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A Proposal on the Development of an Integrated Software Solution for On-site Examiners and
Off-site Supervisors in the Bangko Sentral ng Pilipinas







Gomez, Carlo Martin G.

Information Management

MIS535M


July 14, 2014





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I. Context of the Problem

i. Introduction

The Bangko Sentral ng Pilipinas, hereafter referred to as BSP or the Bank, is
one of the top performing government agencies in the Philippines. In fact, the Makati
Business Clubs (MBC) Economic Outlook Survey (EOS) conducted last 2012 showed that
the BSP was given the highest satisfaction rating among government agencies in the
country. The BSP topped the MBCs EOS with a satisfaction rating of 94.6 percent and
has consistently stayed on top since 2006. The aforementioned EOS for second
semester of 2012, tracked the performance of government agencies, covered 55
respondents or 14.7 percent of 375 member companies of the MBC and was conducted
between June 19 and July 23 of the said year.

One of the primary factors of the remarkable satisfaction rating achieved by the
BSP is the way it maintains a a strong financial system that contributes to a balanced
and sustainable growth of the economy

ii. Company Background

The Bangko Sentral ng Pilipinas is the central monetary authority of the Republic
of the Philippines. It was established on 3 July 1993 pursuant to the provisions of the
1987 Philippine Constitution and the New Central Bank Act of 1993. The BSP took over
from the Central Bank of Philippines, which was established on 3 January 1949, as the
countrys central monetary authority. The BSP enjoys fiscal and administrative
autonomy from the National Government in the pursuit of its mandated responsibilities.

The BSPs primary objective is to maintain price stability conducive to a balanced
and sustainable economic growth. The BSP also aims to promote and preserve
monetary stability and the convertibility of the national currency.

The BSP provides policy directions in the areas of money, banking and credit. It
supervises operations of banks and exercises regulatory powers over non-bank financial
institutions with quasi-banking functions.

Under the New Central Bank Act, the BSP performs the following functions, all of
which relate to its status as the Republics central monetary authority:

Liquidity Management
o The BSP formulates and implements monetary policy aimed at
influencing money supply consistent with its primary objective to
maintain price stability.



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Currency issue
o The BSP has the exclusive power to issue the national currency. All
notes and coins issued by the BSP are fully guaranteed by the
Government and are considered legal tender for all private and public
debts.
Lender of last resort
o The BSP extends discounts, loans and advances to banking institutions
for liquidity purposes.

Financial Supervision
o The BSP supervises banks and exercises regulatory powers over non-
bank institutions performing quasi-banking functions.

Management of foreign currency reserves
o The BSP seeks to maintain sufficient international reserves to meet
any foreseeable net demands for foreign currencies in order to
preserve the international stability and convertibility of the Philippine
peso.

Determination of exchange rate policy
o The BSP determines the exchange rate policy of the Philippines.
Currently, the BSP adheres to a market-oriented foreign exchange
rate policy such that the role of Bangko Sentral is principally to ensure
orderly conditions in the market.

Other activities
o The BSP functions as the banker, financial advisor and official
depository of the Government, its political subdivisions and
instrumentalities and government-owned and -controlled
corporations.

BSP Vision

The BSP aims to be a world-class monetary authority and a catalyst for a globally
competitive economy and financial system that delivers a high quality of life for all
Filipinos.

BSP Mission

The BSP is committed to promote and maintain price stability and provide
proactive leadership in bringing about a strong financial system conducive to a balanced
and sustainable growth of the economy. Towards this end, it shall conduct sound
monetary policy and effective supervision over financial institutions under its
jurisdiction.

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BSP Core Values

Integrity
o We articulate our desire to perform our mandate with sincerity, honesty
and uprightness, worthy of respect and emulation by those we work
with.

Excellence
o We express our dedication to achieve a level of competence in service
delivery comparable with the best practices of other central banks in the
world.

Patriotism
o We affirm our selfless commitment to the service of the community,
Filipino people and the country.

Solidarity
o We articulate our desire to perform with team spirit. To act and think as
one in the pursuit of common goals and objectives with mutual
responsibility.

Dynamism
o We express our dedication to achieve things with energetic enthusiasm
and zest in fulfilling different tasks amid unavoidable changes and
progress.

Organizational Chart



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The Monetary Board (MB)

The MB exercises the powers and functions of the BSP, such as the conduct of
monetary policy and supervision of the financial system. Its chairman is the BSP
Governor, with five full-time members from the private sector and one member from
the Cabinet.

The Governor

The Governor is the Chief Executive Officer (CEO) of the BSP and is required to
direct and supervise the operations and internal administration of the BSP. A Deputy
Governor heads each of the BSP's operating sector as follows:

Monetary Stability Sector (MSS)

The MSS takes charge of the formulation and implementation of the BSPs
monetary policy, including serving the banking needs of all banks through accepting
deposits, servicing withdrawals and extending credit through the rediscounting facility.

Supervision and Examination Sector (SES)

The SES enforces and monitors compliance to banking laws to promote a sound
and healthy banking system.

