Comparative Bank Study: A Background Paper

COMPARATIVE

BANK

STUDY:

A

BACKGROUND

PAPER*

by Marfo Working

B.

Paper

April

Bank for

Lamberte** No.

87--04

1987

* This is part of a bigger study entitled: Study" jointly sponsored by the Philippine Development Studies (PIDS) and Ohio State

(osu).

"Comparativ6 Institut_ University

** Research Fellow, PIDS. The author is grateful Kristine Chua for her able research assistance and Juanita Tolentino for patiently typing the draft.

to to

Ms. Ms.

TABLE

OF

CONTENTS

page I.

II.

iII.

IV.

Introduction

Regulatory

1

Environment

Performance

of

Comparative and RBs

VI.

VII.

The

Financial

Performance of at the Regional

Strength

V.

the

2

in

Deposit

System

KBS, Level

18

PDBs, 29

Mobilization

35

Stability

41

Profitability

44

Interest Institution

Focus

Rate Elasticity and Elasticity Hypotheses

on

Individual

Concluding

Remarks

Colnmercial

Banks

47

54

64

I.

The

PIDS-OSU

Studies

in

banks private The

research

Rural

(RBs),

objective

is

offering

clientele

in

the

private

commercial

team

comparative secondary (I)

and

to

briefly

describe recent by

the past;

region;

85)

and

namely

test using

individual

PDBs

data and

commercial

RBs; banks.

the

and

regions (5)

to

mainly

of

and

help

for

the

based

objectives

on are:

(2)

in

the

to most

KBs,

PDBs

and

"institution

time

the

and

series

3 categories

examine

the

could

design

system

of

of

to

here

main

rate"

data

banks.

regulations;

a combination (13

and

is

performance

"interest

rural

branches

The

financial

to

to

banks

research

of

the

institutional

services

areas.

Primary

analysis

the

for

findings

data.

and

rural

background

banking

compare

cross-section KBs,

The

(KBs)

[1986]).

general

the

rural[

same

development

existing

to

elasticity"_hypotheses

rural

The

aggregative

performance

(4)

a

preparing

review

(3)

of

private

studies.

more

Grailam

project.

in

bank

fiilancial

(see

provides

the

Bank

of

banks

prospechs

expanding

sample

performance

serving

deter_line

and

research

research

to

the

"Comparative

cotm_ercial

(PDBs)

a

banks

paper

ab0vementioned

private

and

from

entitled:

examine

Philippines

collected

This

the

of

banks

in

be

will

branches

viability

will

project

Areas"

development

overall

INTRODUCTION

RBs

(1983of

banks,

performance

of

Ii.

Financial by

the

institutions

1980

reforms

financial

are

banks,

and

longer

term

The

to (2)

of of

have

banks,

make

not

banks

of

our

the

the

banks

by

framework

objectives

set

of

such

conditions

availability

of

and

amon_

access

below

inflation

Universal

rate

banks services,

example,

to

of

scope

categories

financial expanded

values 1980

allowed

many

of

to

are

capital banks.

1980

to

greater

significant creation

banking

capital

other.

broadened

the

which

in

and

development

One

is

among mortgage

allow

banks.

of

minimum

real

between

and

minimum

types

these

their

been

a

current

each

have

co_nercial

The

and

from

regulations

different of

of

the

private

reforms

stud'y.

are

savings

bank

demands

distinctions

and

of

all,

1 shows

different

salient

of

Functional

category

have

values

_'igure

associations

different

among

real

substantially

For

economies

1980

first

system.

legally

one

bank

varies

non-banking

the

competitive

system.

loan

1 summarizes

current

percent

main

objectives,

reduced.

which

comparative

greatly

these

anymore

among

Table

the

banking

realize

competition

universal

of

and

offered

feature

under

The

increase

financial

been

are

Services

to

increase

the

the

savings

banks

operating

reforms.

(i) to

are

ENVIRONMENT

funds.

restructuring

banks

:

attainment

structure

REGULATORY

o_

functions.

relevant

to

requirement Interestingly,

requirements because

of

are the

139

1986.

to

offer

which

were

a

host

prohibited

of

banking

and

before

the

Figure

1

.......................................................

-n..........................................................................

UniversalBanks

CommercialBanks

Private Develop_ent BanWs

........................................................................................

Minimum Capital •. R_equire_,lent

_5_._M._

Rural Banks

7 .......................

_I@V)M

a} New: "

_ ..................

P@,5_

Metro Manila Other Places - P

b) E_isting: 14etroManila - _I_ Other _}laces- PSM

iI. Limits or,Eq_ity Investmerls

N.

FinancialPfllied Unde_ akings:

A.

CoA_' uanks - 30X Thrift bp_ks _ rural hanks - I@_W Others - tO@,X

Fhl Und

_llied Is'

Co_m'l banks - 30t, Thrift banks & ,floralbanks- 10@X Others - t00)_'

A,

ncial Allied ur,u_rtahinqs' Banks - 3@X Others - 4@X

B. Non-Finar, c:ia[$1lIiedB," Non-FinancialAllied B. Non-financialAllied Undertakings- I@@_4 C. Non-Illlied Et

r-

Undertakings- I@0_( C.

prises - JSW

Non-AlliedEnterprises - prohibited

A, Financial Allied Und,-j'tak Jnps: - alloq_ed but with orlor apnroval of the _on+..'ta,'?' Board. B. Non-Financial_lllied

Undertakin.os -._Y. _. Non-_lliedEnter-

Undertakinos- i_1_._ C.

prises- prohibited

Non-(lllied EnterpY-is_s- prohibited

Ill. Banking offices

Nation_

Nationwide

Nationwide

Limited _o the re_ion where the a_oli_ant ban_¢ is Icr_ ed,

IV, Reserve _eoui.... _ents (shortterm deoosit liabilities}

_(

_IX

14_(

I_X

'

1980

financial

investment

reforms.

or

merchant

For

banking

instance,

which

was

they

can

previously

go

into

restricted

to

I

investment economic

houses activities.

instance, and

only.

they

There

may

non-allied

respectively,

for

list

of

undertakings). fully

owned

or

universal in

by

shares

may

approval

The

than

is

_

all For

commercial 30

Danks

percent

shares

and

almost

and

35

(see, Annex

A

non-financial

these

allied

categories

may

be

are

Monetary

financial

equity

they

but

not

they

the

most

allied

Board. they

networth and

bigger banks.

