BSP cuts reserve requirement further

THE BANGKO SENTRAL ng Pilipinas (BSP) on Thursday announced another percentage point cut in bank reserves, marking the second such adjustment this year as the regulator moves to reduce lending costs in the Philippines.

In a statement, the Monetary Board announced that the reserve requirement ratio ( RRR) imposed on universal and commercial banks will be trimmed to 18% effective June 1 under Circular No. 1004, series of 2018, that was signed by BSP Governor Nestor A. Espenilla, Jr. on May 24. BSP’s Monetary Board approved this move on March 22 via Resolution No. 471.

This follows a cut of the same magnitude announced on Feb. 15 which took effect March 2.

“These operational adjustments are part of the BSP’s shift toward a more market-based implementation of monetary policy that aims to gradually reduce the BSP’s reliance on reserve requirements for managing liquidity in the financial system,” the central bank said in a statement on Thursday.

Mr. Espenilla committed to reducing the ultra-high reserve standard for big banks right after he assumed his post in July last year, saying the move would keep the Philippines competitive relative to its Asian peers.

The central bank previously clarified that any RRR adjustment involves an “operational” change rather than a shift in policy stance.

The adjustment is also designed to support a broad financial market reform agenda to deepen the local debt market and open up new channels for borrowing.

The RRR cut applies to deposit liabilities and substitutes held by big banks.

An estimated P90 billion will be unleashed from idle funds kept by banks with the BSP which they may soon deploy for greater lending and other uses.

Mr. Espenilla has said that he personally wants to see the required reserves down to single-digit levels down the road, given that currently steep level “distorts” the financial system as it constrains lenders from offering additional credit to productive sectors.

The decision to finally implement the second cut was made on May 10, the same day policy makers decided to raise benchmark interest rates by 25 basis points to rein in inflation close to expectations. The decision on the RRR was withheld for two weeks to avoid confusing the market, a source familiar with the matter said.

Sought for comment, an industry official said the BSP’s decision to bring down bank reserves anew is a welcome development.

“It’s not confusing because those are two separate issues,” Edwin R. Bautista, president and chief executive officer at the Union Bank of the Philippines, said when asked about the impact of an RRR cut alongside a policy rate hike.

“One is competitiveness of the banking industry — we want Philippine banks to be globally competitive. At the same time, he (Espenilla) needs to manage inflation. That’s how it is if you are a regulator, you are managing two opposing issues.”

On the other hand, mandated reserves for thrift banks and rural banks remain at eight percent and five percent, respectively.

Sought separately for comment, Jose Mario I. Cuyegkeng, senior economist at ING Bank N.V. Manila, noted that the “BSP program is to bring RRR of banks to 10% or less in the next five years.”

“Market had partly anticipated the cut and timing… The market takes this for now as a liquidity infusion which is seen to ease shortterm rates,” Mr. Cuyegkeng said.

“Banks would likely use part of the liquidity to finance the economy thorough higher loans. If this liquidity is not removed, then economic growth should be enhanced.”

Central bank officials have said they are now looking at the weekly term deposit auctions as their main tool to influence market rates, which have proven to be a potent instrument after nearly two years.

The BSP asserted that the adjustment in the reserve standard is not tantamount to a change in policy stance, with monetary authorities noting that they “continue to have the scope to offset their potential liquidity impact via an expansion in auction-based monetary operations.”

The term deposit facility is currently the central bank’s main tool to siphon excess liquidity in the financial system. The window allows banks to park the idle cash they hold with the BSP in exchange for a small margin, which in turn will prod market rates closer to the 3.25% benchmark set by the central bank.

The BSP hiked the auction amount to P120 billion for Wednesday’s exercise, but was met by bids worth only P98.455 billion. For next week, the volume was trimmed to P110 billion.

Domestic money supply grew by 14.4% in March from a year ago to reach P10.9 trillion, according to latest available data from the central bank.