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Banks want deposits worth up to P1-M insured to lure large funds

Banks want deposits worth up to P1-M insured to lure large funds

MANILA, Philippines — Regulators are studying proposals to double the maximum deposit insurance to as much as P1 million in a bid to boost confidence in the local banking sector facing headwinds from accumulating bad debts.

“It is under study and the condition for an adjustment is subject to strict conditions including for banking stability as determined by BSP,” Roberto Tan, president of the Philippine Deposit Insurance Corp., said in a text message on Tuesday.

The Chamber of Thrift Banks, a group of savings banks, floated the proposal before the Bangko Sentral ng Pilipinas (BSP), but a position paper would be submitted later, said Suzanne Felix, executive director.

BSP Governor Benjamin Diokno said he would consider taking up the proposal with the PDIC Board, a seven-member body chaired by Finance Secretary Carlos Dominguez III. Dominguez did not reply to request for comment.

Interestingly, the proposal, if approved, is unlikely to matter to 96.7% or 73.27 million deposit accounts containing deposits already fully insured under the present P500,000 limit per account as of March. 

The insurance amount represents the maximum value a depositor may get from government if a bank shuts down. By current estimates, an additional 1.12 million in large accounts containing between P500,001 and P1 million would become fully insured and reimbursable under a higher limit. 

Tan said essentially, hiking the deposit insurance cap “provides incentive and confidence for large savings” which during these hard times, can provide additional cash flow to lenders.

When a bank fails, an assurance to millionaire depositors that they can get their money back in full can also attract liquidity back to the banks, where low interest rates are prompting large investors to place their funds elsewhere.

An increase in deposit insurance during the health crisis would follow the same tack used to entice funds siphoned off by the global financial meltdown. In April 2009, Republic Act No. 9576 doubled the insurance from P250,000 and gave PDIC power to hike it further without amending the law and by just asking the president.

While indeed raising the deposit insurance is now easier, Tan stressed there is need to assess whether an adjustment is needed considering most deposits are already fully covered. “As I said, all of these aspects are being studied, and we likely need to engage an expert adviser to have an in-depth study on it,” Tan said.

Insurance costs would also inevitably increase with a higher deposit insurance. This, in turn, would hurt banks and offset any benefit from larger deposits. Under the law, PDIC manages a Deposit Insurance Fund, a pool of required contributions from banks equivalent to 1/5 of 1% of their total deposits. 

“The potential cost can be significant for the Deposit Insurance Fund,” Tan said.