The Bangko Sentral ng Pilipinas (BSP) has reduced both banks and non-banks’ reserve requirement ratios (RRR) to single-digit levels effective end-June this year, BSP Governor Felipe M. Medalla announced on Thursday, June 8. In a statement, the BSP said it cut the RRR of the big banks and non-bank financial institutions by 250 basis points (bps), digital banks by 200 bps, and 100 bps for thrift banks, rural and cooperative banks. By June 30, all universal and commercial banks’ RRR as well as non-banks with quasi-banking functions will be 9.5 percent from 12 percent, while digital banks’ RRR will be six percent from eight percent. Thrift banks’ RRR are slashed to a low of two percent from three percent, while rural and cooperative banks will only have an RRR of one percent. The new ratios will apply to the local currency deposits and deposit substitute liabilities of banks and non-banks, said the BSP. The cut in the RRR will unleash fresh funds in the financial system of as much as P300 billion that the BSP will have to mop up using its open market operations such as the weekly term deposits and securities auctions, and the reverse repurchase facility, among others. "As we promised a long time ago," said Medalla, referring to the BSP's commitment to reduce the RRR to single-digit levels by mid-2023. It was in 2017 when the late BSP chief, Nestor A. Espenilla Jr. first announced a 2023 deadline for the RRR reduction to single-digit levels. "There will be some liquidity effects (but we can) mop up any excess liquidity," said Medalla. The BSP has previously announced to the market that it will reduce the RRR before the expiration of a pandemic relief measure on June 30. This relief measure allowed banks to use its reserve requirements as loans to micro, small and medium enterprises and eligible large enterprises. It was first implemented in March 2020 to ensure there is enough liquidity and credit in the financial system during the Covid crisis. The BSP on Thursday said the RRR reduction is an operational adjustment and will enable it to be “more active and flexible” in conducting market-based monetary operations. “The BSP emphasizes that the lower reserve requirements do not constitute any shift in the BSP’s monetary policy settings,” said the BSP. For some, reducing the RRR can be considered as loosening of monetary policy, or effectively it is akin to a policy rate cut. The BSP has recently paused its year-long, nine-cycle rate hikes after increasing the key rate by a cumulative 425 bps by end-March this year. RRRs are required reserves that applies to demand deposits, savings deposits and time deposits. Basically, changes in reserve requirements have a significant effect on money supply in the banking system. The last time the BSP reduced the RRR for big banks was March 2020, when Covid-19 was first declared a global pandemic. By August of the same year, the BSP also reduced the RRR of thrift and rural banks by 100 bps. Since reserve requirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must set aside in deposits with the BSP, these funds cannot be used for lending. Reservable liabilities include demand, savings, time deposit and deposit substitutes. Big banks’ RRR was at its peak at 20 percent in 2014, and at the time, it was the highest RRR in the region. The BSP has targeted to bring the RRR to single-digit levels by 2023 to lower intermediation costs.