Banks cheer BSP chief’s ‘bold move’ to cut reserves aggressively

MANILA, Philippines — The Philippines largest financial institutions on Friday cheered the decision of financial regulators to progressively reduce the amount of cash banks are required to hold inactive in their vaults, saying the move will help boost the country’s economic growth.

In a statement, the Bankers Association of the Philippines (BAP) – the umbrella organization of the country’s largest banks – said the move is also timely since the inflation rate in the domestic economy has fallen to a 16-month low as of April.

“The 2 percent cut in reserve requirements recognizes the BSP’s effectiveness in strengthening the country’s banking system,” BAP president Cezar Consing said. “It is a bold move, coming on the heels of a policy rate cut, but equally appropriate given how our financial system has advanced under the BSP’s stewardship.”

Previous to the Monetary Board’s Thursday decision to cut the reserve requirement to 16 percent from 18 percent staggered over three months, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said he was told about the financial institutions’ plight amid the tight liquidity in the local market that had been driving up their borrowing and lending rates. As recently as last week, however, the central bank chief said there were some officials within the organization who were unconvinced the liquidity level in the financial system was tight.

BAP said that moving forward, it is optimistic that the reserve requirement ratio reduction, together with easing of policy rates, will sustain the growing economic momentum of the Philippines.

“The association is confident that the Bangko Sentral will continue to exercise its regulatory role effectively as catalyst to bolster economic growth and consumer confidence in the banking industry,” Consing said.

Separately, Rizal Commercial Banking Corp. chief economist Michael Ricafort said the reserve requirement cut “should be generally positive” for the local economy and financial markets.

This is because banks – which had previously been struggling with expensive funding costs – will now be able to extend more loans to businesses, consumers and households which may, in turn, spur greater economic activities and faster gross domestic product growth.

The central bank estimates that each percentage point reduction in the reserve requirement ratio releases over P90 billion in cash into the local economy. Presently at 18 percent before the first stage of the reserve cut comes into effect at month’s end, the Philippine banking system has the highest reserve requirement in Southeast Asia.

Ricafort said the latest reserve reduction cut for universal and commercial banks is consistent with the reiterated signals from the BSP to reduce it to below 10 percent by 2023, as originally suggested by the late BSP Governor Nestor Espenilla who started the reductions in early 2018 with two successive 1-percentage point cuts, before rising inflation forced regulators to pause. (Editor: Katherine G. Adraneda)