BSP’S BETRAYAL OF PUBLIC TRUST DURING THE ASIAN CRISIS

For: Ms. Belinda Olivares-Cunanan
Members of media
Members of the academe
Members of the economics “profession”
BSP Governor and members of the BSP Monetary Board
Concerned Filipinos who care about what is happening
in our country and economy


Subject: BSP’S BETRAYAL OF PUBLIC TRUST DURING THE ASIAN CRISIS:
IT REFUSED TO ACT AGAINST ADVERTISED BANKING CARTEL THAT
HARMED THE PUBLIC AND BUSINESSES THAT TRANSACTED WITH BANKS



WHAT BSP LAMENTED IN ITS FEBRUARY 10, 1998 LETTER TO ME
AS UNTAMED “RECALCITRANTLY HIGH” INTEREST RATES APPEARED
THEREAFTER AS PRODUCT OF PRICE-FIXING BANKING CARTEL,
WHICH THE BANKERS ASSOCIATION OF THE PHILIPPINES (BAP)
INDIRECTLY ADMITTED THROUGH PROMINENT NEWSPAPER ADS OR
PUBLISHED ANNOUNCEMENTS ON FEBRUARY 20 AND MARCH 11, 1998--
BUT BSP REFUSED TO ACT ON THE BANKING CARTEL DESPITE
REPEATED REQUESTS TO IT


Was Bangko Sentral ng Pilipinas (BSP) captured by the regulated banking industry and was protecting banks rather than the public and businesses that transacted with the banks? This is a question--often echoed for some industries by Secretary Romy Neri when he was still BSP Monetary Board member--which is derived from economics textbooks [Paul Samuelson and William Nordhaus, Economics, 14th ed., (Metro Manila: McGraw-Hill, Inc., 1993), p. 340].



BSP LOOKED INTO A RELATIVELY MINOR AND UNPROVEN CARTEL in 2006

“The Bangko Sentral ng Pilipinas is looking into allegations of price-fixing in the secondary market trading of GOVERNMENT SECURITIES at the height of the recent turmoil involving unit investment trust funds (UITFs). Banking sources said the BSP’s attention was caught by some money market traders who were trying to “intervene” in the setting of MART1 bids to prevent the sharp decline of prices during the massive sell-off of UITFs last May.” (Doris C. Dumlao, “BSP probes price-fixing in trade of securities,” Philippine Daily Inquirer, July 7, 2006, p. B1).



BUT BSP REFUSED TO ACT AGAINST ITS SEEMINGLY CODDLED BANKS
WHEN THEY ADVERTISED THEIR OWN NATIONWIDE CARTEL IN 1998

As reported, BSP acted in 2006 on a relatively minor and hard-to-prove circumstantial case of PRICE-FIXING. Compare it to how BSP REFUSED TO ACT despite published comments and repeated letters to it on the following OPEN DECLARATION of CARTEL by the banking system when banks were charging up to more than 30% high interest rates in many parts of the country, especially in Visayas and Mindanao, which provoked militant rallies in Mindanao, to be followed up in Cebu, and I suppose in Luzon. The snowballing protest rallies, reported by media in first quarter 1998, might have sparked an uncontrollable conflagration of bank runs if banks would not tone down their price-fixing cartel.

In its 8.5 x 11.5-inch advertisement on page 25 of the February 20, 1998 issue of the Philippine Star, in response to mounting complaints against high interest rates that became the subject of Senate investigation at the time, the Bankers Association of the Philippines (BAP) announced, among other things, the following:

“…the banks AGREED to bring down the range of their LENDING RATES to commercial accounts…by ONE PERCENT a WEEK beginning February 10, 1998 (capitalization supplied for emphasis--MLT). The schedule is as follows:

• Week of Feb. 3 -- 26 percent prime up to 31 percent non-prime
• Week of Feb. 10 -- 25 percent prime up to 30 percent non-prime
• Week of Feb. 17 -- 24 percent prime up to 29 percent non-prime
• Week of Feb. 24 -- 23 percent prime up to 28 percent non-prime
• Week of March 3 -- 22 percent prime up to 27 percent non-prime
• Week of March 10 -- 21 percent prime up to 26 percent non-prime
• Onwards -- three percent to eight percent over 91-day T-bills.”


It is relevant to point out that as of February 1998 when the Bankers Association of the Philippines issued the foregoing published announcement, the banking system’s COMPOSITE COST OF FUNDS (weighted average cost to banks of funds lent out to borrowers) was at the rate of only 11.34 percent (per annum), down from its peak rate of 12.248 percent the previous month. This information came from BSP itself under the July 27, 1998 Report of BSP’s ad hoc Committee on Interest Rates.


In a practically full-page ad on page B6 of the March 11, 1998 issue of the Philippine Daily Inquirer, BAP issued for the second time “AN IMPORTANT MESSAGE FROM THE BANKERS ASSOCIATION OF THE PHILIPPINES.”

