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Transcript of BSP TOOLS
Policy 5 Tools of BSP Required Reserves Rediscounting Open Market Operations Selective Credit Control The Bangko Sentral ng Pilipinas and abbreviated as BSP, is the central bank of the Philippines. It was rechartered on July 3, 1993, pursuant to the provision of the 1987 Philippine Constitution and the New Central Bank Act of 1993. The BSP was established on January 3, 1949, as the country’s central monetary authority. Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. *Required Reserves
*Open Market Operations
*Selective Credit Control
*Moral Suasion The BSP decides the general lending behavior of the commercial banks. At any time, it may change the percentage at which banks can lend out of their deposits. With the prerogative as the banker of commercial banks, the BSP simply requires commercial banks to keep a certain percentage of their deposits in reserve this is to influence the banks lending behavior. To illustrate, if the BSP decides that lending behavior should be 80%, the reserves it requires is 20%. Rediscounting refers to BSP's prerogative to set the limit to the funds that commercial banks can borrow and to designate the rate of interest at which it lends when commercial banks, on the basis of bank's loan papers, borrow from BSP. The BSP rediscounts this loan paper and the rate of interest it charges is called rediscount rate. The rediscount rate provides a signal to the commercial banks on the trend of interest rates in general, thus it is helpful when BSP seeks to control interest rate. For example, instead of giving up to 85% of the face value of the loans, it may give only up to 65%. The BSP actively participates in the purchase and sale of government securities in active and open money market. Open Market Operations consist of repurchase and reverse repurchase transactions, outright transactions, and foreign exchange swaps.
*Repurchase and Reverse Repurchase
This is carried out through the Repurchase Facility and Reverse Purchase Facility of the Bangko Sentral ng Pilipinas. In Purchase transactions, the Bangko Sentral buys government securities with a dedication to sell it back at a specified future date, and at a predetermined interest rate. The BSP’s payment increases reserve balances and expands the monetary supply in the Philippines. On the other hand, in Reverse Repurchase, the government acts as the seller, and works to decrease the liquidity of money. These transactions usually have maturities ranging from overnight to one month. *Outright Transactions
Unlike the repurchase or reverse repurchase, there is no clear intent by the government to reverse the action of their selling/buying of monetary securities. Thus, this transaction creates a more permanent effect on our monetary supply. “When the BSP buys securities, it pays for them by directly crediting its counterparty’s Demand Deposit Account with the BSP.” The reverse is done upon the selling of securities.
*Foreign Exchange Swaps
This refers to the actual exchange of two currencies at a specific date, at a rate agreed upon the deal date and the reverse exchange of the currencies at a farther ate in the future, also at an interest rate agreed on deal date. The reserve requirement (or cash reserve ratio) is a central bank regulation that sets the minimum fraction of customer deposits and notes that each commercial bank must hold (rather than lend out) as reserves. These required reserves are normally in the form of cash stored physically in a bank vault (vault cash) or deposits made with a central bank.
The required reserve ratio is sometimes used as a tool in monetary policy, influencing the country's borrowing and interest rates by changing the amount of funds available for banks to make loans with. Western central banks rarely alter the reserve requirements because it would cause immediate liquidity problems for banks with low excess reserves; they generally prefer to use open market operations (buying and selling government-issued bonds) to implement their monetary policy. Moral Suasion Using this tool, the BSP decides the kind of credit it will give to clients. It prioritizes its lending activity either to production or consumption. Because, if production is prioritized, credit for consumption is lessened and gives more funds to production and vice-versa.
It is an important tool in BSP which is a major weapon of the monetary policy used to control the demand and supply of money (liquidity) in the economy. The BSP may hold sessions with commercial banks and try to persuade or make suggestions to the heads of commercial banks to redirect their efforts in national development goals. It is the monetary policy tool that tests the persuasive ability of the Monetary Board and the Governor of BSP.
Non-official' tool of monetary policy which governments employ to persuade (instead of coerce through law making power) financial institutions in following suggested guidelines on the availability and cost of credit. Moral suasion is used typically by making policy announcements to induce the desired response, before resorting to mandatory compliance through statutory regulations.