BSP to adjust banks’ reserve requirement

The Bangko Sentral ng Pilipinas is set to adjust the reserve requirement of banks, lowering the proportion of deposits to be set aside as reserves, from the existing 21 percent.

The central bank’s Monetary Board on Thursday approved the implementation of a new reserve requirement framework, according to BSP Deputy Governor Diwa Gunigundo.

The BSP will formally announce the schedule of the implementation of the framework within the week, Gunigundo added.

Under the new framework, the banks are also required to let the BSP keep all the reserves, thus revising the old system wherein a portion of the reserves, or 11 percentage points of the 21-percent reserve requirement, are kept at the individual vaults of the regulated banks.

In effect, the banks may no longer earn from the idle funds.

BSP Governor Amando Tetangco Jr. earlier said the new reserve requirement framework would be similar to those now being implemented by many foreign central banks.

“Other central banks are not paying interest on the reserves. We will just rationalize our own system,” Tetangco had said.

The change in the reserve requirement framework, nonetheless, will have little effect on the country’s financial sector, the BSP stressed. This is because, although banks will no longer earn interest from the reserves, the amount of reserves they must keep with the BSP will be lower.

Under the old system, the 10 percentage points of the 21-percent reserve requirement, called the “statutory reserves,” is kept at the BSP. The central bank pays 4 percent per year on 40 percent of this type of reserves.

The remaining 11 percentage points, called the “liquidity reserves,” are kept by banks in their respective vaults and are paid interest equivalent to 50 basis points below comparable government securities.

Monetary officials said the new reserve requirement framework would have a neutral effect on the amount of liquidity in the economy.

This is because there is a belief among regulators that banks do not religiously comply with the “liquidity reserve” rule, in that the money banks that should be kept as reserves in their own vaults are actually being used for operations, such as lending.

Therefore, requiring banks to put all reserves to the BSP and lowering the reserve requirement should not lead to an increase or decrease in the overall liquidity in the economy, the BSP explained.

Also, inflation should also not be affected, it added.

The BSP said the overhaul of the reserve requirement is not meant to temper inflation nor to help accelerate growth in liquidity and growth of the economy. The move was just intended to rationalize and simplify the reserve requirement framework, the BSP stressed.

Economists believe that there is a need for measures to boost growth of the domestic economy given the ill effects, of a weak global economy on the country.

The BSP said it had responded to that need earlier by cutting its key policy rates, which influence commercial interest rates, in January. Lower interest rates help boost demand for loans, which in turn support consumption and investments.

The BSP also said it would be willing to cut policy rates further if the economy would need further boost and if such a move would not lead to higher-than-target inflation.