Questions and Answers Related to Year 2000 Contingency Measures for the Banking Industry

December 28, 1999 BSP CIRCULAR LETTER QUESTIONS AND ANSWERS RELATED TO YEAR 2000 CONTINGENCY MEASURES FOR THE BANKING INDUSTRY For the information and guidance of all banks, we issue the attached clarifications related to the Year 2000 Contingency Measures for the Banking Industry. LibLex (SGD.) RAFAEL B. BUENAVENTURA Governor QUESTIONS AND ANSWERS RELATED TO YEAR 2000 CONTINGENCY MEASURES FOR THE BANKING INDUSTRY I. Circular letter to all banks on Year 2000 Contingency Measures for the Banking Industry dated December 2, 1999 Section B . Banking Hours during the Contingency Period 1. What services shall BSP provide the holidays (Dec. 30, 31, Jan. 1) Answer : BSP shall be open during the holidays to: a. service cash withdrawals from banks b. open the RP window c. service credit availments of the Y2K Loan Facility d. settle the Returned COCI AM clearing on December 30 e. provide updated electronic and hardcopy demand deposit ledgers 2. Will banks who decide to open during non-working days be required to service check deposits/withdrawals? Answer : Banks are encouraged to open during the holidays to service deposit withdrawals of their clients. Each bank has the option as to how many times they will open during the holidays and what services to offer to their clients. 3. If so, will check deposits/cash withdrawals be credited/debited on the same day? Answer : In house checks and other checks encashed by drawee banks and cash withdrawals shall be posted on same day. 4. Will there be check clearing during these days? Answer : There will be clearing only on regular working days. In addition, the AM Returned COCI clearing shall be conducted on December 30, 1999 for value December 29, 1999. Therefore, checks received for deposit from December 30, 1999 to January 2, 2000 shall be presented for clearing on January 3, 2000. Section H . Interbank Call Loan Transactions (IBCL) MIPS 1. What will be the value date of IBCL transactions done on December 30? (Dec 29-Jan 3, or Dec 29 to Dec 30 )? Answer : IBCL transactions done on December 30 shall be for value December 29. Closing transactions for value December 29 shall be inputted in the MIPS on December 30 as well as initiating transactions for value December 29 to close on January 3, 2000. There will be no overnight transactions from December 30 to January 3, 2000. 2. If the value date will be Dec 29 to 30, how will banks lend/borrow value Dec 30 to Jan 3? Or will reserve compliance be suspended from Dec 30 to Jan 2? Answer : Interbank lending/borrowing transactions during the crossover period shall be treated as follows: Transaction Processing Lend/Borrow Value Date Maturity Date Tenor Mode Date Term IBCL-MIPS December 30 December 29 January 3, 2000 or later Term Manual-use form in Dec January 3, 2 Circular Letter 1/ December 30 December 30 2000 or later Term Manual-use form in Dec January 3, 2 Circular Letter 1/ December 31 December 31 2000 or later Term Manual-use form in Dec January 3, 2 Circular Letter 1/ January 1 January 1 2000 or later 1/ Including BTR requirements BSP Circular Letter dated December 16, 1999 states the guidelines for reserve compliance on interbank loans. ". . . the Monetary Board, in its Resolution No. 1631 dated November 11, 1999, decided to lower the reserve requirement on interbank loans from one percent to zero percent effective December 17, 1999, provided, however, that for prudential reasons, only interbank borrowings evidenced by interbank advice or repayment transfer tickets and settled through the respective demand deposit of banks or non-banks with quasi-banking functions with the BSP should be eligible to the zero level of reserve requirement." cdlex Reserve compliance for other liabilities subject to reserves will not be suspended from December 30, 1999 to January 2, 2000. Banks that decide to open on December 30, 31, 1999 and January 2, 2000 shall disclose actual levels of deposit liabilities and cash position for these dates in the corresponding Consolidated Daily Report of Condition (CDRC) to be submitted to BSP. Banks that transact business other than ATM operations shall be considered open for purposes of reserve compliance. In the case of banks that opt not to open, their reserve position as of the last banking day shall be carried forward to the next banking day in accordance with existing practice. 