BSP to 'substantially' cut reserve requirement in 2024

The Bangko Sentral ng Pilipinas (BSP) is looking to cut the reserve requirement ratio, the amount of cash a bank must hold in its reserves against deposits, “substantially” this year and reduce it further in 2025.

BSP Governor Eli Remolona Jr. said on Wednesday that the cut in the reserve requirement is being considered, with the timing being discussed. He earlier said this can be reduced to 5% from the present 9.5% for big banks.

“We will reduce the reserve requirement substantially this year, and then there may be further reductions by next year,” he told reporters in a briefing in Manila City.

“There’s a funny dynamic that’s going on with the banks on a reduction of the reserve requirement. They’re saying if you do reduce it, we’ll do this other thing for you, reduce transaction costs on payments, for example,” he added.

Bank of the Philippine Islands (BPI) president and chief executive officer Jose Teodoro “TG” Limcaoco last month called for the conditional reduction of the RRR of big banks for them to cut down interbank transfer fees, but Remolona said he preferred a uniform adjustment.

“We’re trying to manage that, but the idea is to reduce reserve requirements in a substantial way,” Remolona said.

The current RRR of 9.5% for universal and commercial banks and non-bank institutions with quasi-banking functions is among the highest in the region. It is at 6.0% for digital banks and 1.0% for thrift, rural, and cooperative banks.

Latest data from the BSP show that domestic liquidity or M3 — the broadest measure of money in the financial system — stood at P17.5 trillion in July, reflecting 7.2% year-on-year growth.

The central bank said it plans to absorb the boost in liquidity through its facilities, such as the BSP bills that it offers every Friday with two tenors—28-day offers and 56 days.

“In terms of liquidity, the reserves for the reserve requirement are on our balance sheet on the same side of the liabilities, so if we cut that, we cut the reserve requirement, and that part will go down, and we want to compensate for that,” Remolona said.

“That’s more liquidity for the banking system, and we want to compensate for that, so that’s more liquidity for the banking system. We want to compensate for that by absorbing some of the liquidity, which will go into some other part of our balance sheet,” he added.

According to Assistant Governor Zeno Ronald Abenoja, while the impact of a reserve requirement cut could take some time, the BSP is hopeful that the additional liquidity will be deployed to help expand productive economic activities.

“Some of it will be deployed by banks in various financial markets, including government securities equity, but some of it may still reside in their accounts, including depositing it back to the BSP, so there is expectation that the volume of operations may increase over the near term as the banks prepare to deploy these funds productively into the economy, invest it, or put it in their loan portfolio,” he said in the same briefing.

“In the near term, the volume of the entire operations, including the BSP bills, may expand to help manage this liquidity that will be released to the system. That’s how we view what could happen over the near term,” he added. — VBL, GMA Integrated News