Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? (2nd of 3 Part Series)

 

In the course of history various commodities have been employed as media of exchange. A long evolution eliminated the greater part of these commodities from the monetary function. Only two, the precious metals gold and silver, remained. In the second part of the 19th century, more and more governments deliberately turned toward the demonetization of silver. In all these cases what is employed as money is a commodity which is used also for nonmonetary purposes. Under the gold standard, gold is money and money is gold. It is immaterial whether or not the laws assign legal tender quality only to gold coins minted by the government—Ludwig von Mises 

This post is the second in a three-part series 

In this Issue 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order?

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise

II. A Brief Recap on Gold’s Role as Money

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard)

IV. The Age of Fiat Money and the Explosion of Debt

V. Central Banks: The Marginal Price Setters of Gold

VI. Is a U.S. Gold Audit Fueling Record Prices? 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? 

The second part of our series examines the foundation of the global economy—the 54-year-old U.S. dollar standard—and its deep connection to gold’s historic rally. 

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise 

Global central banks have played a pivotal role in driving gold’s record-breaking rise, reflecting deeper tensions in the global financial system. 

Since the Great Financial Crisis (GFC) of 2008, central banks—predominantly those in emerging markets—have significantly increased their gold reserves, pushing levels back to those last seen in 1975, a period just after the U.S. government severed the dollar’s link to gold on August 15, 1971, in what became known as the Nixon Shock. 

This milestone reminds us that the U.S. dollar standard, backed by the Federal Reserve, will mark its 54th anniversary by August 2025.

Figure 1

The accumulation of gold by central banks, particularly in the BRICS nations, reflects a strategic move to diversify away from dollar-dominated reserves, a trend that has intensified amid trade wars, sanctions, and the weaponization of finance, as seen in the freezing of Russian assets following the 2022 Ukraine invasion.  (Figure 1, upper window)

The fact that emerging markets, particularly members of the BRICS bloc, have led this accumulation—India, China, and war-weary Russia have notably increased their gold reserves, though they still lag behind advanced economies—reveals a growing fracture in the relationship between emerging and advanced economies.  (Figure 1, lower graph and Figure 2, upper image)  

Figure 2

Additionally, their significant underweighting in gold reserves suggests that BRIC and other emerging market central banks may be in the early stages of a structural shift. If their goal is to reduce reliance on the U.S. dollar and close the gap with advanced economies, the pace and scale of their gold accumulation could accelerate (Figure 2, lower chart)

Figure 3

As evidence, China’s central bank, the People’s Bank of China (PBOC), continued its gold stockpiling for a fourth consecutive month in February 2025. (Figure 3, upper diagram)

Furthermore, last February, the Chinese government encouraged domestic insurance companies to invest in gold, signaling a broader commitment to gold as a financial hedge. 

This divergence underscores a deepening skepticism toward the U.S.-led financial system, as emerging markets seek to hedge against geopolitical and economic uncertainties by strengthening their gold reserves 

In essence, gold’s record-breaking rise may signal mounting fissures in today’s fiat money system, fissures that are being expressed through escalating geopolitical and geoeconomic stress. 

II. A Brief Recap on Gold’s Role as Money 

To understand gold’s evolving role, a brief historical summary is necessary. 

Alongside silver, gold has spontaneously emerged and functioned as money for thousands of years. Its finest moment as a monetary standard came during the classical gold standard (1815–1914), a decentralized, laissez-faire regime in Europe that facilitated global trade and economic stability. 

As the great dean of the Austrian School of Economics, Murray Rothbard, explained, "It must be emphasized that gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium. Above all, the supply and provision of gold was subject only to market forces, and not to the arbitrary printing press of the government." (Rothbard, 1963) 

However, this system was not destined to endure. The rise of the welfare and warfare state, supported by the emergence of central banks, led to the abandonment of the classical gold standard. 

As Mises Institute’s Ryan McMaken elaborated, "This system was fundamentally a system that relied on states to regulate matters and make monetary standards uniform. While attempting to create an efficient monetary system for the market economy, the free-market liberals ended up calling on the state to ensure the system facilitated market exchange. As a result, Flandreau concludes: ‘[T]he emergence of the Gold Standard really paved the way for the nationalization of money. This may explain why the Gold Standard was, with respect to the history of western capitalism, such a brief experiment, bound soon to give way to managed currency.’" (McMaken, March 2025) 

The uniformity, homogeneity, and growing dependency on the state in managing monetary affairs ultimately contributed to the classical gold standard’s demise. 

