Moral hazard, which refers to a situation where a party lacks the incentive to guard against financial risk due to protection from consequences, is highly undesirable in the world of finance and investments. Economic policymakers and financial institution regulators actively avoid and even prohibit moral hazard as it encourages reckless money management, which historically leads to negative outcomes both locally and internationally. Unfortunately, the Bangko Sentral ng Pilipinas (BSP) is endangering itself of creating moral hazard by considering the possibility of granting regulatory relief to Land Bank of the Philippines and Development Bank of the Philippines (DBP), the two largest banks in the country, after they transferred significant amounts of their financial resources to the Maharlika Investment Fund.
According to BSP Governor Eli Remolona Jr., the central bank may temporarily exempt Landbank and DBP from stringent capitalization requirements imposed on Philippine banks as a result of their combined investment of P75 billion in the Marcos administration’s newly established project. These capitalization rules are in place to ensure that financial institutions, especially those that accept deposits from the public and provide loans, are resilient in the face of sudden shocks in financial markets.
Our central bank chief, who has extensive experience working at the New York Federal Reserve, should be well aware of the importance of avoiding moral hazard situations. The regulator of the largest banks in the United States is known for its vigilance in preventing moral hazard and has successfully dealt with crises caused by risky behavior. Instead of treating Landbank and DBP like vulnerable entities, they should be expected to act responsibly as mature financial institutions and manage their operations without relying on government support. This is particularly crucial for Landbank, which could potentially become the largest financial institution in the Philippines if the merger with DBP proceeds. It would be unfair for Landbank to stand at the pinnacle solely because it was exempted from the rules that apply to its competitors. Furthermore, we must question whether we want the savings of millions of Filipinos, investments of overseas Filipino workers, and funds of small entrepreneurs to be managed by bankers who have become complacent due to the shielding from market realities.
Additionally, we must consider the nature of Landbank and DBP’s involvement in the Maharlika fund. They did not lend money to the fund; instead, they made investments. Anyone with even basic knowledge of finance knows that investments are riskier than loans since loans must be repaid while failed investments can often be written off. Remolona stated that both Landbank and DBP remain liquid and well-capitalized even after their significant contributions to Maharlika. They continue to comply with the minimum capitalization ratios, which is positive since Philippine banks are currently overcapitalized according to international and local standards. This means that our financial institutions are hoarding unproductive capital instead of investing in small businesses and entrepreneurs, which could stimulate economic growth. If Landbank and DBP continue to meet the regulatory requirements, there is no need to grant them relief. However, if their resources fall below the mandated threshold due to their investments in Maharlika, it should be addressed by requiring them to raise their capital to the required level instead of exempting them from the requirements.
To be fair, Remolona did not explicitly state that the central bank would grant regulatory exemptions to Landbank and DBP. He merely mentioned that they are considering the possibility. It would be wise to carefully consider and promptly dismiss this idea since it may appear beneficial in the short term but poses long-term risks. The safety and stability of our financial system depend on all stakeholders, including the regulator, being vigilant and attentive to prevent malpractices and well-intentioned policies that can lead to adverse outcomes and government bailouts.
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