CENTR

AL BANKI
NG
On June 15, 1948, the Central Bank Act or the
Republic Act No. 265 was approved. This Act
provides for the creation of the Central Bank of the
Philippines, which finally opened its doors to the
public on January 3, 1949. The capital of the bank, as
provided by the Act, shall be ten billion pesos
(P10,000, 000, 000), with the initial subscription
coming from the liquidated assets of the Exchange
Standard Fund.
The Central Bank has: the responsibility of administering the
monetary, banking and credit system of the Republic. Therefore the
bank should have achieved the following objectives:

1. Primarily to maintain internal and external monetery stability in the

Philippines.

2. To preserve the international value of the peso and the convertibility of

the peso into other freely convertible currencies:

3. To foster monetary, credit and exchange conditions conducive to a

balanced and sustainable growth of the economy; and

4. To maintain price stability in the economy.

 THE OLD MONETARY
BOARD
The policy-making body of the Central Bank the Monetary Board, which is composed of seven
members. The Chairman of the Board is also the Governor of the Central Bank. The other members
are the Secretary of Finance, the Director General of the National Economic Development
Authority (NEDA), the Chairman of the Board of Investments, the Secretary of Budget and
Management, and two appointed representatives from the private sector. The Chairman of the Old
Monetary Board has a term of six years while the representatives from the private sector have four
years.
 THE NEW CENTRAL
BANK
Republic Act 7653 is known as the New Central Bank Act. Section 1 of
RA 7653 states that the state shall maintain a Central Monetary Authority
(CMA) that shall function and operate as an independent body in the
discharge of s mandated responsibilities concerning money, banking and
credit. This established independent Central Monetary Authority shall be
a corporate body known as the Bangko Sentral ng Pilipinas, hereafter
referred to as the Bangko Sentral.
Composition of the New Monetary Board of Bangko
Sentral
THE POWERS AND FUNCTIONS OF THE BANGKO SENTRAL SHALL BE
EXERCISED BY THE BANGKO SENTRAL BOARD, COMPOSED OF SEVEN (7)
MEMBERS APPOINTED BY THE PRESIDENT OF THE PHILIPPINES FOR A
TERM OF SIX (6) YEARS. THE SEVEN MEMBERS ARE
The Governer of the Bangko Sentral, who shall be the Chairman of the Monetary Board.
1 The Governor of the Bangko Sentral shall be head of a department and his appointment
shall be subject to confirmation by the Commission on Appointments

A member of the Cabinet is to be designated by

2 the President of the Philippines.

3 Five (5) members who shall come from the

private sector, all of whom shall serve full-
time.
QUALIFICATIONS OF THE
MONETARY BORAD
BANGKO SENTRAL NG PILIPINAS
• Each member of the
Monetary Board must
be a natural born
citizen of the
Philippines at least
thirty five (35) years
of age, with exception
of the Governor who
shall at least be forty
(40) years of age, of
good moral character,
of unquestionable
integrity, of known
probity and patriotism,
and with recognized
competence in social
and economic
disciplines.
BANGKO SENTRAL AS
LENDER OF LAST REPORT
AS BANK OF ISSUE
• In case banks need
• The Bangko Sentral is funds for lending to
the only bank their clients, they may
avail of the rediscount
authorized to
manufacture and issue facilities of the
money. As the bank of Central Bank.
Through the
issue, it has the
monopoly of note rediscount window of
issue. Thus, anyone the Central Bank,
who makes money banks may borrow
without the authority funds by using their
given by the Bangko notes and having
Sentral is guilty of them rediscounted.
counterfeiting
DOMESTIC MONETARY STABILIZATION
Action when abnormal movements occur in the monetary aggregates, credit, or price level —
Whenever abnormal movements in the monetary aggregates in credit or in prices, endanger the
stability of the Philippine economy or important sectors thereof, the Monetary Board shall:

(a) Take such remedial measures as are appropriate and within the powers granted to the Monetary
Board and the Bangko Sentral under the provisions of Article 1, Chapter III, Section 63, of the New
Central Bank Act (Republic Act 7653), and

(b) Submit to the President of the Philippines and the Congress, and make public, a detailed report
which shall include, as a minimum, a description and analysis of:

(1) the causes of the rise and fall of the monetary aggregates, of credit or of prices,

(2) the extent to which the changes in the monetary aggregates, in credit, or in prices have been
reflected in changes in the level of domestic output, employment, wages and economic activity in
general, and the nature and significance of any such changes, and

(3) The measures which the Monetary Board has taken and the other monetary, fiscal or
administrative measures which it recommends to be adopted.
INSTRUMENTS OF CENTRAL BANK ACTIONS
In order to maintain monetary stability within and out of the country, the Bangko Sentral endeavors to
control the expansion or contraction of the money supply, the level of credit, or any rise or fall in
prices. Monetary authorities are empowered to institute a number of devices for purposes of proper
regulations of the volume of money supply.
This devises may be as follows:

