Higher PDIC coverage: Good or bad?

The issue of increased deposit coverage by the Philippine Deposit Insurance Corporation (PDIC) is probably a no-brainer to most people. If it can be made to guarantee a higher deposit amount to protect depositors from any bank failures, why still argue about it, right?

Apparently, there is more to just increasing the amount of insured deposits, and that’s what PMT members are talking about in the discussion thread Proposed increase in PDIC coverage.

What is the PDIC?

The PDIC is the Philippine counterpart to the US Federal Deposit Insurance Corporation (FDIC). As a deposit insurer like the FDIC, the PDIC collects semiannual fees from member banks similar to premiums collected by an insurance company. The fees paid represent the assurance of depositors that the PDIC will guarantee deposits up to P250,000 (US$5,200) in that bank.

In case a bank run or bank holiday is declared, the PDIC will step in to reimburse that bank’s depositors up to P250,000 of their deposit accounts. If closed banks are not rehabilitated or taken over by other banks, deposits amounting to more than P250,000 can still be claimed if there are bank assets remaining which can be liquidated.

Right now, the PDIC guarantee covers only deposit accounts, meaning Savings, Checking, and Time Deposit accounts offered by banks in the Philippines.

Higher PDIC coverage

Last week, Sen. Francis “Chiz” Escudero filed a bill in the Senate calling to double the maximum deposit insurance coverage from P250,000 to P500,000. President Gloria Macapagal-Arroyo herself supported the idea and even proposed that the coverage be further increased to P1 million.

What’s wrong with the bill? Overall, it’s generally a good bill except that it might spur a few negative implications.

For one, the government will have to contribute P42 billion more to cover the proposed increase in insured deposits. According to PDIC president Jose Nograles, the hike in insurance coverage will entail the government to raise its contribution from the current P3 billion to P45 billion. That’s a lot of government money that could be better spent to increase the competitiveness of Philippine industries or, to address the bank deposits issue, ensure that no local bank will collapse.

Second, maintaining the blanket insurance coverage on all deposits might encourage banks to offer “risky” deposit accounts such as double-your-money investments or hybrid time deposits that offer up to 20% interest per annum.

There’s nothing wrong with those products as long as the money is placed in investment vehicles whose return exceeds the offered interest rate. But what would prevent a greedy bank from offering, say, a 50%-interest-per-annum, P1-million-minimum time deposit account whose proceeds we won’t know how they are being invested?

The bank would surely pocket the profits, but once they become unable to sustain the high payout, they can simply declare a bank run and tell depositors:

“Uh-oh, we blew it. Apparently, we can’t offer 50% interest per annum. No, no, you won’t lose money because you can run after the PDIC. Go after them, not us. By the way, we’re planning to open a new bank soon and we’ll offer the same double-your-money time deposit product, so see you again when you make an investment with us. Nope, this is not going to be risky because, remember, the PDIC will reimburse you when we fail!”

Actually right now, the blanket insurance coverage is being used – actually, exploited – by some banks that offer high-yield but high-risk deposit accounts, such as several double-your-money investment programs. Again, there is no problem with this as long as banks are able to make interest payments. However, once the bubble bursts, they simply shift the responsibility and pass on the burden to the PDIC.

Discretion of insurance coverage

For this reason, we concur with the provision in the proposed Senate bill giving the PDIC discretion on which deposit accounts to insure. If ever this bill is approved, depositors can still be protected by requiring banks to inform them if the deposit account they are opening is covered by the PDIC or not. Depositors must have the right to know if their accounts are protected by the insurance coverage PRIOR to opening the account, NOT after the bank has closed down.

The PDIC should not and should never be made to guarantee erring decisions of faulty banks. Because if it continues refunding depositors for risky deposit accounts that should not be offered in the first place, the PDIC may — and can — go bankrupt.

And when and if the PDIC, the insurer of our bank deposits, ultimately finds itself in trouble, without a doubt, no depositor will laugh his way to the bank.

Additional readings:

• Discussion forum: Proposed PDIC coverage of P500,000
• Discussion forum: Explanation on the rules of the PDIC coverage
• Double-your-money investment schemes — are they for real?
• Experiences investing in double-your-money programs in the Philippines
• List of banks offering double-your-money or high-interest accounts