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard) 

World War I forced governments to abandon gold convertibility, leading to the adoption of the Gold Exchange Standard—where only a select few currencies, such as the British pound (until 1931) and the U.S. dollar (until 1933), remained convertible into gold. 

Later, the Bretton Woods System attempted to reinstate a form of gold backing by pegging global currencies to the U.S. dollar, which in turn was tied to gold at $35 per ounce. 

However, rising U.S. inflation, fueled by fiscal spending on the Vietnam War and social welfare programs, combined with the Triffin dilemma, led to a widening Balance of Payments (BoP) deficit. Foreign-held U.S. dollars exceeded U.S. gold reserves, threatening the system’s stability. 

As economic historian Michael Bordo explained: "Robert Triffin (1960) captured the problems in his famous dilemma. Because the Bretton Woods parities, which were declared in the 1940s, had undervalued the price of gold, gold production would be insufficient to provide the resources to finance the growth of global trade. The shortfall would be met by capital outflows from the US, manifest in its balance of payments deficit. Triffin posited that as outstanding US dollar liabilities mounted, they would increase the likelihood of a classic bank run when the rest of the world’s monetary authorities would convert their dollar holdings into gold (Garber 1993). According to Triffin, when the tipping point occurred, the US monetary authorities would tighten monetary policy, leading to global deflationary pressure." (Bordo, 2017)

Bretton Woods required a permanently loose monetary policy, which ultimately led to a mismatch between U.S. gold reserves and foreign held dollar liabilities. 

To prevent a run on U.S. gold reserves, President Richard Nixon formally ended the dollar’s convertibility into gold on August 15, 1971, ushering in a fiat money system based on floating exchange rates anchored to the U.S. dollar. 

IV. The Age of Fiat Money and the Explosion of Debt 

With the shackles of gold removed, central banks gained full control over monetary policy, leading to unprecedented levels of inflation and political spending. Governments expanded their fiscal policies to fund not only the Welfare and Warfare State, but also the Administrative/Bureaucratic State, Surveillance State, National Security State, Deep State, Wall Street Crony State, and more. 

The most obvious consequence of this system has been the historic explosion of global debt. The OECD has warned that government and bond market debt levels are at record highs, posing a serious threat to economic stability. (Figure 3, lower chart) 

V. Central Banks: The Marginal Price Setters of Gold 

Ironically, in this 54-year-old fiat system, so far, it is politically driven, non-profit central banks—rather than market forces—that have become the marginal price setters for gold. 

Unlike traditional investors, central banks DON’T buy gold for profit, but for political and economic security reasons. 

The World Gold Council’s 2024 survey provides insight into why central banks continue to accumulate gold: "The survey also highlights the top reasons for central banks to hold gold, among which safety seems to be a primary motivation. Respondents indicated that its role as a long-term store of value/inflation hedge, performance during times of crisis, effectiveness as a portfolio diversifier, and lack of default risk remain key to gold’s allure." (WGC, 2024) 

This strategic accumulation reflects a broader trend of central banks seeking to insulate their economies from the vulnerabilities of the fiat system, particularly in an era of heightened geopolitical risks and dollar weaponization.

Figure 4 

The Bangko Sentral ng Pilipinas (BSP) has historically shared this view. (Figure 4, upper graph) 

In a 2008 London Bullion Management Association (LBMA) paper, a BSP representative outlined gold’s importance in Philippine foreign reserves—a stance that remains reflected in BSP infographics today. 

Alas, in 2024, following criticism for being the largest central bank gold seller, BSP reversed its stance. Once describing gold reserves as "insurance and safety," it now dismisses gold as a "dead asset"—stating that: "Gold prices can be volatile, earns little interest, and has storage costs, so central banks don’t want to hold too much." 

This shift in narrative conveniently justified BSP’s recent gold liquidations. 

Yet, as previously noted, history suggests that BSP gold sales often precede peso devaluations—a warning sign for the Philippine currency. (Figure 4, lower window)

VI. Is the Propose U.S. Gold Audit Help Fueling Record Prices? 

Finally, could the Trump-Musk push to audit U.S. gold reserves at Fort Knox be another factor behind gold’s rally? 

There has long been speculation that U.S. Treasury gold reserves, potentially including gold stored for foreign nations, have been leased out to suppress prices.

