Bangko Sentral ng Pilipinas may reduce the reserve requirement of banks if the parked funds at the overnight deposit facility falls to P500 billion, a top official said over the weekend.
Bangko Sentral Deputy Governor Diwa Guinigundo said in an interview the parked funds at the special account deposit facility was currently around P1 trillion. He said the amount was expected to decline because of the weekly term deposit facility auctions that started on June 8.
“Maybe if we reach one half of the P1 trillion, perhaps we can consider adjusting the reserve requirements. Because we don’t want to find ourselves in a situation where we are mopping up liquidity and migrating from ODF [overnight deposit facility] to TDF [term deposit facility] and on the other hand, you are releasing liquidity through the reduction in the reserve requirement,” Guinigundo said.
He said monetary authorities would look at all the numbers and developments in the market before thinking of adjusting the reserve requirement.
“We are talking here of about a trillion [pesos]. Normally, when you reach halfway of that, something is going to happen,” he said.
Reserve requirement, also called cash reserve ratio, is a regulation used by most, but not all of the world’s central banks that sets the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves rather than lend out.
The current reserve requirements are 20 percent for universal and commercial banks, 8 percent for thrift banks and 5 percent for rural banks.
Bangko Sentral’s Monetary Board in its last meeting on June 23 maintained the reserve requirement ratios at 20 percent, alongside the benchmark interest rates at 3.5 percent for overnight lending, 3 percent for overnight borrowing and 2.5 percent for deposit facility.
Guinigundo said earlier the introduction of the term deposit auction facility under the interest rate corridor system would “allow us to depend less on reserve requirement.”
He said through the interest rate corridor, Bangko Sentral would be able to migrate some of the funds from SDA.
Bangko Sentral transformed the RRP facility into purely overnight facility, offered using a fixed-rate and full allotment method, under the interest rate corridor system. The special deposit account and RP facility were converted to overnight standing liquidity windows, available on demand during BSP business hours.
Bangko Sentral set the interest rates for the formal shift of its monetary operations to an interest rate corridor starting June 3.
The IRC system is expected to help improve monetary policy transmission and limit interest rate volatility.
The sustained oversubscription in the term deposit auctions starting June 8 prompted Bangko Sentral to raise the weekly volume beginning Aug. 3 to P70 billion from P50 billion in a bid to effectively siphon off excess liquidity in the financial system.
The week-long tenor will continue to account for P10 billion but the 28-day tenor will be increased to P60 billion from the previous P40 billion.