COMMENTARY: Banks rule

Bulatlat Perspective

A WEEK before his fifth State of the Nation Address, President Benigno Aquino III signed into law Republic Act (RA) 10641 or “An Act Allowing the Full Entry of Foreign Banks in the Philippines.”

This superseded RA 7721, “An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines,” which allowed the entry of foreign banks either through ownership of up to 60 percent of the voting stock of an existing domestic bank or of a new banking subsidiary or establishment of branches with full banking authority.

With RA 10641, a foreign bank could own 100 percent of a domestic bank and/or establish a bank in the country.

The law also grants full banking privileges to locally incorporated subsidiaries of foreign banks.

Presidential Communications Operations Office (PCOO) Secretary Herminio “Sonny” Coloma cited the economic benefits of the new law.

First, it would facilitate Asean (Association of Southeast Asian Nations) integration as the Philippines went ahead of its neighbors in implementing the planned Asean Banking Integration in 2020. In fact, it went beyond the plan because with the law, all other banks, not only those from Asean countries, could operate in the Philippines.

Second, it would make available more capital in the Philippines, particularly when these giant multinational banks establish full operations in the country. As of the present, local subsidiaries of foreign banks are in the top 100 banks in the country but do not occupy the topmost spots. Among these are:

1. Citibank N.A. # 11 with declared assets of P278.77 billion ($6.3 billion) while its global assets amounted to $1.899 trillion and is ranked #14 by Forbes magazine

2. HSBC #13 with declared assets of P203.769 billion ($4.63 billion) while it is ranked # 2 in the world with $2.723 trillion

3. JP Morgan Chase #25 with P52.521 billion ($1.2 billion) while it is ranked #6 in the world with $2.463 trillion in global assets

4. Bank of America #31 with P19.751 billion ($448.8 million) while it is ranked #12 in the world with $2.126 trillion in global assets

5. ANZ #24 with P56.552 billion ($1.285 billion) while it is ranked #46 in the world in terms of assets and #18 in market capitalization

6. Deutsche Bank AG #18 with P83.821 billion ($1.9 billion) while it is ranked #10 in global assets

With the full entry of big multinational banks, the government is hoping that they would bring in more assets thereby making available a bigger loanable capital in the country.

Third, the availability of more loanable capital would facilitate the entry of more foreign investments.

The bases cited by Malacañang seem logical (without going into an analysis of the benefits that is currently being derived by the country from foreign investments, considering the numerous incentives being accorded them).

However, there is another side to the full entry of foreign banks.

Argentina, which was considered as a poster child of liberalization, including financial liberalization, is currently in the news because it is in a deep financial crisis.

According to a study Measuring Financial Liberalization In Latin America: An Index Of Banking Activity1 by Myriam Quispe-Agnoli and Elizabeth McQuerry, Argentina deregulated the banking sector in 1976 and lifted interest rates controls in 1977. Public funded deposit insurance was replaced by a bank-funded partial coverage plan in 1979. By 1991, the central bank charter was reduced in scope and it was granted full independence as an institution (much like the US Federal Reserve). Subsequently, state-owned banks were privatized.

Also, much of the banking sector was sold to foreign ownership.

The financial openness, according to the study, enabled Argentina to attract foreign capital and investments. But this also increased the vulnerability of the economy to external crisis.

The financial crisis in Mexico in December 1994 and the Russian and Asian crises in 1997 resulted in massive capital flight from Argentina, which was, of course, facilitated by the fact that foreign banks could just as easily pull out their capital from the country because banking deregulation and liberalization policies were in place.

Because of capital flight, in combination with the lack of solid, stable foundation of the economy, Argentina plunged into a recession, nay depression, in 1999. Argentina depended on loans from the International Monetary Fund – World Bank (IMF-WB) to keep its economy afloat.

The huge debt that Argentina incurred in 2001 is now the subject of the country’s conflict with US financial investment houses. US hedge fund “vultures” (as the Argentina government calls these US banks cum financial investment houses) have been demanding full payment of the loans that Argentina incurred in 2001, which they bought at 50 percent of its value from the IMF-WB and other lending agencies. Because no compromise has yet been reached, Argentina would default on its loans, triggering another financial crisis.

In like manner, President Aquino’s signing into law of the full liberalization of the banking sector would make the Philippines more vulnerable to external crisis and capital flight.

When the housing bubble burst in 2007, triggering a financial and economic crisis, some were asking why the Philippines appeared to have not been gravely affected. Why did the country not fall from the cliff much like countries such as the US, and most, if not all, European countries?

One reason for this is that local banks do not have enough capital to gamble on such financial derivatives as the Collateralized Debt Obligation that big multinational banks gobbled up to earn super profits quickly. Local media reported that only a few local banks such as the BDO invested in these derivatives. BDO’s investments and consequent losses were not big enough to shake its foundations.

The scenario would be different with the full liberalization of the banking sector. Multinational banks would buy out or dwarf local banks. The former would, in the process, corner a lot of savings from companies and individuals. And they could use these locally generated savings to gamble on derivatives, commodity futures, stock options and the like.

If and when they lose, the local savings they used in betting on derivatives, futures, options, and other portfolio investments would evaporate; there would be capital flight; and the country would plunge into a financial crisis.

Another negative implication of the full liberalization of the banking and financial sector is that multinational banks would seize control of the economy.

Quoting from the study Measuring Financial Liberalization In Latin America: An Index Of Banking Activity1 by Myriam Quispe-Agnoli and Elizabeth McQuerry:

“Banks are central to the functioning and support of most all financial activity even if they are not the only important type of institution in a financial system. In many respects, banks are the backbone of the economy and the financial system because they provide the means for intermediation of funds at all levels of economic activity.”

“The role played by banks in developing country economies is even more critical because of the nonexistence or shallowness of other mechanisms of finance. Lacking deep equity markets, companies in developing countries rely on banks (both domestic and external based) to make available the capital required for investment and growth (Morris et al. 1990; Rojas-Suárez and Weisbroad 1995).”

Thus, in the future, once big multinational banks dominate the finance sector, they would be able to determine who gets the loan and at what rate. They could, essentially, determine which company expands and which contracts, which flourishes and which goes bankrupt.

Added to this, they would also control other aspects of economic activity. A July 27, 2013 letter of the US Congress to the Board of Governors of the US Federal Reserve Board expressed concern over the expansion of banks to non-financial commercial spheres. It cited the importation of oil and petroleum products into the US by Morgan Stanley in June 2012; the dealing and price manipulation of aluminum by Goldman Sachs and its ownership and operations of airports, toll roads, and ports; and the marketing of electricity and manipulation of power rates by JP Morgan.

The US Congress letter quoted legal scholar Saule Omarova: “These financial services companies have become global merchants that seek to extract rent from any commercial or financial business activity within their reach.”

So is this the future that we want for the Philippines?

The movie International, which tackled the shadowy operations of a fictional bank IBBC, made the following quotation famous: “You control the debt, you control everything.”

How fiction mirrors reality. (