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

2. PRESENTATION OUTLINE: I.Deposit Insurance Risk Exposure II.Establishing the Deposit Insurance Reserves Target Basic Principles Target Methodology III.Estimation of Insurance Reserves Target IV.Deposit Insurance Fund V.Investment of Funds VI.Alternative Fund Sources VII.Tax Issues VIII.Recent Legislative Amendments to Build-up the DIF

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

4. 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. II. DEPOSIT INSURANCE RESERVES TARGET

5. 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 assistance set as a percentage of estimated insured deposits (EID) of banks not included in the estimation of specific reserves. II. THE METHODOLOGY

6. Amounts in Billion Pesos Bank Risk Category EIDRisk Weight Funding Requirements Loss Rate Specific Reserves Banks-at- Risk (BAR), Categories 1&2, and Unrated P94100%P9470%P65.8 Estimation of SPECIFIC Reserves III. ESTIMATION of 2009 TARGET

7. Bank Risk Category EIDTarget Rate for General Reserves General Reserves Categories 3, 4 & 5 Banks P871.52.5%P21.8 Estimation of GENERAL Reserves Amounts in Billion Pesos III. ESTIMATION of 2009 TARGET

8. CompositionAmount Specific ReservesP 65.8 General ReservesP 21.8 Insurance Reserves TargetP 87.6 Equivalent Ratio to Insured Deposits 8.6% III. ESTIMATION of 2009 RESERVES TARGET Amounts in Billion Pesos

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

10. CompositionAmount Insurance Reserves Target (IRT)P 87.6 Deposit Insurance Fund (DIF)P 61.2 DIF/IRT 70% DIF/ Insured Deposits 6% IV. DEPOSIT INSURANCE FUND SUFFICIENCY Amounts in Billion Pesos

11. 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. V. INVESTMENT of FUNDS

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

13. V. INVESTMENT OF FUNDS PORTFOLIO MIX

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

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

17. 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) INTERNAL REVENUE (BIR) Value Added Tax (VAT) on assessment collections from member banks (12%) Income Tax on assessment collections from member banks (30%)

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

20. 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 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 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 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.It does not have the authority to pass on VAT to banks because the rate of assessment is fixed by law. VII. TAX ISSUES with the BUREAU of INTERNAL REVENUE (BIR) INTERNAL REVENUE (BIR)

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

22. 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 VIII. OTHER LEGISLATIVE AMENDMENTS LEADING to the BUILD-UP of the DIF

23. NO payment of deposit insurance on the following: a) Investment products 2.Authority to determine insured deposits b) Unfunded, fictitious and fraudulent deposit accounts or transactions VIII. OTHER LEGISLATIVE AMENDMENTS LEADING to the BUILD-UP of the DIF

24. NO payment of deposit insurance on the following: 2.Authority to determine insured deposits d) Deposits from proceeds from an unlawful activity 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 VIII. OTHER LEGISLATIVE AMENDMENTS LEADING to the BUILD-UP of the DIF

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