The Philippine Financial System

What is a Financial System? The BSP Governor:

 A financial system is the system that covers  Nestor Aldave Espenilla Jr.
financial transactions and the exchange of funds -(born 12 October 1958) is the fourth and current
between investors, lender and borrowers. Governor of the Bangko Sentral ng Pilipinas. He was
 The term financial system is a term used in appointed by Philippine President Rodrigo Duterte
finance to describe the system that allows on 8 May 2017 and assumed office on 3 July 2017.
money to go between savers and borrowers.
He previously served as the bank's deputy
The Six Elements of Financial System
governor under his predecessor Amando M.
1. Financial Institutions
Tetangco Jr.
 These are organizations that offer
Objectives:
financial services.
 The BSP’s primary objective is to maintain price
2. Financial Market
stability conducive to a balanced and
 The system that allows people to buy
sustainable economic growth.
and sell goods and services to each
 The BSP also aims to promote and preserve
other.
monetary stability and the convertibility of the
3. Financial Instruments
national currency.
 These are assets belonging to a person
Responsibilities:
or company. This can include cash,
 The BSP provides policy directions in the areas of
bonds, or other assets; such as property
money, banking and credit. It supervises
or items of value.
operations of banks and exercises regulatory
4. Financial Services
powers over non-bank financial institutions with
 These are offered by financial
quasi-banking functions.
institutions. These include such things
 Liquidity management
as banking, insurance policies, loans and
 by formulating and implementing
mortgages, as well as pensions.
monetary policy aimed at influencing
5. Financial Practice
money supply, consistent with its
 A sort of guideline around how the
primary objective to maintain price
financial institutions should operate
stability.
their services.
 Currency issue
6. Financial Transactions
 The BSP has the exclusive power to
 These are the actual exchange of cash
issue the national currency. All notes
or assets for goods or services – paying
and coins issued by the BSP are fully
for a new car, or a loan, for instance.
guaranteed by the Government and are
 These six elements work together to create a
considered legal tender for all private
healthy financial system, which in turn builds a
and public debts.
strong economy. No one element is more
 Lender of last resort
important than the others – they simply
 by extending discounts, loans and
represent different mechanisms within the
advances to banking institutions for
system that allows it to function.
liquidity purposes.
 Financial supervision
The Bangko Sentral ng Pilipinas
 by supervising banks and exercising
 The Bangko Sentral ng Pilipinas
regulatory powers over non-bank
• is the central bank of the Philippines.
institutions performing quasi-banking
• It was established on July 3, 1993,
functions.
pursuant to the provision of Republic
 Management of foreign currency reserves
Act 7653 or the New Central Bank Act of
 by maintaining sufficient international
1993.
reserves to meet any foreseeable net
 The Bank of All Banks
demands for foreign currencies in order
to preserve the international stability
and convertibility of the Philippine peso.
 Determination of exchange rate policy
 by determining the exchange rate policy
of the Philippines. Currently, the BSP
ensures orderly conditions in the
market.
 Being the banker, financial advisor and official
depository of the Government, its political
subdivisions and instrumentalities and GOCCs.
 It’s operations differ from those of ordinary
banking institutions
 Does not accept deposits from the
public
 Does not grant loans directly to
individuals
 Is designed mainly to serve the banking
institutions and the government hence, it is
called banker’s bank
Characteristics of Central Banks
+ Promote the common good, i.e. the general
welfare of the public
+ The profit motive is only secondary in the
operations of central banks
+ It is undesirable for central banks to deal
directly with the public
Functions of the BSP
+ It is a bank of issue (Currency issue)
+ It is the government’s banker, agent and
financial adviser
+ It is the custodian of cash reserves of banks
(Financial supervision)
+ It is the custodian of the nation’s reserves of
international currency (Management of Foreign
Currency Reserves)
+ It is a lender of last resort (Lender of Last
Resort)
+ It is a bank of central clearance and settlement
+ It controls credit (Liquidity Management)
+ BSP has the complete monopoly of note issue
+ Main reasons for granting the BSP the sole
power to issue notes:
+ To ensure uniformity in money
+ To effect government supervision over
money supply
+ to provide a source of income or reduce
printing expenses on the part of the
government
BSP is the government’s banker, agent & Adviser
+ As a banker – the BSP conducts the banking
accounts of government agencies.
+ As an agent – the BSP performs a variety of
financial services for the government. (lends money,
buys and sells stocks, manages debts)
+ As an adviser – the BSP informs the top officials
like the President and Finance Secretary about
the financial conditions of the economy.
+ A legal reserve requirement is imposed on the
deposit liabilities of banks.
BSP as the custodian of cash reserves of banks
+ The reason for such reserve requirements is to
control the volume of money generated by the
credit operations of the banking system.
BSP is a lender of last resort
+ BSP may lend only to a distressed bank if the
latter has exhausted all available sources and
means of solving its financial problems.
