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Fewer, bigger banks seen to dominate banking sector |
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By Des Ferriols
The Philippine Star 01/30/2006 A handful of major banks will ultimately dominate the country’s banking industry, the Bangko Sentral ng Pilipinas (BSP) said over the weekend. Driven by competition, technological pressures and increasingly strict regulation, the BSP said it expects consolidation in the domestic banking industry to accelerate over the next three years. BSP Governor Amando M. Tetangco Jr. said the industry would likely be dominated by a few major banks with many smaller banks serving various well-defined market niches. According to Tetangco, a stronger regulatory framework would help drive this consolidation by hastening the exit of weak banks. On the other hand, increasingly stronger competition by existing foreign banks and new foreign investors coming into existing banks would also force different groups to merge and consolidate to achieve better economies of scale. Tetangco said modern banking practices driven by technological developments in information and communication would likewise impose rigorous technical demands that are easier to meet with economies of scale. "We also see parallel developments in the capital market," Tetangco said. "That would make it necessary for the BSP to actively collaborate for the completion of much-needed market infrastructure to enhance system integrity and overall market confidence." In the end, Tetangco said the developments in the capital market as well as the banking industry would provide a richer array of investment opportunities for the public as well as greater funding flexibility for public and private entities. The BSP’s long-term goal of consolidation in the banking sector, however, is not necessarily considered a good thing for the industry, particularly since the ownership structure of banking institutions has been subject of criticism by credit rating agencies. Despite significant reforms in country’s bank regulatory regime, international credit rating agency Fitch Ratings earlier said the BSP ability to enforce its own regulations are being hampered by private interests. According to Fitch, the prudential and regulatory framework for Philippine banks has been substantial over recent years but enforcement remains a critical factor. "The capabilities of the BSP in this regard continue to be hampered in a sector where private interests hold considerable sway over government agencies," Fitch said. "This has been highlighted in the past with banks successfully suing the BSP for wrongful closure and other actions." In the report, Fitch said that while the BSP had made significant progress in its efforts to improve regulatory oversight and reduce banking risks, the gradual overhaul of the regulatory climate is likely to be a long-term affair. "This would require reforms not just at the regulatory level, but also in regards to bank ownership," Fitch said, explaining that bank ownership in the Philippines is "concentrated in the hands of a few wealthy, powerful families," who also hold substantial non-bank interests. Fitch however admitted that the BSP’s regulatory framework regarding capital adequacy, asset quality and liquidity is "reasonably solid". The various rules and regulations, according to Fitch, have given the BSP significant powers including the authority to take corrective action and impose various stipulations on the operations of under-capitalized banks. Fitch noted that the ownership structure of the industry is an aggravating factor that limits the capability of the BSP to strengthen the regulation and risk management of local banks. "While the central bank has implemented several reform initiatives to improve regulatory oversight and reduce banking risks, its enforcement capabilities continue to be hampered in a sector dominated by large domestic banks majority-owned by prominent Filipino business families wielding significant political influence," Fitch said. |
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