BSP eases bank reserve rules to release more cash into economy

The central bank may have called a halt to interest rate cuts and bank reserve requirement reductions for the rest of 2019, but that doesn’t mean they have stopped releasing liquidity into the Philippine financial system.

In a statement released on Friday, the Bangko Sentral ng Pilipinas (BSP) announced that its policy-making Monetary Board had approved the exemption of so-called deposit substitutes from the computation of banks’ reserve requirements.

Under the new rules, banks will no longer have to set aside cash buffers for funds they borrow from other financial institutions—a key reform measure that will result in a more efficient market.

“This means that borrowings from banks, quasi-banks and other financial intermediaries are no longer considered as deposit substitutes, which are subject to reserve requirements,” the central bank said. “Examples of these borrowings include interbank borrowings, repurchase agreements with financial counterparties as well as bonds issued to financial intermediaries.”

“The exclusion of these types of borrowings from the reserve base of banks and quasi-banks will result in freed-up liquidity for lending or investment activities,” it stressed.

The Monetary Board approved the revision to the definition of a deposit substitute to align the same with the provisions of the BSP charter, which was amended under Republic Act No. 11211.

Under Section 95 of the new BSP charter, a deposit substitute refers to a form of obtaining funds from the public, other than deposits, through the issuance, endorsement or acceptance of debt instruments for the purpose of relending or purchase of other receivables and obligations. The provisions of Section 95 clarify that the term “obtaining funds from the public” refers to borrowing from 20 or more lenders that are individuals or corporate entities which are not financial intermediaries.

“This amendment is in line with the BSP’s commitment to implement legislation and ensure that the BSP’s regulatory framework is consistent with prevailing laws,” the central bank said. “It also facilitates the flow of funds within the financial system, which may help reduce intermediation costs and, in turn, support the economic activity.”

The central bank last moved to release more liquidity into the Philippine economy through a 100-basis point reduction in banks’ reserve requirement last month. The move will release an estimated P100 billion in fresh cash—previously immobilized in bank vaults as reserves—into the economy in the form of loans.

That move brought the total reserve requirement cuts made by the BSP to 4 percentage points since Governor Benjamin Diokno took over the BSP reins earlier this year.