Standardization Law,
BSP is able to offer an attractive compensation package to its staff and fund capacity
building programs. In 2002, it reorganized its Supervision and Examination Sector by
creating four departments: the first department supervises the largest banks and their
subsidiaries; the second department, other large banks with less complex organizations
including some large foreign banks; the third department, mid-size banks including some
foreign banks; and the fourth department, non-bank financial institutions and rural and
microfinance banks. At the time of the writing of this report, BSP is undergoing another
round of reorganization.

There were indeed instances in which the BSP exercised its authority to arrest undue
risk-taking by banks. For example, it warned and eventually penalized banks found
speculating in the foreign exchange market. Also, it immediately closed one thrift bank
that declared a bank holiday. Despite this, there still remains a perception that BSP acts
quickly and decisively whenever small banks are in trouble, but acts slowly and
tentatively whenever large banks are in trouble. This leads many observers to conclude
that the BSP is pursuing the “too big to fail” policy.

Despite the reforms cited above, there remain some weaknesses in bank supervision
which can be traced to some infirmities in the legal framework that have been exposed
by recent developments in the financial sector. And this can be addressed only by
amending the ten-year old Central Bank Act. Some of the key reforms that have been
identified are:

18
“Quasi-banks” refer to entities engaged in the borrowing of funds through the issuance, endorsement or
assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of the New Central
Bank Act for purposes of re-lending or purchasing of receivables and other obligations.

15
 (a) Granting the BSP authority to examine a bank and its subsidiaries and
affiliates engaged in allied undertaking. This will strengthen BSP’s
consolidated approach to supervision in line with international best
practices.
(b) Granting the BSP authority to approve transfers or acquisitions of shares
in a supervised institution in cases wherein such transfers are sufficient to
elect one board seat or result in change in the majority ownership. This is
meant to prevent entry of undesirable persons or entities into the banking
system.
(c) Granting the BSP the authority to direct existing stockholders to infuse
additional capital to meet prudential standards, accept new investors or
be merged with other banks. This is to ensure that owners of a severely
undercapitalized bank do not delay raising capital to a level
commensurate to the risk their bank is taking or to meet the minimum
capital requirement.19
(d) Granting BSP personnel, especially bank examiners, immunity from
lawsuits in lieu of indemnification so that they can properly discharge their
functions without fear of retaliation.
(e) Granting the BSP the authority to prescribe transparent grounds for bank
closure to minimize losses on the part of depositors and the general
public.
(f) Requiring DOSRI borrowers to waive the deposit secrecy law to deter
insider abuse.

As of end-March 2007, BSP regulates/supervises 17 universal banks, 22 commercial

banks, 84 thrift banks, 738 rural and cooperative banks, 12 non-bank financial
institutions with quasi-banking functions (or quasi-banks), 83 non-bank financial
institutions without quasi-banking functions but with trust or investment management
license and/or subsidiaries/affiliates of banks and quasi-banks, 79 savings and loans
associations, 7 offshore banking units and 6,099 pawnshops.20

3.3.2. Securities and Exchange Com mission

The Securities and Exchange Commission (SEC) was established in 1936 by virtue of
the Securities Act. Its establishment was prompted by the need to safeguard public
interest in view of local stock market boom at that time. It was headed by a
Commissioner. SEC was abolished during the Second World War but was reactivated in
1947. In 1975, SEC was reorganized as a collegial body with 3 commissioners and was
given quasi-judicial powers. In 1981, the Commission was expanded to include two (2)
additional commissioners and two (2) departments, one for prosecution and enforcement
and the other for supervision and monitoring. Then, in December 2000, the SEC was
reorganized as mandated by R. A. 8799, also known as the Securities Regulation Code
(SRC). Under the new organizational set-up, SEC is overseen by a collegial body,
composed of a Chairperson and four (4) Commissioners, appointed by the President for
a term of seven (7) years each. It reports to the Secretary of Finance and is funded
19
A recent case is that of a thrift bank whose capital was found deficient yet its stockholders refused to
infuse additional capital or accept new investors until it experienced a bank run that eventually led to its
closure.
20
Under the existing law, BSP has regulatory powers over pawnshops.

16
under the Department of Finance budget. However, it generates income from its
company registration function and other activities more than sufficient to finance its staff
annual compensation. The President fixes the salary of the Chairperson and the
Commissioners based on an objective classification system, at a sum comparable to the
members of the Monetary Board and commensurate to the importance and
responsibilities attached to the position. Under the SRC, SEC is no longer subject to the
Salary Standardization Law.

Under the SRC, SEC regulates the capital market, licenses and supervises self-
regulatory organizations, and is responsible for company registration and the conduct of
market participants. It is organized into four functional areas, namely: (i) capital market
development and regulation; (ii) company registration and monitoring; (iii) enforcement;
and (iv) support services. Thus, SEC covers both financial institutions engaged in the
securities market and non-financial corporations and partnerships.

Focusing on the first functional area mentioned above, the SEC has developed and
published a medium-term Capital Market Development Plan (CMDP): 2005-2010 aimed
at accelerating the development of the country’s capital market. Included in the Plan is
the proposal to strengthen SEC’s enforcement by changing some provisions in the SRC.
More specifically, it proposes to expand SEC’s statutory powers to include the bank
records of institutions/persons suspected of breaching the Code’s anti-fraud and anti-
manipulation provisions, to authorize SEC to obtain freeze orders in appropriate
circumstances, and grant SEC staff with immunity from personal suits in lieu of
indemnification. To enhance the competitiveness and soundness of the capital market
regionally and internationally, the SEC adopted and implemented in January 2006 the
risk-based capital adequacy (RBCA) framework for brokers and dealers and has plans to
expand it to cover all non-bank financial intermediaries that it regulates.

As of 2006, SEC has regulatory powers over 851 finance companies, 41 mutual fund
companies, 45 investment houses, 29 pre-need plans, 28 transfer agents, 64 dealers of
government securities, 115 broker-dealers, and 36 public companies. It also supervises
the Philippine Stock Exchange, the Philippine Central Depository, the Securities Clearing
Corporation, the Securities Investor Protection Fund, and the newly established
Philippine Dealing and Exchange Corporation (PDEx).

3.3.3. Insurance Com mission

The Insurance Commission (IC) operates under the Insurance Code of 1978 and is
attached to the Department of Finance. It has the authority to supervise and regulate
the operations of life and non-life insurance companies, mutual benefit associations, and
trusts for charitable uses. It issues licenses to insurance agents, general agents,
resident agents, underwriters, brokers, adjusters, and actuaries. It also has the authority
to suspend or revoke such licenses. It has however no jurisdiction over pre-need
companies offering memorial service plans, educational plans, pension plans and other
products similar to insurance. IC is headed by a Commissioner, who is assisted by a
Deputy Commissioner.

While neighboring countries have recently modernized the legal frameworks for their
insurance industries to keep them in sync with international best practices in supervising
insurance companies, the Philippines has maintained the same Insurance Code of 1978.

17
Lack of independence of the IC is one of the weaknesses of IC as a regulatory agency.
The Commissioner serves at the pleasure of the President and he/she can be removed
anytime, and indeed this is what happened recently when the Commissioner wanted to
introduce reforms into the insurance industry which were vehemently opposed by
interest groups within the industry because they would substantially alter the pay-off
matrix. Another weakness is that unlike the BSP and the SEC, IC is subject to the
Salary Standardization Law, which constrains it from hiring highly qualified staff. It has
funds of about Php2 billion that it can use for capacity building but such cannot be used
to increase the salaries of the staff.

There is now a proposal to amend the Insurance Code which provides, among others,
granting fixed terms to the Commissioner and Deputy Commissioners, exempting the
Commission from the Salary Standardization Law, and giving a legal basis for adjusting
minimum capitalization of insurance companies and for introducing the risk-based capital
framework for insurance companies. If passed, the new Insurance Code can pave the
way for reorganizing the Commission.

IC currently supervises 32 life insurance companies, 104 non-life insurance companies

and 2 reinsurance companies.

3.3.4. Philippine Deposit Insurance Corporation

The Philippine Deposit Insurance Corporation (PDIC) was created in 1963 by virtue of
Republic Act No. 3591, but it formally started its operations in 1968 with an appointment
of a President. In 1983, Executive Order 890 reconstituted the PDIC Board of Directors
with the Central Bank Governor as Chairman, PDIC President as ex-officio Member and
Deputy Minister of Finance as Member. Then, Republic Act 7400 was approved in 1992,
amending Republic Act 3591 that effected major changes, which include, among others:
granting PDIC the power to conduct independent examination of banks; making PDIC
the receiver and liquidator of banks ordered closed by the Monetary Board; and
increasing the number of Board members from 3 to 5, with the inclusion of 2
representatives from the private sector to be appointed for a term of 6 years. However,
with the passage of the General Banking Law in 2000, PDIC's power to conduct
independent examination of banks was repealed.

PDIC’s charter was again amended in August 2004. Among the significant amendments
are: increasing the maximum deposit insurance for each depositor from Php100,000 to
PhP250,000; conducting examination of banks with prior approval of the Monetary
Board; issuing cease and desist orders; giving authority to bring suits to enforce liabilities
to or recoveries of closed banks; and increasing penalties imposed upon any director,
employee or agent of a bank. Thus, under its present charter, PDIC performs three
major roles: insurer of bank deposits; co-regulator of banks; and receiver and liquidator
of closed banks.

All banks in the country are members of the Philippine deposit insurance system and
pay an insurance premium. Under its amended charter, PDIC is no longer subject to the
Salary Standardization Law. Its income is more than enough to pay a handsome
compensation package to its staff.

3.3.5. Cooperative Development Authority

18
The cooperative movement in the Philippines has a relatively long history influenced by
a similar movement in the U.S.A. Over the years, the cooperative sector passed from
one regulatory hand to another. Presently, the Cooperative Development Authority is
the oversight agency of the sector. It was created by R.A. 6939 of 1990 to "Promote the
viability and growth of Cooperatives as instrument of equity, social justice, and economic
development" in fulfillment of the mandate in Section 15, Article XII of the Constitution.
CDA is governed by a Board of Administrators consisting of a Chairman and 6 members
to be appointed by the President for a fixed term of six years without renewal. Oversight
of CDA has recently been transferred from the Office of the President to the Department
of Finance.

