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The government banking institutions include the Philippines National Bank,

Development Bank of the Philippines, Land Bank of the Philippines, and Philippine
Amanah Bank. Under the non-bank financial institutions are the private non-bank
financial institutions and the government non-bank financial institutions. Under the
private non-bank financial institutions are the investment banks/houses, investment
companies, finance companies, securities dealers and brokers, non-stock savings and loan
associations, building and loan associations, pawnshops, lending investors, fund
managers, trust companies/departments, insurance companies, and venture capital
corporations. Under the government non-bank financial institutions are the Government
Service Insurance System (GSIS) for the government employees and Social Security
System (SSS) for the private company employees.
Bangko Sentral ng Pilipinas is charged to supervise and regulate the financial
system of the Philippines. It is primarily responsible in regulating the flow of money and
credit into the whole economy in order to attain monetary stability and sustainable
economic growth. Its major task is to mobilize and direct the resources of the Philippine
financial system toward the social and economic growth of the economy, in particular,
and the country, in general. Of paramount importance is the improvement of the life of
the masses by alleviating poverty. Through its different monetary instruments, Bangko
Sentral ng Pilipinas is able to fashion a desire level of prices, investments, production,
incomes, and consumptions (Fajardo et al. 1994). Bangko Sentral ng Pilipinas has the
ultimate social responsibility of uplifting the economy and developing the country.
Financial institutions not under Bangko Sentral ng Pilipinas are the cooperatives
that are handled by the Cooperative Development Authority under the Office of the
President. Private insurance companies are under the Insurance Commission. These
organizations are, however, mandated to submit reports to Bangko Sentral ng Pilipinas so
that BSP can monitor their operations and the effect on the financial and monetary system
of the country. Other financial institutions are also overseen by the Securities and
Exchange Commission.
Bangko Sentral ng Pilipinas
According to Fajardo (1994), the concept of a central banks was developed in
1933 by Miguel Cuaderno, the first governor of the Central Bank of the Philippines (now
Bangko Sentral ng Pilipinas). For thirteen years, he conducted a research on the various
central banks of many countries. In 1946, a formal preparation for the establishment of a
central bank began upon the instruction of the then President Manuel Roxas. Cuaderno
was assigned the task of governor. As governor, he chose the charter of the Central Bank
of Guatemala as a model for the charter of the Central Bank of the Philippines because of
the similar economic and social conditions of Guatemala and the Philippines.
The Board that governs the Central Bank is called the Monetary Board. Its
members are appointed by the President of the Philippines and the Chairman is the
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Governor of the Central Bank. Five other members come from the private sector. The
New Central Bank Act took effect on June 14, 1933 during the reign of then-President
Fidel Ramos. It established an independent Central Monetary Authority, which is now
known as Bangko Sentral ng Pilipinas (BSP|) with a capital of ₱50 billion.
The different institutions governed by BSP. They are basically divided into the
banking system and the non-banking system. By organization, however, the basic
structure of Bangko Sentral ng Pilipinas includes,
The Monetary Board, which exercises the powers and function of the BSP, such
as the conduct of monetary policy and supervision of the financial system;
The Monetary Stability Sector, which takes charge of the formulation and
implementation of the BSP’s monetary policy, including serving the banking needs of all
banks through accepting deposits, servicing withdrawals, and extending credit through
the rediscounting facility:
The Supervision and Examination Sector, which enforces and monitors
compliance to banking laws to promote a sound and healthy banking system; and
The Resource Management Sector, which serves the human, financial, and
physical resources needs of the BSP.
Objectives of BSP
BSP, as the central monetary authority of the country, is expected to provide the
country with a safer, more flexible, and more stable and healthy monetary and financial
system that will help support a stronger economy. It is enjoined to:
1. Maintain monetary policies conducive to a balanced and sustainable growth of the
economy:
2. Maintain price stability in the country;
3. Promote and maintain monetary stability and the convertibility of the peso;
4. Maintain stability of the financial system;
5. Provide payment and other financial services to the government, the public,
financial institutions, and foreign official institutions; and
6. Supervise and regulate institutions.
To attain its objectives, the monetary and fiscal policies of the country need to be
closely and efficiently coordinated. The different agencies of the government, both
financial and fiscal, need to cooperate with one another. Moreover, it is important that
there be coordination and cooperation between the government and the private sectors.
These sector are the partners in nation-building.
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Functions of BSP
Being the primary monetary authority, BSP performs the following function:
1. Bank of Issue
BSP has the monopoly of printing money bills and minting money coins. This
monopoly is design to:
a. Ensure the uniformity in design and content of money;
b. Effect government supervision over money supply;
c. Give prestige and honor to the central bank; and
d. Become a good source of income for the government.
2. Government’s banker, agent, and adviser
BSP handles the banking accounts of government agencies and instrumentalities.
All government agencies deposit their funds with BSP. It provides foreign
exchange to the government for the importation of goods and services and for
payment of foreign loans. If not available in the country, BSP borrows from
international financial institutions like World Bank and International Monetary
3. Custodian of the cash reserves of banks
All banks are regulated to have adequate reserves with BSP in proportion to their
deposit liabilities to ensure availability of cash to depositors who wish to
withdraw deposits. These reserve requirements create the interbank call loans.
