TOPIC VII: Bangko Sentral NG Pilipinas: Learning Objectives

TOPIC VII: Banko Sentral ng Pilipinas
TOPIC VII: Bangko Sentral ng Pilipinas
Learning Objectives
• Explain the principle behind the central bank formation and its objectives.
• Differentiate BSP from other banks
• Enumerate and explain the 3 pillars of BSP/Central Banking
• Define BSP, Monetary Policy, and IMF
CENTRAL BANK DEFINED

A central bank is defined by several writer. These definitions are presented below.
Collin defines central bank as “the main government-controlled bank in a country, which controls the financial affairs of
the country by fixing main interest rates, issuing currency, supervising all other banks within the country and controlling
the foreign exchange rate.”
Kidwell and Peterson define central bank as “an institution that is responsible for managing a nation’s money supply
(monetary aggregates) in its best interest.”
A central bank, according to Horvitz and Ward, refers to “the institution that a nation endows with power to manage and
provide services to its money and banking system, and foreign exchange system.”
Kohn defines a central bank as an “official institution with broad responsibilities for a nation’s payment system;
established to help maintain the liquidity of private banks.”
Mishkin defines a central bank as the government agency that oversees the banking system and is responsible for the
amount of money and credit supplied in the economy.”
The foregoing definitions indicate that a central bank is a government-controlled institution that ensures the financial
health of the nation through proper management of money and credit.
Objectives of Central Bank

The principal objective of a modern central bank is:
1. To oversee the financial health of private banks;
2. To maintain monetary and credit conditions that encourage a high level of employment; and
3. To assure a reasonably stable level of prices
BANGKO SENTRAL NG PILIPINAS

The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines. It was established on 3 July
1993 pursuant to the provisions of the 1987 Philippine Constitution and the New Central Bank Act of 1993. The BSP took
over from the Central Bank of Philippines, which was established on 3 January 1949, as the country’s central monetary
authority. The BSP enjoys fiscal and administrative autonomy from the National Government in the pursuit of its
mandated responsibilities.
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.
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.
BSP Core Values

Excellence – Consistently doing our best to master our craft, continually improving our competencies, and learning new
things in pursuit of the organizational goals, comparable to the best practices of other central banks
• We do things right the first time in a consistent and timely manner. We continuously grow professionally.
• We innovate in response to the changing environment/times.
Patriotism – Selfless commitment to the service of the Filipino people and the country
• We promote the welfare of the Filipino people in policy and decision-making.
• We uphold the interest of the Filipino people over one’s self and willing to sacrifice for the institution and the
country.
Integrity – Performing mandate with sincerity, honesty, and uprightness, worthy of respect and emulation from others
• We behave ethically in accordance with the BSP Code of Ethics, laws, rules and regulations. We protect
information appropriately.
• We exhibit consistency of thoughts, words and deeds. We respect individual differences.
• We engage our stakeholders and weigh their concerns. We recognize contributions and give credit where it is
due.
Solidarity – Performing with team spirit; acting and thinking as one in the pursuit of common goals and objectives
• We collaborate with others and facilitate consultative decision-making to achieve common goals and objectives.
• We uphold group decision.
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• We build constructive relationships by appreciating and respecting the diversity and contribution of others.
Accountability – Taking full responsibility for one’s or group’s actions
• We acknowledge and commit to the fulfillment of one’s responsibility.
• We demonstrate and exact an understanding of one’s responsibility in relation to the mandates of the institution.
Governance of the Bank

The Monetary Board exercises the powers and functions of the BSP, such as the conduct of monetary policy and
supervision of the financial system. Its chairman is the BSP Governor, with five full-time members from the private sector
and one member from the Cabinet.
The Governor is the chief executive officer of the BSP and is required to direct and supervise the operations and internal
administration of the BSP. A deputy governor (or a Senior Assistant Governor in the case of the Currency Management
Sector) heads each of the BSP's operating sector as follows:
• Monetary and Economics Sector is mainly responsible for the operations/activities related to monetary policy
formulation, implementation, and assessment
• Financial Supervision Sector is mainly responsible for the regulation of banks and other BSP-supervised financial
institutions, as well as the oversight and supervision of financial technology and payment systems
• Currency Management Sector is mainly responsible for the forecasting, production, distribution, and retirement of
Philippine currency, as well as security documents, commemorative medals, and medallions
• Corporate Services Sector is mainly responsible for the effective management of corporate strategy,
communications, and risks, as well as the BSP's human, financial, technological, and physical resources to support
the BSP's core functions
Responsibility and Primary Objectives of the BSP