banks

areas:

development

may to

are

lbanks

have

investments own

voting

exceed not

40

as shares

percent

of

allowed

to

own

restricted

banking

system.

undertakings They

are

cannot

only

upon

prior

also

own

non-allied

to

go

into

non-

8 percent

for

permitted

undertakings.

minimum banks

on

that

far

However, a_lied

two

and

by

by

the

private

enterprises.

in

smaller

universal

in

invest

that

Voting

restrictions

shares

banks

and

undertakings

non-allied

universal here

same

allied

enterprises. financial

total

of

in

limitations.

other

extent

included

banks

except

voting

Rural They

the

banks,

in

engage

them.

less

total

the

in

allied

not

can

certain

shares

the

financial

they

however

to

of

commercial

financial

the

are

voting

Others

Ordinary more

own

short,

enterprises

percQnt, the

In

i0

risk

percent

and The

is

to

assets

for

other

well-capitalized lower

actually

5

networth an

invitation

ratio

is

banks. banks to

risk to

The are

more

assets banks

assumption stable ratio to

for

expand

their

capital.

banks

are

to

extent

the

of

of

been

10

to

regulation banking.

branch

in

that

might

any

frustrate

or

the

•entire

these

country and

areas Central

There

is

thrift required

Bank

securities

banks

are

to

the

region

however,

encourage

divided banks

are

has

is,

te

reduce

branching

rural

limited

_.ffort

to

branch into

five

opening

to

buy

a

up

a

five-year

according

to

the

schedule: I

b)

Service

Area

II

c)

Service

Area

III

d)

Service

Area

IV

e)

Service

Area

V

banks

opened.

(Heavily

The

(Idealy

there

is

indeed

questionable.

branched

has In

fact',

areas)

20M

_

15M

_

10M

_

5M 0

required

to

the

for

6

_500,000

Bank

is

collapse

reinforced

special

is

the the

to in

in

a

better

of

a

significant

Central time

being

five-year

for

able

overcompeticion

market

recent

has

worth

Central or

The

it

purchase

securities

that

the

merely

areas)

F

(Encouraged)

undercompetition

•However,

areas)

areas)

(Underbranched

Bank idea

overbranched

(Overbranched

are

government/[_entral

issue.

1 oca ted.

commercial

Area

banks

is

and of

time,

shares

capital.

size,

_ ' s,_lll

new

encouraged

optimal

first

universal

of

minimum

being

although

the

Service

it.

ti_e

wealth,

offering

required

their

is,

a)

Rural

the

are

branches,

government

following

of

_ For

of

a public

achieve

branch

areas,

special

to

ma in

That •

percent

banks

open

the

service

concentration

undertake

promoted.

permitted where

to

undue

mergers/consolidations

number

also

avoid

required

While the

To

each know

one

imposed

view

whether area

position

Bank's

branch

is

to

know

number

of

on

this

a moratorium

on

the

onset to

granting of

the

their

of

license

financial

to

crisis.

and

new

bank

or

branch

since

the

of! those

banks

collapsed

the

Central

Ban_

rediscounting

supervision,

not

on

poor

a

Many

over-dependence

facilities

open

due

to

due

cutthroat

competition.

Aside against

from

branching.

total

deposits

they

are

area.

This

the

The

types

of

reserve

and

o_

even

experience

shows

Thus,

also

The parcel

tries

the

of

enjoy

of

present

1980

to

may

50

banks

in be

their ensure

also

percent the

lent

of

to

flow

the

where

the

portfolio the

work

area

same across

_f

a questionable

already

less),

banks they

but

are

not

14

funds

to

fact,

it

(i.e.,

across deposits

across

different

is

21

for

percent

thrift

and

subsidiaries/affiliates

types

bigger

uniform

percent

intention

different

banks

made

requirement

and

The

by

been

liabilities

reserve

banks.

of

least

should

deposit

bigger

scheme

banks.

days

such

of

remains

has

enjoyed that

at

manage

still

across

deregulation of

scheme

if

colnmercial

advantages

they

to

comfaercial

requirement

cost

banks

730 The

scheme,

operate

short-term

of

banks,

universal

the

of

banks.

universal

rural

to

which

retention

branches

requirement

maturities

types

by

profitability

reserve

different with

such

areas,

the

this

permission limits

rural

deposit

Under

While

reduces

the

mobilized

given

branches.

for

this,

of of

banks.

bought

the

banks

differential is

However,

thrift

and

of

to

offset

the

recent

rural

banks.

privilege.

the

financial

bank reforms.

7

interest But

rates

was

while

banks

part

and

interest

rates

were

Central

deregulated,

Bank

which

continued.

It

shifted

its

the tended

was

to

only

emphasis

cheap

in

red iscounting

favor

certain

November

from

policy

economic

1!985 that

credit

the

activities

the

allocation

0f

Central

Bank

to • stabilization i

functions.

Since

then,

all

rediscountaDle

papers

are

treated i

uniformly

in

rediscount the

rate

same

funds

have

high

experience

Lamberte

While schemes

Unlike

to

features to

various

from

lending

under

financial

the

are

_Dr to

virtually

been

at

eliminated. only

and highly

while

previously

subsidies

were

the

rediscounting

subsidies

credit

led

to

inflation,

regressive

programs

not (see

and/or

Thus,

private

which

8

Table

by

these

is

rice

CALF

whose Bank, to

guarantee

just

for

and the came

agencies. funds

funds come

came

for from

schemes

financing newly

is

funds

government

have

in

guarantee

Its

Central

schemes

four

2.

programs

initiatives CALF

are

schemes.

credit

risk-reducing

scheme

in

managed

guarantee

out,

there

insurance

_uarantee

government

for

phased

summarized

institutions.

Except

crop

special

these

being Today,

the

the

credit

facilitate

activities.

they

are

the <_previous

directly

and

that

t •rate

Since

[1987]).

addition

addition

marke

• disint_rmediation

introduced.

latest

value.

rates

have

that

loan

the

re-len-ding

was

being

Their

the

past

subsidies

in

with

sectors

fact

and

cred it

credit

corn.

from

on

resources,

Lim

are

schemes

of

the

rate

aligned

removed,

the

and

been

priority in

mention

r ediscoui1t

ceilings been

• ••.-.misallocation to

of has

time,

considered The

terms

onthe •

support economic

established,

the

TabLe 2 SELECTED SPECIALCREDIT PRDGRI_MS Creoi_ Pro§rail

Elm_LoieProjects

• EligibleBorrowers

Loan Purposes

Na_imum Loanab[e

Interest

Maturity

Mooe of .

