Money, central banking, and monetary policy

1. 1. Money, Central Banking, and Monetary Policy

2. 2. WHAT IS MONEY? Money refers to all things that are generally acceptable as a means of
payment for good and services (medium of exchange) and as a payment.
3. 3. What are the functions of money?  Money as a unit of account means that the value of
goods and services are store and services are expressed or quoted with the use of a single
item, usually a country’s currency. Money as a medium of exchange means that you can
trade your money in the market and in return, get the goods and services that you want to
purchase because money is generally accepted as a means of payment. The prerequisite of
the barter system is called the double coincidence of wants. Money as a store of value or
standard of deferred payment means that you can keep or save money now and then spend
it at a future date because its capacity to buy the same amount of goods and services is not
lost or diminished over time.
4. 4. EVOLUTION OF MODERN PAYMENT SYSTEM IN THE PHILIPPINE From a period of
autarky or no trade system where the much older generation of Filipino families produced
commodities for their own consumption, the mode of transaction often cited was the barter
system. Followed by the use of commodity money were people used commodities such as
salt, carabao, shells that serves as a medium of exchange.
5. 5. Face value refers to the amount of goods and service that can be bought with the use of
the paper bills. Example: if you have a one thousand peso bill, then it is possible for you to
purchase goods and services worth of a thousand pesos at the maximum. Specialized
bankers offered businessmen and traders the particular service of safekeeping their surplus
money for a fee. Overtime, bankers discovered that they can also lend a portion of the
traders’ surplus money to other people who needed funds and then charged as an interest in
return. With the vast developments in commerce and industry, the system of fractional
reserve banking also evolved.
6. 6. The Demand of money The demand for money for real balances or purchasing power, i.e.,
the amount of goods and services money can buy. According to John Maynard Keynes,
there are 3 motives for holding money: Transaction motive refers to the holding of money
to enable people and firm to pay off their daily transaction such as paying for electricity,
telephone bills, house rent, education, food, clothing, etc. Precautionary motive for holding
money arises because household and firms cannot predict exactly their level of expenditure
per unit time and the inflow of income as well. Speculative or portfolio allocation motive
refers to the holding of money for purpose of taking advantage of market opportunities.
7. 7. The Supply of money The supply of money may be viewed in terms of monetary
aggregates: M1 – this refers to the narrow definition of money which consists of currency
(e.g., paper bills and coins) in circulation plus demand or checking deposits; M2 – this refers
to M1 plus savings and small time deposits; M3 – this refers to money supply, peso savings,
time deposits, plus deposit substitutes of money-generating banks, and negotiable order of
withdrawal (NOW) accounts. RM – this is the reserve money which represents liabilities of
the BSP to the public sector in the form of currency in circulation and to banking sector in the
form of cash reserve. Money supply is determined by the behavior of three principal actors—
the public, the bank, and the BSP.
8. 8. THE ROLE OF MONETARY INSTITUTIONS IN THE ECONOMY The Bangko Sentral ng
Pilipinas The Central Bank of the Philippines (CB) was established on June 15, 1948 by
virtue of Republic Act No.265. Its primary objectives then were: a) To maintain the monetary
stability in the country; b) To preserve the international value of the peso; and c) To promote
rising level of production, employment, and real income in the Philippines. On June 14,
1993 , through R.A. 7653, the Bangko Sentral ng Pilipinas (BSP) was put up as a central
monetary authority. Its primary objectives were still to maintain price stability (or fight
inflation) conductive to a balanced and sustainable growth of the economy as well as
 promote and maintain monetary stability and convertibility of the peso. BSP likewise called
lender of the last resort. From whom ailing or bankrupt banks can borrow if other banks in
the financial system cannot provide them with the necessary funds.
9. 9. Financial Institutions The Philippine financial or monetary system is a network of markets
and institutions that transfer funds from individuals and groups who save money to
individuals and groups who want to borrow money. Banks Classified as: a) universal and
commercial b) rural bank c) thrift bank – which include: 1. Savings and mortgage banks 2.
private development banks 3. microfinance institutions 4. stock savings 5. loan associations
10. 10. Non banks institutions are: a) contractual savings institutions – such as: 1. Insurance
companies b) Investment institutions c) Securities market institution 1. Securities brokers and
dealers. 2. Lending investors 3. Organized exchanges d) Credit card companies e)
Pawnshops
11. 11. Distribution and classification of banks in the Philippines 0.20% 1.60% 3.30% 9.10%
14.20% 48.20% Universal and Comercial Banks Rural Banks Thrift Banks Savings Banks
Private Development Banks 23.50% Stock Savings and Loans Associations Micro Finance
12. 12. Number of Banks and Non-bank Institution in the Philippines in 2008 25,000 22,595
20,000 14,747 15,000 10,000 7,848 5,000 0 Total Banks Total Banks Non-banks Non-banks
13. 13. Financial Institutions Financial or monetary institutions are important because of the
following major roles: a) they allocate or channel saving efficiently from savers to borrowers.
b) they provide information, liquidity, and risksharing services. c) they provide flexibility and
divisibility of funds for the users and sources of this funds d) they are essential for ensuing
capital formation and economic growth.
14. 14. Simple Money Creation Bank Deposit Required Reserves Funds Available For Lending
ZEST 10,000 1,000 9,000 GOLDEN RULE 9,100 900 8,100 PATIENCE 8,100 810 7,290 . :
TOTAL, FIRST 3 BANKS . : 27,100 . : . : 2,710 . : . : 24,390 . : . : OTHER BANK’S RETURN
72,900 7,290 65,610 GRAND TOTAL 100,000 10,000 90,000
15. 15. SIMPLE MONEY CREATION Money Multiplier is the factor by which money supply will
change given a change in monetary base o given a change or deposit. Formula of the
Money Multiplier: mm = 1 / rr Formula of the Change in Money Supply: M = mm x MB
16. 16. MONETARY POLICY Monetary Policy can either be expansionary (increasing money
supply) or contractionary (decreasing money supply) The following is a list of important
instruments of monetary control used by the Monetary board: a) Reserve requirement – is
the percentage of deposits that banks are mandated to keep in their vaults for safekeeping
by the BSP. b) Rediscount Rate – is the interest charged by the banks to wish to borrow from
it. c) Open Market Operation – in simplistic terms, refer to the buying and selling of
government securities by the BSP. Open market purchase, means buying of government
securities (e.g., bonds) from private individuals or firms by the BSP. Open market sale refers
to the sale of government securities to private individials or firms by the BSP.
17. 17. INTERNATIONAL MONETARY INSTITUTIONS ABD THE PHILIPPINE MONETARY
SYSTEM Even prior to financial liberalization and globalization of markets in the recent past,
the Philippine monetary system has been affected by international monetary institutions
particularly by the International Monetary Fund (IMF) and the World Bank (WB). International
Monetary Fund was created to: a) Act as lender of last resort; b) Encourage domestic
economic policies consistent with foreign exchange rate stability; and c) Monitor the financial
activities of member countries.
18. 18. World Bank was also created to: a) To make a long term loans available for developing
countries b) Give loans for infrastructure to aid economic development c) Sell bonds in
international capital market to raise loanable funds. Composed of five (5) institutions: 1.
International Development Association (IDA) 2. International Bank for Reconstruction and
Development (IBRD) 3. International Finance Corporation (IFC) 4. Multilateral Investment
Guarantee Agency (MIGA) 5. International Center for Settlement of Investment Disputes
(ICSID) The World Bank also encourages member counties to give priority to programs for
 good governance and transparency, environmental protection and sustainable development.
These programs are envisioned as potential solutions to eradicate poverty in member
nations.

Monetary policy of the Philippines

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Monetary policy is the monitoring and control of money supply by a central bank, such
as the Federal Reserve Board in the United States of America, and the Bangko Sentral
ng Pilipinas in the Philippines. This is used by the government to be able to control
inflation, and stabilize currency. Monetary Policy is considered to be one of the two
ways that the government can influence the economy – the other one being Fiscal
Policy (which makes use of government spending, and taxes). [1] Monetary Policy is
generally the process by which the central bank, or government controls the supply and
availability of money, the cost of money, and the rate of interest.

Philippines

Background. The Philippines reported its first case of confirmed COVID 19 on January

30, 2020. After flattening the COVID 19 curve by end-2020, the Philippines is currently
experiencing a resurgence of virus infections, although the number of daily cases has
declined recently, averaging about 5,200 in the last week of June, down from over
12,500 on April 8, the highest since the onset of the pandemic. The weekly average of
the positivity rate in COVID-19 tests stood at about 11.6 percent at end-June. The
authorities have extended the general community quarantine (GCQ) on Metro Manila
and surrounding provinces until July 15. Under GCQ, mass gatherings are mostly
prohibited, public transport services restricted, and restaurants limited to operate at
partial capacity. The country has extended its ban on travelers from several countries
until July 15 to prevent the spread of the Delta COVID 19 variant. The Philippines
started inoculation of eligible adults on March 1, 2021 and about 6.1 percent of the total
population (over 10 percent of the adult population) have received at least the first dose
of the vaccine as of June 23. The government aims to administer 500,000 doses a day
to be able to reach herd immunity within the year.

Financial market volatility has subsided recently, with the peso/US$ exchange rate
staying stable. Meanwhile, real GDP in 2020 contracted by 9.6 percent.
 Key Policy Responses as of July 1, 2021

The government launched a 4-pillar socioeconomic strategy against COVID 19, which
includes support to vulnerable groups and individuals, expanded resources for frontline
medical workers, as well as fiscal and monetary measures.

FISCAL MEASURES

I. The fiscal support included two stimulus packages (Bayanihan Acts I and II) in 2020
and an accelerated reduction of corporate income tax rates. In total, the direct
budgetary support amounted to 4.4 percent of 2020 GDP. The government also
introduced below the line measures, mainly for credit guarantees, that amounted to
about 0.6 percent of 2020 GDP.

 The first package, the “Bayanihan I” Act, was signed into law in March and
provided direct budgetary support of about 2.2 percent of 2020 GDP, including:
(1) social protection and cash aid program of about PHP 225 billion (1.3 percent
of 2020 GDP); (2) assistance for vulnerable workers and micro-, small-, and
medium-size enterprises (MSMEs) of about PHP 52 billion (about 0.3 percent of
2020 GDP); (3) COVID 19 related medical responses of about PHP 49 billion
(around 0.3 percent of 2020 GDP); (4) assistance to local governments of about
PHP 37 billion (about 0.2 percent of 2020 GDP) and (5) assistance for agriculture
and education sectors of about PHP 22 billion (about 0.1 percent of 2020 GDP).
Total disbursement under Bayanihan I was about 88 percent of total allotments
or 95 percent of obligations.

The second package, “Bayanihan II” Act, which was signed into law in
September, provided additional support (about 1.5 percent of 2020 GDP), with a
focus on vulnerable households and hard-hit sectors, such as agriculture,
transportation, and tourism, and also included capital injections into state-owned
banks. In addition, under Bayanihan II capital injection of PHP 5 billion was given
to PhilGuarantee which could support loan guarantee of PHP 100 billion (about
0.6 percent of 2020 GDP). The use of the unspent Bayanihan II funds has been
extended to June 30, 2021.

II. The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act was
passed on March 26, 2021 after it was recalibrated to make it more relevant and
responsive to the needs of businesses negatively affected by the COVID 19 pandemic,
and to improve the ability of the Philippines to attract highly desirable investments. The
Act reduces the corporate income tax rate (effective July 2020) from 30 percent of net
taxable income to 25 percent for nonresident foreign corporations and large
corporations (net taxable income above PHP 5 million), while reducing the rate to 20
percent for small-and-medium sized corporations. From 2022, the corporate income tax
rate for foreign companies will decline further, by 1 percentage point per year, to reach
20 percent in 2027. The revenue forgone is estimated to be about 0.7 percent of GDP in
2021.

MONETARY AND MACRO-FINANCIAL

 The Bangko Sentral ng Pilipinas (BSP) reduced its policy rate five times in 2020
by a cumulative 200 bps to 2 percent, with the latest cut of 25 bps to becoming
effective on November 20, 2020. The BSP also lowered the reserve requirement
ratio for commercial banks by 200 bps to 12 percent, effective from April 3, 2020.
To ensure the availability of short-term liquidity in the financial system, the BSP
also made purchases of government securities in the secondary market.

To support the government’s COVID 19 response programs, the BSP purchased

PHP 300 billion of government securities through a repurchase agreement with
the government (redeemed in September 2020). A provisional advance to the
government of PHP 540 billion was approved in October 2020 and renewed in
December 2020. These instruments are authorized under the BSP Charter. In
addition, the BSP also remitted PHP 20 billion to the government even though
dividend payments to the government are no longer required under the newly
amended BSP Charter.