Figure 5

Notably, Comex gold and silver holdings have spiked since these audit discussions began. Gold lease rates rocketed to the highest level in decades last January. (Figure 5, top and bottom charts) 

With geopolitical uncertainty rising, central bank gold buying accelerating, and doubts growing over fiat stability, gold’s record-breaking ascent may be far from over. 

Yet, it’s important to remember that no trend goes in a straight line.

___

References 

Murray N. Rothbard, 1. Phase I: The Classical Gold Standard, 1815-1914, What Has Government Done to Our Money? Mises.org 

Ryan McMaken, The Rise of the State and the End of Private Money March 25,2025, Mises.org 

Michael Bordo The operation and demise of the Bretton Woods system: 1958 to 1971 CEPR, Vox EU, April 23, 2017 cepr.org 

World Gold Council, Gold Demand Trends Q2 2024, July 30,2024, gold.org

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?

 

The USD-PHP Hits Fresh 11 Year Highs! The Balance of Payment Has Hardly Been the Culprit; Sssh, It’s About…. (Secret!)

The USD-Philippine peso broke into a fresh 11-year high at 51.53 Thursday, before closing the week below the breakout point.

Fascinatingly, because it rose by a skimpy .12%, the peso was one of the best performing Asian currencies as the US strengthened against most Asian currencies this week.

Media and by their favorite mainstream experts have frequently stated that the infirmities manifested by the peso have not signified a weakness at all.  Instead, such is a reflection of underlying strength expressed through Balance of Payment conditions (deficits). 

Satisfying ‘domestic demand’ through trade deficits is a sign of strength, so it is held.

In short, trade and current account deficits are blessing in disguise!

The Balance of Payments (BoP) defined as the current account and the capital account, represents an accounting summary of an economy’s transactions with the rest of the world for a specified time period.

The current account, defined as the sum of the balance of trade (goods and services exports lessimports), net income from abroad and net current transfers, represents the difference between nation’s net savings and investment. A country is a net lender to the world when it posts a current account surplus. On the other hand, a country is a net borrower from the world when it registers a current account deficit.

The capital account, on the other hand, defined as foreign direct investment (FDI), portfolio and other investments, plus changes in the reserve account, signifies the net change in physical or financial asset ownership for a nation

Theoretically, the Balance of Payments should balance or show a net figure of zero. That would be because current account deficits will have been offset by capital surpluses and vice versa.

During the gold standard, flows in gold functioned as a natural financial and economic anchor to keep BoPs in “balance” or in equilibrium.

The international gold standard wrote Austrian economist Murray Rothbard*, provided an automatic market mechanism for checking the inflationary potential of government. It also provided an automatic mechanism for keeping the balance of payments of each country in equilibrium. [*Murray N Rothbard The Monetary Breakdown of the West Mises.org]

Today, under fiat monetary system, a crisis may emerge out of severe imbalances in the Balance of Payments conditions.

Notes the Wikipedia: (bold mine)

A BoP crisis, also called a currency crisis, occurs when a nation is unable to pay for essential imports or service its debt repayments. Typically, this is accompanied by a rapid decline in the value of the affected nation's currency. Crises are generally preceded by large capital inflows, which are associated at first with rapid economic growth. However a point is reached where overseas investors become concerned about the level of debt their inbound capital is generating, and decide to pull out their funds. The resulting outbound capital flows are associated with a rapid drop in the value of the affected nation's currency. This causes issues for firms of the affected nation who have received the inbound investments and loans, as the revenue of those firms is typically mostly derived domestically but their debts are often denominated in a reserve currency. Once the nation's government has exhausted its foreign reserves trying to support the value of the domestic currency, its policy options are very limited. It can raise its interest rates to try to prevent further declines in the value of its currency, but while this can help those with debts denominated in foreign currencies, it generally further depresses the local economy

In short, the BoP can serve as a barometer for boom-bust cycles.

By the way, September BoP turned to a USD $24 million surplus.

 

The Philippine balance of payment and the USD peso have so far had little correlations.

The USD peso rose when the BOP had been in neutral or close to neutral (2000-2004) and even during periods when surpluses were substantial (2007-2008, 2013 and 2015). Conditions underlying these periods varied. 2000-2004 signified the epoch of rebalancing post-Asian Crisis, 2007-2008 represented external shocks and 2013-2015 could be the peak of the Philippine boom which had been rattled by the Taper tantrum.

Exports are the price paid for imports. Imports signify as the key benefits of trade. That's the theory.

