Financial instruments tied to bank reserve requirements under review

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is now identifying the types of financial instruments to be covered by the reserve requirement ratio (RRR) for banks in light of the recent amendments to the charter of the central bank.

BSP Deputy Governor Diwa Guinigundo told The STAR the regulator is reviewing existing regulations on RRR to align the new regulations on deposit substitutes with the provisions of the new BSP Charter under Republic Act 11211. 

“We shall be covering all applications of RRR not only on different types of banks, but also with consideration of the type of financial instruments. This is also necessary in the light of the amendments of the BSP Charter,” he said.

Under Section 95 of the new law signed by President Duterte last Feb. 14, a deposit substitute is now defined as an alternative form of obtaining funds from the public, other than deposits through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of re-lending or purchasing of receivables and other obligations. 

Obtaining funds from the public involves borrowing from 20 or more individuals and corporate entities that are not acting as financial intermediaries, at any one time, subject to the safeguards and regulations issued by the Monetary Board.  

With the new law, borrowings from financial intermediaries are now excluded from the accounts subject to RRR.

BSP Governor Benjamin Diokno had said the RRR reduction is part of the central bank’s broad financial sector reform agenda to promote a more efficient financial system by lowering financial intermediation costs.

These operational adjustments are in line with the BSP’s objectives of enhancing the effectiveness of monetary policy and deepening the domestic money market.

The BSP’s Monetary Board resumed the reduction of the level of deposits banks are required to keep with the central bank by slashing the level by 200 basis points to 16 percent from the current 18 percent in three tranches.

The reduction would apply to the reservable liabilities of universal and commercial banks starting with 100 basis points on May 31, followed by 50 basis points on June 28, and another 50 basis points on July 26.

Diokno said the BSP would review the potential cuts on the reserve requirements for other banks and non-bank financial institutions in the next round of reserve requirement adjustments.

He added the BSP has recognized the continued downtrend in domestic inflation for the past six months to a 16-month low of three percent in April, bringing the average to 3.6 percent in the first four months, well within the central bank’s two to four percent target.

The BSP chief said the adjustment would help mitigate any tightness in domestic liquidity conditions due to limited public expenditure following the budget impasse in the first quarter of the year.

The reduction is seen releasing as much as P190 billion in additional funds into the financial system. Last year, the BSP slashed the RRR level by 200 basis points freeing up P190 billion into the system to help boost economic activity.