Government banks urged to raise private deposit base

The Bangko Sentral ng Pilipinas (BSP) said government banks should not rely on government deposits, hinting that it is likely to reject the appeal to lower the two percent liquidity floor requirement on government deposits.

BSP Governor Amando M. Tetangco Jr. told reporters that government financial institutions (GFIs) should raise their private deposit base to strengthen their portfolio.

GFIs have been asking the BSP to lower the liquidity floor on government deposits but the central bank is unlikely to agree, saying that the liquidity floor was put there for prudential purposes.

“GFIs have other deposits which is where they would get the effect of the 200-point reduction in liquidity reserves,” Tetangco said. “Government banks should not really be relying on just government deposits anyway.”

According to Tetangco, government banks should also generate deposits from other sectors.

Tetangco said the BSP is studying the proposal but cautioned that the intent of the liquidity floor requirement was prudential and easing it could be problematic.

The BSP had earlier reduced the reserve requirement of banks to release more liquidity into the system and even out what monetary officials said was an uneven distribution of liquidity in the banking system.

According to the Land Bank of the Philippines, however, the reduction in the reserve requirement did little for government financial institutions (GFIs) unless the BSP would also reduce the liquidity floor requirement which was tying up their funds.

The imbalance is particularly true for GFIs that have very little private deposit since the 200-point reduction in reserve requirements only applied to private deposits.

“The GFIs have made the request and that is being studied,” Tetangco said. “But remember that the policy intent of the liquidity floor is very different.”

Tetangco explained that the policy intent of the 50-percent liquidity floor requirement on government deposits was to ensure that when the government needed the funds, the cash would be actually available for withdrawal.

“Another intent is for the GFIs to be encouraged to buy government securities since these are the only ones eligible for compliance in the liquidity floor,” Tetangco said. 

Aside from the reduction in the reserve requirement, the BSP also doubled its peso rediscounting budget, moves that officials said would pre-empt tightness in credit and money supply.

The BSP has been making a series of moves but officials hinted this was not to be the last, saying that the Monetary Board would “act as warranted” to shield the financial system from the global financial crisis.

Major eocnomies have been struggling to jumpstart interbank lending which has been frozen solid because banks were too nervous to lend to each other until the dust had settled on the financial meltdown.

Sooner or later, monetary officials said this freeze would extend to the real sector, with banks too scared to lend to anybody at all. Tetangco said this would cause economic activities to grind down to a halt unless liquidity was flushed into the system.