National Bank of Cambodia

The main role of reserve requirements is as an instrument of monetary policy. They allow the Central Bank to influence the amount of liquidity in the banking system changes in reserve levels change the banking system’s ability to make loans, reserve requirements also play a limited prudential role as they ensure that commercial banks and possess a minimum of cash in the vaults of the Commercial bank and demand balances deposited at the central bank. A commercial bank remains responsible for the Management of its liquidity to meet the withdrawals made by customers from their accounts. Required reserves are structured in terms of average holdings for the reserve maintenance period. This a verging allows a commercial bank to reduce temporarily its clearing balances with the central bank, always provided the commercial bank increases its clearing balances or designated account balances later in the period so that it meets the reserve requirement by the end of the reserve maintenance period.

Each reserve accounting period is four weeks long. It starts on cover two reserve accounting periods. During the 28 day base period a commercial bank calculates the average amount of reserves that it shall maintain during the 28 day maintenance subject to reserve requirements as the lending bank has already provided reserves on the underlying liabilities. Borrowings from affiliates, head offices, other branches and other banks that are outside Cambodia are subject to reserve requirements.

Using the cash holdings in the base period to establish the reserve requirement for the maintenance period is known as lagged reserve accounting.

The commercial Bank shall complete form 015RR-1 shortly after the end of the base period. The commercial bank shall calculate its reserve requirement by applying the percentage stated in the regulation to the riel deposits (demand (1), time (3), savings (2), and other items [e.g. margins held against letters of credit] (4) foreign currency deposits and borrowing [specified liabilities in foreign currency] (5) on form 015RR-1 that forms part of the regular report. The bank then deducts its daily cash holdings from the percentage of its deposits and other borrowing that appears on the worksheet. The resultant figure becomes the amount that a commercial bank shall maintain during the maintenance period on shows the daily average required balances (on its clearing account and other designated accounts) in a box at the foot of the form. A commercial bank with multiple branches in Cambodia shall use the deposit and other borrowing data for the whole bank (head office and branches). These amounts are added together for each day of the base period and multiplied by the percentage reserve requirement - presently 5% Daily riel cash holdings are then deducted. US$ notes are not regarded as reserve assets for the purposes of this regulation. The daily result is added together and the total required balance is shown in the row marked total. Some commercial banks may find that they have already satisfied their reserve requirements. In this case the total row in the last column on form 015RR-1 will show a minus figure. Form 015EE-1a is a worksheet for the conversion of deposit liabilities and other borrowing from dollars or bath to riel which is the reporting currency. The daily total on form 015RR-1a is transferred to form 015RR-1 column headed (5) Specified liabilities in foreign currencies. Form 015RR-2 is for use during the maintenance period. It is designed to give a commercial bank’s reserve money manager every day, the exact amount of reserves that the commercial bank must hold in its clearing account (and on any designated accounts) on average during the remaining days of any reserve maintenance period. The last column of the form shows this figure. Form 015RR-2b is a conversion worksheet to be used where non interest bearing US$ account with the Central Bank are designated as reserve assets for the purposes of this circular and the regulation on required reserves. The Central Bank recognizes that many depositors have opened foreign currency accounts with the commercial banks in Cambodia. If the commercial banks are required to hold riel reserves against these deposits they will incur an exchange risk. In order to avoid an unnecessary exchange risk, the central bank will exceptionally permit, for the time being, a commercial bank to hold a part of its required reserves in a non interest bearing US$ account with the Central Bank or any US$ denominated accounts with other banks in or outside Cambodia are not considered as a part of a commercial banks reserves for the purposes of the regulation on required reserves, although they may qualify as liquid assets for the purposes of satisfying any liquidity requirement that may be established . The Central Bank expects that depositors will soon choose to open riel and as the rate of inflation slows down. At a suitable future time, and with a reasonable period of notice the Central Bank will require all reserve holdings to be denominated in riel.

As a commercial bank adds each days clearing balance and the balance of any designated account to form 015RR-2 . The Commercial Bank’s reserve money manager will know how much he must keep in the clearing account on average on each of the days of the maintenance period that remain.

If the daily average required balance for the rest of the period is growing the money manager must in crease the balance in the clearing account or the designated accounts. The following options are currently available to a reserve money manager:

a- He must raise enough to cover his commercial bank’s anticipated shortfall for the remainder of the maintenance period:

b- When a commercial bank has a reserve deficiency in any maintenance period the deficit will be cured by the transfer of an amount equal to one tenth (10%) of the deficiency from the commercial bank’s clearing account to a non-interest bearing account in the commercial bank’s name ( required reserve deficiency account ) . The amount transferred will be returned to the clearing account after ten days. Balances on such reserve deficiency accounts are not regarded as reserves during any maintenance period. Reserve deficiency accounts will not be designated by the Central Bank as eligible in any circumstances.

1- Cash holdings in the base period will help to satisfy the reserve requirement in the following maintenance period. Therefor, transferring riel cash to the commercial bank’s clearing account at the Central Bank in maintenance period I will contribute towards meeting the reserve requirement in maintenance period 1, but will reduce the cash holdings that contribute towards meeting reserve requirement in maintenance period 2.

2- A Commercial bank must ensure that it is always has sufficient cash in its tills and vault to service the needs of its customers. It should not reduce its case holdings to very low levels merely to satisfy reserve requirements in one maintenance period.

3- The Central Bank will accept cash dollar deposits to designated foreign currency accounts for the time being. Ultimately the method of designating foreign currency accounts as eligible reserve assets will be phased out at that time banks will be required to sell foreign currency to the Central Bank for riels. The designation will not be phased out, however, until the credit window is open to commercial banks operating in Cambodia.

4- A Bank that suffers reserve deficiencies on several occasions may be subject to penalties, including the levying of interest approximation charges at penal rates whenever the Central Bank has to make mandatory transfers to required reserve deficiency account.

By order of the Governor

National Bank of Cambodia

Bank Supervision and Examination Department

Signed : Mr. Nuon Sam Ean Mr. Chea Sok