PHILIPPINE FINANCIAL

SYSTEM, MONETARY AND

MONETARY POLICY
WHAT IS MONEY?
 Before defining money let us first understand
what an asset is
 ASSET
 It is defined as anything which serve as means to store
value over a period of time.
 Real assets

 These are assets that are physical in nature

 Financial Assets
 These are assets that are financial in nature
 Money refers to all things that are generally
acceptable as means of payment for goods and
services (medium of exchange) and as payment
of debts (standard of deferred payment).
WHAT ARE THE FUNCTIONS OF
MONEY
 Money as a unit of account
 Means that the value of goods and services are
expressed or quoted with the use of single item,
usually a country’s currency.
 In the case of the Philippines we have the
Philippine (peso).
 Each country, therefore uses its own monetary
unit in the domestic market express the value of
its commodities and services.
WHAT ARE THE FUNCTIONS OF
MONEY
 Money as a medium of exchange
 This simply 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 means of
payment.
 During the barter system there really was no
medium of exchange then in the strict sense of
the term. The reason behind this is that you can
only trade with the person who desires the item
that you will trade and that you will accept what
that person has to offer. This is called double
coincidence of wants.
WHAT ARE THE FUNCTIONS OF
MONEY
 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 ad
services is not lost or diminished over time. The
underlying assumption here is that inflation will
not occur in between time periods of saving and
spending the money.
EVOLUTION OF THE MODERN
PAYMENT SYSTEMS IN THE
PHILIPPINES
 Autarky
 This is also called as no trade system where
commodities are produce for own consumption
this was practiced by the older generations of
Filipino Families.
 Barter System
 We already know that in order to trade in a
barter system the condition of double
coincidences of wants should be satisfied.
EVOLUTION OF THE MODERN
PAYMENT SYSTEMS IN THE
PHILIPPINES
 Commodity money
 Itfollowed the barter system. Before the Spanish
Colonial Period people are using commodities
such as salt, carabao, and shells that served as
units of account and medium of exchange.
 During the Spanish era, silver and bronze coins
were used. These coins were produced by
minting firms in Central and South America and
were brought to the Philippines via the Galleon
Trade.
 In 1861, the Casa de Moneda de Manila was
established and it minted coins made of silver
and gold for use in the Philippines until 1896.
EVOLUTION OF THE MODERN
PAYMENT SYSTEMS IN THE
PHILIPPINES
 Under the American regime, the coins in
circulation were produced in the United States
from 1903-1912.
 In 1920, the mint of the Philippine Islands was
established and made coins for use in our country.
It operated as part of the US Bureau of the
Treasury until 1941.
 Between the Japanese Occupation and the mid-
1970s, the coins that circulated in the economy
came from foreign sources, it was only in 1975
that the Philippine Mint was created in Quezon
City and it became operational after two years
after having been placed under the authority of
the Central Bank of the Philippines
EVOLUTION OF THE MODERN
PAYMENT SYSTEMS IN THE
PHILIPPINES
 The Money Museum of the Bangko Sentral ng
Pilipinas (BSP) which is located along Roxas
Boulevard displays a vast collection of
commodities, coins, and paper bills that were
used in the Philippines.
 The important factors that were considered
in the production of coins are the following:
 The availability and cost of raw materials, and
 Their coinability
EVOLUTION OF THE MODERN
PAYMENT SYSTEMS IN THE
PHILIPPINES
 The money that we have used over time has undergone
various changes in:
 Size
 Denomination
- Also known as the face value, face value refers to the amount of
goods and services that can be bought with the use of paper bills.
 Color
 Design
 Intrinsic Value
- Inherent worth of an item
 We had the “Flaura and Fauna Series”, “Ang Bagong
Lipunan Series” coins that were used during the reign of
President Ferdinand Marcos.
 The coins that are now in circulation are called “BSP
Series” the intrinsic value of this coin are lower
compared to other set of coins.
EVOLUTION OF THE MODERN
PAYMENT SYSTEMS IN THE
PHILIPPINES
 Paper Bills were already used during the
Spanish Colonial rule. BSP is the one who are
issuing paper bills at present and the
inscription on the upper right side reads “Ang
salaping ito ay bayaring ng Bangko Sentral at
pananagutan ng Republika ng Pilipinas”. This
assures us that our money is legal tender. The
two signatures found are the bottom center
are of the President of the Philippines and of
the Governor of the BSP.
 The bills are liabilities of the Philippine
Government and the Bangko Sentral ng
Pilipinas to the holders of such money.
PRESIDENT OF THE
REPUBLIC OF THE
GOVERNOR OF BANGKO
PHILIPPINES
SENTRAL NG PILIPINAS
WHOSE SIGNATURE WILL BE ON OUR MONEY
AFTER THE PRESIDENTIAL ELECTIONS
EVOLUTION OF THE MODERN
PAYMENT SYSTEMS IN THE
PHILIPPINES
 Specialized Bankers
 These came into existence because of the
growth of business activities people could not
just bring all their money along whenever they
made transactions.
 These bankers offered businessman and traders
the particular service of safekeeping their
surplus money for a fee.
 Over time the, bankers discovered that they can
also lend a portion of the traders’ surplus money
to other people who needed funds and then
charged an interest in return
EVOLUTION OF THE MODERN
PAYMENT SYSTEMS IN THE
PHILIPPINES
 Fractional Reserve Banking
 This evolved because of the vast developments
in commerce and industry.
 Checks became widely preferred means of
payment to avoid the inconvenience of carrying
bulks of paper bills especially for high-value
transactions. Checks also minimize risks of theft.
* In recent times, payment systems have
transformed into other modes that have
provided more convenience and security to
people and clients. Thus, we can see the use of
ATM card, credit cards, debit cards, wire
transfers, and other systems of electronic fund
transfers.
THE DEMAND FOR MONEY
 Two reasons why people and businesses hold
money
 To exchange it for goods and services today
 Or keep it as a store of wealth to spend it to
future consumption or investment
* But the amount of money that people demand
does not really depend the number of peso bills or
coins. Rather, the demand for money is a demand
for real balances or purchasing power i.e., the
amount of goods and services that money can buy.
THE DEMAND FOR MONEY
 According to John Meynard Keyenes there are three
motives for holding money
 Transactions motive
 Refers to holding money to enable people and firms to pay for
their daily transactions
 Precautionary motive
 for holding money arises because households and firms cannot
predict exactly their level of expenditures per unit time and the
inflows of income as well.
 Thus they would set aside money for contingency purposes or

