BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate?

 

Central banks and finance ministries do not hold copper, aluminum, or steel supplies, yet they hold gold. The only explanation for central bank gold hoards is the obvious one - gold is money― James Rickards

In this issue 

BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate?

I. BSP’s Contradicting Official Statements

II. Why the Rhetorical Shift? World’s Largest Gold Seller in 2024—BSP

III. BSP’s Gold Sales: Supporting the USD-PHP Soft Peg

IV. Other Reserve Assets (ORA) and Financial Derivatives: Did the BSP Short Gold?

V. Broader Economic Pressures: 11-Year High January Balance of Payments (BoP) Deficit and Soaring External Debt

VI. Signaling Channel: The BSP’s Softening Rhetorical Stance on the USDPHP Cap

VII. Conclusion: Inevitable Devaluation of the Philippine Peso? 

BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate? 

The BSP’s gold reserves have been shrinking since 2020, ultimately contributing to the devaluation of the Philippine peso. The BSP sold the most gold in 2024—how low will the peso fall? 

I. BSP’s Contradicting Official Statements 

So, the BSP’s caught up in the wild storm of election season, and guess what? They’re back at it, defending their whole deal with gold reserves. 

BSP, February 24: "The country’s GIR is not used for any other purpose other than meeting the country’s forex requirements. Tasked to manage the country’s external accounts, among other functions, the BSP has been buying and selling gold over the years as part of its core functions. When the BSP sells gold, the proceeds revert to and stay within the GIR. Last year, the GIR rose to USD 106.3 billion from USD 103.8 billion in 2023. Similar to other central banks, the BSP maintains a portion of its reserves in gold as part of the country’s GIR mostly to hedge against/offset movements in the market price of other assets. It buys or sells gold to maintain an optimum level for this purpose, not too much, not too little. This follows basic portfolio-management principles. Gold prices tend to move in the opposite direction of other assets. Therefore central banks hold some gold as a hedge against price declines in other assets in the reserves. However gold prices can be volatile, earns little interest, and has storage costs, so central banks don’t want to hold too much." (bold added) 

Back in September, after basking in the limelight, the BSP defended its decision to sell gold.

BSP, September 24, 2024: "The Bangko Sentral ng Pilipinas (BSP) sold gold during the first half of the year as part of its active management strategy of the country’s gold reserves, which form part of the country’s Gross International Reserves (GIR). The BSP took advantage of the higher prices of gold in the market and generated additional income without compromising the primary objectives for holding gold, which are insurance and safety." (bold added) 

There is a stark shift in the BSP’s stance on gold reserves. Earlier, they described gold as essential for "insurance and safety," yet last month they’ve characterized it as a "dead asset" that "earns little interest and has storage costs." 

II. Why the Rhetorical Shift? World’s Largest Gold Seller in 2024—BSP

Figure 1

The World Gold Council (WGC) noted that the BSP "confirmed its gold sales—totaling 30 tonnes"—the largest sale by a central bank in 2024. (Figure 1, upper image)

While some other central banks also sold gold, their sales were on a significantly smaller scale.

Globally, central banks were net buyers in 2024, particularly emerging market central banks. The WGC reported that "Central banks added 1,045 tonnes to global gold reserves in 2024."

Since the 2008 financial crisis, global central banks have been rebuilding reserves. (Figure 1, lower pane)

Figure 2

Notably, China’s PBOC and the Central Bank of India were among the most aggressive buyers—not just in 2024, but for several years. (Figure 2, upper window)

Alongside Russia, their gold holdings have matched or even exceeded those of some developed nations, closing the gap with the US. (Figure 2, lower chart—excludes unpublished holdings)

Given this trend, BSP’s claim that "central banks don’t want to hold too much" appears misleading—an appeal to the false majority (argumentum ad populum).

It seems more like an attempt to justify its selling spree rather than reflect actual central bank behavior globally.

III. BSP’s Gold Sales: Supporting the USD-PHP Soft Peg

As part of its "active management strategy," the BSP has been selling gold to finance the USD-PHP soft peg, capping the exchange rate at 59 per USD. This is not just about portfolio rebalancing—it’s a deliberate move to influence the USDPHP exchange rate. 

But that’s not the whole story.

There are costs to this approach. Central banks are political institutions and are not driven by profit-and-loss activities. When the BSP came under scrutiny for its aggressive selling, not only did they stop, but they also started repurchasing gold in August—at much higher prices. In essence, they sold high but bought higher, leading to opportunity losses.

Figure 3

Despite recent incremental purchases, BSP’s gold reserves remain at their lowest level since at least 2019, according to BSP and IMF’s data template on International Reserves and Foreign Currency Liquidity (IRIFCL) data. 

