Bangko Sentral makes it cheaper for banks to issue bonds
Starting next month, banks will have more cash to lend out for productive uses after the central bank approved a cut in the amount of liquidity that financial institutions must set aside to back up their debt securities.
In a statement, the Bangko Sentral ng Pilipinas said its policy making Monetary Board had approved the reduction in the reserve requirement rate for bonds issued by banks and quasi-banks to 3 percent “as part of its commitment to contribute to deepening of the local debt market.”
This rate is lower than the required reserves of other debt instruments issued by banks such as long-term negotiable certificates of time deposits which is currently at 4 percent. The new reserve requirement ratio will take effect on the reserve week that begins on Nov. 1, 2019.
The cut in the reserves for banks’ bond issues—though substantially smaller than the nearly P100 billion that was freed up with last September’s 100-basis point cut for reserves on bank deposits—is “a step in the right direction,” according to bank officials who spoke to the Inquirer.
“[Bank-issued bonds] make up a relatively smaller market, because we’re still a deposit-based industry,” said one bank president. “But that’s definitely a good move.”
The central bank said the lower bank reserves on bond issuances was expected to reduce the bond issuers’ intermediation cost that could be passed on to the holders of such securities.
The adjustment in the required reserves for bonds complements the BSP’s earlier policy issuance streamlining the rules and requirements for the issuance of debt instruments by banks and quasi-banks. These initiatives are intended to incentivize financial institutions to tap the domestic bond market as part of their liquidity management activities.
Late last month, the central bank announced another round of monetary policy easing a day after it reduced its key benchmark rate.
Bangko Sentral ng Pilipinas Governor Benjamin Diokno said universal and commercial banks would be mandated to keep 15 percent of their deposits as liquid reserves starting on the first day of the first reserve week of November 2019.
This move represented a 100-basis point reduction from the existing reserve requirement ratio level of 16 percent, and is expected to help pump prime gross domestic product growth after a lackluster performance in the first semester.
The latest round in reserve requirement cuts marks the second time such a move was announced by the central bank this year. In May, the BSP announced a three-stage reduction in bank reserves totaling 200 basis points but staggered over a three month period.