.............. ,........................................................................ _........ _R_ouoL ............ _Ra t.e_ ............... _P _e r_ i. _d_ ......... _P_X_,e,! .... i. Indu.str!al ....... Those involvedin the Guarantee and estab_ish_,_nt or expanLoan Fund (IGLF)

sion of an induz(;ria]: agro-ir,dustrial or ¢,;inine enterorisesinclu. _=nu,a,._rih_conCorns and _,hoseservzce ir,dustries supoortiv of manufac_uric,_acti vities. '" for a co eligible

A.

Cottaoe_entsrprisetotal assets over

A. Purchase of factory site

P50,@ON__u% _Ot more than PS@@:E,_'_ "befh'6e'" financing, B.

,or new and expansion projec(;s,

P@.4M. B, Sraall-5cal_

Jg_(oer annum

,_aium-Scale prises - tot

'Iof more (;ha but not e P2@N

R. FiNed asset acQuisition - _2

inclusive of all charoes,

_._aii-Sca'..__Enter B. Construction1 5e - (;oral assets of factory more than PF_,@@_ .buildiY "or e_cee'_ PSM ._e fir_ar_ C, Purcha_.

_s, ) C.

A. For Cot(;age Industries-

years inclusive of a _,laxir_ur_ of 3 y_ars grace peric, d on prinpal 9ay._lent. B.

rqachin_ eq_ipme fixturesano

;_:(;s

E_ua! euartp.r_yaT_ortiza_ionof orinc.{aoa] 8 interest.

_,},__rk;.ng capital 7 years inclusire of a naxi_.,a_ oF 2 years _rac__oeriod or, principal pay-.

)5.0M" ._ding :fore

,._en(;.

financing.

2.

f_gricultural

Agrl

al and agro T

Loan Fund (ALF)

processi j projects:_ f_. Short-tone seasohal production credit prelects. _.

,_ediu_and

lc, n_-

teru credit: pou]try orodu_tion, swine oroduction, cattle oroduction, f_sheries develc,__:er, t, plantation prcLject% aoroOVc, cessiF, g and .I)os(; harvest facili(;ies_ and far[L: mechanizet i¢,n.

l.ndividuals,

sin[_le

_)pm

"

A,

rietorhips, par(;ner .... ps_ corporations'andcooperatires.

_ - 18 _ ar exciudin_ _and.

B,

A.

._rannum :loatin_ _nter_s_ rate)

Worki_

Short-t_n'_a l?lq_

""-"f_t_'l_y,_

to e_ce_d )?. ,'.,..r,t_ % except for s_ar and banana _"roduc-

<.._" -__'n,_, e,._ar_ew'ly.

tion. _.

_,_di,.,.r, and Lon_-terr._ Loans - based on _rv,ec_ _ _' cash flow b'It ::9".: to _.___-|5 y_ars inc!u_ive of a _rac'e" e_.ri,_r,.J-" e__reedin¢ 7 years.

_,tarterly,j

Cr•ect Proorafa

3.

Elioible Projects

involved

Eligible Borrowers

Guarantee

Projects

Fund for S_lal i and Medium

the direct production and /or prc,cessina of food inter, deal for bie-

irr

Enterprises (GFSY_E)

logical consumption; those w_directlyinvolvL,d in food produ_ti_r, an_ other agri-oro_-_ct ; ma.jority of its ._roduee ts intendedfor e_por_,

A.

S:nall Scale Projeotsi p

Loan Purposes

R.

als or enter-

acquisition.B.

B.

Fi_ed asset_ •

Vedium Sca[e•,_rojects.,.. - Filipino stock cot-

Construction of plant • facilities.

porations, C.

Working capital.

_axim_mLoanable Interest _mount Rate ............................... R,

P62,5@_. but r,o more than P2.5; after f inaneino, B. _ediu_

4. D_P-SSS Fir, ar, cir, 9 Proraram

15Y,per

Work_na Capital

Eeu_l

Loan P3@@, _,¢_ to P_2.@M,

annum fixed for term of

- f,_a. imua of 5 ,/_ars, inclu5ire of the one

monthly,or euarterly ar,_c, rtiza-

loan a_proved for

},ear trace oeriod on _rin-

tic, n,

B. M.edium-Scale Loan -more than P2_ to PB_.

Euarantee by theGFS,_.

ci_-ai fJayi,l_nt. B.

_c_uisitEon of fixed _ssets r:laxilm*,u,_1 of

IC

of existing loans with other linen-

year%ine!usive of the t_..,.--),ear craoe peric, o on

cial ins_ih_tions that are current

prir, cipal oay_,_ent.

it, statu_i not to exceed

Scale

total projec assets of r_lore thal

55X of the of the total

PP.5M but not e_ceeding Plk_ after'financing.

loan aoprov_d

Industrial,a0rieultural

Individuals,single prop-

or agro- ind,strial projects.(See Annex B

rietorships,partnerships and coroorations

for a partial !ist eli§ibleprojects,

v_:.de of

o__,_t....

Small-Scale

O. Ref£nancino A. 5n_all Scale - iota project assets o r_:k less tha

n,

)lat,.irity

. _p_r i..qd_ .........

Working capital,

PSi_'_e,per-

17)¢_er

borrower. •

annum oiue set-

_.a,'terly, s_r_i-

vice fee of 4._oF?

a_ml-,,_a;.[y.

of

Ti],'e_ .Veers'

_-,_.v _.nl.,,"

ducted i5 advance. 5. Co'norehensive A_oricultural Loan Fund (CALF)

Any agricultural orojacks provided total orojects assets must not e_c'eedPS_k_.

Individual_,cor_rations and cooperatives_

_ny a_ricultural P5@¢,_ loan, for _orkin.o capital or acoui-

Fiwed ter_ to be determined

simeon of assets,

by the B. Fi_ed _sse_ CPLF at the O._quisition be_innin_o 12 years. of the

fi_ed

quarter.

_, Working capital - 8 years,

E_,Lal wnn_h!y or D,T.'i_.-tmr]y.

Table

2

(cont'd.)

track far

record been

of

quite

however,

reached

an

unutilized this.

