NATURE AND IMPORTANCE OF 1. Risk Sharing.

The term risk is generally

PHILIPPINE FINANCIAL SYSTEM referring to "general uncertainty, doubt,
FINANCIAL SYSTEM an insured object, or chance of loss".
For our purposes, risk is defined as the
- can be thought of as being composed of
chance that the value of financial assets
the myriad markets and institutions
will change relative to what you expect.
through which funds flow between
o Individuals prefer stable returns
lenders and borrowers. intervened and
on the collection of assets they
assisted by financial institutions.
hold which is called a portfolio
- It is composed of the legal and tax
which may consist of investment
framework, savers, corporate investors,
holding such as t-bonds, some
and financial institutions. It is a network
shares of stock and some shares
of various institutions that generate,
in a mutual fund.
circulate and control money and credit.
o The performances of those
- Some of these institutions, such as
assets will vary in terms of their
households, firms, or governments,
ability to generate income. Some
spend more during a given period than
may perform well and earn much,
they earn, while other institutions spend
while another set of assets
less. Some business firms, for example,
belonging to the same portfolio
usually spend more during a specific
may turn out to be not so good or
period than they earn while households
bad performers.
spend less on current consumption than
they earn. eg. If you want to somehow minimize or totally
- As a result, an intermediation between eliminate the possible risk, you may assume to
the suppliers and users of credit or a better tell the one you will communicate to on
mechanism is needed to facilitate the investing your money. This one could be a
transfer of savings for those institutions broker, a dealer or even the bank itself
with a Surplus to those with a deficit because they also, aside from deposits, they
(because they are in need of additional are also engaged in the field of investment.
funds to sustain business operations) They do cater investors then help them to
- This is precisely the function of financial invest their money to the right vehicle which is
system which is to allocate or match the suited to their risk profile and investment
supply of savings in the economy to the objective.
demanders (users) of those savings in a
o Diversification- The spreading of
safe and efficient manner. the supplier
assets to make up a portfolio.
of funds to the spenders being the users
o The principle of efficient
or demanders of funds, almost always
diversification holds that bundles
facilitated by the financial institutions
of assets should be combined to
KEY SERVICES PROVIDED BY THE mitigate market risks.
FINANCIAL SYSTEM o The financial system provides risk
sharing by allowing savers to hold
Aside from providing matching services diversified assets.
to individuals with excess fund to those that o Financial markets have the
need them, the financial system also provides capacity to create instruments
three key services for savers and borrowers, that can transfer risks from
namely: risk sharing, liquidity, and information.
savers or borrowers who do not
favor uncertainty in their returns
or payments to savers or
 investors who are willing to bear transactions. As a result, financial
the risk. arrangements, in some cases, must be
o The ability of the financial system structured so that borrowers do not take
to share risk makes savers more advantage of asymmetric information at
willing to buy the borrower's the expense of the lenders. Because of
IOU's asymmetric information, funds borrowed
o This willingness, in turn, for the purpose of putting up a business
increases a borrower's ability to that is supposed to be self- liquidating
raise funds within the financial could easily be diverted to another
system. purpose. To address the problem of
2. Liquidity. liquidity in the financial asymmetric information the financial
system is manifested by the case with system usually sets up a mechanism
which an asset can be exchanged for that specializes in information gathering
money to purchase other assets, goods, and monitoring.
and services. It is a benefit for savers
BARRIERS TO MATCHING SAVERS AND
since they can exchange their assets
BORROWERS
easily when they need them for their
own consumption or investment. In 1. Transaction Costs- the cost of buying
general, the more liquid an asset, the or selling a financial instrument such as
easier it is to exchange the asset for a stock or a bond. These also include
another asset or for goods and services. the brokerage commission, minimum
Financial assets created by the financial investment requirements, and lawyer's
system, such as stocks, bonds, or fees. Transaction costs make investing
checking accounts are more liquid than in debt and equity instruments in
cars, machinery, or real estate. Financial financial market costly for small savers.
markets and intermediaries provide Financial intermediaries take advantage
training systems for making financial of economies of scale by pooling savers'
assets more liquid. The efficiency of the funds to lower transactions costs.
financial system can be measured by 2. Information Costs- additional costs that
the extent to which an investor can will be incurred by the savers to
easily transform illiquid assets into liquid determine the creditworthiness of
claims. borrowers and to monitor how borrowers
use the acquired funds. This reduces
3. Information. the financial system the efficiency of the financial market
provides Market players more access to since borrowers must pay higher costs
vital information about borrowers' and of funds and reduce the expected
lenders' expectations, what they have to returns to savers. This inefficiency
offer. Obtaining such information would creates profitable opportunities for
be costly and time-consuming for savers individuals and institutions that can
(lenders), who of course want all the reduce transactions and information
facts before lending their money. In costs.
