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On March 17 2011, Banco Filipino was closed by regulatory authorities and placed
under receivership (2nd closure of its 47-year history).
The bank was closed because it was insolvent. Its loan portfolios NPL ratio stood at
91%. Over 50% of its loan portfolio was made to insiders (Directors, Officers,
Stockholders and their Related Interests -DOSRI loans). Interest Expense exceeded
Interest Income by 1 Billion annually.
The Bank was already in this condition way back 2002 up to 2004. On December 4,
2002, the BSP extended the bank a 180-day special liquidity facility of 3.5 Billion.
of which the bank availed of 1.34 Billion as of December 2002. By March 2004,
86% of its total loan portfolio was already non-performing and 30% to 40% was
classified as DOSRI.
From 2007 to 2010, loses exceeded its capital base of 1.6 Billion (last reported in
March 2004) every year. It is 4.2 Billion as of December 31, 2007, 2.37 Billion in
December 31, 2008, 2.6 Billion in December 31, 2009 and 2.68 Billion in
September 30, 2010. In early 2009, the bank needed BSP's help again. It was
extended Overnight Clearing Lines of a cumulative of 4.1 Billion from January 30 to
March 26, 2009.
Ponzi Scheme created cumulative losses from 2007 to 2010 amounted to 11.86
Billion wiping out the 1.6 Billion capital base several times over. Cash flows was
funded by 8.5 Billion in deposit growth since March 2004 and 4.5 Billion in past
due emergency loans from the BSP. BSP had a comptroller in place since the 2002
emergency loans. It had to know what was going on. Inaction of the BSP and PDIC to
close Banco Filipino earlier means consent.
Inaction by regulators to close Banco Filipino earlier has proven to be very costly.
Deposit base at closure was 15 billion or around 8.5 billion bigger than 6.5
billion deposit base in 2004. Uninsured deposits at closure was estimated at 5.6
Billion or 86% of 2004 total deposit base. PDIC could have saved a substantial
portion of 9.4 Billion it has to pay out to depositors from its insurance fund.
Regulatory inaction persisted despite repeated complaints of minority shareholders.
In 2003, BSP was asked by minority shareholders to investigate the bank for
fraudulent loans to 6 dummy corporations. Minority shareholders not only sued
Banco Filipino board and management, they also sued both the BSP and the
members of the Monetary Board to replace current board and management and
place the bank under receiverships.
The basic corporate governance practices were ignored. The bank did not have any
audited financial statements since 2002. The bank held no formal board meetings
since 2002. Minority shareholders with a major stake in the bank had no access to
information regarding the bank's financial conditions or operations. This happen
despite Banco Filipino being a bank in the highly regulated financial sector, being a
publicly listed company, and having the presence of a BSP-installed comptroller as a
condition of BSP's emergency in 2002.

Regulators are at fault why Banco Filipino failed. Bangko Sentral ng Pilipinas, which
provides supervisory oversight over the banking sector. Philippine Deposit Insurance
Corporation, which monitors conditions of the banks, steps in when a bank is placed
in receivership, and provides deposit insurance when a bank fails. Securities and
Exchange Commission, which promotes investor protection and adherence to
internationally accepted corporate governance practices. Philippine Stock Exchange,
a self-regulatory organization which disciplines erring trading participants and listed
On June 19, 2009, the Philippine Supreme Court ruled that all bank fraud cases are
the exclusive jurisdiction of the BSP. Minority Shareholders have no recourse to the
Regional Trial Courts even if BSP does not act on their complaint. This Ruling have
severe diminution of investor protections, particularly for foreign investors who lack
political connections of their local partners. It may dissuade further investment into
the Philippine banking sector.
Banco Filipino failed because of these possible reasons. First, is possible
reluctance of the Regulators. There is plausible threat of punitive litigation at an
institutional and personal level. In 1991, the Supreme Court declared Banco
Filipino's 1985 closure by the Central Bank as arbitrary and with grave abuse of
discretion. Banco Filipino filed an 18.8 Billion damage suit against the Central
Bank, the estate of the late Central Bank Governor Jose "Jobo" Fernandez, and 3
other Central Bank officers. Second, Media and Regulators characterized the Banco
Filipino case as a family Squabble. It was characterized as an inheritance dispute
among members of the Aguirre clan, who have controlling stake in the bank. They
ignored the serious possibility of bank fraud, the loss of additional depositor,
taxpayer and investor money, as well as the unnecessary and additional depletion
of PDIC's insurance fraud. Third, Erosion of confidence in the banking system. Banco
Filipino fosters a "control fraud" environment wherein a bank owner/executive uses
the bank he controls as a "weapon" to commit fraud. A determined and criminally
minded bank owner can steal from his own bank and get away with it. The fraud
exists and go unreported for years on end. Regulators are unable to stop fraud.
Fraud stops only when bank collapses. Bank fraud cases are rarely prosecuted.
Fourth, the long prosecution process that leads to a "Culture of Impunity". Just like
Orient Bank, failed 1998, prosecution of owner Jose Go allowed in November 2009,
case still pending. Urban Bank, failed in 2000, charged in November 2000, cases
still pending. As a consequence, the cycle of fraud still continues. In November
2010, the BSP stated that it was monitoring large commercial banks for possible
DOSRI violations. In this kind of environment where punishment is rare how can the
public put their trust and confidence in the Philippine Banking System. In this
environment where regulation is poor and ineffective and fraudulent banking
practices continue with impunity the best way to rob a bank in the Philippines is
might to have one.