During the uproar over the transfer of P60 billion of the P89.9 billion the Department of Finance (DoF) ordered withdrawn from the state-owned Philippine Health Insurance (PhilHealth), a suit was filed by budget watchdogs that prompted the Supreme Court to issue a temporary restraining order (TRO).

The TRO ordered PhilHealth to halt the remittance of the remaining P29.9 billion and ordered oral arguments over the DoF authority that emanated from a provision in the 2024 national budget allowing the agency to sweep state firms for so-called excess funds.

Since the DoF needed to raise more than P200 billion to plug the unprogrammed items in the 2024 budget made up of crucial projects that were bumped off to make way for pork barrel contracts, it turned to the Philippine Deposit Insurance Corp. (PDIC) for P117 billion from its reserve funds.

Last 14 January, the PDIC remitted P107.23 billion in “excess funds” to the National Treasury to be used supposedly for government projects.

The PDIC then assured depositors that its Deposit Insurance Fund (DIF) was still enough to cover the risks of the banking system. Its president and chief executive officer, Roberto Tan, said the DIF stood at over P250 billion.

Legal eagle Ferdinand Topacio, however, said the PDIC’s charter requires the state firm to maintain a reserve fund of P250 billion and taking P107 billion from the fund removes a substantial part of the required buffer.

The required P250 billion in reserves constitutes 5.5 percent of the total deposits of Filipinos so the expectation on PDIC is that it would have enough funds to insure deposits up to a maximum of P500,000 each in the event of a bank closure, Topacio said.

He blamed the budget provision allowing the DoF to sweep government-owned and -controlled corporations for taking away money from the reserves of state firms that is “needed for them to perform a public service.”

Topacio recalled it was the same practice to build up the seed capital for the Maharlika Investment Fund that came from state financial institutions Development Bank of the Philippines (DBP), Land Bank of the Philippines (LandBank) and the Bangko Sentral ng Pilipinas.

“Nothing has happened yet in the MIF since it was established in 2023,” Topacio stated, adding that the money infused into the sovereign wealth fund could have helped farmers secure additional capital and provide start-up funds for new businesses.

The DBP is now asking for a change in its charter to increase its capital. “Where will the funds come from?” Topacio asked.

He said that recapitalization of the DBP would only come from tax revenues or the reallocation of funds from other agencies.

The strengthening of the reserve funds came after the bank troubles that started with the Legacy Group crisis in 2009.

It was then that the need for PDIC to continuously increase and replenish its DIF to meet all claims made against insured banks was made urgent.

At the time, the PDIC fell P14 billion short of paying the claims of 130,000 small depositors of the shuttered rural banks of the Legacy Group since it had only P60 billion in its DIF.

The Senate then raised the need for PDIC to always be ready for worst-case scenarios like several banks folding up simultaneously.

The PDIC tried to borrow from the BSP the P14 billion DIF shortfall but the Monetary Board denied the proposal since it already owed the central bank P72.5 billion.

Senators said that making PDIC strong assures depositors will have peace of mind.

The PDIC should not resort to borrowing from the BSP in case of future problems in meeting claims but the siphoning of funds from it defeats this purpose.

The strength of the financial system is built partly on the perception that the government has the means to protect small depositors from losing their savings, a trust that is degraded when the PDIC is drained of its reserve funds.