HOUSE Committee on Ways and Means Chairman and Albay 2nd District Representative Joey Sarte Salceda is pushing for a set of measures to protect the country’s banking system from “financial contagion” brought about by concerns among banks abroad, particularly with startup lender Silicon Valley Bank (SVB) and major European bank Credit Suisse.

“We can be proactive with protecting the banking sector by strengthening their balance sheets. I am confident our banks are strong, but just the same, we can act early,” Salceda said.

Among the measures, Salceda proposed the extension of the Financial Institutions Strategic Transfer (FIST) Act, which lapsed this year. FIST allowed banks to use special purpose vehicles called “FIST Corporations” to offload non-performing assets.

“Although our banks are strong, they remain sensitive to shocks. NPL (non-performing liability) and NPA (non-performing asset) ratios have not recovered to pre-pandemic levels, and capital adequacy ratios are in continuous decline, partly due to the rollback of regulatory reliefs, especially the inclusion of MSME (micro, small, and medium enterprise) loans in the computation of the CAR,” he said.

“In fact, the effect of FIST on banks only became evident in 2022. NPLs have begun to decline in magnitude only that year. At this rate, it would take the banking sector three more years to reduce NPLs to pre-pandemic magnitudes,” Salceda said.

Banking system non-performing assets were at 527.26 billion in 2022, down from 571.79 billion in 2021. Salceda estimates that the rate of asset disposition will take another three years to return the banking system’s asset quality to pre-pandemic levels.

“I am working with [Banks and Financial Intermediaries Committee] Chair Irwin Tieng on legislation to extend the FIST Act by another three years. I think we will be able to pass this on 3rd reading in the House when we return in May,” he said.

Salceda added that he requested the Bangko Sentral ng Pilipinas (BSP) to extend incentives and assistance to cooperative banks to encourage them to consolidate.

“I also requested the BSP to extend the same incentives granted to rural banks to the cooperative banking sector so that they can fortify their own balance sheets,” he said.

There are 147 rural and cooperative banks in the Philippines.

Salceda said they could consolidate into bigger banks to “both serve their constituents better and be more resilient to shocks in the global environment, especially now that interest rate expectations have become unanchored.”

Salceda also said the BSP should study extending the same incentives to the Thrift Banking sector, of which there are 36 banks.

‘On LBP, DBP merger’

Salceda also expressed openness to the proposed merger of the Land Bank of the Philippines (LBP) and the Development Bank of the Philippines (DBP) but said that the proposal needs legislation to be carried out.

“In principle, it’s a good idea to combine these banks to make them more resilient to global shocks. We just need to work out how they can continue to fulfill their respective mandates,” he said.

Asked about the need for legislation, Salceda replied, “Yes, you need a law for that since LBP has its own legislated charter with its own specific mandates. Currently, the legislative agenda is to revise the LBP charter to increase its capitalization and allow it to list.”

“I would ask the Executive to seriously study who will perform the original mandates of the respective banks once the merger takes place.

The condonation of ARB loans allows the Land Bank significant organizational flexibility, and having one bigger government depository is generally good for cash consolidation among the national government and LGUs (local government units), but there are also concerns that the mandate of the LBP to lend to farmers could get diluted by the merger. So, the economic managers need to present a strategy for performing those roles,” Salceda added.

“With that strategy complete and presented, I am sure the proposal will gain support in the House,” Salceda said.