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Monday, March 19, 2012

Looking Back at Banco Filipino Through a Variant of the Texas Ratio

Editor's Note:  This blog was inspired by the spectacular failure of Banco Filipino Savings and Mortgage Bank for the second time in its 38 years of existence.  This blog post and other blog posts like it attempt to describe why the bank failed.  But it also attempts to assess what other Philippine Banks have the potential to fail in the not too distant future. To see blog posts on other distressed banks, click on the Banco Filipino Graphic at the top of the blog or click on the blog archive on the right hand column, or simply go to

It's been more than a year since Banco Filipino closed for the second time in the bank's history.  This blog has featured a post that elaborated how Banco Filipino could have failed much earlier but was kept alive for some time as a Ponzi Scheme by the BSP.  See: "The System is Broken".  The blog has also attempted to point out other banks that are in danger of failing through the use of a screening methodology called the "Texas Ratio" but adapted to the Philippine banking system.  The blog has done this, on a periodic basis, for both Philippine Commercial Banks as well as Philippine Thrift Banks.  But the blog has never applied the Texas Ratio methodology to Banco Filipino.

Well, now it has.  And here is the result:

Needless to say, when Banco Filipino's Ratio of Total Distressed Assets over its Total Capital Cushion exceeded the Borderline Insolvency Level of 100% in 2002, the bank nearly failed and had to turn to the BSP for an emergency rescue package of PHP 3.5 billion.  Nevertheless, Banco Filipino never recovered and continued to lose money in significant amounts - so much so that its capital base was wiped out somewhere between 2002 and 2011.   The bank survived during this nine year period because it operated as a "Ponzi Scheme" - it used the lure or relatively high interest rates on deposits to attract new depositors and the money of these new depositors helped the bank fund its losses.  But all good scams come to an end and Banco Filipino's scam certainly did with a resounding thud, but not before ensnaring thousands of unsuspecting depositors.

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