Philippine banks are bracing themselves for a much more stringent reserve requirement as the Bangko Sentral ng Pilipinas (BSP) plans to overhaul existing rules to sharpen this tool into an even more potent mopping up measure, banking sources said.
Banking regulators plan to change the computation of the reserve requirement—the percentage of bank deposits and deposit substitute liabilities that banks cannot lend out but should be kept on hand or in deposit with the BSP—to align local rules with global standards and make compliance monitoring much easier, the sources said.
This requirement, currently at 21 percent of total bank deposits and deposit substitutes, has a significant effect on money supply in the banking system.
The planned changes in the reserve requirement framework that were sounded off to bankers recently have three key components:
Removal of the distinction between regular or “statutory” reserves and “liquidity” reserves;
BSP to stop paying interest on all reserves mandated to be kept in its vault; and
Cash kept in bank vaults will no longer be considered as part of reserves.
At present, the BSP pays 4 percent per year on up to 40 percent of deposits maintained by banks as part of the statutory reserve. The average effective interest rate paid by the BSP on all statutory reserves is about 1.6 percent.
Of the 21 percent reserve requirement ratio, 10 percentage points of which are in the form of statutory reserves while the remaining 11 percentage points represent liquidity reserves.
Liquidity reserves are paid rates based on comparable government securities less half a percentage point. The use of liquidity reserves help reduce bank intermediation costs since they are paid market-based interest rates.
Banks are concerned that the proposed changes in the reserve requirement may substantially increase the cost of financial intermediation. The influential Bankers Association of the Philippines met last week to discuss the impact of the plan and the consensus was to seek further dialogue and convince banking regulators that this plan might be “too drastic,” banking sources said.
“Anything that increases the cost of intermediation is not good for business and the economy,” one banker said, adding that this is a de facto monetary tightening.
The new framework means the BSP will improve its capability to mop up excess liquidity through the reserve requirement while avoiding the cost of keeping banks’ reserve deposits. Its argument is that most other central banks in the world do not pay banks for holding their reserves given their mandate to manage liquidity levels.
If the BSP will no longer consider cash in bank vaults as part of the reserves, another banking source said, this would plug loopholes in compliance because it is actually tedious for the BSP to validate the physical presence of cash kept by banks in their branches.
At the same time, such a framework is seen giving banks little leeway in using cash in vaults for speculative purposes.
Bankers understand the BSP’s rationale in fine-tuning the reserve requirement rules, but many believe that if the banking regulator were to be as strict as its peers overseas, it should consider bringing down the reserve requirement ratio.
With banks unable to touch 21 percent of their funds, the local reserve requirement ratio is seen as one of the highest in the region.