By Lee C. Chipongian
The Bangko Sentral ng Pilipinas (BSP) will reduce banks’ reserve requirement ratio (RRR) by another 400 basis points (bps) in 2020, effectively slashing the rate to 10 percent from 14 percent and flooding the financial system with fresh funds in the amount of P450 billion at least.
This was an acceleration of the BSP’s previous forward guidance last December that at best, the BSP will be gradually reducing the RRR to single digit level or about nine percent by mid-2023.
In a statement Tuesday, the BSP said the first 200 bps RRR cut will be implemented by the end of this month, or March 30, to ensure that big banks will have the funds it will need amid the coronavirus outbreak and resulting lockdown in Luzon and other areas to contain the medical threat. The 200 bps will release about ₱225 billion liquidity into the financial system.
The BSP said that a special Monetary Board meeting approved the maximum 400 bps reduction to the RRR for this year, and that the timing of these cuts will be determined by BSP Governor and Monetary Board Chairman Benjamin E. Diokno.
On Monday, the BSP announced will buy ₱300 billion worth of short-term government bonds to help in the fight against the spread of COVID-19 in the country and ensure the economy remains afloat.
BSP Governor Benjamin E. Diokno said the central bank via this stimulus program can provide support to government projects. The additional amount is intended to provide support for those most affected by the ECQ, especially in Luzon, for the next 60-90 days, he said.
“We continue to support the government’s initiatives and objectives during the enhanced community quarantine (ECQ),” according to Diokno.
The BSP’s Monetary Board has authorized central bank officials to buy Bureau of the Treasury (BTr) government securities under a repurchase agreement with a maximum repayment period of six months.
The BSP said that the “fund generated from the said agreement shall be used to support the National Government’s programs to counter the impact of Coronavirus Disease 2019 (COVID-19).”
To assure markets that liquidity will not be an issue, Diokno decided to reduce the RRR by an initial 200 bps. The big banks can use the additional liquidity for lending, to buy foreign exchange or purchase government securities, or to invest back in the BSP’s open market operations (OMO) as soon as these are re-opened.
The BSP said the RRR cut is “intended to calm the markets and to encourage banks to continue lending to both retail and corporate sectors. This will ensure sufficient domestic liquidity in support of economic activity amidst this global pandemic due to COVID-19.”
The Monetary Board has authorized Diokno to “properly calibrate” the reduction in the RRR and to decide on the timing, extent, and coverage of the adjustments depending on the impact of COVID-19 on domestic liquidity. “The authority given to (Diokno) to adjust the RRR allows the BSP flexibility to promptly address any possible liquidity strain in the industry,” said the BSP.
The first 200 bps RRR cut will apply to reservable liabilities of universal and commercial banks effective on March 30.
The BSP will still decide on what to do with other banks such as thrift banks, and non-banks. “Potential cuts on the reserve requirements for other banks and non-bank financial institutions will also be explored. The BSP will issue guidelines on these operational adjustments,” said the BSP.
Last year, Diokno slashed the RRR by 400 bps, more than the 200 bps adjustment in 2018. Based on BSP data, and according to sources, about 70 percent or ₱300 billion of the ₱450 billion fresh liquidity released from the RRR cuts in 2019 found their way back to the central bank’s term deposit facility and other fixed-rate OMO.
A lower RRR reduces intermediation costs. But so far, only banks are benefitting from the RRR cuts while lending rates remain high. The additional liquidity has yet to be passed on to borrowers or bank clients.
The International Monetary Fund (IMF) has strongly suggested to the BSP to sterilize the liquidity impact of the RRR cuts. In a country report, the IMF said the “RRR reduction should take credit conditions into account, and its liquidity impact may need to be sterilized.”