Resource Management Sector (RMS)

The RMS serves the human, financial and physical resource needs of the BSP.

Security Plant Complex (SPC)

The SPC safeguards the printing/minting/refining, issuance, distribution and
durability of coins, banknotes, gold bars, government official receipts, lottery tickets,
internal revenue stamps, passports, seaman identification record books, strip stamps,
official documents, registration certificates, Torrens titles, treasury warrants, stocks and
bonds, government contracts, ration coupons, forms, checks and other security printing
or minting jobs of the Philippine government.

iii. Current Setting

In this study, the researcher belongs to the Integrated Supervision Department II
(ISD II) under the Sub-sector III of the SES. Among the main functions of ISD II is
conducting off-site supervision and on-site examination of selected banks. The selected
banks referred to are those (i) under the Prompt Corrective Action (PCA) framework;
and (ii) on the brink of being placed under receivership.

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The banks under PCA are those with significant deterioration of financial
condition, needs business improvements plans and corporate governance reforms.
These concerns of PCA banks must be addressed timely to prevent further losses to its
stakeholders i.e., depositors, government thru the Philippine Deposit Insurance
Corporation (PDIC), creditors. Meanwhile, those banks that are in the brink of being
placed under receivership are those that will be recommended for closure and eventual
turnover to the PDIC for liquidation. The following reasons for a banks closure are those
stipulated in Section 30 of Republic Act No. 7653 (The New Central Bank Act) which read
as follows:

SEC. 30. Proceedings in Receivership and Liquidation.

Whenever, upon report of the head of the supervising or examining
department, the Monetary Board finds that a bank or quasi-bank:

(a) is unable to pay its liabilities as they become due in the
ordinary course of business: Provided, That this shall not include inability
to pay caused by extraordinary demands induced by financial panic in the
banking community;
(b) has insufficient realizable assets, as determined by the Bangko
Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable losses
to its depositors or creditors; or
(d) has willfully violated a cease and desist order under Section 37
that has become final, involving acts or transactions which amount to
fraud or a dissipation of the assets of the institution; in which cases, the
Monetary Board may summarily and without need for prior hearing forbid
the institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver of the banking
institution. xxx

At present, ISD II has a little more than 100 banks under its supervision. The
compositions of these are Thrift Banks (TBs), Rural Bank (RBs) and Cooperative Banks
(CBs), but majority are RBs.

iv. Problem

Reports from both on-site examination (on-site) and off-site supervision (off-site)
of the Bangko Sentral ng Pilipinas (BSP) contain inconsistent financial data even though
they refer to the same examination and time period.

The problem was derived using 5 Whys which is a technique for determining the
root cause of a problem.


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The 5 Whys is a technique used in the Analyze phase of the Six Sigma DMAIC
(Define, Measure, Analyze, Improve, Control) methodology. It is a great Six Sigma
tool that does not involve data segmentation, hypothesis testing, regression or
other advanced statistical tools, and in many cases can be completed without a
data collection plan. (www.isixsigma.com)

Stated below is the application of the 5 Whys in determining the root cause of
the problem of this study, to wit:

1. Why are the financial data from on-site and off-site of the BSP inconsistent?
o Because the financial data furnished by both the on-site examiners and
off-site supervisors of the BSP may not have been reconciled.

2. Why are the financial data furnished by both the on-site examiners and off-
site supervisors of the BSP not reconciled?
o Because the on-site examiners and off-site supervisors of the BSP obtain
a certain financial institutions (FI) financial data from several reports.
For on-site, these are reports obtained during field work. Meanwhile,
off-site source its financial data from reports submitted by the said
financial institution on a periodic basis.

3. Why do the on-site and off-site source their needed financial data from
various reports submitted by a FI?
o Because the on-site and off-site compute on their own the needed
financial data (i.e., key financial ratios) to address timeliness of data. It
this way, prompt decisions may be made which eliminate lead time for
conducting field work when a certain FI is not yet due for on-site
examination.

4. Why does the on-site and off-site compute their needed financial data by
themselves?
o Because there is no database where the aforesaid financial data can be
obtained by both on-site and off-site when needed abruptly.

5. Why is there no database for financial data needed by both on-site and off-
site?
o Because there is no software solution developed yet, that could reconcile
computations from both on-site and off-site, recognize the uploaded data
and easily cross-refer source of data gathered. In this manner, financial
data that will be used for reports will become consistent, timely and
reliable.




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v. Significance of this Study

This study is very important because it exposes the BSP and its stakeholders to
various risks. Inconsistent data may lead the BSP to wrong decisions or when the
inconsistent data is discovered, the decision will not be timely. In addition, inconsistent
data may also bestow added Legal Risk due to wrong decisions as produced by the
same. On the other hand, the stakeholders of the BSP i.e., depositors, government thru
PDIC and other creditors of banks, collectively referred to as stakeholders, may be
affected by inconsistent data. This happens when a losing bank is not yet placed under
receivership because an off-site supervisor of the BSP has not yet imposed such action
due to inconsistent data provided. As a product of this scenario, further losses are
absorbed by the losing banks depositors. Moreover, upon closure of the bank, the
government also loses since the PDIC must pay the insured amount of Php500 thousand
per depositor while deposit above the threshold covered by the PDIC are already
considered losses.

