The Philippine Deposit Insurance Corporation (PDIC) reiterated support for the temporary four-fold increase in the maximum deposit insurance coverage (MDIC) from P250,000 to P1 million in a series of consultations with government economic managers and legislators. Appearing before the House Committee on Banks, PDIC President Jose C. Nograles said that under the temporary increase in coverage, the PDIC will cover up to P250,000 with the remaining P750,000 to be guaranteed by the Government. Corollary measures will need to be implemented to build up the Deposit Insurance Fund (DIF) and address risks posed by the increased MDIC.

First among the corollary measures is an increase in PDIC’s capitalization of P24 billion.

“At the current MDIC of P250,000, we need P24 billion to cover the required insurance reserve. It may be recalled that the increase in MDIC from P100,000 to P250,000 in 2004 was done without a corresponding increase in assessment,” Nograles said.

The second corollary measure is exemption from taxes on assessment. This is consistent with the tax exemption enjoyed by other deposit insurance agencies, and will contribute to the build up of the DIF. Sufficiency of the DIF will ensure that depositors have immediate access to their hard-earned savings in the event of bank closures.

As third corollary measure, PDIC seeks authority to determine which deposit products are covered by insurance. This will enable PDIC to manage its risks in the light of new and complex financial products.

Nograles said that the fourth corollary measure is the authority to conduct independent examination of banks. The authority to independently examine banks will strengthen PDIC’s co-regulatory and oversight function. Under existing rules, bank examination cannot be conducted within one year from the last examination date. It also requires that PDIC seek prior approval of the Monetary Board before it can conduct its own examinations. The inability of the PDIC to move swiftly increases the risk exposure to the Deposit Insurance Fund (DIF) which is the source of funds for payout operations when banks closed.

Fifth, PDIC is requesting for the grant of bridge bank authority as an additional bank failure resolution method for orderly liquidation. Establishment of a bridge bank helps preserve critical banking functions until a final resolution can be accomplished. Bridge banking is being practiced in the United States and in neighboring countries such as Japan, Korea, and Taiwan, among others.

The bridge bank authority is one of the 21 Core Principles for Effective Deposit Insurance Systems published by the International Association of Deposit Insurers (IADI). The Core Principles are designed to enhance the effectiveness of deposit insurance systems and are based on IADI research and guidance papers and practical experience of members, associates and observers. The IADI is an international organization of 52 deposit insurers established to contribute to the stability of financial systems worldwide. The PDIC is a founding member of the organization. Nograles is a member of IADI’s policy-making Executive Council.

Sixth is the grant of authority to modify its existing corporate structure to make PDIC responsive to functional and operational needs consistent with its expanded mandate.

Nograles expressed optimism that the quadrupling of the MDIC together with the proposed corollary measures will further contribute to the stability of the financial system.