Interest Rates and Reserve Requirement

Funding Treasury Lending

 Interest Rates:

 Compensation to the lender for allowing the use of funds.

 The fee paid by the borrower for the privilege of using the funds.

 Reserve Requirement:

 a bank regulation that sets the minimum reserves each bank must hold to customer
deposits.
 designed to satisfy withdrawal demands of clients.
 normally in the form of currency stored/deposited with a central bank and/or
investments in government securities

Basic Formula:

Nominal Rate
---------------------------------
(1-Reserve Requirement)

Formula Including Earnings on Reserves:

Nominal Rate –Earnings on Reserves

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(1-Reserve Requirement)

Reserve Requirement for Commercial Banks and Universal Banks:

Statutory/Legal Reserves : 8.00%

Liquidity Reserves : 11.00%
----------
19.00%
Reserve Cost Computation
Illustration:
 Nominal Cost : 5.00%
Reserve Requirement : 19.00%

5.00%
--------------
(1 –19 .00%)

6.17283951% or 6.17%

Exercise

• Compute for the Effective Cost based on the following assumptions:

– Nominal Rate
– Reserve Requirement
• Liquidity Reserves : 11.00%
• Legal Reserves : 8.00%
– Earnings on Liquidity Reserves
– Earnings on Legal Reserves
: 8.00%
: 19.00%
: 5.75% of total liquidity reserves
: 4% of 40% of total legal reserves

NOTE: Assume earnings on liquidity reserves are subject to 20% withholding tax while
earnings on legal reserves are not.

• Answer: 9.094%

Transfer Pool Funds

– Reservoir of excess funds from any surplus units of the Bank
– Serves as the source of funds from deficient units around the Bank
– Price attached to it is the Transfer Pool Rate (TPR)

 Transfer Pool Rates (TPR)

 Price attached to the reservoir/pool of excess funds from any surplus units of the Bank
○ Surplus Units earn interest at TPR as if it were another asset/outlet
○ Deficient Units borrow from the pool at TPR

• Transfer Pricing:
– Removes market risk exposure from Business Units.
– Provides business units with consistent and predictable spreads.
– Promotes Management accountability

• To summarize:
– Peso deposit liabilities are subject to the reserve requirement imposed by the Bangko
Sentral ng Pilipinas to satisfy withdrawal demands from clients.
– Transfer Pricing is employed to enable the business units to focus on its respective
mandates: for branch units to generate deposits and lending units to lend the funds.