Bangko Sentral Review 2009 1 uthors A Andy Mullineux at: [email protected]. at: [email protected]. Thea Josefina Natalia W. Santos W. Santos Thea Josefina Natalia

has published extensively on monetary policy and has published extensively regulatory and and supervisory in developed reform emerging market economies. More recently, he has economies. More recently, emerging market

Business School at the University of Birmingham. He Business School at the University Non- Financial Institutions. Since 2003, she has examiner for the then Department for of Thriftexaminer and Finance Research Group and the Finance Group of the and the Finance Group Group Finance Research been working on financial exclusion, access to finance, access exclusion, on financial been working micro and small enterprise financing and the corporate financing and the corporate and small enterprise micro been with the Office of Supervisory Policy Development, governance of banks. Andy Mullineux can be contacted of banks. Andy Mullineux can be contacted governance business cycles as well as on financial restructuring and as well business cycles is Professor of Global Finance and Director of the Global of Global Finance and Director is Professor joined the Bangko Sentral ng Pilipinas in 1998 as a bank in 1998 Sentral ng Pilipinas joined the Bangko the policy arm of the Supervision and Examination Sector. the policy arm of the Supervision and Examination Sector. Department and Finance in the Birmingham of Accounting

in the the in of Financial Conglomerates Financial of The Supervision Supervision The 2 Bangko Sentral Review 2009 The global financial landscape has undergone tremendous undergone has landscape financial global The Introduction 1 traditional approach. responsibility Supervisory is shared by three supervisory regulatory framework for financialservices inthe country is still founded onthe introduction of universal banking in the early 1980s (Milo, 2002). However, the a the with of result the in as liberalization environment, the particularly regulatory landscape financial domestic the dominate conglomerates Financial The Philippines has similarexperienced developments in its financial system. assessment. risk institution-focused an just than rather risks system-wide account into takes which framework, discussions about integrating the macroprudential approach in the supervisory systemically important financial institutions inthe recent financialcrisis led to regulation of all financial firms in a numberMoreover, of countries. the role of agencies of establishment that supervisory are responsible for the prudential Union), and even changing the institutional structure of supervision through of the enabling ratification laws (such as groups, the Financial Directive Conglomerates in financial the European for regulations supplemental of institution the as such challenges, new these to responses different been have There conglomerates. financial of oversight the separately–to overseen is financial activity each approach–where supervisory traditional the of applicability the on questions raised have risks. These system. financial the new of stability the on brings structures financial Ultimately, the complex failure of a large these conglomerate may have of a negative implication presence The many countries” (Van Lelyveld and Schilder, 2002) regulation,andlawkeptseparate, byin been many yearsfor a “group of firms that engages in financialactivities that have is conglomerate financial a defined, Loosely conglomerates. outcome of these developments is liberalization.the emergence of financial regulatory and international as innovation, well technological as of pace rapid the were change of drivers primary The decades. three last the in changes financial industry.services the in players major as considered now are and services, of breadth a offer assets, of amountconsiderable a hold to come have conglomerates these time, Through interest. or management, ownership, common by connected are firms

A moreformal definition iscited inthesection onFinancialConglomerates in the Philippines. reflecting theposition oftheEuropean Commission. paper are the sole responsibility of the authors and can under no circumstances be regarded as higher education Europeinstitutions in anddeveloping economiesAsia.Thecontentsin of this of the European Commission that seeks to promote regional and multilateral networking among System edu.ph/~cba/asialink) Financial the of Soundness and Limoges Safetyof University the (Asialink/ASIE/B7-3010/2005/105-139),by coordinated Finance, and Banking on Euro-Phil- Network project: development ippines resource human K ASIA-LIN the for prepared was paper This and updated in light of recent developments.K is a ASIA-LIN Programme 1 where the (www.upd. O ne Bangko Sentral Review 2009 3

- - - 4 ver ver O Rizal Commercial Banking Banking Commercial Rizal 2 of the investment house’s receivables at receivables house’s investment the of n the other thehand, sharing of supervisory O

3 othari, othari, 2007). By allowing banks to sell their , it gave banks ad K n one hand, there may be companies within a group that the production or distribution of a financial service that is O ditional liquidity and freed up capital, which they could use to undertake other activities. More activities. undertake other to use could they which capital, up freed and liquidity ditional in the on different banks roles had more took opportunities income when they earn fee to over, securitization process (e.g., of servicer, provider credit enhancement or liquidity support). With seen. be to remains viability future its 2008, of turmoil financial the of heart the at securitization sectors. with other traditionally associated products ucts that emulate The other type of integration occurs at the product level, where one financial sector offers prod sector financial one where level, product the occursat integration of type other The “The Closure of Urban Bank”, BSP Media Release, August 28, 2003 August Bank”, BSP Media Release, “The Closure of Urban Securitization was instrumental in reshaping the role of financial intermediaries in the last two decades (Fabozzi and