It shall be the responsibility of the BSP:
1. To provide policy directions in the areas of money, banking, and credit;
2. To supervise the operations of the banks and to exercise such regulatory and examination powers as provided under
Republic Act No. 11211 (The New Central Bank Act, as amended) and other pertinent laws over the quasi-banking
operations of non-bank financial institutions; and
3. To exercise regulatory and examination powers over money service businesses, credit granting businesses, and
payment system operators. Its primary objective is to maintain price stability conducive to a balanced and sustainable
growth of the economy and employment.
It shall also:
1. Promote and maintain monetary stability and the convertibility of the peso;
2. Promote financial stability and closely work with the National Government, including, but not limited to, the Department
of Finance, the Securities and Exchange Commission, the Insurance Commission, and the Philippine Deposit Insurance
Corporation;
3. Oversee the payment and settlement systems in the Philippines, including critical financial market infrastructures, in
order to promote sound and prudent practices consistent with the maintenance of financial stability; and
4. Promote broad and convenient access to high quality financial services and consider the interest of the general public.
3 PILLARS OF CENTRAL BANKING

1. Price Stability through the conduct of monetary policy
2. Financial Stability through banking supervision and regulation
3. Efficient Payments and Settlement System through operation of real-time gross settlement system
1st Pillar: Price Stability

Price Stability is = the BSP’s primary mandate. It refers to low and stable inflation, and preserves purchasing power
How are prices measured?

Consumer Price Index – represents the average price of a standard basket of goods and services consumed by a
Typical Filipino family for a given period.
Inflation Rate – annual percentage change in consumer price index
Inflation = sustained increase in the average prices of goods and services typically purchased by consumers.
Price Level vs Inflation

Year 1 Year 2 Year 3
Price Level P 100 P110  P120 
Increase in prices 10 10
Inflation (rate of increase in prices) 10.0%  9.1% 
Prices increased but inflation slowed down … but consumes will usually fixate on the rise in prices rather than on
the slowdown in inflation.
What is BSP’s Monetary Policy Framework?

Inflation Targeting – Involves publicly announcing an inflation target which the BSP promises to achieve over a certain
period.
Why adopt inflation targeting?

- Simple framework - Allows greater focus on price stability - Forward looking
- Enables comprehensive approach to monetary policy
- Increases accountability of BSP and helps build credibility
- Promotes transparency in monetary policy – Under inflation targeting, monetary policy decisions as well as
outlook for inflation of the BSP are communicated to the public regularly through various means. The BSP
maintains its credibility, then inflation expectations will remain well anchored.
2nd Pillar: Financial Stability
3rd Pillar: Efficient Payments and Settlement System

What is the National Payments and Settlement System?
- Includes the country’s entire matrix of institutional and infrastructure arrangements and processes through
which money is transferred from one party to another
- Makes the transfer of funds between two parties easier.
What is the Role of BSP
BSP – is the owner and operator of the Philippine Payments and Settlements System (PhilPaSS), a real-time gross
settlement system where settlement is done thru the member-bank’s demand deposit account maintained by the BSP.
Other Functions of the BSP

1. Issuer of Money
2. Official Depository and Financial Advisor of the Government
3. Bank of Banks and Lender of Last Resort
4. Custodian of Official Reserves
Financial Inclusion Programs of the BSP

1. Microfinance: Continued proactive stance in microfinance to support the development of a sustainable
microfinance business environment.
2. Economic and Financial Learning Program (EFLP): Sustained implementation of EFLP to promote greater
public awareness of economic and financial issues to enable households and businesses to make well-informed
economic and financial decisions.
3. National Strategy for Financial Inclusion (NSFI): Spearheaded the foundation of NSFI as a roadmap in
promoting further inclusion and inclusive growth.
Promote Credit Delivery thru BMBEs

Republic Act No. 9178
Barangay Micro Business Enterprises (BMBE) Act of 2002
- To mainstream BMBEs in the economy
- To grant incentives and other benefits to BMBEs
BSP’s Role
- Formulate implementing rules on credit delivery/guarantee to BMBEs as well as incentive programs, and monitor
implementation of the law
- Consider loans granted to BMBEs under RA 9178 as alternative compliance with RA 9501 (Magna Carta for Micro,
Small and Medium Enterprises)
MONETARY POLICY
- To manage the supply and cost of money and credit
- To influence overall demand for goods and services
- To attain price stability
We can think of monetary policy as the faucet, BSP as the person who controls the faucet, and water as the supply of
money in the economy.
Contractionary – When there is “too much money” in the economy supporting overall demand for goods and services
which, in turn, increases inflationary pressures, the BSP “tightens” the faucet to reduce the money supply. This action
dampens demand which could lead to lower inflation.
- Higher interest rates – Less lending/borrowing – More savings – Less spending
Expansionary – When there is “too little money” in the economy which dampens overall demand for goods and services,
the BSP “loosens” the faucet to expand money supply.
- Lower interest rates – more lending/borrowing – less savings – more spending
Monetary Policy Frameworks (2002 – Present)

