OSIAS COLLEGES, INC.

F. Tañedo St., San Nicolas, Tarlac City

(045)982 -02-45, e-mail: osiastrc@pldtsl.net
http:/www.osiascolleges.edu.ph

WRITTEN

REPORT
Submitted by:

Submitted to:
 CHAPTER 6:

THE

BANKING

SYSTEM
 LEGAL FRAMEWORK OF BANGKO SENTRAL NG PILIPINAS

The Philippine financial system is governed by a set of laws that establish a clear
and reasonably effective legal framework for the supervision and regulation of
financial institutions.

These laws form the basis for the promotions of a proactive and prudent
supervisory and regulatory environment. –Reyes 2008

CENTRAL BANK ACT OF 1948

January 3, 1949

---- The Act established the first central bank in the Philippines
---- empowered the country’s monetary and banking system
---- maintain monetary stability, preserve international stability
---- convertibility of the zero of the peso, growth in production
---- promote employment and real income

The Monetary Board

Secretary of Finance
Governor
President of the Philippine National Bank
Chairman of the Board of Governors of the Rehabilitation Finance Corporation
Three other members appointed by the President

Insular Treasurer by virtue of Act No. 52

Creation of the Charter who will supervise and examine departments of all banking institutions
operating in the country

February 1929
The Bureau of Banking took over the supervision of banks.
 GENERAL BANKING ACT R.A. 337

Act No. 3154 in 1924

---- Law gave the Central Bank the sole authority over banks in terms of supervision and
regulation.

Under Section 2
---- scope of central bank supervision “shall include not only the issuance of rules, but also the
overseeing to ascertain that regulations are complied investigating or examining to
determine whether an institution is conducting its business on a sound financial basis and
acquiring into the solvency and liquidity of the institution”

---- the powers and extent of authority of all banking institutions operating in the Philippines,
including branches and agencies of foreign banks.

AMENDMENTS TO THE CENTRAL BANK ACT AND

THE GENERAL BANKING ACT

1971 - to embark on a study of the Philippine banking system, the Monetary board created the
Joint International Monetary Fund – Central Bank of the Philippines
Banking Survey Commission
 it set up programs for promoting a sound
and more effective banking system

The commission recommended several banking measures, these measures constituted the
decrees promulgated during Martial Law.

1. Presidential Decree No. 72, which amended R.A. No. 265

Among the amendments according to Reyes (2003) were introduced to the existing law
were as follows:

a. Extended the authority of the Central Bank to cover not only the administration of the
banking and monetary system but also of the credit system.
b. Redefined the objectives of the Central Bank
c. The Central Bank was made responsible for the fostering of monetary, credit and
exchange conditions
d. The Governor was appointed Chairman of the Monetary Board
e. The MB may, at its discretion, appoint a conservator not connected with the Central Bank
f. The Board was also authorized to impose administrative sanctions on banks
g. The MB was also had the discretionary authority
h. The MB can modify or set aside penalties on a bank’s reserve deficiencies

2. Presidential Decree No. 71, which amended the GBA, introduced the
following amendments:

a. The concept of the term “bank” was limited to entities engaged in the lending of funds
obtained from the public through the receipt of deposits of any kind to distinguish it from
other financial intermediaries.
b. Encouraged the policy that banks should remain under the control of Filipinos by
increasing the minimum Filipino – owned investment in any new bank to be established
from 60% to 70% of the bank’s voting stock.

THE NEW CENTRAL BANK ACT

(R.A. 7653)

 Identifies price stability as the primary objective of the BSP.

 It mandates the maintenance of price stability conducive to a balanced and sustainable

growth.

 BSP is tasked to promote and maintain monetary stability and convertibility of the peso.

1993
Lawmakers passed this Republic Act
Creating an independent central monetary authority called the Bangko Sentral ng Pilipinas

The BSP Charter

Seeks to promote greater stability of the banking system and strengthen supervisory
capability of the BSP.
 GENERAL BANKING LAW
(R.A. 8791)
The enactment of the General Banking Law of 2000 strengthened BSP’s policy agenda.
The GBL institutionalized banking reforms in the Philippines and amended the GBA.