Corporation (RCBC), one of the country’stheCorporation of oneuniversal banks, sufferedalso (RCBC), from company, pre-need affiliated an in troubles to due risks reputational increased Pacific Plans,Inc. need may groups financial for oversight the that indicate circumstances These regulatory relevant the tightercoordination among achieve to improved be to practicesexistinginternationalthe of presents paperagencies.review This a as well as Philippine enhanced regulationsan of that design possible relate the to on insights the provides supervision also It of conglomerates. financial supervisory framework financial for conglomerates. 4 2 3 Merton (1995) offers a theoretical underpinning for the emergence of financial financial of emergence the for underpinning theoretical a offers (1995) Merton economic central a fulfill intermediaries financial that states He conglomerates. function, i.e., the allocation and deployment of economic resources. 1. Financial Conglomerates, Their Rewards and Risks and Rewards Their Conglomerates, 1. Financial agencies, with the supervision of financial groups largelyaddressed by the Philippine central bank’s supervisory mandate over banks and quasi-banks. This arrangement has been cited as inadequate in addressing the risks of conglomerates. notare effectively supervised. responsibilities among multiple agencies may result in confusion as to which confusionto responsibilitiesresultas in agencies may multiple among agency is ultimately responsiblethe for oversight of a particular firm. An often-cited case is that of Urbanclosed in 2000 Bank, due to liquidity problems.a It was commerciallater determined that bank bank that was funds amounting to P4.6 billion were used to support withdrawals and pre- terminations of placements made by clients of the trust department done was transfer of The Inc. Investment, Urbancorp affiliate, itshouse investment Bank Urban by purchase the through face value. The receivables were classified as “substandard,” “doubtful,” or collection. for prospects poor had they that implying An offshoot of these structural changes is “financialintegration,” whichcharacterized is by sectors–banking, financial major three the of one withassociated traditionally securities and insurance–by an entity from another sector. The delivery of varied services by financial conglomerates is a type offirm-level integration that can be deemed as the groundmiddle between three all services having or alliances forming theoreticalconstruct) a and entity(largely one offeredby joint ventures with entities from different sectors 2000). (Skipper, time, the manner by which the function is carried out and efficiency. thatperformpursuitthetheenhancing ofthe in Among change itmay institutions well-observed drivers of this structural change are developments in finance theory, financialinnovation, technologicaladvancements and liberalization both within and across borders (Merton, 1995; Allen and Santomero, 1999; Borioand Filosa,1994). and 4 Bangko Sentral Review 2009 of of management of other corporations. company’s business is limited to the ownership of stock in and the supervision in a which holding a holding is structure, company third model The services. firm and ownsseparately-capitalized subsidiaries engaged in different The parent financiala as serves company insurance an or activities. bank a where is model second securities and banking commercial both undertakes bank universal The services. financial owning other and bank insurance universal offering a subsidiaries has which model, banking universal the is First Skipper (2000) outlines three possible structures for financial conglomerates. 5 development the with eroded margins their see may lending corporate from and Lelyveld (Van Schilder, 2002). discriminating Banks that and have traditionally obtained most of their sophisticated revenues have increasingly investors as become important is This revenues. enhances Conglomeration 1.1.3 Revenue enhancement States. United the in operations non-bank and bank in differences document that portfolio through risk of reduction Bank TheNational Australia a (1996)studies numberofcites diversification. the possible make groups Financial diversification 1.1.2 Portfolio (Skipper, functions 2000). administrative of centralization the from savings realize also may conglomerate The channels. distribution and on departments, research such as informational capital, resources leverage existing likewise can activities new undertaking Firms lines. business different across securities costs both operational reducing for thereby used activities, banking be and to management risk for systems technology information for probable highly it makes set-up this the since achieved likewise possible makes it because of are scope of Economies over volume large a outputs. of costs of distribution reduction realization cost the and scale facilitates of economies conglomerates financial of size sheer The 1.1.1 Economies of and scale scope in financialsystems. dominant forces tobe and why continue they A number of reasons have been cited for the creation of financial conglomerates Conglomeration from Benefits 1.1 company model is associated with the United States and Japan. States United the with associated is model company The 2002). (Half, holding the while Europe continental in common is model banking institutions universal financial for framework regulatory existing and laws, history, country’s a as such factors by dictated be will jurisdiction they tend to offset each other and thus lessen the risks for the entire group. entire for the risks the and lessen thus other each tooffset tend they correlated, highly not are lines business various from revenues that Given

company). to the proportion of the subsidiary’s stock that it owns. (http://www.answers.com/topic/holding- company can reap the benefits of a subsidiary’s goodwill and reputation while limiting its liability investment.holding of A minimum severala controlof with concentrating companies of means a provides company holding A them. over controlexercise to companies other more or one in stock voting enough owns that corporation a is company holding a of definition generalized A O ne finding is that insurance has less volatile returns than banking. than returns volatile less has insurance that is finding ne 5 The dominant structure in a particular Bangko Sentral Review 2009 5 At the same time, time, same the At

7 that may lower search costs for clients. for costssearch lower may that

6 The financial conglomerate, however, may impute this implicit service in the price it passes on to on passes it price the in service implicit this impute may however, conglomerate, financial The clients. Also as a “financial or supermarket” “financial mall.” This is also to related cross-selling, i.e., a the of car insurance from avail a bank can immediately out a car from who takes borrower same institution. ne problem that is attributed to the layered structures of conglomerates