INFLATION TARGETING
- Government sets inflation target (in consultation with BSP)
- BSP announces inflation target
- BSP assesses monetary condition and forecasts inflation
- “Is the Inflation forecast in line with the target? If YES, NO CHANGE in policy settings; if NO, BSP ADJUSTS policy
settings.
- BSP communicates through press statements, highlights of Monetary Board meetings, inflation reports, and open
letter to the President.
QUANTITATIVE INSTRUMENTS OF MONETARY POLICY

Central monetary authorities use various tools to implement monetary policy. These tools are as follows:
1. Open Market Operations
2. Discount Policy
3. Reserve Requirements
WHAT MONETARY POLICY IS SUPPOSED TO ACHIEVE: EFFECTS OF THE DISCOUNT POLICY:
OPEN MARKET OPERATIONS

OMO refers to the central bank’s activity of buying or selling of government securities in the open market. This tool is used
to effect changes in interest rates. When the central bank makes open market purchases, the monetary base is expanded,
thereby raising the money supply and lowering short-term interest rates. Conversely, when the central bank makes open
market sales, the monetary base shrinks, lowering the money supply and raising short-term interest rates.
Open market operations consist of two types as follows:

1. Dynamic open market operations – those which, are intended to change the level of reserves and monetary base.
2. Defensive open market operation – those which are intended to offset movements in other factors that affect
reserves and the monetary base.
Open market operation is a tool used by Bangko Sentral ng Pilipinas (BSP). This activity is made possible through the sale
of BSP holdings of Treasury securities.
1. The BSP has complete control over the volume of transactions. The BSP demonstrated that power once when it
partially rejected some bids of T-bill offerings to arrest an abrupt appreciation in the yields of such financial
instrument.
2. They are flexible and precise and can be used to any extent. If only a small change in reserves or monetary base
is required, the central bank can achieve it with small sale of purchase of securities if a big change is needed, a
large sale or purchase is made.
3. Mistakes, can easily be corrected if the central bank feels that the rate of government securities purchased is too
low, it can reverse the error by conducting open market sales.
4. The implementation of open market operations can be made quickly, involving no delays in administration. To
change the monetary base or reserves, the central bank will just place orders with securities dealers, and the
transactions are affected immediately.
DISCOUNT POLICY
The central bank lends money to depository institutions. The interest rate charged to the borrower is called the discount
rate. Discount policy is that which primarily involves changes in the discount rate. Any increase in discount loans adds to
monetary base and results to an expanded money supply. Any decrease in discount loans reduces the monetary base
which results to a reduced money supply.
The volume of discount loans granted may be achieved by the central bank through any of the following measures:
1. By affecting the discount rate;
2. By affecting the quantity of loans.
The reduction of discount rates provides an incentive to depository institution to obtain additional reserves thereby creating
additional lending capacity. The result is that credit becomes easier for the individual borrowers. An increase in the discount
rate may discourage increases in reserve availability resulting to the reduction of the expansion rate of the economy.
RESERVE REQUIREMENTS
Reserve requirements refer to the regulation making it obligatory for depository institutions (i.e., those accepting deposits)
to keep a certain fraction of their deposits in accounts with the central bank (the BSP in the case of the Philippines). This
requirement helps the central bank exercise more precise control over the money supply.
QUALITATIVE INSTRUMENTS OF MONETARY POLICY OR SELECTIVE TOOLS
PRESCRIPTION OF MARGINS REQUIREMENTS

Generally, commercial banks give loan against ‘stocks’ or ‘securities’. While giving loans against stocks or securities they
keep margin. Margin is the difference between the market value of a security and its maximum loan value. Let us assume,
a commercial bank grants a loan of Php 8M against a security worth Php 10M. Here, margin is Php 2M or 20%. If central
bank feels that prices of some goods are rising due to the speculative activities of businessmen and traders of such goods,
it wants to discourage the flow of credit to such speculative activities. Therefore, it increases the margin requirement in
case of borrowing for speculative business and thereby discourages borrowing. This leads to reduction is money supply
for undertaking speculative activities and thus inflationary situation is arrested. On other contrary, central bank can
encourage borrowing from the commercial banks by reducing the margin requirement. When there is a greater flow of
credit to different business activities, investment is increased. Income of the people rises. Demand for goods expands and
deflationary situation is controlled. Thus, margin requirement is a significant tool in the hands of central bank to counter-
act inflation and deflation.
CONSUMER CREDIT REGULATION

