Philippine Deposit Insurance Corporation

Moves by other jurisdictions to expand the scope of their bank deposit insurance in early October 2008 also led the Philippine government to consider similar measures (PDIC 2008b; Salceda 2008). On October 10, 2008, the Philippine Deposit Insurance Corporation (PDIC) announced its full support for two legislative proposals that would double the maximum deposit insurance limit (PDIC 2008c).

Section 3 of Republic Act No. 9576 doubled the deposit insurance limit from PHP 250,000 to PHP 500,000 per depositor (Republic Act No. 9576 2009). The Act also conferred broader co-regulatory powers upon the PDIC, such as the ability to determine insured deposit eligibility and conduct special examinations if a member bank were deemed to be unsound (Republic Act No. 9576 2009).

To support the Deposit Insurance Fund (DIF), the law waived all of the PDIC’s tax obligations for a five-year period following the date of effectivity (i.e., June 1, 2009), and, thereafter, waived all income tax, final withholding tax, value-added tax on assessments collected from member banks, and local taxes (Republic Act No. 9576 2009). It also allowed the PDIC to issue tax-free notes, debentures, bonds, and other obligations (Republic Act No. 9576 2009).

Given its experience in dealing with the Asian Financial Crisis of 1997–98, the government of the Philippines believed itself well-prepared to handle the potentially severe economic fallout stemming from the GFC (BSP 2008). A report from the central bank, Bangko Sentral ng Pilipinas (BSP), noted that the domestic banking system had very little exposure to subprime mortgages and other securitized products, benefited from improved risk management and liquidity frameworks, and was subject to heightened supervisory scrutiny compared to those in Western economies (BSP 2008). Despite the relative strength of the banking sector, however, the BSP also reported that the domestic economy suffered from ongoing volatility in commodity and consumer prices, rising interest rates, the depreciation of the peso against the US dollar, capital outflows, and a sudden decline in export activity (BSP 2008).

To address these issues, the BSP introduced measures to strengthen its daily monitoring of the banking system and enhance interbank liquidity (International Monetary Fund 2009). It also moved to preemptively reduce the reserve requirement by two percentage points to 19%, while doubling the amount allocated for the rediscount window from PHP 20 billion to PHP 40 billion (International Monetary Fund 2009). The BSP also opened a dollar-denominated deposit window and a short-term dollar repurchase facility to address fragmentation in the dollar interbank market (International Monetary Fund 2009). Philippine banks, for their part, informally agreed to reduce their surplus dollar positions by 50%, increase interbank dollar lending, and heighten oversight of clients’ foreign investments (International Monetary Fund 2009).

Republic Act No. 9576 came into effect on June 1, 2009. The months-long legislative process involved multiple readings by both the House and Senate, which reviewed their own versions of the amendment (PDIC 2008b; PDIC 2009e). A consolidated measure was finally passed by the House and Senate on March 4 and 5, 2009, respectively; the President of the Philippines then signed it into law on April 29 as a collection of amendments to the PDIC Charter (Republic Act No. 9576 2009). The law took effect on June 1, 2009 (GoP 2009b).

Republic Act No. 9576 gave the PDIC the power to adjust the deposit insurance limit in the event that the Monetary Board of the BSP identified “a condition that threatens the monetary and financial stability of the banking system that may have systemic consequences” (Republic Act No. 9576 2009). Such a determination would compel the Secretary of Finance to call for a special meeting by the PDIC Board of Directors, who would then vote on the adjustment (Republic Act No. 9576 2009). If the Board’s vote were unanimous, the decision would go the President of the Philippines for final approval (Republic Act No. 9576 2009).

On January 6, 2009, the PDIC announced that it had signed an agreement with KPMG Manabat Sanagustin & Co., CPAs, to expedite the pre-settlement examination of 12 banks placed under PDIC receivership in December 2008 (PDIC 2009a). With KPMG’s assistance, the PDIC intended to begin paying out deposits by mid-February (PDIC 2009a). PDIC personnel estimated that payouts would not have commenced until September 2009 without external support (PDIC 2009a).