there may be a psychological benefit derived from the familiarity of dealing with only one institution and their personnel (Skipper 2000, Santos 1998), unless customers prefer the expertise of specialized institutions. 7 6 is the occurrence of multiple or excessive gearing. This refers to a situation risks thesupport to enough not is group the by held capital actual the wherein being run by the entities that comprise it. Multiple gearing is present when a parent raises funds by issuing capital instruments, invests these funds to downstreams turn, the subsidiary, in subsidiary, theand samea its fundsto own subsidiaries and affiliates.Multiple gearing canalso occur when funds are upstreamed from the subsidiary to the parent company. When viewed separately, it may seem that the parent company and all recycledbeing merely fact,are funds theadequately in capitalizedthe when, are subsidiaries from one level of the conglomerate to another. There is greater risk investment of the parent if in its subsidiaries is sourcedthe from debt rather than equity issues. Given the size of some financial conglomeratesand the wide reach of their activities, multiple gearing and inadequate capital may have negative impact on financial stability when the conglomeratesuffers large losses (Tripartite 1995). Group, O 1.2.1 Multiple gearing Multiple 1.2.1 Notwithstanding the benefits that can be obtained from the delivery of services of delivery the from obtained be can that benefits the Notwithstanding to posesrisksconglomerates also of operation thegroup-wide structure, a by the groups themselves, their stakeholders, the system. and financial 1.2 Risks of Conglomeration Financial Financial conglomerates confer benefits functions to consumersservices who require and multiple products of menu wide a offering institution An services. one-stopshop a as 1.1.4 One-stop services1.1.4 multiple for shop of capital markets that provide alternative and cheaper sources of funding to funding sourcescheaperof and alternativeprovide capitalthatmarkets of their corporate clients. Banks may also be playing a diminished role in the payments system owing to the widespread use of credit cards and money market accounts that allow investors the flexibility to withdraw money with lessdifficulty.ancillary in businesses engage Banks, therefore, such trust as and fiduciary services and brokerage torevenues conglomerationcontributesto that way Anotherrecoup 1999). Santomero, lost revenues (Allen and is through cross-selling. Branches can be used more intensively to facilitate the sale of products of other entities in the group, e.g., insurance products being sold banks. in 6 Bangko Sentral Review 2009 who do not enjoy any ties with the conglomerate (Santos, 1998). (Santos, conglomerate the with enjoy not do who any ties and industrial firms aremore favorable than those which areoffered to clients Another example is when terms offered to related entities such as commercial 1.2.2 9 8 in generation. terms of particularly comprehensive view report of operations, a producing in involved costs monitoring significant be may Moreover, there whole and develop appropriate a policiesas group to the manage of these risk risks the (Skipper, assess to 2000). able be therefore, must, conglomerate financial a of Managers importance. of degrees and magnitudes different in but risks of types same the give create may they or risk of types businesses different to rise Different units. its among coordination greater requires demand management. on Ensuring its that the group is functioning optimally higher a places conglomerate ina andactivities functions of multiplicity The of functions Multiplicity 1.2.4 (1995) Group Tripartite The group. the in entities other affects group the within entity one of problems the when happens which contagion, The interrelationship between firms in aconglomerate makesit susceptible to Contagion 1.2.3 trading. securities in or markets capital in involved is that group the information. in unit privileged of misuse the in Information through obtained a relationship can be creditor-debtor by used a arise also interest of Conflicts even are they not. when insurance are bydeposit covered most are investments they their that expect even they that bank).times, (e.g.,a At familiarwith entity the with dealing are they that belief the in firms unknowingly, be induced to purchase products or obtain with services related may, they or products investment mispriced or risky offered be may clients such, market.” “captive As a represents already base client The clients. with of inalso lead interest to dealings Financial multiple conflicts conglomerates institutions in order to protect their own operations (Tripartite Group, 1995). (Tripartite own their operations toprotect in order institutions is exacerbated when the stronger areentities compelled to “help” the weaker andamong The situation borrowings, guarantees, others. shared resources, of one entity is transmitted to other entities because of actual linkages such as hand, contagion attributed to intra-group exposures occurs when the weakness institutions. stand-alone to compared risk reputational levelof entity. This implies that firmswithin a financialconglomerate may run a higher thefragile with association its of because difficulties vulnerable to same the perceives that the relatively healthy member(s) of the conglomerate would be by affected the adverse condition of a related entity. It arises when the public Psychological contagion occurs when one entity with no inherent weaknesses is and of (i)contagion (ii)exposures. contagion: types psychological intra-group

sion. Supervi Banking on Committee Basel the of instance the at 1993 in formedinitiative sectoral cross- a Regulators, Insurance and Securities Bank, of TripartiteGroup the as known Formally offered by aninstitutionmay alsowidenthescopefor conflicts ofinterest (Claessens,2002). nesses are conducted in separate of departments one firm. However, a wider range of products busi- two when i.e., organization, single a within occur also can interest of conflict of type This Conflicts of interestConflicts O n the other other the n 9 cites two two cites 8 -

Bangko Sentral Review 2009 7 LR O 10 LR) facilityLR) may O LR functions and guaranty schemes, the framework for prudential O AIG was bailed out by the US Federal Reserve in order to protect not only the insurance industry insurance the only not protect to order in Reserve Federal US the by out bailed was AIG banking of counterparty the subsidiarywas failed AIG’s that given industry, banking the also but institutions.

