Banking Structural Reforms

On July 18th 2014, Philippines President Benigno Aquino III signed into law a landmark Bill allowing foreign banks to acquire 100% stake in domestic Philippine banks besides setting up fully owned banking subsidiaries. Likewise, limits to the number of foreign banks operating in the country were eliminated – an important step towards implementing the ASEAN Banking Integration Framework (ABIF). The latest piece of banking legislation is rather rare and unprecedented amongst emerging economies and reflects the Philippines Government’s commitment to hard and enduring reforms – a prerequisite for sustaining the economy’s ongoing favorable growth momentum. Philippines’ open-up of its banking sector is due in part to the economy’s exceptional performance in the second half of last year despite the global financial turmoil that was triggered by Fed’s QE tapering expectations. Against this backdrop, we evaluate the implications of the latest banking sector liberalization measures on the Philippines economy, on potential foreign bank entrants and on local domestic banks. We think that the medium to long term benefits to - 1) the Philippines economy from a vibrant banking sector, 2) foreign lenders, looking expand their footprints in fast growing emerging economies, and 3) the domestic banks, looking to catapult into the big league, - far outweigh the short term painful adjustments that may take place as the Philippines economy and its lightweight banking sector is exposed to foreign banking heavyweights. Thus, we believe that the Government’s bold banking reforms are a win-win situation for all its stakeholders over the long haul.

On January 29th, the European Commission (EC) released its proposal on structural reform that would impose new constraints on the structure of European banks. The proposal aims at ensuring the harmonization between the divergent national initiatives in Europe. However, the EC goes beyond many of the European national legislations and opts for a mix solution that establishes both (i) a prohibition of proprietary trading such as the US Volcker Rule and (ii) a mechanism to require the separation of trading activities including market making such as the UK Banking Reform. This note provides a description of the proposal, a comparison with the other undertaken initiatives and an assessment