Module 1: Financial System
stability
Financial Intermediation - describes collectively the financial
markets, the financial systems participants, and the financial
instruments and securities that are traded in the financial
markets.
Functions of financial system:
1. To channel funds from the savings units (lenders) to
the deficit units (borrowers);
2. To provide a medium of exchange.
3. To provide a mechanism for risk sharing; and
4. To provide a channel through which the central bank
can influence the economy, in general and the
financial system.
Financial System Participants
Households or Consumers- Generally described as the
group that receives income, majority of which typically comes
from wages and salaries (
- Gross Savings = current income – expenditure
Financial Institutions/Intermediaries - These are the firms
that bridge the gap between surplus units (SUs) or
investors/lenders and deficit units (DUs) or borrowers. They
channel funds from the borrowers.
Non-financial Institutions - These are businesses other than
financial institutions or intermediaries. They include trading,
manufacturing, extractive industries, construction, genetic
industries and all firms other than the financial ones
Government - It means the national, provincial, municipal or
city governments and barangays or towns compromising the
Philippines as a whole. Each division has its heads and
agencies that help in running the division they are responsible
for. Ex: (BTR)
Central Bank - The Bangko Sentral ng Pilipinas ensure that
the Philippinese have a stable and healthy financial system,
regulations, and monetary policies that will help them maintain
a healthy and stable economy.
Foreign Participants - This refers to the participants from the
rest of the world – households, governments, financial and
non-financial firms, and central banks.
Bangko Sentral ng Pilipinas and the Philippine Financial
System
Logo of BSP
The Philippine eagle- symbol of strength, clear vision, and
freedom qualities aspire for central bank.
Three stars - three pillar of central banking (price stability,
stable banking system, safe and reliable payment system)
Colors blue- stability
Stars rendered in gold - wisdom, health, idealism, high
quality.
White color - purity, neutrality, mental clarity
Font or typeface, non-serif bold- solidarity, strength, and
Round shape - continuing and unending quest to improve the
quality of life of Filipinos.
History
1933- A group of Filipino had conceptualized a central bank for
the Philippines. It came up with the rudiments of a bill for the
establishment of a central bank for the country after a careful
study of economic provisions of the Hare-Haws Cutting Bill, the
Philippine Independence Bill approved by the US Congress.
1946 - The start of the formal preparation of the organization
JANUARY 3, 1949 - The central bank was inaugurated and
formally opened.
JULY 3, 1993 - The Bangko Sentral ng Pilipinas was
established pursuant to the provision of the 1987 PHILIPPINE
CONSTITUTION AND THE NEW CENTRAL BANK ACT OF
1993.
1947- The central bank council was formed
Fajardo (1994) cited that it was Miguel Cuaderno, the first
governor general of the Central Bank of the Philippines
initiated the development of the concept of Central Bank.
RA No. 265- approved by President Elpidio Quirino. The
establishment of the Central Bank of the Philippines
Organizational Structure
Monetary Board- exercises the power and functions of the
BSP, (conduct of monetary policy supervision of the financial
system)
Executive Management Services- functional grouping of all
units directly reporting to the Monetary Board or to the
Governor
Functional Sectors:
A. Monetary Stability Sector - takes charge of the
formulation and implementation of the BSPs monetary
policy, (serving the banking needs of all banks
through accepting deposits, servicing withdrawals,
and extending credit through the rediscounting
facility.)
 B. Supervision and Examination Sector- enforces
and monitors compliance to banking laws to promote
a sound and healthy banking system.
C. Resource Management Sector - serves the human,
financial and physical resource needs of BSP.
The Security Plant Complex- responsible to produce
Philippine currency, security documents and commemorative
medals and medallions.
The Monetary Board
The Board that governs the Central Bank. Hence, the powers
and functions of the Bangko Sentral are exercised by its
Monetary Board, which has seven members appointed by the
President of the Philippines.
Major functions of the Monetary Board include the power
to
1. Issue rules and regulations it considers necessary for
the effective discharge of the responsibilities and
exercise of the powers vested in it.
2. Direct management, operations and administration of
Bangko Sentral, organize its personnel, and issue
such rules and regulations as it may deem necessary
or desirable for this purpose.
3. Establish a human resource management system
which governs the selection, hiring, appointment,
transfer, promotion, or dismal of all personnel.
4. Adopt an annual budget for and authorize such
expenditures by the Bangko Sentral in the interest of
the effective administration and operations of Bangko
Sentral in accordance with applicable laws and
regulations.
5. Indemnify its members and other officials of Bangko
Sentral
The
BSP Vision
The BSP aims to be recognized globally as the monetary
authority and primary financial system supervisor that supports
a strong economy and promotes a high quality of life for all
Filipinos
The BSP Mission
To promote and maintain price stability, a strong financial
system, and a safe and efficient payments and settlements
system conducive to a sustainable and inclusive growth of the
economy.
Objectives of BSP
1. Maintain monetary policies conducive to a balanced
and sustainable growth of the economy.