Under the existing law, CDA has two major functions: promotional/developmental and
regulatory and supervisory functions. It is currently managed by professional staff that is
strongly dedicated to the cooperative movement. However, up to now CDA lacks the
capacity to effectively perform its functions, especially its supervisory function, which can
be attributed to several factors. First, CDA does not have the necessary resources to
carry out both functions. The annual appropriation for CDA amounts to only Php100 per
cooperative, with Php70 going to CDA overhead expenses. Unlike the BSP, CDA does
not earn seigniorage. Second, RA 6939 does not include a provision that would allow
the CDA to impose penalties on cooperatives not complying with the provisions of the
law. This greatly weakens its regulatory function. Third, the existence of so many
cooperatives including non-financial cooperatives and the variety of multipurpose
cooperatives it has to cover have complicated its task of regulating cooperatives.
Fourth, CDA is subject to the Salary Standardization Law and hence has difficulty
attracting highly qualified staff. Currently, 99 percent of CDA specialists who examine
cooperatives are neither full-fledged accountants, nor well versed in examining financial
cooperatives.

In the past, CDA focused on its developmental functions and paid less attention to its
function of supervising and regulating cooperatives. In the last three years, however, it
has given more emphasis on its supervisory function by developing a standard chart of
accounts (SCA) and performance standards (COOP PESOS) for credit cooperatives
with savings and credit services and by adopting the framework for effective regulation
and supervision of credit and other types of cooperatives with credit services. It has
drafted a Manual of Rules and Regulations (MORR) that will provide cooperatives with
credit and saving services with specific rules for the safe and sound conduct of their
operations.21 Its medium-term plan includes a program for enhancing the capacity of its
supervisory staff and building information infrastructure for effective regulation and
supervision of cooperatives. It supports the effort to amend the CDA Charter and
Cooperative Code that will strengthen CDA’s authority and give it more power to
regulate and supervise cooperatives.

The most recent report by the CDA indicates that there are about 70,000 registered
cooperatives in the country, of which about 22,000 are considered operating. Around 80
percent of those operating credit cooperatives are financial cooperatives. It is to be
noted, however, that to date the CDA does not have an accurate count of the number of
operating cooperatives in the country.

21
At the time of the writing of this report, the Department of Finance has not yet sent the draft MORR to the
President for her approval and signature.

19
3.4. Issues for Consideration

This section discusses the motivation for opening the debate on the supervisory
structure appropriate for the Philippine financial system, and the suggestion from various
quarters to consider adopting an integrated financial supervisory framework in sync with
current direction of domestic financial market development and the trend around the
world regarding the establishment of a single financial supervisory authority as a way of
seamlessly harmonizing regulations across various types of financial entities.

3.4.1 Costly Failure of Financial Institutions

The history of the Philippine financial system is replete with failures of many financial
institutions. Such failures have adversely affected not only many individuals who had
direct exposure to specific financial instruments such as deposits of a failed bank, but
the country in general in terms of lower economic growth because the financial system
has not been able to generate more resources which it should have had it been safe and
sound. Between 1970 and 2005, the Monetary Board closed a total of 586 banks,
including medium-sized banks. Resolution of failed banks is far from complete. As of
December 2005, PDIC reported that there were 7 rural banks under receivership and a
total of 439 banks under liquidation, which includes 2 commercial banks, 55 thrift banks
and 382 rural banks.

The remaining banks are not the healthiest either. Although non-performing loans
(NPLs) of banks settled at 7.5 percent as of June 2006, down from a high of 19 percent
in 2001, it does not reflect the true picture of the financial health of the banking system
because banks have also been restructuring and foreclosing loans, thereby acquiring
properties used as collateral. Thus, the true distressed assets of banks should consist
of non-performing loans, real estate and other properties owned or acquired (ROPOA)
and restructured loans. As of June 2006, total distressed assets of banks remained high
at 18.8 percent. Progress in cleaning up these distressed assets has been slow even
after the passage of Special Purpose Vehicle (SPV) Act in 2002, which can partly be
attributed to the unreliable valuation of real estate properties and the undeveloped
capital market.

As the economy recovered from the 1997 financial crisis, many banks, especially
universal and commercial banks, went into the lucrative credit card business. It is not
uncommon nowadays to receive a credit card by mail even from those banks that
customers do not deal with. However, as credit card receivables of banks have
increased, so have past due receivables. As of September 2006, past due credit card
receivables of over 180 days accounted for 10 percent of the total credit card
receivables.22

Credit unions are self-help groups and they are not supposed to fail because the
borrowers are also the lenders (savers). Yet, we have seen so many credit unions fail
due to massive non-repayment of loans. As mentioned, the CDA’s recent survey shows
that there are only about 22,000 operating cooperatives out of more than 70,000
22
In Korea, this problem threatened the stability of its banking system at the time when its economy was
recovering from the 1997-78 Asian financial crisis.

20
registered cooperatives. Currently, CDA does not really know the true financial health of
cooperatives because it has not yet developed its information infrastructure. Only a few
cooperatives are using the newly developed standard chart of accounts and the financial
performance standards.

We not only see people lining up in front of the premises of failed banks. We see them
too in front of the premises of failed non-bank financial institutions. Not too long ago,
front pages of local newspapers prominently showed many middle income people
queuing in front of an office of a failed pre-need plan provider trying to recover their
hard-earned money placed in educational plans for their children. No one ever thought
that it had financial problems especially since it is part of a conglomerate which includes
one of the largest banks in the country and is associated with a family known for their
integrity in the financial circle.

The equities market has its share of problems too. Fresh in the minds of many investors
is the BW scandal that brought untold miseries to many, especially small investors who
could not quickly get out of the market. The Philippine Stock Exchange (PSE) has a
history of ineffective regulation and a highly politicized board, and the SEC has not been
able to police it adequately.

If only china walls could be effectively built around segments of the market, then it would
be easier to address failures of financial institutions belonging to a particular section.
The problem though is that the domestic financial markets are becoming more integrated
so that problems originating from one segment of the market can easily spill over into
other markets. For example, the sharp drop in the stock prices in 2005 prompted many
investors to terminate their placements in the bank-managed UITFs knowing that a large
portion of the latter is invested in listed stocks.

Liberalization of the financial sector has led to the blurring of distinctions among financial
institutions, which in turn has made overlapping functions among financial regulatory
agencies more glaring and at the same time has created regulatory gaps which had
been cited as the cause of the failure of some financial institutions. Classic examples for
the latter are the failures of Urbancorp Investments, Inc., a subsidiary of Urban Bank and
Westmont Investment Corp., a unit of Westmont Bank. In this case, there was confusion
in the proper assignment of regulatory function over investment houses between the
BSP and SEC (Milo 2002).

Financial liberalization has also encouraged financial innovations. Many financial

services providers are now offering several hybrid financial products that combine
features of different product lines that are regulated by different regulatory agencies.
The emergence of financial conglomerates has posed another challenge to the domestic
financial system. Practically all universal and commercial banks in the country have
financial subsidiaries and affiliates that offer specific financial products.23 Here, there is
a large probability that the failure of one subsidiary could contaminate the rest of the
group.

3.4.2. Addressing failures of financial institutions

23
Most banks have subsidiaries and affiliates (see Annex E). They are, in turn, part of large conglomerates
that include financial and non-financial firms.

21
There are several ways of addressing frequent failures of financial institutions depending
on the stage of development of the financial sector and the starting point. These will be
discussed below.

3.4.2.1. Formulating appropriate legal framework

Many of the failures of financial institutions can be traced to the lack of or weaknesses in
the legal framework for financial products and services. Such should make the case for
passing new laws or amending existing ones. There are no specific laws that apply to
certain financial products such as pre-need plans, UITFs and CTFs. Only rules issued
by SEC in the case of pre-need plans and by BSP in the case of UITFs and CTFs
governed these financial products. As reported in Pinoy Money Talk.Com (2007), a lot
of investors lost money during the UITF crash in the summer of 2006, yet no bank was
made liable for it. Thus many believe investors have due recourse in the case of mutual
funds but do not enjoy the same in the case of UITFs.

As discussed, there are proposals to amend existing laws to improve the supervisory
and regulatory environment for the financial sector. These include amendments to the
New Central Bank Act, the Securities Regulation Code, the Insurance Code, Investment
Company Act, the Cooperative Development Authority Charter and the Cooperative
Code.

3.4.2.2. Enhancing capacities of regulatory and

supervisory authorities

It is not enough to provide the financial sector with appropriate legal framework for
regulation and supervision. Capacities of various supervisory agencies need to be
enhanced so that they can effectively regulate and supervise financial institutions. This
requires good recruitment and training programs for staff. These require resources.
Presently, the BSP, PDIC and SEC have the capacity to generate enough resources that
can be used to develop an attractive compensation package for their staff and fund
capacity building programs.24 IC claims to have raised enough resources but It cannot
use them without securing budgetary appropriations from Congress. CDA is totally
dependent on annual budgetary appropriations and official development assistance.
The latter two are subject to the Salary Standardization Law. This needs to be
addressed because uneven capacities among supervisory authorities could invite
regulatory arbitrage.

3.4.2.3. Coordination and Harmonization of Functions

Coordination and harmonization of functions of various regulatory agencies can address

many problems with respect to overlapping functions and regulatory arbitrage. This
requires a mechanism for coordinating and harmonizing functions of different

24
During a focus group discussion, Deputy Governor Nestor Espenilla, Jr. pointed out that although the
salaries BSP offers to its staff are more attractive compared to those of other government agencies, they are
not as attractive as those offered by financial regulatory agencies in other countries. Thus the BSP has
been losing its best supervisors to foreign regulatory agencies.

22
supervisory agencies. The government has tried to address this issue by establishing in
2004 the Financial Sector Forum (FSF) consisting of four supervisory and regulatory
bodies, namely, the BSP, SEC, IC and PDIC (See Box 1). The FSF is a “voluntary
cooperative endeavor of the concerned agencies to provide an institutionalized
framework for coordinating the supervision and regulation of the financial system while
preserving each agency’s mandates.” It focuses on three broad areas: (a)
harmonization and coordination of supervisory and regulatory methods and policies; (b)
reporting and information exchange dissemination; and (c) consumer protection and
education. Complementing the FSF, which is a multilateral framework, are bilateral
arrangements to cover operational issues and other issues relevant only to two
regulatory agencies. Since its establishment, the FSF has already made several
accomplishments such as the adoption of the General Information Sheet (GIS) as a
common information source instrument and a memorandum of agreement establishing
an information sharing framework.

