Understanding Deposit Insurance: Why Do You Need To Know About Deposit Insurance3 min read
Whenever you walk to the door of the banks, you will see a logo of the Philippine Deposit Insurance Corporation (PDIC), saying that the maximum deposit insured to each depositor is PhP 500,000. While most people do not wonder what does the said PDIC decal mean, you should know what does deposit insurance mean and why it is important for people to know about deposit insurance.
What is deposit insurance?
In a nutshell, deposit insurance is a measure implemented by governments to protect depositors from losses caused by the banks. In times that the bank will not be able to pay off the amount put by the depositors, deposit insurance will cover the amount deposited by the bank’s clients.
Deposit insurance exists to protect depositors from the risks involved in investing money in banks. In addition, deposit insurance creates an air of confidence among investors and banks, encouraging depositors to have more faith in banks since there will be safety nets for their investments.
The modern system of deposit insurance came after the height of the Great Depression in the United States, where a lot of depositors rushed to the banks to pull out their money after learning about the financial crisis of the said time. To prevent such bank runs from occurring again, deposit insurance exists.
How does it work?
Deposit insurance works pretty much like your regular insurance policy: there is an insuring body that exists to protect stakeholders from the risks involved in depositing money in banks. Unlike your usual insurance however, deposit insurance does not require depositors to pay premium to protect their investments; it’s free and it’s automatic the moment you entrust your money in the hands of the banks.
As part of the government’s ways to regulate banks, deposit insurance corporations require banking institutions to fund the insurance premium from their own assets. The said funds will come in handy once the banks defaulted and depositors demand their amount back.
For deposit insurance corporations to assess the risks involved in methods used by banks in managing the assets of the consumers, they send investigators to review the business practices and ventures entered by banking institutions. From there, deposit insurers will determine the probability of risks involved and come up with the premium.
In an event that the bank fails, deposit insurers will come in and liquidate all bank assets to pay the bank depositors. Until all assets have been liquidated or another banking institution is willing to take care of the defaulting bank’s accounts, deposit insurers will draw money from the funds collected from bank premiums. They will recreate the balance deposited by all users up to the maximum insurable amount mandated. In the Philippines, the maximum amount insured by the PDIC to each depositor is PhP 500,000.
What are the types of deposit accounts insured?
According to the Republic Act 6426, also known as the Foreign Currency Deposit Act of the Philippines, “deposits of all commercial banks, savings and mortgage banks, rural banks, private development banks, cooperative banks, savings and loan associations, as well as branches and agencies in the Philippines of foreign banks and all other corporations authorized to perform banking functions in the Philippines.” The only exclusions stipulated by the said law are the following:
- Investment products such as bonds, securities and trust accounts;
- Deposit accounts which are unfunded, fictitious or fraudulent;
- Deposit products constituting or emanating from unsafe and unsound banking practices;
- Deposits that are determined to be proceeds of an unlawful activity as defined under the Anti-Money Laundering Law.
In the end, deposit insurers exist to boost the confidence of public towards banks. While deposit insurance companies may only be able to insure a certain maximum amount, keep in mind that you’d rather have insurance in case of emergency than nothing at all.