CHAPTER 10: BANK RESERVES required to maintain reserves against their shall not exceed four percentage points

not exceed four percentage points in any

deposit liabilities. thirty-day period.
Bank Reserves- are set up primarily to ward off
2. Sec. 95. Definition of Deposit Substitutes. 7. Sec. 100. Computation on- Reserves. The
any possible embarrassment on the part of the
The term "deposit substitutes" is defined as an reserve position of each bank or quasi-bank
bank and to insure the protection of the
alternative form of obtaining funds from the shall be calculated daily on the basis of the
depositors and investors. should not be
public, other than deposits, through the amount, at the close of business for the day, of
construed to mean the ordinary accounting
issuance, endorsement, or acceptance of debt the institution's reserves and the amount of its
reserves which may either be valuation or
instruments for the borrower's own account, liability accounts against which reserves are
funded reserves, or the liability and surplus
for the purpose of relending or purchasing of required to be maintained.
reserves
receivables and other obligations.
8. Sec. 101. Reserve Deficiencies- Whenever the
Primary Reserves- primary reserve consists
3. Sec. 96. Required Reserves Against Peso reserve position of any bank or quasi. bank,
mainly of the highly liquid assets of the bank
Deposits- The Monetary Board may fix and, computed in the manner specified in the
and its main objective is to maintain the bank's
when it deems necessary, alter the minimum preceding section of this Act, is below the
liquidity and solvency. A bank may keep primary
reserve ratios to peso deposits, as well as to required minimum, the bank or quasi-bank shall
reserves in the form of cash in its vaults,
deposit substitutes, which each bank and/or pay the Bangko Sentral one-tenth of one
deposits with the central bank (legal reserves);
quasi-bank may maintain, and such ratio shall percent (1/10 of 1%) per day on the amount of
deposits with other banks, exchanges for the
be applied uniformly to all banks of the same the deficiency or the prevailing ninety-one-day
clearing house the classification of excess
category as well as to quasi- banks. treasury bill rate plus three percentage points,
reserves, and checks for collection.
whichever is higher.
4. Sec. 97. Required Reserves Against Foreign
Legal Reserves- form part and parcel of the
Currency Deposits- The Monetary Board is 9. Sec. 102. Interbank Settlement- The Bangko
primary reserves . It is sometimes alluded to as
similarly authorized to prescribe and modify the Sentral shall establish facilities for interbank
the required reserves due to the fact that
minimum reserve ratios applicable to deposits clearing under such rules and regulations as the
supervisory and regulatory agencies impose this
denominated in foreign currencies. Monetary Board may prescribe.
requirement uniformly and without
discrimination on all banks. 5. Sec. 98. Reserve Against Unused Balances of ART VII- The deposit reserves maintained by the
Overdraft Lines- In order to facilitate Bangko banks in the Bangko Sentral in accordance with
legal reserves as well as all its other facets, we
Sentral control over the volume of bank credit, the provisions of Section 94 of this Act serve as
quote hereunder the pertinent provisions of
the Monetary Board may establish minimum basis for the clearing of checks and the
the Republic Act 7653 (New Central Bank Act
reserve requirements for unused balances of settlement of interbank balances, subject to
of 1993), at embodied in Chapter IV, Article VII,
overdraft lines. such rules and regulations as the Monetary
entitled "Bank Reserves:"
Board may issue with respect to such
6. Sec. 99. Increase in Reserve Requirements.-
1. Sec. 94. Reserve Requirement- In order to operations.
Whenever in the opinion of the Monetary
control the volume of money created by the
Board it becomes necessary to increase 10. Sec. 103. Exemption from Attachment and
credit operations of the banking system, all
requirements against existing liabilities, the Other Purposes- Deposits maintained by banks
banks operating in the Philippines shall be
increase shall be made in a gradual manner and with the Bangko Sentral as part of their reserve
requirements shall be exempted from 4. The percentage of legal reserve earning assets which are easily converted to
attachment, garnishments, or any other order requirements- Such percentage will certainly cash with the least delay and without loss.
or process of any court, government agency or affect the cash reserves. If the monetary
any other administrative body issued to satisfy authority sets a high percentage of legal
the claim of a party other than the government, reserves, then the primary reserve should be TYPES OF SECONDARY RESERVES
or its political subdivisions or instrumentalities. large enough to absorb such as requirements
plus the normal cash as determined by other Quality of Assets- in order that an asset could
Working Reserves- is the another form of be included in the secondary reserve, it must
factors.
primary reserve possess three important qualities The asset
5. The percentage and quality of the secondary must be of high quality, it must be of short
Excess Reserves- are those over and above the
reserve. The secondary reserve is the bank's duration, and it must be marketable.
legal reserve requirements. Besides, it could
second line of defense. If this consists of highly
also be the amount in excess of working Credit risk- is present if the issuer's capacity to
marketable securities which could be disposed
reserves. pay is questionable so that the asset could not
of with the least delay and without loss, then
the cash reserve should relatively be of a small bring in its full value in case of emergencies
percentage. Assets in the Secondary Reserves- Having thus
FACTORS AFFECTING SIZE OF PRIMARY
6. The demand for loans- This may also explored the requirements of the assets
RESERVE REQUIREMENTS
contribute to the need for cash. There may be comprising the secondary reserve, we could
1. Number of depositors and the diversity of many small loan applicants whose cash needs now pinpoint with some accuracy what specific
their business interests- these may influence may likewise be small. In which case, the cash items could be eligible for this purpose
bank management in fixing the primary reserve. outlay may be of lesser percentage. Or there Size of Secondary Reserves- The size of the
An example, a bank need heavy cash outlays or may be a few big loan applications which would secondary reserve is also a matter of "rule of
withdrawals entail a tremendous cash outlay. thumb" on the part of the bank. What would be
2. Confidence of the public on the bank- A new 7. Habits and customs of the community. The the most ideal is as good a guess as anyone
bank needs a greater amount of cash to meet existing habits and customs of a place may also would wager.
normal window requirements since it is still in influence the size of the cash reserves. The Investment Reserve- is an economic rather
the stage of attracting customers. people of the community may not as yet be than an accounting term as in the case of
3. Nature of a bank's deposits- This is also a oriented to banks and the banking functions primary and secondary reserves. Assets which
determinant of cash requirements. This means which may lead to frequent withdrawals. do not qualify for the first two reserves could
particularly the proportion of current or time 8. Other factors. Seasonal requirements, conveniently be deemed as eligible for the
deposits to total deposits If there are more holidays, paydays, first day of the week and investment reserve.
demand deposits, then there should be a bigger similar circumstances may also affect the size of Assets Eligible For Investment Reserve-
cash outlay because the bank must be ready to primary reserves. Investments imply funds that are used for long
satisfy the depositor's demand.
Secondary Reserves- is often alluded to as a term purposes, particularly in corporate
bank's next line of defense. It is composed of securities. So, the assets comprising the
investment reserves are not as liquid as those in
the primary reserve nor as easily converted into
cash as those of the secondary reserve.