unforeseen events.
 This could be link to the store of value function of money

 Speculative or portfolio motive

 This is also related to the store of value function of money
 It is the holding of money for the sole purpose of taking

advantage of market opportunities such as buying and sharing

stocks in a company.
THE SUPPLY OF MONEY
 The supply of money can 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
 M4
 This is the reserve money which represents liabilities of the BSP to
the public sector in the form of currency in circulation and to the
banking sector in the form of cash reserves.
* Money Supply is determined by the behavior of three principal
actors- the public, the banks and the BSP
THE ROLE OF MONETARY
INSTITUTIONS IN THE ECONOMY
 The Bangko Sentral ng Pilipinas
 The Central Bank of the Philippine (CB) was
established on June 15, 1948 by virtue of
Republic Act No. 265. Its primary objectives are
the following
 To maintain the monetary stability of the country
 To preserve the international value of peso

 To promote rising level of production, employment and

real income in the Philippines

 Itwas also established to play a major role in the
rehabilitation of the economy devastated by
World War II. Its role being shifted to being a
participant in the international economy which
had generally experienced growth from the
1950s to the 1970s.
THE ROLE OF MONETARY
INSTITUTIONS IN THE ECONOMY
 The Bangko Sentral ng Pilipinas
 On June 14, 1993 through R.A. 7653 the Bangko Sentral
ng Pilipinas (BSP) was put up as a central monetary
authority. Its primary objective are the following:
 To maintain price stability (or fight inflation) conducive to a
balanced and sustainable growth of the economy
 To promote and maintain monetary stability ad convertibility

