The BSP’s One-Two Punch: Can RRR Cuts and PDIC Deposit Insurance Avert a Liquidity Crisis?

Historical research on bank runs indicates that the reason people run is run is not fear of people running. People typically ran when the bank was already insolvent. Healthy purpose of closing the bank before the bank lost even more money. True, the losses were unevenly distributed, depending on whether you got on the front of the line or the back of the line. In a way, that provides a useful incentive mechanism: monitor your bank and don't rely on other people to monitor it for you—Lawrence White

In this issue

The BSP’s One-Two Punch: Can RRR Cuts and PDIC Deposit Insurance Avert a Liquidity Crisis?

I. From Full Reserves to Fractional Banking: The Risks of a Zero-Bound RRR

II. Has the BSP’s "Easing Cycle"—Particularly the RRR Cut—Eased Liquidity Strains?

III. Bank Assets: A Tale of Contradictions: Booming Loans and Liquidity Pressures

IV. Bank Credit Boom Amid Contradictions: Soaring Credit Card NPLs as Real Estate NPLs Ease

V. Investments: A Key Source of Liquidity Pressures

VI. Hidden Risks in Held-to-Maturity (HTM) Securities: Government Debt

VII. Slowing Deposit Growth and the Structural Changes in the Banking System’s Asset Distribution

VIII. Liquidity Constraints Fuels Bank Borrowing Frenzy

IX. PDIC’s Doubled Deposit Insurance: A Confidence Tool or a Risk Mitigant?

X. Conclusion: Band-aid Solutions Magnify Risks

The BSP’s One-Two Punch: Can RRR Cuts and PDIC Deposit Insurance Avert a Liquidity Crisis?

Facing the risks from lower bank reserve requirements, the BSP may have pulled a confidence trick by doubling deposit insurance. But will it be enough to avert the ongoing liquidity stress?

I. From Full Reserves to Fractional Banking: The Risks of a Zero-Bound RRR 

Full reserve banking originated during the gold standard era, where banks acted as custodians of gold deposits and issued paper receipts fully backed by gold reserves. This system ensured financial stability by preventing the expansion of money beyond available reserves. However, as banks realized that depositors rarely withdrew all their funds simultaneously, they began lending out a portion of deposits, leading to the emergence of fractional reserve banking.

Over time, governments institutionalized this practice, largely due to its political convenience—enabling the financing of wars, welfare programs, and other government expenditures. This shift was epitomized by 1896 Democratic presidential candidate William Jennings Bryan's famous speech in which he declared, "You shall not crucify mankind upon a cross of gold!" 

Governments reinforced this transition through the creation of central banks and an expanding framework of regulations, including deposit insurance. Ultimately, these policies culminated in the abandonment of the gold standard, most notably with the Nixon Shock of August 1971. 

While fractional reserve banking has facilitated economic growth by expanding credit, it has also introduced significant risks. These include bank runs and liquidity crises, as seen during the Great Depression, the 2008 financial crisis, and the 2023 U.S. banking crisis; inflationary pressures from excessive credit creation; and moral hazard, where banks engage in riskier practices knowing they may be bailed out. 

The system’s reliance on high leverage further contributes to financial fragility. 

The risks of fractional reserve banking are amplified when the statutory reserve requirement (RRR) approaches zero. A zero-bound RRR effectively removes regulatory constraints on the proportion of deposits banks can lend, increasing liquidity risk if sudden withdrawals exceed available reserves. 

This heightens the probability of bank runs, making institutions more dependent on central bank intervention for stability. 

Additionally, a near-zero RRR expands the money multiplier effect, increasing the risks of excessive credit creation, exacerbating asset-liability mismatches, fueling asset bubbles, and intensifying inflationary pressures—ultimately turning individual failures into systemic vulnerabilities that repeatedly require central bank intervention. 

Without reserve requirements, banking stability relies entirely on the presumed effectiveness of capital adequacy regulations, liquidity buffers, and central bank oversight, increasing systemic dependence on monetary authorities—further assuming they possess both full knowledge and predictive capabilities (or some combination thereof) necessary to contain or prevent disorderly outcomes arising from the buildup of unsustainable financial and economic imbalances (The knowledge problem). 

Moreover, increased reliance on these authorities leads to greater politicization of financial institutions, fostering inefficiencies such as corruption, regulatory capture, and the revolving door between policymakers and industry players—further distorting market incentives and deepening systemic fragility. 

Consequently, while a zero-bound RRR enhances short-term credit availability, it also raises long-term risks of financial instability and contagion during crises. 

At its core, zero-bound RRR magnifies the inherent fragility of fractional reserve banking, increasing systemic risks and reliance on central bank intervention. By removing a key buffer against liquidity shocks, it transforms banking into a highly unstable system prone to crises. 

