Philippine Deposit Insurance Corporation President Jose C. Nograles reiterated support to calls for an increase in the Maximum Deposit Insurance Coverage (MDIC) during a public hearing conducted by the Senate Committee on Banks, Financial Institutions and Currencies. Nograles also stressed the need for corollary measures to support the increase in coverage to ensure depositor protection and at the same time safeguard against moral hazard. Three bills have been filed at the Senate all calling for an increase in coverage to P500,000. These are SB 2678 filed by Senator Francis Escudero, SB 2687 filed by Committee Chair Senator Edgardo Angara, and SB 2688 filed by Senator Mar Roxas.

The state deposit insurer proposed a temporary increase in deposit insurance coverage to P1 million for three years, extendable when warranted. The first P250,000 will be for account of PDIC, while the remaining P750,000 will be paid by the national government. When conditions warrant, the coverage may be adjusted, subject to approval of the President of the Philippines.

The P1 million level will cover 98.5% of total deposit accounts in the banking system and 40% of total amount of deposits. It is a proportionate response to the crisis.

Nograles said that institutional and financial strengthening measures are needed to buttress the increase in insurance coverage. Among the institutional strengthening measures being proposed to mitigate moral hazard and strengthen oversight function were granting PDIC the authority to determine insured deposits, authority to conduct independent special limited bank examination, authority to organize bridge bank and immunity from suit.

The authority to determine insured deposits will allow PDIC to check and counter abuses to the Deposit Insurance Fund (DIF), which is the source for payouts on deposit insurance. The authority to conduct special examinations will give PDIC flexibility to assess first-hand the risks to the DIF. Bridge bank authority will provide an alternative bank failure resolution for orderly liquidation of closed banks. Immunity from suit subject to clear accountability would enable PDIC personnel to effectively discharge their duties without undue threats from harassment suits.

Nograles said that the proposed institutional strengthening measures will be complemented by financial strengthening measures. This includes increase in government contribution to PDIC by P24 billion, exemption from all taxes, and sovereign guarantee on bonds, debentures and other debt instruments. The increase in government contribution to PDIC will enable the Corporation to close the DIF gap at the current P250,000 coverage level. Nograles said that the last time government contribution was increased was in 1992 when the coverage was P100,000. When the coverage was increased to P250,000 in 2004, there was no increase in government contribution and bank assessment. He said that there is a clear need to provide PDIC with additional funding to give the Corporation the financial capacity to cover the risks posed by threats of insurance calls.

The said measure along with the tax exemption and sovereign guarantee, will shore up the DIF and enhance PDIC’s financial capability. This will bolster confidence in the banking system and send a strong signal that the country will be ready in case it is adversely affected by the global crisis.

Committee Chairman Sen. Angara expressed support for most of the corollary measures proposed by the PDIC. He directed Nograles to spearhead the formation of a technical working group with the Bangko Sentral ng Pilipinas and bank groups to harmonize the details of the proposals. Nograles said he was confident that the proposals could be fine-tuned to help boost the confidence in the stability of the financial system.