The PDIC was an “attached” agency of the Department of Finance, but it was operationally independent (World Bank 2011, 7). The PDIC’s Board of Directors, pursuant to Section 2 of the PDIC Charter, consisted of five members: the Secretary of Finance (ex-officio Chairman), the Governor of the BSP (ex-officio member), the President of the Corporation (Vice Chairman of the Board, appointed for a term of six years by the President of the Philippines, from either the public or private sector), and two private-sector representatives (each appointed for six years by the President of the Philippines for staggered terms) (GoP 2009).

Although the PDIC could not conduct independent examinations of its member institutions, Section 8 and Subsections 9(b-1), 9(d), and 9(d-1) of the PDIC Charter outlined its abilities to do so either jointly or with the approval of the BSP (GoP 2009). The PDIC could also carry out “special” inspections alongside the BSP if a bank were to be “threatened” or face “impending closure” (GoP 2009). Subsection 9(d[1]) required insured banks to “keep and maintain a true and accurate record or statement” of their daily deposit transactions, although the PDIC was unable to access more detailed reports and records until after the bank’s liquidation (GoP 2009). Until that point in the bank resolution process, the BSP served as the PDIC’s main source of information (IMF and World Bank 2011).

The PDIC was required by subsection 20(a) of its Charter to submit annual reports of its operations to Congress “as soon as practicable” after January 1 (GoP 2009). Subsection 20(b) also provided for an external examination of the PDIC’s activities by the government’s Commission on Audit (GoP 2009).

In advocating for the increase in the deposit insurance limit, the PDIC’s president said it was a “pre-emptive move to maintain public confidence in light of the current financial crisis overseas” (PDIC 2008d). The PDIC noted in a press release the very large percentage of depositors whose accounts would be fully insured: 97.2% of all deposit accounts, up from 95.1% under the previous limit. The other 2.8% of accounts would be partially covered, up to the new limit of PHP 500,000 (PDIC 2008d).

Once the legislature approved the increase, the PDIC communicated with depositors and banks through multifaceted “awareness campaigns” (IMF and World Bank 2011). These included frequently publishing updates to their website, arranging speaking engagements, and distributing advertisements to insured institutions. The World Bank commended the PDIC for its efforts to ensure public understanding of the deposit insurance system, which “should” have particularly benefited small depositors (IMF and World Bank 2011).

Upon the closure of a bank by the BSP, the PDIC sent staff from the Depositors Assistance Bureau (DAB) to begin coordinating between local government officials and bank staff while also publicizing information about the institution’s failure (IMF and World Bank 2011). The DAB would then hold a Depositor Forum to explain the claims procedure, distribute claim forms to affected depositors, and assist with the filing of any related documentation (IMF and World Bank 2011).

The PDIC guaranteed the first PHP 250,000, while the National Government guaranteed any excess amount up to PHP 500,000 (GoP 2009). The new limit covered PHP 1.41 billion in deposits, representing 34.52 million accounts in 797 banks; this amounted to 30% of total deposits in 2009, up from 23% in 2008 (PDIC 2010b; PDIC 2009h).

The Philippine government had previously raised the deposit insurance limit from PHP 100,000 to PHP 250,000 in 2004 (IMF and World Bank 2011).

The DIF consisted of a PHP 3 billion Permanent Insurance Fund, assessment collections from member institutions, “reserves for insurance and financial assistance losses,” and “retained earnings” to fulfill its obligations (GoP 2009). Subsection 6(a) of the PDIC Charter provided the legal authority for the PDIC Board of Directors to set the assessment rate. However, that rate could not exceed 0.2% per annum of a bank’s total deposit liabilities, and the PDIC already charged that level, so the PDIC could not raise its assessment during the GFC (GoP 2009).

The 2009 law gave Congress the ability to annually appropriate the necessary funds to cover any shortfalls for three years (HB 5911 2009; SB 2964 2008; Republic Act No. 9576 2009).

