Policy tools take effect

REPORT FROM BUSINESSWORLD A new set of monetary tools designed to mop up excess liquidity in the financial system takes effect Thursday, with the scheme expected to draw banks’ appetite off low-yielding government debt papers. Also, banks are now deemed to have complied with liquidity floor requirements on state firm’s deposits with existing special deposit accounts (SDAs) with the Bangko Sentral ng Pilipinas (BSP). The Monetary Board ruled that the special deposit accounts are now eligible reserves, that is, banks can use them to hit the required 50% of government deposits that must be kept in cash or near-cash instruments . Normally, banks buy government securities to comply. Banks’ SDA placements stood at P46.94 billion as of April 13. With yields from government securities hitting all-time lows, banks are expected to move away from the local debt market. The SDAs carry a rate of as much as 7.8% for three months, compared with 3% from the 91-day Treasury bill. Allowing trust units of banks to deposit with the central bank is most effective in soaking up cash, analysts said. In a memorandum, authorities said trust departments would enjoy the SDA rates available to banks. The central bank is expected to siphon off around P50 billion from the system, mostly from trust units, banking sources said. "When the trust units withdraw their funds... [banks] will have less money to buy government securities and will be lending less to BSP under its overnight borrowing window," a bank said. Rates of government papers should rise by 20 to 30 basis points, bond dealers said. The placements of trust units, coursed through depository institutions such as banks, would be subjected to a tiering scheme, which pays less interest for placements above P5 billion, according to the memorandum. The minimum amount of funds that could be placed in the SDA facility is P10 million, the memorandum said. — Maria Eloisa I Calderon/BusinessWorld