File photo of BSP Gov. Nestor Espenilla Jr. INQUIRER
Monetary regulators may reduce the amount of cash that banks are required to hold by as much as two percentage points each year which, if implemented without interruption, will free up almost P1 trillion in idle funds by the end of the term of Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla Jr.
The BSP chief believes that these funds — which regulations require to be kept immobilized in bank vaults both as a source of emergency liquidity and a monetary control tool — constitute an indirect tax on the financial system, which could better utilize them to fund the needs of the growing Philippine economy.
In a text message to the Inquirer, Espenilla said he envisioned a 200-basis point annual reduction in banks reserve requirements over the rest of his six-year term as the country’s chief monetary regulator, but stressed that this schedule is not set in stone.
“If you start at 20 percent reserve requirement ratio and assume [a reduction of] 200 basis points per year over a 6-year term, then that takes us to single digit territory over the medium term,” he said.
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At this proposed pace, Espenilla will have reduced banks’ reserve requirements to a mere 8 percent of their total deposits by the time his term ends in 2023. Each one-percentage point cut releases an estimated P90 billion into the financial system, which banks can use for loans that, in turn, could spur economic growth.
The BSP cut bank reserve requirements earlier this year in two one-percentage point moves, bringing the total down to 18 percent. Despite this, the reserve requirement of Philippine banks is still one of the highest in the world.