+ Thus, its last resort is to borrow funds from the
central bank.
BSP is a bank of central clearance and settlement
+ Settlements among banks are easier, faster and
more convenient if these are done by a central
bank.
+ Philippine Clearing House Corporation – a
private firm located at the ground floor of the
BSP. Processing, sorting and clearing of checks
are computerized.
+ Check clearing is the process of moving money
to complete a payment made by check. The
recipient submits the check to their bank, and
the bank collects funds from the check writer's
bank.
Bsp controls credit
+ This is a major function of any central bank.
+ BSP uses monetary tools in order to regulate
credit to be able to maintain price/monetary
stability which is very vital in the growth of the
whole economy.
Financial Institutions
Banking Institutions
The Financial System
• A network of various institutions which
generates, circulates, and controls money and
credit.
• Provides facilities for the transfer of purchasing
power from individual to individual and from
firm to firm both within the country and
internationally.
 primarily business loans, such as construction loans or
Banking Institutions loans to finance business purchases.
• Private BI – A savings and loan is focused more on
– Commercial Banks lending to individuals for home
– Thrift Banks purchases.
– Rural Banks • Rural bank
– Cooperative Banks – Is established to provide adequate
• Government BI credit facilities to small farmers,
– DBP -AAIIB businessmen and cottage industries in
– LBP -PVB the rural areas.
Non-Bank Financial Institutions • Cooperative banks
• Private NBFI – Are banks established to assist the
– Investment Houses/Companies various cooperatives by lending those
– Financing Companies funds at reasonable interest rates.
– Securities Dealers/Brokers – A bank that holds deposits, makes loans
– Pawnshops and provides other financial services to
– Private Insurance Companies cooperatives and member-owned
– Lending Investors organizations.
• Government NBFI Specialized Government Banking Institutions
– SSS • Development Bank of the Philippines
– GSIS – Was created by the government with
– PAG-IBIG Fund the specific function of providing long-
• Bank term credit to the agricultural,
– Is an entity duly authorized by the commercial and industrial sectors to
Monetary Board of the BSP to engage finance private development projects
regularly in the lending of funds • Land Bank of the Philippines
obtained from the public through the – Provides financial support in the
receipt of deposits of any kind. implementation of the Comprehensive
Agrarian Reform Program (CARP) of the
Functions of Banks government
– Accepting deposits • Al-Amanah Islamic Investment Bank
– Lending out funds – It was especially designed to promote
Private Banks and accelerate the socio-economic
Commercial Bank development of the
• Universal Bank or Expanded Commercial Bank
– Any commercial bank which performs Autonomous Region of Muslim Mindanao by
the investment house function performing banking financing and investment
operations based on the Islamic concept of banking.
• Regular or Ordinary Commercial Bank
– It is a financial institution whose • Philippine Veterans Bank
primary function is to accept deposits – Was established as a commercial bank;
and grant loans to its clients. it specifically provides an opportunity
• Thrift Bank for veterans of the AFP to work in the
– It is a financial institution that have a field of banking and finance (as
primary focus on taking deposits and depositors, borrowers, stockholders, or
originating home mortgages. as officers)
• Thrift bank vs. Commercial bank Financial Institutions
– Both commercial banks and savings and Non-Bank Financial Institution
loans accept deposits, which they in -A non-bank financial institution (NBFI) is a financial
turn lend out to both individuals and institution that does not have a full banking license or is
businesses. not supervised by a national or
– Commercial bank loans are international banking regulatory agency.
 -This is a collection of investment banks, insurers
and other non-bank financial institutions that
replicate some of the activities of regulated banks,
but do not operate in the same regulatory
environment.
Private banks NBFI
 Investment House
 Is any enterprise which engages in the
underwriting of securities of other
corporations
 Investment Companies
 Are companies that raise funds for
capital by selling their own securities to
private investors
 Finance Companies
 Are firms set up primarily to help
distributors of motor vehicles and
household appliances push their
installment sales
 Pawnshops
 Refer to a person or entity engaged in
the business of lending money on
security of personal property such as
jewelry, appliances, even cellular
phones
 Securities Dealer
 Is one who buys and sells securities of
another for the purpose of reselling or
offering them for sale to the public for
profit
 Securities Broker
 Is a person engaged in the business of
effecting transactions in securities for
the account of others
 Lending Investors
 Are persons who make the practice of
lending money using his own capital for
the purpose of extending all types of
loans generally short-term and
oftentimes without collateral
 Private Insurance Company
 Are corporations engaged in the
business of investment and provide
loans to their policy holders
Government NBFI
 Social Security System (SSS)
• Provides retirement benefits, funeral
benefits, housing loans, personal loans and
calamity loans to employees who are
working in private companies and offices.