The PDIC reported that, of the PHP 12.8 billion that the PDIC paid out to depositors of failed banks between June 1, 2009, and May 31, 2012, the national government assumed responsibility for PHP 4.9 billion. According to PDIC Vice President of Corporate Affairs Jose Villaret Jr., the PDIC was required to pay for all insured deposits upfront, regardless of amounts, and then submit a claim for reimbursement to the Department of Budget and Management. The Department would then include the claim in the following year’s appropriations bill. The entire process, from the PDIC’s initial submission to reimbursement by the government, took about two years.

To support the Deposit Insurance Fund (DIF), the law also waived all of the PDIC’s tax obligations for a five-year period starting June 1, 2009 (Republic Act No. 9576 2009). This resulted in a tax subsidy of PHP 13.9 billion between 2009 and 2014, according to PDIC annual reports. Starting in 2014, PDIC continued to be exempt under the law from all taxes except value-added taxes, which represented a significant permanent government subsidy.

The PDIC’s deposit insurance fund remained well-funded throughout the GFC. It was PHP 54.3 billion at the end of 2007, covering 6.1% of estimated insured deposits at the PHP 250,000 insurance limit (PDIC 2008j). It rose to PHP 60.5 billion at the end of 2008 (6.3%), and declined only slightly to PHP 60.3 billion at the end of 2009, despite a relatively large number of bank failures (PDIC 2009h; PDIC 2010b). In its 2009 annual report, the PDIC reported that estimated insured deposits rose 46% to PHP 1.41 trillion in 2009, when the insurance cap increased from PHP 250,000 to PHP 500,000. Due to the increase in insured deposits, the fund’s coverage fell from 6.3% in 2008 to 4.3% in 2009. Throughout the GFC, however, the DIF stayed above the PDIC’s performance standard.^FIn 2003, the PDIC set a long-term PHP 60 billion target for the DIF. It increased the target to PHP 90 billion in 2004, when the deposit cap was raised from PHP 100,000 to PHP 250,000 but continued in its annual reports to set a “performance standard” of 66% of its target, or essentially still PHP 60 billion. In 2010, it replaced the fixed target with a risk-based formula that resulted in an improvement in its performance to 86%. In 2012, the PDIC switched to a target of 5% of estimated insured deposits. In 2016, it switched to a range of 5.5%-8.0% based on a new methodology (Diaz n.d.; IADI 2018). By the end of 2020, the DIF had grown to PHP 214.8 billion, representing 7% of estimated insured deposits (PDIC 2011). According to Section 18 of the PDIC Charter, the PDIC could borrow from the BSP or “any bank designated as depository or fiscal agent of the Philippine Government” on a short-term basis if there were an “emergency or urgent need” to meet its legally prescribed obligations (GoP 2009).

Section 5 of the PDIC Charter mandated PDIC membership for “any bank or banking institution, which is engaged in the business of receiving deposits as herein defined on the effective date of this Act, or which thereafter may engage in the business of receiving deposits” (GoP 2009). Although the PDIC had no authority to review bank applications, it automatically granted deposit insurance to any institution that received a license from the BSP to conduct banking services (IMF and World Bank 2011).

Subsection 4(b) of the PDIC Charter defined eligible institutions broadly to include “banks, commercial banks, savings banks, mortgage banks, rural banks, development banks, cooperative banks, stock savings and loan associations and branches and agencies in the Philippines of foreign banks and all other corporations authorized to perform banking functions in the Philippines” (GoP 2009).

Deposits of branches and subsidiaries of foreign banks licensed by the BSP to perform banking functions in the Philippines were also insured under the PDIC (GoP 2009).

As of September 30, 2009, the PDIC insured a total of 797 banks (IMF and World Bank 2011).

The amendment to the PDIC Charter resulting from Republic Act No. 9576 defined “deposit” in subsection 4(f) as the following:

The term “deposit” means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account, or issued in accordance with Bangko Sentral rules and regulations and other applicable laws, together with such other obligations of a bank, which, consistent with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the bank… (GoP 2009).