II. Has the BSP’s "Easing Cycle"—Particularly the RRR Cut—Eased Liquidity Strains?

Businessworld, March 15, 2025: THE PHILIPPINE BANKING industry’s total assets jumped by 9.3% year on year as of end-January, preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed. Banks’ combined assets rose to P27.11 trillion as of end-January from P24.81 trillion in the same period a year ago. Month on month, total assets slid by 1.2% from P27.43 trillion as of end-December. 

In the second half (2H) of 2024, the Bangko Sentral ng Pilipinas (BSP) launched its "easing cycle," implementing three interest rate cuts and reducing the reserve requirement ratio (RRR) on October 25.

A second RRR reduction is scheduled for March 28, 2025, coinciding with the Philippine Deposit Insurance Corporation (PDIC) doubling its deposit insurance coverage, effective March 15.

Yet, despite these measures, the Philippine GDP growth slowed to 5.2% in 2H 2024—a puzzling decline amid record-high public spending, unprecedented employment rates, and historic consumer-led bank borrowing. 

Has the BSP’s easing cycle, particularly the RRR cuts, alleviated the liquidity strains plaguing the banking system? The evidence suggests otherwise. 

III. Bank Assets: A Tale of Contradictions: Booming Loans and Liquidity Pressures 

Philippine bank assets consist of cash, loans, investments, real and other properties acquired (ROPA), and other assets. In January 2025, cash, loans, and investments dominated, accounting for 9.8%, 54.2%, and 28.3% respectively—totaling 92.3% of assets.

Figure 1

Loan growth has been robust. The net total loan portfolio (including interbank loans IBLs and reverse repos RRPs) surged from a 10.7% year-on-year (YoY) increase in January 2024 to 13.7% in January 2025.

As a matter of fact, loans have consistently outpaced deposit growth since hitting a low in February 2022, with the loans-to-deposit ratio accelerating even before the BSP’s first rate cut in August 2024. (Figure 1, topmost graph)

Historical trends, however, reveal a nuanced picture.

Loan growth decelerated when the BSP hiked rates in 2018 and continued to slow even after the BSP started cutting rates. Weak loan demand at the time overshadowed the liquidity boost from RRR cuts. (Figure 1, middle image)

Despite the BSP reducing the RRR from 19% in March 2018 to 12% in April 2020—coinciding with the onset of the pandemic—loan growth remained weak relative to deposit expansion. 

It wasn’t until the BSP's unprecedented bank bailout package—including RRR cuts, a historic Php 2.3 trillion liquidity injection, record-low interest rates, USD/PHP cap, and various bank subsidies and relief programs—that bank lending conditions changed dramatically. 

Loan growth surged even amid rising rates, underscoring the impact of these interventions. 

Last year’s combination of RRR and interest rate cuts deepened the easy money environment, accelerating credit expansion. 

The question remains: why? 

IV. Bank Credit Boom Amid Contradictions: Soaring Credit Card NPLs as Real Estate NPLs Ease 

Authorities claim credit delinquencies remain "low and manageable" despite a January 2025 uptick. Since peaking in Q2 2021, gross and net NPLs, along with distressed assets, have declined from their highs. (Figure 1, lowest chart)

Figure 2

This stability is striking given record-high consumer credit—the banking system’s fastest-growing segment—occurring alongside slowing consumer spending.  (Figure 2, topmost window)

While credit card non-performing loans (NPLs) have surged, their relatively small weight in the system has muted their overall impact.

Real estate NPLs have paradoxically stabilized despite a deflationary spiral in property prices in Q3 2024.

Real estate GDP fell to just 3% in Q4—its lowest level since the pandemic recession—dragging its share of total GDP to an all-time low. (Figure 2, middle visual)

Record bank borrowings, a faltering GDP, and price deflation amidst stable NPLs—this represents 'benchmark-ism,' or 'putting lipstick on a statistical pig,' at its finest.

Ironically, surging loan growth and low NPLs should signal a banking industry awash in liquidity and profits.

Yet how much of unpublished NPLs have been contributing to the bank's liquidity pressures?

Still, more contradictory evidence.

V. Investments: A Key Source of Liquidity Pressures 

Bank investments, another major asset class, grew at a substantially slower pace, dropping from 10.7% YoY in December 2024 to 5.85% in January 2025.

This deceleration stemmed from a sharp slowdown in Available-for-Sale (AFS) assets (from 20.45% to 12% YoY) and Held-for-Trading (HFT) assets, which, despite a 22.17% YoY rise, slumped from December’s 117% spike. This suggests banks may have suffered losses from short-term speculative activities, potentially linked to the PSEi 30’s 11.8% YoY and 10.2% MoM plunge in January. (Figure 2, lowest chart)

Ironically, the Financial Index—comprising seven listed banks—rose 15.23% YoY and 0.72% MoM, indicating that losses in bank financial assets stemmed from non-financial equity holdings.

