BSP Reducing Reserves Ratio Further

The Bangko Sentral ng Pilipinas (BSP) will again cut banks’ reserve requirements ratio (RRR) when the timing is right, said its highest-ranking official.

Photo Insert: Last month, the BSP reduced both banks and non-banks’ RRRs to single-digit levels to unleash fresh funds in the financial system of as much as P360 billion.

“We want to cut it some more when the time is right because reserve requirement is essentially a distortion of financial intermediation,” said BSP Governor Eli M. Remolona on Bloomberg TV over the weekend, Canada time.

Remolona reiterated that an RRR reduction is not part of monetary policy. “But, we want to be consistent with monetary policy so we don’t want to cut the reserve requirement while we’re tightening monetary policy,” he said.

The new BSP chief said that even if the RRR is now at single-digit levels, they are not done yet in reducing the rates. “We want the banking system more efficient, part of that is cutting the reserve requirement, part of it is also digitalization,” explained Remolona.

Last month, the BSP reduced both banks and non-banks’ RRRs to single-digit levels to unleash fresh funds in the financial system of as much as P360 billion.

The RRR of the big banks and non-bank financial institutions was reduced by 250 basis points (bps), for digital banks, 200 bps, and 100 bps for thrift banks, and rural and cooperative banks.

All universal and commercial banks’ RRR, as well as non-banks with quasi-banking functions, is now at 9.5 percent from 12 percent, while digital banks’ RRR is at six percent from eight percent. Thrift banks’ RRR was cut to two percent from three percent, while rural and cooperative banks 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. Basically, changes in RRR have a significant effect on the 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 deposits, and deposit substitutes.

Big banks’ RRR was at its peak at 20 percent in 2014, and at that time, it was the highest RRR in the region.

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