supervision needs to be altered to ensure that the monitored. additional being risks are that structures are conglomerate and institutions large in present Initially, proposals for more intense oversight over groups were introduced. This increases the cost of supervision and requires a significantamount of coordination between and among the supervisors of all regulated entities. It could also necessitate an integrated supervisor to oversee the activities of a conglomerate as a whole. Additional prudential safeguards by way of regulations will have to be instituted, including mechanisms for compliance (Claessens, 2002). entities unregulated importancemonitoring crisis,therecent of the of light In and activities within groups has been underscored (FSA 2009). Discussions have also focused on incorporatingsupervision, which takes into account thesystem-wide risksmacroprudential rather than those of individual approachinstitutions only. This may to again involve changes in regulatory structures and the use of new supervisory tools. This is also likely to impact interconnectedon large and firmsand widen the scope regulation.of Such transformations in prudential supervisorythe expansion frameworks,of the scope of particularlyregulation, can cause boundary problems to seenis cost addedand an is Regulation 2009). al., et (Brunnermeier develop as a disadvantage by regulated firms. This can lead toregulatory arbitrage businessin activities increasingly engage lessfirms are regulated. when that 10 In order to prevent such bail-outs and hence guard the against L the abuse of functionis, effect, in extended non-bankto institutions, those even that are, not regulated. by law, If the bank or regulated entity is not saved and liquidation procedures are undertaken, the failure of a conglomerate would also have implications on the coverage of deposit insurance or similar guaranty funds. The sub-prime crisis showed that even if a bank is not part of a group, it is possible for the government to step in to prevent a firm that has heavyexposures to banks another in financial sector. a failure to prevent and from failing 1.2.5 Moral hazard in public safety1.2.5 public in Moral hazard nets From the supervisory perspective, an important consideration agglomeration is of how risks the in a financialauthorities group failing, impacts of danger onin theare institutions extent financial large of When public net. safety preserveto order stability in the aid their tocome or save to obliged feel may of the financial system, otherwise known as the “too big to fail”(Claessens, argument 2002). With recent developments,extended to institutions thethat are argument“too interconnected” has (with other been financial firms), as their failure haslikewise been proven to causeinstability. Large firmsare often members of groups orform groups themselves(FSA, 2009). apply to “toolikely “too interconnected”and the As big”are such, arguments to financial conglomerates too. If a bank is present in the group, the lender of last resort (L be extended to the ailing bank to preserve its role in the payments system and to avert a system-wide panic. If the difficulties of the conglomeratedid L the group, the within firm another from itselfbut bank the from stem not 8 Bangko Sentral Review 2009 discipline over firms as they rely more on regulators tosafeguard theirPrudential interests. regulations may also diminish the public’s out. incentive them bail to to exert market ready stands government the that knowing activities risky on take to induced be supervision-can to subject directly not are that those It can also deepen moral hazard problems. Firms in a conglomerate-including 13 12 11 is BSP activities. allied in the engaged affiliates and Act, Bank Central New the and their subsidiaries of quasi-banks, banks, for the supervision responsible of provision relevant the Under issuances. all of compendium the regulatory as serves which including amendments, are codified intothe Manual of Regulations for Banks, Board, the BSP’s governingMonetary body. circulars andThese memoranda, specific guidelines in the form of circulars and memoranda duly govern approved that The law of is implemented by through their the issuance operations. the BSP by the parameters broad the defines and institutions financial other and banks of authorities and powers the out Banking sets hand, General other the The on Law, supervisor. sector banking and authority monetary central country’s the ng as Pilipinas (BSP) Sentral Bangko the of andpowers 2000 of Law (Republic Banking Act No. General 8791). the The New and Central 7653)Bank Act definesNo. the responsibilities Act (Republic Act Bank Banking regulations are derived from relevant laws, principally the New Central regulations. and insurance banking in recognized are groups financial However, certain conglomerates. financial no law is formally there defines or regulation that InPhilippines, the 1998).(Macdonald, therefore and activities have a risk profilethat is similar to banks are referredto as “bankinggroups” banking-related in only engaged are 1995). that Group, Groups (Tripartite insurance” and securities, banking, in as such consist of providing significant services in at leasttwo different financial sectors under companies common exclusive whose control or predominant activities of group is “any conglomerate financial a of definition accepted commonly A 2. Financial Conglomerates in the Philippines For this purpose, a subsidiary is definedas acorporation or firm more than fifty both–as a subsidiary or affiliatethat would qualifyas a financial conglomerate. It would then be the groups that have either a securities or not an insurance do necessarily constitute financialfirm–orgroups conglomerates based onthe the However, earlier definition. groups. financial delineates effect in powers

Section 25 in addition to (Tripartitein additionto financialservices Group 1995). services industrial and commercial offers which conglomerate,”“mixed a to contrast in is This products, marketing of agricultural products, leasing. ofagricultural cal andpesticides and farm equipmenttrucking andtransportation distribution, companies engaged in warehousing and post-harvest facilities, fertilizer and agricultural chemi- tral Depository, Fixed Income Exchange, health maintenance organizations; for TBs/rural banks: building and development, bureaus, service the Philippine Clearing House Corp, Philippine Cen- home in engaged companiesagencies/brokerages, insurance services, computer of providers themselves, funds mutual the not but funds mutual of management the in engaged primarily companies UBs/commercialcompanies, box warehousing/storage/safetydeposit forare: (TBs) banks enterprises banks/thrift Non-allied (UBs). banks universal for allowed undertakings non-allied and allowedallied the tolimited investments are whose companies holding dealers, brokers/ exchange foreign brokers/dealers, securities companies, card credit companies, ing includeinsur financ- houses, investment companies, alliedleasing enterprises corporations, capital venture companies, ance Financial non-financial. or financial be may activities Allied 12 , 13 This boundary of supervisory supervisory of boundary This 11 -

Bangko Sentral Review 2009 9

16 , 15 46,130 46,130 145,147 145,147 247,432 247,432 701,185 701,185 231,556 231,556 306,153 306,153 621,329 621,329 869,501 869,501 166,305 166,305 155,964 155,964 526,790 235,802 Total Assets Assets Total (Php Millions) September 2010 September Type of Group Type Banking Group Banking Group Banking Group Table 1 Table Financial Conglomerate Financial Conglomerate Financial Conglomerate Financial Conglomerate Financial Conglomerate Financial Conglomerate Financial Conglomerate Financial Conglomerate Financial Conglomerate