general, borrowers may have 3. Asymmetric Information- occurs when
undisclosed intentions or activities that one party in a transaction has better
could be detrimental to the lenders' information than the other, or When the
interests. Pieces of information that are borrower and the lender have different
only available or known by the borrower information about the transaction.
are called asymmetric information that Neither the investors nor the company's
could spell our future problems in most manager can anticipate market
 conditions or economic events that are 2. Moral Hazards - This occurs when the
relatively influenced by market forces. lender is subject to the risk that the
Managers, for example, may know that borrower will engage in risky activities
the future of their firm is very shaky, but that jeopardize payment while seeking
lenders continue lending to the firm high returns. This arises because of
because they do not have this asymmetric information, that is, the
information. The existence of borrower knows more than the lender
asymmetric information makes it costly does about how the borrowed funds will
for the savers and borrowers to make be used, and the resulting problems
exchanges in financial markets. increase the lender's costs.
Two types of costs, arising from asymmetric ELEMENTS OF THE FINANCIAL SYSTEM
information:
1. Financial Claims. These compromise
1. Adverse selection - This occurs when the money and the right to receive
those firms most likely to default are money under specific circumstances.
themselves most actively seeking the Usually, these are evidenced by
loans. this happens because the interest financial instruments which specify the
rate offered for such loans in the most terms of the claims. There are two broad
attractive to the high risk firms. It is the categories of these claims:
lenders' problem of telling the good risk  Debts. The debtor has an obligation
applicants from the bad risk ones before to pay his loan plus interest.
making an investment.  Equities. conveys ownership rights.
These are investments like shares of
Financial intermediaries reduce adverse
stocks which earn dividends.
selection through:
2. Financial Institutions. these are
 Screening. this happens before a private or government organizations,
loan is made. This is to identify the whose assets consist primarily derived
good and bad risk type. Financial from dealing in and/ or performing
intermediaries used a lot of services in connection with claims.
information that concerns the Financial Intermediaries-Institutions
borrower's previous credit history, which deal with the creation and
employment status, etc. issuance of claims against themselves,
 Monitoring. This happens after a and use the proceeds to acquire and
loan is made. Bank monitors the hold claims against others.
borrower to make sure that funds are o acts as middlemen between
used as agreed in the loan contract. suppliers and users of money
Also, because credit information is other financial institutions are
collected by reporting agencies and primarily involved in services
is accessible to lenders, financial related to claims. They provide
intermediaries can punish (by financial information and advice
increasing interest rate, or not manage portfolios of financial
lending at all) the borrowers next assets on behalf Of other
time if they entail moral hazard on economic units, buy and sell
the bank's current loan. Claims on instructions from
clients, and assist in finding
sources for those economic units
seeking loans.
 3. Financial Markets. serves as a means  Derivatives Market- This market
of bringing the forces of demand and deals in derivatives or contracts,
supply of financial claims. These are whose value is based on the
institutions which expedite transactions underlying asset being traded.
in financial Claims.
BY NATURE OF CLAIM
o refers to a marketplace Where
buyers and sellers Participate in  Debt Market- The market where fixed
the trade. It is a platform that claims or debt instruments, such as
facilitates traders to buy and sell debentures or bonds are bought and
financial instruments/ securities. sold between investors.
o eg. Philippine stock Exchange  Equity Market- is a market wherein
and other organizations dealing the investors deal in equity
with money market operations. instrument. It is the market for
IMPORTANCE FUNCTIONS residual claims.
HELPS IN THE Price determination
ECONOMIC BY MATURITY OF CLAIM
GROWTH OF THE  Money Market- Where monetary
COUNTRY
assets such as commercial Paper.
HELPS SAVERS TO Mobilization of funds
certificate of deposits, treasury bills,
BECOME
INVESTORS etc. which mature within a year are
HELPS Ensures liquidity traded. It is the market for short-term
BUSINESSES TO funds. No such market exists
RAISE MONEY TO physically; the transactions are
EXPAND THEIR performed over a virtual network, i.e.
BUSINESS fax, internet or Phone
Saves time and  Capital Market- where medium and
money long-term financial assets are traded
in the Capital market. It is divided in
TYPES AND CLASSIFICATIONS OF two types:
FINANCIAL MARKETS  Primary Market- Wherein
the company listed on an
BY NATURE OF ASSETS: exchange, for the first
 Stock Market- where shares of the time, issues new security
company are listed and traded after or already listed company
their TPO. brings the fresh issues.
