The Monetary Board in its meeting today discussed with concern developments in the foreign exchange market that have led to excessive volatility in the exchange rate. Following these discussions, the Monetary Board decided to impose appropriate sanctions against banks found violating BSP foreign exchange regulations. Such violations refer in particular to inaccurate reporting by a bank of its foreign exchange position and undocumented sales of foreign exchange. BSP examiners have found that some banks may have violated certain FX rules and these banks have been required to explain to the BSP within 48 hours why they should not be sanctioned.
The Monetary Board instructed the Supervision and Examination Sector of the BSP to heighten its vigilance in monitoring the foreign exchange position of banks, keeping an eye on possible temporary parking by banks of their foreign exchange assets in other accounts to circumvent FX rules. The Monetary Board views this as a serious violation that is inimical to the national interest particularly at this time.
To curb speculative demand for foreign exchange, the Monetary Board also approved two measures: a) limiting the tenor of forward contracts, i.e., outright forward and forward leg of swap to cover long-term foreign currency requirements, to a maximum of 6 months, and b) reducing the overbought foreign exchange position of banks to 2 1/2% of unimpaired capital or US$5 million, whichever is lower. These measures shall take effect immediately.
In a separate announcement made after its monthly interest rate review, the Monetary Board expressed concern about recent exchange rate movements and said it was prepared to resort to monetary adjustment should the depreciation of the peso threaten the inflation target.