Banking Institution Financial Groups with Banks as Parent Companies * 14 website ro Unibank, Inc Unibank, Banco de Oro Bank of the Philippine Islands LandBank of the Philippines Bank & Trust Metropolitan Company Allied Banking Corporation Allied Banking Corporation Bank Corporation Asia United China Banking Corporation Philippine National Bank Rizal Commercial Banking Rizal Commercial Corporation Security Bank Corporation Union Bank of the Philippines Union Bank Coconut Planters United * Information on bank activities based on latest Annual Reports; asset figures from the BSP Annual Reports; figures from asset on bank activities based on latest * Information wnership of, control or power to vote up to 10 percent or more of the outstanding voting stock of the entity, or vice-versa; Interlocking directorship or independent directors as definedexistingunder regulations; officership, except in cases Common involvingstockholders owning 10 percent or more of the outstanding voting stock of eachintermediary financial and the entity; to bank the to power granting arrangement any contractorManagement direct or cause the direction of management and policies of the entity, or vice-versa; and Permanent proxy or voting trusts in favor of the bank percentconstituting or 10 more of the outstanding voting stock of the entity, or versa. vice- companies companies may be identified through lateral relationships (commonownership) and not only through vertical relationships (direct or indirect ownership). Moreover, thrift and may rural also banks be part of financial groups, either as parents or affiliates. theyHowever, smaller in size. are much 192.12, Manual of Regulations for Banks for Manual of Regulations Subsection X192.12, Foreign Foreign banks are usually supervised on a group-wide basis by the on the supervision of domestic institutions. This section focuses country. regulators in their home Strictly following the definition in the New Central BankAct, a financialgroup of bank-related

16 14 15 Among the banking institutions in the Philippines, the largest are the universal the are largest the Philippines, the in institutions banking the Among to allowed prudentiallimitations,Subject to banks.are commercial they and effect,institutions in financial financial form and, other equity ofthe in invest groups. 1 Table shows the list of domestic banks which own financialallied subsidiaries affiliates.and The alsotable identifies thegroup that thebanks belong to as either groups banking or financial conglomerates. percent (50%) of the outstanding voting stock of which is directly or indirectlydirectlyor is which outstandingstockof thevoting of percent(50%) owned, controlled or held with the power to vote by a bank. An affiliate, on the other hand, is defined asan entitylinked directly orindirectly to a bank by means of: a) o b) c) d) e) 10 Bangko Sentral Review 2009 person refers to holding companyCode Insurance systems, the which regulations, are insurance groups under comprised recognized of groups a controllingfor As 19 18 17 companies. pre-need and associations, mutual benefit brokers, insurance companies, and reinsurance insurance supervises IC the Finally, companies. investment and dealers/brokers, securities companies, financing houses, investment oversees SEC insurer. The deposit the as role its with inaccordance banks (PDIC) monitors Corporation Insurance Deposit stock savings and loan associations; and pawnshops. In addition, the Philippine financial allied andsubsidiaries affiliates (exceptinsurancecompanies); non- the Insurance Commission (IC). three The BSP banks, supervises quasi-banks, their by supervised is Philippines agencies, the namely, in the BSP, the industry Securities and Exchange services Commission (SEC) financial and The Industry Services Financial Philippine the of Supervision 2.1 to P6.236 billion at the end of September 2010. September of end billion the at P6.236 to financialgroup that does not include abank. 1) Figure (See companies of ATR the be would system company holding a of example An banking under laws. groupfinancial recognized a to equivalent is system the bank, a includes it if However, conglomerate. financial a constitutes it business, securities-related or banking undertakes company. a when exist voting percent power over an to has or forty insurance indirectly directly person presumed is Control controls. person controlling the that

From thegroup’s SECForm 17-Q entity orany (Section282ofP.D. combinationoftheforegoing actinginconcert.” No.1460) A person topertains “an individual, firm,partnership, association, corporation, trust, any similar Corporation. (Theother majorshareholderisATR Holdings.) of 44.63% of Bank, May of subsidiary a Bhd, Sdn Credit Aseam by purchase the with eventually change may This 17 Source: Company disclosures *Not acomprehensive representation;for illustrative purposes only (the “holding company”), the insurance company, and other entities (the “holding company, insurance company”), the entities and other ATR K O ne ne will a note if a that firmthat includes holding company system imEng Capital Partners, Inc. Partners, Capital imEng Sovereign Global Resources, Ltd. Resources, Global Sovereign ATR K ATR K ATR K ATR K 100% im Eng Securities, Inc. Securities, Eng im imEng AMG Holdings AMG imEng Tullett Prebon Tullett BVI-registered imEng Asset Management, Inc. Management, Asset imEng imEng Insurance Brokers, Inc. Brokers, Insurance imEng im Eng Holdings, one of the major shareholders of ATRof shareholders major the of one Holdings, Eng Kim 82.69% 100% 100% 49% Structure oftheATR KimEngGroup 78.49% 100% . It has held the distinction of being the largest largest the being of distinction the held has It ATR K AsianLife & General Assurance Assurance &General AsianLife imEng Financial Corporation Financial imEng (22% indirectly-owned) (22% AsianLife Financial Assurance Assurance Financial AsianLife Corporation 100% Corporation Figure 1 Figure Asia Asset Management Inc. Management Asset Asia Corporation 70% 18 100% Its consolidated assets amount to effective ownership of ATR ATR K of ownership effective to refer boxes inside Percentage Note: 19 imEng Financial Corp. Financial imEng