1. A strong legal basis for consolidated banking supervision

2. Adoption of a fit and proper rule for individuals elected or appointed as bsnk directors or
officers
3. Requirement of at least two independent directors
4. Formal adoption of a risk based capital requirement
5. More comprehensive coverage of the single borrower
6. Stronger safeguards against connected lending
7. Liberalization of foreign bank ownership in existing local banks
8. More flexibility in visiting banks on site in connection with supervisory matters
9. Inclusion of the declaration of bank holiday
10. The legal basis for the formulation of standards for determining unsafe and unsound
practices of banks
11. Greater transparency and disclosure standards for banks

The GBL gives a broader definition of supervision. Under Section 4, supervision

shall include:

1. The issuance of rules of conduct or the establishment of standards of operations for uniform
application to all institutions or functions covered, taking into consideration the distinctive
character of the operations of institutions and substantive similarities of specific functions to
which such rules, modes or standards are to be applied;

2. The conduct of examination to determine compliance with laws and regulations if the
circumstances so warrant as determined by the Monetary Board.
 FINANCIAL INSTITUTIONS UNDER BSP SUPERVISION

BSP Supervised Banks/Statistics

• The Philippine banking system is composed of universal and commercial banks, thrift
banks, rural and cooperative banks. Universal and commercial banks represent the largest
single group, resource-wise, of financial institutions in the country.

1. Banking Sector
• The banking sector is an industry and a section of the economy devoted to the
holding of financial assets for others and investing those financial assets as a
leveraged way to create more wealth.
• The banking sector is an industry and a section of the economy devoted to the holding
of financial assets for others and investing those financial assets as a leveraged way to
create more wealth. The sector also includes the regulation of banking activities by
government agencies, insurance, mortgages, investor services, and credit cards.

2. Non-Bank Financial Intermediary Sector

• A non-bank financial institution (NBFI) is a financial institution that does not have a
full banking license and cannot accept deposits from the public. However, NBFIs do
facilitate alternative financial services, such as investment (both collective and
individual), risk pooling, financial consulting, brokering, money transmission, and
check cashing. NBFIs are a source of consumer credit (along with licensed banks).
Examples of nonbank financial institutions include insurance firms, venture
capitalists, currency exchanges, some microloan organizations, and pawn shops.
These non-bank financial institutions provide services that are not necessarily suited
to banks, serve as competition to banks, and specialize in sectors or groups.

3. Investment Houses
• The investment Houses law of 1973 governs the establishment and operation of stock
corporations engaged in the under writing of securities of other corporations on a
guaranteed basis . Their Principal role, therefore is capital formation, and they are
empowered to engage in other activities such as financial consultancy, portfolio
management, assistance to companies in mergers and takeovers and stock – broking.
4. Financing Companies
• Finance company, specialized financial institution that supplies credit for the
purchase of consumer goods and services by purchasing the time-sales
contracts of merchants or by granting small loans directly to consumers.
• Sources of finance for business are equity, debt, debentures, retained
earnings, term loans, working capital loans, letter of credit, euro
issue, venture funding etc. These sources of funds are used in different
situations. They are classified based on time period, ownership and control,
and their source of generation.

5. Pawnshops
• These are businesses engaged in lending money on personal property delivered as
security of pledge. They may be organized as a sole proprietorship by Filipinos or as
a partnership with 70% of the capital subscribed by Filipinos, or as a corporation with
70% capitalized by citizen of the Philippines.

6. Non- Stock Savings and Loan Associations

• These associations operate under the savings and loan associations act and are
licensed and supervised by the BSP. Their membership is confined to a well – defined
group of person. Non –stock SLAs are not allowed to do business with the general
public, but accept deposits from and grant loans to their member depositors only.
 MONETARY POLICIES OF BANGKO
SENTRAL NG PILIPINAS

 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.

What is Monetary Policy?

Actions by the BSP
To manage the supply and cost of money and credit
To influence overall demand for goods and services
To attain price stability

Monetary policy instruments in the Philippines may be classified into three types:

1. Those that are used as market intervention tools in the financial markets to influence
the availability and rate of return on assets such as open market operations and
rediscounting.