Data further highlights historical trends, including BSP’s two waves of gold sales. (Figure 3, topmost graph) 

First Wave (2020-2021 Pandemic Recession): BSP sold gold even as the USD-PHP was weakening. This suggests it anticipated the pesos’ depreciation. 

Second Wave (Nov 2023 - July 2024): Gold sales preceded another test of the USD-PHP 59 level in June 2024, implying an effort to manage exchange rate volatility. 

Despite record-high gold prices, BSP’s overall reserves increased due to valuation gains rather than inventory growth. (Figure 3, middle diagram) 

In any case, the all-time high in gold prices has led to an increase in gold’s share of the GIR, reaching 2020 levels. (Figure 3, lowest image) 

On the other hand, the BSP’s demonstrated preference for gold sales reveals its dogmatic proclivities, which barely acknowledges gold as a function of ‘insurance and safety.’ 

Still, despite a reduction in inventory, the BSP owes a significant share of its GIR to gold prices. 

IV. Other Reserve Assets (ORA) and Financial Derivatives: Did the BSP Short Gold? 

Figure 4

Beyond public external borrowings, (Figure 4, topmost graph) which bolster the GIR through National Government deposits with the BSP, Other Reserve Assets (ORA) have played a prominent role since 2018. 

ORA has been rising since January 2024, when the BSP accelerated its gold sales. (Figure 4, middle window) 

ORA has played a conspicuous role in the USDPHP. Its surge from 2018 to 2020 coincided with the fall of the USDPHP, and vice versa (Figure 4, lowest chart) 

ORA includes: 

-Mark-to-market financial derivatives (forwards, futures, swaps, options)

-Forwards and options on gold

-Short-term foreign currency loans

-Other financial assets used for immediate liquidity

-Repo assets 

This raises key questions: 

-Has BSP been ‘shorting’ gold via ORA while conducting physical sales to settle delivery? 

-Is BSP boosting its reserves with derivatives and repos via transactions with international financial intermediaries, particularly US-based institutions? 

While the BSP claims that gold "earns little interest and has storage costs," financial derivatives also incur commissions and fees, which are paid to banks, brokers, and dealers. These costs include premiums on options and other transaction fees. 

-Why has the BSP been prioritizing financial derivatives and repos over gold, which serves as "insurance and safety"? Are these instruments not costlier and riskier? 

-Has geopolitics influenced the BSP’s decision-making trade-offs? Aside from its geopolitical alignment with the U.S., could this shift toward Wall Street-linked instruments be connected to the Philippines' removal from the FATF’s money laundering grey list? 

To sum up, has the BSP’s increasing use of financial leverage to sustain the USDPHP soft peg led to diminishing returns? And is its shrinking gold stock a symptom of this trend? 

V. Broader Economic Pressures: 11-Year High January Balance of Payments (BoP) Deficit and Soaring External Debt 

Yet more symptoms. 

BSP, February 19: "The country’s overall balance of payments (BOP) position posted a deficit of US$4.1 billion in January 2025, higher than the US$740 million BOP deficit recorded in January 2024. The BOP deficit in January 2025 reflected the Bangko Sentral ng Pilipinas’ (BSP) net foreign exchange operations and drawdowns by the national government (NG) on its foreign currency deposits with the BSP to meet its external debt obligations."

Figure 5

That is, the January BoP deficit widened to an 11-year high! Ironically, the NG raised USD 3.3 billion in January. This suggests that the BOP deficit largely reflects the net cost of defending the USDPHP soft peg. Remarkable!

Additionally, Bureau of Treasury data shows that external debt in peso terms—partially reflecting devaluation—continues to surge, growing 11.4% year-over-year, with its uptrend dating back to 2012

FX debt servicing costs (interest and amortization) skyrocketed 47.5% in 2024, increasing its share of total debt to 22.9%, confirming a trend reversal in 2023.

Be reminded: This debt buildup wouldn’t have been necessary had there been sufficient organic FX revenue (e.g., remittances, tourism, service exports, FDI and etc.).

VI. Signaling Channel: The BSP’s Softening Rhetorical Stance on the USDPHP Cap

With declining gold reserves and mounting external pressures, peso devaluation appears increasingly likely.

Inquirer.net, February 15: "A peso fall to the 60-level against the US dollar remains “a possibility” despite the Bangko Sentral ng Pilipinas’ (BSP) decision to hold rates steady, Governor Eli Remolona Jr. said, adding that hitting the pause button on easing was the “less disruptive” action for the market." (bold added)

This media communication represents the "signaling channel" approach—where central bankers use public messaging to condition market expectations.