Figure 3

Despite easing interest rates, market losses on the banks’ fixed-income trading portfolios remained elevated, improving (33.5% YoY) only slightly from Php 42.4 billion in December to Php 38 billion in January. (Figure 3, topmost pane) 

VI. Hidden Risks in Held-to-Maturity (HTM) Securities: Government Debt 

Yet, HTM assets declined just 0.5% YoY. Given that 10-year PDS rates remain elevated, HTMs are likely to reach new record highs soon. (Figure 3, middle image)

Banks play a pivotal role in supporting the BSP’s liquidity injections by monetizing government securities. Their holdings of government debt (net claims on central government—NcoCG) reached an estimated 33% of total assets in January 2025—a record high.  (Figure 3, lowest graph)

Figure 4

Public debt hit a fresh record of Php 16.3 trillion last January 2025. (Figure 4, topmost diagram)

Valued at amortized cost, HTM securities mask unrealized losses, potentially straining liquidity. Overexposure to long-duration HTMs amplifies these risks, while rising government debt holdings heighten banks’ sensitivity to sovereign risk.

With NCoCG at a record high, this tells us that banks' HTMs are about to carve out another fresh milestone in the near future.

In short, losses from market placements and ballooning HTMs have offset the liquidity surge from a lending boom, undermining the BSP’s easing efforts.

VII. Slowing Deposit Growth and the Structural Changes in the Banking System’s Asset Distribution

Deposit growth should ideally mirror credit expansion, as newly issued money eventually finds its way into deposit accounts.

Sure, the informal economy remains a considerable segment. However, unless a huge amount of savings is stored in jars or piggy banks, it’s unlikely to keep a leash on the money multiplier.

The BSP’s Financial Inclusion data shows that more than half of the population has some form of debt outside the banking system. This tells us that credit delinquencies are substantially understated—even from the perspective of the informal economy

Yet, bank deposit liabilities grew from 7.05% YoY in December 2024 to 6.8% in January 2025, led by peso deposits (7% YoY), while FX deposits slowed from 7.14% to 6.14%. Peso deposits comprised 82.8% of total liabilities. (Figure 4, middle image)

Since 2018, deposit growth has been on a structural downtrend, with RRR cuts failing to reverse this trend. (Figure 4, lowest visual)

Figure 5

The gap between the total loan portfolio (excluding RRPs and IBLs) and savings widened, with TLP growth rising from 12.7% to 13.54% YoY, while savings growth doubled from 3.3% to 6.8%. (Figure 5, topmost graph)

How did these affect the bank’s cash reserves?

Despite the October 2024 RRR cut, cash reserves contracted 1.44% YoY in January 2025. In peso terms, cash levels rebounded slightly from an October 2024 interim low—mirroring 2019 troughs—but this bounce appears to be stalling. (Figure 5, middle chart)

The ongoing liquidity drain has effectively erased the BSP’s historic cash injections.

The bank's cash and due-to-bank deposits ratio has hardly bounced despite the RRR cuts from 2018 to the present! (Figure 5, lowest pane)

Figure 6

Liquidity constraints are further evident in the declining liquid-to-deposit assets ratio. (Figure 6, topmost pane)

In perspective, the structural changes in operations have led to a pivotal shift in the distribution of the bank's assets. (Figure 6, middle graph)

Cash’s share of bank assets has shrunk from 23.1% in October 2013 to 9.8% in January 2025.

While the share of loans grew from 45.3% in November 2010 to a peak of 58.98% in May, it dropped to a low of 51.6% in March 2024 before partially recovering.

Meanwhile, investments, rebounding from a 21.42% trough in June 2020, have plateaued since the BSP’s 2022 rescue package.

Still, the Philippine banking system continues to amass significant economic and political clout, effectively monopolizing the industry, as its share of total financial resources reached 83.64% in 2024. How does this mounting concentration risk translate to stability? (Figure 6, lowest chart)

VIII. Liquidity Constraints Fuels Bank Borrowing Frenzy 

In addition to the 'easy money' effect of fractional banking's money multiplier, banks still require financing for their lending operations.

Figure 7

Evidence of growing liquidity constraints, exacerbated by insufficient deposit growth, is seen in banks' aggressive borrowing from capital markets. 

Bank borrowing, comprising bills and bonds payable, reached a new record of PHP 1.78 trillion in January, marking a 47.02% year-over-year increase and a 6.5% month-over-month rise! (Figure 7, topmost diagram) 

Notably, bills payable experienced a 67% growth surge, while bonds payable increased by 17.5%.  The strong performance of bank borrowing has resulted in an increase in their share of overall bank liabilities, with bills payable now accounting for 5.1% and bonds payable for 2.43% in January. (Figure 7, middle pane) 

In essence, banks are competing fiercely among themselves, with non-bank clients, and the government to secure funding from the public's strained savings. 

