PDIC, BSP at odds on how to rescue distressed banks

by Jun Vallecera, Business Mirror

Posted at Oct 18 2010 09:44 PM | Updated as of Oct 19 2010 05:44 AM

MANILA, Philippines - Regulators are at odds over how best to rescue financially distressed rural banks that qualify under the P5-billion Special Program for Rural Banks or SPRB.

The goal here is to keep rural lenders from completely toppling over under financial pressure by infusing equity or loan into them long before the banking public notices their distress.

The SPRB is also an offshoot of ongoing efforts to merge or consolidate the banking sector, particularly rural banks which total 612, according to the latest data from the Bangko Sentral ng Pilipinas (BSP).

Official sources said the BSP particularly favors infusing fresh capital into qualified rural banks in the form of tier-two debt, essentially a debt note that qualifies as capital without diminishing the shareholder representation in the bank they own.

According to officials, BSP Gov. Amando M. Tetangco Jr. favors the tier-two method of capital infusion to bring back financially distressed rural banks or even banks just wanting to grow big from operating on the basis of mediocre capital.

Generally speaking, a bank’s capacity to earn from its loan activities is directly related to its ability to put up capital. The smaller the capital, the lesser the bank’s potential to earn.

Officials said the Philippine Deposit Insurance Corp. (PDIC) favors extending financial assistance to rural banks in the form of redeemable preferred shares.

According to the official, this method is more favorable to regulators as the assistance is in the form of equity rather than as debt, which is the nature of tier-two notes.

“The BSP favors tier-two debt, while the PDIC wants the assistance extended in the form of preferred shares,” they said.

Redeemable preferred shares are almost like common shares which have voting rights and is really equity rather than debt, officials reiterated.

Such assistance makes sense to the PDIC given that in the event a bank topples over, common shareholders take precedence over preferred shareholders and then the holders of tier-two debt notes.