3. If reserve compliance will be suspended from Dec 30 to Jan 2, will interest be paid on reserve assets for that period? Will banks pay interest on deposits for the same period. Answer : Since reserve compliance will not be suspended it is only fair that reserve assets are compensated. Banks are likewise expected to pay the interest on deposits. II. Circular Letter from Deputy Governor Alberto Reyes addressed to Dr . Mapa of the BAP dated November 23, 1999 . A. Borrowing from the BSP via RP Window 1. Will a borrowing limit be imposed? If so, what will be the limit? Answer : Borrowing limit will be based on each bank's amount of collateral. 2. Will there be a tiering of RP rates? Answer : The first P200 million will be based on the posted rate. There will be an additional 50 basis point for every succeeding P200 million. 3. How many times can banks borrow from the RP window within the same day? Answer : Only once. 4. Will the RP window be back-valued or will it be the same day value? Answer : Please refer to the following table: Transaction Processing Lend/Borrow Value Date Maturity Date Tenor Mode Date Manual-Debit/ January 3, 2000 Term Credit Authority; December 30 December 29 or later Confirmation Letter 1/ Manual-Debit/ January 3, 2000 Term Credit Authority; December 31 December 30 or later Confirmation Letter 1/ Manual-Debit/ January 3, 2000 Term Credit Authority; December 31 or later December 31 Confirmation Letter 1/ Manual-Debit/ January 3, 2000 Term Credit Authority; January 1 January 1 or later Confirmation Letter 1/ 1/ Including BTR requirements 5. What RP tenors will be available? LexLib Answer : Available RP/RRP tenors are overnight on December 30 only for value December 29; 5 days, 2 weeks and 1 month for December 30, 31 and January 1 on same day value. B. Reduction of Reserves 1. Since the reserve requirement will be effectively reduced "through the release by the Bangko Sentral ng Pilipinas (BSP) to the banks of the 25 percent of regular reserves required deposited with the BSP and the waiver of the penalty on non-compliance with the three percent liquidity reserves:", does this mean that banks can opt not to comply with the 25% minimum DDA balance such that the effective reserve requirement will be 6.75% (9.0% x 75%). Answer : The statutory reserve requirement is not being changed. Only the liquidity reserve requirement will be effectively suspended thru waiver of penalty. Moreover, the 25%-75% component of the statutory reserve requirement may be altered. The banks can opt to go below their 25% CB balance as long as the difference will be applied to the Cash in Vault (CIV). 2. Since liquidity reserves (reserve eligible Government Securities under Circular 10 or "Circular 10" Securities) will be effectively "freed up", can these be used as collateral for borrowing, via the RP window? Answer : Yes, these can be used as collateral for borrowing via the RP window. 3. If "Circular 10" Securities will be used as collateral for borrowing from the BSP via the RP window, will these securities lose their reserve eligibility when the RP matures? Or will their non-eligibility be in-force only while the RP is outstanding? Answer : "Circular 10" securities used as collateral for borrowing from the BSP via the RP window will lose their reserve eligibility when the RP matures. The said securities will lose their reserve eligibility features once sold outright to parties other than the BSP. 4. Can banks pre-terminate their RRP placements during the crossover period? Answer : Yes, banks can pre-terminate their RRP placements during the crossover period. LibLex 5. Will there be penalties imposed when pre-terminating SDA placements? If so, how much would this be? Answer : Penalties will not be imposed on pre-terminated RRP and SDA provided they will not lend to other banks value same day. C. Lengthening the period to comply with the reserve requirement to three weeks (Dec 17-Jan 6). 