MANILA, October 19, 2008 (STAR) By Des Ferriols - The Bangko Sentral ng Pilipinas (BSP) is studying its options on a new dollar facility for banks that need to borrow in dollars, including how it could be used to determine if this window could be made permanent.

As the facility becomes available to banks, BSP Governor Amando M. Tetangco Jr. said the Monetary Board would watch how it would be received and whether it would remain open once the financial crisis blows over.

Tetangco insisted there was no serious tightness in dollar supply or liquidity in general but stressed monetary officials wanted to provide a standby facility to ease apprehensions.

“These measures would be in place as long as necessary,” he said. “Although we still have to see whether banks would even need it at all. Then we will see.”

The MB approved the request of the banking industry for a dollar-denominated repurchase facility that would allow them to borrow dollars from the BSP.

According to Tetangco, these short-term dollar loans would be primarily for liquidity assistance only and would be fully collateralized with dollar-denominated government bonds of the Republic of the Philippines, known as dollar ROPs.

He said this facility should ease apprehensions that banks would not have access to foreign exchange if they need it.

Under normal circumstances, banks just buy dollars either from the currency market or directly from the BSP. But if they had no readily available cash, the dollar repo facility would allow them to borrow dollars from the BSP, using dollar ROPs as the underlying collateral.

Tetangco said the MB also approved the decision of the BSP to allow banks to tap its existing peso-denominated repo facility with dollar ROPs as underlying collateral.

Under existing rules, the BSP’s regular repo facilities require peso-denominated government securities as collateral but banks could now use dollar ROPs to obtain short-term peso loans.

However, these short-term loans from the BSP would be more expensive because the MB also approved revisions in the valuation of these collateral securities.

Tetangco explained that the “enhanced valuation”, in effect, would apply a haircut on the value of the instruments to make them more market risk-sensitive.

He said the same valuation would apply to both the dollar and peso repo loans which would factor increasing market risk for longer-tenor instruments.

“In effect, the longer the tenor of the loan, the longer the tenor of the underlying ROP collateral and the bigger the haircut,” said BSP Deputy Governor Nestor Espenilla. “We are essentially factoring in the uncertainty in the market over a longer period of time. If the loans are short, overnight loans, then that would not be an issue.”

The BSP has been insisting that while there was some tightness in dollar liquidity, the situation was not even close to the seriousness of the crunch being experienced by the US and other markets directly hit by the crisis.

“But it is good to have something ready if the need should arise,” he said. “I’ll have to see if the banks actually need it in the first place.”

Tetangco also reminded banks that the BSP has a standing facility for dollar deposits which allows banks to make dollar placements if they would rather keep their foreign exchange rather than dip them in the volatile offshore markets.

“That dollar deposit facility is there, we’ve had it all this time,” he said. “Just to remind everyone it’s there too.”

But Tetangco said, the BSP is already seeing some easing in the swap market and should banks need the liquidity in case it seizes up, the facility is standing by.

As major central banks around the world released dollars into their system to ease shortages, the BSP said early on that there was “some tightness” in the Philippine market but no dollar shortage.

Before the US Congress started discussing its bailout package, the foreign exchange and the swap markets were experiencing tight dollar supply but not to the extent seen in other markets.

But Tetangco said this was understandable, as both domestic banks and branches of foreign banks—likely under instructions from their head offices—re-evaluate their credit standards.

Tetangco said banks were watching their dollar positions, considering that the root of the financial market turmoil is the United States. He said this was causing some tightness in supply but to alarming levels.

Tetangco declined to say how much liquidity the BSP has so far injected into the system but he said the central bank “continues to be in both the spot and swap FX markets, as part of our normal operations to help smoothen volatilities in the exchange rate.”

Chief News Editor: Sol Jose Vanzi

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