The BSP has also announced a series of regulatory relief measures for the
banking sector, including: (i) a temporary relaxation of requirements on
compliance reporting, maximum penalties on required reserves deficiencies, and
single borrower’s limits; (ii) easier access to the BSP’s rediscounting facility; (iii) a
temporary relaxation of asset classification and provisioning requirements
(subject to BSP approval); and (iv) a temporary relaxation of prudential
regulations regarding mark-to-market valuation of debt securities. These relief
measures are intended to encourage banks to provide temporary financial relief
to their borrowers. To encourage lending to micro, small, and medium-sized
enterprises (MSMEs), the BSP allowed loans to MSMEs to be counted as part of
banks’ compliance with reserve requirements, temporarily reduced their credit
risk weights to 50 percent, and assigned zero risk weight to loan exposures
guaranteed by the Philippine Guarantee Corporation. Also, loans to certain large
enterprises that were critically impacted by the pandemic (but not part of a
conglomerate) could be recognized as in compliance with reserve requirements.
Finally, the BSP increased the limit on banks’ real estate loan share to 25
percent from 20 percent of their total loan portfolio (net of interbank loans).
Further, the Financial Institutions Strategic Transfer (FIST) Act was passed in
February 2021 to facilitate the sale of nonperforming assets by financial
institutions, to help improve their balance sheets and restore lending capacity.
EXCHANGE RATE AND BALANCE OF PAYMENTS

 The BSP has relaxed documentary and reporting rules for FX operations (March
27, 2020).
 STRUCTURAL POLICY

 Under Bayanihan II, private projects determined to be nationally significant with

high economic returns or with high employment potential may have certain
permits, licenses or other requirements waived, to avoid delays in their
implementation. These regulatory relief measures are expected to fast-track high
impact investments and create jobs.

Republic Act No. 265

June 15, 1948

[REPUBLIC ACT NO. 265]

AN ACT ESTABLISHING THE CENTRAL BANK OF THE PHILIPPINES,

DEFINING ITS POWERS IN THE ADMINISTRATION OF THE MONETARY AND
BANKING SYSTEM, AMENDING THE PERTINENT PROVISIONS OF THE
ADMINISTRATIVE CODE WITH RESPECT TO THE CURRENCY AND THE
BUREAU OF BANKING, AND FOR OTHER PURPOSES.

Be it enacted by the Senate and House of Representatives of the Philippines in Congress

assembled:

CHAPTER I.—ESTABLISHMENT AND ORGANIZATION THE CENTRAL BANK OF

THE PHILIPPINES

ARTICLE I.—Creation, Responsibilities and Corporate

Powers of the Central Bank

SECTION 1. Creation of the Central Bank.—There is hereby created a body corporate to be

known as the Central Bank of the Philippines, which shall be governed by the provisions of this
Act.

The capital of the Central Bank shall be ten million (P10,000,000) pesos, which are hereby
appropriated from the assets of the Exchange Standard Fund, as provided in section 134 of this
Act.

SEC. 2. Responsibilities and objectives.—It shall be the responsibility of the Central Bank of the
Philippines to administer the monetary and banking system of the Republic.

It shall be the duty of the Central Bank to use the powers granted to it under this Act to achieve
the following objectives:

(a) To maintain monetary stability in the Philippines;

(b) To preserve the international value of the peso and the convertibility of the peso into other
freely convertible currencies; and

(c) To promote a rising level of production, employment and real income in the Philippines.

SEC. 3. Place of business.—The Central Bank shall have its principal place of business in the
City of Manila, but may have such branches, agencies and correspondents in other places as are
necessary for the proper conduct of its business.

SEC. 4. Corporate powers.—The Central Bank is hereby authorized to adopt, alter, and use a
corporate seal which shall be judicially noticed; to make contracts; to lease or own real and
personal property, and to sell or otherwise dispose of the same; to sue and be sued; and otherwise
to do and perform any and all thing that may be necessary or proper to carry out the purposes of
this Act.

The Central Bank may acquire and hold such assets and incur such liabilities as result directly
from operations authorized by the provisions of this Act, or as are essential to the proper conduct
of such operations.

ARTICLE II.—The Monetary Board

SEC. 5. Composition of the Monetary Board.—The powers and functions of the Central Bank
shall be exercised by a Monetary Board, which shall be composed of seven members, as follows:

(a)  The Secretary of Finance, who shall preside at the meeting’s of the Monetary Board.
Whenever the Secretary of Finance is unable to attend a meeting of the Board, the
Undersecretary of Finance shall act as his alternate, but shall not preside.

(b)  The Governor of the Central Bank, who shall preside at the meetings of the Board in the
absence of the Secretary of Finance. The Governor shall be appointed for a term of six years by
the President of the Philippines with the consent of the Commission on Appointments. Whenever
the Governor is unable to attend a meeting of the Board, the ranking deputy-governor shall act in
his stead.

(c) The President of the Philippine National Bank, whose alternate shall be the senior vice-
president of said bank.

(d) The Chairman of the Board of Governors of the Rehabilitation Finance Corporation, whose
alternate shall be the ranking governor of said corporation.

(e) Three other members, to be appointed for terms of six years by the President with the consent
of the Commission on Appointments: Provided, however, That the first members appointed
under the provisions of this subsection shall have terms of office of two, four and six years,
respectively.
In making appointments to the Monetary Board, the President of the Philippines shall give due
regard to affording fair representation of the financial, agricultural, industrial and commercial
interests, in the composition of the said Board.

SEC. 6. Vacancies.—Any vacancy in the Monetary Board created by the death, resignation, or
removal of an appointive member shall be filled by the appointment of a new member to
complete the unexpired period of the term of the member concerned.

SEC. 7. Qualifications.—No person shall be appointed as a member of the Monetary Board or as

a deputy-governor of the Central Bank unless he be of good moral character and of
unquestionable integrity and responsibility, and who is of recognized competence in the
economics of banking, finance, commerce, agriculture or industry: Provided, however, That the
Governor and deputy-governors of the Central Bank must be of recognized competence in the
field of banking: Provided, further, That the Governor and the members of the Monetary Board
shall be natural-born Filipino citizens.

SEC. 8. Disqualifications.—With the exception of the ex-officio members and their respective

alternates, none of the following may be a member of the Monetary Board or a deputy-governor
of the Central Bank:

(a) Persons holding any public position or office, either by election or by appointment, except
academic positions; and

(b)  Directors, officers or employees of other banking institutions.

SEC. 9. Removal.—The President may remove any member of the Monetary Board for any of
the following reasons:

(a) If the member is disqualified under the provisions of section 8 of this Act; or

(b)  If the member is guilty of acts or operations which are of a fraudulent or illegal character or
which are manifestly opposed to the aims and interests of the Central Bank; or

(c) If the member no longer possesses the qualifications specified in section 7.

SEC. 10. Meetings.—The Monetary Board shall convene as frequently as is necessary to

discharge its responsibilities properly, but shall meet at least once every two weeks. The Board
may be convoked either by the Secretary of Finance, in his capacity as presiding officer of the
Board, or by the Governor of the Central Bank.

The presence of four members shall constitute a quorum.

All decisions of the Monetary Board shall require the concurrence of at least four members,
except in special cases where the provisions of other sections of this Act demand a greater
majority.
SEC. 11. Attendance of the ranking deputy-governor and the chief of the Department of
Economic Research.—The ranking deputy-governor of the Central Bank and the chief of the
Department of Economic Research shall attend the meetings of the Monetary Board with the
right to be heard but not to vote.

SEC. 12. Remuneration of members for attending meetings of the Board.— The members of the
Monetary Board their respective substitutes, except the Governor and the ranking deputy-
governor, shall receive a per diem for every Board meeting attended. The amount of said per
diem shall be set by the President but may not exceed fifty (P50) Pesos, nor the sum of five
hundred pesos (P500) for any single month.

SEC. 13. Withdrawal of persons having a personal interest.—Whenever any person attending a

meeting of the Monetary Board has a personal interest of any sort in the discussion or resolution
of any given matter, or any of his business associates or any of his relatives within the fourth
degree of consanguinity or second degree of affinity has such an interest, said person may not
participate in the discussion or resolution of the matter and must retire from the meeting during
the deliberations thereon. The minutes of the meeting shall note the withdrawal of the member
concerned.

SEC. 14. Exercise of authority.—In order to exercise the authority granted to it under this Act,
the Monetary Board shall:

(a) Prepare and issue such rules and regulations as it considers necessary for the effective
discharge of the responsibilities and exercise of the powers assigned to the Monetary Board and
to the Central Bank under this Act;

(b)  Direct the management, operations and administration of the Central Bank and prepare such
rules and regulations as it may deem necessary or convenient for this purpose;

(c) On the recommendation of the Governor, appoint, fix the remunerations, and remove all
officers and employees of the Central Bank, with the exception of the Governor; and

(d)  Authorize such expenditures by the Central Bank as are in the interest of the effective
administration and operation of the Bank.

SEC. 15. Responsibility.— Any member of the Monetary Board or officer or employee of the
Central Bank who wilfully violates this Act or who is guilty of gross negligence in the
Performance of his duties shall be held liable for any loss or injury suffered by the Bank as a
result of such violation or negligence. Similar responsibility shall apply to the disclosure of any
information of a confidential nature about the discussions or resolutions of the Monetary Board
or about the operations of the Bank, and to the use of such information for personal gain or to the
detriment of the Government, the Bank or third parties.

ARTICLE III.— The Governor and Deputy-Governors

of the Central Bank
SEC. 16. Powers and duties of the Governor.—The Governor shall be the chief executive of the
Central Bank. His powers and duties shall be:

(a) To prepare the agenda for the meetings of the Monetary Board and to submit for the
consideration of the Board the policies and measures which he believes to be necessary to carry
out the purposes and provisions of this Act;

(b) To execute and administer the policies and measures approved by the Monetary Board;

(c) To direct and supervise the operations and internal administration of the Central Bank. The
Governor may delegate certain of his administrative, responsibilities to other officers of the
Bank, subject to the rules and regulations of the Monetary Board; and

(d)  To exercise such other powers as may be vested in him by the Monetary Board.

SEC. 17. Representation of the Monetary Board and the Central Bank.—The Governor of the
Central Bank shall be the principal representative of the Monetary Board and of the Bank, and in
his capacity and in accordance with the instructions of the Monetary Board he shall be
empowered:

(a)  To represent the Monetary Board and the Central Bank in all dealings with other offices,
agencies and instrumentalities of the Government and with all other persons or entities, public or
private, whether domestic, foreign or international;

(b) To authorize, with his signature, contracts concluded by the Central Bank, notes and
securities issued by the Bank, and the annual reports, balance sheets, profit and loss statements,
correspondence and other documents of the Bank. The signature of the Governor may be in
facsimile wherever appropriate;

(c) To represent the Central Bank, either personally or through counsel, in any legal proceedings
or action; and

(d)  To delegate his power to represent the Bank, as provided in subsections (a), (b) and (c) of
this section, to other officers of the Bank upon his own responsibility.

SEC. 18. Authority of the Governor in emergencies.— In the event of war or other emergencies
which require immediate action and in which there is insufficient time to call a meeting of the
Monetary Board, the Governor of the Central Bank, with the concurrence of the Secretary of
Finance or, in his absence, with the concurrence of any two other members of the Monetary
Board, may decide any matter or take any action within the authority of the Board itself and may
suspend any resolution or decision of the Board.

In such cases, the Governor shall call a meeting of the Monetary Board as soon as possible, in
order to explain his action and the reasons for departing from normal procedures. The Board may
then confirm, revoke or modify such action as the circumstances warrant.
SEC. 19. Outside interests of the Governor.—The Governor of the Central Bank shall be
required to limit his professional activities to (those pertaining directly to his position with the
Central Bank; accordingly, the Governor of the Bank may not accept any other employment,
whether public or private, remunerated or ad honorem, with the exception of academic positions
and of public commissions related to the formation, direction or implementation of monetary,
banking or general economic policies which concern the national interest of the Philippines.

SEC. 20. Remuneration of the Governor.—The salary of Governor of the Central Bank shall be
fixed by the Monetary Board with the approval of the President of the Philippines, but in no case
shall it exceed thirty thousand pesos per annum.

SEC. 21. Deputy-Governor.—The Governor of the Central Bank, with the approval of the
Monetary Board, shall appoint one deputy-governor who shall perform such duties as may be
assigned to him by the Governor and the Board.

In the absence of the Governor of the Central Bank, the deputy-governor shall act as chief
executive of the Central Bank and shall exercise the powers and perform the duties of the
Governor.

ARTICLE IV.—Departments of the Central Bank

A. DEPARTMENT OF ECONOMIC RESEARCH

SEC. 22. Responsibilities of the Department.—The Central Bank shall establish and maintain a
Department of Economic Research which shall prepare data and conduct economic research for
the guidance of the Monetary Board in the formulation and implementation of its policies.

Toward this end, the Department of Economic Research shall prepare forecasts of the balance of
payments of the Philippines, statistics on the monthly movement of the money supply and of
prices, and other statistical series and economic studies useful for the formulation and analysis of
monetary, banking and exchange policies.

The scope of the other functions and duties of the department shall be defined and prescribed by
the Monetary Board.

SEC. 23. Authority to obtain information.—The Department of Economic Research shall have

the authority to request from any person or entity, including Government offices and
instrumentalities, any data which the Central Bank may require for the proper discharge of its
functions and responsibilities. The Central Bank shall have the power to issue a subpoena for the
production of the books and records of all such persons and entities for the aforesaid purpose.
Those who refuse without justifiable cause to supply the Bank with the data requested, or
required by the subpoena, shall be subject to the penalties provided in section 32.

