By Lee C. Chipongian
The Bangko Sentral ng Pilipinas (BSP) will no longer slap reserve requirements (RR) to banks’ interbank borrowings, bonds and repurchase agreements after amending the definition of deposit substitutes under the new BSP Charter.
“The exclusion of these types of borrowings from the reserve base of banks and quasi-banks will result in freed-up liquidity for lending or investment activities,” the BSP said in a statement.
The BSP said this should improve the flow of funds in the financial system and that removing the reserve requirement will “help reduce intermediation costs and, in turn, support the economic activity.”
The Monetary Board approved the revision to the definition of a deposit substitutes based on Section 95 of Republic Act No. 11211 or the amended BSP Charter.
Section 95 defines deposit substitutes as “a form of obtaining funds from the public, other than deposits, through the issuance, endorsement or acceptance of debt instruments for the purpose of relending or purchase of other receivables and obligations.”
The BSP said this clarified that “obtaining funds from the public” refers to borrowing from 20 or more lenders that are individuals or corporate entities which are not financial intermediaries.
“This means that borrowings from banks, quasi-banks and other financial intermediaries are no longer considered as deposit substitutes which are subject to reserve requirements,” it said.
These are interbank borrowings, repurchase agreements with financial counterparties as well as bonds issued to financial intermediaries, noted the BSP.
In the old and new version of the BSP Charter, deposit substitutes are instruments including but not limited to, bankers acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements.
However, when the new BSP Charter was approved last February, it contained a new provision on deposit substitutes, such as an expanded take on “obtaining funds from the public” which would now mean as borrowing from 20 or more lenders at any one time and that these lenders are individual and corporate entities “that are not acting as financial intermediaries.”
The Monetary Board has cut the reserve requirements ratio (RRR) by four percent or 400 basis points (bps) this year, and releasing about P400 billion into the financial system. By the first week of December, the RRR will be at 14 percent for big banks.
Last month, the BSP also cut the RRR for bonds by 100 bps from four to three percent to further reduce banks’ intermediation costs.
The central bank wants to encourage banks to source its liquidity requirements from the capital market, as well as to “tap the domestic bond market as part of its liquidity management.”