BSP pursues gradual cut in bank reserve requirements

The Bangko Sentral ng Pilipinas ( BSP) is pursuing the gradual reduction of the banks’ reserve requirement in line with the shift to the interest rate corridor (IRC) system.

BSP Deputy Governor Diwa Guinigundo said the gradual lowering of the 20 percent reserve requirement for banks would depend on the liquidity in the financial system.

“We don’t like it really fast. We have to be gradual. The more uncertain and more volatile global economy and financial markets call for greater consciousness and gradualism,” he said.

Reserve ratios are the percentage of bank deposits and deposit substitute liabilities that banks maintain or deposit with the central bank. The Philippines has the highest ratio in the region.

Adjusting policy settings such as the reserve requirement ratio of banks also reduces the intermediation costs while also controlling liquidity.

“It has to be gradual and constant so the possible reversal could be manageable,” Guinigundo said.

The BSP official earlier said the central bank would start reducing the banks’ reserve requirement within the next couple of months when close to P1 trillion worth of funds parked at the BSP’s overnight deposit facility (ODF) is cut by half.

He pointed out monetary authorities would consider reducing the reserve requirement ratio currently pegged at 20 percent once half of the funds parked at the ODF (formerly the special deposit account facility) or P500 billion are migrated to the term deposit facility (TDF).

A percentage point cut in reserve requirement ratio could release between P60 and P70 billion to the financial system.

Starting Aug. 31, the BSP will offer P90 billion worth of term deposits through the TDF from the current volume of P70 billion. The central bank would auction P10 billion worth of seven-day term deposits and P80 billion worth of 28-day term deposits.