BSP weighs banks’fitness for higher liquidity

The Bangko Sentral ng Pilipinas (BSP) is evaluating the banking sector’s preparedness in digesting more money supply as the central bank mulls of further cuts in the reserve requirement ratio (RRR) anytime soon, based on current economic and liquidity conditions.

BSP Deputy Governor Diwa C. Guinigundo said the BSP has resumed its “careful communication with the market” to assess banks’ absorptive capacity when the RRR is further reduced from its current 18 percent level. This is a continued effort from the BSP, he said.

A one percentage point or 100 basis points (bps) reduction in the ratio of cash reserves that banks must maintain with the central bank translates to billion fresh funds released into the financial system. Banks could either lend this out, or place it back in the BSP’s open market operations to earn interests.

“These are operational issues to be discussed such as the readiness of the banks to handle any operational adjustments,” Guinigundo said. “This has to be threshed out in a continuing dialogue with the industry.”

The market is anticipating another RRR reduction anytime soon, particularly after the new BSP chief Benjamin E. Diokno, said last March 12 that he could be looking at several RRR cuts this year since with a decelerating inflation rate, there is space for a policy rate easing.

Diokno has said there could be a 100 bps RRR cut every quarter for the next four quarters, with the market assuming the first cut will begin this quarter. A few market analysts, namely ING Bank, predicted an RRR trim by Thursday, March 28, in an off-cycle move.

Diokno reiterated the BSP’s heavy reliance on data before deciding on any actions that would impact on price stability, which was its primary mandate. Besides timing issue, the next RRR reduction would also depend on economic conditions.

If the BSP will reduce RRR by 400 bps this year, this will release about P400 billion money supply. The benchmark rate is still at 4.75 percent, the overnight deposit facility at 4.25 percent, and the overnight lending facility (OLF) at 5.25 percent. The weekly term deposit facility (TDF) auction is the BSP’s main liquidity siphoning off tool and the yield is near the OLF rate of 5.25 percent.

With billion liquidity from the RRR cut – and this is 100 bps reduction every quarter – the BSP will be paying about billion in interest costs to keep this additional liquidity in the TDF. This would impact on the BSP’s bottomline, which would mean that it will be sacrificing its capitalization buildup to get to the billion capital base, the BSP would have to draw on its dividends from its net income. The new charter has allowed the BSP to finally increase its capitalization from billion to billion but it