Government Service Insurance System (GSIS)
-Provides retirement benefits, housing loans, personal
loans, emergency and calamity loans to government
employees
 PAG-IBIG Fund
 Provides housing loans to both
government and private employees
Financial Instruments
They can be:
 Monetary contracts between parties
 Cash
 a contractual right to deliver or receive
cash or another type of financial
instrument, or
 evidence of one’s ownership of an
entity.
 Financial Asset is a tangible liquid asset whose
value is derived from a contractual claim. These
assets may be traded on financial markets.
 Examples: Notes Receivable, Loans Receivable,
Investment in Stocks, Investment in Bonds
 Financial Liability is a contractual obligation to
deliver cash or other financial instrument to
another entity or to exchange financial
instruments with another entity under
conditions that are potentially unfavorable.
 Examples: Notes Payable, Loans Payable, Bonds
Payable
Suppliers of Funds & Demanders of Funds
• Suppliers of Funds are the holders of Financial
Assets. (ig. Individuals)
• Demanders of Funds/Users of Funds are the
makers of Financial Liabilities and Equity
Instruments. (ig. Businesses & Governments)
• When companies are in need of funding, they
either sell debt securities (or bonds) or issue
equity instruments. The proceeds from the sale
of those instruments will be used to finance the
company’s plans.
• On the other hand, investors buy debt securities
or equity instruments in hopes of receiving
returns through interest, dividend income, or
appreciation in the financial asset’s price
Security
• A Security is an exchangeable, negotiable
financial instrument that holds some type of
monetary value.
• It represents an ownership position in a
publicly-traded corporation (via stock), or a
creditor relationship with a governmental body
or a corporation (represented by owning that
entity’s bond).
Debt Securities/Instruments
• Debt Instrument is a paper or electronic
obligation that enables the issuing party to raise
funds by promising to repay a lender in
accordance with terms of a contract.
• It represents money that is borrowed and must
be repaid on the maturity date (termination or
due date)
• Types of debt instruments include notes, bonds,
mortgages, leases or other agreements
between a lender and a borrower.
• Debt securities generally entitle their holder to
the regular payment of interest and repayment
of principal amount (regardless of the issuer’s
performance).
• These securities are typically issued for a fixed
term.
• They can be secured (backed by collateral) or
unsecured.
• Collateral – property or other asset that is
offered by borrowers as a way for a lender to
secure the loan.
Examples of Debt Securities/Instruments
• Treasury Bonds and Treasury Bills (T-Bonds/T-
Bills) are issued by the Philippine government
through its Bureau of Treasury.
• These bonds and bills have usually low interest
rates and have very low risk of default since the
government assures that these will be paid.
• Corporate Bonds are issued by publicly listed
companies. These bonds usually have higher
interest rates than Treasury bonds.
Equity Securities/Instruments
• Equity Instruments refer to documents which
serve as a legally applicable evidence of the
ownership right in a firm.
• It is not necessary that the issued equity must
return a dividend because it is based on profits
and the terms of business.
• Returns from equity instruments come from
either dividends or stock price appreciation.
• Capital Stock is the total amount of shares a
company is authorized to issue. It is a
combination of a company’s common stock and
preferred stock.
Examples Equity Securities/Instruments
• Preferred Stock (Preference Shares) has priority
over a common stock in terms of claims over
the assets of a company.
Holders of Common Stock (Ordinary Shares) can be
considered as the real owners of the company.
The shareholders have the privilege of being entitled
to co-ownership.
Capital can be obtained by issuing stock (equity) or
debt securities.
Financial Market
• Financial Markets are organized forums in
which the suppliers and users of various types
of funds can make transactions directly
Primary vs. Secondary Markets
• Primary Market – Financial market in which
securities are initially issued; the only market in
which the issuer is directly involved in the
transaction.
• To raise money, users of funds will go to a
primary market to issue new securities (either
debt or equity) through a public offering or a
private placement.
The sale of new securities to the general public is
referred to as a public offering and the first offering of
these securities is called an initial public offering
• The sale of new securities to one investor or a
group of investors (institutional investors) is
referred to as a private placement.
• Secondary Market – Financial market in which
pre-owned securities (those that are not new
issues) are traded.
• Suppliers of funds or the holders of the
securities may decide to sell the securities that
have been previously purchased.
• The sale of previously owned securities takes
place in secondary markets.
• The Philippine Stock Exchange (PSE) is both a
primary and secondary market.
Money Market vs. Capital Market
-Money Markets are a venue wherein securities with
short-term maturities (1 year or less) are sold.
-They are created because some individuals,
businesses, governments, and financial institutions
have temporarily idle funds that they wish to invest
in a relatively safe, interest-bearing assets and
sometimes they find themselves in need of seasonal
or temporary financing.
On the other hand, securities with long-term maturities
(more than 5 years) are sold in Capital Markets.
• The key capital market securities are bonds
(long-term debt) and both common stock and
preferred stock (equity).