The Philippine Deposit Insurance Corporation (PDIC) is set to issue a regulatory issuance that will prohibit banks or its directors, officers and employees from marketing and promoting transactions that constitute or emanate from unsafe and unsound banking practices (U and U). The regulation provides for the issuance by PDIC of a directive to cease and desist (DCD) from marketing, issuing, and/or offering deposit accounts or transactions constituting, and/or emanating from, unsafe and unsound banking practice/s as authorized by Section 4 (f)[3] of the PDIC Charter.

The DCD is unlike the cease and desist order (CDO) provided for in Section 7 (a) of the PDIC Charter. The CDO calls for prior submission of a report to the Monetary Board (MB) to take corrective action on the bank in case there is a finding of U and U in conducting the business of the bank and may only be issued if the MB is unable to take corrective action 45 days after from the submission of the report. On the other hand, the DCD is a directive issued solely by the PDIC which specifically addresses deposit accounts and transactions emanating from U and U following the examination of the bank and subject to approval by the PDIC Board. A DCD does not need the prior submission of a report to the MB.

PDIC President Jose C. Nograles reminded the public that deposit accounts or transactions emanating from unsafe and unsound banking practices and covered by the DCD, will not be covered by deposit insurance. He said that an exposure draft of the regulation is already being finalized for dissemination to all member-banks.

Nograles said that the regulatory issuance will promote the government’s campaign against unsafe and unsound banking practices and develop market discipline among depositors. These will likewise enable the PDIC to safeguard and build up the Deposit Insurance Fund (DIF), the source of deposit insurance payouts. A stronger DIF contributes to the stability of the financial system, he added.

Under the RI, PDIC will adopt the U and U practices identified in BSP Circular No. 341, as follows: 1) acts or omissions that have resulted or may result in material loss or damage, or abnormal risk or danger to the safety, stability, liquidity, or solvency of the institution, 2) acts or omissions that have resulted or may result in material loss or damage, or abnormal risk to the institution’s depositors, creditors, investors, stockholders, the Bangko Sentral ng Pilipinas (BSP), or to the general public, 3) acts or omissions that have caused any undue injury, or has given unwarranted benefits, advantage or preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable negligence, and 4) acts or omissions that involve entering into any contract or transaction manifestly and grossly disadvantageous to the bank, quasi-bank, or trust entity, whether or not the director or officer profited or will profit thereby.

The DCD shall take effect immediately upon its publication and PDIC shall not pay deposit insurance on all deposit accounts or transactions that are opened, renewed, rolled over, converted, or transformed, as covered by the DCD.

The PDIC Charter excludes the following accounts or transactions from deposit insurance coverage: 1) investment products such as bonds and securities, and other similar instruments which do not fall under the definition of a deposit, 2) unfunded, fictitious, or fraudulent deposit accounts or transactions, and, 3) deposits that are determined to be the proceeds of an unlawful activity. A penalty of prision mayor or a fine of not less than P50,000 but not more than P2 million will be imposed on any officer of the bank found to have conducted business in an unsafe and unsound manner.

The recent amendments to the PDIC Charter authorized the Corporation to conduct special bank examinations whenever there is a threatened or impending closure of said bank and inquire into deposit accounts and all information related in case there is a finding of the unsafe and unsound practice. The authority to conduct examination will enable the PDIC to effectively manage the risks to the DIF which were increased when the maximum deposit insurance coverage was doubled to P500,000.