Box 1. Memorandum of Agreement Establishing the Financial Sector Forum

Master MOA

The Financial Sector Forum (FSF) was formally established on 5 July 2004 upon the signing of a Master
Memorandum of Agreement (MOA) by the heads of the four regulatory agencies: Bangko Sentral ng
Pilipinas (BSP); Securities and Exchange Commission (SEC); Insurance Commission (IC); and Philippine
Deposit Insurance Commission (PDIC). FSF will focus on the following three broad areas:
1. Harmonization and coordination of supervisory and regulatory methods and policies. The Forum is
committed to identifying and filling in the gaps and eliminating overlapping functions in the current
supervisory regime. It is likewise concerned with adopting a common supervisory approach to
similar activities in order to reduce regulatory arbitrage.
2. Reporting and information exchange and dissemination. Efforts on this end would include
developing comprehensive rules on disclosure to enhance transparency of firms, harmonizing
regulatory reporting requirements to lighten the load of supervised institutions, and creating
database linkages between the agencies to facilitate a speedier and more accurate transfer of
information.
3. Consumer protection and education. The Forum will undertake initiatives on consumer protection
and education in order to curb the proliferation of unlawful and unethical business practices as well
as various financial scams.

Multilateral MOA on Information Exchange: BSP, SEC, IC and PDIC

The Multilateral MOA on Information Exchange sets the framework for the sharing of reports and information
essential in effectively performing the complementary mandates and regulatory functions of each agency
over financial institutions. The MOA paves the way for a consultation process among FSF member
agencies in formulating regulations on reports required for submission from its regulated financial
institutions.

Bilateral MOA: BSP and SEC

It calls for the joint examinations of non-bank financial institutions dually regulated by these agencies.

Bilateral MOA: BSP and PDIC

The purpose of the MOA is to establish an overall framework for the BSP and PDIC to effectively supervise
banks through the conduct of joint examination or independent examination, by either party, in accordance
with existing laws. The BSP and the PDIC have agreed to establish an examination framework as provided
in the MOA on joint examination for a more effective examination coverage and to avoid duplication of
efforts in the same functional areas over the same period. The MOA also provides a framework for the

23
prompt sharing and exchange of relevant reports, significant information and preliminary findings on
individual banks resulting from the conduct of independent on-site examinations by either party.

Bilateral MOA: BSP and IC (draft)

The MOA will cover information sharing and ensure that there is no duplication of functions.

Sources: Media Releases of FSF (various years).

The issue is how far the FSF can go in addressing many supervisory and regulatory
challenges brought about by the blurring of distinctions among financial institutions, the
emergence of conglomerates, and the circulation of hybrid financial products produced
by individual financial institutions, among others. Aside from slowness in sharing vital
information, each supervisory agency also faces constraints as to how much information
can be shared with other institutions without violating the law on confidentiality. This
may be the reason why establishing a unified board for or sharing of support services
among supervisory agencies has not been popular among countries. They either have a
fragmented approach to supervision of financial institutions and markets, or have a
single supervisory agency for some sub-sectors, if not all, of the financial system that is
backed up by a law. Governor Tetangco’s comments regarding the need to formalize
the FSF, which can be interpreted as giving it a legal basis for its existence, clearly
suggests that the FSF as currently organized and structured is inadequate to handle the
supervisory issues mentioned above. If formalized, however, Governor Tetangco wants
the FSF to supervise only the activities of financial conglomerates. However, large
financial institutions that are not part of conglomerates may produce financial products
like hybrids that cut across supervisory lines. They too must be properly regulated and
supervised not by one but by several regulatory agencies.

3.4.2.4. Some Practical Considerations

There are some practical issues that must be considered in switching from a fragmented
approach to an integrated approach to supervision and regulation of financial institutions.
The supervisory agencies are manned by human beings who might be more interested
in serving their own interests and those of their institutions rather than putting the
interest of the general public first. In other words, they might have the tendency to
protect their own turf, using existing laws to support their position. Thus, it is unlikely
that heads of supervisory agencies will ever shepherd a bill in Congress that, if approved,
would lead to the diminution or dissipation of their powers over their sector. This may be
a role advocacy groups and various stakeholders could play and influence some
members of Congress to support such initiative. As mentioned, recent cases of
switching to a single supervisory regime were initiated by national governments, not by
supervisory agencies for obvious reasons.

Creating a single supervisory agency for the financial system would require not only
changes in enabling laws of regulatory and supervisory agencies but also an
amendment to Section 20 of the Philippine Constitution which stipulates that the Central
Monetary Authority shall have supervision over the operations of banks and exercise
such regulatory powers as may be provided by law over the operations of finance
companies and other institutions performing similar functions. Changing the Constitution

24
at this time may be difficult to do, as has been demonstrated by failures suffered by the
past and present Presidents to introduce amendments to the Constitution.

The alternative, which will not require an amendment to the Constitution, is to lodge the
integrated supervision with the BSP as suggested by Bautista (2004). This however
goes against the worldwide trend of separating monetary policy function from financial
supervisory function. As pointed out by Lamberte (2002), the move to place these two
important functions under separate agencies is to reduce conflict of interest which arises
from the fact that monetary policy is supposed to have countercyclical effect whereas
financial institutions supervision has pro-cyclical effects. Political factors need to be
considered as well. An independent central bank responsible for monetary policy only
already makes that institution a powerful one. Making it also the sole supervisory body
for all financial institutions can further increase its power. It will have both the powers to
create and destroy money and to grant and revoke licenses of financial institutions. Of
the two, the latter gives the central bank coercive power of the state against private
citizens and it has no equivalent in the powers given to a separate, independent central
bank that does only monetary policy function (Quintyn and Taylor 2002). Democratic
societies are unlikely to build institutions with highly concentrated power. Thus, if there
is indeed a strong economic reason for having a single supervisory body for all financial
institutions, it is likely that it will be established independent from the central bank. As
Goodhart (2000) noted, this could perhaps be the overriding reason why those countries
that shifted towards a unified supervision of all financial institutions established a
separate, independent authority.

4. Stakeholder Analysis25

The team has catalogued stakeholders’ positions on a deliberate and timetabled move
toward a single supervisory body. The results are summarized in Table 5. Consumers of
financial services benefit most from a well-supervised financial system and suffer the
most whenever the financial system suffers a crisis. However, they appeared to have
low interest in the issues discussed and conceded to have low policy influence in these
issues. This is not surprising considering the fact that stakeholders who attended the
focus group discussions represent institutions that have more interest in other issues.
While there are organized groups that focus on major national issues such as
environment and national debt, there is none for the financial sector. Nonetheless, the
stakeholders representing the consumers of financial services were able to clearly
articulate their views on the issues after understanding the implications of having a weak
and ineffective supervisory structure for the financial system.

The last column of this table provides the possible impact of the switch from a
fragmented approach to a single supervisory body on the stakeholders concerned. Other
thematic issues that surfaced during the focus group discussions and stakeholders’
views on these issues are shown in Table 6.

In this section, we summarize the stakeholders’ views on the following issues:

fragmented vs. unified (i.e., having a single supervisor) approach to supervision; scope
of integration of supervision; preconditions for moving toward a single regulator model;

25
The proceedings of the four FGDs, final workshop and peer review are presented in a separate report.

25
 Table 5. Stakeholder Positions on a Timetabled Switch from Fragmented Supervision to a Single Supervisory Body

Stakeholder/actor Interest in Influence Position on issue Impact of policy move on

issue (w.r.t. issue) stakeholder

Consumers (represented by various Low Low Highly supportive. Integrated regulation is Consumers reap benefits of diminished
civil society organizations) needed to cope with increasing risk in financial system.
conglomeration in the financial industry.

Financial institutions High Medium-high Receptive. Warn to proceed with caution Level playing field for financial
because transition costs are very real. Prefer instruments and institutions,
evolutionary path with stronger FSF. consistency in rules and standards,
diminished risk in financial system

Bangko Sentral ng Pilipinas High High Opposed. Prefers evolutionary path. BSP either parts with bank supervision
Strengthen FSF. function or becomes the single
supervisor.

Philippine Deposit Insurance Medium-high Medium-high Opposed. Prefers evolutionary path. ‘Let FSF It has yet to be determined how the
Corporation run its course.’ PDIC will interface with a single
supervisor.

Insurance Commission High Medium-high Highly supportive. RP finance industry is Obsolescence/Absorption into single
small and needs just one regulator. Only regulatory body
integration can address harmonization
issues.

Securities and Exchange Medium-high Medium-high Opposed. Cites legal constraints and doubts Obsolescence/Absorption into single
Commission about how a single regulatory body would regulatory body
function. Open to change contingent upon in-
depth study proving its superiority.

Cooperative Development Authority Low Low Supportive. Main concern is building up Obsolescence/Absorption into single
regulatory capacity to cope with integration. regulatory body

Department of Finance Low-medium Medium Receptive. Main concern is what will become It has yet to be determined how the
of existing agencies that are part of the DOF single supervisor will interface with the
structure, and how the single supervisor will DOF.
relate to the DOF.

Legislature (represented by the Low High Receptive. n.a.

Senate Economic Planning Office
and Congressional Planning and
Budget Department)

26
 Table 6. Summary of Findings and Recommendations of the Focus Group Discussions
and the Final Workshop
Issues Consumers
(A)
(1) Financial literacy There is a need to launch a
massive financial literacy
campaign and include basic
concepts in personal finance in
elementary curriculum.
This is especially crucial for
OFWs and their families who
have been observed to save
very little. Even small and
medium enterprises (SMEs) will
benefit from this campaign, as
many have difficulty complying
with abstruse rules and
cumbersome paperwork
required for them to access
loans.
(2) Transparency of Consumer representatives
financial institutions/ lamented banks’ lack of
Consumer protection transparency about certain
financial instruments. They
noted an effort to play up the
benefits of instruments (e.g.,
the UITF) without informing
people of the risks involved.
(3) Access to financial There is a culture of not
services opening up to small savers
because they do not have much
Legislators and Key
Government Agencies
(B)
It was observed that there is ‘so
much OFW money floating
around’ and people are enticed
to seek high returns for their
deposits regardless of the risk.
It was suggested that regulators
look into this to protect people
like OFWs who have the money
to invest but may not know
where to put it.
While financial instruments
have to be structured to cater to
various risk appetites, investors
must be informed what the risks
are. The latter is the
responsibility of financial
institutions.
27
Financial Institutions
(C)
There is a need to launch a
massive financial literacy
campaign. Inadequate financial
literacy is compounded by the
fact that products are getting
more sophisticated over time,
and the boundaries between
financial institutions are
becoming blurred.
Financial institutions are not the
best agents to educate
investors because they tend to
oversell, emphasizing returns
while downplaying risks.
Regulators
(D)
Use tri-media to reach out to
the public.
The Bangko Sentral and PDIC
have launched financial literacy
campaigns.
Regulators have to use tri-
media to reach out to the
public. Many consumers are
unaware that there is a
Consumer Welfare Division
under the Bureau of Trade
Regulation and Consumer
Protection. The BSP also has a
Consumer Affairs Unit which
acts as an arbitration body
between consumers and banks.
Likewise, the PDIC has a
Depositors Assurance Bureau
that tends to consumer issues.
 money. Furthermore, banks
have the tendency to hoard
financial instruments (e.g., retail
treasury bonds), thereby
ousting small entities from the
market. The same situation
prevails in the securities and
insurance industries.