SEC. 24. Training of technical personnel.—The Central Bank shall promote and sponsor the
training of technical personnel in the field of money and banking. Toward this end, the Central
Bank is hereby authorized to defray the costs of study, at home or abroad, of outstanding
employees of the Bank, of promising university graduates or of any other qualified persons
which shall be determined by proper competitive examinations to be conducted by the
Commissioner of Civil Service as in other cases. The chief of the Department of Economic
Research shall prepare and supervise the training program of the Bank, subject to the rules and
regulations of the Monetary Board on the matter.

B. DEPARTMENT OF SUPERVISION AND EXAMINATION

SEC. 25. Creation of the Department.—In order to assure the observance of this Act and of other
pertinent laws, and of the rules and regulations of the Monetary Board, the Central Bank shall
have a Department of Supervision and Examination which shall be charged with the supervision
and periodic examination of all banking institutions operating in the Philippines, including all
government credit institutions. The Department of Supervision and Examination shall discharge
its responsibilities in accordance with the instructions of the Monetary Board. The Chief of the
department shall be known as the Superintendent of Banks.

The Superintendent of Banks and the examiners of the Department of Supervision and
Examination are hereby authorized to administer oaths to any director, officer, or employee of
any institution under the supervision of the department and to compel the presentation of all
books, documents, papers or records necessary in has or their judgment to ascertain the facts
relative to the true condition of any institution.

SEC. 26. Qualifications.—The Superintendent of Banks must be a person of recognized probity

and competence in accounting, auditing and banking practice.

SEC. 27. Prohibitions.—The Superintendent and all employees of the Department of

Supervision and Examination are hereby prohibited from:

(a) Being an officer, director, employee, or stockholder, directly or indirectly, of any institution

subject to supervision or examination by the department;

(b) Receiving any loan, advance, gift, or thing of value from any such institution or from any
officer, director; or employee thereof;

(c) Revealing in any manner, except under orders of the court, information relating to the
condition or business of any such institution. This prohibition shall not be held to apply to the
giving of information to the Monetary Board or the Governor of the Central Bank, or to any
person authorized by either of them, in writing, to receive such information.

SEC. 28. Examination and fees.—It shall be the duty of the Superintendent, personally or by
deputy, at least once in every twelve months, and at such other times as either he or the Monetary
Board may deem expedient, to make an examination of the books of every banking institution
within the purview of this Act and to make a report on the same to the Monetary Board.

Every such institution shall afford to the Superintendent and to his authorized deputies full
opportunity to examine its books, cash and available assets and general condition at any time
when requested so to do by the Superintendent: Provided, however, That none of the reports and
other papers relative to such examinations shall be open to inspection by the public except in so
far as such publicity is incidental to the proceedings hereinafter authorized, or is necessary for
the prosecution of violations in connection with the business of such institutions.

The institutions which are subject to examination by the Superintendent shall reimburse the
Central Bank for the cost of maintaining the Department of Supervision and Examination and,
for this purpose, shall pay to the Central Bank, within the first thirty days of each year, an annual
fee in an amount to be determined by the Monetary Board in the manner provided in the next
paragraph of this section.

The fee to be paid by each institution shall be an amount equal to a prescribed percentage of its
average total assets during the preceding year, as shown, on its end-of-month balance sheets,
after deducting its cash on hand and amounts due from banks, including the Central Bank and
banks abroad: Provided, however, That said percentage may not exceed one twentieth of one per
cent (1/20 of 1%). If the total of the maximum fees authorized under this paragraph should be
insufficient to defray the entire costs of the department, the difference shall be borne by the
Central Bank.

SEC. 29. Proceedings upon insolvency.—Whenever, upon examination, by the Superintendent or

his examiners or agents into the condition of any banking institution, it shall be disclosed that the
condition of the same is one of insolvency, or that its continuance in business would involve
probable loss to its depositors or creditors, it shall be the duty of the Superintendent forthwith, in
writing, to inform the Monetary Board of the facts, and the Board, upon finding the statements of
the Superintendent to be true, shall forthwith forbid the institution to do business in the
Philippines and shall take charge of its assets and proceeds according to law.

The Monetary Board shall thereupon determine within thirty days whether the institution may be
reorganized or otherwise placed in such a condition so that it may be permitted to resume
business with safety to its creditors and shall prescribe the conditions under which such
resumption of business shall take place. In such case the expenses and fees in the administration
of the institution shall be determined by the Board and shall be paid to the Central Bank out of
the assets of such banking institution.

At any time within ten days after the Monetary Board taken charge of the assets of any banking
institution, institution may apply to the Court of First Instance for an order requiring the
Monetary Board to show cause why it should not be enjoined from continuing such charge of its
assets, and the court may direct the Board to refrain from further proceedings and to surrender
charge of its assets.

If the Monetary Board shall determine that the banking institution cannot resume business with
safety to its creditors, it shall, by the Solicitor General, file a petition in the Court of First
Instance reciting the proceedings which have been taken and praying the assistance and
supervision of the court in the liquidation of the affairs of the same. The Superintendent shall
thereafter, upon order of the Monetary Board and under the supervision of the court and with all
convenient speed, convert the assets of the banking institution to money.
SEC. 30. Distribution of assets.—In case of liquidation of a banking institution, after payment of
the costs of the proceedings, including reasonable expenses and fees of the Central Bank to be
allowed by the court, the Central Bank shall pay the debts of such institution, under order of the
court, in accordance with their legal priority.

SEC. 31. Disposition of fees and commissions.—All costs and fees earned by the Central Bank in
winding up the affairs and administering the assets of any banking institution within the purview
of this Act shall be used to pay the salaries of the clerks and other employees whose employment
is rendered necessary in the discharge of the trust, together with other additional expenses caused
thereby. The balance of fees and costs earned, after the payment of all expenses, shall be for the
account of the Central Bank.

SEC. 32. Refusal to make reports or permit examination.—Any owner, agent, manager, or other
officer in charge of any banking institution within the purview of this Act who, being thereunto
required in writing by the Monetary Board or by the Superintendent, shall willfully refuse to file
the required report or permit any lawful examination into the affairs of such institution shall be
punished by a fine of not more than ten thousand pesos or by imprisonment for not more than
one year, or by both, in the discretion of the court.

SEC. 33. False statement.—The willful making of a false statement to the Monetary Board or to
the Superintendent of Banks or to his examiners shall be punished by a fine not to exceed fifteen
thousand pesos, or by imprisonment for a term not to exceed two years, or by both, in the
discretion of the count.

SEC. 34. Proceedings upon violation of laws and regulations.— Whenever any person or entity
willfully violates this Act or any order, instruction, rule or regulation legally issued by the
Monetary Board, the person or persons responsible for such violation shall be punished by a fine
of not more than twenty thousand pesos and by imprisonment of not more than five years.

Whenever a banking institution persists in violating its charter or by-laws or any law, or orders,
instructions, rules or regulations legally issued by the Monetary Board, or whenever a banking
institution persists in carrying on its business in an unlawful or unsafe manner, the Board shall,
by the Solicitor General, and without prejudice to the penalties provided in the preceding
paragraph of this section, file a petition in the Court of First Instance praying the assistance of
the court to compel the banking institution to discontinue the violations or practices objected to
in the petition of the Board. The Monetary Board may, with the approval of the court, take such
action as the court may deem necessary compel the banking institution complained against to
discontinue the violations or practices set forth in the Boards petition, and, if necessary, the
Board may, under order of the court, direct the Superintendent of Banks to liquidate the business
of the institution.

C. OTHER DEPARTMENTS OF THE CENTRAL BANK

SEC. 35. Organization of other departments.—The Monetary Board shall organize a foreign

exchange department, a credit department, and such other departments as it deems convenient for
the proper and efficient conduct of the business of the Central Bank. The powers and duties of
the departments shall be determined by the Monetary Board, within the authority granted to the
Board and the Central Bank under this act.

ARTICLE V.—Reports and Publications

SEC. 36. Reports and publications.— Within the first eight days of each month the Central Bank
shall publish a general balance sheet showing the volume and composition of its assets and
liabilities as of the last working day of the preceding month.

SEC. 37. Annual report.—Before the end of March of each year the Central Bank shall submit to
the President of the Philippines, to the Senate through its President, to the House of
Representatives through its Speaker, and shall publish an annual report on the condition of the
Bank and a review of the policies and measures adopted, by the Monetary Board during the past
year and an analysis of the economic and financial circumstances which gave rise to said policies
and measures.

The annual report shall also include a statement of the financial condition of the Central Bank
and a statistical appendix which shall present, as a minimum, the following data:

(a) The monthly movement of the money supply, distinguishing between currency and deposit
money;

(b) The monthly movement of purchases and sales of exchange and of the international reserve
of the Bank;

(c) The balance of payments of the Philippines;

(d)  Monthly indices of wages, of the cost of living and of import and export prices;

(e) The monthly movement, in summary form, of exports and imports, by volume and value;

(f) The monthly movement of the accounts of the Central Bank and of other banks, by groupings
and classifications to be determined by the chief of the Department of Economic Research in
agreement with the Superintendent of Banks;

(g)  The principal data on Government receipts and expenditures and on the status of the public
debt, both domestic and foreign; and

(h)  The texts of the major legal and administrative measures adopted by the Government and the
Monetary Board during the year which relate to the functions or operations of the Central Bank
or of banking institutions operating in the Philippines.

SEC. 38. Signatures on statements.—The balance sheets and other financial statements of the
Central Bank shall be signed by the officers responsible for their preparation, by the Governor,
and by the auditor of the Bank.
 ARTICLE VI.— Profits, Losses, and Special Accounts

SEC. 39. Fiscal year.—The fiscal year of the Bank shall begin on January first and end on
December thirty-first of each year.

SEC. 40. Computation of profits and losses.—Within the first thirty days following the end of
each fiscal year, the Central Bank shall determine its net profits or losses. In the calculation of
net profits, the Bank shall make adequate allowance or establish adequate reserves for bad and
doubtful accounts.

SEC. 41. Distribution of net profits.—Within the first sixty days following the end of each fiscal
year, the Monetary Board shall determine and carry out the distribution of the net profits, in
accordance with the following rules:

(a)  Twenty-five per cent (25%) of the net profits shall be carried to surplus until such time as the
total capital accounts of the Bank reach a sum equivalent to at least ten per cent (10%) of the
total assets of the Bank less its assets in gold and foreign currencies;

(b)  Any net profits remaining after fulfilling the conditions established in subsection (a) of this
section shall be used to increase the resources of the Securities Stabilization Fund, until the
volume and liquidity of the Fund’s assets are considered ample for any open market operations
in which the Fund is deemed likely to engage;

(c) Any net profits remaining after fulfilling the conditions of subsections (a) and (b) of this
section shall be used to reduce the Account to Secure the. Coinage or the Monetary Adjustment
Account until said accounts shall have been liquidated. The Monetary Board shall determine the
distribution between these two accounts;

(d) If any net profits remain after fulfilling the conditions of subsections (a), (b) and (c) of this
section, the balance or any part thereof may be transferred, to surplus, or may be used to
liquidate Government obligations to the Central Bank, or may be paid into the General Fund of
the Government. The Monetary Board shall determine this distribution.

SEC. 42. Distribution of net losses.— Should the Central Bank incur net losses during any fiscal
year, such losses shall be debited to surplus, and if surplus be inadequate the balance shall be
debited to the capital of the Bank.

SEC. 43. Extraordinary expenses of currency issue and monetary stabilization.—The Monetary

Board may, whenever it deems it advisable, exclude from the computation of the annual profits
and losses of any given fiscal year all or part of the following extraordinary expenses incurred
during that year:

(a) Extraordinary costs of printing notes or of minting coins;

(b)  Extraordinary expenditures arising from the 0sue and service of the evidences of
indebtedness to which reference is made in section 98; and
(c) Interest paid on bank reserves which exceed fifty per cent (50%) of bank deposits, in
conformity with the provisions of section 101, last paragraph, of this Act.

The amounts which are excluded from the computation of profits and losses in accordance with
the provisions of the first paragraph of this section shall be entered in a suspense account which
shall be called the “Monetary Adjustment Account.”

The Monetary Board shall in every case amortize such expenses over a period which shall not
exceed five years and at a rate which shall be based on the adequacy of the Bank’s surplus and of
the resources of the Securities Stabilization Fund.

SEC. 44. Revaluation profits and losses.—The revaluation profits or losses made or assumed by
the Central Bank m accordance with the provisions of sections 77 and 83 of this Act shall not be
included in the computation of the annual profits and losses of the Central Bank.

Any profits or losses arising in this manner shall be offset by any amounts which, as a
consequence of such revaluations are owed by the Philippines to the International Monetary
Fund and the International Bank for Reconstruction and Development or are owed by these
institutions to the Philippines. Any remaining profit or loss shall be carried in a special frozen,
account which shall be named “Revaluation of International Reserve” and the net balance of
which shall appear either among the liabilities or among the assets of the Central Bank,
depending on whether the revaluations have produced net profits or net losses.

The Revaluation of International Reserve account shall be neither credited nor debited for any
purposes other than those specifically authorized in the present section or in section 45 of this
Act.