Foreign institutions have begun forecasting a breach of the 59-peso level:

Sunlife: 61

Bank of America: 60

Maybank: 63

BMI: Above 60

HSBC: Beyond 59 

These are hardly typical forecasts or implicit pressure on the BSP; rather, they seem part of the signaling effort in shaping the Overton Window. 

The USDPHP exchange rate operates under a ‘soft peg’ regime, meaning the BSP will likely determine the next upper band or ceiling. In the previous adjustment, the ceiling rose from 56.48 in 2004 to 59 in 2022, representing a 4.5% increase. If history rhymes, the next likely cap could be in the 61-62 range. 

VII. Conclusion: Inevitable Devaluation of the Philippine Peso? 

BSP’s evolving stance on gold raises fundamental questions about its broader strategy. Its aggressive sales, followed by reactive repurchases at higher prices, suggest a focus on short-term currency stabilization—driven by sensationalist politics—rather than strategic reserve management. 

At the same time, the increasing reliance on derivatives and external debt amplifies long-term financial risks. 

Moreover, the BSP appears less committed to defending the 59 level, as indicated by both its rhetoric and evolving fundamentals, including declining gold reserves. 

With external pressures mounting, peso devaluation seems not a matter of IF but WHEN.

 

Mounting Cracks in the PSEi 30: How Structural Imbalances Are Amplifying Market Stress

True confidence does not come from “you can trust us if we screw up because someone else will bail you out” but from “you can trust us because it is demonstrably in our interest to make sure we don’t screw up”. Deposit insurance is an inferior confidence product – one might even say, a confidence trick—Kevin Dowd 

In this issue

Mounting Cracks in the PSEi 30: How Structural Imbalances Are Amplifying Market Stress

I. The PSEi 30’s February and 2025 Performance

II. PSE’s Market Internals Remain Bearish

III. Is This a Regional Trend? Emerging Signs of Asian Financial Crisis 2.0?

IV. PSEi 30’s Mounting Market Imbalances

V. Symptoms of Capital Consumption: Despite Surging Credit Expansion, Falling Liquidity and Diminishing Returns

VI. Share Buybacks as Panacea?

VII. The Path to Full-Fractional Reserve Banking and Deposit Insurance Expansion: A False Sense of Security? 

Mounting Cracks in the PSEi 30: How Structural Imbalances Are Amplifying Market Stress 

The erosion of a major rally this February following January’s selloff reveals the underlying structural fragilities and operating dynamics of the Philippine Stock Exchange.

I. The PSEi 30’s February and 2025 Performance

Figure 1

Echoing January’s 4.01% end-of-month selloff, the final trading day of February saw a similar 2.06% pre-closing plunge, erasing nearly half of the recovery gains the PSEi 30 had posted for the month. (Figure 1, upper and lower images)

While it may be convenient to attribute this last-minute market move to portfolio rebalancing, it primarily reflected underlying trend weakness and growing fragility in the PSEi 30.

A portion of January 2025’s selloff was driven by changes in PSEi membership.

In contrast, February’s decline was largely fueled by massive foreign money outflows.

Despite this, the headline index ended February up 2.31% month-over-month (MoM), yet remained down 13.63% year-over-year (YoY) and was still 8.13% lower year-to-date (YTD) in 2025.

II. PSE’s Market Internals Remain Bearish

Why do internal market activities signal a bearish backdrop?

Figure 2

1. Weak Volume Trend

Despite a 7.6% improvement in the PSE’s two-month gross volume, it marked the third-lowest level since 2012, reinforcing a volume downtrend that has persisted since 2015. The 2021 volume spike—an anomaly fueled by the Bangko Sentral ng Pilipinas (BSP)’s Php 2.3 trillion historic injections into the financial system—merely highlighted the short-lived effects of the banking system’s pandemic-era rescue. (Figure 2, topmost diagram)

2. Broad-Based Selling Pressure

The two-month selling spree has been widespread. Market breadth, as measured by the advance-decline spread, recorded its second-worst performance since the pandemic crash of March 2020. (Figure 2, middle graph)

3 Persistent Foreign Outflows

In 2025, foreign outflows accounted for the third-largest capital exodus since 2012. Foreign trade made up 50.8% of gross volume, highlighting that selling pressure in the PSEi 30 was exacerbated by weak local investor support. Foreign capital has played the role of the marginal price setter, and its exit underscores the lack of domestic buying power or the dearth of local savings. (Figure 2, lowest chart) 

III. Is This a Regional Trend? Emerging Signs of Asian Financial Crisis 2.0?

Figure 3

The sustained foreign money outflow suggests that the phenomenon extends beyond the Philippines.

In 2025, the PSEi 30 ranked as the third-worst-performing equity benchmark in Asia. (Figure 3 topmost and middle graphs)

More broadly, the four largest ASEAN indices have exhibited pronounced weakness since Q3 2024.

