News Update BSP cut in bank reserves frees up P100 B

MANILA, Philippines - The decision of the Bangko Sentral ng Pilipinas (BSP) to slash the reserve requirement ratio for banks by three percentage points effective April 6 could free up at least P100 billion worth of funds to the financial system and help boost the country’s slackening economy, the country’s top banker said. BSP Governor Amando M. Tetangco Jr. said in a statement that the central bank’s Monetary Board decided to reduce the reserve requirement ratio by three percentage points to 18 percent from the current level of 21 percent to help offset the impact on the intermediation costs of banks. He said the reduction would apply to the reservable liabilities of universal banks, commercial banks, thrift banks, rural banks, cooperative banks, and non-bank financial institutions with quasi-banking functions. BSP Deputy Governor Diwa Guinigundo said in an interview with reporters that the Monetary Board approved three operational adjustments in the central bank’s reserve requirement policy last Thursday to increase the effectiveness of reserve requirement as a monetary policy tool, simplify its implementation, and improve the monitoring of banks’ compliance. “These are the unification of the existing statutory reserve requirement and liquidity reserve requirement into a single set of reserve requirement; the non-remuneration of the unified reserve requirement; and the exclusion of vault cash and demand deposits as eligible forms of reserve requirement compliance,” he said. However, the BSP also decided to lower the reserve requirement ratio as it anticipates that the operational reforms would have some impact on banks’ intermediation costs. According to the BSP, the operational changes would achieve the two-pronged objectives of simplifying the BSP’s reserve requirement regime and ensuring adequate liquidity in support of economic growth given the prevailing weak global economic conditions. The central bank clarified that the reduction in the reserve requirement ratio as well as the operational changes should not affect banks’ lending and deposit rates or their service fees. The BSP currently imposes a 21 percent reserve requirement ratio in banks. Of the total requirement, 10 percentage points is in the form of statutory reserve wherein the banks’ reserves are actually kept in the vault of the BSP, while 11 percentage points are in the form of liquidity reserves set aside by banks in their own vaults. Banks could place up to 40 percent of the regular reserve requirement and these are “paid interest of four percent per annum, while liquidity reserves are paid the rate on comparable government securities less half a percentage point.” Guinigundo said banks are now required to keep all their reserves with the BSP while the amount kept by banks in their vaults is now excluded in the compliance in the reserve requirement policy. The BSP said it was having difficulty monitoring the banking system’s actual liquidity reserves kept by banks in their own vaults. The central bank announced the review of its reserve requirement policy last November to operationally strengthen the reserve requirement as a liquidity management tool. Authorities conducted a series of discussions with major players in the banking industry late last year and early last month. - By Lawrence Agcaoili