RP banks have small exposure in Lehman
Des Ferriols
Philippine Star
The exposure of the local banking sector to collapsed US investment bank Lehman Brothers has been estimated at around P15 billion, equivalent to less than one percent of the industry’s total asset base.
Amid the panic that gripped the global financial markets following the collapse of Lehman Brothers, Philippine officials said depositors had no cause to worry because local banks are strong enough to absorb possible losses.
Speaking at the sidelines of yesterday’s mid-year economic briefing, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said the BSP had conducted a survey of Philippine banks to determine exactly how big the problem could be.
While there were large banks with exposure to Lehman and it’s related interests, Tetangco said the amount was small in relation to the industry’s P5-trillion asset base and P500-billion capital base.
According to Tetangco, the exposure of local banks to Lehman Brothers was equivalent to only about 0.3 percent of the industry’s total asset base, equivalent to about P15 billion.
“More importantly, this amount is spread across several banks,” Tetangco said. “Consumers should not panic because our banks are in a good position to absorb this easily,” he added.
Thus far, three major banks have disclosed having set aside over P5-billion worth of funds as loss provisioning when their Lehman holdings are marked down to reflect the decline in value.
Banco de Oro and Metrobank said they were setting aside provisions totaling P4.4 billion to cover their exposure to Lehman Brothers while the Rizal Commercial Banking Corp. (RCBC) also said that it has set aside P980 million to cover the banks’ exposure to the failed investment bank.
The estimate reflects exposures to Lehman Brothers although bank exposures to other troubled financial institutions such as Merrill Lynch were “relatively small.”
Tetangco said the BSP was also not as concerned over Merrill Lynch since it has already found safe harbor when it was taken over by the Bank of America (BA).
At the very worst, the BSP estimated that banks would only suffer some decline in income with very little impact on their capital base even if their Lehman investments were declared completely worthless.
“We do not see this as a solvency issue, just a little erosion in the income of banks,” said BSP Deputy Governor Nestor Espenilla who is head of the central bank’s Bank Supervision and Examination Sector
Espenilla also explained that the financial system had learned from the 1997 crisis when banks faced a serious capital crunch that made it difficult to weather the financial crisis.
“We have been telling banks to build up their capital base precisely so that they could survive this kind of event,” Espenilla said. “First of all, not all banks are exposed to this and those that do have exposure are big banks that can easily handle it.”
Espenilla added that even in the worst case scenario where their exposure to Lehman would be completely uncollectible, he said banks would only suffer a slight decline in income.
“It would not seriously affect their capital base,” he said. “But then, remember that these exposures are not likely to be uncollectible. At most, banks would probably have to absorb some discount but they would not be completely worthless.”
Espenilla said the bulk of these exposures were in the form of collateralized loans with government bonds as the underlying asset.
“So there is also an additional layer that would mitigate the risk in that the underlying assets of these instruments are basically doing okay,” he said.
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