All about the Dominican Republic

Is Banking Safe, or in the least Insured, in the Dominican Republic?

Many Americans, Canadians, and other nationalities mistakenly believe the stereotype that the Dominican Republic is a tin-pot third world banana republic. They believe there are no regulations, extreme poverty everywhere and complete government mismanagement. I do not agree with this opinion, but this is the stereotype that many other nationalities still have.

The most common question we see from readers involves the safety of bank deposits in the Dominican Republic. Americans especially point to the US government run FDIC insurance program as a benchmark to compare the rest of the world to. My advice is to understand what you are trying to compare or ask. FDIC was broke during the early 1990’s due to bank failures in the late 1980’s (which by the way was a point in time most people would deem to be decent or positive economically speaking). The link to this information is below.

The point is, FDIC is one of the most miserably run insurance programs and if it were a private insurance company, would have been out of business due to insolvency a very recent 10 years ago. Considering that the late 1980’s were not a time many would term a severe economic depression, and less than 20% of US banks folded up causing FDIC to become insolvent, what might the case be for a real bad US economic crisis? If the system goes broke with less than 20%, what will happen if 30% go belly-up? Americans probably sleep better seeing that little FDIC sign on the bank door, but the reality is truly something very different than the hype or promotion. You are correct if you say, It is better than nothing. However, one should compare apples to apples when looking at foreign banks and how much is kept on reserve to cover failed banking institutions. In many countries, the Central Bank of the country is charged (as is the case in the Dominican Republic) with this responsibility and the reserve requirement is often as high as 5% or more of each bank’s deposits. In other words, which number is greater, 5% or 1.38%? (See the FDIC information below, whereby in reality only 1.38% is in reserve for the entire insured number of banking deposits as of 1998 figures). 

What about FDIC, with it’s US$ 29 Billion Dollars (1998 figures) in the bank insurance fund account? Well, according to FDIC statistics, there are 77 commercial banks with US$ 10 Billion Dollars or more on deposit. This means it only takes 3 out of these 77 very large banks to fail, and the FDIC insurance fund is wiped out once again (See 1991 & 1992 statistics regarding the insolvency of FDIC). How many Americans knew that the FDIC Bank Insurance Fund (BIF) was broke in 1991, to the tune of negative US$7 Billion Dollars and also broke in 1992 to the tune of US$ 100 Million Dollars?  Not only was the bank insurance fund insolvent in these years, it was in debt!  And this was not so long ago.

A quote from the 1998 FDIC Report to Congress:

The BIF (Bank Insurance Fund) has grown steadily from a negative fund balance of $7 billion at year-end 1991 to $29.6 billion at year-end 1998.  Here is the Link, so you can read for yourself: 

http://www.fdic.gov/about/strategic/report/98Annual/cond.html

Also, as of 1998, for each US$ 100 Americans have on deposit with US banks, the FDIC can only cover US$ 1.38 if all US banks (covered by FDIC) go under. Now how comforted are you, knowing your account is covered by FDIC insurance?  See the FDIC’s own statistics here: 

http://www.fdic.gov/about/strategic/report/98Annual/122.html

The following has been taken directly from the FDIC web site (http://www.fdic.gov/). Some changes to FDIC coverage were made in 1992 & 1993 and it would seem most US investors are not even aware of these changes (Is it so ironic that they reduced coverage right after they were broke?): 

Governments (and people) in other parts of the world are no less concerned about having a safe and solvent banking system, and do have certain regulations or systems in place (although they may be different than the US operated FDIC program). For example, the Central Bank in the Dominican Republic is charged with the regulation, licensing and solvency of the local banking community. If you want to compare this to the US, we can say that the equivalent to the US Federal Reserve (with regards to the Central Bank in the Dominican Republic) has the responsibility of the FDIC and the Federal Reserve rolled into one, or under one roof and not two.  The Central Bank of the Dominican Republic does audit all banking institutions regularly, and requires a reserve deposit depending upon the type of deposits and loans the bank may have which is far in excess of what the US government has on deposit or requires of its banking institutions.

When we discuss the topic of banking, another important point to consider is the lending and business practices of banks in a particular market. Many people view banking in Latin America as unstable or risky, yet banks in the Dominican Republic are far stricter than their US counterparts when it comes to things like credit cards, car loans and home mortgages. Because there are no credit bureaus to speak of, Dominican Banks usually ask for at least one, sometimes more guarantees or co-signers to any loan, including credit cards (which are a form of unsecured personal loans in effect). This means you must demonstrate collateral or at least have one or more other people stick their neck out for you when trying to apply for a car loan or any other kind of loan. The result is, if you do not pay, the bank will most assuredly go after your brother in law, sister, best friend (and their assets) accordingly.

US banks on the other hand give out money, often enough seemingly based on a smile. This is all well and good when the economy is fine and everyone is working. But what happens when there are massive layoffs in the US and people stop paying? The Central Bank of the Dominican Republic requires incredible (insurance) deposit ratios for both secured and especially unsecured loans (credit cards) on the books of Dominican Banks. In fact so much so, it would explain the high credit card interest people pay (there are no usury laws in the DR, and annual credit card interest rates of 40% or more is not unusual). The banks need to charge this to make money due to the large amounts of money they must put up with the Central Bank as collateral or what we can call insurance deposits for such loans. US banks, on the other hand, have gotten so competitive that they charge the same amount of interest for car loans or home mortgages as they do for unsecured credit card lines of credit (a far riskier business). So, if you want to make a comparison regarding which banking system is more secure or more solvent, in my opinion, it is the Dominican Republic and not the US.

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