Complexity equals stringency

For rural banks that have diversified their revenue streams and have thus pegged themselves as a “complex” sort, the Bangko Sentral ng Pilipinas (BSP) has decided that some corporate screw-tightening is warranted.

This is a fair price to pay. After all, as rural banks evolve from simply engaging in basic deposit taking and lending activities to more complex ones such as large-scale remittance and cross-selling activities, their potential earnings grow, but so do the potential accompanying risks.

In both instances, the interests of the banks’ clients must be protected, particularly customers in rural communities as they are devoid of the financial safety nets during times of contingencies.

Also, the BSP just wants to protect rural banks from themselves. The industry should have no problem with this. The regulator wants to make sure that any new business venture does not end up in a financial misadventure.

This shift came about after the Monetary Board, the policy-making body of the BSP, formalized its requirements for rural and thrift banks to be classified as simple or complex, based on the complexity of their business. A change in the category will delve on the products and services they offer, their different kinds of customers and geographic reach.

Usually, rural and thrift banks are required to only put up an audit committee as long as they continue to offer a simple package of products and services. But as they level up their operations, these banks will now be obligated to form committees that will supervise certain components of their augmented businesses.

Banks classified as complex will be required to comply with higher corporate governance and compliance standards, including the establishment of governance committees.

In addition, complex rural and thrift banks will be required to appoint full-time compliance officers to ensure adherence by the banks to the requirements of the BSP.

On January 11 this year, the BSP issued Memorandum 2013-002, or the Guidelines in
Assessing the Quality of Corporate Governance in BSP-Supervised Financial Institutions (FIs).

These guidelines aim to provide a framework for assessing the quality of corporate governance in FIs.

“Good corporate governance is the foundation of safe and sound banking operations.

It embodies the principles of fairness, accountability and transparency,” the BSP said.

“This is critical particularly in the financial industry, where the public’s trust is paramount to sustain its resiliency,” it added.

It is better to err on the side of caution, particularly in an environment where public trust is regularly at stake. In this instance, compliance to sound corporate governance practices and standards is the ultimate precautionary measure.

Published in The Manila Times, 25 July 2013