[Vantage Point] How safe is our money in banks?

“God asked me to wait; I endured. God asked me to do right; I struggled for what was right. I kept strong outside, but stood alone …O[h] where is Justice? Where is Truth? Where is Compassion? It is Your face, Lord, I truly seek. If not now, then after this lifetime. If not here, then in Your kingdom… I finished my race; I fought my good fight. I did not give up; I kept my faith. Yet death may still bear meaning or purpose for others, if not our lives.”

This is an excerpt of the email Teodoro C. Borlongan sent to his friend Michael Sycip Huang on April 10, 2005, five days before his 50^th birthday and a day before he shot himself to death in front of his parents’ grave in Loyola Memorial Park, Marikina City.

Borlongan was one of the founders of Urban Bank of the Philippines, which he parlayed into one of the most successful banks in the country before it became embroiled in a financial mess. When the bank was ordered closed in April 2000 by the Bangko Sentral ng Pilipinas (BSP), Borlongan was president and Arsenio Bartolome III was chairman. It was immediately placed under receivership with the Philippine Deposit Insurance Corp. (PDIC) and later acquired by the Export and Industry Bank which also folded years after.

Borlongan and his bank faced legal court cases, the most serious of which were charges of economic sabotage which was back then punishable by death. In less than four weeks that year, the 20-year-old commercial bank had been bled P6.156 billion in service withdrawals – more than half its deposit base. The government-run PDIC could only insure P729 million of the total run.

In his email, Borlongan intimated to Huang what he thought was his failure to obtain justice from those he alleged were responsible for Urban Bank’s permanent closure. The bank’s collapse drove him into depression.  

I thought it fitting to revisit this sad footnote in the country’s banking industry in light of the global turmoil the international banking community has been facing, triggered by the bankruptcy of Silicon Valley Bank (SVB) in Santa Clara, California.

The Philippines has had its share of bank failures, with fund mismanagement as one of the most common reasons. The country is pregnant with stories of financial institutions which had humble beginnings, expanding to great size and prominence only to fade in shame and oblivion.

Bank closures through the years

In 1977, General Bank and Trust Company (GENBANK) was found by the then Central Bank of the Philippines (CB) to have misappropriated various loans to directors, officers, stockholders, and related interests, totaling P172.3 million, 59% of which was classified as doubtful and P0.505 million as uncollectible.

The CB bailed it out with emergency loans totaling P310 million which all went for naught. GENBANK’s financial exposure to moribund Filcapital Development Corporation caused it to overdraw on its current account with the CB. Finally, on March 25, 1977, the government declared GENBANK insolvent. It could not resume business without endangering its depositors, creditors, and the general public. A public bidding of GENBANK’s assets was held from March 26 to 28, 1977, with the Lucio Tan group emerging as winner.

GENBANK was renamed Allied Bank of the Philippines. In 2013, Allied Bank was merged with the Philippine National Bank (PNB).

After a short 17 years of operations, Bank of Commerce (BANCOM) was taken over in 1981 by the Union Bank of the Philippines. Headed by the venerable Dr. Sixto K. Roxas (SKR), BANCOM boasted of a top-notch banking team: Rolando Gapud handled financial consultancy; Louie Villafuerte, legal engineering, and Ray Ilusorio, money and capital markets desk. These gentlemen were all 1973 TOYM awardees.

BANCOM became known as the breeding ground for leadership in Philippine finance. In its short existence, it fathered the most number of TOYM awardees: SKR, Philippine Stock Exchange Chairman Jose Pardo, Managing Director and CEO of First Pacific Company Limited Manny Pangilinan, and former finance secretary Ramon del Rosario Jr., among others.

With this roster, who would have thought that BANCOM would fade into obscurity?

With the same birth year as BANCOM, Banco Filipino catapulted to prominence with a staggering P4 billion in assets, expanding with a network of 89 branches nationwide by 1981. With the slogan “Subok na Matibay, Subok na Matatag,” the bank expanded its client base by enticing children’s deposits through its Happy Savers Club in the ’70s.

As far as I can recall, Banco Filipino pioneered community deposits. It accepted small peso deposits from sari-sari store owners and vendors who flocked to the nearest branch of the bank with their daily earnings in bills or coins wrapped in brown paper bags.

In 1985, the BSP shut down Banco Filipino for insolvency. The government found it to have dodged paying its debt due to mismanagement by its executives. It was reopened in 1994 only to be placed under receivership of the PDIC on March 17, 2011, for conducting business in an unsafe and unsound manner in violation of Republic Act 3591, as amended, or the PDIC Charter, and of RA 8791, or the General Banking Law of 2000.