First, Hence,

Second,

the

the

this

fact,

a

interest

lot

lastly,

very

low,

to

those

who

make

loans

them

are

really

so

takes

rate

be

very

to

the

fact

and

processing

a

responsive

currently

to to

have

to

be

can

be

released

loans

3

of

simplified on

despite

going

to

borrowers. these

these

are

needs the

schemes costs

In

is for

high.

programs

in

especially

of

credit

and

down.

programs.

quite

these

the

very

months.

ra_e

transactions

credit out

are

been

in

redesign

other

prograia.

2 to

under

papers

for

by

this

a high

.has

their

the

_.rationed

at

recently

that

need

about.

banks

reasons

facilities

expensive

occurred

remaining

known

for

these

schemes

the

are

not

pushing

interest

offered

therefore

are

market.

processing

time

they

time are

most

borrowers.

There

Program

margin

SQ:_that by

has

these

IGLF,

are

fixed

to

of

There

still

prepayments

procedures

shortened

system.

of

is

Processing

rate

th_-ough

case

access-ing

is

appears

such

order

repayment

IBRD.

usually

general

considering

There

which

for

rate

the

the

originating

of

programs

are

processing

program

And

few

the

to

g uarant6e

only

that

Thus,

In

returned

procedures

the

needed

were

and

fact

terms

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be

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for

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secured

other

by

loans many

new

deposit

deposits

up

33

the

rates

situation

is

crisis

were

loanS interest prime

on

is

about

of

It been

the

is

in

by

the

weak

and

down

rate,

the

opposite

lending

rates

are

when

the

inflation

rate

is

in

rate

c_nsidered

is

very

high

average

rate

recou_e

their

spread

worst

firms

by

6 percent

spread,

which

the

nominal

1985,

the

real

high

by

practically

abnormally

lending

the this the the

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while

the

is

the

rate

about

100

rate

has

has

been

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real

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today

12

percent

prime

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factor

that

recover

itself

from

standard.

zero,

high.

with

lending

fact,

any

as

high.

while

In

time

losses

in

banks

around

very

for

survived

hovers

still

and

even

firms.

the

nominal

thing

which

rate

On

deposits

incurred

direction.

unusually

1984.

their

a wide

The

[1986]

,-ending

unprofitable

is

that

starting

to

_ne

losses

percent.

deposit

tried

profitable

deposit

12

weighted

down.

pay

time

in

had

maintaining

and

noteworthy

coming

moving

to

percent

which

nominal

going

to

rate

27

Banks

strong

gave

rate

percent

were

made

they

the

years

that

to

Lambertel

average

pre-terminated

percent.

subsequent

interest

only

and

weighted

instruments

sending

Remolona

the

depositors

thus, to

also

Thus,

increased

yields,

in

(see

study).

hand,

bought

banks

This

the is

L_"

could the in

weaken slump.

1984,

But banks

almost

all

in

market,

the

the

this are

the'ir

ability is

now

of not

the all.

charging

loans.

Indeed,

a development

most

24

economy

to

Learning floating this

only

unwelcomed

from or

their

adjustable adds by

more

experience rates uncertainty

businessmen.

on

The

total

resources

oftthe

banking

system

could

give

_s

more

b

or

less

an

indication

recovery.

Between

banking 7).

system But

1983

of

this

to

been

crisis

reversed

thrift

1981

had

the

its

capability

to

1983,

real

increasing

which

took

trend.

quite

place

Several

and

rural

banks

became

In

two

years

time,

the

moderately

towards

the

economic of

latter

Table

part

of

banks,

andwere

resources

the

(see

commercial

insolvent real

the

resources

medium-size

banks

closed.

the

finanhe

later

of

on

the

banking

drop

in

/

system

shrunk

real

loans

lending

by

in

1980

financial

But In

recent

fact,

they

long-term which

mention

long

loans

have

redpced

the their

yieldin_

not the

presently

in

private

development loans

the

Central

care the

that

distress. with

folded

up.

25

short-term

banks, headway

total

have

loan

made reducing

the

portfolio. of

the

large many

for

of

Table

8).

more

cautious.

share

of

their banks

'requirements long-term

them,

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In

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Development

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the

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loans.

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their

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banks, and

of

banks

was

securities.

have

commercial

There

since

favor

Banks

medium-

percent.

outstanding

Bank/government

The

34

funds, DSP,

the to

of

are

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Table

COMMERCIAL

BANK DEPOSITS (_B, 1978 PRICES

1980

Total

Deposits

Share

Loan

Share medium long term

*

Deflated

Source:

by World

1983

1984

1985

38

40.1

30.8

28.4

29

22

16

17

13

12

71

78

84

83

87

88

55.6

55.1

56.7

58.7

40_6

27.1

term

78

73

69

70

61

61

&

22

27

31

39

39

39

&

short

1982

LOANS

34.4

Outstanding

Share

1981

AND _)

30.4

demand

Share time savings

8

the

CPI

Bank

Report

(1986).

27

The

movements

of

key

economic

and

financial

indicatolrs

in

I 1986 after was

seemed

to

be

a negative

growt h

practically resources

to

up.

of

to

banks

rose

slightly

to

24

With

these financial

bright system

growth

two

successive

for

banking

_ng

percent

prospects

expected

of

system of

rate

21 the

loanable (in

to

percent

play

a more

Inflation and

terms) Central

The

M3/GDP previous

the

near

positive

the

Started

and

the in

positive

funds

real

banks

economy

t_irned years.

moderately.

from for

28

flow

loans

im_J_.ed

is

GNP

The

the

Outstand

rediscounting

the

rate

negligible.

financial pick

encouraging.

Bank ratio year. future,

role.

IV.

COMPARATIVE

PERFORMANCE OF KBs, THE REGIONAL LEVEL

AT

This

section

universal

and

compares

ordinary

level.

All

National

Capital

Region

most

all of

prime to

over

their

and

over

significant

head

othe_ are

towns,

the

12

number

of

of

regions

(see

however, and

their

KBs

IV),

in

KBs

and

are

but

thei_

their

at

the

in

the

branches

9).

to

located

are

Although and/or

opera$ions regard

are

both

capitals

banking

offices

RBs

located

Table

Wihh

RBS

(including

provinci=l

region.

head

AND

PDBs

Region

situated

province

of

banks),

offices

(i.e.

branches

cities all

the

performance

commercial

regional

spread

the

PDBs,

extend PDBs,

a

outside

the

I

National

Capital

offices

of

have

very

their

PDBs few

operate branches

branches

province

Region

or

are

region

Originally, after up

the branches

subject

to

Even

then,

quite

a

where

few of

them

Essentially, branches head reason

of

KBs

were

offices

of

why

the

rural

as

head

they

be

either

head

banks

is

done

are

comparing offices at at

a

the

close

to

the

only.

allowed

Section

regional

II.