(4) Adequacy of In some instances, laws
existing laws actually hinder financial
governing financial transactions (e.g., the CARL
transactions prevents farmer beneficiaries
from using their land as
collateral).
There has to be a thorough
study of all policies related to
the issuance of securities and
pre-need plans.
The Congressional Planning
and Budget Department has
been advocating ‘prompt and
corrective’ measures
particularly in banking
supervision, but these have not
gone very far because
Congress has other priorities.
Regardless of whether
centralized supervision is
pursued or not, prompt and
corrective measures need to be
legislated.
There are institutions which
cannot be regulated even
though they are covered by
existing laws. The reality of life
is that there are powerful
people that do not want the
central bank to regulate in a
certain way, and there is always
back dealing going on.

(5) Regulation of Cooperatives need to be The Cooperative Law has to be

cooperatives regulated. reviewed.

Membership of the FSF should

be expanded to include the
Cooperative Development
Authority.

(6) Financial industry More data is needed to have a
conglomeration clear picture of the ‘actual size
of pie’ comprised by
conglomerates. This may be
useful in predicting economic
crises.
Even without conglomeration,
problems would still arise
because of blurred distinctions
among various segments of
financial markets. Failure in one
segment can spill over into
other segments.

(7) Strengthening Amendments to the charters of
regulatory capacity of regulatory agencies should
existing bodies include a provision fixing the
terms of their respective heads.
As evidenced by the number of
bank closures between 1981
and 2005, there is a need to
enhance the regulatory capacity
of each agency before
Regulatory institutions have to
be strengthened and one way
to do this would be to formalize
the Financial Sector Forum
(FSF).
One move that can be explored
is to recognize the formal
authority of the FSF.
Participants suggested

28
harmonizing. removing legal prohibitions to
information sharing in
amending the agencies'
respective charters. They also
emphasized the importance of
ensuring the political
independence of regulators.

29
transition toward a single supervisory authority; and lodging the single regulatory
authority in the central bank.

4.1. Fragmented vs. unified approach to financial supervision

Discussions among stakeholders revealed varied degrees of receptiveness to the idea of

forming a single supervisory authority for the financial sector, but there was no outright
opposition to such a proposal. Consumers of financial services support the proposal to
have a single supervisor for the financial system for the following reasons: emergence of
financial conglomerates whose subsidiaries and affiliates produce financial products that
fall under separate regulatory agencies; the blurring of distinctions among financial
institutions; and rapid financial innovations especially the emergence of hybrid products
that go through regulatory cracks and search for ways to do regulatory arbitrage. These
developments are happening with the consumers of financial services not being able to
clearly understand that various types of financial products peddled by financial service
providers carry different risk-return features. They hope that a well-regulated financial
system will provide services to the general public in a more transparent manner and
improve their access to financial services at better terms.

Financial service providers agree that integrated regulation is ‘something to shoot for’
given the increasing complexity of financial markets and instruments. They are
concerned about unevenness of the rules applied to the same financial instruments
issued by different types of financial institutions and differences in the quality of
supervisory capacities of different supervisory bodies. However, they emphasized the
need to flesh out further the arguments for and against each regulatory approach.
Accordingly, the ultimate criterion for any regulatory structure is whether it gives
consumers and the public better protection. Congressional planning staff and key policy-
making government agencies expressed receptiveness to integration but shared doubts
about whether such an initiative would prosper in the legislature.

While the IC wholeheartedly supports the establishment of a single regulatory body, the
BSP, the SEC and the PDIC prefer to proceed pragmatically and let the Financial Sector
Forum run its course. While this is a ‘waypoint in the evolutionary path towards
integration,’ the BSP argues that the necessity of a single regulator remains to be seen.
Among its arguments against integration, the SEC enumerated legal constraints,
misgivings about creating a powerful superbody, and differences in the nature of banking
and financial market regulation. The SEC however expressed openness to the change
contingent upon an in-depth study showing the superiority of having a single financial
supervisor. On the other hand, the Cooperative Development Authority is receptive to
integration and inclusion in the integrated regulatory regime.

Before leaving this subject, it is important to point out that the SEC’s views under a new
Chairperson somewhat differ from the SEC’s views under the previous Chairperson
regarding the need for moving towards a single financial supervisor approach for the
financial system.

Stakeholders voiced the reservation that consolidating all financial supervisory power in
one agency might raise the probability of a more successful regulatory capture
especially since rewards can be very high. In a fragmented approach, institutions whose
activities are regulated by various regulators may not be able to exert influence on all of

30
them, not to mention the transactions cost26 involved in doing so. As a representative
from the financial institutions remarked, however, regulatory agencies, whether they are
sectoral or integrated, are always exposed to regulatory capture. The challenge
therefore is to develop strategies to avoid, if not eliminate, regulatory capture, such as
making regulatory agencies independent and instilling in them good corporate
governance principles and practices. Furthermore, there is consensus that PDIC’s
mandate of assisting failing institutions in an integrated regime should be revisited
because this might heighten moral hazard. That is, holders of financial instruments
issued by non-bank financial institutions supervised by a single supervisor may think that
their investments in such instruments are accorded the same protection as bank
deposits.

4.2. Scope of integration of supervision

The issues here are two-fold. One is whether a financial supervisor should regulate and
supervise all types of financial institutions or only segments of the financial sector. The
other is that what objectives the single supervisor should pursue.

The focus group discussions and workshop elicited the view that if the country moves
toward a single financial supervisor model, all sectors of the financial system should fall
under its wings. The IC pointed out that the Philippine financial system is small and
there can be economies of scale and scope by having a single financial supervisor. A
view from the academic community, however, differs from this approach, arguing that
there is no case yet that clearly demonstrates that all sectors should be folded under one
financial regulator. The degree of complementation of the products of different financial
institutions is still low, except in the case of banks and insurance products. Hence, the
Philippines might consider a supervisory framework that integrates the functions of
regulating and supervising banks and insurance companies under one agency. It is to
be noted that the informal Integrated Regulation Group mentioned above includes those
supervisory authorities that are responsible for supervising at least the banks and
insurance companies together.

Regarding the objectives that must be pursued by the single financial supervisor, there is
consensus that the financial supervisory must pay attention to micro-prudential issues,
ensuring that financial institutions, including conglomerates, operate on a safe and
sound manner and that the same rules are applied to the same financial products
produced by different types of financial institutions in a consistent manner, a situation
which is hard to do in a regime that is based on several agencies. Aside from this
responsibility, however, there is also consensus that the financial supervisor should also
address one important market failure – market misconduct – to provide investors
adequate protection. This must be accompanied by an effective literacy program, which
can easily be accessed by the general public at the least cost.27 This is important in light
of the emergence of several financial products with various features that are not easy to
comprehend by ordinary investors. Interestingly, not only financial product consumers
are stressing this objective for the financial supervisor but financial services providers as
well. By way of an example, the UITF was considered a product “ahead of its time.” It
should not have been sold to people who do not have the sophistication to understand

26
In layman’s term, grease money or bribe.
27
The literacy program may be performed by an independent group or organization. See the last section for
a related discussion.

31
its risks and should have not been marketed by bank tellers who do not know anything
about UITFs nor can explain their features adequately to ordinary customers. The
marketing of UITFs should have been preceded by an intensive information drive not
limited only to the financial services providers but to the general public.

4.3. Preconditions for moving toward a single financial supervisor regime

Stakeholders have pointed out some preconditions that must be satisfied before moving
toward a single supervisor regime. One is that the legal frameworks for all existing
supervisory agencies need to be overhauled to allow them to strengthen further their
capacities to regulate and supervise financial institutions and instruments that fall under
their respective areas of responsibility. Aside from addressing some weaknesses of
some provisions of the existing charters or laws covering each financial supervisor, the
new law should also emphasize policy, administrative and financial independence of
supervisory authorities. There is a consensus to push for the passage of bills related to
reforming the regulatory agencies currently pending in Congress. Another precondition
is raising the quality of human resources of the regulatory agencies so that they can
effectively regulate and supervise financial institutions under their respective areas of
responsibility. Key to this is the adequacy of financial resources of a regulatory agency
to train its existing staff and recruit highly qualified staff. Putting together supervisory
agencies that have substantially different levels of supervisory capacities could bring
down the quality of supervision for the entire financial system, which is contrary to the
objective of having a single regulator.

As regards financial independence, the BSP pointed out that its regulation and
supervision function is fully funded by income from supervision fees of banks. PDIC and
SEC are also earning income sufficient to fund their operations. IC earns sufficient
income from its operations to fund its operations and upgrade capacities of staff, but it
cannot use such funds without going through the annual budgetary appropriation
exercise. There seems to be consensus that there is some scope for raising resources
to make the supervisory agencies financially independent, but existing laws pose a
barrier to the use of such income, especially to those that are subject to the Salary
Standardization Law.

