‘Unsafe’ banking practices defined

Banks engaged in “unsafe" and “unsound" practices will be probed, or else, closed, according to rules issued by the Philippine Deposit Insurance Corp. (PDIC), the state deposit insurer. Regulatory Issuance No. 2011-01, issued by the PDIC and published in newspapers Thursday, enumerated the consequences for banks that engage in these unsafe and unsound practices. “Deposit accounts and all information related thereto may be inquired into or examined by the PDIC upon the finding of unsafe and/or unsound banking practices…," the regulation read. The insurer’s directors may also issue a cease and desist order, and ask that the bank stop or correct such practices. “Deposit insurance on deposit accounts or transactions constituting and/or emanating from unsafe and/or unsound banking practices… shall not be paid," the regulation further read. The PDIC issued the rules in compliance with Republic Act (RA) 3591 or the PDIC Charter.RA 3591 was amended by RA 9576 enacted in April 2009. RA 9576 principally increased the maximum deposit insurance coverage to P500,000 from P250,000 as large and established banks in the West collapsed at the height of the financial crisis. Lawmakers and banking regulators wanted to avoid the bank runs seen in other countries. At the same time, RA 9576 also specified which bank deposits are not covered by deposit insurance and these included those emanating from unsafe and unsound banking practices. The local banking industry had been rocked by the Legacy controversy, with the central bank padlocking 12 rural banks belonging or linked to the Legacy Group in Dec. 2008 because of liquidity problems and performance of unsafe and unsound practices. “Unsafe" and “unsound" practices, however, needed to be defined, according to RA 9576. Thus, PDIC’s board of directors came up with Resolution 2011-01 -- their first issuance for the year -- in compliance with RA 9576’s provision. As a general principle, the PDIC said it was hewing to the Bangko Sentral ng Pilipinas’ (BSP) guidelines on what constitutes unsafe and unsound banking practices. In addition, it said, these practices may include those that resulted or may result in the delay in the processing or determination of deposit claims after a bank closure; material loss or damage to the bank’s depositors, creditors, shareholders or to the PDIC; and material loss or damage to the safety, stability liquidity or solvency of the bank. Specifically, these practices may include: • activities that result in unaccounted, undocumented or unrecorded deposits; • failure to keep bank records within the bank’s premises such as deposit documents like signature cards, depositor information files and deposit ledgers; and • grant of high interest rates when the bank has negative unimpaired capital, a liquid assets-to-deposit ratio of less than 10% or operating at a loss. An interest rate is high if it is 50% higher than the market median for the same type of banks. “Liquid assets" refer to the sum of cash, due from the BSP/banks, and financial assets, net of allowance for credit losses. The PDIC was careful to say that activities “may" be considered unsafe or unsound. In Annex A of Regulatory Issuance 2011-01, the state deposit insurer explained: “In all cases, the PDIC shall give due consideration to the circumstances of each case vis-a-vis the general principles and guidelines set forth in [Regulatory Issuance 2011-01]." Other practices that may be considered unsafe or unsound are: • solicitation and acceptance of bank deposits outside bank premises without the central bank’s authorization; • non-compliance with identification and documentation requirements for depositors; • recording deposits or withdrawals without supporting documents; • offering and accepting high-interest deposits despite a cease and desist order by the central bank; • allowing unauthorized bank personnel and non-bank personnel to handle deposit transactions; and • allowing depositors to deposit, withdraw, and transfer funds without proper documentation. -- Judy T. Gulane, BusinessWorld