Lately,

commercial

banks.

performance

branches

open

region

branches.

a certain

But

to

certain in

the or

They Usually,

banks

already

of

head

situated.

unit

up

45

1985.

regions

discussed

opened

operating

29

are

subsidiaries

will

_omparison

have

be

of

banks.

within

regulations

became

or

to

out

December

offices

supposed

them

20

commercial

towo_ s/cities

of

of

provinces

reforms

we with

to

in

branching

very

number

NCR

their

other

the

outside compared

financial in

Specifically,

located

RBs

1980

(NCR).

of

PDBs

region. level

of and The

is

that

Table

30

9

Table

9

(cont'd.)

31

Table

9 (cont'd.)

32

Table

9 (cont'd.)

33

the

most

d isaggregative

regarding the

the

the

same

Note, and

performance

level.

Specifically, and/or

head

type

of

are

aggregated

that some

on

of

ratio

The to

in

deposit

could

available.

be

deposit

used

A single

ratio

of

of

return

net

on

measure

equity

could

profitability.

However,

measure

of

of

branches

indicators the

we

banks.

are

using

1983

to

types

of

recent

of

comparison 1985 banks

economic

is

see

for some

the

study

(c)

the

ratio

of the

the ratio

are

here,

to

not i.e.,

The

rate

of

bank

measure derive

determining

very•

strength

Liquidity

used

number

is

anQ

assets

good

be

and

income.

difficult in

IX

of

the

such equity

performance

limited

because

period,

i.e.,

of

data.

be

done

the

consistent crisis

another

involved

this

(a)

utilized.

operating

very

level.

will

stability

is

Indeed,

if

bank

profitability

is

to

II,

measures

liquid

to

RBs

brancn

on

been

it

will

to

have

prob'lem

of

unavailability

The

the

data

income

]

Regions

and

as

is

income

operating.

per used

at

belonging

stability;

For

of

operating

because

bank

are

since

and

indicators:

liabilities

here

in

Bank

s!top

regional

PDBs

deposits

resources

banks

banks

the

are

following

of

of

KBs,

mobilization.

to

not

of

(b)

volume

total

portfolio

the

the

of

operating

PDBs

Central

sheets

at

PDBs

branches

of

the

branches

offices

few

mobilization;

deposits

loan

no

very

of

basis

profitability.

strength

are

regions,

the

deposit

of

there

performance

evaluated in

bank

by

balance

branches

In

The

of

of

however, XII.

published

financial

regional

statements

data

relative over

started

34

over

these towards

a

3-year

performance years. the

of

the

Incidentally, second

semester

from three the of

1983,

and

years.

the

The

this

trend,

respective (see

number

have

slightly

Strength

KBs' RBs'.

the by

of

Deposit

to

about

3 to

in

5

Except groups

branch.

It

average

also

(GDPs)

real

period

same

period.

is

more

extensive

to

from 1983

remained

the

t}_e terms

seemed

gathered

the

either

followed of

in

banks

raay be

branch

the

be the

to

and

over

of

deposit

towns

rural smaller the

that where

banks

3-year

branch

1985.

same

or

volume

are

ranged

from

of

among

KBs

all

ranking has

is

PDBs.

deposit

period

This

the

deposits

sprea d

The

and

last

of

branches

PDBs

i0). of

the

bigger

towns.

1985

Table

rank

the

than

in

(see

per

of

noted

KBs

NCR

banks

terms be

whereas

banks

rural

in

cities

the

of

deposit

region,

including of

consecutive

mow_ments

rural

over

have

per

however

in

countryside_

PDBs

outside

banks

should

found,

groups

the

one

locate

offices

during

regions

of

as

two

regions

the

and

crisis

deposit

times

for

products

commercial

of

13

domestic

mobilization

average

_52M

the

for

Mobi_lization

deposit

_28M

of

fro a

banking

offices

continued

gleaned

the

increased

The

be

gross

Both

of

in

can

be

may

number

The

to

as

affected

declining

tend

conditions

9).

adversely

downswing

economic

regional

Table

three

economic

of been

per

and

PDBs

accounts over

the

the

three fairly

consistent.

The where ratio,

ratio

most the

of more

the

liabilities

resources

successful

35

to

of

banks

come

the

banks

are

total

resource

from. in

The

mobilizing

indicates higher

the

deposits.

Table

36

i0

Table

i0

(cont'd.)

37

Table

i0

(cont'd.)

38

Table

i0

(cont_d.)

39

KBs

have

the

regions.

at

the

highest Except

between

75

One

at

There bear

91

34

of

equipment,

•is that

entire

the

head

resources.

Still

another

mobilized

with

in

inability

to

The

spe_i_idaYi_y

could

the have

regions except

ratios

worked

have the

translated

as

into

that

NCR

_in

all

quite

period the

high

haqe• Bank

is

to

ready

they

are

KBs

office The

access

to

the

augment

their

the main

users

ratio

deposit

liabilities

that

of

branches.

the

surmise

1985.

buildings,

outside

of

very

offices

which

that

deposit:

been

1983

head

as,

of

has

bank_including

in

terms although

higher

in

Region

NCR.

to

this

is due

to

the

ratio

of

40

_ne

the

from for

at

close ra_los

total

the

KBs'

the GDP

deposit

behind

least

the three

to

the

NCR,

are

more

than

supply

demand

their

far

in

both

than

deposit

much

RBs

regions

higher

gathered demand

by

Here,

From

relatively be

very

IV-A,

regions.

together.

may

of

outperformed

and

other

incomes

NCR

are

branches

we

were

III

in

banks

ratio

the

such

noteworthy•that

Reglon

in

offices

resources,

they is

ratios

the

the

Central

second

total

It I

o£

deposits.

rank

However,

low

VI,

mobilize

is

reason

their

the

Region

to

regions.

twice

to

PDBs

liabilities KBs.

by

regard

resources

One

the

that

during

the

of

groups

the

KBs

resources

windows

funds

of

37 percent

rediscount

of

is

resources

for

three

1985.

here

physical

etc.

the

regions,

in

for•this.

the

reason

two

percent

to

reasons

most

for

total

about

among

feature

to

are

other

to

notable

liabilities low

ratio

and

demand

side,

the

other

regions,

values.

instruments.