4.4. Transition towards a single supervisory agency

The issue here is the approach to be used to move toward a single supervisory regime if
ever such is going to be pursued. In general, there is a consensus that the country
should proceed with unifying the various regulatory agencies in a cautious and
measured manner. In other words, the country should follow an evolutionary approach
rather than a revolutionary approach towards this model as happened in most recent
cases such as Japan, Korea, United Kingdom and Australia. It has been suggested that
even if we follow an evolutionary approach, a roadmap could be developed to instill
some structure and direction in the process. For instance, having one supervisory
authority for banks and insurance could be discussed and debated first while ways of

32
separating financial from non-financial functions of SEC and CDA could be included in
that roadmap.28

Another issue is whether there is a need to put a timeframe to this evolutionary process.
During the FGDs, consumer representatives observed that ASEAN economic integration
makes urgent the need for a more effective financial supervisory structure. They
therefore suggested that the transition be completed by 2015. IC and CDA, however,
want it accelerated so that the country’s financial regulatory and supervisory
infrastructure is very well in place and fully tested to deal with changes in the financial
landscape that might occur as a result of the formation of the Community, which is
expected to facilitate the integration of financial markets among ASEAN member
countries. On the other hand, financial institutions and some regulators stressed that the
transition to an integrated supervisory regime must be done in a phased and cautious
manner, and therefore a timeframe should not be defined. This is because there are real
transition costs to be considered, and some things may ‘fall through the gaps’ while
supervisors are busy reorganizing.

BSP’s view is that the outcome of this evolutionary process, such as a single regulator
for the financial system, should not be considered as given. Coordination of the
supervisory functions of supervisory authorities is more important at this point. To a
large extent, this is done with the formation of the Financial Sector Forum (FSF).
Although one can perhaps situate it as milestone in an evolutionary path toward
integrated supervision, it is not clear at this point whether it can lead all the way to that
goal. The FSF was established to harmonize standards and facilitate exchange of
information to ensure that no player in the financial market is left unregulated. To
advance the evolutionary process further, BSP suggested formalizing the FSF by giving
it some legal authority acting as a body to promulgate industry-wide regulation. While the
FSF promulgates regulations, enforcement needs to be done by the member regulatory
authorities. Increasing the powers of the FSF can perhaps address concerns regarding
lack of coordination among supervisory bodies without having to create a single financial
supervisor right away.

The workshop achieved the consensus to formalize the FSF which could perhaps
expedite the evolution towards integrated supervision. There was also consensus to
include CDA in the FSF as a full member. The former was later opposed by the SEC on
grounds that the Memorandum of Agreement presently governing the FSF is sufficient,
and granting the FSF rule-making powers is equivalent to making it a super-regulatory
body. The latter would be incompatible with the collegial relations among SEC
commissioners.

4.5. Lodging financial supervision in the central bank

FGDs elicited the opinion that if designated as the single financial supervisor, the BSP
might have difficulty coping with two functions, namely, monetary policy and prudential
regulation functions especially since the latter will be expanded to include the insurance,
pre-need, mutual funds and securities markets. The BSP already has difficulty

28
The obvious solution here is to transfer the functions of SEC and CDA that pertain to the regulation and
supervision of financial institutions and markets to the single financial supervisor and retain the rest with
these agencies.

33
conducting monetary policy and supervising banks and non-banks with quasi-banking
functions and, in fact, it is still in the process of enhancing its capacity to regulate the
institutions under its purview. As pointed out earlier, despite improving the legal
framework and supervisory capacity of the BSP, several banks still failed.

Another group, however, pointed out that the BSP presently oversees 90 percent of the
finance industry. The SSS and GSIS comprise 8 percent of the industry, so a marginal 2
percent would be added to the BSP’s jurisdiction after integration. This may be a
misunderstanding of the method for measuring the size of various financial markets.
While bank assets comprise 63 percent of GDP, equity market capitalization comprises
40 percent of GDP, which is not inconsequential. Bond market capitalization, though
mostly populated by government securities, comprises 37 percent of GDP.

Finally, while some stakeholders were confident that the BSP can see the big picture as
far as affiliates and subsidiaries are concerned, there may be some value added to
giving the BSP wider rein over the financial system. Presently, BSP has both policy,
administrative and financial autonomy, and has demonstrated its capacity to exercise
such autonomy. A single supervisor lodged at the BSP will therefore immediately have
policy, administrative and financial autonomy, which is important for effectively regulating
and supervising financial institutions and markets.

Final workshop deliberations did not yield consensus on where to lodge the function of
integrated financial supervision.

5. Conclusions and Advocacy Strategy

The first part of this section addresses the TOR using the materials discussed above
while the second part discusses an advocacy strategy to push much needed reforms for
strengthening the country’s financial system.

5.1. Concluding remarks

The team prepared a background paper reviewing the literature on attempts made by
countries around the world to strengthen the regulatory and supervisory structure of their
financial systems. There is a visible trend towards having a single supervisor for the
financial system which was prompted by external and internal factors such as financial
crisis and the recognition of the need for the regulatory framework to mirror the structure
of the financial system that has been significantly altered as a result of liberalization and
deregulation. However, some countries have been able to introduce some reforms
aimed at strengthening the supervision of the financial system without necessarily
altering the regulatory and supervisory framework for their financial systems. The
background paper also reviewed the existing structure of the Philippine financial system
and compared it with those of neighboring countries and discussed the country’s existing
regulatory and supervisory framework for the financial system. The background paper
then outlined the issues that might be considered by stakeholders participating in the
focus group discussions. The background paper helped in leveling the stakeholders’
knowledge about the issues discussed and debated during the focus group discussions.

The team identified four groups of stakeholders, namely, the consumers of financial
services, financial services providers, five financial supervisory agencies, Congress and

34
key government agencies, especially the Department of Finance which has oversight
authority over four financial supervisory agencies. The separate focus group discussions
were meant to quickly elicit consensus from relatively homogeneous group members on
issues that the team had laid out, while the final workshop was designed to put forward
to the various groups common issues to be discussed and debated and to see whether
some consensus can be arrived at among various groups of stakeholders.

A range of views can be observed from stakeholders. The consumers of financial

services, IC and the CDA clearly supported the need to shift to a single financial
supervisory model with a timeframe – either 2015 when the ASEAN Community is
created or earlier. Financial services providers supported such shift but only in a
cautious and measured manner without putting a definite timeframe for achieving the
goal. The SEC imposes the condition that more studies be conducted to demonstrate
the superiority of a single supervisory body over multiple supervisory agencies. The
BSP does not clearly oppose it but wants an evolutionary process for strengthening the
supervision of financial institutions without a defined objective such as creating a single
financial supervisor. PDIC goes along with BSP. There was no dominant voice during
the focus group discussions or shifting of position among groups of stakeholders.

There are three supervisory institutions whose interests are served well by the present
structure. The first is the BSP. If the country establishes a single financial supervisory
body, there is a large probability that BSP will lose its supervisory functions over banks
and NBQBs if we were to use the experience of other countries that shifted to a single
financial supervisor model as a guide. It will also be disadvantageous to the BSP if it is
designated as the single financial supervisor because aside from taking on the functions
of other supervisory agencies, it will have to absorb people from these agencies whose
human capital is not at par with that of the BSP at this point in time and yet will receive
the same remuneration as the BSP staff. This is, of course, a legitimate concern. The
second beneficiary of the present supervisory structure is the SEC. Under a single
financial supervisory model, SEC will have to cede its function of overseeing the capital
market to the single supervisor. The third beneficiary is the PDIC. This is one institution
that must be preserved because it acts as an insurer of bank deposits and, at the same
time, as a receiver and liquidator of closed banks. However, its newly reinstated powers
to examine banks will have to be given up in favor of the single financial supervisor.

A change in the supervisory framework for the financial system will require legislative
action. Thus, Congress will be the ultimate determining factor of such decision. As
pointed out by representatives from both houses, Congress can be relied upon for any
meaningful changes to accelerate economic development, in general, and to strengthen
the financial system, in particular. However, it has huge backlog of bills to be acted
upon, and the bills filed several years ago to amend existing charters of financial
regulatory agencies have not yet been discussed thoroughly by both chambers. A newly
introduced bill which is as complex and politically sensitive as the amalgamation of
functions of five supervisory bodies to create one agency or lodge them at any of the
existing supervisory agencies will less likely attract the attention of lawmakers.
Sometimes, Congress can change its priorities if the President informs its members that
a particular measure is of high priority to the government. The President, however, will
act only if it has a strong support from the executive branch and influential groups from
civil society and the business community. This is presently not the case for the proposal
to shift from fragmented to a unified approach to the supervision of the financial system.
In short, there is no consensus on the need to file a bill reflecting such proposal in

35
Congress immediately after the election. Rather, the consensus is to proceed with
caution, building upon existing initiatives to strengthen the country’s financial system.

The workshop arrived at a consensus on how to move the process forward. First, the
preconditions for moving toward a single supervisor regime need to be satisfied. These
consist of passing the proposed amendments to the existing charters of financial
supervisors and enhancing the capacities of supervisors to supervise financial
institutions. Among the important proposed amendments to the charters is giving the
concerned financial supervisory agencies policy, administrative and financial
independence, a feature which the BSP currently has in its charter.

Second is to build upon what the FSF has already started. The existing financial
supervisors have realized the need for stronger coordination among them, beginning
with the harmonization of rules and information system and exchange of information.
Thus, they created the FSF. The BSP’s proposal to formalize FSF can be viewed as a
significant step towards financial supervisory integration.

Although the SEC does not share other stakeholders’ view on this move, their opposition
stems from belief in present MOUs as a sufficient basis for the FSF, rather than anything
intrinsic to formalization. There is consensus to include the Cooperative Development
Authority in the FSF to resolve the long-standing issue of cooperatives engaging in
unsanctioned insurance activities and deposit-taking of non-members.29

Finally, the legislative process, no matter how cumbersome, cannot be discounted. Any
proposal to formalize the FSF will likely have to run through the legislative gauntlet. This
is an issue discussed below.

5.2. Advocacy strategy

In view of the substantial changes occurring in the domestic financial markets especially
in recent years, financial supervisory bodies have recognized the need to introduce
reforms to strengthen the stability of the sub-sector under their respective purview,
beginning with the proposal to overhaul or amend existing legal frameworks and to
enhance supervisory capacities of their staff. Their approach is rather fragmented and
uncoordinated. This is understandable because each agency has the tendency to look
after each sector, not the entire financial system and the interrelationships among sub-
sectors of the financial system. Also, there is no agency that reminds them that markets
are becoming more integrated and that distinction among different types of regulated
financial institutions has become blurred. Regulatory gaps could weaken not only one
sub-sector but the entire financial system. It does not help that Congress views the
proposed amendments to their respective legal frameworks as measures to promote
self-interest. Thus, the bills proposing amendments to the legal frameworks of
supervisory agencies have not been given special attention by Congress. The team
proposes an alternative approach, one that is built on the consensus discussed above.

