7 Philippine Rural Banks Taken Over; Emerging Cracks In The System? (updated)

Suddenly some small local rural banks emerge to declare bank holidays or are being taken over by the Philippine Deposit Insurance Corp PDIC.

The Philippine Central Bank, the Bangko Sentral ng Pilipinas (BSP) provides a list:

-Rural Bank of Paranaque (Placed under PDIC receivership by the Monetary Board on 9 December 2008)

-Rural Bank of Bais based in Negros Oriental ( placed under PDIC receivership by the MB today, 11 December)

-Pilipino Rural Bank based in Cebu (placed under PDIC receivership by the MB today, 11 December)

-Rural Bank of San Jose based in San Jose, Batangas (placed under PDIC receivership by the MB today, 11 December)

-Philippine Countryside Bank based in Cebu

-Dynamic Bank (RB of Calatagan) based in Batangas

-San Pablo City Development Bank

-Nation Bank based in Bacolod City

While the BSP rightly asserts that the following banks “represent only a tiny fraction of the banking system and that this reaffirms the BSP’s assessment that the banking system remains stable, highly-capitalized, and highly liquid” and further downplayed these events as having systemic repercussions by advising “the public to avoid making sweeping judgment on the condition of individual banks based on pure speculation as these tend to be self-fulfilling”, they haven’t disclosed the reasons behind why these 7 banks suddenly folded up (as these institutions will yet be subjected to investigations).

It is our guess that given the interrelated nature of the global banking industry, these banks have been similarly impacted as with other small banks elsewhere, on exposures to toxic instruments or have seen their capital adequacy ratios shrink on the account of severe markdowns of its asset values.

If more of these “bank holidays” should occur then naturally there will be heightened concerns over the emergence of possible “cracks” in the system.

Only transparency and rapid response by the authorities can assuage the public from being overwhelmed by “self-fulfilling speculations”.

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Latest Update:

We'd like to thank reader m2md for giving us more information about the said foreclosed banks. These banks reportedly fall under an umbrella organization that does selling pre-need plans called the "Legacy Group Banks" from which the Supreme court earlier issued a Temporary Restraining Order (TRO). In short, a domestic issue. See article here.

Earlier Update:

We received a comment suggesting that these bank holidays could have been due to the possible flawed business models adopted by the affected Rural Banks-attracting deposits with above market interest rates and similarly carrying above market interest loan portfolios.

Perhaps.

But this translates to the sensitivity of these rural banks’ portfolios to the country’s economic performance, which equally means that for these banks to fold suggests of a drastic slump in parts of the Philippine rural economy over the recent past quarters or so- or where these banks are located. But this doesn’t seem so.

Aside, our domestic version of “subprime lending” would also have surfaced gradually or could have popped up one at a time than altogether in just one month.

So for us, the issue boils down to a matter of timing.

If there has been anything that has dramatically changed for the worst over the same period, it is the global financial markets.

We are 2 months from the global meltdown and 3 months from the Lehman bankruptcy (September 15), which makes us suspect some causal association.

Besides, as we noted these may not be just about foreign toxic waste in the affected rural bank’s portfolios but also due to inadequate capital ratios brought about by losses in financial assets that have impacted the banks balance sheets.

But of course, correlation doesn’t imply causation, which is why BSP’s transparency matters.

So we’d have to wait for the official BSP pronouncements on these and keep vigil over the trend of bank holidays-if, at all, they might signify the proverbial “Canary In A Coal Mine”.