MANAGEMENT OF DEPOSIT INSURANCE FUND Philippine Experience

1. MANAGEMENT OF DEPOSIT INSURANCE FUNDPhilippine Experience SANDRA A. DIAZ Senior Vice President Deposit Insurance Sector 8th Asia Regional Committee Meeting & International Conference January 18, 2010

2. PRESENTATION OUTLINE: • Deposit Insurance Risk Exposure • Establishing the Deposit Insurance Reserves Target • Basic Principles • Target Methodology • Estimation of Insurance Reserves Target • Deposit Insurance Fund • Investment of Funds • Alternative Fund Sources • Tax Issues • Recent Legislative Amendments to Build-up the DIF

3. I. DEPOSIT INSURANCE RISK EXPOSURE As of September 30, 2009 Amounts in Billion pesos

4. II. DEPOSIT INSURANCE RESERVES TARGET • Basic Principles • Capital adequacy is essential to ensure that the Corporation can absorb losses arising from bank failures under non-systemic conditions. • The insurance reserves shall be maintained at a reasonable level that ensures capital adequacy. • The reasonable level of insurance reserves shall be determined thru a Target Methodology. It shall be based on the estimated risks posed by member banks to the DIF.

5. II. THE METHODOLOGY Composition of Insurance Reserves Target 1. Specific Reserves - the level of insurance reserves to cover anticipated potential losses from banks that have high probability of failure. 2. General Reserves - the minimum level of insurance reserves to cover unanticipated losses from deposit insurance payouts and grant of financial assistanceset as a percentage of estimated insured deposits (EID) of banks not included in the estimation of specific reserves.

6. III. ESTIMATION of 2009 TARGET Estimation of SPECIFIC Reserves Amounts in Billion Pesos

7. III. ESTIMATION of 2009 TARGET Estimation of GENERAL Reserves Amounts in Billion Pesos

8. III. ESTIMATION of 2009 RESERVES TARGET Amounts in Billion Pesos

9. DEPOSIT INSURANCE FUND 1999 to 2009 (In Billion Pesos)

10. IV. DEPOSIT INSURANCE FUND SUFFICIENCY Amounts in Billion Pesos

11. V. INVESTMENT of FUNDS • Section 17 of the PDIC Charter • (a) Money of the Corporation not otherwise employed shall be: • invested in obligations of the Republic of the Philippines or • in obligations guaranteed as to principal and interest by the Republic of the Philippines. • (b) The banking or checking accounts of the Corporation shall be: • kept with the Bangko Sentral ng Pilipinas (Central Bank) or • any other bank designated as depository or fiscal agent of the Philippine government.

12. INVESTMENTS & SINKING FUNDS 1999 - 2009 (In Billion Pesos)

13. V. INVESTMENT OF FUNDS PORTFOLIO MIX

14. V. INVESTMENT OF FUNDS PDIC Investment Portfolio Income vs ROI of Selected Local Bond Funds 2006 - 2009

15. VI. ALTERNATIVE FUND SOURCES • Authority to Borrow • For the settlement of insured deposits and • financial assistance to banks • From the Central Bank • Borrowing interest rate shall not exceed the • treasury bill rate • From any depository or fiscal agent of the • Philippine Government • Short-term loans, credit lines & other credit • accommodations

16. VI. ALTERNATIVE FUND SOURCES • Authority to Borrow • Mostly utilized for long-term rehabilitation • assistance to banks ( 1997-2004) • Repayment is ensured through the set-up of sinking funds

17. VI. ALTERNATIVE FUND SOURCES • Issuance of Bonds, Debentures and Other Obligations • For the settlement of insured deposits and • financial assistance to banks • Local or foreign • Tax-exempt • Board approves the issuance/ re-issuance, interest rates, • term/ maturity, servicing, placement and redemption • Shall be provided reserves for the redemption or • retirement of the obligations

18. VII. TAX ISSUES with the BUREAU of INTERNAL REVENUE (BIR) • Value Added Tax (VAT) on assessment collections from member banks (12%) • Income Tax on assessment collections from member banks (30%)

19. VII. TAX ISSUES with the BUREAU of INTERNAL REVENUE (BIR) • BIR’s position • PDIC is engaged in business, rendering non-life insurance services to its member banks for a fee, hence, liable to pay VAT.

20. VII. TAX ISSUES with the BUREAU of INTERNAL REVENUE (BIR) PDIC maintains that: • It is not engaged in the sale of good or service; consistent with public policy, it is mandated to collect premiums from banks for purposes of DEPOSITOR PROTECTION. • It is not engaged in the sale of insurance, PDIC is not engaged in trade or business. • It is a regulatory agency performing a sovereign function. • It does not have the authority to pass on VAT to banks because the rate of assessment is fixed by law.

21. VIII. RECENT LEGISLATIVE AMENDMENTS to BUILD-UP the DIF EXEMPTION FROM TAXES • First 5 years : Tax obligations of the PDIC chargeable to Tax Expenditure Fund (TEF) • 6th year and thereafter : PDIC exempt from • income tax • final withholding tax • VAT on assessment collections • local taxes

22. VIII. OTHER LEGISLATIVE AMENDMENTS LEADING to the BUILD-UP of the DIF 1. Issuance of Bonds, Debentures and Other Obligations • Fully guaranteed by the National Government • Not to exceed two times the DIF as of date of the debt issuance

23. VIII. OTHER LEGISLATIVE AMENDMENTS LEADING to the BUILD-UP of the DIF Authority to determine insured deposits • NO payment of deposit insurance on the following: a) Investment products b) Unfunded, fictitious and fraudulent deposit accounts or transactions

24. VIII. OTHER LEGISLATIVE AMENDMENTS LEADING to the BUILD-UP of the DIF Authority to determine insured deposits • NO payment of deposit insurance on the following: c) Deposit accounts constituting and/or emanating from unsafe and unsound banking practices, after issuance of a cease and desist order by PDIC against such deposit accounts or transactions d) Deposits from proceeds from an unlawful activity

25. Thank You sadiaz@pdic.gov.ph 632-8414825