[Article] Just how important are banks to the economy https://www.bpiexpressonline.

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[Article] Just how important are banks to the economy

In the recent Greek debt crisis earlier this year, banks played pivotal role in the paralysis of their economy. They
dominated headlines with closures or bank holidays, limits on withdrawals, and restrictions on fund transfers.
Pictures from Greece showed long lines of citizens waiting to withdraw money.

But while the crisis in Greece could not be solely blamed on the banks - the economy as a whole simply took on
too much debt - it served to highlight the fundamental importance of banks to our economy.

"Banks link and match the sources of funds (or the savers) and the users of the funds (investors)," said Jun Neri,
BPI Vice President and Lead Economist, in an interview.

"Without banks you would not be able to put these very important elements of the economy together."

The Greek crisis serves as an ominous example to any economy and the pitfalls of too much debt, but the
Philippines need not look elsewhere - a simple history lesson will do. Neri recalled the country's own version of
the Greek crisis:

"A similar situation happened to the Philippines in the 1980s. Our economic managers and leaders led us into a
situation wherein we had such a sizable amount of debt as an economy that we couldn't pay off our obligations.

"In the same way that Greece had to close banks, the Philippines already experienced that in the 1980s. In fact,
some private financial institutions had to be closed as a result of this loss of confidence."

And if the 1980s are too far back for memory, a similar but less severe decline in confidence in the financial
system happened again during the Asian Financial Crisis of the late 1990s. Neri said that the Philippines along
with other Asian economies got busy borrowing abroad once again to fund unsustainable credit booms ,
resulting in another loss of confidence in banks and leading to a bank run in some institutions — a scenario
where most depositors lose faith in their bank and decide to withdraw all at the same time. A number of
vulnerable banks couldn't find the liquid assets to pay off all the withdrawals, forcing closures.

In the Philippines, strong banks managed to survive, but there were also mergers and consolidations to make the
financial system stronger.

After learning from both crises episodes, both regulators and financial institutions themselves carried out
notable adjustments to the way they run things and Neri cites this to have led to dramatic improvements in
confidence in domestic banks and more importantly, brought out the much vibrant growth potential of the
economy.,

"With all of these negative events happening around us today - the Philippines would have experienced the
same set of problems in the 1990s if we hadn't strengthened our banking system, and in particular the banks
themselves, if they hadn't strengthened their own internal limits," said Neri.

What has changed?

"Essentially, unlike before, the Philippines borrowed too much and earned very little. Today, our borrowings as
an economy have become significantly lower compared to our ability to earn. The Philippines has been cited as
being one of the stronger Asian economies these days, aside from having one of the strongest financial systems
in the ASEAN region. This has been made possible by the reforms put in place in the late 1990s and the whole
previous decade and these past five years. Our central bank has done a very good job and local banks have been
very responsible."

To date, the Philippines is one of the fastest growing in the region, only one of two economies to post an
acceleration in 2Q from 1Q. Boasting a sizeable and stable current account surplus, the Philippines looks
poised to weather an impending reversal of the flow of funds possibly better than any of its ASEAN neighbors.

Click here to watch Jun Neri discuss the importance of the banking system to the Philippine economy.

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[Article] Just how important are banks to the economy https://www.bpiexpressonline.com/p/1/1007/money-insights-15

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