BSP raises ceiling for banks’ dollar stash in move that could temper peso rise

MANILA, Philippines—The monetary regulator is set to allow banks to hold more dollars for their clients’ trade and investment needs— a move that would also help temper the rise of the peso against the greenback due to pandemic-induced trade deficit.

At an online press briefing, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the Monetary Board approved an increase in the so-called “net open foreign exchange position” limit for banks that recognizes the increased demand for foreign exchange arising from the growth in the volume of underlying trade transactions and investments.

“This reform initiative aims to ensure that banks can continually provide ample liquidity in the market and service client demand for foreign exchange,” he said.

Banks’ dollar holding limit will be raised to 25 percent of their qualifying capital or $150 million, whichever is lower, from the previous limit of 20 percent of unimpaired capital or $50 million.

A bank’s net open position represents the amount of its net assets and liabilities denominated in foreign currency.

The peso has appreciated by 7.2 percent against the dollar since the start of the coronavirus pandemic early in 2020, and 4.6 percent over the last 12 months as the weak economy dampened demand for foreign exchange to pay for imported goods and services. A strong peso will make Philippine exports — a key engine of growth — more expensive to overseas buyers.

“The increase in [this] limit is part of a larger set of amendments to the framework for the management of banks’ open foreign exchange positions, which aim to make the calculation and measurement of a bank’s net open position more risk-based,” Diokno said.

Among the changes is the use of qualifying capital as base for the computation of the net open position limit. This aligns that base with that used to measure a bank’s capital requirement for its foreign exchange risk.

A new calculation methodology for this dollar holding limit is likewise prescribed, with the open position computed as the higher of the absolute value of the sum of net long or short positions in individual currencies, rather than as the net position across all currencies.

This is consistent with the computation of a bank’s foreign exchange position under the risk-based capital adequacy framework. The newly-adopted approach is widely accepted and used by other jurisdictions.

The revised framework also provides greater flexibility to the BSP in dealing with breaches in the foreign exchange holding limit. It moves beyond the imposition of monetary penalties, and instead applies a supervisory framework that allows the BSP to deploy a range of supervisory actions depending on the gravity and persistence of limit breaches, with the objective of ensuring that foreign exchange risk does not threaten a bank’s safety and soundness.

These amendments will take effect on Aug. 1, 2021.

As the revised computation methodology will require the implementation of a new reporting template, a one-month parallel run of the new report with the existing report shall be conducted during the entire month of July, the BSP said.

TSB