(1) Control of legal reserve requirement

(2) Control of discount and rediscount rates
(3) Open market operation
(4) Control of collaterals required
(5) Imposition of portfolio ceiling
(6) Minimum capital ratio
(7) Margin requirements for L/C
(8) Moral suasion
 • LEGAL BANK RESERVE
Legal bankREQUIREMENT
reserve refers to that portion of the banks' deposit liability that cannot be available for lending. Instead, it
will have to be set aside as a reserve in the Bangko Sentral, vaults of the bank or temporarily invested in government
securities to meet the withdrawal needs of percentage of the bank reserve is a the depositors. The control of the
powerful and effective instrument that the Bangko Sentral may use in order to effect an expansion of contraction of
money supply.
During inflation, the objective of the Bangko Sentral is to decrease the volume of money supply. In order to do this, it will
increase the percentage of the legal reserve required on banks. This action will give an effect of reducing the lonnable
funds of the banks because they will have to set aside a bigger pertion of their deposit liabilities as reserve to meet
depositors withdrawals Furthermore, this action decreases credit expansion

During deflation, when money supply is insufficient, the percentage of legal bank reserve is decreased to induce greater
credit expansion. When the percentage of legal bank reserve is decreased, the effect is an increase in investible funds,
which may induce greater lending operations and consequently, higher credit expansion.
• PURPOSES OF IMPOSING LEGAL BANK
RESERVE
A reserve requirement is imposed by the Central Bank for the following
reasons:
1. As a monetary device for credit expansion and contraction.

2. To protect the interest of depositors by not allowing the bank to use all the deposits for lending
operations.

3. The pool of legal reserve may be used by the Bangko Sentral to help banks in financial distress.

4. The pool of legal bank reserve deposits may also be used by banks in their "inter-bank call loan
system". This system is one whereby a bank with deficiency in its bank reserve deposits could borrow
from a bank with excess reserve deposits. The lending bank imposes a percentage of interest

5. The pool of bank reserve deposit is also utilized in the settlement of bank claims and counter claims
against each other arising from the operation of a checking account system where the Bangko Sentral
acts as the clearinghouse.
LAWS COVERING LEGAL BANK RESERVES
(RA 7653, SEC. 96 TO SEC.102)
• Required reserves against peso deposit
• Required reserves against foreign currency
deposit
• Required reserves against unused balances of
overdraft
• Increase in reserve requirement
• Computation on Reserves
• Reserve deficiencies
• Inter-bank Settlement
 CONTROL OF THE DISCOUNT AND
REDISCOUNT ON LOANS
The Bangko Sentral extends credit to banking institutions for the following purposes:
a. Using it as a device for credit control
b. Increase the liquidity of the banks through credit, whenever necessary.

When the Bangko Sentral extends credit to banks, it imposes interest or discount rates, primarily, to use it as a device
for credit control, and secondarily, to earn income for the Central Bank.

During inflation, the Bangko Sentral increases the percentage of its rediscount and discount rates on credits extended to
banks. Its purpose is to discourage the banks from borrowing from the Central Bank. The effect is that the banks will
have less loanable funds, which will limit their lending operations and credit expansion.

During deflation, the Bangko Sentral decreases the percentage of discounts or interests on credit extended to the
banking institutions, which encourage the banks to borrow from the Bangko Sentral. Increase in the banks loanable
funds will enable them to expand their operations and promote greater credit expansion.
 INTEREST AND REDISCOUNT RATES (RA
7653 SEC.85)
The Bangko Sentral shall collect interest and other appropriate charges on all loans and advances it
extends, the closure, receivership or liquidation of the debtor-institution notwithstanding.

The Monetary Board shall fix the interest and rediscount rates to be charged by the Bangko Sentral
on its credit operations in accordance with the character and term of the operation, but after due
consideration has been given to the credit needs of the market, the composition of the Bangko
Sentral's portfolio, and the general requirements of the national monetary policy. Interest and
rediscount rates shall be applied to all banks of the same category uniformly and without
discrimination.
OPEN MARKET OPERATION
GOVERNMENT SECURITIES

This refers to the buying and selling of government securities by the Bangko Sentral for
the purpose of credit control. Government securities refer to evidences of indebtedness of
the government.

