Bangko Sentral cuts banks’ reserve requirement ratio to 7.0%

‘The reductions will lower intermediation costs and promote better pricing for financial services,’ the central bank says

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) will substantially cut the reserves that banks are required to hold against deposits, which would free up billions in loanable funds.

In a statement on Friday, September 20, the BSP said it will cut the reserve requirement ratios (RRRs) by 250 basis points for universal and commercial banks, and non-bank financial institutions with quasi-banking functions; 200 bps for digital banks; and 100 bps for thrift banks, rural banks, and cooperative banks.

Here are the new RRRs that will take effect beginning the week of October 25, applying to local currency deposits and deposit substitute liabilities:

• Universal and commercial banks, non-bank financial institutions: from 9.5% to 7.0%
• Digital banks: from 6.0% to 4.0%
• Thrift banks: from 2.0% to 1.0%
• Rural and cooperative banks: from 1.0% to 0.0%

“The BSP emphasizes that these adjustments in reserve requirements are in line with its continuing efforts to reduce distortions in the financial system,” the central bank said on Friday.

“The reductions will lower intermediation costs and promote better pricing for financial services. As inflation continues to track a target-consistent path over the next two years, the BSP will reassess the need for further reductions in the RRRs to better align them with regional norms over the medium term,” it added.

The last time that the BSP cut the RRR was in June 2023.

The Philippines has among the highest reserve requirement ratios in Asia, which means that banks must keep a substantial portion of their funds locked up in reserve rather than utilizing them for loans. By lowering reserve requirements, banks will have more capital available for lending, which can encourage banks to lend more money and stimulate economic activity.

Just last month, the central bank also cut its key policy rate from 6.5% to 6.25%, the first policy rate cut in four years. This is expected to lower borrowing costs, although the BSP acknowledges that there will be a lag before consumers and businesses begin to feel the effects. – Rappler.com