This On

two

is the

•

supply

side,

Manila

are

PDBs

The

banks

It total

same

located

is

all

regions,

finding

noteworthy

the

like

phenomenal.

regions

during

X,

and

therefore

the

observed

of

and

RBs

the

period

increase

this the

be

ratios

PDB_

During

contractionary

and

close

to

tend with

to

Metro

be

regard

more to

the

NCR.

the

KB$,

Region

branches

can

the

that

of

and/or

managed

near

resources

almost

offices i

professionally

competitive. rural

head

deposit

had

in

to

increasing

in

been

1983-1985.

the

period:,

Central

liabilities

ratio

of

KBs

monetary

Bank

In

some

has

been

policy

practically

was

blosed

its

t

rediscounting already

window,

except

unavailable,

Treasury

bills

yielding

deposit

for

and

very

export

the

high,

interest

banks

instruments

pa@ers.

in

With

rates

responded

order

to

on by

stay

cheap

CB

money

bills

and

offering

high-

competitive.

Stability

The

loan

to

overstretches

deposit

its

ratio

resources

to

[1986]).

The

higher

the

Normally,

the

ratio

should

have

_o

still

a portion

of

securities

the as

Accordingly, 80

provide

"indicates

part

of

Japanese

loans"

ratio,

the

more

not

exceed

100

reserves

deposits

provide

the

is the

for usually

their

banks

are

which

a bank

(World

Bank

Report

unstable percent

the

in

In

to

addition, and/or

of

keeQ

the

is. banks

equities

diversification

required

bank

because

deposits.

invested

portfolio

extent

banks.

ratio

below

percent.

In percent

1985, in

KBs' almost

loan all

to

deposit

regions,

41

ratios except

ranged in

the

between NCR

and

20 Region

to

45 VI.

t

While

below

should

i00

be

percent,

pointed

deposit

retention

not

below

gone

that

this

Most

of

have

gone

out

50

is

and

NCR

are o[

not

surprisingly

KBs

therefore,

However, being

funds

the

ratios

branches

percent.

deposit to

that

scheme

regulation the

these

of

w:ith

since

ratios

the

loan

to

by

the

should

the

results,

followed

of

It

cow-_red

the

strictly

branches

are

low.

and

commercial deposit

_t

have appears

enforced,

banks ratio

could in

this

=

region

exceeds

their

100

branches

deposit their

located4

taking

have

raising

deposits

regard

to

profitable

Indeed,

a

acted

them

risk in

RBs'

Metro

is

that

Manila

highly

limited

possible

decision

Moreover,

head i

industrial

risky

than

an

issue

loan

almost

but

agencies

loans

KBs

regard

as

mainly

then

that

with

,regard

making

power

with

offices

may

have

NCR

more

in

agricultural

the loans

worthwhile

in

watching

by

a

of

their

loans

from

the

Central

sudden

a difficult

special or

than

real

change

in

situation.

42

in

greatly

proportion

conduits

rather

ratios

and

borrowings

as

funds,

deposit

regions

having

merely

since

to

all

significant

depo_its

government

to

very

and

and in

government

show

discretionarypower

commercial

is

to

outside It

loans.

less

tends

to

the

in

the

survey.

percent

they

have

This

PDBs'

by

areas

originating

countryside.

not

in

greater

but

and

forthcoming

This

institutions.

branches

regarded

percent.

almost

exceed

all

the

were Bank

i00 years.

supported and

other such,

credit

programs.

As

brokers

of

Bank

banks.

They

policy Indeed,

Central

could this

are

more

exposed

immediately happened

and

put in

the

recent

past

when

the

_entra!

Bank

tightened

its

rediscountiing L

policy.

It have

is

loan

interesting to

to

deposit

note

ratios

that

lower

PDBs

than

located i00

near

Metro

percent.

In

Manila

the

case

I

of

Region

range

III-A,

except

region

in

the the

operate

deposits

like

more

a

have

real

bank

of

In

KBs.

to

respective

head

offices

that

loan

to

had

been

1984.

declining This

outstanding

in

was of

significant

the

banks

more

deposits

already

pointed

out

deposits

to

The

deposit head

compete

overall

in

regions

specializing special

credit

The

with

in

lending

offered

programs

with of

the

43

to

this from PDBs

deposit

_rans_erred

groups the

instead is

that

of

banks

period

1983-

that

loans

is

economic

factor

banks

Metro

all

One

were

higher

crisis.

A

invested

in

they

interest

were

able

rates.

As

high

interest

on

from

the

findings

is

are

specializing

very

securities.

can

be

drawn

Manila,

support

however,

were

during

offering

Metro to

of

general

funds

other

that

outside

in

to

in

come

loan

factors.

government

picture

located

two

PDBs

NCR.

ratio

due

above,째

mobilization offices

of

lower

regions

their

by

III_

deposits

the

the normal

mostly

Reaion

in

the_e

loans

their

all

declined

securities.

raise

that

result

of

of

deposit

almost

proportion

government to

the

most

within

that

They'-have

suggesting

Note

that

falls

seems

whose

mobilized.

branches

less

It

ratio, their

or

las_t, year.

like

they

behave

ratio

the

KBs lending

Manila, most

activity

whereas of

government.

the

PDBs funds

The

of and

RBs

coming

implications

in their are from of

this is

to

our

study

clear.

It

comparing

from

means

the

standard

comparing:the

drawing

of any

deposit

that

we; have

performance

ratios.

that

performance

A

a unit

of

branch

may

bank.

This

conclusion.

ratios

of

For

branches

KBs,

to

exercise

different

types

be

pursuing

has

to

an

be

example, of

of

commercial

and_RBs

.extra of

care i

banks

objective

sorted

we

PDBs

out

usin_

different; first

found

that

banks

are

in

before

the

loan

below

to !00

i

percent, only

the

performing

noted the

"but

that

one

their

mother

very

low

ratio

function

function

made

of

us

to

banking.

is dictated

suspect

that

they

are

it

should

be

'However,

by

tha

Overall

objective

of

is

the

bank.

