The Bangko Sentral ng Pilipinas (BSP) will significantly reduce the reserve requirement ratio (RRR) of banks this year, with plans for further cuts in 2025, Governor Eli Remolona Jr. said Wednesday.
“We will reduce the reserve requirement substantially this year, and then there may further reductions by next year,” he said.
Reserve requirements are the minimum reserves required for depository institutions. They are set by the central bank within limits specified by law. A change in the minimum reserve ratio affects the amount of deposits a financial institution can lend out.
“There’s a funny dynamic that’s going on with the banks on a reduction of the reserve requirement. They’re saying if you do reduce it, we’ll do this other thing for you, reduce transaction costs on payments for example,” Remolona said.
Remolona earlier hinted that the RRR could potentially be lowered to as low as 5 percent from 9.5 percent.
The BSP in June 2023 slashed the RRR by 250 basis points, or 2.5 percent, for universal and commercial banks and non-bank financial institutions with quasi-banking functions or NBQBs, 200 bps or 2 percent for digital banks and by 100 bps or 1 percent for thrift banks, rural banks and cooperative banks.
The reduction brought the RRRs of universal and commercial banks and NBQBs from 12 percent to 9.5 percent: digital banks from 8 percent to 6.0 percent; thrift banks from 3 percent to 2 percent; and rural and cooperative banks from 2 percent to 1 percent.
“In terms of liquidity, the reserves for the reserve requirement are on our balance sheet, on the same side of the liabilities side, so if we cut that, we cut the reserve requirement, and that part will go down and we wanna compensate for that,” Remolona said.
“That’s more liquidity for the banking system…so that’s more liquidity for the banking system. We wanna compensate for that by absorbing banks some of the liquidity which will go into some other part of our balance sheet,” he said.
Data from the BSP showed that domestic liquidity grew by 7.2 percent year-on-year to about P17.5 trillion as of end-July 2024. On a month-on-month seasonally-adjusted basis, M3 increased by about 0.7 percent.
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