An analysis of the commercial banks' incentives and opportunities for risk-taking in the Philippines

• Main Author: Castell, Marvin Raymond de la Fuente
• Format: text
• Language: English
• Published: Animo Repository 2001
• Subjects: Incentives in industry; Banks and banking; Risk; Economic Theory
• Online Access: https://animorepository.dlsu.edu.ph/etd_masteral/2611
• Institution: De La Salle University

This study determines the impact of the major financial reforms affecting banks' charter value and regulatory supervision of banks on risk incentives and opportunities of commercial banks in the pre-deregulatory (1990-1994) and deregulatory (1995-1999) period.The sample of the study consists of 16 publicly listed Philippine Commercial Banks whose shares are being traded at the Philippine Stock Exchange (PSE). However, all commercial bank data are considered in computing for the Herfindahl-Hirschman Index (HHI) of the banking sector. For a bank to be included in the study, it must have at least nine annual data for the study. The data on the market share of commercial banks are gathered from the Bangko Sentral ng Pilipinas' (BSP) Statistical Center, BSP yearbook and Financial Statement of Commercial Banks. Commercial bank share prices, number of common stocks outstanding, value of preferred stock, short-term liabilities and assets, total assets, equity returns, operating leverage, capitalization ratio and value of total outstanding shares are obtained from the Philippine Stock Market and Securities and Exchange Commission offices.The HHI is used to determine whether the market structure of the Philippine banking system changed from 1990 to 1999. The charter value of the commercial banks is computed using the simple approximation of q suggested by Chung and Pruitt (1994). The ordinary least squares model developed by Galloway et al (1997) is used to determine the relationship between a bank's ex-ante risk-taking incentives and its ex-post risk-taking behavior. The study reveals that there is a deterioration in the banking industry's risk control system and its time-varying relation between a bank's risk-taking incentives and its ex-post risk-taking behavior over the period 1990-1999. This was seen during the deregulated period from 1995-1999. The deregulation of the banking industry also has not improved the auditing procedures of the Central Bank as shown in the number of special audit made during the pre-deregulated and deregulated period.Liberalization of the foreign bank entry in the Philippines in 1994 has increased bank competition and lowers the profit of banks. The decrease in profit erodes the charter value of banks and this distorts the risk taking incentives of the institutions by assuming more risk when given the opportunity in order to increase profit. However, more risk can prove to be detrimental to commercial banks as in the case of Urban Bank Corporation, which declared bank holiday. This can be linked to a very low charter value and ineffectiveness of regulators in monitoring the industry. Financial liberalization may seem to bring about positive results but it may not be true for developing countries such as the Philippines.