SAN SEBASTIAN COLLEGE – RECOLETOS

Surigao City Extension

Surigao City, Surigao del Norte

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PDIC AND ITS ROLE AS A FINANCIAL SAFETY NET IN THE PHILIPPINES

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A Term Paper Presented to

DR. ADRIAN ARPON, CPA
Graduate School of Law
Masters of Law Program

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In Partial Fulfillment of the Requirements for the Subject

AMLA AND BANKING LAWS

1st Semester, A.Y. 2019-2020

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By

ATTY. JASON OLIVER C. SUN

DECEMBER 25, 2019

 CHAPTER I
INTRODUCTION

The history of banking is intimately intertwined with the history of money. The earliest proto-

banks hail from ancient Assyria, India, and Sumeria. This concept eventually made its way to Greece and

Rome.1

In the Roman Empire, banking-houses were known as Taberae Argentarioe and Mensoe

Numularioe. Moneylenders would set up their stalls in the middle of enclosed courtyards called macella

on a long bench called a “bancu,” from which the term “bank” was eventually derived. Unlike its

predecessors, the Roman Empire greatly contributed to the formalization of the administrative aspects

of banking, primarily by instituting greater regulatory measures for financial institutions and practices. 2

From its humble origins on the “bancu,” banking has now evolved into an increasingly complex

and important undertaking, affecting the financial and economic landscapes of every nation in the

world. Considering their crucial role in a nation’s future, it is imperative that financial safety nets are put

in place to ensure the stability of a nation’s baking system.

This paper first aims to provide some general information on financial safety nets and their

importance to a country’s banking system and will then discuss how the Philippine Deposit Insurance

Corporation (PDIC) functions as a critical financial safety net in this jurisdiction.

CHAPTER II
FINANCIAL SAFETY NETS

In almost all countries, financial safety nets are considered an integral part of the financial

infrastructure and are seen as necessary for promoting the stability of financial systems by enhancing

confidence in the banking system.3 Institutional arrangements may vary from country to country but by

and large, looked at from a functional perspective, effective financial safety nets generally have four

components: (1) prudential regulation and supervision, (2) lender of last resort, and (3) deposit

insurance, and (4) a clearly defined resolution mechanism for banks in distress. 4

1
History of Banking. Retrieved from: https://en.wikipedia.org/wiki/History_of_banking on 3/28/2020
2
Id.
3
Landau, D.F. and Lindgren C.J., Toward a Framework for Financial Stability (1998), Retrieved from:
https://www.imf.org/external/pubs/ft/wefs/toward/pdf/file05.pdf on 3/28/2020
4
Research and Guidance Committee for International Association of Deposit Insurers, General Guidance to
Promote Effective Interrelationships Among Financial Safety Net Participants (2006), Retrieved from:
https://www.iadi.org/en/assets/File/Papers/Approved%20Guidance%20Papers/Guidance_Interrelationship.pdf on
3/28/2020
Prudential Regulation and Supervision

The regulatory framework and prudential supervision are designed to promote improved

stability performance in the banking system as they attempt to offset the negative consequences of the

market failure present in the industry. Prudential regulation and supervision include, inter alia, the

chartering (e.g. licensing) function, disclosure requirements, restrictions on the types of assets banks

may hold, and the types of activities that banks may engage in. Regulation is designed to reduce

unwarranted or unmitigated risk taking and supervision to monitor banks to see that they are complying

with the regulations in order to ensure safety and soundness of the banking system. 5

Lender of Last Resort

Lender of last resort policies typically have three primary objectives: (1) to protect the integrity

of the payment system; (2) to avoid runs that spill over from bank to bank and develop into a systemic

crisis; and (3) to prevent illiquidity at an individual bank from unnecessarily leading to its insolvency. 6

Deposit Insurance

The most important role of deposit insurance is to protect depositors from market

imperfections by guaranteeing the liquidity of deposits, thus, lending stability to the financial system.

Deposit insurance assures depositors that they will have immediate access to their insured deposits

even if their bank fails, thereby reducing the incentive to make a run on the bank. This prevents panic

from spreading throughout the financial system which will adversely affect both healthy and troubled

banks if not immediately contained.7

Resolution Mechanism for Banks in Distress

Another essential feature of any financial safety net is having a system in place for dealing with

distressed banks. An effective and efficient system in this regard prevents the trouble from exploding

into a full-blown crisis. In this way, the adverse effects of a bank’s failure are substantially contained,

with only negligible effects to the country’s banking system or financial industry as a whole.

5
Id.
6
Landau, supra note 3
7
Llanto, G.M., Deposit Insurance: Role, Limitation, and Challenges (2005). Retrieved from:
http://www.pdic.gov.ph/files/PDIC_Occasional_PaperNo1.pdf on 3/28/2020
 CHAPTER III
THE BSP

Central banks are often regarded as the most important feature in a country’s financial system.

They play an important role in managing the country’s monetary policy and banking regulations, which

is necessarily linked with financial stability.

In the Philippines, the role of central bank is performed by the Bangko Sentral ng Pilipinas (BSP).