Moreover, although general reverse repo usage has decreased, largely due to BSP actions, interbank reverse repos have surged to their second-highest level since September 2024. (Figure 7, lowest chart) 

The increasing scale of bank borrowings, supported by BSP liquidity data, reinforces our view that banks are struggling to maintain system stability. 

IX. PDIC’s Doubled Deposit Insurance: A Confidence Tool or a Risk Mitigant? 

The doubling of the Philippine Deposit Insurance Corporation's (PDIC) deposit insurance coverage took effect on March 15th. 

The public is largely unaware that this measure is linked to the second phase of the reserve requirement ratio (RRR) cut scheduled for March 28th. 

In essence, the Bangko Sentral ng Pilipinas (BSP), through its attached agency the PDIC, is utilizing the enhanced deposit insurance as a confidence-building measure to reinforce stability within the banking system. 

Inquirer.net, March 15, 2025: The Philippine Deposit Insurance Corp. (PDIC)—which is mandated to safeguard money kept in bank accounts —finally implemented the new maximum deposit insurance coverage (MDIC) of P1 million per depositor per bank, which was double the previous coverage of P500,000. The expanded MDIC is projected to fully insure over 147 million accounts in 2025, or 98.6 percent of the total deposit accounts in the local banking system. In terms of amount, depositor funds amounting to P5.3 trillion will be safeguarded by the PDIC, accounting for 24.1 percent of the total deposits held by the banking sector. To compare, the ratio of insured accounts under the old MDIC was at 97.6 percent as of December 2024. In terms of amount, the share of insured funds to total deposits was at 18.4 percent before. It was the amendments to the PDIC charter back in 2022 that allowed the state insurer to adjust the MDIC based on inflation and other relevant economic indicators without the need for a new law. (bold added)

ABS-CBN News, March 14: PDIC President Roberto Tan also assured the public that PDIC has enough funds to cover all depositors even with a higher MDIC. The Deposit Insurance Fund (DIF) is around P237 billion as of December 2024. The ration of DIF to the estimated insured deposits (EID) is 5% this 2025, which Tan said remains adequate to meet potential insurance risks. (bold added) 

Our Key Takeaways: 

1) An Increase in Compensation rather than Coverage Ratio, Yet Systemic Coverage Remains Low

-The total insured deposit amount is capped at PHP 1 million per depositor.

98.6% of accounts are fully insured, up from 97.6% previously.

-The insured deposit amount increased to PHP 5.3 trillion (24.1% of total deposits) from PHP 3.56 trillion (18.4%) prior to the MDIC.

2) Systemic Risk and Vulnerabilities

-Most of the increase in insured deposits stems from small accounts.

-Large corporate and high-net-worth individual deposits remain largely uninsured, maintaining systemic vulnerability.

3) PDIC’s Coverage Limitations

-The PDIC only covers BSP-ordered closures, excluding losses due to fraud.

-If bank failures are triggered by fraud (e.g., misreported loan books, hidden losses), depositor panic may escalate before the PDIC intervenes.

-Runs on solvent banks could still occur if system trust weakens.

Figure/Table 8 

4) Mathematical Constraints on PDIC's Deposit Insurance Fund (DIF) and Assets

-The PDIC's 2023 total assets of PHP 339.6 billion account for only 1.74% of total deposits. (Figure/Table 8)

-The Deposit Insurance Fund (DIF) of PHP 237 billion represents a mere 6.7% of insured deposits.

-PDIC assets and DIF account for 3.46% and 2.42% of the deposit base of the four PSEi 30 banks.

-In the event of a mid-to-large bank failure, the DIF would be insufficient, necessitating government or BSP intervention.

5) The Systemic Policy Blind Spot

-Such policy assumes an "orderly" distribution of bank failures—small banks failing, not large ones. In reality, tail risks (big bank failures) drive financial crises, not small-bank failures.

6) Impact of RRR Cuts on Risk-Taking Behavior

-The second leg of the RRR cut in March 2025 injects liquidity, potentially encouraging higher risk-taking by banks.

-Once again, the increase in deposit insurance likely serves as a confidence tool rather than a genuine risk mitigant.

7) Rising risk due to moral hazard: The increased insurance may encourage riskier behavior by both depositors and banks.

8) Consequences of Significant Bank Failures

-If funds are insufficient, the Bureau of Treasury might cover the DIF gap. Such a bailout would expand the fiscal deficit, with the BSP likely to monetize debt.

-A more likely scenario is that the BSP intervenes directly, as the PDIC is an agency of the BSP, by rescuing depositors through liquidity injections or monetary expansion.

In both scenarios, this would amplify inflation risks and the devaluation of the Philippine peso, likely exacerbated by increased capital flight and a higher risk premium on peso assets. 