 Bond Market- This market allows  Secondary Market-
companies and the government to alternately known as the
raise money for a project or stock market. It is an
investment. Investors buy bonds organized marketplace,
from a company, which later returns wherein already issued
the amount of bond with agreed securities are traded
interest. between investors, such
as individuals, merchant
 Commodities Market- In this market,
investors buy and sell natural bankers, stockbrokers and
mutual funds.
resources or commodities, like corn,
oil, meat, and gold.
TIMING OF DELIVERY FUNCTIONS OF FINANCIAL SYSTEM
 Cash Market- where the transaction The financial system acts as a link or bridge
between buyers and sellers are between individuals and businesses with a
settled in real time. surplus of funds and a deficit of funds. In this
 Futures Market-is one where the way, it ensures the optimal allocation of funds
delivery or settlement of commodities in the economy. Through mobilization of credit
takes place at a future specified from surplus areas to deficit areas, the financial
date. system helps in capital formation.
ORGANIZATIONAL STRUCTURE  It facilitates the payment for economic
transactions through several services
 Exchange Trade Market- which has
such as credit cards, debit cards, etc.
a centralized organization with the
 The financial system also provides
standardized procedure, eg.
liquidity to investors through financial
Philippine Stocks Exchange.
markets. The prices of financial
 Over-the- counter Market- is
instruments are mostly determined
characterized by a decentralized
through the market mechanism of
organization, having customized
demand and supply.
procedures.
 It also helps inefficient allocation and
4. Government agencies. The monetary distribution of risks by facilitating risk
bond is the policy making body of the pooling and risk sharing opportunities for
Bangko sential ng Pilipinas. Laws on individuals and businesses.
money, credit and banking are legislated  This system also helps in asset-liability
by the Congress and through executive transformation through commercial
orders issued by the President of the banks. The banks accept deposits from
Philippines. The role of the government people who are liabilities for the bank.
agencies has a tremendous impact on These deposits together make up
the Financial System. reserves for the bank, which is then
used for extending loans. These loans
Eg. one Very important goal of are assets for the bank.
the Bangko Sentral ng Pilipinas is
to attain internal and external The basic function of the Financial System is to
Stability of our peso. provide channels to transfer funds from savers
with an excess of funds to Spenders facing a
5. Laws and Policies- The national shortage of funds. The most important
government regulates and supervises suppliers or savers of funds are the
the behavior of the whole economy. households, while firms, the government and
Hence, its control of the financial system foreigners sometimes find themselves with
is a vital condition for the whole excess funds and so lend them out. Funds may
economic behavior. Laws and Policies flow from lenders to borrowers via three routes:
have been formulated to ensure the
desired levels of investment 1. Direct Finance-one engages in a direct
employment production income and finance when he borrows money from a
consumption. lender, and at the same time, gives him
or her his 10u. A direct finance also
transpires when a person purchases
stocks or bonds directly from a company
issuing them. This involves primary
securities, which are Claims through that
 flow directly from the borrower to the Broker- an individual or a
ultimate lender of funds. financial institution whose only
o However, this form of financial function is to match buyers and
transaction carries a set of sellers of securities. Part of their
limitations, of which include a function is to provide information
necessary concurrence of wants concerning possible purchases
between the borrower and the and sales of securities.
lender in terms of the amount and
Dealer- links buyers and sellers
form of a loan, and a substantial
by buying and selling securities at
information cost between lender
stated price.
and borrower in finding each
Other. These restrictions are 3. Indirect finance - In this system,
overcome by an efficient (ie. deep monetary transactions are made through
and liquid) financial markets. financial intermediaries such as
When efficient lenders and depository institution, contractual
borrowers can just go to the institution, investment institution such as
market Where they will always investment bankers, mortgage bankers,
find a price and term for any security dealers and security brokers.
amount of borrowing or lending. These intermediaries certainly carry low
risk of default as they themselves issue
securities of their own to ultimate lender
and at the same time accept TOUs from
borrowers.
PARTICIPANTS OF THE FINANCIAL
SYSTEM
Household or consumers – are the wage
salary earners whose income is spent on
goods and services, and if there is something
left to save, they save it. Gross savings are
equal to current income fewer current
expenditures. Consumption is what is spent
and can be for non-durables (consumed within
2. Semi direct finance- another form of
the current period) and durable (goods that will
financial transaction. Here, individuals last more than a year).
and business firms become Securities
brokers and dealers whose primary Financial institutions/intermediaries – are
function is to bring together the buyers firms that act as the bridge between surplus
andthe sellers of securities, hence units/lenders and deficit unit/borrowers. Other
reducing information costs. Semi direct than acting as a bridge (intermediaries), they
finance may improve on direct finance if also act as lenders or borrowers at certain
it lowers the search cost for participants, times.
and dealers can divide securities into
Non-financial firms - are businesses other
smaller units that are more affordable
than financial institutions or intermediaries like
even by an average laborer, expanding
trading, manufacturing, mining, and other
the flow of savings and investment.
businesses.
