BSP backs temporary deposit insurance hike

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said the BSP is in favor of the proposal for the temporary increase in deposit insurance to avoid moral hazard issues.

Tetangco told reporters over the weekend that deposit insurance should have the flexibility to respond to emerging conditions in the financial system but the mechanism should also be flexible enough to revert when conditions normalize.

The BSP has been supportive of initiatives to adjust the deposit insurance coverage but wants to avoid permanent policies that officials said could encourage depositors to stop making the distinction between good and bad banks, creating a moral hazard that would unwittingly promote unsafe practices.

Regulators said the PDIC did need strengthening but raising the deposit coverage too high would create a moral hazard that since it would remove the need to be careful about which bank people would choose to do business with.

The Philippine Deposit Insurance Corp. (PDIC) has made proposals to make these insurance coverage adjustments temporary and Tetangco said this was a step in the right direction that the BSP would support.

“The reasons for these adjustments are almost always going to be temporary in nature,” Tetangco said. “So, permanently increasing deposit insurance coverage would raise moral hazard issues that would run contrary to the basic tenet of financial stability.”

According to Tetangco, the law could be amended so that the PDIC would be enabled to adjust the level of deposit insurance coverage depending on triggering factors.

“I think this should be presented in terms of flexibility,” Tetangco said. “The law currently sets the coverage at P250,000 and that’s it. This should be adjustable both ways—to increase when necessary and to reduce when conditions normalize.”

The PDIC had proposed that the increase in deposit insurance to P1 million would be temporary, lasting only three years. It also proposed a 25-75 burden-sharing mechanism between itself and the National Government to make the increase in deposit insurance coverage more manageable.

PDIC president Jose C. Nograles said raising the deposit insurance coverage was a “proportionate” response considering the bold moves already undertaken by other countries in response to the global financial crisis.

Aside from actions taken by deposit insurers in Europe, Nograles said blanket guarantees are already in place in some countries in Asia such as Singapore and Malaysia as well as Hongkong and Taiwan. Indonesia also raised its deposit guarantees.

According to Nograles, PDIC supported the P1-million increase although this would last for only three years, presumably until the dust settled on the global financial crisis.

“Frankly, nobody knows the breadth and depth of this crisis and more importantly, when it will abate and be over,” Nograles said, adding that other countries such as the US, Malaysia and Singapore have limited their deposit increases to a period of two to three years only.