X. Conclusion: Band-aid Solutions Magnify Risks 

The BSP’s easing cycle has fueled a lending boom, masked NPL risks, and propped up government debt holdings, yet liquidity remains elusive. Cash reserves are shrinking, deposit growth is faltering, and banks are borrowing heavily to stay afloat. 

The PDIC’s insurance hike offers little systemic protection, leaving the banking system vulnerable to tail risks. A mid-to-large bank failure would likely burden the government or BSP, triggering further unintended consequences. 

As contradictions mount, a critical question persists: can this stealth loose financial environment sustain itself, or is it a prelude to a deeper crisis?

 

Mounting Cracks in the PSEi 30: How Structural Imbalances Are Amplifying Market Stress

True confidence does not come from “you can trust us if we screw up because someone else will bail you out” but from “you can trust us because it is demonstrably in our interest to make sure we don’t screw up”. Deposit insurance is an inferior confidence product – one might even say, a confidence trick—Kevin Dowd 

In this issue

Mounting Cracks in the PSEi 30: How Structural Imbalances Are Amplifying Market Stress

I. The PSEi 30’s February and 2025 Performance

II. PSE’s Market Internals Remain Bearish

III. Is This a Regional Trend? Emerging Signs of Asian Financial Crisis 2.0?

IV. PSEi 30’s Mounting Market Imbalances

V. Symptoms of Capital Consumption: Despite Surging Credit Expansion, Falling Liquidity and Diminishing Returns

VI. Share Buybacks as Panacea?

VII. The Path to Full-Fractional Reserve Banking and Deposit Insurance Expansion: A False Sense of Security? 

Mounting Cracks in the PSEi 30: How Structural Imbalances Are Amplifying Market Stress 

The erosion of a major rally this February following January’s selloff reveals the underlying structural fragilities and operating dynamics of the Philippine Stock Exchange.

I. The PSEi 30’s February and 2025 Performance

Figure 1

Echoing January’s 4.01% end-of-month selloff, the final trading day of February saw a similar 2.06% pre-closing plunge, erasing nearly half of the recovery gains the PSEi 30 had posted for the month. (Figure 1, upper and lower images)

While it may be convenient to attribute this last-minute market move to portfolio rebalancing, it primarily reflected underlying trend weakness and growing fragility in the PSEi 30.

A portion of January 2025’s selloff was driven by changes in PSEi membership.

In contrast, February’s decline was largely fueled by massive foreign money outflows.

Despite this, the headline index ended February up 2.31% month-over-month (MoM), yet remained down 13.63% year-over-year (YoY) and was still 8.13% lower year-to-date (YTD) in 2025.

II. PSE’s Market Internals Remain Bearish

Why do internal market activities signal a bearish backdrop?

Figure 2

1. Weak Volume Trend

Despite a 7.6% improvement in the PSE’s two-month gross volume, it marked the third-lowest level since 2012, reinforcing a volume downtrend that has persisted since 2015. The 2021 volume spike—an anomaly fueled by the Bangko Sentral ng Pilipinas (BSP)’s Php 2.3 trillion historic injections into the financial system—merely highlighted the short-lived effects of the banking system’s pandemic-era rescue. (Figure 2, topmost diagram)

2. Broad-Based Selling Pressure

The two-month selling spree has been widespread. Market breadth, as measured by the advance-decline spread, recorded its second-worst performance since the pandemic crash of March 2020. (Figure 2, middle graph)

3 Persistent Foreign Outflows

In 2025, foreign outflows accounted for the third-largest capital exodus since 2012. Foreign trade made up 50.8% of gross volume, highlighting that selling pressure in the PSEi 30 was exacerbated by weak local investor support. Foreign capital has played the role of the marginal price setter, and its exit underscores the lack of domestic buying power or the dearth of local savings. (Figure 2, lowest chart) 

III. Is This a Regional Trend? Emerging Signs of Asian Financial Crisis 2.0?

Figure 3

The sustained foreign money outflow suggests that the phenomenon extends beyond the Philippines.

In 2025, the PSEi 30 ranked as the third-worst-performing equity benchmark in Asia. (Figure 3 topmost and middle graphs)

More broadly, the four largest ASEAN indices have exhibited pronounced weakness since Q3 2024.

If this trend continues, it could lay the groundwork for a potential Asian Financial Crisis 2.0. 

IV. PSEi 30’s Mounting Market Imbalances 

A deeper look at the PSEi 30 reveals intensifying distortions: 

The Financial Index/PSEi 30 has surged to consecutive all-time highs, reflecting massive outperformance since the BSP's historic banking sector rescue during the pandemic recession. (Figure 3, lowest pane) 

Conversely, the Property Index/PSEi 30, representing banks’ largest clients, has plunged to its lowest level since 2012. In other words, most of the selling pressure in the PSEi 30 has emanated from this sector.

