P1T excess liquidity keeps RRR in place

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But reserve requirement may be eased if liquidity drops by half – BSP
The central bank said the banking system is currently awash with P1 trillion in excess liquidity, creating no pressure to change the reserve requirement ratio (RRR) for banks, but if that excess cash recedes by half, the RRR may be reviewed for relaxing.

Since May last year, the BSP has maintained the RRR of banks at 20 percent to prevent a rapid rise in liquidity and credit expansion, which otherwise, could have threatened the stability of the country’s financial system.

“I think we have to look at all the numbers and development in the market before we are able to consider adjusting the reserve requirement,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo told reporters.

But given the excess liquidity, banks can place these funds in the instruments used as mopping tools by the central bank, he said.


“They place that in the BSP in the term deposit facility [TDF] every Wednesday, or in the overnight reverse repurchase facility at the end of the day, or in the overnight deposit facility [ODF],” he said.

“I think if we were able to siphon off at least half of that P1 trillion… perhaps we can consider [adjusting the RRR]because we do not want to find ourselves in a situation where we are mopping up liquidity by migrating funds from ODF to TDF, and on the other hand, you are releasing liquidity through the reduction in the reserve requirement,” he said.

The RRR is the proportion of current deposits that banks need to keep with the BSP, against the sum that they can loan out to borrowers.

Liquidity still growing
Guinigundo explained that factors to be considered in adjusting the RRR include the growth of M3 or domestic liquidity, which pertains to the amount of money that is circulating in the economy.

“When you see excess or ample liquidity in the system you are referring to the fact that right now your M3 is growing by 13.5 percent. In other words, you have a liquidity that is growing and this available to the market,” he said.

Another one, he said, is “structural liquidity,” which now sits in the central bank and could be withdrawn by banks to finance economic activities.

“The banks have the option if there is sufficient demand for liquidity to simply withdraw their money from the BSP and fund the additional requirements through bank loans,” he said.

In addition, there is the excess liquidity or the funds that banks were not able to lend to the public.

Lower RRR a BSP goal
Sharing the same view as BSP’s Deputy Governor, a Bank of the Philippine Islands (BPI) economist suggested an RRR cut is not likely to happen in the near-term, despite the move being an objective of the BSP.

“With so much liquidity in the system, [BSP Governor Amando] Tetangco [Jr.]’s goal to eventually lower the reserve requirement ratio, now one of the highest in the region, may need to be on the back burner,” BPI associate economist Nicholas Antonio Mapa said.

“He did allude to his desire to move away from the ‘high reserve requirement regime’ as early as June 2015, but until Tetangco is able to siphon off all that excess liquidity via larger TDF auctions, he’d be wary to release even more money into the already inundated financial system,” he explained.

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