Now-a-days, most of the consumer durables like T.V., Refrigerator, Motorcar, etc. are available on installment basis
financed through bank credit. Such credit made available by commercial banks for the purchase of consumer durables is
known as consumer credit.
If there is excess demand for certain consumer durables leading to their high prices, central bank can reduce consumer
credit by (a) increasing down payment, and (b) reducing the number of installments of repayment of such credit.
On the other hand, if there is deficient demand for certain specific commodities causing deflationary situation, central bank
can increase consumer credit by (a) reducing down payment and (b) increasing the number of installments of repayment
of such credit.
MORAL SUASION
Moral suasion means persuasion and request. To arrest inflationary situation central bank persuades and request the
commercial banks to refrain from giving loans for speculative and non-essential purposes. On the other hand, to counteract
deflation central bank persuades the commercial banks to extend credit for different purposes.
Central bank also appeals commercial banks to extend their wholehearted co-operation to achieve the objectives of
monetary policy. Being the monetary authority directions of the central bank are usually followed by commercial banks.
DIRECT ACTION
This method is adopted when a commercial bank does not co-operate the central bank in achieving its desirable objectives.
Direct action may take any of the following forms:
Central banks may charge a penal rate of interest over and above the bank rate upon the defaulting banks;
Central bank may refuse to rediscount the bills of those banks which are not following its directives;
Central bank may refuse to grant further accommodation to those banks whose borrowings are in excess of their capital
and reserves.
INTERNATIONAL MONETARY FUND
The International Monetary Fund (IMF) is an organization of 190 countries, working to foster
global monetary cooperation, secure financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and reduce poverty around the world.
Created in 1945, the IMF is governed by and accountable to the 190 countries that make up
its near-global membership.
The IMF's primary purpose is to ensure the stability of the international monetary system—
the system of exchange rates and international payments that enables countries (and their
citizens) to transact with each other. The Fund's mandate was updated in 2012 to include all
macroeconomic and financial sector issues that bear on global stability
WHAT IMF DOES?

The IMF’s fundamental mission is to ensure the stability of the international monetary system. It does so in three ways:
keeping track of the global economy and the economies of member countries; lending to countries with balance of
payments difficulties; and giving practical help to members.
Economic Surveillance
The IMF oversees the international monetary system and monitors the economic and financial policies of its 190 member
countries. As part of this process, which takes place both at the global level and in individual countries, the IMF highlights
possible risks to stability and advises on needed policy adjustments.
Lending
The IMF provides loans to member countries experiencing actual or potential balance of payments problems to help them
rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong
economic growth, while correcting underlying problems.
Capacity Development
The IMF works with governments around the world to modernize their economic policies and institutions, and train their
people. This helps countries strengthen their economy, improve growth and create jobs.
References:
Pagoso, C.M. (2010) Money, Credit and Banking
Dr. Roberto G. Medina (2014) Money, Credit, and Banking
http://www.bsp.gov.ph/downloads/PPT/PPT_Role%20of%20BSP.pdf
https://www.bsp.gov.ph/SitePages/AboutTheBank/AboutTheBank.aspx
https://www.bsp.gov.ph/Media_And_Research/Learning%20Materials/Q32019.pdf
https://www.slideshare.net/dakshbapna/monetary-policy-31444561
https://www.imf.org/en/About
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TOPIC VII: Banko Sentral ng Pilipinas

TOPIC VII: Bangko Sentral ng Pilipinas

CENTRAL BANK DEFINED

Objectives of Central Bank

BANGKO SENTRAL NG PILIPINAS

BSP Core Values

Governance of the Bank

Responsibility and Primary Objectives of the BSP

3 PILLARS OF CENTRAL BANKING

1st Pillar: Price Stability

How are prices measured?

Price Level vs Inflation

What is BSP’s Monetary Policy Framework?

Why adopt inflation targeting?

2nd Pillar: Financial Stability

3rd Pillar: Efficient Payments and Settlement System

Other Functions of the BSP

Financial Inclusion Programs of the BSP

Promote Credit Delivery thru BMBEs

Monetary Policy Frameworks (2002 – Present)

QUANTITATIVE INSTRUMENTS OF MONETARY POLICY

WHAT MONETARY POLICY IS SUPPOSED TO ACHIEVE: EFFECTS OF THE DISCOUNT POLICY:

OPEN MARKET OPERATIONS

Open market operations consist of two types as follows:

QUALITATIVE INSTRUMENTS OF MONETARY POLICY OR SELECTIVE TOOLS

PRESCRIPTION OF MARGINS REQUIREMENTS

CONSUMER CREDIT REGULATION

INTERNATIONAL MONETARY FUND

WHAT IMF DOES?

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