of the peso
 BSP was tasked to concentrate on monetary
management unlike before when it was mandated with
fiscal agency functions as well. It has also been
mandated with stronger regulation and supervision
framework. The BSP is likewise the lender of last resort
from whom ailing or bankrupt banks can borrow of
other banks in the financial system cannot provide
them with the necessary funds
THE ROLE OF MONETARY
INSTITUTIONS IN THE ECONOMY
 Financial Institutions
 The Philippine Financial or Monetary
System is a network of markets and institutions
that transfers from individual and groups who
save money to individuals and group who want
to borrow money these financial institutions
consists of bank and non-bank institutions. Banks
are classified as
(a) Universal banks
(b) Rural banks
(c) Thrift banks which include savings and mortgage
banks or private development banks, microfinance
institutions and stock savings, and loan associations.
THE ROLE OF MONETARY
INSTITUTIONS IN THE ECONOMY
Non-bank institutions are the following
(a) Contractual saving institutions such as insurance

companies and pension funds (e.g. Social Security

System (SSS) Government Service Insurance System
(GSIS))
(b) Investment institutions like mutual funds and finance

companies.
(c) Securities market institutions which comprises
securities, brokers and dealers, lending investors, and
organized exchanges like the Philippine Stock
Exchange (PSE).
* In 2003 credit card companies and pawnshops were
include as well (BSP, 2009)
THE ROLE OF MONETARY
INSTITUTIONS IN THE ECONOMY
 Financial or monetary institutions plays an
important role in the economy. They serve as
“go-betweens”. They play the following
major functions or roles.
(a) they allocate or channel savings efficiently from
savers and borrowers
(b) They provide information, liquidity, and risk
sharing services
(c) They provide flexibility and divisibility of funds
for the users and sources of these funds
(d) They are essential for ensuring capital
formation and economic growth
SIMPLE MONEY CREATION
 How do banks create money? One bank cannot do this
alone It has to be a system of banks. First we must try
to understand the transfer of funds between depositing
institutions.

