The Bangko Sentral ng Pilipinas yesterday reaffirmed its commitment to sharply reduce the cash buffer that financial institutions are required to keep immobile in their vaults amid rising clamor from bankers for regulators to release more liquidity to feed the growing economy.
In a message to reporters on Thursday, BSP Gov. Nestor Espenilla Jr. said that the so-called “reserve requirement ratio” had become an outmoded way of managing the amount of cash circulating in the financial system and, as such, needs to be reformed.
“The reserve requirement ratio is one of the traditional monetary policy instruments available to BSP. We have heavily relied on it for a long time to run effective monetary policy in a situation of underdeveloped banking and financial markets and limited central bank open market operation tools,” he said. “This is no longer the case for the Philippines.”
Current regulations require banks to keep 20 percent of their deposits in their vaults, preventing their productive use as loans or investments. This policy is a tool that helps the central bank control the amount of liquidity in the economy while providing banks with a ready cash buffer for large client withdrawals.
Since assuming the governorship of the central bank last year, however, Espenilla has made it clear that his preference is for the reserve requirement ratio to be cut to single-digit levels.
“Continued heavy reliance on RRR has become highly burdensome and distorts the financial system,” he said yesterday, explaining that the central bank now has a more effective and market friendly tool for managing liquidity in the form of the so-called “interest rate corridor.”
Espenilla said the interest rate corridor—where the central bank’s various policy tools are used to delineate the median, upper, lower limits of interest rates in the local market—served as “the main logic” behind the plan to gradually phase down bank reserves.
The BSP chief noted that other Asean countries with similar levels of economic development already enjoyed single-digit bank reserves, allowing the economy to benefit from cash that would otherwise be locked up in bank vaults.
But Espenila stressed that the forthcoming reductions in bank reserves “should not be mistaken as a change in monetary policy stance.”
“Rather, it should be viewed as part of ambitious financial market reforms that BSP is currently implementing,” he said, explaining that high levels of reserve requirement “belongs to the same regime as extensive quantitative foreign exchange controls that we are also easing.”
“This is more compatible with our more sophisticated financial system and much stronger economy today,” he added.
The higher levels of liquidity in the financial system that will result from the reserve cuts will be offset by the central bank’s deposit taking activities with banks, Espenilla said.