SEC. 45. Profits from recoinage or from reductions in the Bank’s currency liabilities.—Any
profits arising from a remitting of coins or from a reduction in the currency liabilities of the
Central Bank as a consequence of the loss, destruction or demonetization of notes and coins shall
not be included in the computation of the annual profits of the Central Bank.

Any such profits shall be used to reduce the Monetary Adjustment Account, the Account to
Secure the Coinage, or the asset account Revaluation of International Reserve. The distribution
of such profits among these accounts shall be determined by the Monetary Board.

If none of said accounts exists, the profits to which this section refers shall be used to increase
the resources of the Securities Stabilization Fund.

ARTICLE VII.— The Auditor

SEC. 46. Appointment and personnel.—The Auditor-General shall appoint a representative who

shall be the auditor of the Central Bank. The Auditor-General shall appoint the necessary
personnel to assist said representative in the performance of his duties. The salaries of the auditor
and his staff shall be determined by the Auditor-General with the advice of the Monetary Board.
Said salaries and aid other expenses of maintaining the auditor office shall be paid by the Central
Bank. The auditor of the Central Bank said personnel under him may be removed only by the
Auditor-General.

The representative of the Auditor-General must be a certified public accountant with at least ten
years experience as certified public accountant or a person who has had training and experience
in commercial or central banking. No relative of any member of the Monetary Board or the
Auditor-General within the sixth degree of consanguinity or affinity shall be appointed such
representative.

CHAPTER II.—THE CENTRAL BANK AND THE

MEANS OF PAYMENT

ARTICLE I.— The Unit of Monetary Value

SEC. 47. The peso.—The unit of monetary value in the Philippines is the “peso,” which is
represented by the sign “P.”

The peso is divided into one hundred equal parts called “centavos,” which are represented by the
“c.”

ARTICLE II.— The International Value of the Peso

SEC. 48. Par value.—The gold value of the peso is seven and thirteen-twenty firsts (7-13/21)
grains of gold, nine-tenths (0.900) fine, which is equivalent to the United States dollar parity of
the peso as provided in section 6 of Commonwealth Act No. 699.

SEC. 49. Changes in par value.— The par value of the peso shall not be altered except when
such action is made necessary by the following circumstances:

(a) When the existing par value would make impossible the achievement and maintenance of a
high level of production, employment and real income without:

(1) The depletion of the international reserve of the Central Bank; or

(2) The chronic use of restrictions on the convertibility of the peso into foreign currencies or on
the transferability abroad of funds from the Philippines; or
(3) Undue Government intervention in, or restriction of, the international flow of goods and
services; or

(b) When uniform proportionate changes in par values are made by the countries which are
members of the International Monetary Fund; or

(c) When the operation of any executive or international agreement to which the Republic of the
Philippines is a party requires an alteration in the gold value of the peso.

Any modification in the gold or dollar value of the peso must be in conformity with the
provisions of all executive and international agreements subscribed to and ratified by the
Republic of the Philippines, and such modification shall be made only by the President of the
Republic upon the proposal of the Monetary Board and with the approval of Congress. The
proposal of the Monetary Board shall require the concurrence of at least five of the members of
Board.

Notwithstanding the provision of the proceeding paragraph with respect to the approval of
Congress, if there should be an .emergency which, in the opinion of the President, is so grave
and so urgent as to require immediate action, the President may modify the par value of the peso
without the prior approval of Congress: Provided, however, That he shall report to the Congress
on his action at the earliest opportunity.

SEC. 50. Parties of foreign currencies with respect to the peso.— The legal parties of foreign
currencies with respect to the Philippine peso shall be determined as follows:

(b)  Currencies of countries which are members of the International Monetary Fund shall have
their parities with respect to the peso established on the basis of their par values as announced by
said Fund. If the par value of the currency of a member country has not been announced, the
parity of such currency with respect to the peso shall be calculated on the basis of the exchange
rates for that currency in foreign markets. If there is divergence among the rates quoted in
foreign markets, the Monetary Board shall determine which rates shall be employed for the
calculation of parity.

(b)  Currencies of countries which are not members of the International Monetary Fund shall
have ‘their parities with the peso established on the basis of their gold or United States, dollar
equivalents, provided such currencies are freely and effectively convertible into gold or dollars.
Whenever the currency of any such country is not so convertible its parity with the peso shall be
calculated on the basis of the exchange rates for that currency in foreign markets. If there as
divergence among the rates quoted in foreign markets, the Monetary Board shall determine
which rates shall be employed for the calculation of parity.

The Central Bank shall determine, in conformity with the provisions of this section, and shall
publish regularly, the legal parities of the foreign currencies of importance in the international
transactions of the Philippines. The Central Bank may also specify the parity of any foreign
currency not included in the published list of parities.

The parities published or specified by the Central Bank shall be recognized as the legal parities
for all purposes.

ARTICLE III.—Issue of Means of Payment

A. CURRENCY

SEC. 51. Definition of currency.—The word “currency” is hereby defined, for the purposes of
this Act, as meaning all Philippine notes and coins issued or circulating in accordance with the
provisions of this Act.
SEC. 52. Issue power.—The Central Bank shall have the sole right and authority to issue
currency within the territory of the Philippines. No other person or entity, public or private, may
put into circulation notes, coins, or any other object or document which, in the opinion of the
Monetary Board, might circulate as currency.

The Monetary Board may issue such regulations as it may deem advisable in order to prevent the
circulation of foreign currency or of currency substitutes.

SEC. 53. Liability for notes and coins.—Notes and coins issued by the Central Bank shall be
liabilities of the Bank, and may be issued only against, and in amounts not exceeding, the assets
of the Bank. Said notes and coins shall be a first and paramount lien on all assets of the Central
Bank.

The Central Banks holdings of its own notes and coins shall not be considered as part of its
currency issue and, accordingly, shall not form part of the assets or liabilities of the Bank.

SEC. 54. Legal tender power.—All notes and coins issued by the Central Bank shall be fully
guaranteed by the Government of the Republic of the Philippines and shall be legal tender [in the
Philippines for all debts, both public and private.

SEC. 55. Characteristics of the currency.—The Monetary Board, with the approval of the
President of the Philippines, shall prescribe the denominations, dimensions, designs, inscriptions
and other characteristics of notes issued by the Central Bank: Provided, however, That said notes
shall state that they are liabilities of the Central Bank and are fully guaranteed by the
Government of the Republic of the Philippines. Said notes shall bear the signatures, in facsimile,
of the President of the Philippines and of the Governor of the Central Bank.

Similarly, the Monetary Board, with the approval of the President of the Philippines, shall;
prescribe the weight, fineness, designs, denominations and other characteristics of the coins
issued by the Central Bank. In the minting of coins, the Monetary Board shall give full
consideration to the availability of suitable metals and to their relative prices and cost of minting.

SEC. 56. Printing of notes and minting of coins.—The Monetary Board shall prescribe the
amounts of notes and coins to be printed and minted, respectively, and the conditions to which
the printing of notes and the minting of coins shall foe subject. The Monetary Board shall have
the authority to contract institutions, mints or firms for such operations.

All expenses incurred in the printing of notes and the minting of coins shall be for the account of
the Central Bank.

SEC. 57. Inter convertibility of currency.—The Central Bank shall exchange, on demand and
without charge, Philippine currency of any denomination for Philippine notes and coins of any
other denomination requested. If, for any reason, the Central Bank should temporarily be unable
to provide notes or coins of the denominations requested it shall meet its obligation by delivering
notes and coins of the denominations which most nearly approximate those requested.
SEC. 58. Replacement of currency unfit for circulation.— The Central Bank shall withdraw from
circulation and shall demonetize all notes and coins which for any reason whatsoever are unfit
for circulation and shall replace them by adequate notes and coins: Provided, however, That the
Central Bank shall not replace notes and coins the identification of which is impossible, coins
which show signs of filing, clipping or perforation, and notes which have lost more than two-
fifths of their surface or all of the signatures inscribed thereon. Notes and coins in such mutilated
condition shall be withdrawn from circulation and demonetized without compensation to the
bearer, unless it is proved to the satisfaction of the Central Bank that the currency became unfit
for circulation as a result of accidental causes or forces beyond control, in which ease
replacement shall be made.

SEC. 59. Retirement of old notes and coins.—The Central Bank may call in for replacement
notes of any series or denomination which are more than five years old and coins which are more
than ten years old.
Notes and coins called in for replacement in accordance with this provision shall remain legal
tender for a period of one year from the date of call. After this period, they shall cease to be legal
tender but during the following three years, or for such longer period as the Monetary Board may
determine, they may be exchanged at par and without charge in the Central Bank and by agents
duly authorized by the Central Bank for this purpose. After the expiration of this latter period,
the notes and coins which have not been exchanged shall cease to be a liability of the Central
Bank and shall be demonetized. The Central Bank shall also demonetize all notes and coins
which have been called in and replaced.

SEC. 60. Profits from recoinage or from reductions in the Bank’s currency liabilities.—Any
profits resulting from recoinage or from a reduction in the liabilities of the Central Bank through
loss, destruction or demonetization of currency shall be used for the purposes mentioned in
section 45 of this Act.

B. DEPOSIT MONEY

SEC. 61. Definition.—For the purpose of this Act, the term “deposit money” means all those
liabilities of the Central Bank and of other banks which are denominated in Philippine currency
and are subject to payment in legal tender upon demand by the presentation of checks.

SEC. 62. Issue of deposit money.—Only banks duly authorized so to do may accept funds or
create liabilities payable in pesos upon demand by the presentation of checks, and such
operations shall be subject to the control of the Monetary Board in accordance with the powers
granted it with respect thereto under this Act.

SEC. 63. Legal character.—Checks representing deposit money do not have legal tender power
and their acceptance in the payment of debts, both public and private, is at the option of the
creditor.

CHAPTER III.—GUIDING PRINCIPLES OF MONETARY

ADMINISTRATION BY THE CENTRAL BANK
 ARTICLE I.—Domestic Monetary Stabilization

SEC. 64. Guiding principles—The Monetary Board shall endeavor to control any expansion or
contraction in the money supply, or any rise or fall in prices, which in the opinion of the Board is
prejudicial to the attainment or maintenance of a high level of production, employment, and real
income. In adopting policies and measures in accordance with this principle the Monetary Board
shall have due regard for their effects on the availability and cost of money to particular sectors
of the economy as well as to the economy as a whole, and their effects on the relationship of
domestic prices and costs to world prices and costs.

SEC. 65. Definition of the money supply.— For the purposes of this section, and of this Act, the
money supply is defined as consisting of all holdings of domestic currency and deposit money
with the exception of such holdings by the Government and by banks having checking deposit
liabilities in domestic currency. The statistics prepared by the Central Bank on the volume of the
money supply shall be based on this definition to the extent that available data permit.

SEC. 66. Action when abnormal movements occur in the money supply or price level.—
Whenever abnormal movements in the money supply or in prices endanger the stability of the
Philippine economy or important sectors thereof, the Monetary Board shall:

(a) Take such remedial measures as are appropriate and within the powers granted to the
Monetary Board and the Central Bank under the provisions of this Act; and

(b) Submit to the President of the Philippines and the Congress, and make public, a detailed
report which shall include, as a minimum, a description and analysis of:

(1) The causes of the rise or fall of the money supply or of prices;
(2) The extent to which the changes in the money supply or in prices have been reflected in
changes in the level of domestic output, employment, wages and economic activity in general,
and the nature and significance of any such changes; and
(3) The measures which the Monetary Board has taken and the other monetary fiscal or
administrative measures which it recommends be adopted.

Whenever the money supply increases or decreases by more than fifteen per cent (15%), or the
cost of living index increases by more than ten per cent (10%), in relation to the level existing at
the end of the corresponding month, of the preceding year, the Monetary Board shall submit the
report to which reference is made in subsection (b) of this section, and shall state therein
whether, in the opinion of the Board, said changes in the money supply or cost of living
represent a threat into the stability of the Philippine economy or of important sectors thereof.

The Monetary Board shall continue to submit periodic reports to the President of the Philippines
until it considers that the monetary or price disturbances have disappeared or have been
adequately controlled.

ARTICLE II.—International Monetary Stabilization

SEC. 67. Guiding principle.—The Central Bank of the Philippines shall exercise its powers
under this Act to maintain the par value of the peso and the convertibility of the peso into other
freely convertible currencies.

SEC. 68. International reserve.—In order to maintain the International stability and

convertibility of the Philippine peso, the Central Bank shall maintain an international reserve
adequate to meet any foreseeable net demands on the Bank for foreign currencies.

In judging the adequacy of the international reserve, the Monetary Board shall be guided by the
prospective receipts and payments of foreign exchange by the Philippines. The Board shall give
special attention to the volume and maturity of the Central Bank’s own liabilities in foreign
currencies, to the volume and maturity of the foreign exchange assets and liabilities of other
banks operating in the Philippines and, insofar as they are known or can be estimated] the
volume and maturity of the foreign exchange assets and liabilities of all other persons and
entities in the Philippines.

SEC. 69. Composition of the international reserve.—The international reserve of the Central

Bank of the Philippines may include the following assets:

(a)  Gold; and

(b)  Assets in foreign currencies in the form of: documents and instruments of types customarily
employed for the international transfer of funds; demand and time deposits in central banks,
treasuries and commercial banks abroad; foreign government securities with maturities not,
exceeding five yeans; and foreign notes and coins.

