The rate of statutory reserves varies depending on the country and the type of intermediary as defined by the central banks. Currently, the percentage of legal reserve requirements for several banks in the Dominican Republic is 10.6% in pesos and 20.0% in dollars. As of June 30, 2019, the central bank`s debt resulting from the issuance of these certificates amounted to DR$644,350 million, which is equivalent to $12,887 million, which is really a gigantic snowball. This is one of the main reasons why the Dominican economy has lost its competitiveness over the past decade, because as a result of these restrictive monetary policy measures by the central bank, our currency has been overvalued against the dollar. That is, it has been artificially estimated, which has led to a significant decline in our export sector and our key sectors that generate foreign exchange, such as free trade areas and tourism. Therefore, if this restrictive monetary policy continues, it is very difficult for these sectors to benefit from these measures in order to release statutory minimum reserves, as their net impact would be null and void for the reasons mentioned above. The resources freed up, which theoretically amount to 15%, remain an absolute marginal number,” explains economist Leonardo Buniak. The Central Bank of the Dominican Republic (BCRD) and the Association of Commercial Banks (ABA) met on Monday to consider the request for the recent release of resources from the legal reserve approved by the Monetary Committee (JM) to provide loans for low-cost housing, as well as to support agricultural producers affected by the floods. For example, at the beginning of the arrival of the coronavirus in our country (in March of this year), the monetary unit ordered the release of the resources of the legal reserve in local currency for an amount of RD30,133.4 million, or 2.7% of the required coefficient, and in foreign currencies for an amount of 222.4 million dollars, or 2.5%. as a means of channelling new credit to various productive sectors and households affected by the crisis caused by the pandemic, thereby stimulating consumption and investment. According to financial analyst Henkel García, “this seems to be the beginning of a gradual reduction.” “It`s time for BCV and the government to expand bank lending a bit.
The legal reserve requirement increases from 93% to 85%. Do inflation expectations make this expansion more real than nominal? Hard to say for sure,” he wrote on Twitter. In April 2020, the institution relaxed the rule, which kept the sector in liquidity difficulty. At that time, resolution 20-03-01, published in Official Gazette No. 41850 on 30 March, created a legal reserve that was increased from 100 per cent to 93 per cent for weekly collection in bolivars and a mandatory reserve of 31 per cent for foreign currency deposits. During the meeting, which took place at the BCRD, the two institutions discussed mechanisms to facilitate loans of 12 billion pesos released for housing construction, the terms of which are: 20-year term, at a rate of up to 9%, which can be revised every four years without exceeding 12% in the specified period. It was pointed out that with the recent amendments to the first resolution of the Monetary Committee of 26. March 2015, which frees up $10,000.0 million to RD$10,000.0 million to finance low-cost housing and make its use more profitable, it is expected that there will be greater fluidity in disbursements in the future.
Thus, the remaining RD$4,400.0 million will be channelled through banks along with the RD$12,000.0 million that was recently released to help more low-cost homebuyers. For BCV-Gob, it was time to expand the bank loan a little. The statutory reserve increases from 93% to 85%. This seems to be the beginning of a gradual reduction. Do inflation expectations make this expansion more real than nominal? Hard to say. They also discussed the credit terms of the pesos of RD$5,066 million. released from the legal reserve for agricultural producers in the 15 provinces that were in a state of emergency due to the rains of recent weeks. For the rating agency Lonardo Buniak, this reduction in reserve requirements, if it seeks to reactivate bank loans, will not succeed and will not revive private consumption. “The most important stimulus for private consumption is consumer credit, which in the past accounted for more than 20% of the bank`s loan portfolio and now accounts for less than 6%; What people are looking for is to expand the limits of credit cards, but this measure will not have that impact on the economic recovery,” he predicts.
Similarly, in the case of microfinance banks, the rule states that those with a minimum intermediation coefficient of 50% must maintain a legal reserve of 40%, which will be in force from 1 March this year. The legal reserve is a regulation imposed by the central banks of the world in which they require that a percentage of public deposits or deposits with commercial banks or financial intermediaries be kept in the central bank as a reserve. The legal reserve is usually made up of cash, which is physically stored in the vault of the central bank. The legal reserve is sometimes used by the central bank as an instrument of monetary policy to influence interest rates and free up resources for commercial banks to increase their lending by lowering the required interest rate. In the Dominican Republic, this new release of the reserve requirement ratio corresponds to 0.5% of the liabilities subject to the legal obligation to build reserves, which would increase several banks from a coefficient of 11.1% to 10.6% and savings and credit associations from 6.9% to 6.4%, according to the statement of the central bank. Similarly, reductions in reserve requirement ratios have an impact on the money supply, as this would free up more resources for the economy and allow for greater circulation of money.