29
Credit cooperatives call them associate members who are allowed to deposit money but are not allowed
to borrow money. In large, community-based cooperatives, associate members’ deposits can be a
significant proportion of the total.

36
The agenda for reform should, in general, focus on the need to strengthen the entire
supervisory structure of the financial system to make the supervision of different financial
institutions more effective so that failure of any financial institution which could
potentially hurt many people especially small savers and enterprises can be prevented,
and if it happens, its negative effects minimized. The agenda consists of two mutually
reinforcing elements. One is the set of proposals to amend the legal frameworks of
financial supervisory agencies so that they can move in one direction and no agency
should be lagging behind so as to avoid regulatory gaps. These proposals should now
be looked at from the entire financial system’s perspective and must be coordinated.
While the charters recognize the special characters of individual supervisory agencies,
however, they should include common provisions, which may include, among others,
granting supervisory agencies policy, administrative and financial independence,
flexibility to adopt “best practices” in supervising institutions under their respective
jurisdictions and immunity from suit for fulfilling their mandates; and mandating them to
harmonize and enhance supervisory capacities, share up-to-date information with other
supervisory agencies and cooperate with the FSF.

The second element is the formalization of the FSF, which means giving it a legal
personality and clear mandates. Giving the FSF legal basis will raise its importance in
the agenda of each agency and will expedite the FSF’s progress toward a single
financial supervisor. Among the important mandates of a formalized FSF we
recommend are: to secure much needed information including high frequency data from
member agencies on a timely manner;30 act quickly on the information being gathered
and analyzed; issue industry-wide regulations; and monitor actions taken by member
agencies with respect to industry-wide regulations being issued. Collection of primary
data and enforcement of regulations, however, still need to be done by individual FSF
member institutions. Under this new structure, the FSF definitely needs a lean, but full-
time and highly qualified staff whose compensation is at par with the BSP. As a way of
moving the FSF process further, representatives of private financial institutions
suggested that the FSF start experimenting on joint supervision; that is, a common team
drawn from different supervisory agencies could look at a company whose financial
products are being regulated by two or three members of the FSF. This should be
seriously considered in the reform agenda.

The advocacy strategy therefore is to present the reform agenda as one package of
reforms intended to improve the stability and efficiency of the financial system, not just
individual sub-sectors. The CMDC which is co-chaired by the private sector and the
government (represented by the Secretary of Finance) is in the best position to present
the agenda to Congress. This will address Congress’ concerns that supervisory
agencies are just advancing their own interest in proposing amendments to their
respective charters.

It is to be noted, however, that CMDC, though an influential body in advancing financial

sector reform agenda, represents the private financial services providers and the
government. Civil society therefore needs to be brought in to help shape the reform
agenda and also advocate it. As pointed out, however, there is no organization that
looks after the interest of consumers of financial services. The formation of such a
group is important in coming up with financial sector reform agenda that balances the

30
This addresses the issue of confidentiality.

37
interests of the general public, financial services providers and financial supervisors.31
The group can also take up the cudgel of informing and educating the general public
about new financial institutions being organized or created, the risk-return profile of new
financial instruments being marketed, etc. There are relatively strong organizations
looking after important national issues such as environment, national debt and crime that
have been quite successful in their advocacy programs and are well respected by both
the government and private sector. It is high time to have a group that looks after the
interest of consumers of financial services and actively participates in debates on issues
related to strengthening the country’s financial system.

31
This group may include, among others, academics, journalists, accountants, lawyers, teachers, senior
citizens, youth, ordinary office workers and farmers.

38
 References

Bautista, L. R. 2004. Moving Towards a Unified Financial Regulation in the Philippines.

Philippine Deposit Insurance Corporation (PDIC) Forum. Volume 2, No. 1. June.

Bernanke, B. S. 2007. Central Banking and Bank Supervision in the United States.
Remarks given At the Allied Social Science Association Annual Meeting, Chicago,
Illinois.

Briault, C. 2002. Revisiting the rationale for a single national financial services regulator.
Financial Services Authority Occasional Paper Series 16.

!ihák, M. and R. Podpiera. 2006. Is One Watchdog Better Than Three? International
Experience with Integrated Financial Sector Supervision. IMF Working Paper
WP/06/57.

Demaestri, E. and F. Guerrero. 2003. The Rationale for Integrating Financial Supervision
in Latin America and the Caribbean. Sustainable Development Department
Technical Papers Series IFM-135.

Demaestri, E. and D. Sourrouille. 2003. Integrated Financial Supervision: Experiences in

Selected Countries. Sustainable Development Department Technical papers
series IFM-139.

Di Giorgio, G. and C. Di Noia. 2001. Financial Regulation and Supervision in the Euro
Area: A Four-Peak Proposal. Wharton Financial Institutions Center 01-02.

Soo Lee J. Undated. Integrated Financial Supervision: The Korean Experience. Asian
Development Bank.

Lamberte, M. 2003. Central Banking in the Philippines: Then, Now and the Future.
Philippine Institute for Development Studies Perspective Paper Series No. 5.

Lamberte, M., M. Guererro, and A. Orbeta. 2000. “The Impact of the Southeast Asian
Financial Crisis on the Philippine Manufacturing Sector” in Dominique Dwor-
Frécaut, Francis Colaço, and Mary Hallward-Driemeier (eds.). Asian Corporate
Recovery. Washington D.C: The World Bank.

Lumpkin, S. A. 2002. Regulatory and Supervisory Regimes for Financial Services.

Second International Roundtable on Securities Markets in China. A paper
presented at the Second International Roundtable on Securities Markets in China,
Shanghai, 6-7 June 2006.

Milo, M. S. 2004. Integration of Financial Supervision: The Global Experience.

Philippine Deposit Insurance Corporation (PDIC) Forum. Volume 2, No. 1. June.

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___________. 2005. Financial Services Integration and Consolidated Supervision:
Some Issues to Consider for the Philippines. Philippine Institute for Development
Studies (PIDS) Discussion Paper No. 2002-22. Makati City.

Quintyn, M. and M.W.Taylor. 2007. Building Supervisory Structures in Sub-Saharan

Africa—An Analytical Framework. IMF Working Paper WP/07/08.

Takayasu, Kenichi. 2007. Banking Sector Restructuring in Post-Crisis Asia:

Consolidation, Competition and System Stability. The Japan Research Institute,
Ltd.

White, L. J. 2002. Consolidation or Competition for Financial Regulators. Project

Syndicate.

World Bank and the International Monetary Fund. 2005. Financial Sector Assessment: A
Handbook (Washington: World Bank and the IMF). Available on the web at
http://www.imf.org/external/pubs/ft/fsa/eng/index.htm

40
 Annex A

A Stakeholder Analysis on the Initiative to Harmonize/Integrate Regulatory

Functions of BSP, SEC, and the Insurance Commission
Series of Focused Group Discussions
February – May 2007

LIST OF PARTICIPANTS

A. Consumer Stakeholders – February 15, 2007

The Blue Room, Ateneo Professional Schools
Rockwell, Makati City

1. Fernando Antolin – Economic Policy Reform and Advocacy-Research Advisory

and Advocacy Group (EPRA-RAAG)
2. Josephine Ann Aparte – Infineia Consulting
3. Shelah Mae Famador – EPRA-Financial Market (FM) sector
4. Vic del Fierro – Coalition for Consumer Protection and Welfare (CCPW)
5. Eduardo Garcia – Microfinance Council of the Philippines, Inc. (MCPI)
6. Eugenio Gonzales – Resource Catalyst, Inc. and Atikha
Overseas Workers and Communities Initiatives, Inc.
7. Mario B. Lamberte – EPRA Consultant
8. Marlon P. Miña – Philippine Chamber for Commerce and Industry (PCCI)
9. Juan Angelo G. Rocamora – Philippine Exporters Confederation, Inc.
(PhilExport)
10. Karen G. Tecson
11. Lorna G. Villamil – Philippine Center for Policy Studies-EPRA (PCPS-EPRA)

B. Representatives of Senate, Congress, and Key Government Agencies–

February 16, 2007
The Blue Room, Ateneo Professional Schools
Rockwell, Makati City

1. Josephine Ann Aparte – Infineia Consulting

2. Manuel Aquino – Congressional Planning and Budget Department-House of
Representatives (CPBD-HOR)
3. Ronnie Buenviaje – Department of Finance (DoF)
4. Susan Bulan – Senate Economic and Planning Office (SEPO)
5. Florencio Carandang, Jr. – SEPO
6. Marianne Domingo – SEPO
7. Shelah Mae Famador – EPRA-FM
8. Pamela Go – Department of Trade and Industry (DTI)
9. Cielito F. Habito –EPRA
10. Mario B. Lamberte – EPRA Consultant
11. Romelia I. Neri –EPRA- RAAG
12. Dina Pasague – CPBD-HOR
13. Lisa Pilapil – Ateneo-EPRA
14. Maria Lourdes B. Recente –DoF
15. Michael Reyes – National Economic and Development Authority (NEDA)
16. Karen G. Tecson
17. Lorna G. Villamil – PCPS-EPRA

41
 18. Ma. Julie A. Villaralvo-Johnson – SEPO

C. Representatives of Financial Institutions – February 21, 2007

The Adam Room, Mandarin Oriental, Makati City

1. Josephine Ann Aparte – Infineia Consulting

2. Leonilo G. Coronel – Bankers Association of the Philippines (BAP)
3. Shelah Mae Famador – EPRA-FM
4. Gem Guiang – EPRA
5. Noel Javier – Capital Market Development Council (CMDC)
6. Mario B. Lamberte – EPRA Consultant
7. Conchita L. Manabat – CMDC/Financial Executives Institute of the Philippines
(Finex)
8. Melito Salazar, Jr. – Capital Market Development Council (CMDC)
9. Edita A. Tan – UP School of Economics
10. Karen G. Tecson
11. Lorna G. Villamil- PCPS-EPRA

D. Financial Regulators – February 22, 2007

The Visayas Room, Executive Business Center
Bangko Sentral ng Pilipinas, Malate, City of Manila

