The problems faced by one of the largest universal banks in the country compel us to analyze the quality of assets such banks carry in each of their balance sheets, especially where banks are typically ranked, not by profitability, the amount of deposits it can generate, the amount of equity infused or even operating efficiency, but by simple asset size.

Simplistically, a big bank is the bank with the most assets and there is an implied assumption there — albeit it is a misconception that requires some clarification — that bigger is better.

In what mainstream media has casually labeled as “the biggest corporate default” in Philippine banking history, five of what are ranked among the biggest banks with the largest assets are principal creditors in a non-syndicated loan that, upon the debtor’s declaration of a need for statutory relief, the five are now compelled to coordinate with each other and act as if the individual debt exposures were syndicated.

While one upside of the default is that it represents only one-fourth of one percent of the banking industry’s total loans, a syndicated rehabilitation and quasi-reorganization of the debtor’s capital structure might be in order for several reasons.

One, the debtor’s domestic liabilities are now technically cut off from any lifeline to its parent company in Korea had one existed or had one been provided for in the original loan agreements at the time these were negotiated. Because the loans were unsecured, a recourse umbilical might have been provided for.

Like a wagon train surrounded by hostile Indians, the cavalry appearing in the nick of time would do nicely. But that’s not going to happen now. Unfortunately, the Korean parent company had declared bankruptcy way before the Philippine-based subsidiary’s request for a stay on its loan repayments and a recourse would now be impossible.

Two, since the Philippine subsidiary also has humongous liabilities to Korean creditors back home and as these are almost double of the domestic liabilities, then somewhere down the road of a debt rehabilitation, some creditors will be subordinated and need to wait in line or take a hit. They will likely write-off some amount of uncollectible receivables, suffer reduced bottom lines in their profit and loss statements and eventually reflect a diminution of their retained earnings under the equity column of their balance sheets reflecting the write-off and the net income loss.

Three, misery loves company. It makes sense for creditors to coordinate and syndicate the rehabilitation since the total indebtedness, even on an individual bank basis, is largely unsecured by any real remnant assets of the debtor. Such is the risk of lending on a “clean” basis with neither chattel nor real estate annotations.

While a bank might be big and thus be casually considered “too big to fail.” The simplistic asset measure to determine “bigness” is sorely inadequate should we consider the foregoing where these introduce us factors as to the type and quality of bank assets. The collectability of a loan is a question of asset quality. So are the recourse conditions. So are the periods that a loan might be overdue. And so are the values of the debtor’s assets surrendered as collateral. The list of factors that determine asset values are endless.

Two months before the default, note the data on the banking system’s bad debts.

Non-performing loans, while among a bank’s assets, rose by 10.5 percent from 2017.

Fortunately, their ratio to total loans fell, thus indicating improving asset quality for banks.

Past Due Loans however rose by 31.7 percent while restructured debts, loans granted longer repayment terms, shrank by 20 percent. Both are non-performing assets.

To improve asset quality, banks may restructure the repayment periods or increase provisions for losses. For 2018, this buffer called a Coverage Ratio fell to 134.46 percent.

Still enough to cover for potential defaults.

Simply counting a bank’s assets is illusory. Even foreclosed real estate assets turn into value only when liquidated.