1. If an institution becomes reserve deficient during this three-week period, is this institution automatically considered as having "chronic deficiency"? Answer : The three-week period from December 17, 1999 to January 6, 2000 shall be considered as one reserve week. The offsetting privilege is relaxed since the ceiling on number of days deficient during the extended reserve week is waived for as long as the accumulated position is not deficient at the end of the period (January 6, 2000). Further, if an institution becomes reserve deficient during this period, this institution shall not be considered as automatically having a chronic deficiency. prcd However, if an institution is deficient at the end of the period, it shall be considered in abuse of the offsetting privilege or in chronic deficiency if, on either the immediately preceding week (December 10-16, 1999) or the immediately succeeding reserve week (January 7-13, 2000), it exceeded the number of allowable days in deficit (abuse) or it is deficient at the end of these periods (chronic). Moreover, notwithstanding the temporarily relaxed reserve rules, it is further understood that, for purposes of monitoring compliance with reserve requirements, banks shall continue to submit to BSP the regular weekly report every 3rd banking day following the end of the normal reserve week (December 28, January 4 and January 11). D. Grant of Emergency Loans 1. Can the deadline for the filing of applications for the emergency loans facility (fast track availment) be extended further? Answer : BSP is still accepting applications for emergency year 2000 loan facility. However, priority in processing is subject to first come, first served basis, reckoned from date of completion of all required documents. prcd E. Others 1. Granting of emergency loans are based on total unimpaired capital of the borrowing institution per BSP's capitalization requirements. Will these capitalization requirements be relaxed? Answer : BSP relaxed the eligibility requirements for accessing the emergency year 2000 loan facility. Banks with capital below the prescribed level but whose capital-to-risk assets ratio meets the 10% statutory minimum may be allowed access. 2. Will borrowing via the RRP window require documentation per ROSS guidelines or will it follow MIPS documentation? Answer : Borrowing via the RRP window will follow MIPS documentation. For overnight transactions, the banks are required to submit a contract of pledge and declaration of pledge. For term RP transactions, RRP agreement will have to be submitted aside from the contract of pledge and declaration of pledge, notice of release of securities, confirmation from CEDEL that US-denominated securities had been credited to BSP's account.. cdll 3. US Dollar denominated bonds can be used as collateral for borrowing via the RRP window. However, this will reduce asset cover in the FCDU books. Will the asset cover requirement be relaxed? Answer : US Dollar denominated bonds can be used as collateral for borrowing via the RRP window. However, the asset cover requirement will not be relaxed. Banks will have to submit a confirmation from Cedel that they have these securities and the same are lodged into their account. The banks have to transfer these securities to the BSP once these are used as collateral. 4. Banks were grouped into clusters. What are the duties and functions of cluster members? Answer : The banks were grouped into clusters for internal monitoring of the BSP. 5. It was mentioned in the December 8 meeting that banks can be eligible to borrow under the BSP's liquidity facility and lend to the market at the same time as long as these banks are not net lenders to the market. Can this "net lender rule" be explained more thoroughly. Answer : Borrowing banks should not be net lenders in the inter-bank market nor act as conduit bank for another borrowing bank. F. Final confirmation of following items: 1. Maximum overbought positions of banks cannot be compromised; i.e., must be fully complied with to access the BSP's RP window. Answer : BSP confirmed that the maximum overbought positions of the banks must be fully complied to access its RP window. 2. Special Deposit Accounts may be preterminated to service liquidity needs. Answer : BSP confirmed that SDAs may be preterminated to service liquidity needs. 3. Last auction for 1999 will be December 20 for TBills and Dec 21 for TBonds, for settlement December 22 and 23 respectively. llcd Answer : BSP confirmed the above dates. 4. Request of the TOAP to relax the reserve compliance Answer : There is no intention to relax reserve compliance since the situation is not considered analogous to deposits that may be subject to panic. 5. Peso Dollar swap with BSP to service liquidity needs of the banks (Banks with excess US dollar positions) Answer : No 6. Eligibility of dollar deposits as collaterals for borrowings Answer : Dollar deposits with BSP are included among the eligible collaterals for emergency year 200 loan facility.