Loren: Could BSP Have Averted or Eased Philippine Bank Losses Due to Lehman?

MANILA, PHILIPPINES — Could a more watchful Bangko Sentral ng Pilipinas (BSP) have averted, or lessened the massive financial losses incurred by Philippine banks due to the collapse of US investment bank Lehman Brothers Holdings Inc.?

Sen. Loren Legarda raised this question shortly after US Federal Reserve Chairman Ben Bernanke said US regulators allowed Lehman to file for bankruptcy since many of its counterparties have had the chance to hedge their exposure in anticipation of the investment bank’s possible collapse.

Counterparties refer to the entities that had contracts or agreements with Lehman.

“In a recent testimony before the US Senate (Committee on Banking, Housing and Urban Affairs), Mr. Bernanke said US regulators bailed out American International Group Inc. and The Bear Stearns Companies Inc. because the collapse of the two firms would have posed grave ’systemic risks’ to the US and global financial markets,” Legarda said.

“However, in Lehman’s case, Mr. Bernanke said the US investment bank was left to fend for itself and file for bankruptcy because the firm’s counterparties supposedly already had enough time to prepare for its possible financial ruin,” Legarda pointed out.

“Does this mean more vigilant regulators could have forewarned local banks against Lehman’s possible collapse? That more circumspect supervisors could have pushed local banks early on to take extra precaution or hedges against the risks they faced with respect to their Lehman exposure?” Legarda asked.

She added: “Is it possible that a more mindful BSP could have cautioned (exposed) local banks in advance to try to find ways to minimize their risks, or to buy more insurance against a possible default?”

Legarda raised the questions a day before the start of a public hearing by the Philippine Senate Committee on Banks, Financial Institutions and Currencies on the impact of Lehman’s collapse on the local banking industry.

“We are asking these questions now not to find fault, or blame anyone, but simply to find ways to help local regulators and banks brace themselves ahead of more turmoil in the global financial markets,” stressed Legarda, chairperson of the Senate Economic Affairs Committee.

While the $386 million (P18.1 billion) in losses incurred by six Philippine lenders as a result of Lehman’s collapse seem minimal, Legarda nonetheless stressed that “any potential shocks, big or small, faced by the banking system, is always of serious concern to all of us.”

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