Supposed Lara and Mary are both depositors of LIFE

Bank. If Lara fives 1000 peso worth of check to Mary. LIFE
Bank should deduct the amount from its deposit liability (
note: all your deposits are liabilities of the bank to you) to
lara and increase its deposit liability to Mary.
What if Lara is a depositor of LIFE bank and writes a
check of 100 pesos and gives it to Mary who deposits it to
YOLO bank, then YOLO will add 1000 pesos to its deposit
liability to Mary and send the check to LIFE bank
SIMPLE MONEY CREATION
 Who then deduct the 1000 pesos from its
deposit liability to Lara. LIFE now owes YOLO
1000 pesos, to collect YOLO will send an
armored vehicle to LIFE and haul the check
transaction. But this is tedious and expensive
so banks wait for a certain time to settling up
so that things can be averaged out i.e.,
offsetting transactions that will require YOLO
or some other banks to pay LIFE. Thus a
clearing process whereby financial
institutions will check each other regarding
payment due or accruing and settle the net
payments
SIMPLE MONEY CREATION
 The Bangko Sentral ng Pilipinas (BSP) could
receive checks let say from a transaction
done by a commercial bank with a savings
bank. These checks could also be sent to
other local clearing houses for clearing
purposes.
 Then BSP may compare the books of both
banks and at the end of the day conclude
that one bank owes the other some amount.
MULTIPLE EXPANSION OF DEPOSITS
What do banks do with your deposits?
 When you deposit one peso, only a fraction
of the peso is kept by the bank in its vault for
safekeeping. The rest of the money is made
available for loans and other investments.
 In very simple terms banks earn a profit from
the difference in the deposit rates that they
give to their depositors and the lending rates
that they charge to their borrowers.
MULTIPLE EXPANSION OF DEPOSITS
 Reserve Requirement
 Is the percentage of deposits that banks are
mandated to keep in their vaults for safekeeping
by the BSP.
 Its purpose is the servicing of day-to-day
withdrawals and unexpected heavy withdrawals
during bank runs or in times of emergencies.
Example: If the BSP mandates a 10% reserve
requirement, this means that 10 centavos for
every one peso deposit must be kept in the bank’s
vault for safekeeping and 90 centavos would be
available for lending
MULTIPLE EXPANSION OF DEPOSITS
 Excess Reserves
 It is the additional percentage of deposits that
banks keep, which is above the reserve
requirement.
Example: If the banks desire 5% excess reserves
over the 10% required reserves, then this means
an additional 5 centavos for every one peso
deposit will be kept for safekeeping.
* The level of reserve requirement set by the BSP
varies from time to time depending on the
performance of the economy and the subsequent
monetary policy that must be adopted. Historically,
though, reserve requirements averaged between
10%-13%
SIMPLE MONEY CREATION PROCESS
 Now how do a system of commercial banks
create money from deposit here is an
example.
We assume that deposits are the only
component of the monetary base , the reserve
requirement is 10%, and banks do not keep
excess reserves. Let us say that THEME bank
receives an initial deposit of 10,000 pesos from
the Golden Store. Given the reserve
requirement of 10% THEME bank will keep
1000 pesos as required reserves and 9000
pesos will be available for lending. If the 9000
pesos is borrowed by HOPIA industries and
then it is deposited to FALL Bank, FALL bank
SIMPLE MONEY CREATION PROCESS
of 9000 pesos which is 900 in their vaults and makes
8100 pesos available for lending. Now the 8100
pesos was lend out to ASA Handicrafts and it deposits
it to WAIT bank. So 10% of this which is 810 is kept
and 7290 will be available for lending. The process
continues until at funds available for lending have
been converted into required reserves or when the
sum of all required reserves in each bank has risen by
an amount equal to the initial deposit of 10,000
pesos. By then the initial deposit of 10,000 pesos
have expanded into 100,000 pesos if we sum up all
the additional deposits received by each bank in the
system. The sum of funds available for lending for all
banks will have reached 90,000 pesos.
MULTIPLE EXPANSION OF DEPOSITS
 Money multiplier
 Is the factor by which money supply will change
given a change in monetary base, or in our
example, given a change in deposits.
 In our simple case (minus all other
complications), the money multiplier which we
denote as mm , is just the reciprocal of the
reserve requirement, rr, as shown by the
following formula:
mm=1/rr
 So from our example, the money multiplier will
be given the 10 % reserve requirement mm will
be equal to 10. If rr increses from 10% to 20%,
the money multiplier will decrease from 10-5.
MULTIPLE EXPANSION OF DEPOSITS
 Money Multiplier
 This inverse relationship of the reserve requirement
and money supply has an important implication on
the money supply. The change in Money Supply (M)
is equal to the product of the money multiplier
(mm) and the change in monetary base (MB) or
deposits. Hence,
M= mm x MB

 The reserve requirement is important tool used by the BSP

in controlling money supply. From our example we have
and initial deposit of 10,000 pesos and a reserve
requirement of 10% getting the mm=10 the deposit will
expand to 100,000 pesos but what if the reserve
requirement increases to 20% which gives us and mm=5
then the expansion of deposit will be equal to 50,000.
MONETARY POLICY
 Why is there a need to control money supply in
the first place? If you could remember the
primary objective of the BSP is to maintain
price stability and the convertibility of the
peso. So in short we do not want too much or
too little money circulating in the economy.
 If there is too much money held by
households and firms this can result in
overspending and if manufacturers if goods
and services cannot catch up with the increase
in consumption, inflation can occur. Since the
only way for the firms to sell the remaining
inventories is to charge higher prices.
MONETARY POLICY
 If there is too little money circulating in the
economy, unemployment of resources can
occur because firms will not be receiving as
much revenues to pay off their costs of
operations and they will be forced to cut
down on their production.
* Thus aside from using fiscal policies to affect
the level of economic activity to meet a
desired or targeted growth in our national
income or GDP (Gross Domestic Product),
monetary policy can also be resorted to.
MONETARY POLICY
 Monetary policy can be either be
expansionary (increasing money supply) or
contractionary (decreasing money supply)
The following is the list of important
instruments of monetary control used by the
Monetary Board of the BSP:
(a) Reserve requirement

