(This is part of Take Charge of Your Money , a partnership between INQUIRER.net and Citibank to help readers handle their personal finances well.)

Question: The current financial crisis in the US has made many people panic there. I have read of the value of Americans’ retirement funds going down. Just how safe is my money in Philippine banks? Are we headed for a similar crisis? – Daniel

Answer: The recent events in the United States have certainly affected many economies. Because of the subprime crisis (many real estate loans left unpaid), US banks had to bear the loss, thus affecting their liquidity. And since banks have transactions with other banks, many other financial institutions were affected in other countries.

Some Philippine banks also have an exposure to the US banks in crisis. However, as revealed by the Bangko Sentral ng Pilipinas, the Philippine banking system is safe since the local banks’ level of exposure to the troubled US banks is just a small percentage of the Philippine banks’ total assets.

Aside from this, our local banks and insurance companies follow strict restrictions imposed by governing bodies regarding investment and loans, keeping exposure manageable.

Your money is considered safe in Philippine banks because of the above reasons. But even if a bank fails for some reason, your money is protected all the more if it is kept in bank deposits. This is because peso and foreign currency deposits in bank accounts in the Philippines, from savings to checking to time deposits, are backed by insurance coverage from the Philippine Deposit Insurance Corporation (PDIC).

The government created PDIC by law in 1963 through Republic Act 3591 to insure bank deposits. In the event that a bank gets closed by the Monetary Board, the governing body of Bangko Sentral ng Pilipinas, depositors will be able to get back their money up to a set amount. In 2004, the maximum deposit insurance coverage was increased to P250,000 per depositor as specified in Republic Act 9302.

In computing the insured deposit, a person’s deposit accounts in a closed bank will be added together, adding interest, deducting withholding taxes, unpaid loans and other obligations of the depositor to the closed bank.

Money invested through trust accounts in banks, either through money market placements or participation in unit investment trust funds (UITF), are not covered by the PDIC. Trust products carry with them a certain amount of risk. Because the yield from these investment products is determined by the market, you may have gains or losses. It is possible to gain more than what savings accounts may give you. In the same manner, you may lose a part of your principal also when the markets are down.

When thinking of investing in trust products, study all options carefully. Ask yourself how much risk you are willing to take to let your money grow, then decide on which product(s) to invest in. It may be good to take on some risk, since not taking any will let you miss out on the possible gains you may earn through trust products. If you decide to invest in trust products, just invest for the long term so as to ride out the volatility in the markets.

Another important thing to remember is to diversify. Invest in a number of asset classes to spread out the risk. By also investing in UITFs, you achieve diversification since the fund invests in not just one, but many instruments.

The current financial crisis abroad has spooked some investors, and some of them pulled out their investments locally. By pulling out at this time, investors will not be able to realize the gains that they may have once the market rallies. And banks, since they are stable, do not need to be shaken up.

So our advice is: Stay cool. The crisis will pass. The Philippine banking system is stable. Your money is safe, subject to the usual risks in trust products. Invest for the long term and join the upswing ride when the market rallies.

(INQUIRER.net and Citibank invite readers to ask questions regarding financial matters. Send your questions to personal_finance@inquirer.net or comment through our personal finance blog called MoneySmarts )

*Disclaimer: Readers are solely responsible for their own investment decisions and should thus conduct their own research and due diligence and obtain professional advice. INQUIRER.net will not be liable for any loss or damage caused by a reader's reliance on information obtained from our web site. INQUIRER.net receives no compensation of any kind from companies or industries or funds that are mentioned here.

Related sites:
Bangko Sentral ng Pilipinas

PDIC

Citibank