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Central bank frees up cash to calm markets, bolster economy

BANGKO Sentral Governor Benjamin E. Diokno announced on March 24, 2020 a reduction of 200 basis points (bps), or 2%, in the reserve requirement (RR) ratio of universal and commercial banks in a bid to ensure sufficient liquidity in the system and calm the markets.

The move is the latest attempt of monetary officials to encourage banks to continue lending and support economic activity amid the coronavirus disease (COVID-19) pandemic.

This brought the RR ratio of universal and commercial banks to 12% effective March 30, 2020. The RR ratio is the percentage of a bank’s deposits that the bank must keep in its vaults overnight. Reducing this would boost the money supply.

Diokno said potential cuts on the reserve requirements for other banks and non-bank financial institutions will also be explored.

The Bangko Sentral ng Pilipinas (BSP) has yet to issue guidelines on this adjustment.

Diokno said the Monetary Board (MB), in a special meeting on March 23, authorized him to reduce the RR ratios of BSP supervised financial institutions by up to 400 bps for 2020.

To properly calibrate reduction in the RR, the MB also authorized Diokno to determine the timing, extent, and coverage of the reduction in the RR, taking into consideration the impact of COVID-19 on domestic liquidity.

The authority given to the Governor to adjust the RR allows the BSP flexibility to promptly address any possible liquidity strain in the industry, the central bank said in a statement.

For further reserve requirement reductions, Diokno said, “The BSP will have to assess the impact of COVID-19 on the broader economy.”

He added that the behavior of banks, particularly their capacity to absorb, invest, and lend the freed-up liquidity, will determine the need for further adjustments.

Earlier, the MB also authorized the Bangko Sentral to purchase government securities of up to P300 billion from the Bureau of Treasury (BTr).

Proceeds will be used to support “those most affected by the ECQ, especially in Luzon, for the next 60 - 90 days”.

ECQ refers to the enhanced community quarantine that is being imposed in Luzon, the country’s biggest island with over 53 million inhabitants, as a measure against the spread of COVID-19. Luzon accounts for about 73% of the country’s gross domestic product.

The securities will be purchased under a repurchase agreement with a maximum repayment period of 6 months.

“This arrangement is the most cost-effective way for us to provide an extra lifeline to the national government to support the programs to fight this pandemic,” said National Treasurer Rosalia V. de Leon.

On March 19, 2020, the Bangko Sentral also slashed the overnight reverse repurchase (RRP) facility by 50 basis points (bps) to 3.25%, effective March 20, 2020, to boost the economy.

The interest rates on the overnight lending and deposit facilities were reduced to 3.75 % and 2.75%, respectively.

The MB also authorized the time-bound, temporary relaxation of BSP regulations on compliance reporting by banks, calculation of penalties on required reserves, and single borrower limits.

A temporary reduction in the term spread on rediscounting loans relative to the overnight lending rate to zero was also authorized. (Ventures Cebu)

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