BSP cuts banks’ reserve requirement by 3 percentage points

February 3, 2012 10:49 pm 

By Joann Santiago

MANILA, Feb. 3 – Central bank’s policy-making Monetary Board (MB) on Thursday slashed by three percentage points banks’ reserve requirements effective April 6, 2012 in a bid to rationalize the reserve requirement policy.

The decision brought to 18 percent, from 21 percent, banks’ RR requirement, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said in a statement Friday night.

Tetangco said the Board, in its meeting on Feb. 2, 2012, also approved the “unification of the existing statutory reserve requirement and liquidity reserve requirement into a single set of reserve requirement; the non-remuneration of the unified reserve requirement; and the exclusion of vault cash (for banks) and demand deposits (for non-bank financial institutions with quasi-banking functions) as eligible forms of reserve requirement compliance.”

“The Monetary Board expects that the rationalization of the reserve requirement policy will increase the effectiveness of reserve requirement as a monetary policy tool, simplify its implementation, and improve the monitoring of banks’ compliance. However, the Board also anticipates that the operational reforms may have some impact on banks’ intermediation costs,” he said.

The central bank chief said that the cut in the reserve requirement was aimed to counter the impact on banks’ intermediation cost.

He said the cut in the RR requirement was applicable to reservable liabilities of universal/commercial banks (U/KBs), thrift banks (TBs), rural banks (RBs), cooperative banks (Coop Banks) , and non-bank financial institutions with quasi-banking functions.

He explained that the Board believes that “the operational changes will achieve the two-pronged objectives of simplifying the BSP’s reserve requirement regime and ensuring adequate liquidity in support of economic growth, especially given the prevailing weak global economic conditions.”

“The Board noted that with the reduction in the reserve requirement ratio, the operational changes should not affect banks’ lending and deposit rates or their service fees,” he added. BSP requires banks to keep a fraction of their deposits, usually in an account held with the central bank, to control growth of money supply and in turn contain inflation.

The central bank defines RR as the “percentage of bank deposits and deposit substitute liabilities that banks must keep on hand or in deposits with the BSP and therefore may not lend.”

Monetary official said “changes in reserve requirements have a significant effect on money supply in the banking system, making them a powerful means of liquidity management.’

Before the unification of the two forms of banks’ reserves, central bank allowed banks to place up to 40 percent of the regular reserve requirement, which is paid four percent annual interest. While the liquidity reserves are paid the rate on comparable government securities less half a percentage point.

With the unification, these reserves will not be paid any interest anymore. (PNA) RMA/JS/utb

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