The BSP provides policy directions in the areas of money, banking, and credit. It has supervision over the

operations of banks and exercises such regulatory powers over the operations of quasi-banks. Its

primary objective is to maintain price stability conducive to a balanced and sustainable growth of the

economy, as well as promote and maintain monetary stability and the convertibility of the peso. 8

Particularly relevant to the discussion on financial safety nets, the BSP performs the following

functions: (1) Liquidity Management. The BSP formulates and implements monetary policy aimed at

influencing money supply consistent with its primary objective to maintain price stability; (2) Lender of

last resort. The BSP extends discounts, loans and advances to banking institutions for liquidity purposes;

(3) Financial Supervision. The BSP supervises banks and exercises regulatory powers over non-bank

institutions performing quasi-banking functions; and (4) Other activities. The BSP functions as the

banker, financial advisor and official depository of the Government, its political subdivisions and

instrumentalities and government-owned and -controlled corporations. 9

Based on the foregoing, it should be abundantly clear that the BSP plays a crucial role not only in

the country’s financial safety net, but also in its financial and banking system as a whole.

CHAPTER IV
THE PDIC

A country’s deposit insurer plays a complementary role with its central bank. The most

important function of a deposit insurer is to protect depositors from market imperfections by

guaranteeing the liquidity of deposits, thus, lending stability to the financial system. 10 Absent a credible

deposit insurer, there continues to exist a possibility that depositors might “run” by removing their

deposit from a particular bank or numerous banks, in response to minor difficulties being experienced

by the said bank or the banking industry.

8
R.A. 7653
9
Retrieved from: http://www.bsp.gov.ph/about/functions.asp on 3/28/2020
10
Llanto, supra note 7
 In the Philippines, the role of deposit insurer is played by the PDIC. The PDIC insures the

deposits of all banks and exercises certain powers over corporations authorized to perform banking

functions in the country.

Based on its charter, the PDIC performs three primary functions:

Deposit Insurer

The PDIC is the sole entity authorized to insure bank deposits in the Philippines. Originally,

deposit insurance coverage was left to the discretion of each bank. However, as the law improved, the

government eventually chose to make deposit insurance mandatory and automatic for all banks or

corporations authorized to perform banking functions in the country. As the law currently provides, a

maximum deposit insurance coverage of Five Hundred Thousand Pesos (PhP 500,000.00) per depositor

per bank is provided by the PDIC. This covers all types of bank deposits in banks whether denominated

in local or foreign currencies. All deposit accounts of a depositor in a closed bank maintained in the

same right and capacity are added together. A joint account is insured separately from any individually-

owned deposit account.11

As of December 31, 2017, around 57.1 million accounts in 587 banks are covered by deposit

insurance. Of the total number of accounts, 96.3% are with balances not exceeding the maximum

deposit insurance coverage of PhP500,000 per depositor per bank. For the same period, total deposits in

the Philippine banking system amounted to PhP11.7 trillion, of which 20.8% is covered by deposit

insurance.12

Statutory Receiver

The PDIC’s charter clearly provides that whenever it is necessary to appoint a received for a

distressed bank, the PDIC shall be appointed as receiver. Hence, PDIC is duty-bound to hold, manage,

and preserve the assets of the distressed bank in trust for its creditors and shareholders. To perform

these functions PDIC is given significant control over the management and administration of the bank. 13

11
Retrieved from: http://www.pdic.gov.ph/?nid1=1&nid2=12 on 3/28/2020
12
Id.
13
R.A. 3591, as amended
Co-regulator of Banks

While the BSP continues to serve as the primary regulator of the country’s financial and banking

system, the PDIC has also been granted some regulatory powers over banks. For example, under Section

8 of its charter, the PDIC may conduct special examinations of banks suspected of committing unsafe

and unsound banking practices.14

CHAPTER IV
CONCLUSIONS AND RECOMMENDATIONS

Based on the foregoing, it is abundantly clear that the PDIC plays a limited, yet critical role in the

country’s financial safety net. PDIC complements the functions of the BSP by achieving the following:

1. Protecting depositors from market imperfections by assuring the liquidity of their deposits even

if the bank should fail. This improves the public’s trust and confidence in the banking system and

prevents an industry-wide crisis if trouble should arise.

2. Functioning as a secondary lender of last resort when it makes loans to, or purchases the assets

of, or assumes the liabilities of, or makes deposits in: (1) a bank in danger of closing, upon its

acquisition by a qualified investor; (2) a qualified investor, upon its purchase of all assets and

assumption of liabilities of a bank in danger of closing; or (3) a surviving or consolidated

institution that has merged or consolidated with a bank in danger of closing. 15

3. Acting as a co-regulator of banks by conducting periodic examinations and supplying regulatory

issuances to deter the commission of unsafe and unsound banking practices.

4. Finally, ensuring the effective resolution of the affairs of a closed bank, as its statutory receiver

and liquidator. The PDIC settles the bank’s obligations to the depositors and its creditors by

taking charge of the bank’s assets, converting these assets into cash, and distributing them as

directed by law. It may also facilitate the purchase of assets and assumption of liabilities of the

closed bank by another insured bank. By performing these functions effectively, the PDIC

ensures that there is minimal disruption to the banking industry, as a whole, and reduces the

possibility of asset wastage by the closed bank itself.

14
R.A. 3591, as amended
15
Sec. 22(3), R.A. 3591, as amended