BSP prepares for capital build-up, reserve fund

By Lee C. Chipongian

Without interference from the Commission on Audit (COA), the Bangko Sentral ng Pilipinas (BSP) is now free to build up a reserve fund as additional buffer against threats of external volatilities as mandated under its amended charter.

MB file photo. MB file photo.

With the reserve fund as safety net to absorb losses from foreign exchange transactions in “bad” times of capital flow reversals, the BSP can now also increase its capitalization by P150 billion through a virtual waiver of dividend payments that it has to remit to the National Government (NG). All these are for the central bank’s “rainy day” provisions.

Under Republic Act 11211, An Act Amending Republic Act No. 7653, otherwise known as the “New Central Bank Act, and for Other Purposes”, the BSP is allowed to establish a reserve fund from its income or positive surplus.

This fund is for the mitigation of “future risks such as, but not limited to, impacts of foreign exchange and price fluctuations and to address other contingencies inherent in carrying out BSP-mandated functions such as central monetary authority.”

The amended charter also states that the reserve fund will include a fluctuation reserve, a contingency reserve and “such other reserves as the Monetary Board deems prudent or necessary.”

BSP Deputy Governor Ma. Cyd Tuano-Amador said setting up of allowances and provisions of contingencies such as for the reserve fund will preserve BSP’s financial soundness.

“That’s one that we have to work on (for) the operational details,” Tuano-Amador said when asked how much will be the seed amount for the reserve fund.

BSP Senior Assistant Governor and General Counsel, Atty. Elmore O. Capule, said: “Essentially a central bank operates differently from other corporations… we are allowed to have reserves – all kinds of reserves. (But in the past) we’re always having a problem with COA as to what are these reserves. So, we finally made it clear that the reserves should be general enough to give the BSP flexibility in creating these reserves.”

The BSP has long argued for a reserve fund which is basically, a safety net against adverse external factors such as potential capital flow reversals and losses from exchange rate fluctuations arising from pressures in the management of these flows.

The BSP is always on its guard about the potential destabilizing impact of volatile capital flows on price and financial stability. A reserve fund should reduce the cost to the BSP in managing capital flow surges.

In the past, to boost its reserve buffer, the BSP has borrowed for liquidity purposes. The loans were short-term borrowings and were availed of for “international reserve management.”

But, BSP has a need to boost its capitalization as well as a reserve buffer to continue to implement stabilization measures.

To increase its P50 billion capitalization to P200 billion, the BSP has to raise the additional P150 billion on its own.

Capule said to get this provision passed, the BSP haggled with lawmakers and the government. “But in the end, the provision that came out is that Congress will not appropriate money. Instead, the money that will be used to pay for our capitalization will come out of our dividends… the dividends will be brought back to the BSP by the NG in the form of subscriptions to our capitalization.”
“That’s a very important piece of legislation because it’s a huge amount,” added Capule.

The BSP has been reporting losses for some time until it was reversed in 2016 and 2017 when it had earnings of P17.51 billion and P23.51 billion. Before that, the last time it reported an income was in 2009 followed by six years of losses. As of end-November 2018, it has P42.69-billion net income.

Since the BSP remits 50 percent of its dividends to the NG, it could take awhile to buildup the P150 billion. “We can never really tell, depends on the net income position,” said Tuano-Amador. In another provision of the law, the BSP has to assist the NG in liquidating the liabilities of the old central bank and they have to remit a higher dividend amount.

BSP Senior Assistant Governor for Capital Market Operations Sub-Sector, Ma. Ramona GDT Santiago, said it will depend on global developments, mostly.
“There’s a saying that central banks make money during bad times and during good times, central banks don’t make money but that’s just one of the inputs, so it’s hard to tell,” said Santiago.