Spinoff of trust operations seen
Foreign interest in the local financial service industry is expected to grow with the recent liberalization of rules to encourage banks to spin off their trust operations to independent entities.
The relaxed rules free trust managers from single-borrower limits (SBL), and directors, officers, shareholders, and related interest—known as SBL and Dosri restrictions, letting capital flow more freely to follow demand for cash.
“Right now, trust departments feel constrained. But if these departments are spun off, then that means more business for them,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Nestor A. Espenilla Jr. said.
As the name suggests, money held in trust by banks, which are handled by departments separate from deposit-taking functions, are considered investments by clients.
When banks use client deposits for lending or investments, the gains and losses go to the bank.
When investments are handled by trust departments, risks are assumed by clients in return for potential profits.
Older rules prohibited the creation of so-called “stand-alone” trust entities. All trust operations in the country had to be handled by trust departments that are part of banks.
Last week, the BSP released more detailed guidelines for a new rule that allow for the creation of stand-alone trust companies that need not be part of or related to banks.
At the end of March this year, trust entities and other investment management businesses of banks had total assets of P2.48 trillion, up from P2.41 trillion the same month last year.
Having stand-alone trust firms benefits clients because it gives more flexibility in how money is managed because trust accounts will no longer be covered by SBL and Dosri limits, Espenilla said.
SBL and Dosri restrictions for banks are in place to protect deposits; the first limits a bank’s ability to channel funds to just one company or group of companies, while the second keeps lenders from using deposits to bankroll the businesses of its affiliates.
Espenilla said while the goal of the new rule was to encourage banks to spin off trust departments, it also opens the door for the creation of unaffiliated trust companies, possibly owned by foreign financial institutions.
He likewise said the separation of trust entities from banks would also make the trust business more “visible” to regulators, leading to the better assessment of risks and more precise policymaking.
Josephine Tuplano, president of the Fund Managers Association of the Philippines (FMAP), said whether banks spin off their trust departments would still be a tough decision for many banks, despite the attendant benefits enumerated by regulators.
“I’m sure the BSP will offer a lot of sweeteners,” Tuplano said. “For big groups, there will be a lot of savings, but if you’re small, you have to think about it,” she said.
The main issue, she said, boils down to operational challenges. “The idea of a separate corporation is you’ll have your own IT, your own HR,” she said.