2. Maintain price stability.
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 depository institutions.
The primary objective of the BSP’s monetary policy is “to
promote price stability conducive to a balanced and
sustainable growth of the economy” (Republic Act 7653)
Inflation targeting - focused mainly on achieving a lows and
stable inflation, supportive of the economy’s growth objective
Functions of BSP
Bank of issue- BSP has the monopoly of printing money bills
and minting money coins.
Government’s banker, agent, and adviser- BSP handles the
banking accounts of government agencies and
instrumentalities.
Custodian of the cash reserves of banks- All banks are
regulated to have adequate reserves in proportion to their
deposit liabilities with BSP to ensure availability of cash to
depositors who wish to withdraw their deposits.
Custodian of the nation’s reserves of international
currency- This is designed to meet problems relevant to
balance of payments and maintaining the external value of the
local currency.
Bank of central clearance and settlement- The central bank
act as sort of clearing house.
Controller of credit - The BSP regulates and influences credit
availability and cost in the economy to achieve specific
economic goals.
Monetary Policy - Monetary Policy refers to the manipulation
of money supply to affect the economy of a country.
Fiscal policy - is set by the government to manage spending,
taxation, and borrowing.
Expansionary
 Reduces cost of borrowing
 Increase money supply/ liquidity.
  Induce spending/ investment increase Inflation/
Stimulate the economy.
Contractionary
 Increase the cost of borrowing.
 Slow down money supply/liquidity
 Tempers spending/ investment to slow inflation
Module 2: Financial Markets and Instruments
Financial Markets - structure through which funds flow.
Institutions and systems that facilitate transactions in all types
of financial claim.
(Meeting place for those with excess funds)
Financial claim- entitle a creditor to receive payment from a
debtor in circumstances specified in a contract between them
oral or written.
Primary Markets - Markets in which users of funds
(corporations) raise funds, through new issues of financial
instruments such as stocks and bonds. They consist of
underwriters, issuers, and instruments involved in buying and
selling original or new issues of securities referred to as
primary securities.
- Most primary market transactions are done through
investment banks, also called merchant banks.
Financial Intermediary- acts as the middleman or bridge that
will satisfy the needs of the deficit units and the surplus units.
initial public offerings (IPOs) - First time issues for the public
Secondary Markets - Markets for currently outstanding
securities, referred to as secondary securities. securities were
previously bought and owned and now being resold. Shares
held by the public are termed outstanding shares or securities.
Money Markets- Cover markets for short-term debt
instruments, usually issued by companies with high credit
standing.
- The Philippine money market started in 1965.
- Ex: interbank call market
The International Money Market (IMM) was opened in May
1962
PH GOVERNMENT ISSUES TWO KINDS OF SECURITIES
- Treasury Bills (T-Bills) - government securities
which mature in less than a year.
- Treasury Bonds - government securities which
mature beyond one year.
Capital Markets - Markets for long-term securities. Long-term
securities are either debt securities (notes, bonds, mortgages,
leases) or equity securities (stocks).
- Securities Market- Companies issue common stocks
or bonds, which are marketable/negotiable, to obtain
long term funds. An instrument that is transferable by
endorsement or delivery is negotiable.
- Negotiated/Non-Securities Market - Does not
involved securities. It is called negotiated because it
results from negotiation between a borrower and a
lender.
Stock Market- Serves as the medium or agent of exchange
transactions dealing with equity securities.
Bond Market - Market where bonds are issued and traded.
- Treasury notes and bonds - Issued by the
government’s treasury. Like T-bills, T-notes and T-
bonds are backed by the full faith and credit of the
government and are therefore free from risks.
- Municipal Bond (LGU) - Is an important financial
instrument for development.
- Corporate Bonds - Long-term bonds issued by
private corporation.
Bond indenture- is the legal contract that specifies the rights
and obligations of bond issuer and bondholders.
Derivative Securities Market - Refers to the market where
derivatives securities are traded.
OTHER MARKETS
1.Consumer Credit Market - Involves parties and transaction
related to loans granted to households (properties, cars or
appliances, trave
2.Organized Market - Exchanges, whether stock markets or
derivatives exchanges started as physical places where trading
took place.
3.Over the Counter (OTC) Market - Have never been a
“place”. They are less formal, although often well-organized
networks of trading relationships centered on one or more
dealers.
4.Auction Market - It is where the trading is done by an
independent third-party matching prices on orders received to
buy and sell a particular security.
5.Foreign Exchange Markets - Provides physical and
institutional structure through which the money of one country
is exchanged for that of another country.
- Foreign Exchange Transaction - agreement
between a buyer and a seller that a given amount of
one currency is to be delivered at a specified rate for
some other currency.
6.Spot Market - Buying and selling is done “on the spot” that
is, for immediate delivery and payment. The buyer pays
immediately, and the seller delivers immediately.
7.Futures Market - It is where contracts are originated and
traded that give the holder right to buy something in the future