The Monetary Board shall endeavor to hold the foreign exchange resources of the Central Bank
in freely convertible currencies; moreover, the Board shall give particular consideration to the
prospects of continued strength and convertibility of the currencies in which the reserve is
maintained, as well as to the anticipated demands for such currencies. The Monetary Board shall
issue regulations determining the other qualifications which foreign exchange assets must meet
in order to be included in the international reserve of the Central Bank.

The Central Bank shall be free to convert any of the assets in its international reserve into any
other asset of a type included under subsections (a) and (b) of this section.

SEC. 70. Action when the international stability of the peso is threatened.—Whenever the
international reserve of the Central Bank falls to an amount which the Monetary Board considers
inadequate to meet the prospective net demands on the Central Bank for foreign currencies, or
whenever the international reserve appears to be in imminent danger of falling to such a level, or
whenever the international reserve is falling as a result of payments or remittances abroad which,
in the opinion of the Monetary Board, are contrary to the national welfare, the Monetary Board
shall:

(a)  Take such remedial measures as are appropriate and within the powers granted to the
Monetary Board and the Central Bank under the provisions of this Act; and
(b)  Submit to the President of the Philippines a detailed report which shall include, as a
minimum, a description and analysis of:

(1) The nature and causes of the existing or imminent decline;

(2) The remedial measures already taken or to be taken by the Monetary Board;
(3) The further monetary, fiscal or administrative measures proposed; and
(4) The character and extent of the cooperation required from other Government agencies for the
Successful execution of the policies of the Monetary Board.

If the resultant actions fail to check the deterioration of the reserve position of the Central Bank,
or if the deterioration cannot be checked except by chronic restrictions on exchange and trade
transactions or by sacrifice of the domestic objectives of a high level of production, employment
and real income, the Monetary Board shall propose to the President such additional action as it
deems necessary restore equilibrium in the international balance of payments of the Philippines.

The Monetary Board shall submit periodic reports to the President until the threat to the
international monetary stability of the Philippines has disappeared.

CHAPTER IV.—INSTRUMENTS OF CENTRAL BANK ACTION

ARTICLE I.—General Criteria

SEC. 71. Means of action.—In order to achieve the international and domestic objectives, of the
national monetary policy, the Monetary Board shall rely on its moral influence, the powers
granted to it under this Act for the regulation of money, credit and exchange, and the support and
cooperation of the Government and all its agencies.

ARTICLE II.—Operations in Gold and Foreign Exchange

SEC. 72. Purchases and sales of gold.—The Central Bank may buy and sell gold in any form,
subject to such regulations as the Monetary Board may issue.

The Monetary Board may at any time require that any gold held by any person or entity under
the jurisdiction of the Philippines be delivered to the Central Bank or to any banks or other
agents contracted or engaged by the Central Bank for the purpose. The Monetary Board may also
impose conditions under which gold in any shape or form may be acquired and held, transported,
melted or treated, imported, exported, earmarked or held in custody for foreign or domestic
account.

The purchases and sales of gold authorized by this section shall be made in national currency and
at rates which do not differ from the par value of the peso by more than the margins established
by the International Monetary Fund.

SEC. 73. Purchases and sales of foreign exchange.—The Central Bank may buy and soil foreign
notes and coins, and documents and instruments of types customarily employed for the
international transfer of funds. The Bank may engage in future exchange operations.
The Central Bank may engage in foreign exchange transactions with the following entities only:

(a) Banking institutions operating in the Philippines;

(b)  The Government, its political subdivisions and instrumentalities;

(c) Foreign or international financial institutions; and

(d)  Foreign governments and their instrumentalities.

In order to maintain the convertibility of the peso, the Central Bank shall, at the request of any
banking institution operating in the Philippines, buy any quantity of foreign exchange offered,
and sell any quantity of foreign exchange demanded, by such institution, provided that the
foreign currencies so offered or demanded are freely convertible into gold or United States
dollars. This requirement shall not apply to demands for foreign notes and coins.

The Central Bank shall effect its exchange transactions between foreign currencies and the
Philippine peso at the rates determined in accordance with the provisions of section 76.

SEC. 74. Emergency restrictions on exchange operations.—Notwithstanding the provisions of

the third paragraph of the preceding section, in order to protect the international reserve of the
Central Bank during an exchange crisis and to give the Monetary Board and the Government
time in which to take constructive measures to combat such a crisis, the Monetary Board, with
the concurrence of at least five of its members, and with the approval of the President of the
Philippines, may temporarily suspend or restrict sales of exchange by the Central Bank and may
subject all transactions in gold and foreign exchange to license by the Central Bank. The
adoption of the emergency measures authorized in this section shall be subject to any executive
and international agreements to which the Republic of the Philippines is a party.

SEC. 75. Acquisition of inconvertible currencies.—The Central Bank shall avoid the acquisition
and holding of currencies which are not freely convertible, and may acquire such currencies in an
amount exceeding the minimum balance necessary to cover current demands for said currencies
only when, and to the extent that, such acquisition is considered by the Monetary Board to be in
the national interest. The Monetary Board shall determine the procedures which shall apply to
the acquisition and disposition by the Central Bank of foreign exchange which is not freely
utilizable in the international market.

SEC. 76. Exchange rates.—The Monetary Board shall determine the rates at which the Central
Bank shall buy and sell spot exchange, but said rates shall not differ by more than one-half of
one per cent from the legal parities established in section 50, unless in any given case a greater
divergence from the legal parity exists in foreign markets. The Central Bank shall not collect any
additional commissions or charges of any sort, other than actual telegraphic or cable costs
incurred by it.

The Monetary Board shall similarly determine the rates for other types of foreign exchange
transactions by the Central Bank, including purchases and sales of foreign notes and, coins, but
the margins between the legal parities and the rates thus established may not exceed the
corresponding margins for spot exchange transactions by more than the additional costs or
expenses involved in each type of transaction.

SEC. 77. Revaluation profits and losses on Central Bank’s international assets.—The profits or
losses arising from any revaluation of the Central Bank’s net assets or liabilities in gold or
foreign currencies as a result of changes in the gold value of the peso, or of changes in the
parities or exchange rates of foreign currencies with respect to the Philippine peso, shall be
distributed in the manner provided in section 44 of thus Act.

SEC. 78. Operations with foreign entities.—The Central Bank of the Philippines may grant loans
to and receive loans from foreign banks and other foreign or international entities, both public
and private, and may engage in such other operations with these entities as are in the national
interest and are appropriate to its character as a central bank. The Central Bank may also act as
agent or correspondent for such entities.

The Central Bank may pledge any gold or other assets which it possesses as security against
loans which it receives from foreign or international entities.

ARTICLE III.—Regulation of Foreign Exchange Operations

of the Banks

SEC. 79. Rates applicable to purchases and sales of exchange by the Banks.—The Monetary
Board shall determine the minimum and maximum rates at which, the banks may buy spot
exchange, and the maximum and minimum rates at which they may sell spot exchange, but the
rates thus established for each currency shall not differ from the respective legal parity by more
than one per cent, unless in any given case a greater divergence from parity exists in foreign
markets. The banks shall not collect any additional commissions or charges other than actual
telegraphic or cable costs incurred by them.

The rates to be used by the banks for other types of exchange transactions shall be based on their
spot exchange rates and shall not differ from such rates by margins greater than those considered
reasonable by the Monetary Board: Provided, however, That the Board may at any time
specifically fix such margins. The Monetary Board shall issue such rules and regulations as may
be necessary to implement the provisions of this paragraph.

The rates established in accordance with the provisions of this section shall not apply to
exchange transactions with the Central Bank. Such transactions shall be made at the rates
established in accordance with the provisions of section 76 of this Act.

SEC. 80. Foreign exchange holdings of the banks.—In order that the Central Bank may at all
times have foreign exchange resources sufficient to enable it to maintain the international
stability and convertibility of the peso, or in order to promote the domestic investment of bank
resources, the Monetary Board may require the banks to sell the Central Bank all or part of their
surplus holdings of foreign exchange. Such transfers may be required for all foreign currencies
or for only certain of such currencies, according to the decision of the Monetary Board. The
Transfers shall be made at the rates established under the Provisions of section 76 of this Act.

For the purposes of this Act, surplus holdings of any foreign currency shall be defined as the
amount by which a bank’s assets in the currency exceed the sum of the working balance required
to accommodate normal short run fluctuations between the bank’s sales and purchases of said
currency and the total liabilities of the bank in the currency: Provided, however, That in
calculating surplus holdings in any given currency, a bank may, at the discretion of the Monetary
Board, subtract from its net assets in that currency an amount equal to any net liabilities of the
bank in other currencies into which said currency is freely convertible.

The Monetary Board may stipulate that the working balance to which reference is made in the
preceding paragraph shall not exceed a specified proportion of the average daily sales of the
respective currency by the bank to entities other than the Central Bank during the preceding
month. Any proportion thus established by the Monetary Board, and any requirement to transfer
foreign exchange to the Central Bank, shall be applied to all banks alike and without
discrimination.

SEC. 81. Requirement of balanced currency position.— The Monetary Board may require the
banks to maintain a balanced position between their assets and liabilities in Philippine pesos or in
any other currency or currencies in which they operate. The banks shall be granted a reasonable
period of time in which to adjust their currency positions to any such requirement.

The powers granted under this section shall be exercised only when special circumstances make
such action necessary, in the opinion of the Monetary Board, and shall be applied to all banks
alike and without discrimination.

SEC. 82. Regulation of non-spot exchange transactions.— In order to restrain the banks from
taking speculative positions with respect into future fluctuations in foreign exchange rates, the
Monetary Board may issue such regulations governing bank purchases and sales of non-spot
exchange as it may consider necessary for said purpose.

SEC. 83. Revaluation profits and losses on bank’s holdings of gold and foreign exchange.—Any
revaluation profits realized or losses suffered by the banks on their net assets or liabilities in gold
or freely convertible foreign currencies as a result of changes in the par value of the peso, in the
legal parities between the Philippine peso and such foreign currencies, or in the Central Bank’s
exchange rates for such currencies, shall be for the account of the Central Bank in their entirety.

The Monetary Board may at any time declare that revaluation profits or losses on banks’ net
holdings of any foreign currency other than those included under the provisions of the first
paragraph of this section shall also be for the account of the Central Bank until such time as the
Board gives notice to the contrary. Said notice shall be communicated, to the banks at least eight
days before the date on which the revaluation risks cease to be for the account of the Central
Bank, however, and shall apply only to acquisitions of the specified foreign currency subsequent
to said date. The Board shall issue appropriate regulations to restrain the banks from increasing
their holdings of the specified currency during the period from the date of the notice to the date
on which it becomes effective.

The Monetary Board shall issue such rules and regulations as may be necessary to administer the
provisions of this section.

SEC. 84. Other exchange losses.— The banks shall bear the risks of non-compliance with the
terms of the foreign exchange documents and instruments which they buy or sell, and shall also
bear any other typically commercial or banking risks, including exchange risks not assumed by
the Central Bank under the provisions of the preceding section.

SEC. 85. Information on exchange operations.—The banks shall report to the Central Bank of
the Philippines the volume and composition of their purchases and sales of gold and foreign
exchange each day, and must furnish such additional information as the Central Bank may
request with reference to the movements in their accounts in foreign currencies.

The Monetary Board may also require other persons and entities to report to it currently all
transactions or operations in gold, in any shape or form, and in foreign exchange. The Monetary
Board shall prescribe the forms on which such declarations must be made. The accuracy of the
declaration may be verified by the Central Bank by whatever inspection it may deem necessary.

ARTICLE IV.—Loans to Banking Institutions

A. THE CREDIT POLICY OF THE CENTRAL BANK

SEC. 86. Guiding principles.—The rediscounts, discounts, loans and advances which the Central
Bank is authorized to extend to banking institutions under the provisions of the present article of
this Act shall be used to regulate the volume, cost availability and character of bank credit and to
provide the banking system with liquid funds in times of need.

In periods of inflation, or as long as inflationary dangers exist, the Central Bank shall refrain
from extending credit to banks and at such times shall grant credit only in exceptional cases
where special circumstances justify a deviation from the principle stated herein.

Conversely, whenever the national monetary policy requires an expansion of the money supply,
the Central Bank shall make full use of the credit operations authorized under the present article
of this Act.

B. NORMAL CREDIT OPERATIONS

SEC. 87. Authorized types of operations.—Subject to the principles stated in the preceding

section of this Act, the Central Bank may normally and regularly carry on the following credit
operations with banking institutions operating in the Philippines:

(a) Commercial credits.—The Central Bank may rediscount, discount, buy and sell bills,
acceptances, promissory notes and other credit instruments with maturities of not more than 180
days from the date of their rediscount, discount or acquisition by the Central Bank and resulting
from transactions related to:

(1) The importation, exportation, purchase or sale of readily salable goods and products, or their
transportation within the Philippines; or
(2) The storing of nonperishable goods and products which are duly insured and deposited, under
conditions assuring their preservation, in authorized bonded warehouses or in other places
approved by the Monetary Board.

