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Are your deposits really insured?

(Article published in the Apr 1, 2009 issue of Manila Standard Today)

The affluent cheered when the affluent-dominated Senate and House of Representatives approved, before going into their Lenten break presumably in sorrow for their sins, if any be admitted,  the Conference Committee Report on the latest amendments to the PDIC law.  After all, they were the main beneficiaries of their kind’s last hurrah before heading for the beach.

 As the consolidated bill’s title proclaims, the main subject or concern of the bill was to increase the maximum insurance coverage, and, only I might say, “in connection therewith, to strengthen the regulatory and administrative authority and financial capability” of the PDIC.  Since, as Speaker Prospero Nograles’s brother and PDIC President Jose Nograles says the previous maximum insurance coverage of Php  250,000 already covered about 95% or so of deposits, then the target beneficiary of new cover are clearly the remaining 5% affluent depositors.

 I am not affluent, but if I were, I would examine the new law a bit more carefully, before joining in the toasting.  In fact, I think, some roasting is called for.

 After the expected salute to motherhood in Section 1, declaring it “the policy of the State to strengthen the mandatory deposit insurance coverage system to preserve, maintain faith and confidence in the country’s banking system and protect it from illegal schemes and machinations,” the new law in Section 2(f) makes clear what are to be considered “deposits” for purposes of insurance coverage.

 Some arrangements regardless of how the transaction or account is denominated, documented, or booked, will not be paid deposit insurance in case of bank failure.

 The first of these are “investment products such as bonds and securities, trust accounts and similar instruments.” 


Trust accounts and similar instruments have by regulation long been required to be clearly documented as not covered by the PDIC simply because they are not debts of the bank. However, bonds and (debt) securities, which also partake of the debtor-creditor relationship present in deposits, are, nevertheless, also not considered “deposits” in the law.

The rationale for making the distinction between the two relationships of the same nature, it seems to me, is that the lender in the case of bonds and debt securities are, most likely, “sophisticated” investors who can fend for themselves and thus have no need for the protective mantle of government insurance.  Such awe of the “sophisticated” investor, at least in the Philippines, is misplaced.  Not only is he a mythical figure; he is just as gullible as the lonely depositor.

 The second type of transactions that the PDIC will not recognize as deposits is “deposit accounts or transactions which are unfunded or that are fictitious or fraudulent.” 

 Celso De Los Angeles’s Legacy rural banks seemed to have perfected this criminal technique of fictitious deposits into a science thereby putting the PDIC at risk, at least on paper, of paying about Php14 billion to insured depositors. 

 Unfortunately for De Los Angeles, PDIC, was not born yesterday.  It has a long standing requirement to require claiming depositors to personally appear, with sufficient and valid identification, to establish their actual existence and capability to have made the deposits.  There is a good chance that not all the Php 14 billion deposits recorded by the Legacy rural banks will be actually claimed.   Php 14 billion translates into a lot of Php250,000-account holders that not even the Pied Pier of Hamelin can gather with his music of high interest.

 The third class of transactions that the PDIC will not pay are accounts and transactions that are in conflict in line with principles of safe and sound banking.  The new law prohibits the PDIC from paying deposit insurance for accounts “constituting or emanating from unsafe and unsound banking practice/s.”  It looks well-meant; but a closer look, indicates that the invocation of the safe and sound principle is only a whit better than lip service.

 In the first place, whether an account or transaction has the dubious patrimony of “constituting or emanating from unsafe and unsound banking practice/s” is to be determined by the PDIC in consultation with the BSP.  In practice, this means that the determination of “unsafe and unsound banking practice” is required to be a joint endeavor of the PDIC and BSP, even if the monetary consequences of such a determination fall only on the PDIC.  There is no reason why the PDIC should not be able to determine that by itself.    

 Secondly, the determination (joint that it is) must be made only “after due notice and hearing.”  The determination, therefore, cannot be summary and expeditious; and must instead follow “due process” which Philippine-style often means tedious and time-consuming. This requirement in my mind, is the legislative approval of what Celso De Los Angeles had wanted the BSP to follow before it closed the Legacy rural banks.   De Los Angeles went to court to insist that he be given a copy of the Examination Report prepared by the BSP examiner who headed the team that simultaneously looked into the shenanigans of his rural banks before it was submitted to the Monetary Board.   Not that, he was not curious about his contents (he had already been given an idea when the exit interviews provided him with a List of Findings); he wanted to have a document to challenge in court who would have to give him “due notice and hearing.”

 Finally, the last requisite that renders this exclusion ineffective is the need for the PDIC, not only to have issued, but to have caused the “publication of a cease and desist order issued by the Corporation (PDIC) against such deposit accounts or transactions.”  What a tricky requirement.  It is not even clear what ought to be published by the PDIC. Is it the fact of the issuance of the CDO against a class of transactions considered unsafe or unsound? Or, as the word “such” suggests, must the publication be of the issuance a CDO against the specific deposit accounts or transactions which are considered “constituting and/or emanating from unsafe and unsound banking practice/s”? 

 If the latter, would not the PDIC, be violating the law on secrecy of bank deposits since its publication of the issuance of its CDO would necessarily have to mention “such deposit accounts or transactions”?  If only the class of is required to be adverted to in the publication, how is the word “such” to be interpreted without doing violence to the plain meaning of the word?

 The fourth and final group excluded from PDIC coverage consists of “deposits that are determined to be the proceeds of an unlawful activity as defined under Republic Act No. 9160, as amended.”  It is the least contentious and least problematic.  And with reason: if the deposit is of dirty money, then the depositor has no right to it.  And Vic Aquino, executive director of the Anti-Money Laundering Council, will make sure it is forfeited to the government.

 The obvious purpose of the exclusions is to limit PDIC coverage only bona fide deposits.  Insurance payments, after all, are to come from Deposit Insurance Fund which is a special purpose public fund, to be devoted exclusively for deposit insurance and related purposes specified in the PDIC charter.  While it is commendable that legislature by the exclusions attempted to protect that trust, the new law, like all compromise, leave some more room for improvement.