The Financial System

Central Bank
 It is the most important player in any financial
system as it is its de facto overseer.
Function of Central Bank
1. Issue currency for circulation
2. Withdraw damaged currency from circulation
3. Clear checks
4. Issue banking regulations
5. Lend to bank
6. Conduct monetary policy
The Philippine Financial System
Bangko Sentral ng Pilipinas
 It was created through the enactment of republic
act no. 7653(The new Central bank act of 1993).
 The BSP replaced the old Central bank (republic
act no. 265) of 1949.
 It is headquartered at he BSP complex in Roxas
Boulevard, Manila and has 3 regional offices in
Dagupan, Cebu and Davao.
 Structure of the Philippine Financial System

BSP
Non – Bank
Banking System
Quasi - Bank

Banking System
1. Commercial Bank
a. Universal Bank
b. Ordinary Commercial
2. Savings Bank
a. Savings and Mortgage
b. Stocks Savings and Loans
c. Private Development Bank
3. Government Bank
a. Land Bank of the Philippines
b. Development Bank of the Philippines
c. Philippine Islamic Bank
NBQB’s Financial Intermediaries
1. Insurance Companies
2. Investment houses
3. Building and loan association
4. Pawnshops
5. Non stocks savings and Loans
6. Investment companies
7. Trust companies
8. Venture capital corporations
9. Security Dealers and Brokers
10.Lending Investment
11.Financing Companies
12.Credit unions
13.Government NBQB
a. Social Security System
b. Government Service Insurance System
What is Banking System?
 It plays a principal role in financial
intermediation.
Banks
 These are the financial intermediaries that
average person interacts with most frequently.
Commercial Banks
 These are the financial intermediaries raise funds
principally by creating deposit liabilities in the
form of demand deposits, savings deposit and
time deposits.
Monetary Policy
 It is a set of guidelines and plans of action
designed to achieve stability and reliability of
financial system so that it automatically responds
and adjusts to the changes of an economy.
 The primary objective of monetary policy is to
provide financial stability that promotes growth
and development of the economy with minimal
inflation.
Market for Money
1. Money Supply
a. this is set by the Central bank using monetary
Policy instrument.
Mˢ = Mₒ
2. Money Demand
a. interest rate is opportunity of holding money
b. transaction demand depends on real GDP, Y
and on the level of Prices, P in the Economy.
Mᵈ = P x L (r, Y)
3. Equilibrium
a. Keynesian Theory of Liquidity preference says
real interest rate moves to equate the demand
and supply at any level of real GDP, L.

Mₒ = P x L (r, Y)
P
 Measures of Money Supply
- Money supply is measured in three levels:
1. M1 – which is also called as “narrow money”, it
is comprised of money in circulation plus
demand and savings deposits.
2. M2 – which is also called the “broad money”, it
is comprised of money in circulation, demands
and savings deposit plus time deposit.
3. M3 – which is also called the “expanded
money” in circulation, demand deposit, savings
deposit and time deposits plus deposits
substitutes.
Theory of Monetary Policy
- The principles of monetary theory as we know is
based principally on Cambridge University’s Alfred
Marshall and Yale’s Irving Fischer’s treatise on
“Income Velocity of Money and Quantity theory of
Prices.”
1.Income Velocity of Money
 It is the ratio of total nominal GNP to the stocks of
money.
Velocity
 It measures the rate of turnover of the stock of money
relative to the total income or output of the economy
Mathematically expressed as follows:
V = GNP= P₁Q₁ + P₂Q₂ = PQ
M M M

Therefore,
V = PQ or MV = PQ
M
Where:
P = Average Price Level
M = Stock of Money
Q = Real GNP
Illustration
Assume that an economy produces only one
product, cloth, and GNP consists of 500 million
yards of cloth selling @ P10 per yard. Compute
for the velocity?
2. Quantity theory of Prices
 It is an extension of the income velocity of
money.
- With this insight, we can explain the movement
in prices in relation to money supply.
Rewriting the Equation: P = MV
Q
- But since, V/Q tends to be constant, then, the
equation can be written as P = KM
K – being the constant ration of V / Q
Tools of Monetary Policy
- In the Philippines, the Bangko Sentral ng Pilipinas exercise the
authority in the implementation of monetary policy. It uses 3
tools in implementing monetary policy, as follows:
1. Open – Market Operation
 This is the BSP’s main tool in increasing and decreasing
money supply.
2. Rediscounting Facility
 It is the lending windows of central bank to commercial
banks.
3. Reserve requirement
 The most powerful tool of monetary policy is the reserve
requirement variation.
 It is the portion of bank deposits set aside by banks and
therefore not available for lending.
Seatwork:
Supply the necessary requirements:
1. What are the most important functions of the
Central Bank?
2. What are the components of the Following:
a. M1 (Narrow Money)
b. M2 (Broad Money)
c. M3 (Expanded Money)