BSP slashes banks’ reserve requirements

The Bangko Sentral ng Pilipinas (BSP) on Friday announced the reduction in banks’ reserve requirement ratios (RRR) in a bid to lower financial transaction costs.

In a statement, the BSP said it will be slashing the RRRs for universal and commercial banks and non-bank financial institutions with quasi-banking functions by 250 basis points.

The central bank is also lowering the RRR for digital banks by 200 basis points and 100 basis points for thrift banks and rural banks and cooperatives.

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, 2.0% for thrift, and 1.0% for rural and cooperative banks.

The reduction in banks’ RRR will take effect on October 25, 2024, and “shall apply to the local currency deposits and deposit substitute liabilities of banks and non-banks with quasi-banking functions,'' the BSP said.

The trimming of the reserve requirement would bring the RRR for universal and commercial banks and non-bank institutions with quasi-banking functions to 7%, for digital banks to 4%, for thrift banks to 1%, and for rural and cooperative banks to 0%.

Reserve requirement refers to the portion or percentage of cash from deposits that banks must keep on hand, which they cannot lend out or invest, to ensure they have enough money to meet liabilities.

The BSP said that changes in reserve requirements have a significant effect on money supply in the banking system, making them a powerful means of liquidity management.

“The reductions will lower intermediation costs and promote better pricing for financial services,” the BSP said.

“As inflation continues to track a target-consistent path over the next two years, the BSP will reassess the need for further reductions in the RRRs to better align them with regional norms over the medium term,” it added.

In an emailed commentary, Rizal Commercial Banking Corp. chief economist Michael Ricafort said that the reduction in RRR of 2.5 percentage points for universal and commercial banks would release a total of about P375 billion in the financial system and about P400 billion for all bank types, “in terms of more funds available for lending/credit by banks for consumers, business/industries, government, and other institutions.”

Ricafort also said the RRR cut would increase demand for loans and boost economic growth.

“Furthermore, there would be more pesos that could be invested in the financial markets such as bonds and other fixed income investments, stocks, foreign currencies, property/real estate, among others that would help support price gains than otherwise,” the economist said.

Latest data from the BSP showed 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. —VBL, GMA Integrated News