From Where We Sit

Bigger, stronger, more trustworthy banks

Third Librea

I attended a seminar last week where one of the topics was about integrity. The speaker presented a slide showing a public survey that placed bankers among the bottom ranks in terms of perceived integrity, just above politicians and below lawyers. It is, indeed, a strange state of affairs when the people you trust with your money are perceived by many to be lacking in integrity. Perhaps, there is too much focus on profit and return-on-investment rather than on building trust.

In my years of public practice as a financial auditor, consultant and advisor, it saddens me to hear a banker say that his business is about “making money out of other people’s money.” While this may be true, I’d rather that my banker friends go into more detail about why people should entrust their money with them and what it takes to keep that trust.

I also recently had a look at the list of receiverships and liquidations at the Philippine Deposit Insurance Corp. (PDIC.) We are just halfway into 2016 and we already have eight banks under receivership. The list of ongoing liquidations currently has 321 banks. All of them are mainly rural and cooperative banks—the smallest of our banks. Most of them you may not have heard of, but their closures had significant impact on the communities they served.

So why then is trust so critical to building and growing a bank?

Depositors trust banks to keep their hard-earned money for them safely. Investors place trust in fund managers’ choices and decisions. Payees trust banks to honor managers’ checks and payors trust them to deal with crossed checks properly. I trust that when I pay my bills through my bank, they are posted properly. Users trust that bank transactions made online are safe and secure and that their bank records are protected from fraudsters and hackers. Potential borrowers trust banks to grant fair property valuations and equitable interest rates on their mortgage applications. Even simple operational expectations from the public, such as timely ATM replenishment, are all rooted on principles of trust.

The public trusts bank owners not to squander their money on questionable investments. The public trusts that financial institutions share in the responsibility of nurturing the country, such as full support for the Agri-Agra Reform Credit Law, and preventing fraud and corruption through proper know-your-customer and anti-money laundering compliance procedures and prudent risk management policies. More and more, as seen in recent Senate hearings and trials in public courts, the transparency and accountability of our banks are being tested on these matters. I see in the foreseeable future—and am hopeful—that laws will be changed to minimize barriers to transparency, allow better monitoring of fund flows throughout the system, and, in general, instill more trust in the people with whom we entrust our money. Banks need to be better prepared for this future.

Security, controls and proper governance are the keys to building that trust, but these keys are generally internal in nature. So banks need to add in some marketing savvy by telling the public that they are, indeed, investing in security, controls and proper governance. Doing all this will improve its capital base and bring in profits in the long term.

Common perceptions about security, control and compliance matters are not helping the situation. Many bank managers think that augmenting security or controls makes things more difficult, inconvenient or inefficient for clients and employees; and they think that it is costly to acquire and implement additional security or controls, whether in terms of the technology or additional headcounts or training. Unfortunately, these perceptions are true—building trust is, indeed, costly and size matters when it comes to cost.

For example, the smallest minimum capital requirement of the BSP is P5 million. This is for rural or coop banks in 5th or 6th class municipalities. To give you an idea as to why size is relevant for banks, there are firewalls that cost above P2 million. One may argue that a small bank may not need such sophisticated technology but if it wants to grow and expand, it has to invest more. Perhaps not in a P2 million firewall, but maybe into, for instance, a better credit risk-rating system and related skills training.

Security and controls play significantly into the growth strategies of banks. Without them, a bank will not grow. Conversely, not investing in security and controls will result in losses and eventual demise. Nothing is more telling than the PDIC data—our smallest banks are dying. And I am willing to bet that their diminutiveness affected the decisions to invest in security and controls necessary to ensure growth and to protect the interests of their public.

I applaud and support the regulators’ moves to consolidate the industry in light of global shocks and the Asean integration. We need bigger, stronger banks that have the headroom to invest in security and controls necessary to engender trust in the system and bring growth.

Security and controls should not be viewed as a cost. In the banking industry, they should be seen as investments necessary to build and maintain the public’s trust and ensure growth. And like all prudent investments, there are forthcoming returns. Banks just need to be big enough to make these investments and reap the benefits.

Third Librea is a Partner, Head of Advisory Services, and CIO of P&A Grant Thornton. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firms in the Philippines, with 20 Partners and over 700 staff members.

As published in The Manila Times, dated 29 June 2016