Talking about things that is good for the public and the seriousness by which Philippine Deposit Insurance Corporation (PDIC) takes its job, it may seem I am out of sane character to mock PDIC. My mental faculties must be out of sync. Call me anything. But what would you expect from a man who took a whole dose of red pill?
So, having in mind that PDIC is for the public good and it fulfills the mandated job with no joke, what a shame someone like me would still insinuate things that are unworthy to the perceived good image of the PDIC?
In a superficial sense, deposit insurance exists to prevent bank runs. This is not the true case. FSLIC did not prevent the bank runs in 1980’s. And in fact bank runs even brought the FSLIC to its knees and in 1989 it was declared dead because of insolvency. And all of its functions were transferred to FDIC.
In more accurate sense, deposit insurance exists only to protect the depositors. It strengthens the banking system, not necessarily by making bank-run-proof banks (which is of course impossible), but by making depositors much less weary of bank runs.
Where Insurance Fund Come From
As insurer, it collects premium from member banks. PDIC puts the collected premiums into a pool of fund it calls Deposit Insurance Fund (DIF). This is the rescue fund.
By the way, the term “member banks” is actually a redundant, not honest and inappropriate term to use. There are no “non-member” banks since it is mandatory to be a PDIC member before any bank is granted to operate. Thus, there must be no need to mention "member banks" since all banks are already under the PDIC.
Going back to DIF, it is interesting to note that DIF in extreme cases may not be enough. In the case of US FSLIC, it got a series of public money bailouts when its own fund was exhausted. DIF was proven to be not crash-proof. Resorting to bail-out is the last remedy. But even this can fail too. That is why FSLIC was still terminated after a series of taxpayer bailouts.
All banks today use fractional reserve banking. This means they don’t keep 100% of their clients’ deposit in their vaults. Banks only keep a smaller fraction of it (thus called fractional) and can lend out the other bigger fraction of it. The current rate of reserve requirement is 18%, as recently approved by the BSP. This means if you deposited P1000.00, your bank keeps P180.00 in their vault. The P820.00 is offered for lending. Assuming you are the only client your bank has, and for any reason you decided to pull- all your money out, your bank will be unable to give you your full money back since the only amount contained in their vault is P180.00.
Fractional reserve banking is the main reason why at times of mass withdrawals, banks can't service 100% all of their liabilities to their clients. In this sense fractional reserve banking is an unsound banking.
Deposit insurance is a cunning strategy to perpetuate the corrupt system of fiat money and fractional reserve banking - the root cause of almost all economic mess. It is to cheat the people to make them believe society operates in sound monetary system which in reality only ran by printing presses/electronic balance sheets behinds the hideous walls of every bank, which of course headed by the BSP no less.
PDIC, which is just a copy-cat of the USA FDIC, is just another assful monkey creation to plug the hole which is already there from the beginning - the fractional reserve banking.