Capital & Strategic Issues,cash mgmt cycle,cash,Corporate Governance,countryupdates,fi,Operational Risk Management,Philippines,riskmanagement,

Capital & Strategic Issues,cash mgmt cycle,cash,Corporate Governance,countryupdates,fi,Operational Risk Management,Philippines,riskmanagement,

The country’s top banking regulator wants to reform the local financial system to make it a more efficient user of funds that can help the economy grow more equitably—even if comes at a hefty price tag for the Bangko Sentral ng Pilipinas (BSP).

In particular, BSP Governor Nestor Espenilla Jr. said the high level of statutory reserves in the Philippine banking system—one of the highest in the world, with 19 percent of total deposits required to be kept idle in banks’ vaults—was a burden that results in lower interest rates for depositors and higher interest costs for borrowers.

The BSP chief wants to cut this reserve requirement level to “single digits” on par with other economies of similar size while mopping up the inflationary liquidity that will be released into the financial system through the central bank’s term deposit facility.

But doing so will entail additional costs for the central bank as it will have to pay interest to entice banks to deposit their excess cash with the monetary authority, versus the present system where the opportunity cost of keeping idle funds is shouldered by the banks themselves.

“The correct way to look at it is that unremunerated reserve requirement is effectively a tax on the financial system that’s ultimately passed on the public,” Espenilla said in a text message to the Inquirer.

This de facto tax of mandating banks to keep a portion of their cash unused results in higher borrowing costs which is shouldered by end users and consumers, he said.

“That’s why most modern central banks keep such reserve requirements, if at all, at relatively moderate levels,” the BSP chief added, explaining the rationale for his proposed reform of cutting this ratio to single-digit levels.

“We want to go there soonest because we want a more progressive and more efficient banking system that supports a faster growing economy,” Espenilla said. “The timing is also good while interest rate levels are at relative lows historically.”

Yesterday, the central bank reported that its term deposit facility—which it uses to mop up excess cash from the system from last month’s initial one-percentage point reserve requirement cut—was once more oversubscribed by banks.

Banks tendered P70.8 billion for the P50 billion on offer in the seven-day deposit window, with the average yield at 3.1893 percent. Another P52.2 billion was tendered for the P40 billion on offer for the 14-day facility which fetched a rate of 3.2404 percent, while P22.7 billion were tenders for the P20 billion on offer for the 28-day window with a yield of 3.3274 percent.

The central bank made a full award on all three tenors totaling P110 billion.

Re-disseminated by The Asian Banker from Inquirer.net