There are two purposes of government securities:

1. To raise revenue

2 To control credit

The Central Bank plays a significant role in the issue and placement of government
securities. It also maintains the security stabilization fund, which is a reserve intended to
be used in the buying and selling of government securities to stabilize the value and
liquidity of such government securities.
 PURCHASES AND SALES OF GOVERNMENT SECURITIES
(RA 7653 SEC.91)
In order to achieve the monetary policy, the Bangko Sentral may, in accordance with the principle
stated in Section of RA 7653 and which such rules and regulations as may be prescribed by the
Monetary Board, buy and sell in the open market for its own account:

(a) Evidences of indebtedness issued directly by the Government of the Philippines or by its political
subdivisions; and

(b) Evidences of indebtedness issued by government instrumentalities and fully guaranteed by the
Government
 ISSUE AND NEGOTIATION OF BANGKO SENTRAL
OBLIGATIONS (RA 7653 SEC. 92)
In order to provide the Bangko Sentral with effective instruments for open market operations, the Bangko Sentral may, subject to
such rules and regulations as the Monetary Board may prescribe and in accordance with the principles stated in Section 90 of RA
7653, issue, place, buy and sell freely negotiable evidences of indebtedness of the Bangko Sentral; Provided, that issuance of such
certificates of indebtedness shall be made only in cases of extraordinary movement in price levels. Said evidences of indebtedness
may be issued directly against the international reserve of the Bangko Sentral or against the securities which it has acquired under
the provisions of Section 91, RA 7653, or may be issued without relation to specific types of assets of the Bangko Sentral.
CONTROL OF THE COLLATERALS REQUIRED
ON BANK LOANS
The Bangko Sentral has the power to impose conditions or requirements on the securities against the loans
extended by the bank. This in effect increases the loan value of the collateral.

During inflation, the Bangko Sentral may increase collaterals required on loans, which in effect decreases
the loan value of the collaterals. This may discourage public borrowings from the banks, decrease lending
operation of the banks, and decrease credit expansion.

During deflation, the Bangko Sentral may decrease collaterals, which may be an incentive to borrowers.
REQUIRED SECURITY AGAINST BANK LOANS (RA 7653 SEC. 106)
In order to promote liquidity and solvency of the banking system, the Monetary Board may
issue such regulations as it may deem necessary with respect to the maximum permissible
maturities of the loans and investments which the banks may make, and the kind and
amount of security to be required against the various types of credit operations of the
banks

IMPOSITION OF PORTFOLIO CEILING

This refers to the upper limit that the Bangke Sentral may place on the loane and
investment of banks. It is instituted only during inflation. It is a direct limitation on the
volume of loans and investments that banks may extend. Such restrictions may not be
instituted during deflation. To do this, the Bangko Sentral sets a date and whatever is the
total amount of loans and investment the bank has on that date is its limit.
PORTFOLIO CEILING (RA 7653 SEC.
107)
Whenever the Monetary Board considers
it advisable to prevent or check an
expansion of bank credit, the Board may
place an upper limit on the amoum of
loans and investments which banks may
hold, or may place a limit on the rate of
increase of such assets within specified
periods of time. The Monetary Board may
apply such limits to the loans and
investments of each bank or to specific
categories thereof
MINIMUM CAPITAL RATIO
It is the maximum ratio that the
combined capital account of surplus
may bear on the banks' corporate assets.
The Bangko Sentral requires 10% of
the risk assets of a bank as its minimum
capital required. Thus, total assets
minus non-risk assets equals risk assets.
MARGIN REQUIREMENTS AGAINST LETTERS OF CREDIT
(RAThe
7653 SEC. 105)
Monetary Board may at any time prescribe
minimum cash margins for the opening of letters of
credit, and may relate the size of the required margin to
the nature of the transactions to be financed.

MORAL SUASION
This is more of a psychological approach in which the Bangko Sentral may use
its persuasive power to make the banks follow or support credit policies thout
direct imposition of restrictions. There are cases when the Bangko Sedral shies
away from imposition of credit restrictions because of posthle unfavorable
repercussions such that, the Bangko Sentral may just use their milience among
banks for voluntary support of a credit policy For instance, during the imposition
of free floating exchange rate in 1970, the Central Bank was able to avoid the
buying and selling of US $ at very high speculative rates. The banks agreed
among themselves to limit their trading in foreign transactions to an agreed
foreign exchange rate.
OTHER MONETARY POLICIES TO STABILIZE BANKING
OPERATION
1. Bangko Sentral may fix maturities in bank loans for the purpose of credit control or as a means of
payment.

2. Bangko Sentral may also fix the maximum interest that the bank may pay on deposit substitutes for the
purpose of preventing competition among banks in attracting depositors.

3. Bangko Sentral may establish priorities for bank loans especially with respect to funds, which has been
borrowed from the Bangko Sentral.

4. Bangko Sentral makes periodic examination of the banks accounting records and requires banks to
submit their financial statement at the end of every quarter

5. Bangko Sentral looks into the character and integrity of the bank's incorporators and members of the
board as well as the top ranking executives of the bank
 BANKO SENTAL AS A FISCAL
AGENT
As a fiscal agent of the government, the Bangko Sentral has the
following functions:

1. To be the official representative of the government to financial entities;

2. To be the depository banker of the government,

3. To be the financial adviser of the government, and

4. To manage public debts.

 THAN
K
Pretty Frill, Shane, Arch-jay