Open Market Operations

- It represents purchases or sale of government securities and treasuries
to influence the money supply.
- Those operations are a central bank the most important stabilizing
instrument
- Open market operations serve the purpose of managing interest rate,
the liquidity situation in the market and signaling the stance of
monetary policy.

2. Those that place restrictions on the portfolios or operations of banks such as reserve
requirements and direct controls.

Legal Reserve Requirements

• All banks are required to hold a minimum percentage of deposits are reserve.
Changes in required reserve ratios can have an important influence on the
money supply
• Changes in reserve requirements are made sparingly because they present too
large change in monetary policy
3. Others that do not strictly fall into the first two types such as NG deposits with the
BSP from proceeds of Treasury bill sales and moral suasion.

Discount Rate Policy

• Is the interest rate at which the central bank stands ready to lend reserves to
commercial banks
These are the three key interest rates for the banks:
1. The interest rate on the main refinancing operations
2. The rate on the deposit facility, which banks may use to make overnight
deposits
3. The rate on the marginal lending facility, which offers overnight credit to
banks.
 MARKET INTERVENTION
- If competitive market is free of intervention, market forces will always drive the price and
quantity towards equilibrium

- however, the are times when the government feels need to intervene in he market and prevent it
from reaching equilibrium.

- while often done with good intentions, this intervention often brings about undesirable
secondary effects

-market intervention often comes as either a price floor or a price ceiling

 When people hear of market intervention,

sometimes they assume the stock market has been
rigged and you have to be high up in a corporate
structure to benefit. But that's rarely the case and
the government does intervene in financial
markets from time to time.

PRICE FLOOR

-A price floor set a minimum price fo which the good may be sold

- Price floors are designed to benefit the procedures providing them a price greater than the
original market equilibrium .

- for example, the government imposed price floors for certain agricultural commodities , such
as wheat and corn. At a price floor, greater than the market equilibrium price, producers increase
the quantity supplied of the good. However, consumers now face a higher price and reduce the
quantity demanded. The result of the price floor is a surplus in the market.

 Price floor is a situation when the price

charged is more than or less than the equilibrium price
determined by market forces of demand and supply.
By observation, it has been found that lower price
floors are ineffective. Price floor has been found to be
of great importance in the labour-wage market
PRICE CEILINGS

- Price ceilings are intended to benifit the consumer nd set a maximum price for which the
product may be sold
- The ceiling price must be below the market equilibrium
Price Ceiling

A maximum price

 shortage if below equilibrium

 controlled rent
 black markets

 Price ceiling is a situation when the price

charged is more than or less than the equilibrium
price determined by market forces of demand and
supply. It has been found that higher price ceilings
are ineffective. Price ceiling has been found to be of
great importance in the house rent market.

ECONOMIC SURPLUS
- In competitive market, the economic surplus which is the combined are of the consumer
and producer surplus is maximized
-
Economic Surplus = Consumer Surplus + Producers Surplus
  The term economic surplus refers to the sum of producer surplus and consumer surplus. It
is the gain that producers and consumers make when they sell or buy products. Economic
surplus is also known as “total welfare” or Marshallian surplus.

Deadweight loss- price floor

- When a price floor is imposed, there is a loss in the economic surplus (Area and B) know
as deadweight loss.
- Since consumer surplus is the area below the demand curve and above the price, with
the price floor the are of consumer surplus is reduced from areas B, C, and E to only
area E.
- Procedures surplus which is below the price and above the supply or marginal cost curve
changes from area A and D to D and C

DEADWEIGHT - PRICE CEILING

- A price ceiling also creates a deadweight loss of area A and B.

- The consumer surplus area changes from areas E and B to E and C and the producer
surplus area is reduced from A, C, an D.
 EXCISE TAX
- Another government market intervention is the imposition of a tax or subsidy
- An excise tax is a tax levied on the production or consumption of a product.
- To consumer, tax increases the price of the good purchased moving them along the
demand curve to a lower quantity demanded

Due to the tax, the new equilibrium price (P1 )is higher and the equilibrium quantity (Q1 ) is
lower, while the consumer is now paying price (P1 )the producer only receives price (P2 )after
paying the tax.