Staggered reserve cuts to free up P1T in cash by 2023
Monetary regulators may reduce the amount of cash banks are required to hold by as much as two percentage points each year which, if implemented without interruption, will free up almost P1 trillion in idle funds by the end of the term of Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr.
The BSP chief believes these funds — which regulations require to be kept immobilized in bank vaults both as a source of emergency liquidity and a monetary control tool — constitute an indirect tax on the financial system which can be better used to fund the needs of the country’s growing economy.
In a text message to the Inquirer, Espenilla said he envisioned a 200-basis point yearly reduction in banks reserve requirements over the rest of his six-year term as the country’s chief monetary regulator, but stressed that this schedule was not set in stone.
“If you start at 20 percent reserve requirement ratio and assume [a reduction of] 200 basis points per year over a six-year term, then that takes us to single digit territory over the medium term,” he said.
At this proposed pace, Espenilla will have reduced banks’ reserve requirements to a mere 8 percent of their total deposits by the time his term ends in 2023. Each one percentage point cut releases an estimated P90 billion into the financial system, which banks can use for loans that, in turn, can spur economic growth.
The BSP cut the bank reserve requirements earlier this year in two one percentage- point moves, bringing the total down to 18 percent. Despite this, the reserve requirement on Philippine banks is still one of the highest in the world.
“Of course, the 200-basis point reduction per year is not a hard commitment,” the BSP chief said. “There should be room for some flexibility because there’s always the element of uncertainty and we need to adapt.”
Espenilla recently declared a temporary halt to the reserve requirement cuts for the rest of the year, saying this particular drive to reform the local financial system will resume once the country’s five-year-high inflation rate stabilizes in 2019.
This decision was lauded by the International Monetary Fund which noted the possibility of “communications issues” arising from any simultaneous move to release more funds into the economy while trying to quell inflationary pressures by raising interest rates.
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