Holiday economics

Like a roller-coaster ride, this one starts off slowly, relegated by broadsheets to an eighth of a page on the bottom corner of page one. Its presence will not be felt until the mess is adequately sordid and the victims totally helpless. The story will at first be filled-in with historical references to 1985, over a quarter of a century too distant for present day victims whose references will be the Legacy scandals and the grandstanding it produced at the Senate. Many will use the rather unseemly term “Holiday” to refer to a bank that suddenly padlocks its doors and switches off its cash dispensers. “Holiday” refers to a cheerful event. A bank holiday is the farthest from that. The technical definition is the “temporary closure of a bank in the event its obligations exceed its resources.” Such definitions of business economics are illusory. Recent history is replete with banks on holiday, seeking bankruptcy protection and never to re-open. Should some re-open, they reincarnate as a different bank with different capital structures and owners. Even the terms “obligations” and “resources” are debatable. In a bank’s balance sheet, a hierarchy of liabilities or “obligations” array opposite the degrees of liquidity of assets or “resources”. Deposits are liabilities and are placed at the upper levels declaring their priority over the claims on assets by creditors and shareholders. Deposit liabilities are opposite entries representing liquid assets which depositors have a prior claim. Despite these, defenders of self-imposed holidays insist on solvency rather than liquidity. Under banking statutes, a solvent bank where total resources still cover obligations can go on a “holiday” by invoking illiquidity. Yet Section 29 of Republic Act 7653 authorizes imposing conservatorship on a bank “in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors.” In last Tuesday’s closure of a major thrift bank, avoiding official declarations of a holiday, bank officials claimed solvency while pointing to illiquidity as the cause. Under Section 29, a declaration triggers conservatorship. But R.A. 7653 does not require a declaration in the strictest sense. It requires an examination report from the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) prior to conservatorship. While there are other multi-billion peso-capitalized commercial, thrift and rural banks afflicted with the same malignant structural weakness, when padlocking afflicts mid-to-low net worth depositors, inequities are particularly tragic and the whole economy is threatened. In last Tuesday’s bank holiday the inequities are even more wretched where these spawn from disputes between regulators tasked to instill economic stability and a bank with a multi-billion won-but-unsettled claim against its regulator. In a March 14, 2011 memorandum, the bank’s executive vice-president said the bank has “been suffering from extraordinary panic caused by a well-orchestrated smear campaign” Add reckless and irresponsible statements made by a ranking government official whose position on systemic risks is at best lackadaisical thus perpetuating moral hazards within the banking system, the public is indeed in for a roller-coaster ride. The bank in question has been down this road before. On July 23, 1984, citing illiquidity, it declared a self-imposed holiday. Granting a Php 3 billion line, regulators placed the bank under conservatorship a week after. On January 25, 1985, following an examination report released two days earlier, the bank was ordered closed. Six years later, in 1991, the Supreme Court (SC) declared the closure illegal. The bank re-opened in 1994. The bank has been seeking Php 25 billion in financial assistance and regulatory relief for its closure. As part of its prayer, it filed a Php 18.8 billion damage suit against the Board of Liquidators of the regulators. Presently, based on Basel III’s capital adequacy requisites (CAR) and the BSP’s requirements for Tier I core capital, the subject thrift bank’s capital deficiency reached Php 1 billion. Albeit critical, the CAR imposition is not urgent enough to cause closures. Basel III’s deadline is 2015. While authorities say the bank continues to lose “from Php 800 to Php 900 million a year” and “has admitted its inability to generate enough income from normal banking operations”, its contingent multi-billion receivables from the damage suit, financial assistance and regulatory relief would alleviate CAR pressures several times over. Years after the SC ruling, a Makati court directed the authorities to release the financial assistance and regulatory relief to the bank without delay. That was two years ago in November 18, 2009. Early this week, the Court of Appeals stopped the implementation of that order. It is one thing for innocent depositors now denied their savings to have to bear the CAR deficiencies of a bank. It is quite another to have a stagflation-afflicted economy suffer severe collateral damages from a quarter of a century long dispute between government agencies and a private institution.