To quote its second paragraph: “On February 3, 1998, responding to public and regulatory pressure to reduce loan rates, the BAP member banks reached a gentlemen’s AGREEMENT to COLLECTIVELY bring down their LENDING RATES by instituting a ONE PERCENT a week INTEREST RATE REDUCTION from the prevailing range of lending rates then of 26% prime – 31% non-prime (capitalization supplied for emphasis--MLT). The following is the schedule:”


NOTES:

---The published or advertised schedule presented the following: for weeks beginning on February 3 up to March 17 1998 onwards, shown were three columns of interest rates: prime rate, average rates, and non-prime (maximum lending) rate. The non-prime rate started at 31% on February 3, ended at 26% on March 10, and was set at 8% over 91-day Treasury bills from March 17 onwards. The “average rates (what many borrowers would pay)” started at the high of 30% on February 3, tapered down to 25% by March 10, and was pegged at 4% to 7% over 91-day Treasury bill rates from March 17 onwrds.

---If the BAP-admitted AVERAGE lending rate to MANY BORROWERS of 30% as of February 3 is compared to the foregoing 12.248 PERCENT peak COMPOSITE COST OF BANK FUNDS as of January 1998, BANK SPREAD was at the atrociously and way OUT-OF-LINE highest bank margin in the region of roughly 18 PERCENT. Of course, it was up to as much as 26 PERCENT when bank lending rates peaked at as much as 38% or more BEFORE February 3, 1998.



"BANK AD PROVES BANKS ARE A CARTEL"—
NOT I BUT AN INQUIRER COLUMNIST FIRST SAID IT,
I MERELY FOLLOWED IT UP REPEATEDLY WITH BSP--TO NO AVAIL

Inquirer columnist Honesto General wrote: “For years, a lot of people strongly suspected that the banks were a cartel. Just as strongly, the banks have denied it. Now, the banks themselves have bared the smoking gun…. A cartel takes various forms… (and) the most common form is the price-fixing cartel where the members agree to fix minimum prices for their products or services…. In a newspaper ad ran last March 11…the Bankers Association of the Philippines (BAP) announced that on February 3, 1998…the BAP member-banks reached a gentlemen’s agreement to collectively bring down their lending rates by instituting a one percent a week interest rate reduction…. (Deogracias N. Vistan, “An Important Message from the Bankers Association of the Philippines,” Phil. Daily Inquirer, March 11, 1998, p. B6). There’s the smoking gun…. Here’s another smoking gun. The ad also says, ‘On Tuesday, March 17, 1998, we shall start the 3
percent to 8 percent spread or margin over the week’s 91-day Treasury bills rate….’ Had this ad appeared in the (United) States, the dreaded Anti-Trust Division of the justice department would have packed every last member of the association to the nearest jail….” (Honesto C. General, “BAP ad proves banks are a cartel,” Phil. Daily Inquirer, March 20, 1998, p. B5).

What has BSP done to columnist Honesto General’s charge of cartel? Nothing. While Mr. General stated that had the advertisement, which was a clear admission of price fixing, appeared in the US, “the dreaded Anti-Trust Division of the justice department would have packed every last member of the association to the nearest jail,” BSP did not even bother to comment on this charge in my two years of repeated referral to it. It eventually answered indirectly the accusation by saying, in its October 25, 2000 letter to me, that the calculated low HERFINDAHL INDICES for the local banking industry showed that there was enough competition in the market that precluded collusion by market players.

BSP’S REPLY WAS RIDICULOUS. It is like saying, when report of an actual prison escape took place, that the report is not true because the prisoners are in caged prison cells and with jail guards. Favorable Herfindahl indices are merely suggestive indicators of lack of cartel. However, these are not straitjackets that will prevent banks from conniving and going into cartel, so if there are ACTUAL EVIDENCES of cartel it means there is cartel.

While BSP refused to perform its duty against published ADMISSION of local BANKING CARTEL, let us look at how the US responded to mere indications of cartel. On the basis alone of circumstantial allegations that Philippine telecom companies were acting as cartel at the expense of US telecom firms, the US State Department issued subpoenas to 30 Filipino telecom executives attending a conference in Honolulu. It would not allow them to leave the US until they answered questions and testified in a grand jury. (Tina Arceo-Dumlao, et. al., “US bars RP executives….” Philippine Daily Inquirer, Jan. 16, 2004, pp. A1, A2)


As this email is similarly issued to the BSP Governor and BSP Monetary Board members, I hereby respectfully request them to please explain to the public (including my humble self) why BSP looked into the relatively MINOR apparent SECURITIES CARTEL in 2006, yet it did not lift a finger at all at the much bigger Bankers Association of the Philippines’ self-confessed PRICE-FIXING CARTEL in 1998, which put BSP into the embarrassing position of being INUTILE in bringing down HIGH INTEREST RATES despite the concessions it already extended to banks, as lamented in BSP’s February 10, 1998 letter to me. BSP’s letter is shown in full on pages 200 to 201 of my published book Puzzlers/Economic Sting. It is subject of my 2nd email dated October 2, 2008 on the subject: ON BANGKO SENTRAL’S FAILURE TO TAME “RECALCITRANTLY HIGH” INTEREST RATES….”



MARCELO L. TECSON

San Miguel, Bulacan
October 8, 2008

Cc through separate emails:
Selected executive & legislative government officials,
Selected BSP officials,
Selected members of media and academe,
professional & think-tank organizations,
civil society groups, concerned citizens, etc.