ATR K imEng Land, Inc. Land, imEng 100% K imEng Financial KimEng im Eng Group Eng im - Bangko Sentral Review 2009 11 as it allows the allows itas 20 Banks must subject – These are capped at 10 percent – Credit accommodations to one person/related – –Banks’ investments that accord them control over the the over control them accord that investments –Banks’ These should not exceed 15 percent of the total loan portfolioloan totalor the ofpercent 15 exceed not Theseshould – exposures that exceed five percent monitoring of and inform netthe BSP worthwhen these to may potentially more impact on intensive capital adequacy. Single borrower’s limit Equity investments Equity subscribed total of percentages specific at capped are company investee voting stockand of the investee. Large exposures and credit concentrations group should generally be less percent than 25 of net worth. Loans to directors, officers and related interest, commonly known as DOSRI percent100 of net worth, is whichever lower. Loans to subsidiaries and affiliates of net worth for each subsidiary/affiliate, five percent of networth net of percent worth20 and subsidiary/affiliate each for to loansunsecured thefor total loans subsidiaries to all affiliates. and Section 25 of R.A. 7653 (The New Central Bank Act) Central Bank Act) (The New Section 25 of R.A. 7653 c) BSP to examine not only a bank or quasi-bank but also supervisory its BSP’s subsidiaries the and of organization The activities. allied in engaged affiliates function supports this approach as all related companies are also overseen by the same that unit supervises a particular or quasi-bank. bank the Moreover, BSP regularly conducts simultaneous on-site examinations of subsidiariesaffiliates,their and and banks cut-off common using dates. This possibleitassess into makes to takingarrangement bank, a conditionofthe account the activities that are being conducted in entities that, while legally separate from the bank, contribute to risks that should be controlled by the verifytransactionsinter-companyto easier isimportantly, ititself.More bank certain a To double-gearing. to contribute could that funds of transfers as such addressedactivities may sincebeing thatalso isarbitrageregulatory degree, during uncovered be subsidiaries can allied financial passedto beenon have on-site examinations. Subsidiaries and affiliates to beexamined are chosen on the basis of their importance, the type of activities and transactions they undertake, and the extent of the impact that such transactions or activities on the parent bank. have may subject also are affiliates and subsidiaries financial non-bank and Quasi-banks to a number of BSP regulations. For monitoring purposes, they are required data including reports information, corporate and financial monthly submit to addition, they In others. among basis, annual officers directors and an on on parent their to apply that regulations governance corporate to subject also are banks/quasi-banks such as those pertaining to disqualification procedures for directors and officers,requirements for the engagement of services of independent auditors, regulations and on credit card operations. BSP regulations likewise promote the construction of firewalls between the related and bank firms rulesthrough following the on: a) b) d) e) prudential thatregulationthe BSP key A consolidatedhasa implementedon basis for financial groups is the risk-based capitaladequacy requirement. It 20 The supervisory ambit of the BSP, as defined in its charter, provides the basis the provides charter, its in defined as BSP, the supervisoryofThe ambit implementationtheconsolidated offor supervision banking 12 Bangko Sentral Review 2009 operations of the well-functioning units in the group. in the units well-functioning the of operations the to over spill not do entities unregulated in failures that ensure to place in have to safeguards important is it Thus, avoiding to contagion. operations unauthorized to end an putting regulated from span to concerns regulatory the connected entities, are firms such When in engage transactions. that firms unauthorized stand-alone unlicensed of cases certainly are There The problem of unregulated entities is not specificto financialconglomerates. results. optimal The BSP’s recourse is through the regulated bank, which may not always yield aia regimes. capital of these regulated entities, given that these institutions are subject to distinct subsidiary broker/dealers and insurance companies and any capital shortfalls in investments of amountfull the availablecapital from deduct to opted has BSP the requirements, capital of calculation 2007. July the in In framework 2 Basel the implementing began and 2001 in principles Basel the adopted 24 23 22 21 that their operations would have material effect on the insurer. of any of the firms in aholding company system if there aregrounds to believe examination the direct may IC the of Moreover, group. commissioner the the controlled firmsif these aredeemed relevantto the condition of the insurer in its of anyand company holding the about information produce to compelled be can insurer controlled The “controlled” such. as as classified are IC they once the institutions with register to required are companies insurance Code, Insurance the in defined systems company holding the to regard With be important considering that they are able to direct the actions of a firm. a of actions the direct to able are they that considering important be from constrained obtaining its also information of is from BSP parent The operations companies or affiliates. entities, business which and may normal subsidiaries sometimes as unregulated off these passing by unauthorized transactions in engage indirectly may firm regulated A warranted. if even firms, these of operations the of examination permits or affiliates non-allied there is no provision in existing laws that allows it to acquire information from activities), allied in supervise engaged are that affiliates and to over examinesubsidiaries and it allow law banking supervision the and BSP’s charter of its (i.e., groups coverage financial extensive seemingly the with Even rules. capital respective their with compliance subsidiary’s insurance or regulator,primary i.e., the SEC or the as IC, to of the the broker/dealerextent jurisdictions. As noted earlier, financial groups that are subjected to to subjected are that groups financial earlier, noted As supervisory in overlaps some jurisdictions. to led have entities supervised the govern that regulations the and agencies regulatory the of mandates existing The group. recognized a within entities non-regulated of activities the addressing to regulations comes it when banking vis-a-vis accommodating more is Code Insurance the