If this trend continues, it could lay the groundwork for a potential Asian Financial Crisis 2.0. 

IV. PSEi 30’s Mounting Market Imbalances 

A deeper look at the PSEi 30 reveals intensifying distortions: 

The Financial Index/PSEi 30 has surged to consecutive all-time highs, reflecting massive outperformance since the BSP's historic banking sector rescue during the pandemic recession. (Figure 3, lowest pane) 

Conversely, the Property Index/PSEi 30, representing banks’ largest clients, has plunged to its lowest level since 2012. In other words, most of the selling pressure in the PSEi 30 has emanated from this sector.

Figure 4

The cumulative free float shares of the three largest banks have hit all-time highs as of February 28, suggesting that without intervention from the so-called “national team,” the PSEi 30 would have been substantially lower. (Figure 4, topmost image)

V. Symptoms of Capital Consumption: Despite Surging Credit Expansion, Falling Liquidity and Diminishing Returns

Despite back-to-back record highs in systemic leveraging—measured by the combined growth of universal commercial bank loans and public debt in pesos—the PSEi 30 continues to suffer from diminishing YoY returns. (Figure 4, middle image) 

This is also reflected in the banking system’s all-time low cash-to-deposits ratio, a key liquidity measure. (Figure 4, lowest window) 

The broader implication is clear: massive liquidity injections via credit expansion have led to capital consumption rather than productive investment. This is evident in the declining productivity rate of the economy and diminishing returns on stock market investments. 

It is also misleading to blame the PSE’s underperformance on local investors shifting to foreign assets such as offshore stocks or cryptocurrencies. While it may be true for some, the more pressing issue is the depletion of domestic savings.

VI. Share Buybacks as Panacea?

So, how does the establishment help resolve this predicament? While they might claim their shares are "undervalued"—indicating a perceived 'market failure'—Metro Pacific, for instance, opted to delist.

Figure 5

SM Investments made a similar claim while observing their diminishing clout, reflected by their declining share of the free float capitalization in the PSEi 30. 

In response, they recently launched a P60 billion share buyback program, "the largest ever announced by a Philippine corporation," aimed at purchasing an estimated 77 million shares, or 6% of the company's outstanding shares. 

Could this, however, signal a panic reaction? 

Some listed companies use their shares as collateral for loans or as currency in the context of mergers, often with price floors stipulated in their covenants. 

VII. The Path to Full-Fractional Reserve Banking and Deposit Insurance Expansion: A False Sense of Security? 

This fragility dilemma is further aggravated by the BSP’s recent reserve requirement ratio (RRR) cuts—and strikingly, the central bank is now proposing a transition to FULL fractional reserve banking, with plans to lower the RRR to ZERO. 

We previously discussed it here. 

The Philippines is NOT the U.S., which can afford zero RRR rates due to its deep and diversified capital markets. 

In contrast, systemic risks in the Philippines are being amplified as banks have increasingly monopolized the nation’s total financial resources, leaving the economy vulnerable to liquidity shocks and credit misallocation 

Meanwhile, the Philippine Deposit Insurance Corporation (PDIC) has doubled its maximum deposit insurance coverage. However, this comes at a time when the rate of qualified deposits continues to decline.

Figure 6 

As of Q3 2024: 

-Total insured deposits had been trending downward since 2011, reaching just 18.3% of total deposits. (Figure 6, upper chart) 

-Of this, only 9.83% were fully insured, while 8.4% were partially insured. 

Although this decline is attributed to aggressive bank credit expansion, which has inflated deposit levels, it has barely delivered a proportional increase in deposits. 

As an aside, it is unclear how much in assets the PDIC has to support such claims. 

VIII. In Summary: Intensifying Imbalances and Amplified Volatility; Opportunity? Mining Index 

The PSEi 30’s performance in 2025 reflects worsening structural imbalances, manifested through magnified volatility. 

To be sure, while fierce bear market rallies can occur, this does not mean that rising prices will eliminate these risks. 

Here’s what we’re watching: one key development has been gold’s record-breaking surge. 

If this trend continues, it could help provide a boost to the mining index, which has been quietly gaining upside momentum at the margins. (Figure 6, lowest pane) 

This represents a fringe (or niche) opportunity with potential. 

Nota bene: This article offers market insights but does not constitute a recommendation or call to action. 

BSP’s Aggressive RRR Cuts: A High-Stakes Gamble?

 

If there is one common theme to the vast range of the world’s financial crises, it is that excessive debt accumulation, whether by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels and make banks seem more stable and profitable than they re­ally are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced—Carmen Reinhart and Kenneth Rogoff 

In this issue

BSP’s Aggressive RRR Cuts: A High-Stakes Gamble?