What led to the collapse of these local banks?

What I see as the common denominators of these financial institutions are greed, basic management issues such as the inability to correct asset-liability disparities, and high-stake risk-taking. What is more apparent and appalling in these cases is the arrogance that came with success – the management’s false feeling of impregnability that too often lulled them into complacency. How then could we be surprised that history keeps on repeating itself?

Is it still safe to keep money in banks?

Since the downfall of SVB and Signature Bank earlier this month, coupled with the breakdown of Credit Suisse, US regulators, business leaders and politicians have been bombarding the public with messages of assurance that their hard-earned money is safe to deposit in banks.

The latent period for “contagion,” analysts point out, has become unlikely after the Federal Deposit Insurance Corp. (FDIC), Federal Reserve, and Treasury came together to backstop all insured and uninsured depositors of SVB and Signature.

Here at home, the BSP says it is ready to respond to any contagion effects and that the local banking system “remains safe and sound,” adding that Philippine banks do not have any material exposure to the collapsed US banks.

In a Senate Finance Committee hearing last week, US Treasury Secretary Janet Yellen told lawmakers that Americans “can feel confident” about the safety of their deposits. Reuters reported that Citigroup CEO Jane Fraser told the Economic Club of Washington DC on Wednesday that the banking system is “sound” and that “this is not a credit crisis” because both large and regional banks are “well-capitalized.”

When Credit Suisse went under shortly after SVB, analysts argued that the former was a scandal-plagued institution that Federal Financial Analytics’ Karen Petrou described as “flying very close to the edge, [beleaguered by] a number of serious scandals with fraudulent borrowers, [and] terribly lax internal controls,” racking up billions in losses from high profile issues, including the Archegos hedge fund implosion of 2021.

They added that SVB clients and depositors merely lost confidence in the bank due to its fatal, although easily avoidable, errors in risk management which were not indicative of the overall financial system’s health. SVB also suffered from heavy unrealized losses from rising interest rates that resulted in a bank run from its large base of uninsured depositors.  

In their March 13, 2023, paper, New York University (NYU) researchers revealed that, aside from SVB, Signature Bank, and Credit Suisse, US banks had unrealized losses of $1.7 trillion at the end of 2022. NYU professors Philip Schnabel and Alexi Savov and the University of Pennsylvania’s Itamar Drechsler explained that these losses nearly equaled the banks’ total equity of $2.1 trillion.

Another research paper, also from March 13, disclosed that, rising interest rates have slashed the value of the US Treasuries and mortgage-backed securities that comprise a large portion of many banks’ assets, causing US banks’ assets to lose 10% of their value over the past year alone.  

Should we still worry?

Some analysts forecast more pain for the sector as concern continues to spread about hidden risks in the banking sector and its vulnerability to the rising cost of money.

“There could be a bloodbath next week as banks are in trouble, the short sellers are out there and they are going to attack every single bank, especially the smaller ones,” Christopher Whalen, chairman of Whalen Global Advisors, was quoted as saying.

SVB’s collapse is the largest bank failure in the US since the global financial crisis. Its meltdown can be traced back to the rising interest rate environment. With higher interest rates causing the market for initial public offerings to shut down for many startups, private fundraising became more costly and some SVB clients – a high proportion of whom were uninsured deposits – started pulling their money out. The bank also had a huge proportion of its deposits invested in hold-to-maturity securities.

As a major player in the tech industry, SVB provided banking and financial services to startups and venture capitalists. Its failure means a loss of funds for startups and venture capitalists who rely on the bank for financing. This would be extremely detrimental to innovation and growth in the tech industry, which has been a key driver of economic growth in recent years, and a trigger of job losses and a decline in consumer spending, further exacerbating the economic impact of the SVB collapse.

There could also be regulatory and legal consequences for the bank and its executives in light of any investigation that may be made into the bank’s operations and potential violations of banking regulations, leading to fines, lawsuits, and criminal charges.

Since the implications are far-reaching for the tech industry and the broader global economy, it is crucial for regulators and policymakers here and abroad to closely monitor banks positioned like SVB and take steps to prevent another financial disaster from occurring. – Rappler.com

Val A. Villanueva is a veteran business journalist. He was a former business editor of the Philippine Star and the Gokongwei-owned Manila Times. For comments, suggestions email him at mvala.v@gmail.com.