MANILA, Philippines—The Senate will open an investigation in January into the issue of seven troubled rural banks that early this month either unilaterally declared a bank holiday or were shut down by the central bank for questionable practices.

Before adjourning for a month-long Christmas break on Wednesday, the plenary referred Senate Resolution 812 introduced by Sen. Miriam Defensor-Santiago to the Senate committee on banks, financial institutions and currencies.

The committee, chaired by Sen. Edgardo Angara, will start the probe as soon as Congress reopens in January.

The banks that unilaterally declared a bank holiday on Dec. 11 were the Philippine Countryside Rural Bank, based in Cebu, Dynamic Bank (Rural Bank of Calatagan) in Batangas province, San Pablo City Development Bank in Laguna province and the Nation Bank in Bacolod City, Negros Occidental.

On the same day, the central bank, Bangko Sentral ng Pilipinas (BSP), added three more rural banks to the distressed list: Rural Bank of Bais based in Negros Oriental province, Pilipino Rural Bank based in Cebu province and Rural Bank of San Jose in San Jose town in Batangas province.

The seven banks on Senator Santiago’s list are among nine believed to be affiliated with the controversial Legacy group that the BSP closed down and placed under receivership early this week.

Not included on the senator’s list are Bank of East Asia in Cebu and First Interstate Bank in Tacloban City in Leyte province.

The BSP said it had uncovered certain irregularities — including making loans without collateral and documentation, and use of bank funds to pay for obligations of affiliated pre-need companies — in some of the Legacy-affiliated banks.

In her resolution, Santiago said the purpose of the investigation was to determine the financial condition and viability of the troubled banks and of the entire Philippine banking system.

She said the Senate should also look into possible violations of banking laws by the rural banks’ officials, and the writing of new laws or amendments to existing banking laws.

The Santiago resolution quoted an ABS-CBN Broadcasting television report on “7 More Troubled Banks Declare Holiday, Placed under Receivership” aired last Dec. 12, which claimed that the rural banks had unilaterally declared a bank holiday on Dec. 11.

“It was also reported that the following local banks were placed under PDIC [Philippine Deposit and Insurance Corp.] receivership by the Monetary Board on the same date,” Santiago said.

Jittery public

The senator sought the investigation even after the BSP issued a statement last week to calm a jittery public.

The BSP said that “despite the growing list of troubled local banks, these banks represent only a tiny fraction of the banking system.”

The Monetary Board, the policymaking body of the BSP, has authority to summarily close and place under PDIC receivership any bank that notifies the BSP, publicly announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than 30 days.

A bank depositor can file a claim for his insured deposits — up to a maximum of P250,000 — within two years of the takeover of the bank by the PDIC which is mandated to service the claims of insured deposits and the ailing bank’s creditors.

The distressed banks declared the bank holiday less than a week before the Senate approved on Wednesday SB 2678 increasing the maximum deposit insurance coverage from P250,000 to P500,000.

Panic time

Senator Angara said increasing the insurance coverage of bank deposits was crucial to the viability of banks and other financial institutions amid the global recession.

“These are extremely confusing times where panic can only make matters worse,” he said. “Maintaining, if not restoring, confidence in the banking system should be our priority. A stable and dependable deposit insurance system shores up depositor confidence. It also guarantees the sufficiency of credit to finance vital economic activities in the country.”

The longtime senator said the maximum deposit insurance coverage would cover 97.23 percent of the more than 31 million deposit accounts in the country.

“They will enjoy the benefits of deposit insurance cover,” he said. “The increase will encourage depositors to keep their money in the banks, knowing that their savings would be safe, intact and readily available on the faith and credit of the government.” With editing by INQUIRER.net