BSP cuts bank reserve requirements to boost liquidity

By Francis Allan L. Angelo

The Bangko Sentral ng Pilipinas (BSP) has announced a significant reduction in reserve requirement ratios (RRRs) for various banking institutions, aiming to enhance liquidity and lower financial service costs.

Effective October 25, 2024, the BSP will cut the RRRs by 250 basis points for universal and commercial banks (U/KBs) and non-bank financial institutions with quasi-banking functions (NBQBs), and by 200 basis points for digital banks.

Thrift banks, rural banks, and cooperative banks will see a 100 basis-point reduction.

The reduction brings the RRRs of U/KBs and NBQBs to 7.0%, digital banks to 4.0%, thrift banks to 1.0%, and rural and cooperative banks to 0.0%.

These changes will apply to local currency deposits and deposit substitutes.

RRR) is the portion of depositors’ balances that banks are required to hold in reserve, rather than lend out or invest. This reserve is kept either in the bank’s vault or with the central bank, in this case, the Bangko Sentral ng Pilipinas (BSP). The RRR serves as a tool for monetary policy to control liquidity in the financial system, helping manage inflation and ensure financial stability.

 

Basis points (bps) are a unit of measurement used in finance to describe changes in interest rates, bond yields, and other percentages in financial contexts. One basis point is equal to 1/100th of a percentage point, or 0.01%. For example, a 250 basis-point reduction means a 2.5% reduction in the reserve requirement ratio.

Both RRR and basis points are crucial in central bank policy decisions, as they influence lending practices and the broader economy.

In a statement, the BSP emphasized that the move is part of its broader strategy to reduce financial system distortions.

“The reductions will lower intermediation costs and promote better pricing for financial services,” the central bank noted.

The BSP also highlighted that the cuts come as inflation remains within its target path, allowing for policy flexibility.

The move is expected to free up substantial liquidity in the financial system, giving banks more capacity to lend and invest.

According to economists, lowering reserve requirements could also stimulate economic growth, especially in sectors that rely on credit expansion.

The BSP further noted that it will reassess the need for additional reductions in RRRs as part of its efforts to align with regional norms over the medium term.

This reduction is seen as a continuation of the BSP’s efforts to gradually lower reserve requirements, which have historically been among the highest in Southeast Asia.