Boosting depositors confidence - A better stimulus package?

As expected, problems spawned by the global financial debacle are just starting to unfold in the local environment. Job loss figures are mounting, and it does not help when there are stories of banks that have been closed.

When people lose jobs, they turn to their savings to tide them over. During these critical times, it is comforting to hear that we have a responsive deposit insurance scheme that will protect hard-earned savings from bank failures.

There has been some debate on whether there is really a need to raise deposit insurance coverage to P500,000 from the current P250,000. Those against the proposal – mostly from the side of banks – are arguing that this is not necessary since the old coverage already adequately protects close to 99 percent of small depositors.

They also point out that the proposal will only encourage “immoral” behavior of depositors who are less selective when deciding to deposit their savings in reckless – and usually questionable – banks that offer higher returns from interest rates.

More depositors covered

The Philippine Deposit Insurance Corp., which fully supports the proposed hike in insurance coverage, is quick to point out that the proposal will cover 97.2 percent of deposits in banks from 92 percent at current insurance level. This will practically provide full insurance coverage to small depositors, normally serviced by rural banks.

According to PDIC president Jose Nograles, the increase in coverage will not necessarily mean an increase in premiums paid by banks, something which the banks want to avoid and have been vocal about.

What Nograles is batting for is for the finance department to exempt PDIC from paying income taxes. In 2007 alone, it paid P1.7 billion in taxes. Nograles notes that PDIC, unlike other government financial institutions and corporations, is not exempt from paying income tax and VAT. 

The savings from taxes that will not be remitted to the national government can be funneled to the deposit insurance fund which needs to be shored up to as much as P85 billion from the current P60 billion to cover for the increase in deposit insurance.

Nograles, the younger brother of the House Speaker and an investment banker, said that increasing coverage would strengthen depositor protection and help build public confidence in the banking system amid the spate of bank failures taking place globally.

Global increases in deposit insurance

Expanding the mantle of deposit protection has been one of the first actions adopted by many countries around the world in response to the global financial turmoil.

As early as October last year, Hongkong, Indonesia, Malaysia, Singapore, and Taiwan have not only raised their coverage but provided for blanket guarantee, with their respective national governments assuming the risks. The PDIC counterpart in the US, the Federal Deposit Insurance Corporation, has raised its coverage limit to $250,000 from $100,000.

The European Union also implemented higher insurance coverage while some of their members like Germany, Belgium, and Ireland opted for a blanket coverage as well.

Senator Edgardo Angara, one of the sponsors in the Senate of the bill that seeks to raise coverage to P500,000, explains that these are extraordinary times and the government needs to take decisive action in response to a global threat, the same way that governments around the world have prioritized vital measures such as increasing deposit insurance to help restore their economies.

Additional powers

To ensure that increased coverage will not be abused, the bill carries a proposal to widen PDIC’s regulatory powers that gives the state-owned firm the power to remove coverage for “deposits that are unfunded, fictitious, fraudulent, or from activities that constitute unsafe and unsound banking practices.” This means that PDIC will not pay insurance for these products even if they were booked as deposits and documented as such by a bank.

This is particularly useful against unscrupulous banks that allow its personnel to brazenly invoke PDIC’s name to assure would-be investors of a deposit insurance coverage that would protect their savings from any risk. They even advice their clients to open accounts in the name of other family members up to the amount that can be insured.

Under the proposed bill, PDIC will be allowed to publish a warning in a newspaper against a rogue bank that encourages questionable deposit transactions.

In addition, in exchange for not levying the banks’ additional premium, the bill allows PDIC, with prior approval of the Monetary Board, to conduct bank examination even more than the once-yearly mandatory examination of the BSP, if conditions are called for.

With these additional powers contemplated, it is equally important that the PDIC, same with the BSP, should be assured of independence to be able to operate in an environment that will not encourage any political intervention.

Anything less will just shortchange the public of the protection that this bill is supposed to offer.

If we doubt that the “economic resiliency plan” of this administration will generate the millions of jobs it promises, this government-sponsored legislation offers a much more realistic assurance. This seems to provide a more sensible response to the global crisis than the vaunted economic stimulus package. 

Presently, both the Senate and the House of Representatives have passed their corresponding versions of this bill. Let’s hope it will not take long for the bill to be passed into law.

Should you wish to share any insights, write me at Link Edge, 25^th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.