The Urban Bank case: a statement from Borlongan

The following is a statement from Teodoro C. Borlongan, President of Urban Bank in the Philippines at the time it was taken over by the Monetary Board and the Philippine Deposit Insurance Corporation. FinanceAsia magazine in its July 2000 issue published The Baptism of the Liquidator, an account of the Urban Bank closure from the point of view of the PDIC. Borlongan and other Urban Bank officials are facing charges of "economic sabotage".

In various newspapers last October 14, 2000, the Bangko Sentral ng Pilipinas published a statement, misleadingly captioned "BSP says Urban Bank rehab plan on track" or similar to it. However the statement, more than half-page long, did not talk of Urban's re-opening; rather, it lengthily discussed two things - defending BSP's actions of closing the bank, and defending its economic-sabotage charge against Urban officials.

As my space limits me to address each and every point that BSP raised, I will address only some of them here, since all the arguments and incidents mentioned in BSP's statement are, coincidentally, answered in my counter-affidavit and summary annex that I filed with the Dept. of Justice last Oct. 6, and supported by documentary evidence. I ask the readers to visit the website for the thorough facts and documents on the Urban case.

First and foremost, let me address the charge of estafa and economic sabotage that BSP and PDIC filed with the DOJ against me, my chairman, and eight other Urban officers. The charge essentially is the misappropriation of P2.8 billion of bank funds through the "illegal" transfer of "garbage/trash" receivables from its investment house-affiliate, Urbancorp Investments Inc. (UII), to Urban Bank. Their charge is completely baseless for many reasons, but let me highlight some of them here.

One, the transfer of loans is legal, because they are covered by four BSP rules that allow it. It has been a practice in the banking industry since 1993 when BSP rules allowed it, thereby providing another intermediation vehicle for banks.

Two, BSP examiners have seen and examined the loan transfers in their regular examinations of Urban Bank and UII during the past 6 years, and have found them to be legal and in order. The transfer of loans has been a regular, transparent and obvious activity since 1994 when BSP granted Urban its quasi-bank license. BSP examination reports, citing the transfers and accepting them, were submitted as proof to the DOJ with my counter-affidavit last Oct. 6, and BSP and PDIC did not challenge their validity in their reply-affidavit of Oct. 13. (BSP probably forgot that they examine us almost every year, and provide us with hard copies of their preliminary and final reports.)

Three, BSP examiners have examined and evaluated these so-called "garbage/trash" receivables as recently as January-February of this year, when they conducted a special examination of the investment house and its trust department, under a Monetary Board order. (We should still recall in early May, BSP tried blaming the SEC for UII's "fiasco" because investment houses were supposedly not under BSP's supervision.) In a written report, BSP examiners rated most of these loans as "unclassified" or "specially mentioned" (using the terms of BSP Circular 210), the latter requiring a loan-loss provision of only 5%. None of these loans were rated by BSP examiners as "doubtful" or "loss". It is therefore strange that two months after, they are suddenly classified as "garbage/trash" (terms that, by the way, are not found in said circular). The BSP special examination report of February 14, 2000 was submitted as proof to the DOJ with my counter-affidavit, and the BSP and PDIC also did not challenge its validity.

(BSP probably thought we didn't yet receive or that we may have forgotten the February report?)

Four, there is no misappropriation if the funds are accounted for, the receivables are genuine, they have value, they are secured by adequate collaterals (mostly real estate), and they are supported by sufficient loan-loss reserves as required by BSP in its 1999 and Feb. 2000 examination reports. So, BSP and PDIC found no fictitious loans, no fake titles, no personal gains. Just "garbage/trash"??

Another point which I wish to address here is BSP's obstinate claim (repeated also in their charges filed against us) that Urban suffered grave illiquidity since February. The BSP's statement read, "The financial condition of Urban Bank is worse than what appears on the surface.

Since the early part of February up to April 25, when it declared a bank holiday, Urban Bank was resorting to heavy interbank borrowings to meet its mounting liquidity requirements. It is on record that Urban Bank was a net borrower in the interbank market in 17 out of 20 banking days in February, borrowing a total of P5.8 billion. In March, in 19 out of a total of 23 banking days, Urban Bank's borrowings totaled P5.7 billion." How falsely they present their facts to justify their action of closing Urban with questionable haste.

One, borrowing in the interbank market does not mean illiquidity, as there are several banks that also borrow regularly in the interbank market.

To quote a BusinessWorld article, "a bank that borrows in the interbank market is not necessarily illiquid. All borrowers know that to borrow, you must first prove that you don't need to borrow. That is the layman's logic.

"If we employ banker's logic, the interbank market, in times of fluctuating rates, is the ideal landscape for arbitrage. All bankers know this.

"Only an uninitiated idiot will cite borrowings as definitive proof of insolvency.

"By contrast, borrowings may even enhance liquidity if one arbitrages and plays the game of liquidity management as many bankers do."

Two, BSP mischievously added-up Urban's daily interbank borrowings to make it appear that we borrowed enormous amounts from the interbank market.

