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Compiled 1234 PDF
Compiled 1234 PDF
CHAPTER I
- helps in creating more efficient allocation of
FINANCIAL SYSTEMS AND THE FINANCIAL capital
MARKET - channels or places where funds and financial
instruments are exchanged between willing
Financial System individuals
- channel to transfer excess funds from fund
- Composed of network inter-related systems
providers to fund demanders
of financial markets, intermediaries and
- serves as forum
services.
- Permits an efficient method to move funds Information Symmetry
between entities who have funds and entities
who needs funds - One stakeholder to a transaction holds
- Enhances welfare of individual consumers superior information than the other party.
as they have immediate access to funds
- Normally regulated by CENTRAL BANKS
7 ELEMENTS OF FINANCIAL SYSTEM
Finance
1. Lenders and Borrowers – players; fund
- Key player in the continuity of operations. providers and fund demanders
- Life blood of company respectively
- Application of economic principles to 2. Financial intermediaries – special type of
decision making involving allocation of financial entity that acts as third party to
money under conditions of certainty facilitate the borrowing activity
- Set of arrangements or conventions 3. Financial Instruments – medium of
embracing lending and borrowing of funds exchange of contractual obligations of a
party
3 key areas of studying capital markets 4. Financial Markets
Money Market – cash financial
1. Financial system instruments are exchanged
2. Structure of interest rates Capital Market – derivative
3. Pricing assets financial instruments
5. Regulatory Environment – governance
body to ensure that it complies with the
laws and regulations
6. Money Creation
Direct Financing – borrower-spenders borrow and
7. Price Discovery – process of determining
deal directly with lenders through selling financial
or valuing the financial instrument in the
instruments.
market
Indirect Financing – borrowing activity between
parties still happens indirectly through intervention of
Trading – exchange of financial instruments
a financial intermediary
1. Price Discovery
- price is set at the level wherein buyers are willing to buy and sellers are willing to sell
- determines how the available funds from funds providers are allocated towards the fund demanders
based on the fund demanders’ willingness to accept return required by the fund providers
2. Liquidity –
3. Reduction in Transaction Cost
- Transaction Cost – cost incurred of parties’ transaction to trade a financial instrument
Search Cost – cost incurred to look for financial instruments that can be purchased or sold by a
party
o Explicit Search Cost - advertisements
o Implicit Search Cost – value of time consumed to look for the counterparty for transaction
Information Cost – cost related in evaluating investment characteristics of financial instrument;
Information about profitability, liquidity, stability and market value
1. Broker Market
Brought together by a broker and
trading occurs;
Usually composed if national and
regional securities exchanged.
2. Dealer Market
Not brought directly together by 3 rd
party
Seller sells securities to dealer and
buyer buys from dealers
Dealers earn through spread
between ask price and bid price
Do not have centralized trading floors
compared with changes
Ask Price - lowest price of a security for sale
Bid Price – highest proposed price in order
for investors to buy a security
Individual Banking – focuses on financial Overdraft refers to the deficit in a deposit account
requirements of individuals and included resulting from withdrawing more money than what
services. is deposited in the account.
Institutional Banking – caters to needs of
TAKE NOTE! Section 84 of RA No. 7653
financial and non-financial corporations and
government entities in activities such as - BSP provides fully secured emergency
commercial real estate financing and loans to serve as financial assistance to
leasing. resolve liquidity woes
Global Banking – sector wherein - Only up to the amount needed by the
commercial banks contend with investment bank to resolve liquidity predicament but
banks by offering broad range of service not exceed 50% of its deposits that any
offerings revolving around corporate emergency advance should be
financing; providing financial advice on collaterized by government securities
strategic initiatives such as financing and unencumbered first-class collateral
sources.
Contractual Savings Institutions are financial
BANKS play a significant role in transmitting the intermediaries that obtain funds at periodic intervals
impact of the monetary policy set by a country’s based on an existing contract; project more
central bank to the rest of the economy. accurately how much money they need to pay in
the future.
R. A. 7653 – sole power to issue currency within Set of interrelated processes of settlement
the PHILIPPINES of goods or services rendered in exchange
for a set of instruments
- Faking of money results to 5-10 years
Characteristics for an Effective Payment
imprisonment System: amenable, convenient and
acceptable
Chapter 4 of the BSP Circular No. 829, series of
According to BSP, a payment system
2014 – must follow in depositing the amount
normally requires the following:
o Standard methods of transmitting 2. Effective Risk Management
payment
o Agreed means of settlement Risks of Payment Systems
o Common operating procedures
and rules 1. Credit Risk – ability of the payor to meet
1. Standard Methods of Transmitting the full value of its obligation
Payment 2. Liquidity Risk – timing difference on
o E-banking with other features posting may affect the visibility of the user
allows payment and money or a party
transfers. 3. Default Risk – payment will be made on
2. Agreed Means of Settlement time
- Exchange is contract between the 4. Technological Risk – system downtime
parties and system “bugs”
The normal means of settlement are as 5. Legal Risk – changes in rules and
follows: regulations
- Cash or cheque Payment
- Online Payment 3. Facilities Financial Market Transactions
- Automated Teller Machine - Facilitate the settlement of the financial
- Fund Transfer market transaction; validate the
- Credit Cards personality or credit rating of certain
- Debit Cards & Stored Value Cards instruments before completed the trade.
- Electronic Money 1. Facilitate opening an account
- Manual Money transfer 2. Facilitate purchase or sale of the
- Paybox System transactions
- Cash Deposit 3. Reduce human intervention provides
- Assignment objective approach to manage
3. Common Operating Procedures and financial market transactions
rules
Importance of Payment System
- Payment System essential facility to
enable the complete course of the
transaction
Safe and Real Time
Transactions
Effective risk management
Facilities Financial Market
Transactions
1. Safe and Real Time Transactions
- Designed to safeguard the identity and
transaction as a whole especially on
electronic payment system facilities;
deemed safe given that the
characteristics are mutually agreed by
the parties including the manner of
payment which is convenient for both.
Real time – normally applicable for
electronic / internet-based system; can be
applicable to manual payment system.