Congress urged to amend central bank charter

The Bangko Sentral ng Pilipinas continues to seek the authority to issue and trade its own bonds which it says will boost its own open market operations and help it better manage liquidity in the banking system.

The BSP is not allowed by law to issue and trade its own debt instruments. It mainly relies on government securities for its open market operations.

The proposal to amend the central bank’s charter has been languishing in Congress for years.

But according to the Bangko Sentral, now is the time for the regulator to update its charter.

This is because the BSP is preparing to rationalize the way it conducts monetary policy, particularly by adopting the so-called “interest rate-corridor” system.

Using that system, the BSP may predict the liquidity needs of the banking industry on a day-to-day basis. In turn, the regulator can determine the volume of bonds it needs to trade in the market to match the liquidity requirement.

The interest rate-corridor is considered to be an international best practice, the BSP said.

The regulator said that, with sufficient liquidity, the banking industry would be in a position to better support the economy and avert any crisis.

To actively manage interbank liquidity through open market operations (OMO), the central bank must have “sufficient collateral to perform OMO as may be needed,” Bangko Sentral ng Pilipinas Governor Amando Tetangco told the Inquirer.

The BSP must then have the authority “to issue its own negotiable debt instruments,” Tetangco added.

The Bangko Sentral is believed to be the only central bank in the world that is not allowed to issue and trade its own securities.

Its charter prohibits it from doing so because of what happened to the Central Bank of the Philippines, predecessor of the Bangko Sentral.

The old Central Bank was said to have incurred enormous losses and eventually had to shut down in the 1990s for abusing its authority to sell bonds.

But monetary officials now believe that times have changed, and that the Bangko Sentral, unlike its predecessor, will not be prone to abuse.

This is because the BSP now maintains autonomy from the government.

Also, the BSP is trying to improve its liquidity forecasting models to complement the need for efficient open-market operations, Tetangco said.

The regulator has tapped technical assistance from the International Monetary Fund to enhance its liquidity-forecasting tools.

“We engaged the IMF in a technical assistance … to help us refine our current models and ensure our forecasting framework is internally consistent,” Tetangco said.