The Board of Directors of the Central Bank of Chile has agreed to temporarily amend the rules set out in Chapter 3.1 of the Compendium of Monetary and Financial Standards with regard to minimum reserves to be maintained by banking companies and savings and credit cooperatives©. The following example shows an idea of how the legal reserve is applied: a commercial bank`s profits are derived from the return it makes on the deposits it receives. That is, when a bank receives 100 pesos in deposits, it pays a passive interest rate of 3% per year to the depositor for them and lends this 100 pesos to the public, which charges them an annual active interest rate of 18%. This amendment, which will apply from that date until September 8, 2020, will come into effect for the current monthly reserve period, which began on March 9. The daily and fourteenth minimum reserves are made up of cash deposited in the current accounts of the NCB`s banks and financial undertakings. In the event of non-compliance with the obligation to build up daily reserves for more than two days out of fourteen, whether continuous or discontinuous, a fine shall be imposed on the financial institution concerned, from the third daily deviation observed to the following daily deviations. Failure to comply with the fourteenth reserve requirement shall result in a fine and, in addition, banking supervision may prohibit the bank or financial company from making new loans and investments for the duration of the fourteenth reserve deficit. For example, at the beginning of the arrival of the coronavirus in our country (in March of this year), the currency unit ordered the release of resources from the legal reserve in local currency for an amount of 30,133.4 million. RD, which corresponds to 2.7% of the required coefficient, and in foreign currency for an amount of USD 222.4 million, which corresponds to 2.5%. as a way to channel new loans to various productive sectors and households affected by the crisis caused by the pandemic, thus promoting consumption and investment. Therefore, when monetary authorities increase the legal reserve, financial institutions complain because they see that their level of profitability is falling or, as they have just announced, decide to raise interest rates and maintain their profit levels. The legal reserve is not only a support for the support of the sector, i.e.
the solvency of banks, but also a monetary instrument to limit or increase working capital. If the percentage of the legal reserve is reduced, the money supply increases, and if it increases, then the money supply is reduced. This reserve is called a legal reserve and applies to deposits in domestic and foreign currency. Until last week, the legal reserve for several banks was 12.3% and was increased by the central bank to 14.3% to stop the rise in the dollar exchange rate. In savings banks (AAyP) and savings banks, the reserve requirement increased from 8.1% to 10.1%. Currently, the reserve requirement ratio is 15% fourteen times and 10% per day for liabilities in both currencies. The basis for calculating the minimum reserves of a bank or financial entity to determine its fourteenth minimum reserves and daily minimum reserves (the latter included this week) is the same. The application of the legal obligation to build up reserves is provided for in Article 26(b) of Monetary and Financial Law 183-02. This paragraph states: « Financial intermediaries are subject to the legal reserve, that is: the obligation to hold at the Central Bank or, when the Monetary Council so determines, a percentage of all funds collected by the public in any modality or instrument in national or foreign currency. Now the legal reserve applies to deposits received from banks, and since it is now 14.3%, the example of the bank that receives deposits per 100 pesos must hold 14.30 pesos of the statutory reserve in the central bank. This means that you can only use 85.70 pesos to lend them later and make a profit on the interest rate.
This amendment envisages extending the possibility of establishing minimum reserves in foreign currencies not only with dollars from the United States of America©, but also©with the euro, the Japanese yen and the national currency. The increase in reserve requirements also widens the gap between passive interest rates (which the bank pays to depositors) and the active interest rate (which borrowers pay to the bank), as they can only lend 85.7% of the deposits they receive and have to pay interest on 100% of these deposits. It is necessary to offer a low passive rate and charge high active rates. So the difference between the 3% you pay and the 18% you get could be the gross profit of that bank. Financial intermediaries (several banks, savings and credit associations, development banks, savings and credit unions, and even the Agricultural Bank) are required to maintain in the Central Bank or in another place determined by the Monetary Committee a certain percentage of the amount of deposits accumulated by any modality. The NCB shall not recognise interest or maintenance of value on the amount of the reserve requirement or its surpluses. Article 4 of the Organic Law of the Central Bank of Nicaragua (LOBCN), Law 732, published in La Gaceta, Official Gazette No. Paragraphs 148 and 149 of 5 and 6 August 2010 stipulate that the Central Bank shall determine and implement monetary and exchange rate policy in coordination with the economic policy of the Government in order to contribute to the economic development of the country, mainly accompanying the achievement of its fundamental objective, the stability of the national currency and the normal development of internal and external payments. Article 19 of the same Organic Law, for its part, stipulates as one of the tasks of the Board of Directors of the NCB to establish, amend and regulate statutory reserves. The establishment of legal reserves by the NCB is based on its organic law, which generally describes the basis for its actions in this area; and financial standards, as specific regulations with banks and financial companies.
The mandatory adjustment is measured in two periods: daily and fourteen. The statutory reserve ratio varies depending on the country and the type of intermediary as defined by central banks. Currently, the percentage of minimum reserves for several banks in the Dominican Republic is 10.6% in pesos and 20.0% in dollars.
