Reserve requirements for PH banks’ investment accounts cut

The Bangko Sentral ng Pilipinas (BSP) has eased reserve requirements on a variety of instruments banks use to raise funds, including bonds, in a move expected to encourage lenders to tap the local capital market and help deepen it. Under Circular No. 1229, issued Feb. 11, the central bank will lower the reserve ratio on bonds of large and digital banks to 2 percent from 3 percent, starting the reserve week of Feb. 27.

The measure mirrors a similar step taken in 2019 to reduce intermediation costs for banks issuing bonds—expenses that could be passed on to investors—but this time, it extends to other instruments.

At the same time, the cash requirement for bonds, mortgage, and chattel mortgage certificates issued by thrift banks was eliminated,  down from  6 percent.

The BSP also scrapped the 4 percent reserve requirement on long-term negotiable certificates of time deposits, noting that issuance of these instruments has been under an indefinite moratorium since 2021 to encourage banks to raise funds via bonds.

In addition, the cash requirement for trust and other fiduciary accounts was cut to zero, from 17 percent for large banks, 9 percent for thrift banks and 4 percent for rural banks.

Reserve requirements are portions of funds that banks must keep as standby cash and cannot use for lending or investing. They help ensure banks have enough buffer to meet obligations to both depositors and investors in case of sudden withdrawals, while also serving as a tool for managing money supply in the financial system.

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The BSP said the latest changes are consistent with earlier cuts in reserve requirements on customer deposits held by local lenders—a move meant to inject more loanable funds in the financial system. In February last year, the central bank lowered the ratios on peso deposit liabilities to 5 percent for major banks, 2.5 percent for digital banks and zero for thrift banks.

While adjusting reserve requirements can influence domestic liquidity, the central bank said its estimates show that the latest reductions “are not expected to pose a significant impact on monetary aggregates and economic indicators.”