Financial liberalization has triumphed over the old system of financial restriction. Ever since the 1970s, the Philippines have never looked back from gradually shedding off the restrictive laws and interventionist policies of the state. Nevertheless, the financial sector—in particular, the banking sector—has remained vulnerable to both internal and external threats. The recent Asian financial crisis exposed the institutional weaknesses in the financial system, including problems in regulation and supervision. Deficient laws, inappropriate policies, and weak regulation and supervision all contributed to imprudent lending/investment activities and unhedged borrowing committed by a large segment of the private sector. The paper explores the strength and weaknesses of the financial sector in this context. How competitive are our banks and non-bank financial institutions in light of the irreversible liberalization process, the lingering impact of the Asian financial crisis, and the globalization of services?
