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Chapter 10 - Bank Reserves
Chapter 10 - Bank Reserves
Chapter 10 - Bank Reserves
City of Malaybalay
College of Business
FM103 (Banking and Financial Institutions)
CHAPTER 10
BANK RESERVES
Primary Reserves
Consist mainly of highly liquid assets of the bank and its main objective is to
maintain the bank liquidity and solvency.
The bank keeps primary reserve in the form of non-earning assets.
A bank may keep primary reserve in the form of cash in vaults, deposits with the
central bank (legal reserve); deposit with other banks, exchanges or the clearing
house and checks for collection. These items may fall under the classification of
excess reserves, working reserves, or legal reserves.
The banks do their best to keep the right amount of primary reserves, not too
much to deny the bank income from investment neither too little to jeopardize
the bank’s position in the community.
Legal Reserves
Form part and parcel of the primary reserve. Sometimes alluded to as required
uniformly and without discrimination on all banks.
The BSP, being the monetary authority, has jurisdiction over all banks and,
therefore requires the setting up of legal reserves. Such reserves are kept at the
banks vault.
This reserve is usually a percentage of demand and time deposit, which may
either, be in cash or a combination of cash and highly marketable securities.
The function of legal reserve is to meet the depositors demand for cash.
The bank can only draw on these reserves from the BSP in cases of extreme need
to meet depositor’s withdrawals.
Republic Act 7653 (New Central Bank Act of 1993) as embodied in Chapter IV,
Article VII, entitled “Bank Reserves:”
Sec. 94 Reserve Requirements- in order to control the volume of money created by the
credit operations of the banking system, all banks operating in the Philippine shall be
required to maintain reserves against their deposit liabilities.
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Sec.95 Definition of Deposit Substitute – the term deposit substitute is defined as an
alternative form of obtaining funds from public, other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for the borrowers own
account, for the purpose of relending or purchasing of receivables and other obligations.
Sec.96 Required Reserve Against Peso Deposit – the Monetary Board may fix and, when it
deems necessary, alter the minimum reserve ratios to peso deposits, as well as to
deposit substitute, which each bank and/or quasi-bank may maintain, and such ratio
shall be applied uniformly to all banks of the same category as well as quasi-banks.
Sec. 97 Required Against Foreign Currency Deposits – the Monetary Board is similarly
authorized to prescribe and modify the minimum reserve ratios applicable to deposits
denominated in foreign currencies.
Sec. 98 Reserve Against Unused Balances of Overdraft Lines – in order to facilitate Bangko
Sentral control over the volume of bank credit , the Monetary Board may established
minimum reserve requirements for unused balances of overdraft lines.
Sec. 99 Increase in Reserve Requirements – the increase shall be made in gradual manner
and shall not exceed fourpercentage points in any (30) day period. Banks and other
financial institutions shall be notified reasonably in advance of the date on which such
increase is to become effective.
Sec. 100 Computation on Reserves - The reserve position of each bank or quasi-bank
shall be calculated daily on the basis of the amount, at the close of business for the day,
of the institutions reserve and the amount of its liability accounts against which
reserves are required to be maintained.
Sec. 101 Reserve Deficiencies - whenever the reserve position of any bank or quasi-bank,
computed in the manner specified in the preceding section of this Act, below the
required requirement minimum, the bank or quasi-bank shall pay the BSP one-tenth
percent (1/10 of 1%) per day on the amount of the deficiency on the prevailing 90 day
treasury bill rate plus 3 percentage points whichever is higher.
Sec. 102 Interbank Settlement – the BSP shall established facilities for interbank clearing
under such rules and regulations as the Monetary Board may prescribe. Provided, that
the BSP may charge administrative and other fees for the maintenance of such facilities.
Sec. 103 Exemption from Attachment and Other Purpose – Deposits maintained by banks
with the BSP as part of their reserve requirements shall be exempted from attachment,
garnishments, or any other order or process of any court, government agency or any
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other administrative body issued to satisfy the claim of a party other than the
government, or its political subdivisions or instrumentalities.
Working Reserves
Another form of primary reserves, composed of vault cash in excess of legal
requirements and balances with other banks which are used to meet the
depositors demand.
The amount of working reserves varies in size depending upon several factors.
Excess Reserves
Are those over and above the legal reserve requirements. It could also be the
amount in excess of working reserves.
Secondary Reserves
Often alluded to as a bank’s next line of defense
Composed of earning assets which are easily converted to cash with the least
delay and without loss.
First major role of this reserve is to replenish the needs of the primary reserve.
If the cash is not needed, the next function is to keep a maximum percentage of
the bank’s funds invested in earning asset.
Quality of asset:
The asset must be of high quality, it must be in short duration and it must be
marketable.
Investment Reserve
Is an economic rather than an accounting term as in the case of primary and
secondary reserves.
Assets which do not qualify for the first two reserves could conveniently be
deemed as eligible for the investment reserve.
1. The Monetary Board, in Circular No. 319 (resolution no.63 dated January 17,
2002) as amended by MB resolution No. 163 dated 31, January 2002) approved
the reduction in the liquidity reserve requirement against peso demand savings,
time deposits and deposit substitutes liabilities of Universal banks and
Commercial banks, and Non-bank financial Intermediaries with the quasi-
banking functions, by 2 percentage points from 9% to 7%. The regular reserve
requirement is at 9%.
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- The monetary Board approved the reduction in the liquidity reserve
requirement against peso denominated common trust funds (CTF) and trust and
other fiduciary activities (TOFA) – others:
From To
a.) For universal banks and commercial banks 10% 8%
b.) For thrift banks to remain at 4%
c.) For non-bank financial intermediaries
With or without quasi-banking functions 10% 8%
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As we look back and wonder how we ever made it through, we realize it’s not
because we were wise, but because GOD has been good; not because we’ve been
strong, but because GOD has been mighty; not because we’ve been consistent, but
because GOD has been faithful to all His promises.
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