Costa Rica: High reserve requirements would raise credit costs

Raising the minimum legal reserve requirements for commercial banks and financiers could translate into an increase in interest rates for customers.

Monday, April 21, 2008

The increase in reserve requirements is being considered in an effort to capitalize the Central Bank and give it more power to control inflation. The Executive Branch has sent a bill that would have this effect to the Legislative Assembly.
This initiative would not necessarily work for foreign-owned banks and might decrease their reliability, analysts warn.
The measure is seen as a defence for controlling liquidity for the Central Bank where it believes the limitations are concentrated, mainly in the financial operations of offshore banks.
Analysts worry that a move to increase reserve requirements to 25% from 15% would raise interest rates to borrowers, while lowering rates to savers, but admit that it would help to achieve the Central Bank's goal of lowering inflation.

More on this topic

Nicaragua: Bank Reserves Cut

April 2011

Experts say that it will take time for private banks to lower interest rates.

With the aim of giving Nicaraguan banks greater flexibility and enabling them to create more liquidity, the country's central bank has decided to reduce the mandatory reserves a bank must have.

Banking Legal Reserve Requirements Reduced in Nicaragua

February 2011

The Central Bank announced that the daily legal reserve requirement will now be 12%, while it now stands at 16.25% weekly.

According to Antenor Rosales, president of the Bank, financial institutions must maintain a minimum reserve of 15% biweekly and a daily minimum reserve of 12%.

Costa Rica: Changes in the Banking Reserves Will Restrict Credit

June 2009

According to Banks, the change in the calculation of the reserve will increase the costs of the financial intermediaries and will reduce the supply of credit.

The Central Bank of Costa Rica modified the methodology used to calculate reserves, implicating that, beginning next July 1st, Banks must have deposited in the Central Bank, at the end of each day, deposits of no less than 97.5% of the minimum legal reserves for the previous month. At the moment this calculation is done based on deposits from 5 days beforehand and it is at 90%.

Capitalization of Costa Rica's Central Bank would cause distortions

April 2008

The Law of Capitalization of the Central Bank is being scrutinized by bankers and analysts, many of whom question the benefits attributed to it as an inflation-fighting mechanism.

From the Central Bank's point of view there is evidence that inflation is caused by three main structural factors: Central Bank losses, the exchange system, and distortions that impede the control of liquidity in Costa Rica.

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