1. Rosemarie O. Aguilar – Philippine Deposit Insurance Corporation (PDIC)

2. Yolando L. Amurao – Bangko Sentral ng Pilipinas-Office of Supervisory Policy
Development (BSP-OSPD)
3. Josephine Ann Aparte – Infineia Consulting
4. Fe dela Cruz – BSP-Corporate Affairs Office
5. Francisco Dakila, Jr. – BSP-Center for Monetary and Banking Policy (BSP-
CMFP)
6. Evangeline Escobillo – Insurance Commission (IC)
7. Nestor A. Espenilla, Jr. – BSP-Office of the Deputy Governor for the Supervision
and Examination Sector (BSP-ODGSES)
8. Shelah Mae Famador – EPRA-FM
9. Mario B. Lamberte – EPRA Consultant
10. Romelia I. Neri – EPRA-RAAG
11. Jermy Prenio – BSP
12. Pia Roman – BSP-Microfinance
13. Virgilio V. Salentes – Securities and Exchange Commission (SEC)-Economic
Research Department
14. Teodora I. San Pedro – BSP-OSPC
15. Iluminada T. Sicat, BSP-Department of Economic Statistics
16. Karen G. Tecson
17. Lester Valdes – IC
18. Lorna G. Villamil – PCPS-EPRA
19. Jose G. Villaret, Jr. – PDIC
20. Roberto F. Villaroel - Cooperative Development Authority (CDA)

E. Final Workshop – April 18, 2007

The Mindanao Room, Executive Business Center
Bangko Sentral ng Piliipinas, Malate, City of Manila

42
 Consumers

1. Gerardo Anigan – Philexport

2. Cory dela Cruz – KAKAMMPI
3. Sixto Donato Macasaet – CODE NGO
4. Juan Angelo Rocamora – Partnership and Advocacy for Competitiveness and
Trade

Financial Institutions

5. Celestino Ang – Philippine Insurers and Reinsurers Association

6. Leonilo Coronel – Bankers Association of the Philippines
7. Ma. Lourdes de Vera – Trust Officers Association of the Philippines
8. Noemi Javier – Capital Market Development Council
9. Melito Salazar, Jr. – Capital Market Development Council
10. Ma. Teresa Toledo – Trust Officers Association of the Philippines
11. Mario Valdes – Philippine Insurers and Reinsurers Association

Congress and Key Policy-Making Government Agencies

12. Manuel Aquino – Congressional Planning and Budget Department

13. Ronnie Buenviaje – Department of Finance
14. Ma. Susana Bulan – Senate Economic Planning Office
15. Florencio Carandang – Jr. Senate Economic Planning Office
16. Ma. Teresa Habitan – Department of Finance
17. Peter S. Turingan – Senate Economic Planning Office
18. Rodolfo Vicerra – Congressional Planning and Budget Department
19. Ludy Yaptinchay – Department of Trade and Industry

Financial Regulators

20. Rebecca Abis – Bangko Sentral ng Pilipinas

21. Rose Marie Aguilar – Philippine Deposit Insurance Corporation
22. Yolando C. Amurao – Bangko Sentral ng Pilipinas
23. Fe D. Caingles – Cooperative Development Authority
24. Ferdinand S. Co – Bangko Sentral ng Pilipinas
25. Fe dela Cruz – Bangko Sentral ng Pilipinas
26. Rose dela Cruz – Bangko Sentral ng Pilipinas
27. Nestor Espenilla, Jr. – Bangko Sentral ng Pilipinas
28. Ma. Leonida Fres-Felix – Philippine Deposit Insurance Corporation
29. Evangeline Crisostomo-Escobillo – Insurance Commission
30. Lyn Javier – Bangko Sentral ng Pilipinas
31. Ma. Lecira Juarez – Cooperative Development Authority
32. Prudence Kasala – Bangko Sentral ng Pilipinas
33. Jermy Prenio – Bangko Sentral ng Pilipinas
34. Regina C. Juinio – Bangko Sentral ng Pilipinas
35. Pia Roman – Bangko Sentral ng Pilipinas
36. Elvira Samson – Bangko Sentral ng Pilipinas
37. Robert Syquia – Bangko Sentral ng Pilipinas

Economic Policy Reform & Advocacy/ Philippine Center for Policy Studies

43
 38. Fernando Antolin, Jr. – EPRA-RAAG
39. Mario B. Lamberte – EPRA Consultant
40. Jet Mallare – PCPS-EPRA
41. Eileen Morales PCPS-EPRA
42. Romelia Neri – EPRA-RAAG
43. Ma. Eloisa Pilapil – EPRA
44. Karen Tecson
45. Mark Uy - EPRA
46. Lorna Villamil – PCPS-EPRA

F. Peer Review – April 27, 2007

Madrigal Room, UP School of Economics, Diliman, Quezon City

1. Mario B. Lamberte – EPRA Consultant

2. Fernando T. Aldaba - EPRA
3. Fernando Antolin, Jr. - EPRA
4. Dante Canlas – UP School of Economics
5. Noel de Guzman – Ateneo de Manila University Department of Economics
6. Emmanuel Esguerra – UP School of Economics
7. Edita A. Tan – UP School of Economics
8. Karen G. Tecson
9. Angelo Unite – De La Salle University
10. Lorna Villamil – PCPS-EPRA

G. Consultation with the Securities and Exchange Commission – May 25, 2007
Securities and Exchange Commission, Mandaluyong City

1. Fe B. Barin – SEC Chairperson

2. Karen G. Tecson

44
 Annex B. Economies with Single, Semi-Integrated, and Sectoral Prudential Supervisory Agencies, 2004 1/

Agency Supervising Two Types of Financial Intermediaries Multiple Sectoral Supervisors (at
Single Prudential Supervisor for the Financial System (year of
least one for banks, one for
establishment)
securities firms, and one for
Banks and Banks and Securities and insurers)
securities firms insurers firms insurers
Australia (1998) Maldives* (1998) Finland Canada Bolivia Albania* Jordan*
Austria (2002) Malta* (2002) Luxembourg Colombia Bulgaria* Argentina* Lithuania*
Bahrain* (2002) Netherlands* (2004) Mexico Ecuador Chile Bahamas, The* New Zealand*
Belgium (2004) Nicaragua* (1999) Switzerland El Salvador Jamaica* Barbados* Panama
Bermuda* (2002) Norway (1986) Uruguay Guatemala Mauritius* Botswana* Philippines*
Cayman Islands* (1997) Singapore* (1984) Malaysia* Slovak Rep. * 2/ Brazil* Poland*
Denmark (1988) South Africa* (1990) Peru Ukraine* Croatia* Portugal*
Estonia (1999) Sweden (1991) Venezuela, Rep. Cyprus* Russia*
Germany (2002) United Arab Emirates* (2000) Bolivariana de Czech Republic 2/ Slovenia*
Gibraltar (1989) United Kingdom (1997) Dominican Rep* Sri Lanka*
Guernsey (1988) Uruguay (1993) Egypt* Spain*
Hungary (2002) Latest: China France* Thailand*
Iceland (1988) Turkey Greece* Tunisia*
Ireland* (2002) Hong Kong SAR* Uganda*
Japan (2001) India* United States*
Kazakhstan* (1998) Indonesia*
Korea, Rep. (1997) Israel*
Latvia (1998) Total – 31 Total - 5 Total - 8 Total - 7 Italy* Total - 33
* Banking supervision is conducted by the central bank.
1/ The table focuses on prudential supervision, not on business supervision (which can be carried out by the same agencies or by separate agencies, even in the
integrated model). Also, we do not consider deposit insurers here, even though they play an important role in banking supervision in a number of countries and can do
so under any regulatory model.
2/ The authorities announced plans to integrate prudential supervision in their central banks in 2006.
Source: !ihák M and Podpiera R. 2006. Is One Watchdog Better Than Three? International Experience with Integrated Financial Sector Supervision. IMF Working
Paper WP/06/57. Note that China and Turkey were in the Multiple Sectoral Supervisors Column in the original table prepared by the authors.

45
 Annex C.1. Integrated Financial Supervisory Authority with Sectoral Oversight

Head of Agency

Banks Insurance Securities

Companies Firms
Financial
infrastructure
overseer Financial
infrastructure
Financial overseer
infrastructure
overseer

Prudential Prudential
supervisor Supervisor

Prudential
Supervisor

Conduct of
business
Conduct of Conduct of supervisor
business business
supervisor supervisor

Source: Lumpkin (2002).

46
 C.2. Financial Supervisory Authority with Sectoral Supervision

Head of Agency

Bank Supervisor Insurance Supervisor Securities Supervisor

Systemic stability Market conduct Systemic stability Market conduct Systemic stability Market conduct

Prudential oversight Consumer protection

Prudential oversight Consumer protection Prudential oversight Consumer protection

Banks Insurance Companies Securities Firms

Deposit taking, insurance Deposit taking, insurance Deposit taking, insurance

activities, securities activities activities, securities activities activities, securities activities

Source: Lumpkin (2002).

47
 Annex C.3. Model of Financial Supervisory Agency with Supervision by Objectives

Head of Agency

Financial infrastructure overseer Prudential supervisory agency Market conduct supervisory agency

Prudential oversight Conduct of business,

consumer protection
Payment system oversight,
Clearing/settlement, etc.
Commercial Commercial banks
banks

Commercial banks
Insurance Insurance companies
companies

Insurance companies

Securities Securities firms

firms
Securities firms

Pensions
Pensions
Pensions

Source: Lumpkin (2002).

48
 Annex C.4. Model of Financial Supervisory Agency with Functional Supervision

Head of Agency

Financial infrastructure Licensing Consumer protection Conduct of business

oversight

Commercial Commercial Commercial Commercial

banks banks banks banks

Insurance Insurance Insurance Insurance

companies companies companies companies

Securities firms Securities firms Securities firms Securities firms

Pension funds Pension funds Pension funds Pension funds

Source: Lumpkin (2002).