I. Decline in 2024 Bank Non-Performing Loans Amidst Record-High Debt Levels and a Slowing Economy

II. Deepening Financialization: Financial Assets Surge in 2024 as Banks Drive Industry Monopolization

III. Viewing Bank’s Asset Growth Through the Lens of the PSE

IV. March 2025 RRR Cuts and the Liquidity Conundrum: Unraveling the Banking System’s Pressure Points

V. Liquidity Drain: Record Investment Risks and Elevated Marked-to-Market Losses

VI. Despite Falling Rates, Bank’s Held-to-Maturity Assets Remain Near Record High

VII. Moral Hazard and the "COVID Bailout Playbook"

VIII. The Bigger Picture: Are We Headed for a Full-Blown Crisis?

IX. Conclusion: RRR Cuts a High-Risk Strategy? 

BSP’s Aggressive RRR Cuts: A High-Stakes Gamble?

The BSP announced another round of RRR cuts in March amid mounting liquidity constraints. Yet, the reduction from 20% in 2018 to 7% in 2024 has barely improved conditions. Will this time be different?

I. Decline in 2024 Bank Non-Performing Loans Amidst Record-High Debt Levels and a Slowing Economy

Inquirer.net, February 14, 2025: Soured loans held by Philippine banks as a ratio of total credit eased to their lowest level in a year by the end of 2024 as declining interest rates and softer inflation helped borrowers settle their debts on time. However, a shallower easing cycle might keep financial conditions still somewhat tight, which could prevent a big decline in bad debts this year. Preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed the gross amount of nonperforming loans (NPLs)—or credit that is 90 days late on a payment and at risk of default—had cornered 3.27 percent of the local banking industry’s total lending portfolio as of December, down from November’s 3.54 percent. That figure—also known as the gross NPL ratio—was the lowest since December 2023, when bad loans accounted for 3.24 percent of banks’ total loan book.

An overview of the operating environment 

In any analysis, it is crucial to understand the operating environment that provides context to the relevance of a statistic in discussion.

The Bangko Sentral ng Pilipinas (BSP) initiated its ‘easing cycle’ in the second half of 2024, which included three rate cuts and a reduction in the reserve requirement ratio (RRR). Meanwhile, inflation (CPI) rebounded from a low of 1.9% in September to 2.9% in December. Additionally, the BSP tightened its cap on the USDPHP exchange rate. Fiscal spending over the first 11 months of the year reached an all-time high.

Yet, there are notable contradictions.

Despite record-high bank lending—driven largely by real estate and consumer loans—GDP growth slowed to 5.2% in the second half of 2024 primarily due to the weak consumer spending. The employment rate was also near an all-time high.

Figure 1

Meanwhile, real estate prices entered deflationary territory in Q3, with the sector’s real GDP growth falling to its lowest level since the pandemic-induced recession. Its share of total GDP also dropped to an all-time low. 

Notably, the real estate sector remains the largest borrower within the banking system (encompassing universal, commercial, thrift, and rural/cooperative banks). (Figure 1, topmost chart) This data depends on the accuracy of the loans reported by banks. 

However, despite recent rate cuts and significant reductions in RRR, the sector remains under pressure. Additionally, sluggish GDP growth suggests mounting risks associated with record levels of consumer leverage. 

Upon initial analysis, the decline in non-performing loans (NPLs) appears inconsistent with these economic developments. Gross NPLs dropped to one-year lows, while net NPLs reached levels last seen in June 2020. (Figure 1, middle window) 

Ironically, the BSP also announced another round of RRR cuts this March.

II. Deepening Financialization: Financial Assets Surge in 2024 as Banks Drive Industry Monopolization

Let's now turn to the gross assets of the financial system, also known as Total Financial Resources (TFR).

The BSP maintained its policy rate this February.

Ironically, BSP rates appear to have had little influence on the assets of the bank-financial industry. 

In 2024, TFR surged by 7.8% YoY, while bank resources jumped 8.9%, reaching record highs of Php 33.78 trillion and Php 28.255 trillion, respectively. 

Why does this matter? 

Since the BSP started hiking rates in April 2022, TFR and bank financial resources have posted a 9.7% and 10.9% compound annual growth rate (CAGR), respectively. In short, the growth of financial assets has accelerated despite the BSP’s rate hikes. 

Or, the series of rate hikes have barely affected bank and financial market operations. 