(b) Production credits. —The Central Bank may rediscount, discount, buy and sell bills,
acceptances, promissory notes and other credit instruments having maturities of not more than
270 days from the date of their rediscount, discount or acquisition by the Central Bank and
resulting from transactions related to the production or processing of agricultural, animal,
mineral or industrial products. Documents or instruments acquired in accordance with this
subsection shall be secured by a pledge of the respective crops or products.

(c) Advances.—The Central Bank may grant advances against the following kinds of collateral
for fixed periods which, with the exception of advances against the collateral named in clause (4)
of the present subsection, shall not exceed 10 days:

(1) Gold coins or bullion;

(2) Securities representing obligations of the Central Bank or of other domestic credit institutions
of recognized solvency;
(3) The credit instruments to which reference is made in subsection, (a) of this section;
(4) The credit instruments to which reference is made in subsection (b) of this section, for
periods which shall not exceed 270 days;
(5) Utilized portions of advances in current account covered by regular overdraft agreements
related to operations included under subsections (a)  and (b)  of this section, and certified as to
amount and liquidity by the institution soliciting the advance;
(6) Negotiable treasury bills, certificates of indebtedness, notes and other negotiable obligations
of the Government maturing within three years from the date of .the advance; and
(7) Negotiable bonds issued by the Government of the Philippines, by Philippine provincial, city
or municipal governments, or by any Philippine Government instrumentality, and having
maturities of not more than ten years from the date of the advance.

The rediscounts, discounts, loans and advances made in accordance with the provisions of this
section may not be renewed or extended unless extraordinary circumstances fully justify such
renewal or extension.

Advances made against the collateral named in clauses (6) and (7) of subsection (c) of this
section may not exceed; 80 per cent of the current market value of the collateral.

C. EXTRAORDINARY CREDIT OPERATIONS

SEC. 88. Loans to mortgage, institutions.— Under special circumstances in which the Monetary
Board considers it advisable to promote or facilitate the lending operations, or certain classes
thereof, of savings banks, building and loan associations, or of the Rehabilitation Finance
Corporation, the Central Bank may grant loans or advances with maturities of not more than, one
year to said institutions against pledge or assignment of payments, installments or amortizations
of their borrowers coming due within the twelve months from the date of the granting of such
loans or advances, and in an amount not exceeding forty per cent of the payments, installments
or amortizations pledged or assigned: Provided, however, That the Central Bank shall not make
such loans or advances whenever such action would aggravate or contribute to inflationary
tendencies existing in the economy.

In granting loans and advances under this section, the Central Bank shall first ascertain that the
payments, installments and amortizations to be pledged or assigned to it are in no case currently
in arrears and that said payments, installments and amortizations are related to credit operations
which in every case are adequately secured by mortgages. Said mortgages shall be assigned to
the Central Bank.

SEC. 89. Extension of maturities.—Whenever, in the opinion of the Monetary Board, a

deflationary situation exists which requires special expansionary credit measures, the Central
Bank may extend the maximum maturities of new credit operations granted under the provisions
of subsections (a), (b) and (c) of section 87 to periods not exceeding one year.

D. EMERGENCY CREDIT OPERATIONS

SEC. 90. Emergency loans and advances.—In periods of emergency or of imminent financial

panic which directly threaten monetary and banking stability, the Central Bank may grant
banking institutions extraordinary advances secured by any assets which are defined as
acceptable security by a concurrent vote of at least five members of the Monetary Board. While
such advances are outstanding, the debtor institution may not expand the total volume of its loans
or investments without the prior authorization of the Monetary Board.

E. CREDIT TERMS

SEC. 91. Interest and rediscount rates.—The Monetary Board shall fix the interest and
rediscount rates to be charged by the Central Bank on its credit operations in accordance with the
character and term of the operation, but after due consideration has been given to the credit
needs, of the market, the composition of the Central Bank’s portfolio, .and the general
requirements of the national monetary policy.

SEC. 92. Endorsement.—The documents rediscounted, discounted, bought or accepted as

collateral by the Central Bank in the course of the credit operations authorized in this article must
bear the endorsement of the institution from which they are received.

SEC. 93. Repayment of credits.—Documents rediscounted, discounted or accepted as collateral

by the Central Bank must be withdrawn by the borrowing institution on the dates of their
maturities, or upon liquidation of the obligations which they represent or to which they relate
whenever said obligations have been liquidated prior to their dates of maturity.
Banks shall have the right at any time to withdraw any documents which they have presented to
the Central Bank as collateral, upon payment in full of the corresponding debt to the Bank,
including interest charges.

SEC. 94. Other requirements.—The Monetary Board may prescribe, within the general powers
granted to it under this Act, additional conditions which borrowing institutions must satisfy in
order to have access to the credit of the Central Bank. These conditions may refer to the rates of
interest charged by the banks, to the purposes for which their loans in general are destined, and
to any other clearly definable aspect of the credit policy of the bank.

ARTICLE V.—Credit Operations with the Government

SEC. 95. Provisional advances to the Government.—The Central Bank may make direct
provisional advances to the Government or to any of its political subdivisions to finance
expenditures authorized in the annual appropriations of the borrowing entity: Provided, That said
advances must be repaid before the end of the first quarter following the end of the fiscal year of
the Government or political subdivision and shall not, in their aggregate, exceed fifteen per cent
of the average annual income of the borrower for if the last three preceding years.

ARTICLE VI.—Open Market Operations for the Account

of the Central Bank

SEC. 96. Principles of open market operations.—The open market purchases and sales of
securities by the Central Bank shall be made exclusively for the purpose of achieving the
objectives of the national monetary policy and shall be limited to the operations authorized in
sections 97 and 98 of this Act.

Accordingly in periods of inflation or as long as inflationary dangers exist, the Central Bank
shall refrain from open market purchases and at such times shall endeavor to reduce its security
holdings and/or to sell the evidences of indebtedness which it is permitted to issue under the
provisions of section 98 of this Act.

Conversely, whenever the national monetary policy requires an expansion of the money supply,
the Central Bank may repurchase its own evidences of indebtedness prior to their date of
maturity, as authorized in section 98, and may acquire the securities to which reference is made
dm section 97. In purchasing said securities, the Central Bank shall give preference to short-term
obligations, in order that the Bank may be in a better position to reduce the money supply should
conditions in the future so require.

Whenever securities meeting the conditions established in section 97 of this Act represent
obligations in foreign currencies, the decisions of the Monetary Board to purchase and sell such
securities shall be governed by the adequacy of the international reserve of the Central Bank and
by the effect which such operations would have on the balance of payments and the volume of
the money supply.
SEC. 97. Purchases and sales of Government securities.— In order to achieve the objectives of
the national monetary policy, the Central Bank may, in accordance with the principles stated in
section 96 of this Act and with such rules and regulations as may be prescribed by the Monetary
Board, buy and sell in the open, market for its own account:

(a) Evidences of indebtedness issued directly by the Government of the Philippines or by its

political subdivisions, and

(b)  Evidences of indebtedness issued by Government instrumentalities and fully guaranteed by

the Government.

The evidences of indebtedness acquired under the provisions of this section must be freely
negotiable and regularly serviced.

SEC. 98. Issue and negotiation of Central Bank obligations.—In order to provide the Central
Bank with effective instruments for open market operations, the Bank may, subject to such rules
and regulations as the Monetary Board may prescribe and in accordance with the principles
stated in section 96 of this Act, issue, place, buy and sell freely negotiable evidences of
indebtedness of the Bank. Said evidences of indebtedness may be issued directly against the
international reserve of the Bank or against the securities which it has acquired under the
provisions of section 97 of this Act, or may be issued without relation to specific types of assets
of the Bank.

The Monetary Board shall determine the interest rates, maturities and other characteristics of said
obligations of the Bank, and may, if it deems it advisable, denominate the obligations in gold or
foreign currencies.

Subject to the principles stated in section 96 of this Act, the evidences of indebtedness of the
Central Bank to which this section refers may be acquired by the Bank before their maturity,
either through purchases in the open market or through redemptions at par and by lot if the Bank
has reserved the right to make such redemptions. The evidences of indebtedness acquired or
redeemed by the Central Bank shall not be included among its assets, and shall be immediately
retired and cancelled.

ARTICLE VII.—Composition of Central Bank’s Portfolio

SEC. 99. Review of the Central Bank’s portfolio.—At least once every month the Monetary
Board shall review the portfolio of the Central Bank in relation to the Bank’s future credit policy.

In reviewing the Central Bank’s portfolio, the Monetary Board shall especially consider whether
a sufficiently large part of the portfolio consists of assets with early maturities, in order that a
contraction in Central Bank credit may be effected promptly whenever the national monetary
policy so requires.

ARTICLE VIII.—Bank Reserves

SEC. 100. Reserve requirements.—In order to control the volume of money created by the credit
operations of the banking system, banks operating in the Philippines shall be required to
maintain reserves against their deposit liabilities. The required reserves of each bank shall be
proportional to the volume of its deposit liabilities and shall ordinarily take the form of a deposit
in the Central Bank of the Philippines; nevertheless, the Monetary Board may, whenever
circumstances warrant, permit the maintenance of part of the required reserves in the form of
assets other than peso deposits with the Central Bank. Reserve requirements shall be applied to
all banks uniformly and without discrimination.

SEC. 101. Required reserves against peso deposits.—The Monetary Board is authorized to

prescribe and modify the minimum reserve ratios applicable to each class of peso deposits:
Provided, however, That such ratios shall not be less than live per cent (5%) or more than
twenty-live per cent (25%) for time and savings deposits, and shall not be less than ten per cent
(10%) or more than fifty per cent (50%) for demand deposits.

Notwithstanding the provisions of the preceding paragraph of this section, the Monetary Board
may, in periods of inflation, prescribe higher reserve ratios, but not exceeding 100 per cent, for
any future increase in the deposits of each bank above the amounts outstanding on the date on
which the bank is notified of the requirement.

Whenever the reserve requirements established by the Monetary Board place any bank under
obligation to maintain minimum reserves in excess of twenty-five per cent (25%) of its total time
or savings deposits, or in excess of fifty per cent (50%) of its total demand deposits, the Central
Bank may pay interest on said excess at a rate which shall not be higher than the Bank’s lowest
rediscount rate.

SEC. 102. Required reserves against foreign currency deposits.—The Monetary Board is

similarly authorized to prescribe and modify the minimum reserve ratios applicable to deposits
denominated in foreign currencies: Provided, however, That such ratios may not be set below ten
per cent (10%) or above one hundred per cent (100%), with respect to deposit liabilities in each
foreign currency.
The Monetary Board shall determine the form and the currency, either national or foreign, in
which such reserves shall be maintained: Provided, however, That any such requirements shall
not preclude the banks from keeping a balanced position between their assets and liabilities in
each of the foreign currencies in which they operate.

SEC. 103. Reserves against unused balances of overdraft lines.— In order to facilitate Central
Bank control over the volume of bank credit, the Monetary Board may establish minimum
reserve requirements for unused balances of overdraft lines.

The power is of the Monetary Board to prescribe and modify reserve requirements against
unused balances of over-draft lines shall be the same as its powers with respect to reserve
requirements against demand deposits.

SEC. 104. Increase in reserve requirements.—Whenever it becomes necessary, in the opinion of

the Monetary Board, to increase reserve requirements against existing liabilities, the increase
shall be made in a gradual manner and shall not exceed four percentage points in any thirty-day
period. The banks shall be notified reasonably in advance of the date on which such increase is to
become effective.

SEC. 105. Computation on reserves.—The reserve position of each bank shall be calculated

daily on the basis of the amount, at the close of business for the day, of the bank’s reserves and
the amount of its liability accounts against which reserves are required to be maintained.

For the purpose of computing the reserve position of each bank, its principal office in the
Philippines and all its branches and agencies located therein shall be considered as a single unit.

SEC. 106. Reserve deficiencies.— Whenever the reserve position of any bank, computed in the
manner specified in the preceding section of this Act, is below the required minimum, the bank
shall pay the Central Bank one tenth of one per cent (1/10 of 1%) per day on the amount of the
deficiency: Provided, however, That banks shall ordinarily be permitted to offset any reserve
deficiency occurring on one or more days of the week with any excess reserves which they may
hold on other days of the same week and shall be required to pay the penalty only on the average
daily deficiency during the week. In cases of abuse, the Monetary Board may deny any bank the
privilege of offsetting reserve deficiencies in the aforesaid manner.

If a bank chronically has a reserve deficiency, the Monetary Board may limit or prohibit the
making of new loans or investments by the bank and may require that part or all of the met
profits of the bank be assigned to surplus.

SEC. 107. Interbank settlements.—The Central Bank shall provide facilities for interbank
clearing.
The deposit reserves maintained by the banks in the Central Bank, in .accordance with the
provisions of section 100, shall serve as a basis for the clearing of checks and the settlement of
interbank balances, subject to such rules and regulations as the Monetary Board may issue with
respect to such operations.

ARTICLE IX.—Selective Regulation of Bank Operations

SEC. 108. Guiding principle.—The Monetary Board shall use the powers granted to it under the
present article and elsewhere in this Act to ensure that the supply availability and cost of money
are in accord with the needs of the Philippine economy and that bank credit is not granted for
speculative purposes prejudicial to the national interests.

