The Philippine Banking System The Philippine banking system is compellation of several different types of banks.

The General Banking Law of 2000 was passed in order to regulate both the operations and organization of banks in the Philippines. It also split the banks up into seven different categories. The categories include universal banks, commercial banks, thrift and savings banks, rural banks, cooperative banks, Islamic banks, and other institutions as determined by the Monetary Board of the Bangko Sentral ng Pilipinas. As of 2004, there were nine hundred seven banks total within these categories Bangko Sentral ng Pilipinas The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Philippines. It is located in Manila. BSP was created on July 3, 1993 and took over for the Central Bank of the Philippines. With its creation, BSP was given the power to maintain price stability as well as fiscal and administrative autonomy Universal Banks Universal banks are the most powerful, and have the broadest scope of services available. In addition to the authority to carry out services rendered by the six other categories of banks, they have the ability to practice the functions of an investment house. This includes underwriting. Universal banks can also invest in non-allied activities. In addition, they are allowed to own one hundred percent of equity associated with thrift banks, rural banks, and allied activities Thrift and Savings Banks Thrift banks focus their services on smaller enterprises and individuals. There are a variety of banks that fall under this category, including, savings and mortgage banks and private development banks. Their main function is to accrue savings from customers and invest them. Additionally, they have the power to accept foreign currencies, issue domestic letters of credit, along with several other functions Rural Banks and Cooperative Banks Both rural and cooperative banks hold the same authorities. These banks are most popular in rural areas. The purpose of these banks is to assist local farmers and merchants. They are authorized to provide loans, take savings deposits, offer negotiable order of withdrawal accounts, and act as a trustee over farmer and merchant estates. The only difference between rural and cooperative banks is ownership. Rural

banks are privately owned, while cooperative banks are owned by cooperatives. Banking Sector in Philippines A look back at the history of Philippines banking reveals a developmental role assigned to the banking system and a common pattern of frailty in the face of adverse shocks. Ceilings on interest rates, interest rate subsidies, and directed lending were intended to enable the banking system to promote economic growth by being the main source of development finance. While the system itself has displayed a flexibility and willingness to undertake reforms, these actions were often in response to, rather than preventive measures against, crises. Genuine reforms have usually come after, not before, crises and in the transition from crisis to stability (and one regulatory regime to a stronger one), the restoration of confidence in financial markets was agonizingly slow. The ensuing contraction in credit and intermediation has usually dragged down the rest of the economy. The occurrence of the Asian financial crisis has led to a rethinking of how best to strengthen banking systems so as to prevent banking crises, or to reduce banking system vulnerability to crises. There is apparently a greater appreciation for the idea that regulation and supervision must now increasingly focus on the less traditional and conventional methods. The original impetus for reform in the 1950s and1960s was not the need to respond to crises, but the rapid growth and increasing fragmentation of the banking system. The increasing diversity of financial institutions and services challenged the ability of the central bank to adequately regulate them. The undeveloped capital adequacy standards for solvency were relevant, but required very simple and rudimentary implementation mechanisms; liquidity was managed by imposing the reserve requirement; and supervision and examination requirements were addressed through simple reporting systems. In 19721973, a Joint International Monetary Fund-Central Bank (IMF-CB) Banking Survey Commission recommended that several amendments be made to the General Banking Act and the Central Bank Act. These amendments were meant to realign regulation by function rather than by type of bank. consolidate central bank authority over banks. Redefine the central banks responsibilities to exclude the promotion of economic growth and impose restrictions on entry into the banking system, with concomitant efforts to improve the efficiency of existing banks.

Along with the increasing dynamism of the financial sector and the need for more responsive financial structures to address financing needs, the moves toward rationalizing the central banks supervision over the banking sector led to increasing pressure to adopt more sophisticated prudential regulatory mechanisms and structures. While banking institutions remained the dominant financial intermediaries, nonbank private and quasi-public financial institutions emerged, constituting an alternative means of intermediation. In 2004, the banking sector grew by 8.3%, its fastest growth rate in the last seven years. The sectors growth explains most of the impressive growth of the financial services sector of 8.4%in 2004. In the past two years, banks expanded by an average of 7.5%, a recovery from its sluggish average growth rate of 1.7% between1998 and 2002 after the Asian financial crisis. Despite its growth in recent years, the financial health of the banking sector remains volatile due to the high levels of nonperforming assets in the balance sheets of banks, which have resulted in a slowdown in bank lending. Further, the profitability of Philippines banks remains inferior and lags behind other Asian banks. Considering the foregoing, it may be argued therefore that while the sector posted positive growth rates, much remains to be done to strengthen the banks. 2 Economic Activity and Banking Industry Structure in the Philippine Regions To assess the link between banking industry structure and economic activity in the Philippine regions, we use macroeconomic and regional banking data. T he study period is from 1993 to 2005. Our dataset could not start prior to 1993 as the regions were organized differently then. 2.1 Regional economic activity The Philippines is currently divided into seventeen g eographic regions. For this study however, we refer to only sixteen regions, having integrated Region 4A , Calabarzon and Region 4B, Mimaropa (Region 4 was divided into two separate jurisdictions only in 2 002). Per capita real gross regional domestic product (Per Capita Re al GDP) is used to rank the regions over the period covered by this study (Table 1). The ranking r emains relatively constant whether the 1993 or the 2005 values are used as a reference. In view of the heterogeneity of the stages of economic development, we classify the regions into three groups: less developed, intermediate developed and developed regions. We use the decomposition by economic sector of the real gross regional domestic product to

analyze differences in the regional economic activity. This dec omposition enables us to highlight for each region which economic sector provides the higher contri bution to the per capita real domestic product. Per Capita Real GDP, Agri, Ind and Serv refer respectively to per capita real regional domestic product, per capita real regional added value in the agriculture, industry and services sectors. 2.2 Regional banking industry structure Bank regional data were provided by the Central Bank of the Philippines. The Central Bank aggregates data at the provincial, regional and national levels. While commercial banks and thrift banks operate nationally, rural banks operate mainly at a regi onal level. The formal banking sector is dominated by commercial banks which, over the 19932005 period, represent 56.8% of the total number of bank offices in the Philippines. The thrift banks represent 17.8% of the total number of bank offices and the r emaining 25.4% of the total banking offices operating in the country are regional rural and cooper ative banks.