Special purpose entities (SPEs) present a special case of unregulated entities. Banks were Banks entities. unregulated of case special a present (SPEs) entities purpose Special SeeFSA2009 IC inOctober 2006. in November 2004, while risk-based capital rules for insurance companies were released by the The risk-based capital adequacy framework for broker/dealers was formally adopted by the SEC

ness plan,theSPEitselfisnot subjectto auditby eithertheBSPor theSEC. busi- SPE’s the approvingfor responsibility has that SEC the is it While SPEs. these of percent five to up own only can banks books, their from assets transferred of derecognition for qualify build–up of assetsnon-performing (NPAs) during the Asian financial crisis. However, in order to the given sheets balance their up cleaning in aid to SPEs own their up set to incentives given Section 288ofP.D. 1460 21 However, this approach requires coordination with the the with coordination requires approach this However, 23 24 In this regard, 22

Bangko Sentral Review 2009 13 U was was U O A) with the PDIC to share share to PDIC the with A) O A. The FSF is essentially a O A on information exchange, which O As were likewise signed to harmonize harmonize to signed likewise were As O In 2009, M 2009, In

27 25 26 Us) regarding the institutions that they both supervise. The latest M latest The supervise. both they that institutions the regarding Us) O BSP Media Release, 20 April 2006 Media Release, 20 BSP BSP Media Releases, 1 February 2005 and 19 August 2005 Media Releases, 1 February 2005 and 19 BSP SEC Annual Report 2004 SEC