Profitability

As ratio

mentioned of

indicates

net

operating

to

what

operational the

bank

is

due

is

profits

our

The

to

higher

a peculiar by

to

of

total

banks

mangement's

realized

measure

income

extent

costs.

There the

above,

able

that

banks.

control

the

more

control

costs.

we

observe

here

of

net

their

regarding

commercial

profits

It

profitable

to

Branches

a l__aost--_-li-_--r-e-g_o-_-.4-incurrednegative

income.

to

ratio,

ability

pattern

operating

were

these

profitability

banks

(see

Table

in 9).

- \,_2

This

could

PNB

which

branches owfied

be

have of

branches

result been

KBs.

In

Philippine

Unfortunately, PNB

the

of

two

incurring 1985

away

from

huge

alone,

National however,

factors.

Bank we

the

44

rest

losses

total (PNB)

could

not of

One

the

is have

losses

a

the

to way

branches

branches

dominated

of

amounted find

that

of

the

government-

_7.2 of

of

billion. segregating

KBs

given

the

data

available

deposits

was

on much

hand.

larger

The than

other

their

is

that

loans,

their

hence,

volume

their

interest

;

expense

on

loans.

AS

banks

in

Note

we

it

is

net

activity

that

income

was

more

instance,

PDBs

as where

85.

NCR

PDBs

in

were

Region

however,

their

three

mQ_t noted

banks

not by

to

be

from

reports

required

groups

earned

seems

unaudited did

activity

by

KBs

where loan

to

these

that

negative

have

of

deposits.

is

quite

KBs

lending

to

deposit

lower

interest

two

Of

net

expense

they

,realized

their

in

similar

commercial

institutions.

where

their

expense

interest

words,

volume

areas

incurred

their

other

only

on

regions.

KBs.

For

profits

mainly

exceeded

their

volume

However,

of

in

substantial,

loans

regions

positive

net

realized.

the

be

somewhat III

that In

consistently

suffered

is

of

Consequently,

interest

income

taking VI

indicated

percent.

their

branches

Region

the

I

interest

deposit

and

are as

i00

lending

This

These

than

to

Among have

the

income.

PDBs

profits

only

in

their

earliel=,

mainly

fact

compared

out

are

of

the

exceeded

regions

exceeded

case

interest

pointed

concentrated

The

to

greatly

profits.

_was

ratios

due

have

the

that

positive

deposits

of

of

the

.incorporate

the

CB

positive surprising

the

that

of

recent the RBs in

examiners.

45

banks, profits

RBs

during

considering economic

data

we

submitted their

only

are to

reports

in the

the

all period

fact

crisis'. using the the

are

regions

that It

valuation

RBs

should,

based

Central

1983-

on

Bank.

the Most

reserves

On

the

compare unit

basis

these

profitability banks

income

using

as

branches

the of

Section Secondly, purpose. must

measures varying

of

the measure

for

_ the The be of

obtain'ed

KBs

as

of on

of

the

whole

first would

take

the

three

groups

of

place, as

the

positive

(see

profits) for

statements

that

of

long

used

place.

that operating

bank's be

to

first

•so

are

cannot

financial,

to

the

losses

hard_•

with

income

individual

ha_nd

the

profitability

a

very

PDBs

In

afford

bank

then

and

ope:_ating

could

the

in

characteristics

is

profitability.

available picture

it of

net

analysis

data true

of

banks of

an

branches

of

profits

VI

findings,

ratio

cormaercial

consolidated

RBs

of

the

said

especially

Secondly, i into of

.

other

account ban_s

the

can

be

to

the

i

devised. overall directly

For

example,

profits

of

lending

estimated.

We

the

suspect

is

based

compiled

by

branches

forthcoming

This

contribution bank

providing

analysis

procedure.

the

do

should

comparative

that that

not of

even

reflect banks be

batik

46

if

the the

of

they

funds data

this

simply

study.

the into

are

come on

usin_ taken

branches

of

KBs

not

from

which because

the

ones

them

must

our

present

they

be

were

standard

accounting

consideration

in

the

V.

THE

The

potential

recognized. severe the

for

But

foreign

saving

it

exchange

only

recently

crisis o_f. the

_project: of

mobilizing

is

potentials

The extent

INTEREST RATE ELASTICITY AND ELASTICITY HYPOTHESES

that

banks'

success

in

savings

has

when

Country

at

always

the

given

issue_of

Bank

Stu_y"

mobilizin(_

more

hypothesized rate.

One

financial

The

financial

is

is

facinc_ _to

tap

is

the

address

the

savinas.

In

,i

_

two

interest

savings

other

been

finetune_Z

will

mobilization,

importance.

that

interest

savings

are

!on_

economy.

"

looking

the

policies

dc_nestic

"Comparative

INSTITUTION

variables

rate,

respond

and

are it

is

positively

to

4

availability

of

financial

!

institutions, to

save

and

in

financial

institutions. directly found

to

In

indirectly

be

mixed

view

to could

importance

model =

f

to

institution to

useful

is (i

as

to

is

have

that easy

the

of

the

examine

again

the

way

verifying

of

could

issues

elasticity

the

but the

bank

follows:

, BANKS,

GDP)

o

47

(i)

induced

financial which

results be

were

reached.

involved,

this

interest

rate

hypotheses.

debate,

comparative

to

The

conclusion

are

studies

hypotheses.

settle

the

savers access

reviewed

these

the

alternative

be

they

definitive

intend

an

perhaps

tested no

the

here

(1987)

attempts

course,

provide

FD

of

_and

The

if

and

paper

of

forms

or

elasticity

hypothesis

Lamberte

background

not,

the

we

It

does

nerely

want

hypotheses study.

that

FD

stands

obtained

not

deposits

then

savings.

The

First

of

for from

it

it

government

deposits.

is

studies

which

used

of

cash,

on

from

the

of

Cash

is in

the

our

either

the

of

the

the

rural

savings

or

most areas.

ban_s.

frora or

the

This previous

reported

deposits

and

iDterest on i• actual interest

of

different

time

as

households

the

statutory

obvious.

one

deposits

study

financial

bonds I

effective

dividing

Bank

claims,

institutional

to

are

banks.

•course,

insurance

savings

Data

household

is,

Outstanding

makes

banks.

for

savings.

the

with

or

actual

the

weighted

each

_ype

of

product

of

both.

