{Money Mondays} The PDIC,Fractional Reserve Banking and Fiat Money

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Last Updated on July 6, 2017 by Marie Bautista

Sometimes, life deals you a trick card.

The shower gets busted (and for you, warm showers are a “need”, not a “want”)…

the blow dryer suddenly fries (and you are that kind of person who cannot go out without your hair in place)…

the bedroom TV stopped working after 15 years (and you just have to know how that fifth guy in the reality show confessed he was gay)…

some dark greasy thing is leaking from the CRV in addition to the car remote going dead for like a millionth time…

and transfer taxes on your parents’ estate are bigger than you expected…

(Okaaay, I just let you take a peek on my drama…so shallow now that I am reading it hehe)

Financial gurus have long advised people to have an emergency fund – one that you can dip into in emergency cases like the ones I mentioned above, especially when they happen all at the same time, like the universe is conspiring against you.

They advise you to save for a rainy day, save before spending, make a budget…

BUT WHAT IF YOUR EMERGENCY FUND IS IN A BANK THAT SUDDENLY GOES BANKRUPT????

$#bankrun #fractionalreserve$

But what if your emergency fund is in a bank that suddenly goes bankrupt?

A couple of years ago, I got the shock of my life when one of my banks – LBC Bank – became the latest casualty.

$#fractionalreserve$

Well, after the initial shock, my friends comforted me with the thought that my deposit is insured with the PDIC, unlike some of the rich people I know, who can only get back a small fraction of what they deposited (since they deposited more than P500,000. By the way, is your deposit insured per savings account or per depositor?).

What is the PDIC?

The Philippine Deposit Insurance Corporation is a government agency under the Department of Finance that insures all deposits in all banks nationwide. It covers every deposit account for a maximum amount of P500,000.00.

The PDIC assures and guarantees that bank clients can get their money back even if the bank becomes bankrupt. One of the signs that a bank is about to close is when there is a bank run.I probably had to run to the bank twice in my life.

First was when I was in grade school.

My friends and I who opened a Savings Bank Account at Banco Filipino just so we can have a Hello Kitty Passbook plus several Sanrio products bundled with it had to line up in front of the bank, along with a mass of other people (probably the entire Baguio City) to get back the money we saved (we skipped recess just so we can save some money to save so that we can have a Hello Kitty passbook!).

I couldn’t remember if we got our money back, though.

(I erased bad memories, except that I still love Hello Kitty).

The second was with LBC, but I did not actually line up.

I had insider friends (who didn’t know about the bank problems, ironically) who gave me a form to fill up, a claim slip, and I got my money back within two months.

Thanks, PDIC.

What is a Bank Run?

Bank runs literally mean depositors “running to the bank”, trying to beat time before the bank closes its door forever.

But because there is PDIC, and since the coverage got bigger (your deposit is covered to a maximum of P500,000.00 effective June 1, 2009), people are assured that their deposits are covered by PDIC, making a bank run less likely to happen.

PDIC insures your deposit.

Deposit insurance gives a feeling of protection to depositors, thereby strengthening the banking system. Of course, banks still do go bankrupt, but with the deposit insurance, depositors are less likely to “make patol” a bank run.

Where does the PDIC get its Insurance Fund?

PDIC collects premium from its member banks (By the way, you don’t need to check if your bank is a member of the PDIC. Before a bank can operate, it needs to be under the PDIC.)

But why Do Banks Go Bankrupt?

A bank exists as long as the clients have confidence and trust on it.

A “simpleng mapanirang tsismis” can cause a bank run.

But a bank can survive even with a bank run because they keep the deposits in their vaults anyway, right?

Maybe.

But not for long.

Let me tell you about fractional reserve banking.

Fractional reserve banking, used by all banks today, means that banks don’t keep 100 percent of all the depositors’ money in the bank vaults.

Surprised?

Banks lend out a bigger fraction of the money and keep the smaller part.

The BSP requires a reserve of 18%.

This means that if you deposited P1,000.00, your bank keeps P180.00 and offers the remaining P820.00 for lending.

(You earn an interest rate usually below 1% on your savings deposit while the bank earns probably a lot more from
lending a part of your money).

Everyone was happy – you, the depositor are earning interest from your deposit, the bank is earning money from your deposit …UNLESS of course when all the depositors would want their money back at the same time.

When this happens, the bank cannot give back all of the bank clients’ deposit in full since the amount they retained and available is probably only around 18%.

Those who first got in line would probably get all their money back, but the rest won’t since the bank has very limited available cash.

Bank depositors tend to be complacent if they know that their deposit is insured up to P500,00.00 by the PDIC.

This makes them not pay close attention to any adverse action of the bank.

On the other hand, if there were no insurance on the deposits, depositors will tend to be more vigilant and would make sounder, safer and more responsible decisions on where to park their money, thus avoiding fears that their bank will go bankrupt.

So the simple answer to my question above about your bank going bankrupt is that don’t be lured or sweet-talked by bank agents over high interest rates, perks, etc. (I know, I am talking through life-changing experiences. LBC and its high interest rate and Banco Filipino with the Hello Kitty passbook, remember? ).

Know your bank!

And by the way, do you still believe that our money is backed up by gold?

This was true before 1971, after which the US left the gold standard and every major international currency has followed suit.The truth is our money is just fiat money.

“In 1971, when President Richard Nixon took the dollar off the gold standard, the dollar became fiat money. This is the type on money that fuels the world economy today. Fiat money is money a government declares to be money. The definition of the word fiat is ‘it shall be done’ In simple terms, the government runs a printing press and turns a piece of paper into money.”

Robert Kiyosaki

Why “A” Students Work for “C” Students and Why “B” Students Work for the Government

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