SEC. 109. Interest rates, commissions and charges.— The Monetary Board may fix the
maximum rates of interest which banks may pay on deposits and on any other obligations.

The Monetary Board may, within the limits prescribed in the Usury Law (Act No. 2655, as
amended), fix the maximum rates of interest which banks may charge for different types of loans
and for any other credit operations, or may fix the maximum differences which may exist
between the interest or rediscount rates of the Central Bank and the rates which the banks may
charge their customers if the respective credit documents are not to lose their eligibility for
rediscount or advances in the Central Bank.

Any modifications in the maximum interest rates permitted for the borrowing or lending
operations of the banks shall apply only to future operations and not to those made prior to the
date on which the modification becomes effective.

In order to avoid possible evasion, of maximum interest rates set by the Monetary Board, the
Board may also fix the maximum rates that banks may pay to or collect from their customers in
the form of commissions, discounts, charges, fees or payments of any sort.

SEC. 110. Margin requirements against letters of credit.— In order to restrict the granting of
bank credit for purposes which are contrary to the general welfare of the Philippines, the
Monetary Board may at any time prescribe minimum cash margins for the opening of letters of
credit, and may relate the size of the required margin to the nature of the transaction to be
financed.

The Board may particularly use its powers under this section to require high margins for the
opening of letters of I credit to finance the importation of luxuries or other non-essential goods,
or to finance any goods the importation of which at the time is considered by the Monetary
Board to be unduly prompted by speculative motives prejudicial to the interests of the Philippine
economy.

SEC. 111. Required security against bank loans.—In order to promote the liquidity and solvency
of the banking system, or to influence the availability of bank credit for specific purposes, the
Monetary Board may issue such regulations as it may deem necessary from time to time with
respect to the maximum permissible maturities of the loans and investments which the banks
may make, and the kind and amount of security to be required against the various types of credit
operations of the banks.

SEC. 112. Portfolio ceilings.— Whenever the Monetary Board considers it advisable to prevent
or check an expansion of bank credit, the Board may place an upper limit on the amount of loans
and investments which the banks hold, or may place a limit on the rate of increase of such assets
within specified periods of time. The Monetary Board may apply such limits to the loans and
investments of each bank or to specific categories thereof.

In no case shall the Monetary Board establish limits which are below the value of the loans or
investments of the banks on the date on which they are notified of such restrictions. The
restrictions shall be applied to all banks uniformly and without discrimination.

SEC. 113. Minimum capital ratios.—In order to regulate the volume and distribution of bank
credit, and to ensure the maintenance of bank capital and surplus at levels adequate to protect the
depositors against risk of loss, the Monetary Board may prescribe minimum ratios which the
capital and surplus of the banks must bear to the volume of their assets, or to specific categories
thereof, and may alter said ratios whenever it deems it convenient so to do.
 ARTICLE X.—Government Credit Institutions as
Instruments of the National Monetary Policy

SEC. 114. Co-ordination of credit policies.—Government-owned corporations which perform

banking or credit functions are hereby declared to be instruments of the national monetary policy
and, accordingly, shall co-ordinate their general credit policies with those of the Monetary
Board.

Toward this end, the Monetary Board may, whenever it deems it expedient, make suggestions or
recommendations to such corporations for the more effective co-ordination of their policies with
those of the Central Bank.

CHAPTER V.—FUNCTIONS AS FISCAL AGENT, BANKER

AND FINANCIAL ADVISOR OF THE GOVERNMENT

ARTICLE I.—Functions as Fiscal Agent and Banker of

the Government

SEC. 115. Designation of Central Bank as fiscal agent and banker of the Government.—The
Central Bank of the Philippines shall act as the fiscal agent and banker of the Government its
political subdivisions and instrumentalities.

SEC. 116. Representation with the International Monetary Fund.—The Central Bank of the
Philippines shall represent the Government of the Philippines in all dealings, negotiations and
trans actions with the International Monetary Fund and shall carry such accounts as may result
from Philippine membership in, or operations with, said Fund.

SEC. 117. Representation with other financial institutions.—The Central Bank may be

authorized by the Government to represent it in dealings, negotiations or transactions with the
International Bank for Reconstructions and Development and with other foreign or international
financial institutions or agencies.

SEC. 118. Official deposits.—The Central Bank shall be the official depository of the
Government and its political subdivisions and instrumentalities: Provided, however, That the
Monetary Board may designate Government-owned banks and other banks incorporated in the
Philippines to accept deposits from said entities, subject to such rules and regulations as the
Board may prescribe.

SEC. 119. Fiscal operations.—The Central Bank shall open a general cash account for the
Treasurer of the Philippines, in which the liquid funds of the Government shall be deposited.

Transfers of funds from this account to other accounts shall be made only upon order of the
Treasurer of the Philippines.

SEC. 120. Other banks as agents of the Central Bank.—In the performance of its functions as
fiscal agent, the Central Bank may engage the services of the Philippine National Bank and of
other domestic banks for operations in localities at home or abroad in which the Central Bank
does not have offices or agencies adequately equipped to perform said operations: Provided,
however, That for fiscal operations in foreign countries, the Central Bank may engage the
services of foreign banking and financial institutions.

SEC. 121. Remuneration for services.—The Central Bank shall not charge for services which lit
renders to the Government and to its political, subdivisions and instrumentalities any rates,
commissions or fees.
The Bank shall not pay interest on deposits of the Government or of its political subdivision’s
and instrumentalities.

ARTICLE II.— The Marketing and Stabilization of

Securities for the Account of the Government

A. THE ISSUE AND PLACING OF GOVERNMENT SECURITIES

SEC. 122. Issue of Government obligations.—The issue of securities representing obligations of

the Government, its political subdivisions or instrumentalities, shall be made through, the Central
Bank, which shall act as agent of, and for that account of, the Government or its respective
subdivision or instrumentality, as the case may be: Provided, however, That the Bank shall not
subscribe to the issue of said securities and shall not guarantee their placement.

SEC. 123. Methods of placing Government securities.— The Central Bank may place the
securities to which the preceding section refers through direct sale to financial institutions and
the public, through outright sale to syndicates, brokers or dealers for purposes of resale to the
public for their own account, or through brokers or banks contracted to place the securities with
the public for the account of the Central Bank.

The Central Bank shall not be a member of any stock exchange or syndicate, but may intervene
therein, for the sole purpose of regulating their operations in the placing of Government
securities.

The Government, or its respective subdivisions or instrumentalities, shall reimburse the Central
Bank for the expenses incurred in the placing of the aforesaid securities.

SEC. 124. Servicing and redemption of the public debt.— The servicing and redemption of the
public debt shall also be effected through the Central Bank.

B. CENTRAL BANK SUPPORT OF THE GOVERNMENT

SECURITIES MARKET

SEC. 125. The Securities Stabilization Fund.— There shall be established a “Securities

Stabilization Fund” which shall be administered by the Central Bank for the account of the
Government.
The operations of the Securities Stabilization Fund shall consist of purchases and sales, in the
open market, of bonds and other evidences of indebtedness issued or fully guaranteed by the
Government of the Philippines. The purpose of these operations shall be to increase the liquidity
and stabilize the value of said Securities in order thereby to promote private investment in
Government obligations.

The Monetary Board shall use the resources of the Fund to prevent, or moderate, sharp
fluctuations in the quotations of said Government obligations, but shall not endeavor to alter
movement of the market resulting from basic changes in the pattern or level of interest rates.

The Monetary Board shall issue such regulations as may be necessary to implement the
provisions of this section.

SEC. 126. Resources of the Securities Stabilization Fund.— The resources of the Securities
Stabilization Fund shall come from the following sources:

(a)  Two million (P2,000,000) pesos, which are hereby appropriated from the assets of the
Exchange Standard Fund, as provided in section 134 of this Act, and such other appropriations as
the Government may make from time to time;

(b) That part of the annual net profits of if the Central Bank allocated to the Fund in accordance
with the provisions of section 41;

(c) Profits arising from recoinage or from reductions in the currency issue, under the conditions
specified in section 45.

SEC. 127. Profits and losses of the Fund.—The Securities Stabilization Fund shall retain any net
profits which it may make on its operations, regardless of whether said profits arise from capital
gains or from interest earnings. The Fund shall correspondingly bear any net losses which it may
incur.

ARTICLE III.—Functions as Financial Advisor

of the Government

SEC. 128. Financial advice on official credit operations.— Before undertaking any credit
operation abroad, the Government, through the Secretary of Finance, shall request the opinion, in
writing, of the Monetary Board on the monetary implications, of the contemplated action. Such
opinions must similarly be requested by all political subdivisions and instrumentalities of the
Government before any credit operation abroad is undertaken by them.

The opinion of the Monetary Board shall be based on the gold and foreign exchange resources
and obligations of the nation and on the effects of the proposed operation on the balance of
payments and on the volume of the money supply.

Whenever the Government, or any of its political subdivisions or instrumentalities, contemplates

borrowing within the Philippines, the prior opinion of the Monetary Board shall likewise be
requested in order that the Board may render an opinion on the probable effects of the proposed
operation on the money supply, the price level, and the balance of payments.

SEC. 129. Representation on the National Economic Council.— In order, to assure effective

coordination between the economic, financial and fiscal policies of the Government and the
monetary, credit and exchange policies of the Central Bank, the Governor of the Central Bank
shall be an ex officio member of the National Economic Council.

CHAPTER VI.—PRIVILEGES AND PROHIBITIONS

ARTICLE I.—Privileges

SEC. 130. Tax exemptions.—The Central Bank of the Philippines shall be exempt, from all
national, provincial, Municipal and city taxes and assessments now in force or hereafter
established.

The exemptions authorized in the preceding paragraph of this section shall apply to all property
of the Central Bank, to the resources, receipts, expenditures, profits and income of the Bank, as
well as to all contracts, deeds, documents and transactions related to the conduct of the business
of the Bank: Provided, however, That said exemptions shall apply only to .such taxes and
assessments for which .the Central Bank itself would otherwise be liable, and shall not apply to
taxes or assessments payable by persons or other entities doing business with, the Central Bank.

SEC. 131. Exemption from customs duties.—The importation and exportation by the Central
Bank of notes and coins, and of gold and other metals to be used for purposes authorized under
this Act, and the importation of all equipment needed for furnishing, equipping and operating the
offices of the Bank, shall be fully exempt from all customs duties and consular fees and from all
other taxes, assessments and charges related to such importation or exportation.

SEC. 132. Applicability of the Civil Service Law.—Appointment in the Central Bank, except as
to those which are policy-determining, primarily confidential or highly technical in nature, shall
be made only according to the Civil, Service Law and Regulations.

Officers and employees in the Central Bank, including all members of the Monetary Board, shall
not engage directly or indirectly in partisan activities or take part in any election except to vote.

No officer or employee of the Central Bank subject to the Civil Service Law and Regulations
shall be removed or suspended except for cause as provided by law.

ARTICLE II.—Prohibitions

SEC. 133. Prohibitions.—The Central Bank shall not acquire shares of any kind or accept them
as collateral, and shall not participate in the ownership or management of any enterprise, either
directly or indirectly.

CHAPTER VII.—TRANSITORY PROVISIONS

 ARTICLE I.— The Exchange Standard Fund

SEC. 134. Liquidation of the Exchange Standard Fund.— Prior to the date on which the Central
Bank commences business, the Exchange Standard Fund shall be liquidated. The net assets of the
Fund remaining after outstanding liabilities have been, met shall be used for the following
purposes and in the following priority:

(a)  Ten million (P10,000,000) pesos shall be used to subscribe to the capital stock of the Central
Bank;

(b)  Two million (2,000,000) pesos shall be transferred to the Securities Stabilization Fund; and

(c) The remainder shall be transferred to the Bank in accordance with the provisions of section
135.

ARTICLE II.—Retirement of Treasury Certificate and Coins

SEC. 135. Assumption by the Central Bank of the liability for treasury certificates.— On the date
of which the Central Bank commences business, it shall assume the liability of the Treasury
Certificate Fund for all outstanding treasury certificates. The amount of the liability shall be
determined by the Secretary of Finance and certified by the Auditor-General. In consideration,
for assuming this Inability the Treasurer of the Philippines shall transfer to the Bank all of the
available assets of the Treasury Certificate Fund and that portion of the assets of the Exchange
Standard Fund which may remain after deducting the amounts required to provide the capital of
the Bank and the contribution to the Securities Stabilization Fund, as provided in the preceding
section.

If the total assets thus transferred exceed the liability assumed, the difference shall be used to
establish a reserve on the books of the Central Bank against the: contingency that the actual
amount of treasury certificates which the Central Bank may be called upon to exchange for its
own notes may prove to be larger than the liability originally assumed. If the total assets
transferred should be less than liability assumed, the Secretary of Finance shall deliver to the
Bank a non-interest bearing, non-negotiable note without fixed maturity in the amount of the
difference.