Figure 4

The cumulative free float shares of the three largest banks have hit all-time highs as of February 28, suggesting that without intervention from the so-called “national team,” the PSEi 30 would have been substantially lower. (Figure 4, topmost image)

V. Symptoms of Capital Consumption: Despite Surging Credit Expansion, Falling Liquidity and Diminishing Returns

Despite back-to-back record highs in systemic leveraging—measured by the combined growth of universal commercial bank loans and public debt in pesos—the PSEi 30 continues to suffer from diminishing YoY returns. (Figure 4, middle image) 

This is also reflected in the banking system’s all-time low cash-to-deposits ratio, a key liquidity measure. (Figure 4, lowest window) 

The broader implication is clear: massive liquidity injections via credit expansion have led to capital consumption rather than productive investment. This is evident in the declining productivity rate of the economy and diminishing returns on stock market investments. 

It is also misleading to blame the PSE’s underperformance on local investors shifting to foreign assets such as offshore stocks or cryptocurrencies. While it may be true for some, the more pressing issue is the depletion of domestic savings.

VI. Share Buybacks as Panacea?

So, how does the establishment help resolve this predicament? While they might claim their shares are "undervalued"—indicating a perceived 'market failure'—Metro Pacific, for instance, opted to delist.

Figure 5

SM Investments made a similar claim while observing their diminishing clout, reflected by their declining share of the free float capitalization in the PSEi 30. 

In response, they recently launched a P60 billion share buyback program, "the largest ever announced by a Philippine corporation," aimed at purchasing an estimated 77 million shares, or 6% of the company's outstanding shares. 

Could this, however, signal a panic reaction? 

Some listed companies use their shares as collateral for loans or as currency in the context of mergers, often with price floors stipulated in their covenants. 

VII. The Path to Full-Fractional Reserve Banking and Deposit Insurance Expansion: A False Sense of Security? 

This fragility dilemma is further aggravated by the BSP’s recent reserve requirement ratio (RRR) cuts—and strikingly, the central bank is now proposing a transition to FULL fractional reserve banking, with plans to lower the RRR to ZERO. 

We previously discussed it here. 

The Philippines is NOT the U.S., which can afford zero RRR rates due to its deep and diversified capital markets. 

In contrast, systemic risks in the Philippines are being amplified as banks have increasingly monopolized the nation’s total financial resources, leaving the economy vulnerable to liquidity shocks and credit misallocation 

Meanwhile, the Philippine Deposit Insurance Corporation (PDIC) has doubled its maximum deposit insurance coverage. However, this comes at a time when the rate of qualified deposits continues to decline.

Figure 6 

As of Q3 2024: 

-Total insured deposits had been trending downward since 2011, reaching just 18.3% of total deposits. (Figure 6, upper chart) 

-Of this, only 9.83% were fully insured, while 8.4% were partially insured. 

Although this decline is attributed to aggressive bank credit expansion, which has inflated deposit levels, it has barely delivered a proportional increase in deposits. 

As an aside, it is unclear how much in assets the PDIC has to support such claims. 

VIII. In Summary: Intensifying Imbalances and Amplified Volatility; Opportunity? Mining Index 

The PSEi 30’s performance in 2025 reflects worsening structural imbalances, manifested through magnified volatility. 

To be sure, while fierce bear market rallies can occur, this does not mean that rising prices will eliminate these risks. 

Here’s what we’re watching: one key development has been gold’s record-breaking surge. 

If this trend continues, it could help provide a boost to the mining index, which has been quietly gaining upside momentum at the margins. (Figure 6, lowest pane) 

This represents a fringe (or niche) opportunity with potential. 

Nota bene: This article offers market insights but does not constitute a recommendation or call to action. 

Quote of the Day: The FDIC’s very paltry defense against defaults

Since then, FDIC recovered a bit, and as of 2013 had $47 billion back in its fund. This small defense was insuring some $6 trillion in insured bank deposits, a coverage ratio of 0.79 percent.

Now when I brought up this alarming situation at my personal blog, some people scoffed in the comments. Why, if there is ever another wave of bank failures, the FDIC can just borrow from the Treasury. Ultimately, the government can just turn to the Federal Reserve to create new money and make everybody whole. Now that we’ve gotten rid of that pesky gold standard, Uncle Sam can hand out unlimited amounts of dollars.

Such a reaction is shocking in its glibness. Remember that FDIC is supposed to be an insurance program. It doesn’t get its fund from taxpayers, but from premiums assessed on the insured banks themselves. Indeed, in order to replenish its fund, back in 2009 FDIC made the banks “prepay” thirteen quarters (i.e. a little more than three years) worth of premium payments. Once the immediate danger was past, FDIC issued refunds of these overpayments in 2013.

