BSP proposes wider, more potent powers for PDIC

Regulators are pushing for the authority to put up special purpose vehicles called bridge banks, which will ensure that bank services to the public will not be disrupted even if an institution has been ordered closed.

The Bangko Sentral ng Pilipinas (BSP) said it would throw its support behind a new proposal to amend the charter of its co-regulator Philippine Deposit Insurance Corp. (PDIC), citing the need for stronger resolution mechanisms for mismanaged banks.

“The valuable role of the PDIC is in the resolution of problematic banks,” BSP Deputy Governor Nestor A. Espenilla Jr. said.

While it is the BSP’s job to regulate the operations of banks, the PDIC’s role of liquidating banks deemed too unhealthy to continue operating is a key part in ensuring the stability of the financial system, Espenilla told reporters.

Unfortunately, he added, the PDIC lacked key powers enjoyed by its counterparts in advanced markets like the United States.

One such power is the ability to establish so-called bridge banks or shell companies managed by the PDIC.

“The idea is, once the (BSP’s) Monetary Board closes a bank, the bridge bank can take over and replace the closed bank’s old management,” Espenilla said. “Theoretically, the BSP can order a bank closed on a Friday, and that bank can reopen on Monday under a new management.”

He said this would eliminate the need for the PDIC to service deposit insurance claims because the bank would stay open.

After the takeover, it would be the bridge bank’s role to determine the fair value of the bank’s assets and put these up for sale.

The creation of bridge banks in the Philippines would be similar to those created by the Federal Deposit Insurance Corp. (FDIC) in the United States. Under US rules, bridge banks established by the FDIC have the authority to operate shuttered banks for up to three years.

The assets of these banks must be sold within that time. Only in the event that the bank’s assets are not sold would the FDIC decide to permanently close the bank down and give the money back to its depositors.