By the end of 2024, TFR stood at 128% of headline GDP and 152% of nominal GDP, while bank resources accounted for 107% and 127%, respectively. This reflects the increasing financialization of the Philippine economy—a growing reliance on credit and liquidity—as confirmed by the Money Supply (M series) relative to GDP. (Figure 1, lowest image)

Banking Sector Consolidation

Figure 2

More importantly, the rate hikes catapulted the bank's share of the TFR from 82.3% in 2023 to an all-time high of 83.64% in 2024, powered by universal and commercial banks, whose share jumped from 77.6% to 78.3%! (Figure 2, topmost diagram) 

Effectively, the banking industry—particularly UCBs—has been monopolizing finance, leading to greater market concentration, which translates to a build-up in systemic concentration risk. 

As of December 2024, bank assets were allocated as follows: cash, 10%; total loan portfolio (inclusive of interbank loans and reverse repurchase agreements), 54%; investments, 28.3%; real and other properties acquired, 0.43%; and other assets, 7.14%. 

In 2024, the banking system’s cash reserves deflated 6.01% YoY, while total loans and investments surged by 10.74% and 10.72%, respectively. 

Yet over the years, cash holdings have declined (since 2013), loan growth has been recovering (post-2018 hikes), and investments have surged, partially replacing both. (Figure 2, middle image) 

Notably, despite the BSP’s historic liquidity injections, banks' cash reserves have continued to erode. 

The catch-22 is that if banks were profitable, why would they have shed cash reserves over the years? 

Why the series of RRR cuts? 

III. Viewing Bank’s Asset Growth Through the Lens of the PSE 

During the Philippine Stock Exchange Index (PSEi) 30’s run-up to 7,500, Other Financial Corporations (OFCs)—potentially key players in the so-called "national team"—were substantial net buyers of both bank and non-bank equities. 

BSP, January 31, 2025: "The q-o-q rise in the other financial corporations’ domestic claims was attributable to the increase in its claims on the depository corporations, the other sectors, and the central government. In particular, the other financial corporations’ claims on the depository corporations grew as its holdings of bank-issued debt securities and equity shares increased.  Likewise, the sector’s claims on the other sectors grew as its investments in equity shares issued by other nonfinancial corporations and loans extended to households expanded. The growth in the OFCs’ domestic claims was further supported by the rise in the sector’s investments in government-issued debt securities" (bold added)

The OFCs consist of non-money market investment funds, other financial intermediaries (excluding insurance corporations and pension funds), financial auxiliaries, captive financial institutions and money lenders, insurance corporations, and pension funds.

In Q3 2024, claims on depository corporations surged 12% YoY, while claims on the private sector jumped 8%, both reaching record highs in nominal peso terms.

Meanwhile, the PSEi and Financial Index surged 15.1% and 23.4%, respectively. The Financial Index hit an all-time high of 2,423.37 on October 21st, and as of this writing, remains less than 10% below that peak. The Financial Index, which includes seven banks (AUB, BDO, BPI, MBT, CBC, SECB) and the Philippine Stock Exchange (PSE) as the sole non-bank component, has cushioned the PSEi 30 from a collapse. (Figure 2, lowest chart)

Figure 3

It has also supported the PSEi 30 and the PSE through the private sector claims. (Figure 3, topmost pane)

The irony is that OFCs continued purchasing bank shares even as the banking sector’s profit growth (across universal-commercial, thrift, and rural/cooperative banks) materially slowed (as BSP’s official rates rose)

In 2024, the banking system’s net profit growth fell to 9.8%, the lowest in four years. (Figure 3, middle chart)

Meanwhile, trading income—despite making up just 2.2% share of total operating income—soared 78.3% YoY. 

The crux is that the support provided to the Financial Index by the OFCs may have enabled banks to increase their asset base via their ‘investment’ accounts, while simultaneously propping up the PSEi 30. 

Yet, this also appears to mask the deteriorating internal fundamentals of Philippine banks. (Figure 3, lowest graph) 

There are several possibilities at play: 

1. The BSP’s influence could be a factor;

2. Banks may have acted like a cartel in coordinating their actions

3. The limited depth of Philippine capital markets may have forced the industry’s equity placements into a narrow set of options.

But in my humble view, the most telling indicator? Those coordinated intraday pumps—post-recess "afternoon delight" rallies and pre-closing floats—strongly suggest synchronized or coordinated activities.

The point of this explanation is that Philippine banks and non-bank institutions appear to be relying on asset inflation to boost their balance sheets. 

Aside from shielding banks through liquidity support for the real estate industry, have the BSP's RRR cuts also been designed to boost the PSEi 30?

