Bank reserve requirement cut to 18%

The Bangko Sentral ng Pilipinas has decided to cut the reserve requirement ratio for banks by 3 percentage points in what officials said was part of an overall effort to rationalize the way liquidity in the economy was being managed.

With the reduction, the reserve requirement—the proportion of deposits that banks must keep as reserves—will go down to 18 percent from the current 21 percent. The lower reserve requirement will take effect on April 6.

“The Monetary Board [of the BSP] expects the rationalization of the reserve requirement policy to increase its effectiveness as a monetary policy tool, simplify its implementation, and improve the monitoring of banks’ compliance,” the central bank said in a statement issued Friday evening.

The cut in the reserve requirement ratio comes with other measures, also to take effect on April 6, that were meant to rationalize the overall reserve requirement framework.

First, the BSP will no longer allow banks to keep a portion of the reserves in their own vaults, which means all reserves will be kept at the central bank. Under the old system, 10 percent of deposits are with the BSP and 11 percent are kept by the individual banks.

Regulators believed that some banks were not religiously complying with the reserve requirement and that the funds were actually being used for lending or other activities. Requiring all reserves to be kept by the BSP would ensure compliance, officials said.

Second, the BSP would no longer pay interest on the reserves. Under the old system, an interest of 4 percent a year is paid on 40 percent of the reserves kept by the BSP. An interest equivalent to 50 basis points below comparable government securities is paid on the reserves kept by the banks in their own vaults.