Nobody doubts that the government has the technical ability to create billions or even trillions of dollars and hand them out. But that isn’t a way for society as a whole to become richer. Yes, if a small number of depositors lose money on a few failed banks, then the rest of us can—via the government—act as a backstop, and spread the losses around, so that any individual feels just a slight amount of pain.

Yet having government-imposed deposit insurance makes the system as a whole far more vulnerable, particularly when the banks are being assessed such low premiums (in normal times). Precisely because people think, “My money is 100% guaranteed in the bank,” nobody ever does research on what exactly his or her bank does with the funds it lends out. People care about monthly fees, branch hours, and ATM locations, but they don’t ever inquire, “Does my bank make wise investments?”

FDIC as implemented thus gives us the worst of both worlds: It lulls depositors into a false sense of security, so that there is little market discipline reining in reckless lending by the banks. Yet at the same time, given that the system is pushed to embrace risk, FDIC nonetheless carries a very paltry defense against defaults. In the event of a major downturn, the government would have to freshly dip into taxpayers in order to take money from us, so that it could give us our money back.

(bold mine, italics original)

This is from Austrian economist, consultant and author Robert P Murphy at the Libertychat.com. 

The above is a noteworthy example where centralization of a complex process via political interventions, particularly applied to the US banking system, increases systemic risks. That's because such actions skews on the market's incentives to self regulate via the promotion of depositors' dependency on political authorities, as well as to advance the Moral Hazard incentives of the banking industry.

This also shows of the knowledge problem of political authorities who seem to underestimate the risks from the current system, or alternatively, appears to overestimate the strength of the banking system or the FDIC's capacity to contain risks.  And this may be aside from the possible "regulatory capture" where the banking industry may have influenced authorities on the "low premiums" for maintaining a tenuously funded politically controlled centralized deposit insurance. All these and more combine to produce "the paltry defense against default".

Chinese Mini-Bank Runs: Show ‘em the Money and Deposit Insurance

The other day I posted here of a mini-run of a small Chinese rural bank in progress. 

What course of action has been taken in order quell the run? 

Well, Show ’Em the money!!! Literally.

From the Guardian: (bold mine)

Rural banks in China's eastern city of Yancheng stacked piles of money in plain view behind teller windows to calm depositors queueing at bank branches for a third consecutive day, following rumours they had run out of cash.

According to residents of Sheyang county, panic began on Monday with a rumour that a branch of one local bank turned down a customer's request for a 200,000 yuan (£19,500) withdrawal. Banks declined to comment and Reuters was unable to verify the rumour.

The affected institutions are tiny compared with the scale of China's financial sector, and the rush for cash appears to be an isolated incident so far. Rumours found especially fertile ground there after a failure of three less-regulated rural credit co-operatives last January. Yet the news caught nationwide attention, reflecting growing public anxiety as regulators signal greater tolerance for credit defaults.

Well did show 'em the money work? Unfortunately not. (bold mine). From the same article...

Despite repeated appeals from local officials for calm, by Tuesday the run had extended to another local bank, the Rural Commercial Bank of Huanghai, residents said.

Earlier on Wednesday police and security guards stood by as dozens formed a long queue outside while an electronic sign urged depositors not to be worried by rumours.

The governor of Sheyang county, Tian Weiyou, posted a two-minute video statement on the county government's website on Wednesday, urging depositors not to panic. In it he said: "Please be assured that the People's Bank of China and the rural commercial bank system will ensure the interests of all depositors will be protected. The county's rural commercial banks will ensure that there will be enough funds for depositors to withdraw at any given time."

As one would note, "tiny" and "isolated" in the above report seem to have been negated by "extended to another local bank"

What this instead shows is the periphery-to-the-core dynamic in motion or the contagion from the fringe moving into the center.

The article goes on to advocate deposit insurance as a solution to the banking system's debt problem. 

But deposit insurance will signify a short term solution that comes not only at the cost of taxpayer money but also increases systemic risks from moral hazard—tendency to take on more risks because the costs of the risks will be borne by another party—in the long run.

As International University of Geneva Professor Frank Hollenbeck explained at the Mises Institute (as applied to the US) [bold mine]

Deposit insurance is one of the two factors which allows banks to take such risky gambles. Created in 1933, it is a perfect example of government policy that ultimately will be determined to have done more harm than good. It was supposed to reduce risks, but has done just the opposite. When governments provide flood insurance the private sector would never consider, people then build homes in areas prone to suffer from severe flooding.

Prior to deposit insurance, people were careful about where they deposited their money to pay rent or food bills. If a bank ran into trouble by undertaking poor lending practices, people would quickly try to pull their money out of the bank. Bank runs were a good thing because runs served to force banks to be extremely careful about their lending practices. The threat of a bank run maintained sound incentives.