(b) Rediscount rate

(c) Open market operations

MONETARY POLICY
 Reserve
  requirement
 as discussed earlier is the percentage of deposit that
the banks are mandated t keep in their vaults for
safekeeping by the BSP. If the BSP wants to contract
money supply (or “mop up excess liquidity”) using
this instrument it has to increase the reserve
requirement this means that lesser fund will be
made available for lending so:
 If it wants to expand the money supply it has to
decrease or lower the rr this means that a smaller
fraction of deposits will be kept in the banks’ vaults
and more funds will be available for lending which
implies t
* It is the frequently used tool of monetary control
MONETARY POLICY
 Rediscount Rate
 Is the interest rate charged by the BSP to banks
who wish to borrow from it. To contract monetary
supply using this instrument, the BSP has to
increase the rediscount rate to discourage banks
from borrowing at higher interest rates. This way
less funds will be available for lending.
 As an expansionary monetary policy the BSP
must decrease the rediscount rate to encourage
banks to borrow funds from it thereby allowing
more banks to borrow funds from it hereby
allowing more money to be available for lending.
MONETARY POLICY
 Open market operations
 In refers to the buying and selling of government
securities by the BSP. Open market purchase, means
buying of government securities (e.g., bonds) from
private individual or firms by the BSP. Open market
Sale refers to the sale of government securities to
private individuals of firms by the BSP.
 If the BSP wants to contract money supply it has to
engage in open market sale of government
securities. This way the BSP sells securities to the
public and “gets” their money in return. Hence lesser
money will circulate in the economy because people
are holding bonds instead of cash
 If the BSP want expand money supply it has to
engage in open market purchase of securities, BSP
gets the public bonds and “gives” then money or cash
in return
INTERNATIONAL MONETARY
INSTITUTIONS AND THE PHILIPPINE
MONETARY SYSTEM

 The Philippine monetary system has been

affected by international monetary
institutions particularly by the International
Monetary Fund (IMF) and the World Bank
(WB) even before financial liberalization
and globalization of markets in the past.
INTERNATIONAL MONETARY
INSTITUTIONS AND THE PHILIPPINE
MONETARY SYSTEM
 International Monetary Fund (IMF)
 It was established in 1945 when World War II was
coming to its end, representatives of allied
governments gathered at Bretton Woods, New
Hampshire, to design a new international monetary
and financial system. To help countries in short run
economic adjustment.
 It was created to:
(a) Act as a lender of last resort
(b) Encourage domestic economic policies consistent with
foreign exchange rate stability and
(c) Monitor the financial activities of member countries.
 It is composed of 100 member countries.
 It is a “hyper” bank whose depositors and borrowers
are banks of the world
INTERNATIONAL MONETARY
INSTITUTIONS AND THE PHILIPPINE
MONETARY SYSTEM
 World Bank
 It was created to:
(a) Make long term loans available for the developing
countries
(b) Give loans for infrastructure to aid economic
development and
(c) Sell bond n international capital market to raose
loanable funds
INTERNATIONAL MONETARY
INSTITUTIONS AND THE PHILIPPINE
MONETARY SYSTEM
 World Bank
 It is composed of five institutions:
(a) International Development Association (IDA)
(b) International Bank for Reconstruction and
Development (IBRD)
(c) International Finance Corporation (IFC)
(d) Multilateral Investment Guarantee (MIGA)
(e) International Center for Settlement and Investment
Disputes (ICSID).
 Itencourages member countries 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
INTERNATIONAL MONETARY
INSTITUTIONS AND THE PHILIPPINE
MONETARY SYSTEM
 As a member of the IMF, the Philippines has
been receiving loans form this international
institution and has likewise been monitored
particularly with respect to the domestic
economic policies that the government and
related financial institutions engage in to
affect exchange rate stability.
 The Philippines is also a recipient of long term
loans to aid it in its development this brought
about by its membership to the World Bank.
 We can therefor conclude that it is inevitable
that our monetary system would be linked to
and affected by the monetary policies set by
these international financial institutions.