at a price specified in the contract.
- Speculators - establish anticipation of a price
change.
- Hedges - employ futures to reduce the risk from price
changes, by hedging, the hedgers pass the risk to the
speculators.
Professional traders - also position traders, day traders, or
scalpers who are specialist on the stock exchanges where they
trade for their own account.
- Position traders - take a position in the futures
market based on their expectations about the future
direction of prices of the underlying assets.
- Day traders - generally take position within a day and
liquidate it before the day’s end.
- Scalpers - take position for very short period,
sometimes only minutes, to profit from this active
trading.
Long position - means that the dealers purchase securities
outright, take title to them, and will hold them in their portfolios
as an investment.
8. Forward Market - Both the futures market and the forward
market involve trading contracts calling for the future delivery
of financial instruments, commodities, or currencies.
9. Options Market - It is where stock options are traded. This
is the formal market where the options are bought and sold,
and not when a stockholder is given the option or preemptive
right to buy additional shares of stock to maintain his
proportionate share or ownership in a corporation.
- Options are called warrants if they are issued by
corporations, calls if they are issued by individuals.
- Call options - gives the buyer the right to buy an
underlying security or futures contract at a strike
price.
10. Swap Market - Swaps are arrangements between two
parties (counterparties) in exchanging specified periodic cash
flows in the future based on an underlying instrument or price
(e.g., a fixed or floating rate on a bond or a note)
- Interest rate swaps, Currency swaps, Credit risk
swaps, Commodity swaps, Equity swaps
11. Third and Fourth Markets - Third Market refers to
transactions between broker-dealers and large institutions.
Fourth Market refers to transactions that take place between
securities firms and large institutional investors like pension
funds and investment companies.
Types of Investors
Risk averse investors (bulls and chicken) - type of investors
who, when faced with two investment alternatives with equal
returns but one is riskier than the other, will choose the less
risky environment.
Risk-taker investors (bears and pigs) - They are the
investors who are ready to pay a higher price for an investment
regardless of the risks involved.
Risk-neutral investors - They are the investors who do not
consider the risks involved in the investment and who are
focused only on the expected returns.
bull market -. When the market is showing confidence, that is,
stock prices are going up.
bear market - when the economy is bad, recession is looming,
and stock prices are falling.
FINANCIAL INSTRUMENT
Financial Instrument - Classified as to their term or maturity
date. They can either be short term (with maturity of one year
or less) or long-term (with maturity of more than one year)
- Short term securities belong to the money market.
- long-term instruments belong to the capital markets.
Capital Market Institute of the Philippines (CMIP) - A bullish
organization that stokes and develops the investment
character of Filipinos in the Philippine financial/capital market.
Money Market Instruments - Issued by the government and
corporations needing short-term funds.
Cash Management Bills - Government issued securities with
maturities of less than 91 days, specifically 35 days or 42 days.
They have shorter maturities than T-bills.
Treasury Bills (T-Bills) - These are issued by the Bureau of
the Treasury with 91-day, 182-day, and 364-day maturities. The
odd number of days is to generally ensure that they mature on
a business day.
Banker’s Acceptances - A time draft issued by a bank
payable to a seller of goods. It is drawn on and accepted by
the bank.
- Letter of Credit - Banker’s acceptances are generally
used with the purchase of goods or services either
domestically or internationally.
- A commercial letter of credit - contractual
agreement between bank, known as the issuing bank
on behalf of the buyer (drawer), authorizing another
bank.
 - Negotiable Certificates of Deposit - A receipt issued
by a commercial bank for the deposit of money.
- Repurchase Agreements - Legal contracts that
involve the actual sale of securities by a borrower to a
lender with a commitment on the part of the borrower
to repurchase.

Money Market Mutual Funds - Investment funds that pool

funds from numerous investors and invest in money market
instruments offered by investment companies.
- Growth funds – invest in assets that are expected to
reap large capital gains.
- Income funds - invest in stocks that regularly pay
dividends and in notes and bonds that regularly pay
interest.
- Balance funds - combine the features of both growth
funds and income funds.
- Sector funds - – invest in specific industries as
health care, financial services, utilities, extractive
industries.
- Index funds - invest in a basket of securities that
make up some market index as the S&P 500 index of
stocks.
- Global funds - invest in securities issued in many
countries providing diversification.

Certificate of Assignment - An agreement that transfers the

right of the seller over a security in favor of the buyer.

Certificate of Participation - An instrument that entitles the

holder to a proportionate equitable interest in the securities
held by the issuing firm or an entitlement to a pro rata share in
a pledged revenue stream, usually lease payments.

Eurodollar CDs and Eurocommercial Papers - These dollar-

denominated deposits held offshore in US bank branches
overseas and in other foreign banks are called Eurodollar
deposits and the market in which they trade is called the
Eurodollar market.