BSP approves reforms on reserve requirement

THE policy-making Monetary Board of the Bangko Sentral ng Pilipinas (BSP) has approved in principle the reforms in the reserve requirement policy aimed at strengthening the framework as a liquidity management tool.

In a briefing on Friday, BSP Deputy Governor Diwa Guinigundo said that the Board has approved the three reforms—unification of the statutory and liquidity reserve requirement ratios, non-remuneration of reserve deposits of the banks, and exclusion of cash in vaults from the computation of compliance of the reserve requirements— with the view of enhancing the transmission of monetary policy actions on the economy.

“The implementation will actually take time . . . it will be in several weeks from the time we officially announce it. We still have to do clearances with the management and the Board. But the banks should not be surprised, since we have consulted them twice. It’s a matter of finalizing some of the details, particularly the date of the actual implementation,” he told reporters.

The reserve requirement, which is classified as regular or liquidity, re- fers to the amount that banks must maintain as reserves proportional to the volume of deposit liabilities and deposit substitutes.

At present, a minimum of 21 percent of all regular reserves is required to be deposited with the BSP. Interest is paid on up to 40 percent of such reserves at the rate of 4 percent a year.

Of the 21-percent reserve requirement ratio, 10 percentage points are in the form of statutory reserves while the remaining 11 percentage points represents liquidity reserves.

Reserve requirements, however, tend to be more drastic instruments of monetary policy compared to open market operations and rediscounting, the central bank said. For one, reserve requirements increase bank intermediation costs, since this is effectively a “deadweight loss” to the banks, the BSP noted.

However, the central bank maintained that the rationalization of the reserve requirement is intended to enable monetary authorities to have a better handle on the liquidity circulating in the financial system.

“The reforms are going to be neutral in terms of the impact on banks and interest rates,” Guinigundo said.