The PDIC Charter amendment resulting from the passage of Republic Act No. 9576, effective June 1, 2009, excluded from coverage investment products, unfunded or fraudulent accounts, deposit accounts “constituting, and/or emanating from, unsafe and unsound banking practice/s” or unlawful activity (GoP 2009; Republic Act No. 9576 2009). Otherwise, all deposits specified by the PDIC Charter remained covered.

Subsection 6(a) of the PDIC Charter outlined the rules governing the assessment rate, which was determined by the Board of Directors and was not to exceed one-fifth of 1% per annum. This was calculated based on the total deposits held by the bank, as defined in subsection 4(f) and submitted by the bank via certified statement and did not make allowances for indebted depositors (GoP 2009). Because the PDIC could not adjust fees or charge special assessments in the event that losses exceeded forecasts, the assessment rate had remained at the aforementioned level for several years (IMF and World Bank 2011). It was uniform for all institutions and not risk based.

Although the PDIC was solely responsible for the collection of fees, it did not have the ability to raise premiums or charge any special assessments (IMF and World Bank 2011).

According to subsection 10(a) of the PDIC Charter, the PDIC acted as the legally mandated receiver of insured banks closed by the Monetary Board of the BSP (GoP 2009). The procedures outlined in Section 14 stipulated that the PDIC pay out insured deposits “as soon as possible,” either in cash or by transfer from another insured institution (GoP 2009). However, the PDIC was required to wait to begin examining depositors’ claims until the BSP completed its own review of the failed bank to determine whether it could be rehabilitated, a process which could often take up to 180 days (IMF and World Bank 2011). To complicate matters, failed banks were allowed up to 90 days to submit their own post-receivership resolution plans (IMF and World Bank 2011). The timeliness of the payouts therefore depended heavily on the length of the BSP’s assessment, during which the PDIC had “little involvement with the bank,” as well as the availability of bank records and related documentation (IMF and World Bank 2011).

Between 2001 and 2008, the PDIC commenced its claims process an average of 21 days following the BSP’s determination of a bank’s failure (IMF and World Bank 2011). This allowed most depositors to receive payments approximately two months after a bank’s closure (IMF and World Bank 2011). The World Bank determined, however, that the “larger and simultaneous failures” related to the GFC would result in a longer timeframe (IMF and World Bank 2011). A vast majority of insurance payouts made in 2010, for instance, were issued in response to banks that had failed in 2009 (PDIC 2011).

Beginning in 2010, the government waived the submission of claims for depositors with PHP 5,000 or below in their accounts to “ensure the immediate access by small depositors to their deposit insurance payments without incurring additional costs and time” (PDIC 2011). Payments were then sent by registered mail to the depositors’ addresses on file with the closed bank (PDIC 2011). The PDIC reported that it was able to pay out 150,340 accounts amounting to PHP 107 million (94% of all eligible deposits with balances of PHP 5,000 and below) by year-end 2010 (PDIC 2011).

Republic Act. No 9576 did not contain any additional restrictions on eligible participants or accounts (Republic Act No. 9576 2009).

The Philippine government codified the new cap in the amendment to subsection 4(g) of the PDIC Charter, effective June 1, 2009 (Republic Act No. 9576 2009). Government coverage for deposits in excess of PHP 500,000 expired, as legislated, on May 31, 2012 (Republic Act No. 9576 2009).

Pursuant to Section 13 of the PDIC Charter, the government reviewed the deposit insurance limit two years following the passage of Republic Act No. 9576 and every five years thereafter, considering factors such as inflation adjustments and per capita GDP (GoP 2009; IMF and World Bank 2011). Additionally, subject to approval by the President of the Philippines, the PDIC could adjust a change to the maximum deposit insurance coverage “in case of a condition that threatens the monetary and financial stability of the banking system that may have systemic consequences” (GoP 2009).