Bukidnon State University

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.

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.

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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 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.

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Excess Reserves
 Are those over and above the legal reserve requirements. It could also be the
amount in excess of working reserves.

 Whatever is above the required working reserves may be deemed as excess

reserves.

Factors Affecting Size of Primary Reserve Requirements

1. The number of depositor and the diversity of their business interest.
2. The confidence of the public on the bank.
3. The nature of a bank’s deposits.
4. The percentage of legal reserve requirements.
5. The percentage and quality of the secondary reserve.
6. The demand for loans.
7. Habits and customs of the community
8. Other factors.

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.

Assets in the Secondary reserve:

 Short-term government securities
 Banker’s Acceptances
 Commercial papers
 Loans of a short-term and self-liquidating nature.

Size of Secondary Reserve

 Size of secondary reserve also matters of “rule of a thumb” on the part of the bank.
 Due to the close link between the primary and secondary reserve, certain factors
influence the size of the latter. Both are used to make sure that the bank meets the
demand of the depositor.

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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.

Assets Eligible for Investment Reserve

 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.
 They are of longer maturities which are spaced at even intervals to allow for a
continuous intake of reinvestment of funds.
 The purpose of having such reserve is to earn and to be able to meet any
unanticipated major losses resulting from bank failure.
 Stock and bonds are popular assets in the investment reserve.

BSP’s Current Policies on Reserve Requirements

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%.

2. Reserve Against Peso-Denominated Common Trust funds

- Pursuant to memorandum to All commercial banks and non-bank financial
intermediaries performing trust, other fiduciary business and investment
management activities dated 15 February 2002:
- 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%

3. Reserve Against trust and Other Fiduciary Accounts (TOFA) – Others

- The manual of regulations for the Non-bank financial Institutions, all financial
intermediaries authorized to engage in trust and other fiduciary business shall
maintain regular reserves against Trust and Other Fiduciary accounts (TOFA) ,
others except – a. accounts held under administration, b. bonds issues under deed of
trust or mortgage, c. custodian and safekeeping , d. depository/reorganization . e.
employees benefit plans under trust, f. escrow, g. personal trust (testamentary or

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 living trust) h. executorship, i. guardianship, j. life insurance trust, k. pre-need plans
(institutional/individual).

The regular reserve against TOFA – Others shall be maintained as follows:

a.) For universal banks and commercial banks 6%
b.) For thrift banks 5%
c.) For non-bank financial intermediaries
With or without quasi-banking functions 6%
d.) For rural banks 4%

4. Form and Compensation

- Deposits maintained by financial intermediaries authorized to engage in trust and
other fiduciary business with the BSP up to forty percent (40%) of the regular
reserve against peso-denominated common trust funds as well as the regular
reserves for TOFA- Others shall be paid interest at 4% per annum based on the
average daily balance of said deposits. to be credited quarterly.

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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