IV. March 2025 RRR Cuts and the Liquidity Conundrum: Unraveling the Banking System’s Pressure Points 

Philstarnews.com, February 22, 2025: The Bangko Sentral ng Pilipinas (BSP) surprised markets yesterday as it announced another major reduction in the amount of deposit banks are required to keep with the central bank. The BSP said it would reduce the reserve requirement ratios (RRR) of local banks, effective March 28, to free up more funds to boost the economy.  “The BSP reiterates its long-run goal of enabling banks to channel their funds more effectively toward productive loans and investments. Reducing RRRs will lessen frictions that hinder financial intermediation,” the central bank said…The regulator slashed the RRR for universal and commercial banks, as well as non-bank financial institutions with quasi-banking functions (NBQBs) by 200 basis points, to five percent from the current level of seven percent. 

The BSP last reduced the reserve requirement ratio (RRR) on October 25, 2024. With the next cut taking effect on March 28, 2025, this marks the fastest and largest RRR reduction in recent history.

In contrast, the BSP previously cut RRR rates from 18% to 14% over an eight-month period between May and December 2019.

Why the RRR Cuts if NPLs Are Not a Concern?

Figure 4

BSP’s balance sheet data from end-September to November 2024 shows that the RRR reduction led to a Php 124.5 billion decline in Reserve Deposits of Other Depository Corporations (RDoDC)—an estimate of the liquidity injected into the system. The downtrend in bank reserves since 2018 reflects the cumulative effect of these RRR cuts.  (Figure 4, topmost image)

Yet, despite the liquidity injection, the banking system’s cash and due-from-bank deposits continued to decline through December. It has been in a downtrend since 2013. (Figure 4, middle pane)

Cash reserves dropped 6% in 2024, marking the third consecutive annual decline. The BSP’s 2020-21 historic Php 2.3 trillion injection has largely dissipated.

Since peaking at Php 3.572 trillion in December 2021, cash levels have fallen by Php 828 billion to Php 2.743 trillion in December 2024—essentially returning to 2019 levels.  (Figure 4, lowest chart)

Figure 5

The BSP’s other key liquidity indicator, the liquid assets-to-deposits ratio has also weakened, resonating with the cash reserve trend. This decline, which began in 2013, was briefly offset by the BSP’s historic Php 2.3 trillion liquidity injection but has now resumed its downward trajectory. (Figure 5, topmost diagram) 

Other Factors Beyond Cash and Reserves

The slowdown isn’t limited to cash reserves. 

Deposit growth has also decelerated since 2013, despite reaching record highs in peso terms. Ironically, a robust 12.7% rebound in bank lending growth (excluding interbank loans and repos) in 2024, which should have spurred deposit growth, failed to translate into meaningful gains. Peso deposits grew by just 7% in 2024. (Figure 5, middle pane) 

The question arises: where did all this money go? 

This brings attention back onto the BSP’s stated goal of "enabling banks to channel funds more effectively toward productive loans and investments." This growing divergence between total loan portfolio growth and peso deposit expansion in the face of RRR cuts—20% before March 2018, now down to just 7% last October—raises further questions about its effectiveness in boosting productive lending and investment.

A Deeper Liquidity Strain: Rising Borrowings

Adding to signs of the increasing liquidity stress, bank borrowings hit an all-time high in 2024, both in gross and net terms. (Figure 5, lowest graph)

Figure 6

Total borrowings surged by Php 394.5 billion, pushing outstanding bank debt to a record Php 1.671 trillion.

More importantly, the focus of borrowing was in bill issuance, which accounted for 65% of total bank borrowings in 2024 (!)—a strong indicator of tightening liquidity. (Figure 6, topmost image)

If banks are highly profitable and NPLs are not a major issue, why are they borrowing so aggressively and requiring additional RRR cuts?

The liquidity squeeze cannot be attributed solely to RRR levels alone—otherwise, the 2018–2020 cut from 20% to 12% should have stemmed the tide.

V. Liquidity Drain: Record Investment Risks and Elevated Marked-to-Market Losses

There’s more to consider.

Beyond lending, bank investments—another key bank asset class—also hit a record high in peso terms in 2024.

Yet, despite lower fixed-income rates, banks continued to suffer heavy losses on their investment portfolios: Accumulated investment losses stood at Php 42.4 billion in 2024, after peaking at Php 122.85 billion in 2022. (Figure 6, middle diagram)

Banks have now reported four consecutive years of investment losses.

These losses undoubtedly strain liquidity, but what’s driving them?

The two primary investment categories—Available-for-Sale (AFS) and Held-to-Maturity (HTM) securities—accounted for 40% and 52.6% of total bank investments, respectively.

Accumulated losses likely stem from AFS positions, reflecting volatility in equity, fixed-income, foreign exchange, and other trading activities.

VI. Despite Falling Rates, Bank’s Held-to-Maturity Assets Remain Near Record High

Interestingly, despite easing fixed-income rates, HTM assets remained close to their all-time high at Php 3.95 trillion in December 2024, barely below the December 2023 peak of Php 4.02 trillion.