BANKS in

proxy

, refers D derived by

by

that

rates

average

banks

is

aspect

interest

this

financial

i

on•deposihs

one

proxy

includes•corporate,

This

expense

but

the

excludes

variable,

deposits.

of

of

Secondly,

The

as

financial

forms

deposits

households

used

weakenes

of

important

the

are

all,

instruments

financial

refers

to

a region,

the

while

number GDP

of

stands

bank for

offices gross

of

domestic

a region.

This time

_tudy

series

makes

data.

use This

different

from

interest

rates,

number

available

for

13

85.

that

these

Note

years.

the

the the

5ome

of is

of

ones.

Data

on

deposits,

branches

for

KBs,

PDBs

The rate

the

48

cross-section

aspect

regions.

interest

of

another

previous of

a combination

study

policy

previous

that

makes

covers regime studies

our

study

effective and

the is

and

RBs

period

the tested

same

are 1983-

in the

all two

hypotheses

mentioned

included

different

Equation variables significant runs. all

and

F-statistic.

The

more

banking

deposits

in

the

high

since in

the

accessible

to

was

found

found tried II

studies

GDP

and

to

to

be

have

to

no

rate

if

is

E_ot

I

financial

expected

statistically

at

the

the

of

the

means

are

presence

of

impact

regions. not

includes

the

has:-greater

does

yield

the _ final

tlie basis

that

the

rate

not

in

nave

on

appears

in

did

Model

computed

regions

interest

encountered

This

mean

on seems

anything

to

are

not

institutions

and

severe

BANKS.

Specifically,

strongly

co.rrelated

significant

c_,:gck whether

reestimated

cofficients

GDP

reasonable

the

interest

provinces

ii. All

elasticities

in

high

Table

of

It

1984)

ti_r_e du$_y

dropped

variables.

table.

unilÂŁzed

The

for

were

in

data

them.

Previous between

they

seems

institutions

than

reasonable

same

OLS.

DUMB4

coefficient-

equation

shown

people

the

The

also

and

sum_ar_'zed

independent

However,

significant. 2 R

1983

the

regimes.

using

So,

are

identified

signs.

for

that

policy

estimated

DUMB3

results

knowing

rate

coefficients.

The the

was

not

L

interest

(i)

(i.e.,

above

this

equation elasticities

in

problem (1 ) of

increase with

effect

coll inearity in

income. previous

appears

bank

Thus,

network B_{KS

studies. in

our

without

GDP.

i

virtually

have

problem

was

We

case.

The

have Model

estimated

remaine_d

<he

D same.

In

Model

result

is

that

does

not

have.

III, GDP

has

we

dropped

BANKS

a significant 2

However,

the

49

R

from effect

the on

equation. deposits

The while

i D

considerably

drops

to

a

very

Table

RESULTS OF TESTING AND INSTITUTION

Ii

THE INTEREST ELASTICITY

MODEL

I

RATE ELASTICITY HYPOTHESES

Model

II

Model

III

Coefficients Constant

-7423. 300 (-7.72)*

-7143.9 (-8.55)

iD

6348. i00 (2.20)*

6405.4 (2.22)*

BANKS

iii. 0300 (24.08)*

112.42 (28.34)*

GDP

0. 00998 (0.59)

-

*

-4911.0 (-2.01)* -370.88 (-0.05)

.21444 (5.79)*

2 R

.88

.88

.23

F

266. 168"

401.55*

16.77*

-0.016

Elasticities iD

0.277

0.280

BANKS

2.540

2.572

GDP

0.106

Note: * -

Figures significant

in at

parentheses

2.289

are

5 percent.

5O

t-values.

low to

level,

suggesting

Models

I and

The the

We

Table

for

PDBs

a

mode]

inferior

compared

elasticity

and

by

data

of

examining

PDBs PDBs

fro_a

and

and

results

hypotheses this

study.

the

demand

RBs.

RBs.

the

for

are

be

deposit

(I)

results

t|,at

cannot

Equation

The

is

was

run

presented

in

_ncrease

in

l2.

with

interest and is

that

during

to

KBs on

In

negative

financial small

rate

RBs.

rate

of

KBs, KBs,

Deposits the

approach

further

of

separately

is

drawn

institution

the

proceed

instruments

III

conclusion

and

using

Model

II.

inescapable

interest

rejected

that

fact,

bigger

commercial

both

Many

banks

and

banks

which

to

increase

This

the

period,

system.

found

deposits.

for

this

are

sign

groups there

is

of

the

of

banks.

was

were

and

the

coefficients It

of

should

their

rural

perceived

icase

to

be

noted in

deposits

banks be

with

interest

nervousness

shifted

thrift

an

however

a general

depositors from

not

with

to

the from

branches

relatively

more

stable.

The

number

deposits

wi'_h

additional _127 of

KBs,

branch

million. KBs

of

and

In PDBs

offices

has

a significanh

PDBs

and

RBs.

openend

brings

contrast,

an

attracts

only

respectively.

51

In about

the

case

branch

million

and

effect of

additional

additional _6

positive

on

KBs,

deposits or

head ?4

an of

office

million,

Table

DEMAND

FOR

DEPOSIT

12

INSTRUMENTS

OF

KBs,

KBs

PDBs

and

RBs

PDBs

RBs

Constant

-16904.00 (-6.33)*

-119.44 (-3.68)*

-105.70 (-1.99)**

iD

108640_00 (3.96)*

-16.447 (-0.30)

-520.11 (-1.64)

BANKS

127.00 (19.14)*

6.167 (6.55)*

3.967 (16.16)*

GDP

-0.0695 (-1.70)**

51.6321 (7.98)*

R

0.98

0.93

F

596.81"

134.23"

2

15.422 :(4.19)*

i

_7_

Note:

r

* •*

Significant significant

at at

5 percent i0 percent

52

level. level.

40.88 97.45*

The

effect

negative is

and

indeed

analysis

of

regiodal

statistically

surprising is

needed

and in

income

significant difficult

this

on

deposits

._t 10 to

with

percent

explain.

KBs _ is

level.

This

Perhaps,

more

regard. ]

With have

a

regard significant

improvement raising

in

to

PDBs

and

positive regional

RBs,

regional

effect income

deposits.

53

is

on

income

deposits.

important

is

found

It means to

PDBs

and

to that

RBs

in

VI.

In obtained

FOCUS

ON

Section