Deposit insurance is a perfect example of Frederick Bastiat’s parable of the broken window: what is seen, and what is not seen. For about 70 years, bank runs have been eliminated; giving depositors what some would say is the illusion of protection. That is what is seen. What is not seen is, without insurance, banks would have been taking much less risks with deposits, and governments would have been less able to finance spending through bank purchases of their bonds.

In other words, deposit insurance is a privatize profits-socialize losses transfer mechanism that works in favor of the banking system charged to taxpayers.

And this also means that a lot today’s global financial and economic imbalances, aside from inflationism, stems from many other price distorting regulations such as deposit insurance. 

Two wrongs don’t make a right. 

China's problems has been about massive accumulation of unproductive debt fueled by fractional reserve banking, thus markets should clear such imbalances.

Meanwhile, the periphery to the core “run” on Chinese institutions continues…
 
Updated to add: With the shrinking availability of domestically sourced liquidity as the financial spigot have been closing, Chinese developers have reportedly tapped on a new way of financing: cross border Commercial Mortgage Backed Securities (CMBS).

Quote of the Day: The Roots of the Too Big To Fail Doctrine

For fractional reserve banking can only exist for as long as the depositors have complete confidence that regardless of the financial woes that befall the bank entrusted with their “deposits,” they will always be able to withdraw them on demand at par in currency, the ultimate cash of any banking system. Ever since World War Two governmental deposit insurance, backed up by the money-creating powers of the central bank, was seen as the unshakable guarantee that warranted such confidence. In effect, fractional-reserve banking was perceived as 100-percent banking by depositors, who acted as if their money was always “in the bank” thanks to the ability of central banks to conjure up money out of thin air (or in cyberspace). Perversely the various crises involving fractional-reserve banking that struck time and again since the late 1980s only reinforced this belief among depositors, because troubled banks and thrift institutions were always bailed out with alacrity–especially the largest and least stable. Thus arose the “too-big-to-fail doctrine.” Under this doctrine, uninsured bank depositors and bondholders were generally made whole when large banks failed, because it was widely understood that the confidence in the entire banking system was a frail and evanescent thing that would break and completely dissipate as a result of the failure of even a single large institution.

(italics original) 

This is from Austrian economics professor Joseph Salerno at the Mises blog

Central Bank Fractional Banking System: Bank Runs or Inflation

The incumbent central bank fractional banking system means a choice between bank runs and price inflation.

The great dean of Austrian school of economics Murray N. Rothbard explained. (bold mine)

1. Why fractional reserve banks are uninsurable

The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding. For commercial banks, the reserve fraction is now about 10 percent; for the thrifts it is far less.

This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided. That is why once the public catches on, and bank runs begin, they are irresistible and cannot be stopped.

We now see why private enterprise works so badly in the deposit insurance business. For private enterprise only works in a business that is legitimate and useful, where needs are being fulfilled. It is impossible to "insure" a firm, even less so an industry, that is inherently insolvent. Fractional reserve banks, being inherently insolvent, are uninsurable.

2. Money Printing as camouflage. The political choice of inflation over bank runs.

What, then, is the magic potion of the federal government? Why does everyone trust the FDIC and FSLIC even though their reserve ratios are lower than private agencies, and though they too have only a very small fraction of total insured deposits in cash to stem any bank run? The answer is really quite simple: because everyone realizes, and realizes correctly, that only the federal government--and not the states or private firms--can print legal tender dollars. Everyone knows that, in case of a bank run, the U.S. Treasury would simply order the Fed to print enough cash to bail out any depositors who want it. The Fed has the unlimited power to print dollars, and it is this unlimited power to inflate that stands behind the current fractional reserve banking system.

Yes, the FDIC and FSLIC "work," but only because the unlimited monopoly power to print money can "work" to bail out any firm or person on earth. For it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.

But now bank runs--at least for the overwhelming majority of banks under federal deposit insurance--are over, and we have been paying and will continue to pay the horrendous price of saving the banks: chronic and unlimited inflation.

The political choice of inflation over bank runs can be seen via the loss of US dollar’s purchasing power.

Since the establishment of the US Federal Reserve in 1913, one US dollar in 1913 has an equivalent of buying power of $23.45 today according to the BLS inflation calculator. This means the US dollar have lost nearly 96% of their purchasing power. Chronic and unlimited inflation indeed.

The other implication is that the choice of inflation over bankruns means a subsidy to banks at society's expense.

 

3. Abolish the central banking system and ancillary regulators. Restore sound money

Putting an end to inflation requires not only the abolition of the Fed but also the abolition of the FDIC and FSLIC. At long last, banks would be treated like any firm in any other industry. In short, if they can't meet their contractual obligations they will be required to go under and liquidate. It would be instructive to see how many banks would survive if the massive governmental props were finally taken away.