IN 2009, Republic Act 9576 was enacted wherein among others the guaranteed maximum deposit insurance was raised from P250,000 to P500,000. If in 2021, the said maximum deposit insurance is to adjust, there are three pegs in which to adjust the amount.
The first peg is in accordance with the standard of living. There are different measures of the standard of living, but one that is common and is relevant to the issue is the per capita income. In current terms, the 2009 per capita income was roughly P90,000 per year while the 2019 per capita income was P170,000. Hence, the “standard of living” has increased by a factor of 1.9. By using this peg, the deposit insurance will keep up with the state of economic development. Hence, the proposal set out by Sen. Ramon Bong Revilla Jr. through Senate bill number 1260 to double the maximum deposit insurance from P500,000 to P1 million is reasonable.
The second peg is in accordance with the cost of living. Using the consumer price index or CPI, the same basket of goods worth P100 in 2009 is worth approximately P140 in 2021. Hence, the cost of living has increased by a factor of 1.4. By using this peg, the deposit insurance will keep up with the cost of living. Hence, the present maximum deposit insurance of P500,000 should increase to P700,000.
The technical issue with pegging the maximum deposit insurance with the standard of living is that it is inconsistent with the proposal set out by Sen. Sonny Angara through Senate bill number 2089. In the said proposal, “The Board of Directors can increase the amount of the maximum deposit insurance coverage to an amount indexed to inflation.” If the main peg of adjusting the past maximum deposit insurance to the present is the standard of living, then it will be inconsistent to peg future adjustment with the cost of living. However, Senator Angara’s proposal has a qualifier that includes others stating, “in consideration of other economic indicators.” This implies that the Board of Directors may index to both inflation and per capita income. The problem is that the difference in the increases in the two are too divergent, 1.9 versus 1.4. The divergence may then leave the Board of Directors too much discretion to adjust the maximum deposit insurance.
The third peg to consider is financial sustainability. Sometimes it does not matter whether a certain benefit or protection like deposit insurance is extravagant, just, or unjustly small. Even if unjust, if there is no resource to pool from, the end game is to pay only up to what is financially sustainable. It is no accident that the Secretary of the Department of Finance or DOF is ex officio Chairman of the Board of Philippine Deposit Insurance Corp. or PDIC. As Chair, the Secretary will be able to voice to the Board whether certain adjustments are sustainable. Whether deposit insurance payment is printed money or the public’s pool of deposits, etc., in the end, taxpayers will bear the cost. As Chair, the Secretary in theory is there to represent the interest of the taxpayers. However, because financial sustainability is only voiced by the Chair, the peg is only implicitly or even discretionarily considered. Instead of the Chair having to voice the need for financial sustainability, it should be explicitly stated as a consideration the same way that inflation is explicitly stated.
Not exactly a peg, but rather some points of comparison. In some of the Philippines’ neighboring Asean partners, the approximate maximum deposit insurances are P260,000 in Vietnam (125 million VND), P340,000 (100 million IDR) in Indonesia, P8 million in Thailand (5 million THB), and P3 million in Malaysia (250 thousand MYR). In the United States, the maximum deposit insurance is P12.5 million ($250,000).
The last point of consideration is that raising the maximum deposit insurance too much may result in the opposite of moral hazard. In moral hazard, an entity chooses to be riskier knowing that if the risk does not pay off, its insurance will cover some costs. In the opposite of moral hazard, a depositor chooses to be safer by putting more of one’s extra money to a deposit account knowing that that money is insured. If a person has an extra P1 million and that s/he knows that the maximum deposit insurance is P500,000, s/he is nudged to put the first P500,000 in a deposit account and to put the second P500,000 to some liquid investment, for example in a time deposit account. Better yet, the person might end up spending the second P500,000 in entrepreneurial endeavors. On the other hand, if a person has an extra P1 million and that s/he knows that the maximum deposit insurance is P1 million, s/he is nudged to put all P1 million in a deposit account.
In discernment and in my back and forth weighing of the pros and cons, I take the position of raising the maximum deposit insurance to P700,000 while allowing the Board of Directors to increase the amount of the maximum deposit insurance coverage to an amount indexed to inflation subject to financial sustainability.
Luis F. Dumlao, PhD, is the Dean of the John Gokongwei School of Management, Ateneo de Manila University.