 

But in the Philippines, fiscal policy plays a material role in determining the trade conditions

The nominal fiscal deficit coincided with the USD peso movements in 1998-2007.

When the fiscal deficit peaked in 2002, this coincided with climaxing of the trade deficit in the same year (shown both in nominal and % of GDP lower right).  With a time lag, the USD PHP climbed to its zenith in 2004.

When the trade balance and the fiscal deficit ebbed, the peso rallied.  During these days, the trade deficit was much a function of fiscal policy.

The opposite occurred in the post-Lehman period of 2009-2014. Fiscal deficits swooned, but trade deficits expanded.

Imports during this period would account for market forces rather than fiscal policy, thus signifying as the key benefits of trade.* One may argue justifiably that imports were about economic growth in this period. That would be because the private sector determined import activities.

* I’ll put aside here the influence of monetary policy.

But the mechanics changed in 2015 up to the present. Fiscal policy has once again played a crucial role in imports. The role of fiscal policy in shaping trade balance conditions has expanded in 2016 and the present. (lower right window) Thus, the crowding the effect from these political-economic actions will likely aggravate the US dollar shorts.

The greater the government spends, the more it influences the current account, the BoP and the Peso.

The purchasing power of money and the exchange rate is ultimately driven by the demand and supply. Thus, the demand and supply of the peso will operate relative to the demand and supply of the US dollar by Philippine residents.

Let us look at the supply side of the US dollar.

 

OFW remittances growth rates have pivoted lower since its peak in 2014. (middle window) The PSA’sapproved FDI continues to cascade in the 1H 2017. (upper right window) The BSP’s FDI flows have been up against the years prior to 2016 (July 2017), but debt constitutes a vast majority of these (upper left). Debt accounts for more US dollar shorts.

Growth rates in Gross International Reserves have become negative since February of 2017. Nominal foreign portfolio flows remain negative in the 9-months of 2017.

The establishment has now succumbed to the idea of lower growth rates for the BPO industry which they see at less than 10% this year and would taper off the coming years.

In short, US dollar supply will be scarce RELATIVE to the peso.

And to scare off peso bears, the BSP recently announced the renewal of foreign currency swaps with the Bank of Japan and with the central banks of ASEAN.

Even more, private sector as seen in many listed companies continues to load up on foreign debt. [More on Drowning in Debt: BDO, Ayala Corp, San Miguel and Subprime Emerging Markets September 10, 2017] This should increase future demand for US dollars.

Whether defined by Wikipedia or by the Austrian school, the BoP essentially will reflect on domestic inflationary policies.

 

The USD peso has had a tight correlation with the BSP’s undisclosed use of its nuclear option, especially from 2008 onwards. (upper window)

The USD peso began its steep descend in 2004 when the BSP scaled back from financing the National Government’s (NG) debt. 

When the Lehman crisis struck in 2008, the BSP used this emergency tool for a short period to stabilize the economy whereby the US peso responded with it by soaring to 50. When the BSP pulled back from NG debt subsidies in 2010 to 2013 the peso rallied strongly again.

The taper tantrum compelled the BSP to use this emergency tool again. The peso inflected and began to lose ground. When the BSP pulled back, money supply exploded as the private sector credit roared. The peso lost further ground. In 2015, the BSP decisively used the nuclear option as a regular tool. Thus, the misery of the peso has been sustained.

The mainstream may adamantly IGNORE this, but this has and IS the strongest of all forces to influence the peso.

Money supply has merely been responding to the banking system and or to the BSP’s efforts to shore up the NG.

With the NG rarin’ to spend, just how will they be able to finance such splurges once nominal prices fall? Two days ago, the Department of Budget and Management appealed to congress to raise wages of military personnel by 100%! That’s aside from more military hardware, build, build and build, free college, bigger bureaucracy and more free stuffs for special interest groups.

Moreover, the BSP has oriented the private sector to become hooked to debt.  And how will all these ever mushrooming malls, real estate projects, and hotels survive if money supply growth, pillared on debt, dawdles? And how will they generate revenues for this spendthrift government?

As I have been saying here, the BSP has been playing with fire. And play with fire we get burned. It would be less of the government who will get singed. It will rather be the average citizen, whose purchasing power will wretchedly shrivel.

Anytime a slowdown or stagflation comes to the fore, expect the peso’s downfall to accelerate.

Buy on dips the US dollar-php!