Since January 2023, HTM holdings have hovered tightly between Php 3.9 trillion and Php 4 trillion.

Government Financing and Liquidity Risks

Yet, this plateau may not persist.

Beyond RRR cuts, the banking system’s Net Claims on Central Government (NCoCG) surged 7% to a new high of Php 5.541 trillion in December 2024.

Per BSP: "Net Claims on CG include domestic securities issued by, and loans extended to, the central government, net of liabilities such as deposits."

While this is often justified under Basel III capital adequacy measures, in reality, it functions as a quasi-quantitative easing (QE) mechanism—banks injecting liquidity into the financial system by financing the government.

The likely impact?

The losses in government securities are categorized as HTMs, effectively locking away liquidity.

BSP led Financial Stability Coordination Council (FSCC) noted in their 2017 Financial Stability Report in 2018 that: "Banks face marked-to-market (MtM) losses from rising interest rates. Higher market rates affect trading since existing holders of tradable securities are taking MtM losses as a result. While some banks have resorted to reclassifying their available-for-sale (AFS) securities into held-to-maturity (HTM), some PHP845.8 billion in AFS (as of end-March 2018) are still subject to MtMlosses. Furthermore, the shift to HTM would take away market liquidity since these securities could no longer be traded prior to their maturity" (bold mine) 

Curiously, discussions of HTM risks vanished from BSP-FSCC Financial Stability Reports after the 2017 and 2018 H1–2019 H1 issues.

VII. Moral Hazard and the "COVID Bailout Playbook"

Although NCoCG has been growing since 2015, banks accelerated their accumulation of government securities as part of the BSP’s 2020 pandemic rescue package. 

Are banks aggressively lending to generate liquidity solely to finance the government? Are they also using government debt to expand the collateral universe for increased lending? Government debt is also used as collateral for interbank loans and repo transactions. 

Have accounting regulations—such as HTM—transformed into a silo that shields Mark-to-Market losses? 

The growth of HTM has aligned with NCoCG. (Figure 6, lowest chart)

While this may satisfy Basel capital adequacy requirements, ironically, it also exposes the banking system to investment concentration risk, sovereign risk, and liquidity risk.

This suggests that reported bank "profits"—likely inflated by subsidies and relief measures—are overshadowed by a toxic mix of trading losses, HTM burdens, and potentially undeclared or hidden NPLs. 

These pressures have likely forced the BSP to aggressively cut RRR rates.

As anticipated, authorities appear poised to replicate the COVID-era bailout playbook, which they view as a success in averting a crisis.

The likely policy trajectory template includes DIRECT BSP infusions via NCoCG, record fiscal deficits, further RRR and policy rate cuts, accelerated bank infusions NCoCG, a higher cap on the USD/PHP exchange rate, and additional subsidies and relief measures for banks.

This is unfolding before us, one step at a time.

VIII. The Bigger Picture: Are We Headed for a Full-Blown Crisis?

Given the moral hazard embedded in this bailout mindset, banks may take on excessive risks, exacerbating "frictions in financial intermediation". Debt will beget more unproductive debt. "Ponzi finance" risks will intensify heightening liquidity constraints that could escalate into a full-blown crisis. 

Further, given the banking system’s fractional reserve operating framework, riskier bank behavior, whetted by reduced cash buffers, heightens the risks of lower consumer confidence in the banking system—which translates to a higher risk of a bank run. 

The Philippine Deposit Insurance Corporation (PDIC) reportedly has funds to cover 18.5% of insured deposits, or P3.53 trillion, as of 2023. 

So, with the RRR cuts, is the BSP gambling with this?

IX. Conclusion: RRR Cuts a High-Risk Strategy?

BSP’s statistics cannot be fully relied upon to assess the true health of the banking system.

1. The decline in non-performing loans (NPLs) is inconsistent with slowing economic growth and the deflationary spiral in the real estate sector. Likewise, falling NPLs contradict the ongoing liquidity pressures faced by banks.

2. Evidence of these liquidity strains is clear: bank borrowings have surged to record levels, with bill issuances dominating the market. The BSP’s RRR cuts only reinforce the mounting liquidity constraints. 

3. Beyond lending, banks have turned to investments to strengthen their balance sheets—including supporting the Philippine Stock Exchange (PSE), even as asset prices have become increasingly misaligned with corporate earnings.

4. In a bid to further boost systemic liquidity, implied quantitative easing (QE) spiked to an all-time high in December, which will likely translate into a higher volume of Held-to-Maturity (HTM) assets.

Through aggressive RRR cuts, is the BSP taking a high-risk approach merely to uphold its statistical narrative?