Even with the safety net of deposit insurance, both small and large depositors tend to pull out their funds when a nearby bank shuts down, suggesting that fear of losing access to cash outweighs the assurance of protection, according to a study co-authored by top Bangko Sentral ng Pilipinas (BSP) officials.

“A bank closure does lead to significant withdrawals by depositors at other banks in the vicinity,” said in a study titled “Do small bank deposits run more than large ones? Three event studies of contagion and financial inclusion” published authored by BSP Governor Eli M. Remolona, Jr., BSP Senior Assistant Governor Johnny Noe E. Ravalo, and UP Professor Emeritus Dante B. Canlas.

Among the major findings was the widespread withdrawal of funds before a suspected bank’s closure. This comes despite the safety net provided by deposit insurance to depositors.

“Their withdrawal is suggestive that their fear of a loss in liquidity, even if this is temporary in principle, outweighs the assurance of the insurance,” the authors argued.

They further noted that in terms of behavior, “while a large bank failure can lead to contagion, small and large depositors do not behave that differently.” This means that, generally, if both small and large depositors were well informed, there would be a similar reaction towards bank closure in the vicinity.

“Financial inclusion in the form of access to bank deposits is not likely to add to instability to the banking system, but it is not likely to reduce instability either,” the authors said.

Banks benefit from having “sticky deposits,” or those that tend to stay put, but this stability comes at a cost.

The authors noted that paying for deposit insurance helps keep banks in check by discouraging risky behavior.

“Yet again, there appears to be a market for information that allows both small and large depositors to withdraw early,” they added.

“All these are suggestive that while deposit insurance provides reinforcing effects, it also does not prevent runs in the presence of local adverse information of possible bank stress,” they said.

The BSP-attached deposit insurer, the Philippine Deposit Insurance Corporation (PDIC), doubled its insurance coverage for bank deposits from ₱500,000 previously to ₱1 million per depositor per bank, effective March 15.

According to the PDIC, the maximum coverage hike was approved by its board of directors “to provide enhanced protection and more confidence for the depositing public.”

On May 21, the state deposit insurer expanded this ₱1 million coverage to Islamic banks (IBs) and Islamic banking units (IBUs).