Philippine banks awash in too much cash

The Philippines’ central bank warns that the mountain of cash held by Philippine banks could trigger rampant inflation.

Amando Tetangco Jr., Governor of the Bangko Sentral ng Pilipinas, said the rise in the inflow of foreign portfolio capital and a growth in internal resources might be welcome but carry their fair share of risks.

He said that while rising liquidity in the system makes the local financial sector vibrant, the presence of excess cash might lead to unmanageable inflation. High liquidity might also lead to an increase in demand for various products, thereby fueling faster inflation.

“For us (BSP), there is that added issue of domestic liquidity that is building up and looking for suitable outlets. Some say it is a positive problem that is preferable to the case of liquidity drying up. That may be true, but to central bankers, it is still a concern, positive or otherwise,” Tetangco said.

Economists believe that too much money in financial markets might tempt investors to engage in excessive speculative investments that can destabilize the economy.

Too much money also may cause banks to lend carelessly, even to borrowers who may not be considered credit worthy.

Tetangco said the BSP is prepared to implement more measures to ensure the Philippine financial system will not suffer from the destabilizing effects of growing liquidity.

Among these measures is a rule prohibiting foreign funds from being deposited in the central bank’s special deposit account facility where placements earn interest.