Cut in BSP reserve requirement seen

The Bangko Sentral ng Pilipinas may cut the 21-percent reserve requirement for banks as part of a plan to overhaul its liquidity management tool.

A cut in the reserve requirement is hoped to help ensure that the planned overhaul of the reserve requirement framework will have a neutral impact on the liquidity of the economy.

BSP Deputy Governor Nestor Espenilla Jr. said the central bank’s move was neither intended to tighten nor loosen monetary policy.

The plan is aimed at merely simplifying the system of handling reserves, he said.

Under the proposal, banks will be required to keep all their reserves with the BSP.

Currently, only 10 percentage points of the 21-percent reserve requirement ratio is actually kept in the vault of the BSP, which is called the “statutory reserve.” The higher share of 11 percentage points, called the “liquidity reserve,” is set aside by banks in their own vaults.

Given this arrangement, the central bank said it was difficult to monitor the banking system’s actual liquidity reserve. There is also the risk that portion of the liquidity reserve is being used for investment activities instead of being religiously kept in the vaults of banks. This is considered a loophole in the management of liquidity in the economy.

“The proposal is aimed at streamlining the structure of the reserve system of the BSP. The cash reserves kept by banks is very volatile and difficult to (count), unlike those parked in the BSP,” Espenilla said.

If all reserves would be kept by the BSP, the difficulty in monitoring the reserves would be eliminated.

To make the impact on overall liquidity neutral, Espenilla said, the reserve requirement ratio of 21 percent might be slashed.

“The idea is to streamline and improve the structure, and to make a neutral change,” Espenilla said.

In the meantime, banks have expressed discomfort over the proposed overhaul of the reserve requirement framework. This is because the overall plan also includes a provision seeking the removal of interests paid by the BSP on the reserves.

Consequently, income opportunity of banks would be adversely affected once the proposed overhaul is implemented.

BSP officials, however, said that in many central banks around the world, reserves were actually not paid interest. The proposed overhaul, therefore, is consistent with international practices, they said. Michelle V. Remo