Since ISD II induces Prompt Corrective Action on banks under its supervision,
information such as financial data and other key indicators of a banks overall condition
must be consistent all throughout various reports used by the Department in order to
come up with the correct decision in a timely manner. Thus, inconsistent information
may lead the Department towards a wrong strategy or game plan in the supervision of a
particular bank. Another repercussion of inconsistent information is that it may impair
the timeliness of addressing a deteriorating condition of a bank. For example, when in
fact, there is a significant drop in the capitalization of a bank from the previous quarter,
however, no action was given to the bank by the off-site supervisors since the
information used for decision making was inconsistent with the one determined by the
on-site examiners.

vi. Areas of Consideration

In this study, the following must be considered in order to come up with the
necessary methodology, data collection, analysis of results, designing and conclusion.

a. Stakeholders
o As previously mentioned, they refer to a particular banks depositors, the
government, thru PDIC, and other creditors of banks. They absorb the
losses of a particular bank upon deterioration of its condition and
eventual closure as a product of untimely and spoiled decision making by
ISD II of the BSP due to inconsistent information.

b. Condition of Banks
o The present condition of a particular bank is a significant consideration in
this study. The more severe the condition of a certain bank, the bigger
impact of the inconsistent information it may bring since it translates into

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additional losses when not addressed in a timely manner. Thus, this
study will involve banks with high risk profiles.

c. Key Financial Indicators
o The key financial indicators are the vital information to consider in
determining the strategy or game plan to be implemented in the
supervision of a bank. These are the information that is susceptible to
inconsistency in the various reports furnished by both off-site supervision
and on-site examination. Moreover, these key financial indicators are
more often than not, not reconciled among reports which contain the
same information. Among the key financial indicators used for analysis
and prompt decision making of a particular bank are the following:

Capital Adequacy Ratio (CAR);
Capital Deficiency to meet minimum requirements;
Adjusted Capital;
Net Realizable Value (NRV);
Continuing Operating and Net Losses;
Recommended and Unbooked Allowance for Probable Losses;
Asset Quality Ratios such as Past Due Loans (PDL), Non-
Performing Loans (NPL) and Non-Performing Assets Ratio (NPA);
and
Liquidity Ratios such Loans to Deposits, Liquid Assets to Deposits
and Liquid Assets to Total Liabilities Ratio)

d. Reports for Decision Making
o The various reports produced by on-site examiners and off-site
supervisors must also be considered as this might contain the
inconsistency in the key financial indicators, as stated in (c) above. Stated
below are the various reports considered for prompt decision making of
actions to be imposed to a particular bank, to wit:

Report of Examination
This is a report of the on-site examiners every after a general
examination (annual basis) of a bank.

Receivership Proposal
This is a memorandum to the MB wherein the off-site
supervisors recommend the placement of a bank under
receivership.

Risk Classification
This is a quarterly report of the off-site supervisors on the risk
profiling of banks. The risk classification types are Low,

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Upper Medium, High, Moderately High and Very High.
The risk classification of a bank is adjusted every quarter
based on the developments and trends. Moreover, this report
is the basis for the game plan of ISD II on the bank.

Institutional Overview
This is also a quarterly report prepared by the off-site
supervisors which contains the latest developments of bank,
summary of significant findings during the most recent
examination, overall condition and key financial indicators of a
bank.

II. Methodology and Data Collection

As mentioned above, the condition of a bank is one of the significant
considerations in this study. The more severe the condition of a certain bank is, the
bigger the impact of inconsistent information it may bring since it translates into
additional losses when not addressed in a timely manner. Henceforth, it is more
reasonable and relevant in this study to test the consistency of financial data of banks
with precarious financial condition and have high risk of failure.

This study will involve the testing the consistency of key financial indicators of
the 50 riskiest banks (banks with risk profiles of Moderately High and Very High) in
ISD II which are stated in the following reports: (i) Report of Examination; (ii)
Receivership Proposal; (iii) Risk Classification; and (iv) Institutional Overview. The latest
ranking of the banks will be obtained from the Office of the Director of ISD II which was
already deliberated by higher management. The table below will be used to check the
inconsistencies and shall be documented on the same.



Key Financial Indicators
Report of
Examination
Receivership
Proposal
Risk
Classification
Institutional
Overview
Ties-up? Comments
CAR
Capital Deficiency/(Excess)
Adjusted Capital
NRV
Continuing Operating and Net Losses
Recommended Allowance for Probable
Losses
Unbooked Allowance for Probable Losses
Asset Quality Ratios
PDL ratio
NPL ratio
NPA ratio
Liquidity Ratios
Loans to Deposits
Liquid assets to Deposits
Liquid assets to Total Liabilities