26 27 25 3. Concluding Remarks and Recommendations and Remarks Concluding 3. The recent crisis has shown that supervisory attention should be devoted to regulators that such groups, financial over supervision consolidated improving of the risks aware are lie. they of the may wherever group, in 2004, which defines the responsibilities of each regulator and responsibilitiesand establishes defines 2004,the which regulator in each of dually-regulated of examinations joint of conduct the for procedures operational entities. In addition, both agencies agreed reporting requirements. to harmonize and streamline In In July 2004, the regulatory agencies and PDIC formed the Financial Sector Forum (FSF) via the signing of a master M The BSP also signed a memorandum of agreement (M agreement of memorandum a signed also BSP The information and relevant data (Bautista, 2004). Work has also progressed on agreements with the PDIC and the ICexaminations. for the conduct of coordinated consolidatedinstancessome thesupervision in to BSP equivalenttheare by agencies two The Code. Insurance the in recognized systems whole. company a holding as group the of operations the over concerns similar have may involved subsidiaries are that institutions non-bank subjects likewise set-up current The SEC The SEC. the and BSP the by supervision dual to quasi-banks and banks of houses,investmentcompanies of financing primary theregulator as remains and securities Thesebroker/dealers. entities are typically included in bank- led financial groups. Recognizing that undertaking of memoranda coordination signed SEC the and BSP the is functions, supervisory needed to discharge their (M respective the accreditationsupervisedtheof processauditorsexternalinstitutions for and the processfor evaluation flow the of mergersand consolidations of banks. The foregoing agreements are testament to the value of the FSF in making processes more efficient and consistent acrosssupervised regulatory agenciesinstitutions. and However, agencies supervision on member conglomerates anfinancial the putsof all that approach or a framework a common platformfor has yet to be put place. in the cooperative effort without any legal mandate, lest integrated supervisoryit body, which be is not yet construedsupported by the current legal as an four the of headsthe are FSFthe membersof regulatoryTheframework. and member agencies: the The BSP Governor, Governor. BSPthe the by SEC chaired Chairperson,is It the President. PDIC Insurancethe and Commissioner, FSF essentially aims to improve the supervision of financial conglomerates and address the occurrence of firms operatingin “regulatory greyareas.” It has working groups for three core areas: supervision policy, reporting and information exchange, and consumer protection (FSF Secretariat, In April 2006, 2004).FSF members signed a M lays down the procedures for sharing relevant information among the four agencies. The framework covers a broad spectrum of data and information submittedassuchgenerated reports; and reputationinformationon agents; issuances.regulatory and 14 Bangko Sentral Review 2009 group-wide assessment. However, assessment. the appointment of group-wide a coordinator and the can be if extended to any,activities, coordinating supervisory such as making be agreed upon by all supervisors concerned. Moreover, the role of coordinator 2). the The choice of of a coordinator, including its roles and should responsibilities, structure the on depend conglomerate would and the information coordinator requirements a of of other supervisors (see designation Table The identified. be can group for the acoordinator purpose, this aregular to commit should For exchange regulators information. of the then maytaken up wellbe as (Joint Forum, 2001). case, the is transactions this If intra-group and concentrations exposures, Risk companies. insurance and broker/dealers subsidiary mayof its information need on position the capital BSP the requirements, adequacy capital banks’ of process verification its of of information sharing regarding the operations of the financialgroups. As part O clients. and non-mainstream markets niche reach to able are they as play to role developmental a havemay institutions identificationof smaller groups should notbe ignored. These smaller financial organized framework for coordination could be forestablished this purpose. different regulatory agencies. agencies. regulatory different among the efforts coordination from intensifying gained much to be is There unregulated entities. especially empowerexplicitly it to obtain information on related to institutions the bank, would that charter BSP the to amendment an includes This under jurisdiction. groups its financial the oversee to ability BSP’s the strengthen further to scope still is there Nonetheless, 2002). (Milo ambit regulatory BSP’s the structures that can be described as financialconglomerates–already fall under The largest financial groups in the Philippines–including most of the institutional 30 29 28 important systemically deemed are that organizations to given be should Priority banks. big include that those from apart exist that structures not examined by the BSP. Moreover, there may be a number of conglomerate and insurance companies companies that are pre-need subsidiaries and include affiliates of not banks as does these are this institutions, these supervised its defined, been has all of list a publishes BSP the Although conglomerates identified. be should conglomerates financial of concept the After considered. be can Code Insurance in the system as delineated in banking laws and regulations, as well as the holding company definitiongiven formal earlier,the point, the groupingstarting a of As a bank point. reference and common its subsidiariesa have and to affiliates order in (BSP, agencies byall regulatory the informally adopted and SEC,PDIC)be IC, by which agency, and to what are these extent regulated. The could definition regulated, are institutions which identifying in aid would This context. local of a in the financial the concept conglomerate by begin establishing This can has has a member-bank, information supervisory could be shared by the BSP. that system company holding particular a on information need would IC the if instance, For realm. regulatory its outside fall that group same the within entities about concerns to regard with supervisor another of expertise and The conceptofasystemicallyimportantgroupwouldalsoneed tobedefined. Thisborrows heavily from theapproach oftheFinancialConglomerates Directive of theEU. nce nce the havegroups thecan regulators onidentified, been agree thescope This presupposesthattherearenolegalimpedimentstoinformation sharing. O ne agency can benefit from the resources resources the from benefit can agency ne 30 but the the but 28 An An 29 Bangko Sentral Review 2009 15 Table 2 Table Identifying a Coordinator verlaps in terms of regulation of activities encompass encompass activities of regulation of terms in verlaps O f course, agreement any pertaining to shared supervisory O verlaps in terms of institutions would refer to one institution O The supervisor of the parent holding company if it is supervised. The supervisor of the parent holding company if The supervisor of the dominant entity in the group (in terms of assets, revenue or solvency requirements) even if the parent holding company is a supervised institution. The supervisor of the dominant entity in the group (in terms of assets, revenue or solvency requirements) even if the parent company is an unsupervised holding company. The supervisor of the parent entity if it is insurance company. a bank, securities firm or The supervisor of the dominant entity in the group (in terms of assets, revenue or solvency requirements) even if the parent company supervised institution. is a • • • The coordinator can be – • • Source: The Coordinator Paper of the Joint Forum, 1999 products or services with the same nature and underlying risks being offeredbeing risks underlying and servicesproductsnature sameor the with by different institutions that fall under the jurisdiction of separate regulatory agencies. Coordination supervisory among agencies is crucial addressing in regulatory overlaps. The overlaps can be viewed in termsinstitutions. or of activities regulation of particular manner manner in which its tasks extended are carriedbeing is out net should safety not the result that in an impression excessive the give nor burden regulatory to certain institutions. The coordinator is not intended to replace the role of the original supervisor 2001). Forum, (Joint Any forthcoming initiativesunderstanding among all the regulators concerned. coordination canSuch an of agreement can subject the be be to are thethat conglomerates subjectfinancial the reference ofregulator. each aof responsibilities memorandum the and areas, supervisory ofrelevant the effort, Given that this would be a multilateral effort, it would seem that the appropriatemost venue for discussion to andapproach multilateral a structuringimplementation agencies, relevant the concerns it Since would be the FSF. useful be may It agenda. its of part be can conglomerates financial overseeing to designate working groups consisting of personnel of member agencies to operationalize the plans. It is recognized that these working groups would operate in a spirit of cooperation as the FSF does. It thenwould be useful to completion. for timeline a including activities, their guide to list task clear a set order in members FSF to basis regular a on report to made be also should They to promote accountability. being subjected to the supervision of two agencies, following legal framework. the existing responsibilities should be within legal multilateral arrangementsboundaries. should also be consulted. Moreover, it would Existingbe bilateral or useful to determine if thereenforcement are proper any impediments through to addressed the be implementation can of these that so provisions current ifand, necessary, legislative action. 16 Bangko Sentral Review 2009 Skipper, Harold D. Jr. (2000). “Financial Services Integration Worldwide: Promises and Pitfalls,” and Pitfalls,” Promises Worldwide: Integration D.Services Jr. Harold Skipper, (2000). “Financial Working BIS Review,” A Business: Securities the in Banks “Commercial (1998). 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Directorate Bank, Central Netherlands 49, Supervision Series Research Supervision,” and No. 15, Centre for Central Banking Studies, Bank of England. of Bank Studies, Banking Central for Centre 15, No. DC. Washington 2006, June 6-7 on Structures Needs Country with Supervisory Aligning seminar Bank World a at presented Paper Issues.” Basic Settlements. mimeo. Seminar Finance International School Law Pilipinas. 09/02. Paper Discussion http://ssrn.com/abstract=997079 07-07. No. SSRN: Paper at Working Available ICF O Bank 3096. No. Paper Research Policy Bank World Supervision,” Sector Financial on Roundtable Conglomerates. Netherlands-U.S. Services Joint the at presented Countries” Developing Draft). Conference (Preliminary 11 Report Geneva Hyun of Regulation,” Shin (2009). Financial Principles Fundamental “The 23. No. Paper Working (BIS) Settlements International for Bank Implications,” 1. 2No. Vol. Forum, PDIC 99-30-B. 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