MANILA, January 30, 2006
 (MALAYA) By MAX ESTAYO - The Bangko Sentral ng Pilipinas said that in three years weak banks will have been absorbed or merged due to stricter banking regulations and increased competition.

The International Monetary Fund has said that the Philippine banking system is extremely fragmented with assets lodged principally on few major banks.

The local banking system is the smallest in Asia. Its total assets of $72 billion as of end-2004 was even smaller than Singaporeís second largest bank, United Overseas Bank, whose assets stood at $83 billion.

BSP governor Amando Tetangco Jr. said the small banks, especially those with small capital and inefficient management, will have to make a "voluntary exit" as they canít cope with the changes.

"We envision a banking landscape dominated by a handful of major banks complemented by many smaller banks that serve various well-defined market niches," Tetangco said in an address to bank marketing officers recently.

The central bank is encouraging mergers and acquisitions in the industry to form stronger and well-capitalized banks that can compete with the world and withstand shocks similar to the Asian financial crisis.

The BSP prefers having "5 or 6 strong banks" than the current 42 with weak capitalization and unguided administration.

Tetangco said consolidation in the industry will accelerate in the next three years.

This will be driven by a "stronger regulatory framework" and the "increasingly stronger competition by existing foreign banks and new foreign investors coming in to existing banks."

"Consolidation will move at a faster pace also due to the rigorous technical demands posed by modern banking and finance standards," Tetangco added.

The industry is in the midst of compliance with the new international accounting standards while preparation for Basel 2, which takes effect in 2007, is underway.

Tetangco said "more meaningful" changes can be expected this year as the industry adopts to international best practices.

"Youíll be seeing more binding standards on connected party transactions come into force after a two-year transition period," Tetangco said.

"There will be more standards and better enforcement of risk disclosure and client suitability to better protect customers," he said.

In addition, Tetangco said the BSP will enforce a "stricter fit and proper rule" to ensure officials and managers of banks and related institutions possess the integrity and competence required of the job.

The BSP is currently coordinating moves with the Financial Sector Forum, which is made up of the various regulators, for better sharing of information on bank officers.

"The general information that is submitted to the Securities and Exchange Commission will be made available to other members of the forum. Weíll have a uniform database for the directors and officers," Tetangco said.

"Weíll also get additional information from other sources. This is more organized in a way that it will give ease of use to other members," he said.

The BSP recently issued new regulations enhancing corporate governance, risk management and capital adequacy of banks.

On the new financial reporting package, Tetangco said the BSP will be able to look at the banking institutions and their entire allied interests.

"Consolidated supervision will allow us to see how the different entities are related. Previously, you canít see that, you donít see the whole group because the reporting comes in separate packages," Tetangco said.

Chief News Editor: Sol Jose Vanzi

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