Planned reserve ratio requirement cut to boost lenders

REDUCING the 20% reserve standard will allow big banks to expand faster with additional funds at its disposal, the head of the Bank of the Philippine Islands (BPI) said, although such a move would have to be carefully timed so as not to cause major disruptions in the banking system.

BPI President and Chief Executive Officer Cezar P. Consing said he supports the Bangko Sentral ng Pilipinas’ (BSP) plan to eventually bring down the reserve requirement ratio ( RRR) imposed on universal and commercial banks.

“I am for it because I think our RRR is among the highest in the region. I’d like to see us more in line with the rest of the region. I’d like to see banks being able to grow faster, and I think a lower RRR would help that,” Mr. Consing said in a recent interview in his office in Makati City.

BSP officials have been floating the idea of trimming the RRR since June 2016 as the BSP migrated to an interest rate corridor and introduced weekly term deposit auctions in order to capture excess money supply in the market that has been driving yields lower.

The current 20% RRR for big banks is deemed one of the highest in the world. Effectively, banks must set aside a fifth of their total deposit base with the BSP, which they cannot hand out as loans. These funds are effectively left idle and do not generate returns.

Upon assuming the top post on July 3, BSP Governor Nestor A. Espenilla, Jr. said discussions on the RRR cut remain live within the Monetary Board, with the central bank chief looking to reduce the requirement during his term as it stands as an “inefficiency to the financial system.”

Mr. Consing, however, cautioned against a sudden reduction of the reserve standard, as it could leave banks flooded with cash.

“You can’t do these things lightly. There can be negative effects if you do it too quickly if you do it too much at the wrong time,” the BPI official said, as he noted that he was “very confident” that the BSP will proceed carefully in order to minimize any negative spillovers once the threshold is lowered.

BSP officials have said that any tweaks to the RRR would come at a time of tighter liquidity conditions. The central bank’s weekly term deposit auctions, however, show that there remains ample money supply held by banks even

after a year of introducing the new platform.

On the other hand, Mr. Consing said he remains “very comfortable” with current interest rates and robust credit growth, saying the pickup in lending has been “more measured” than the double-digit increases seen years ago.

“As a bank, I’d like to see rates go up a little bit, obviously — but that’s a banker’s view. If you’re the guy on the street, you want rates to stay low as long as you don’t have inflation and there’s good growth,” Mr. Consing said.

The BSP’s policy-setting Monetary Board has kept benchmark rates within the 2.5-3.5% range over the past year and the reserve requirement steady since 2014, as it noted of benign inflation and firm domestic economic activity which did not need fresh interventions from the central bank.