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 Annex D

TABLE 1. AUTHORIZED ACTIVITIES OF VARIOUS BANK CATEGORIES

Authorized Activities of Various Bank Categories

Authorized Activities Commercial Banks Thrift Banks Rural Banks

Universal Ordinary

A. Commercial Banking Services

1 Accept Deposits 1 1 1 1
a/ a/
2 Issue LC's and accept drafts 1 1 1 11
3 Discounting of promissory notes 1 1 1 1
and commercial papers
4 Foreign exchange transactions 1 1 11 *
5 Lend money against security 1 1 1 1

B. Nationawide Branching Operations 1 1 1 1

C. Equity Investments in Allied 11 11 11 11

Undertakings

D. Equity Investments in Non-Allied 1 * * *

Undertakings

E. Trust Operation 11 11 11 11

F. Issue Real Estate and Chattel Mortgage, 1 1 1 1

Bonds Buy and Sell these for its own
Account, Accept/Receive in Payment
or as Amortization of Loan

G. Direct Borrowing With Central Bank 1 1 1 1

H. Activities of Investment Houses

1 Securities underwriting 1 * * *
2 Syndication activities 1 1 1 1
3 Business development and project 1 1 1 1
implementation
4 Financial Consultancy and Investment 1 1 1 1
5 Mergers and consolidation 1 1 1 1
6 Research and studies 1 1 1 1
7 Lease real and/or personal properties * * * *

Money Market Operation 1 1 * *

1 - Authorized Activities
11 - Authorized but subject to Monetary Board Approval
* - Not authorized/Prohibited
a/
Limited only to domestic LCs and drafts.
Source: Lamberte, Mario B. (1992), "Assessment of the Financial Market Reforms in the Philippines 1980-1992."

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 Annex E
Commercial Banks and their Subsidiaries and Affiliates

BANK AS OF SUBSIDIARIES and AFFILIATES

UNIVERSAL BANKS

1 Allied Banking Corporation 2000 1 Allied Bank Philippines (UK) PLC

2 Allied Capital Resources, Ltd. (Hongkong)
3 Allied Savings Bank
4 Xiamen Commercial Bank (China)
5 Allied Forex Corporation

2 Banco de Oro Universal Bank 2000 1 BDO Forex, Inc.

2 BDO Insurance Brokers, Inc.
3 BDO Capital and Investment Corporation
4 Generali Pilipinas

3 Bank of the Philippine Islands 2002 Subsidiaries

1 BPI Family Bank
2 BPI Capital Corporation
3 BPI Investment Management, Inc.
4 BPI Leasing Corporation
5 BPI Direct Savings Bank
6 BPI Securities Corporation
7 BPI Forex Corporation
8 BPI Computer Systems Corporation
9 BPI Operations Management Corp.
10 Santiago Land Development Corporation
11 BPI Foundation
12 Ayala Life Assurance Incorporated
13 FGU Insurance Corporation
14 Universal Reinsurance Corporation
15 Ayala Financial and Insurance Services Inc.
Affiliates
17 Ayala Land, Inc.
18 Ayala Hotels, Inc.
19 Ayala Corporation
20 Ayala Agricultural Development Corporation
21 Áyala Aon Risk Services, Inc.
22 Integrated Microelectronics Inc.
23 Ayala Systems Technology Inc.
24 Edinet Philippines Inc.
25 Globe Telecom Inc.
26 Ayala International Pte. Ltd.
27 Manila Water Company
28 Ayala Infrastructure Ventures Inc.
29 Honda Cars Philippines, Inc.
30 Isuzu Philippines Corporation
31 Ayala Aviation Corporation
32 Ayala Foundation, Inc.

4 China Banking Corporation 2000 1 CBC Finance Corporation

2 CBC Forex Corp
3 CBC Insurance Brokers, Inc
4 CBC Properties and Computer Center, Inc
5 CBC Venture Capital Corp

5 Development Bank of the Philippines 2002 1 DBP Data Center, Inc.

2 DBP Management Corp.
3 DBP Service Corp.

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 BANK AS OF SUBSIDIARIES and AFFILIATES

6 Equitable PCI Bank 2000 1 Armstrong Securities, Inc.

2 EBC Insurance Brokerage, Inc.
3 EBC Investments, Inc.
4 EBC Management, Inc.
5 EBC Strategic Holdings Corporation
6 Ecology Savings Bank
7 Equitable Card Network (Subsidiary)
8 Equitable Data Center, Inc.
9 Equitable Exchange, Inc.
10 Equitable PCI Express Padala
11 Equitable PCI Life Insurance Corporation
12 Equitable Savings Bank
13 Express Padala (HK) Ltd.
14 Express Padala (Italia) Ltd.
15 Express Padala (Macau) Ltd.
16 Express Padala (USA) Ltd.
17 Express Padala (Rotterdam) Ltd.
18 Maxicare PCIB Cigna Healthcare Corp.
19 Mindanao Development Bank, Inc.
20 PCI Capital Corporation
21 PCIB Forex Brokers, Inc.
22 PCI Leasing and Finance, Inc.
23 PCIB Securities, Inc.
24 Property Care, Inc.
25 Strategic Property Holdings, Inc.

7 Land Bank of the Philippines 2002 1 Masaganang Sakahan, Inc.

2 LBP Insurance Brokerage, Inc.
3 LBP Realty Development Corporation
4 LBP Leasing Corporation
5 LBP Countryside Development Foundation, Inc.
6 People's Credit and Finance Corporation

8 Metropolitan Bank and 2002 Domestic subsidiaries and affiliates

Trust Company 1 Toyota Motor Philippines
2 SMBC Metro Investment Corporation - - 30% owned
by MetroBank
3 Global Business Bank
3 Philippine AXA Life Insurance Corporation
4 Philippine Savings Bank
5 First Metro Investment Corporation
6 ORIX Metro Leasing and Finance Corporation
7 Philippine Charter Insurance Corporation
8 Unibancard Corporation
9 Thomas Cook (Phils.)
10 Multi-Grade Securities Inc.
11 Circa 2000 Homes
11 Toyota Cubao, Inc.
12 Toyota Manila Bay
13 Systematics Technology Services, Inc.
International subsidiaries and affiliates
1 International Bank of California
2 Asia Money Link Corporation (United States)
3 Metrobank Bahamas
4 First Metro International Investment Company, Ltd.
(Hong Kong)
5 MB Remittance Centre, Ltd. (Hongkong)

52
 BANK AS OF SUBSIDIARIES and AFFILIATES

9 Philippine National Bank 2000 1 PNB (Europe) PLC

2 PNB Forex, Inc.
3 Philmay Holding, Inc.
4 PNB Holdings Corporation
5 PNB International Investments Corporation
6 PNB General Insurers Co., Inc.
7 PNB Capital and Investment Corporation
8 Japan-PNB Leasing and Finance Corporation
9 PNB International Finance, Ltd.
10 PNB Investments, Ltd
11 PNB Corporation, Guam
12 PNB Italy S.P.A.
13 PNB Remittance Centers, Inc.
14 PNB Remittance Center, Ltd.
15 PNB Securities, Inc.
16 Bulawan Mining Corporation

10 Prudential Bank 2000 1 Pilipinas Savings Bank

2 Prudential Investments, Inc.
3 Prudential Ventures Capital Corporation
4 PB Currencies, Inc.

11 Rizal Commercial Banking 2002 1 RCBC Savings Bank

Corporation
2 RCBC Securities, Inc.
3 RCBC Capital Corp.
4 RCBC Forex Brokers Corp
5 RCBC Bankard
6 RCBC Land, Inc.
7 RCBC International Finance, Ltd.
8 RCBC California International, Inc.
9 RCBC Telemoney Europe, S.P.A.

12 Security Bank 2002 1 Security International Card Corporation

2 Security Finance, Inc.
3 SB Forex
4 SB Capital Investment Corp
5 Security Land Corporation
6 SB Equities, Inc.

13 Union Bank of the Philippines

2000 1 UBP Capital Corporation
2 Union Properties, Inc.
3 First Union Direct Corp.
4 First Union Plans, Inc.
5 UBP Securities, Inc.
6 UBP Insurance Brokers, Inc
7 Union Bank Currency Brokers Corporation
8 Union DataCorp
9 Interventure Capital Corp (60% owned)

14 United Coconut Planters Bank 2002 Subsidiaries

1 UCPB Savings Bank
2 UCPB Rural Bank
3 UCPB Leasing and Finance Corp.
4 UCPB Properties, Inc
5 United Foreign Exchange Corp
6 UCPB Securities, Inc

53
 BANK AS OF SUBSIDIARIES and AFFILIATES

Affiliates
1 UCPB General Insurance, Inc.
2 The UCPB-CIIF Foundation
3 United Coconut Chemicals, Inc.
4 Cocoplans, Inc.
5 Direct Link Insurance
6 CIIF Oil Mills
7 United Coconut Planters Life Assurance Corp.
(COCOLIFE)

COMMERCIAL BANKS

1 Asia United Banking Corporation 2002 1 Asia United Forex

2 Asia United Finance and Leasing

2 Bank of Commerce 2002 1 Pacific World Building and General Services,Inc.

2 Commerce and Trade Insurance Brokerage
3 Bancommerce Investment Corp.

3 East West Banking Corporation 1998 1 Filinvest Capital, Inc.

2 Filinvest Technologies

4 Export and Industry Bank 1999 1 EIB Forex Corporation

5 Global Bank X N.A.

6 International Exchange Bank X N.A.

7 Philippine Bank of Communications 2002 1 PBCom Finance

2 PBCom Realty Corp.
3 PBCom Forex Corp.

8 PhilTrust Bank X no subsidiary/affiliate

9 Philippine Veterans Bank 1999 1 Intervest Project, Inc.

2 Monarch Properties, Inc.

10 TA Bank of the Philippines, Inc. 1998 1 Philippines TA Securities, Inc.

(merged with ABN Amro Bank, Inc.) 2 TA Property Development (Philippines), Inc.

Other commercial banks (merged with other KB)

1 AsianBank Corporation Mar 1999 1 AB Capital and Investment Corporation

(merged with Global Bank in 2000) 2 AB Card Corporation
3 AB Capital Securities, Inc.
4 AB Leasing and Finance Corporation
5 Stock Transfer Service, Inc. (STSI),

2 Far East Bank and Trust Company 1998 1 FEB Investments, Inc.
(merged with BPI in 2000) 2 FEB Leasing and Finance Corp.
3 Far East Savings Bank

3 Global Business Bank - X N.A.

(merged with MetroBank in 2001)

4 Pilipinas Bank 1998 1 The Bank of Tokyo-Mit., Ltd.

(merged with Prudential Bank in 2000) 2 Prudential Bank

5 Solidbank Corporation 1998 1 Solid Insurance Brokers, Inc.

(merged with MetroBank in 2000)

6 Traders Royal Bank - X N.A.

(merged with Bancommerce in Nov. 2001)

Source: Lamberte, M., M. Milo and G.O. Pasadilla. 2004. Financial Sector Reforms. Presented during the Senators’
Legislative Workshop. July 2004

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