Every banker knows it is impossible for a bank to borrow P5 billion in the interbank market. The interbank market is where banks and quasi-banks borrow from and lend to each other every morning, usually for one day-term at a time. To calculate for the correct daily interbank activity, one should get the volume of daily interbank borrowings, less the volume of daily interbank lendings, and divide it by the number of banking days in the reference period. So using BSP's own figures, Urban therefore borrowed a net daily average of only P295 million and P249 million in February and March, respectively. Definitely not P5 billion.

Three, Urban's net daily borrowing of P295 million and P249 million in February and March is, in correct perspective, a small fraction of the daily interbank market that averaged about P14-15 billion during those months.

Moreover, its interbank borrowing constitutes a small fraction of the bank's total borrowings of about P9-10 billion. Definitely not an enormous amount by relation (about 2% - 3% only).

Fourth, it is strange that, in determining Urban's illiquidity since February, BSP failed to consider the month of January, when Urban was a regular interbank lender. Out of 21 banking days in January, Urban lent during 15 days an average amount of P248 million, borrowed during 4 days only, and neither borrowed nor lent during 2 days. In January, Urban Bank lent a net average of P131 million per day in the interbank market.

Fifth, BSP also conveniently failed to mention that the last loans Urban granted in the interbank market were as recent as end of March and April, as follows-P235 million on March 28; P220 million on March 29; P90 million on March 30; P150 million on April 5; and P131 million on April 6.

Sixth, a normal indicator of a bank's liquidity or illiquidity is its ability to meet the minimum required reserves against its deposit liabilities (reserves consisting of cash in vault and in BSP, and reserve-eligible government securities). It is therefore absurd for BSP to conclude that Urban was illiquid since February if it had always maintained the required reserves except during the last 3 days before it declared a bank holiday.

Seventh, it is even more absurd for BSP to conclude that Urban had been seriously illiquid since February when, inspite of servicing earlier withdrawals and without having drawn any financial assistance from BSP or PDIC, Urban still had, at the time of its closure, P1.95 billion in liquid and non-risk assets, as follows - P970 million in cash in vaults and in banks; P531 million in government securities held; and P447 million in national government-guaranteed assets (even after netting-out P562.5 million sale of NFA paper to Land Bank, back-valued April 25 and offsetted against Land Bank's interbank loan to Urban). And if one would include the P355 million held by UII and its common trust fund, in the form of cash in banks outside Urban and in marketable government securities, that's a total of P2.30 billion in liquid assets and non-risk assets held, as of close of April 25.

Illiquidity, as supposedly evidenced by "heavy" interbank borrowings from February to April 6, was one of the three short reasons cited in BSP's SES (Supervision and Examination Sector) report addressed to the Monetary Board on the morning of April 26, recommending Urban's immediate closure and receivership. It was a mere five-page report, but its bases supporting its recommendation were contained in only two pages. As the public may not be aware, Section 30 of the New Central Bank Act requires that the Monetary Board may close a bank only upon such SES report and under one of four specific conditions. The entire content of the subject SES report, and the manner it was prepared, are highly dubious as discussed and elaborated in my counter-affidavit. The discussion of this can be found in said website.

Section 16 of the same Act also provides that "members of the Monetary Board, officials, examiners and employees of the Bangko Sentral who willfully violate this Act or who are guilty of negligence, abuses or acts of malfeasance or misfeasance or fail to exercise extraordinary diligence in the performance of his duties shall be held liable for any loss or injury suffered by the Bangko Sentral or other banking institutions as a result of such violation, negligence, abuse, malfeasance, misfeasance, or failure to exercise extraordinary diligence".

My choice of having kept silent these past six months is not at all an admission of guilt; rather it was because of an earnest desire to re-open the bank as soon as possible to protect my clients and my employees. It was Gov. Buenaventura in early May who said, "If they want to do that (sue the BSP for Urban's closure), then it's going to delay the sale. That's really their call but I don't think so (because) the shareholders or the directors are quite anxious to complete this."

Why therefore were these baseless charges filed against me and my officers (including the Eizmendi and Fajardo estafa cases, which complainants, strangely by the way, are not Eizmendi and Fajardo themselves, but BSP and PDIC), with threats of more suits to follow? As stated in my counter-affidavit, these charges were filed to camouflage if not suppress the mishandling of Urban's temporary illiquidity, its unlawful and hasty closure, and the bank-runs which plagued several banks in May arising from BSP's mishandling.

The question now really is, who indeed is the economic saboteur? In a meeting of April 23 Easter Sunday at the Manila Golf Club, Urban's proposed financial assistance was reduced from P3.5 billion to P1.3 billion (and I don't know how BSP arrived at that amount), broken down as follows - P500 million from PDIC to finance the trust withdrawals of UII, and P800 million from BSP to finance bank deposit withdrawals. I said that P1.3 billion was not enough, but was told that if it was not enough, Urban may have to declare a holiday. I told Gov. Buenaventura, "Governor, should Urban declare a holiday, it will cause an industry run." Buenaventura replied, "There will be no industry run. I will just declare a holiday for these banks. So be it."

What was the haste in closing Urban? And what is the delay in re-opening it?