The Central Bank shall, as soon as practicable, exchange outstanding treasury certificates for its
own notes in accordance with the procedure described in section 59 of this Act. During the
period of such exchange any treasury certificates exchanged, by the Bank in excess of the
liability originally assumed for such certificates shall be charged, first, to the reserve mentioned
in the preceding paragraph, if there be such reserve, and, second, to the deposit of the
Government. At the expiration of the exchange period any remaining balance of the liability
account for outstanding treasury certificates shall be applied, first, to reduce the face value of the
note delivered by the Secretary of Finance in accordance with the preceding paragraph, if such a
note has been issued, and, second, to reduce the Account to Secure the Coinage, the creation of
which is provided for in the following section. Any remaining balance of the above-mentioned
reserve shall be applied solely to reduce the Account to Secure the Coinage.
SEC. 136. Assumption by the Central Bank of the liability for treasury coins.—On the date on
which the Central Bank commences business, the total Philippine treasury coin issue, including
coins dumped in Manila Bay but not yet salvaged, shall become a liability of the Bank. As a
contra item against the liability thereby assumed there shall be set up on the books of the Central
Bank an asset account in an amount equal to the face value of the total Philippine treasury coin
issue. This account shall be called the “Account to Secure the Coinage.”

The Central Bank shall, as soon as practicable, exchange treasury coins in circulation for Central
Bank coins in accordance with the procedure described in section 59 of this Act. When the
Monetary Board has completed the exchange of treasury coins for its own coins and has thereby
determined the precise amount of the liability which it originally assumed for the treasury coin
issue, the outstanding amount of the Account to Secure the Coinage shall be reduced by the
difference between the original amount of the Account and the amount of the liability as finally
determined.

ARTICLE III.—Extraordinary Advances to the

Government

SEC. 137. Extraordinary advances to the Government. —Notwithstanding any provisions in the

present Act to the contrary, the Central Bank may, until June 30, 1951, make direct advances to
the Government when, in the opinion of the Monetary Board, the international reserve is
adequate to meet all foreseeable demands upon it and when such advances are consistent with
the achievement of the Boards objective of domestic monetary stability. The total advances made
under the authority of this section shall not exceed two hundred million (P200,000,000) pesos.

The Bank shall make the above advances only against an equivalent amount of negotiable
government securities having maturities which, insofar as possible, are appropriate to the uses to
which the advances will be put, but which in no case shall exceed 15 years. In order .to permit
their resale by the Central Bank, the securities shall be in denominations and bear interest rates
which will make them attractive to the banks and to the public.

Advances shall be made only for certain purposes specifically authorized by law, and shall be
made only for productive and income-producing projects, or for the repayment or servicing of
external obligations of the Government.

ARTICLE IV.—Miscellaneous Provisions

SEC. 138. Transfer of powers and functions of the Bureau of the Treasury to the Central Bank.
— All powers, duties and functions vested in the Bureau of the Treasury and the Treasurer of the
Philippines which by the provisions of this Act shall be exercised by the Bank are hereby
transferred to the Central Bank.

SEC. 139. Transfer of authority, powers, and functions of the Bank Commissioner and the
Bureau of Banking to the Central Bank.—All authority now vested in the Bank Commissioner
and the Bureau of Banking with respect to the establishment, operation or liquidation of banking
and credit institutions, and branches or agencies thereof, and all other powers, duties and
functions vested in the Bureau, Ranking and the Bank Commissioner which by the protons of
this Act shall be exercised by the Bank, are hereby transferred to the Central Bank.

SEC. 140. Repeal of inconsistent laws.— All laws, parts laws, and any special charters, or parts
thereof, of banking and financial institutions inconsistent herewith are hereby repealed.

SEC. 141. Exemption from restrictions on bank borrowing.— The restrictions on bank

borrowing which are contained in sections 6 and 7 of Act 3610 shall not apply bank borrowings
from the Central Bank.

SEC. 142. Effectivity of this Act.—This Act shall take effect upon approval. The Central Bank of
the Philippines shall commence business upon organization of the Monetary Board and
certification by the Secretary of Finance that the authorized capital of the Bank has been fully
paid-in and that the Bank is ready for operation.

Approved, June 15, 1948.

Source: Supreme Court Library

RESOURCES
 [PDF] Republic Act No. 265, June 15, 1948

Philippines Monetary Policy October 2020

Philippines: Central Bank keeps rates unchanged in

October
October 1, 2020

At its 1 October monetary policy meeting, the Central Bank of the Philippines (BSP) decided to leave
the overnight reverse repurchase facility rate at a record low of 2.25%. Accordingly, the overnight
deposit facility and the overnight lending facility rates—which establish the floor and the ceiling of the
interest rate corridor—were kept stable at 1.75% and 2.75%, respectively.

The decision to stay put was driven by a recovery in the global economy, and “encouraging signs of
recovery in domestic economic activity”. Moreover, inflation remained within the 2.0%–4.0% target
range in August, despite undershooting the BSP’s expectations. As such, further loosening was not
warranted, and keeping rates unchanged allows the Bank to better analyze the impact of past
easing.

The Bank did not give explicit guidance on the direction of monetary policy going forward, but stated
that it “stands ready to deploy its full arsenal of instruments as needed”. Our panelists are split: while
several see rates unchanged ahead, others see additional loosening to spur activity. Much will
depend on the evolution of the Covid-19 outbreak—a rise in infection rates could lead to further
lockdown measures and necessitate rate cuts.

Analysts at UOB do not see further easing in the short term, stating:

“The overall tone of the latest monetary policy statement is deemed slightly more upbeat than
August’s statement. This infers higher odds for a prolonged rate pause by BSP going into 2021. […]
As such, we keep our view that BSP will leave both the RRP rate and RRR for commercial banks
unchanged at 2.25% and 12.00% respectively through 2021.”

However, analysts at Nomura take an opposing view:

“We think BSP’s pause at its last two meetings is unlikely to last long and hence we still forecast a
total of 75bp in rate cuts this year, taking the policy rate to a record-low 1.5%. The growth-inflation
picture continues to justify our policy rate forecast: we expect 2020 GDP growth of -6.6%, […]
partly because of the fiscal cliff in which government spending growth will slow sharply for the rest of
the year.”

The panel sees the reverse repurchase rate ending 2020 at 2.06% and 2021 at 2.12%.

Author: Oliver Reynolds, Economist

Monetary Policy and Central Banking

March 16, 2021

Central banks play a crucial role in ensuring economic and financial stability. They
conduct monetary policy to achieve low and stable inflation. In the wake of the global
financial crisis, central banks have expanded their toolkits to deal with risks to financial
stability and to manage volatile exchange rates. In response to the COVID-19
pandemic, central banks used an array of conventional and unconventional tools to
ease monetary policy, support liquidity in key financial markets and maintain the flow of
credit. Central banks need clear policy frameworks to achieve their objectives.
Operational processes tailored to each country’s circumstances enhance the
effectiveness of the central banks’ policies. The IMF supports countries around the
world by providing policy advice and technical assistance.

Monetary policy
A key role of central banks is to conduct monetary policy to achieve price stability (low
and stable inflation) and to help manage economic fluctuations. The policy frameworks
within which central banks operate have been subject to major changes over recent
decades.

Since the late 1980s, inflation targeting has emerged as the leading framework for
monetary policy. Central banks in Canada, the euro area, the United Kingdom, New
Zealand, and elsewhere have introduced an explicit inflation target. Many low-income
countries are also making a transition from targeting a monetary aggregate (a measure
of the volume of money in circulation) to an inflation targeting framework. More recently,
amidst growing concern about eroding policy space in a context of lower equilibrium
interest rates and falling inflation expectations, major central banks have been reviewing
their monetary policy frameworks

Central banks conduct monetary policy by adjusting the supply of money, generally
through open market operations. For instance, a central bank may reduce the amount of
money by selling government bonds under a “sale and repurchase” agreement, thereby
taking in money from commercial banks. The purpose of such open market operations
is to steer short-term interest rates, which in turn influence longer-term rates and overall
economic activity. In many countries, especially low-income countries, the monetary
transmission mechanism is not as effective as it is in advanced economies. Before
moving from monetary to inflation targeting, countries should develop a framework to
enable the central bank to target short-term interest rates (paper).

Following the global financial crisis, central banks in advanced economies eased
monetary policy by reducing interest rates until short-term rates came close to zero,
which limited the option to cut policy rates further (i.e., limited conventional monetary
options). With the danger of deflation rising, central banks undertook unconventional
monetary policies, including buying long-term bonds (especially in the United States, the
United Kingdom, the euro area, and Japan) with the aim of further lowering long term
rates and loosening monetary conditions. Some central banks even took short-term
rates below zero.

In response to the COVID-19 pandemic, central banks have taken unprecedented policy
actions to ease monetary policy across the globe, provide ample liquidity to core funding
markets, and maintain the flow of credit. To mitigate stress in currency and local bond
markets, many emerging market central banks used foreign exchange interventions and
deployed, for the first time, asset purchases programs (see IMF COVID-19 policy
tracker).

Foreign exchange regimes and policies

The choice of a monetary framework is closely linked to the choice of an exchange rate
regime. A country that has a fixed exchange rate will have limited scope for an
independent monetary policy compared with one that has a more flexible exchange
rate. Although some countries do not fix the exchange rate, they still try to manage its
level, which could involve a tradeoff with the objective of price stability. A fully flexible
exchange rate regime supports an effective inflation targeting framework.

Macroprudential policy

The global financial crisis showed that countries need to contain risks to the financial
system as a whole with dedicated financial policies. Many central banks that also have
a mandate to promote financial stability have upgraded their financial stability functions,
including by establishing macroprudential policyframeworks.

Macroprudential policy needs a strong institutional foundation to work effectively.

Central banks are well placed to conduct macroprudential policy because they have the
capacity to analyze systemic risk. In addition, they are often relatively independent and
autonomous. In many countries, legislators have assigned the macroprudential
mandate to the central bank or to a dedicated committee within the central bank.

Regardless of the model used to implement macroprudential policy, the institutional

setup should be strong enough to counter opposition from the financial industry and
political pressures and to establish the legitimacy and accountability of macroprudential
policy. It needs to ensure that policymakers are given clear objectives and the
necessary legal powers, and to foster cooperation on the part of other supervisory and
regulatory agencies (see further Key Aspects of Macroprudential Policy). A dedicated
policy process is needed to operationalize this new policy function, by mapping an
analysis of systemic vulnerabilities into macroprudential policy action (Staff Guidance
Note on Macroprudential Policy).

In response to the COVID-19 pandemic, many countries relaxed macroprudential

buffers to complement other policies with the aim of absorbing stresses in the financial
system and support the provision of credit to the economy. Such relaxation can be in
line with the IMF’s existing framework.

How the IMF supports effective central bank frameworks

The IMF promotes effective central bank frameworks through multilateral surveillance,
policy papers and research, bilateral dialogue with its member countries, and the
collection of data for policy analysis and research.

Multilateral surveillance, policy analysis, and research can help improve global
outcomes:

 The IMF has provided policy advice on how to avoid potential side effects from the
implementation of and exit from unconventional monetary policy, and
established principles for evolving monetary policy regimes in low income countries. 
 The Fund has also examined interactions between monetary and macroprudential
policy, and provided principles for the establishment of well-functioning macroprudential
frameworks. 
The IMF is in regular dialogue with member country central banks through bilateral
surveillance (Article IV consultation), FSAPs, and technical assistance:

 In its Article IV consultations, the IMF provides advice on monetary policy action
to achieve low and stable inflation, as well as on establishing effective monetary
policy and macroprudential policy frameworks. 

 The Financial Sector Assessment Program (FSAP) provides member countries

with an evaluation of their financial systems and in-depth advice on policy
frameworks to contain and manage financial stability risks, including the
macroprudential policy framework, which is now often covered in dedicated
technical notes (e.g., Finland, Netherlands, and Romania).

 Country programs supported by an IMF arrangement often include measures to

strengthen monetary policy and central bank governance. 

 Technical assistance helps countries develop more effective institutions, legal

frameworks, and capacity. Topics include monetary policy frameworks, exchange
rate regimes, moving from targeting a monetary aggregate to inflation targeting,
improving central bank operations (such as open market operations and foreign
exchange management), and macroprudential policy implementation.

In order to inform policy development and research, the IMF is also engaged with its
members to develop and maintain databases:

 The IMF has for some time kept track of countries’ monetary policy arrangements
(AREAER), as well as central banks’ legal frameworks (CBLD), and their
monetary operations and instruments (MOID).

 The IMF has recently launched a new annual survey of macroprudential

measures and institutions. This survey will support IMF advice and policymakers
around the world, by providing details on the design of macroprudential
measures, and enabling comparisons across countries and over time

 The IMF also compiled a comprehensive historical database of macroprudential

measures (iMaPP) that integrates the latest survey information and allows for an
assessment of the quantitative effects of macroprudential instruments. This
database is now being used by IMF economists to measure policy effects, and it
is also available to researchers around the world.    
 In response to the COVID-19 pandemic, the IMF released a series of notes to help
members address the economic impact. The notes on monetary and financial
policies cover various topics on monetary policy and central banking.
 The IMF recently compiled a comprehensive and structured collection of various central
banks’ direct market interventions. The newly established Central Bank Interventions
Database (CBID) is now being used by IMF economists to track authorities’ efforts to
support financial markets amid the ongoing COVID-19 pandemic.