4. Custodian of the nation’s reserves of international currency
The early years of central banking required central banks to maintain a minimum
reserve of gold, and later of international currency, as a guarantee for its issuance
of currency bills or notes and deposit liabilities (cash reserves of commercial
banks). Accepted as international currencies in the past were the US dollar, Swiss
francs, Japanese yen, German mark, and the British pound. This is designed to
meet problems relevant to balance of payments and maintain the external value of
the local currency. A central bank needs to able to meet its domestic and
international payments to create confidence in the people it serves and the
countries it deals with abroad.
5. Bank of rediscount and lender of last resort
The rediscounting function of the central bank means the central bank leads
money to the banks is distress on the basis of their promissory notes or the
promissory notes of the bank borrowers. When banks grant loans to borrowers,
the borrowers execute a promissory note, which the bank discounts (interest is
immediately deducted from the proceeds of the loans).
6. Bank of central clearance and settlement
The central bank acts as a sort of clearing house. This means that banks send
representatives to the clearing house at the central bank where claims are
demanded by one bank against another. The banks have their own boxes at the
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clearing house. All checks placed in the boxes are payable to the banks which
cashed them.

7. Controller of credit
Controlling money supply requires controlling credit. The higher the money
supply in circulation is, the higher the prices of goods and services are. Limited
supply of money means lower prices, which do not encourage production. Hence,
it is imperative for the central bank to limit, not only the money supply, but also
the credit. This is because credit is in addition to the money supply in circulation.
The more credit there is available, the more production is encouraged because the
consumers can also spend more if they also are able to obtain credit.
BSP can control credit by:
1. Increasing or decreasing interest rates;
2. Increasing or decreasing the legal reserve requirement of banks;
3. Regulating the margin requirements of stock exchange securities;
4. Open market operations (buying or selling government securities);
5. Imposing ceilings on total amounts bank can lend;
6. Rationing central bank credit;
7. Restricting imports;
8. Selecting projects for funding; and
9. Moral suasion (encouraging people and businesses) to support and
cooperate with the central bank policies and regulation.
Monetary Policy and the Financial System
Monetary policy refers to the manipulation of the money supply to affect the
economy of the country as a whole. It largely impacts interest rates. Increases in the
money supply lower short-term interest rates, encouraging investment and consumption.
In the long run, however, an abundance of money supply leads to increased prices or
inflation and is undesirable. This is where BSP plays its role as the balancer.
Expansionary monetary policy may lower interest rates and stimulate investment and
consumption in the short run and, hence, needs to be balanced. This is the task of BSP.
BSP uses several tools to implement its monetary policy. Among these tools are
its open market operations (buying and selling government securities), reserve
requirements on banks, the discount rate, the interest rate, credit control, money supply,
among others. The monetary policy seeks to influence either the demand for a supply of
excess reserves, resulting from the implementation of monetary policy, triggering a
sequence of events that affects economic factors such as short-term interest rates, long-
term interest rates, foreign exchange rates, the amount of money and credit in the
economy, and the levels of employment, output, and prices.
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Depository institutions trade excess reserves held at the central bank among
themselves. Those with excess reserves earn by leading them to banks with deficit
reserves (also known as interbank all loans, generally overnight only). The rate of interest
on these interbank transactions becomes a benchmark interest rate to guide monetary
policy. This rate is a function of the supply and demand for central bank funds among
banks and the effects of the central banks trading in its open market operations.
The open market operations of BSP influence money supply because when it sells
securities, it siphons off the funds or money supply in the economy, thereby decreasing
money supply. When it buys back securities, it gives back to the economy the money
supply.
When BSP increases the reserve requirement on banks, it reduces the amount
available to banks for lending to borrowers, thus limiting the credit and ultimately the
money supply. When this reserve requirement is lowered, the loans that the banks can
grant are increased, increasing the money supply.
Monetary policy works largely through its impact on interest rates. Increases in
the money supply lower interest rates, which stimulate demand. As the money supply
increases, investors will be encouraged to buy more securities (stocks or bonds), forcing
securities prices up and interest rates down. In the long run, investors may increase their
holdings of securities and buy tangible assets, which stimulate consumption demand
directly.
In implementing monetary policy, BSP can take one of two basic approaches to
affect the market for bank excess reserves:
1. Target the quantity or reserves in the market based on BSP’s open market
operations objectives for the growth in the monetary base (the sum of
money in circulation and reserves) and, in turn, the money supply.
2. Target the interest rate on those reserves that BSP is granting
The approach taken varies depending on the need to combat inflation and the
desire to encourage sustainable economic growth.
QUESTIONS FOR REVIEW AND DISCUSSION
1. Discuss the meaning of financial system. What is its importance in the nation?
2. Discuss the role of each participant in the financial system.
3. What is BSP? What is its role in the well-being of the Philippines?
4. How is BSP structured relative to the financial system? Discuss.
5. How is BSP structured relative to its organizational chart as an organization?
Discuss.
6. What is monetary policy? What is its importance in the economy?
7. Discuss the relationship between monetary policy and financial system.
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8. What are the different tools of monetary policy? Discuss how the tools of
monetary policy influence money supply and interest rates.
9. Discuss the role of BSP in the economic development of the country.
10. Discuss the role of BSP as manager of banks and of non-banks.