System remains liquid, says BSP’s Guinigundo

THE financial system remains awash with cash even as bids for the weekly term deposit auctions have been logging below the central bank’s P180-billion offering, a senior official said, noting that trust funds pulled out of the facility have found its way back through banks.

“[T]he system remains liquid,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said in a text message to reporters when asked for feedback on the term deposit auction on Wednesday.

The auction saw a recovery in demand as bids reached P174.847 billion, picking up from the previous week’s P141.24 billion but still fell short of the P180 billion dangled by the central bank.

Banks crowded the shorter tenor, with offers for the seven-day term deposits reaching P52.579 billion versus the P40-billion auction size. Meanwhile, tenders for the 28-day tenor stood at P122.268 billion versus the P140-billion offering.

Mr. Guinigundo said the higher demand likely showed that trust funds have crawled back to the facility through its parent banks, following their exit from the term deposit facility (TDF) auctions after a year of tapping the window.

This gave lenders additional money supply on their hands, which were deployed to more loans and other better-yielding instruments aside from parking the excess funds under the TDF.

“Trust funds that have been withdrawn from BSP are finally going back as bank funds, the national government has completed its retail Treasury bond (RTB) issue, and the exchange rate appears stabilizing that banks have little incentive to buy more foreign exchange. So banks have higher demand for new options including placement with the BSP’s term deposit facility,” Mr. Guinigundo said.

“Since there were alternative uses for their funds, the banks shifted to more lending, more foreign exchange purchases and more RTB placements resulting in some undersubscriptions.”

Since December, the BSP has kept the weekly auction volume at P180 billion, broken down into P40 billion under the week-long tenor and P140 billion for the month-long term.

The TDF is the central bank’s main tool to capture excess liquidity in the financial system by allowing banks to place their idle funds with the BSP in exchange for returns capped at 3.5%.

BSP Governor Nestor A. Espenilla, Jr. previously said that the central bank is “carefully analyzing” the turnout of the weekly TDF auctions to check whether adjustments to auction volumes and tenors are warranted. For next week, P180 billion worth of term deposits will again be offered by the central bank.

Mr. Espenilla said he is also looking to trim the 20% reserve requirement imposed on big banks given that it stands as an “inefficiency” to the financial system, but noted that it will have to be carefully timed by factoring in existing liquidity conditions.