The government – includes all levels of Chartered bank of India, Australia, and china
government from the barangay up to the (known as the Standard Chartered Bank) and
national government. All government unit act the Honking and Shanghai Banking corporation
as either lenders of borrowers at one time or (HSBC), both British- owned banks, opened
another. their branches in Manila.
The central bank – it is any country is By the end of the Spanish regime, the banks in
generally made in charge of the financial existence were: El Banco Español Filipino de
systems of any country. Bangko Sentral ng Isabel II (now the Bank of Philippine Islands or
Pilipinas is the agency in charge of the BP1) which was given the sole mandate under
Philippine monetary and financial system. a Spanish Royal Decree of 1854 to issue
banknotes called Pesos Fuertes; the
The foreign participants - Branches can
Chartered Bank of India, a branch of the
perform traditional banking functions such as
HSBC; the Monte de Piedad; and the Banco
accepting deposits and issuing loans, but
Peninsular Ultamarino de Madrid.
“foreign bank branch activities tend to be
largely wholesale4 in nature trade with Pesos Fuertes is the first paper money
financing and lending to relatively large circulated in the Philippines. Pesos Fuertes
corporations and government agencies were issued in 1852 by El Blanco Español
generally accounting for the major share of Filipino de Isabel II, the first bank established in
assets” the country. The banknote, "Strongpeso" in
English, had denominations Of 5,10,25,50 and
HISTORY OF BANKING IN THE
100.
PHILIPPINES
During the American Colonial Period, banks
The first organized credit institutions were
from the USA started to establish local
established in the Philippines during the 16th
branches that would cater the growing
century Spanish colonial era. These were the
American economic interests and capital inflow
OBRAS PIAS.
into the country. The American Bank was first
- started by Father Joan Fernandez De to open a branch in 1901. However, it was
Leon in 1754 placed under receivership by the Insular
- ended in 1820 treasurer for making doubtful loans after only 4
- known to be under the control of friars years of operations.

OBRAS PIAS was a charitable foundation In 1916, the Philippine National Bank (PNB)
during the Spanish period. The word itself was established with the Philippine
means works of piety in Spanish. The Church Government as the majority stockholder. This
directed a share of personal fortunes to its is to break the foreign banking monopoly and
charities such as the OBRAS PIAS. remedy the lack of credit facilities. The PNB
was meant to function as a government
Donors had specified that funds are to be used enterprise that would widen the variety of
for charitable, religious, and educational banking services "beyond trade finance in
purposes. However, some funds were exportation and importation, money changing
managed by confraternities that invested of foreign currency, and fund transfers, all of
capital in secular activities like underwriting which, while useful in the short term, failed to
cargoes for the galleon trade. mobilize capital in the development of natural
In 1869, the opening of the Suez Canal resources." Its charter at that time empowered
facilitated trade between the Philippines and PNB to issue banknotes and act as a
Europe. The Philippines then attracted British depository of government funds
capital, and in the years that followed, the
BPl & PNB Notes greater part Of their assets consisted of
worthless Japanese war notes, bonds, and
El Banco Espanol Filipino de Isabel II, renamed
obligations of the Japanese - sponsored
Bank of the Philippine Islands (BPI), and the
republic, and balances with Japanese banks.
Philippine National Bank (PNB) were
authorized to issue banknotes during the In 1947, a branch Of the Bank Of America was
American era from 1908 to 1933 for the former allowed to establish a branch in Manila and in
and 1916 to 1937 for the latter. Republic Act the following year, it absored the assets and
No. 211 dated 1 June 1948 ordered the liabilities of the local branch of the
withdrawal Of PNB notes from circulation. Nederlandsche indische Handels banks.
At the turn of the 20th Century, the Americans In 1952, the Rural Bank Act was enacted and
established the Guaranty Trust Corporation two years later, the Agricultural and Industrial
(GTC) and International Banking Corporation Bank merged with the Reconstruction and
(IBC). The existence of GTC was short-lived, Rehabilitation Fund to form the Development
while IBC was eventually taken over by the Bank of the Philippines.
National City Bank of New York (Citibank).
HISTORY OF BSP
In 1918, the Manila branch of the Yokohama
According to Fajardo (1994), The concept of a
Specie bank was given license to do business
central bank was developed in 1933 by Miguel
in the PH. Cuaderno, the first governor of the central bank
Between 1935 to 1946, more foreign bank of the Philippines (now Bangko Sentral ng
branches were established in the Philippines. Pilipinas). For thirteen years, he conducted
These include the Bank of Taiwan, and the research on the various central banks of many
countries. In 1946, a formal preparation for the
Nederlandsche Indische Handelsbanks.
establishment of a central began upon the
In 1939, the government created the instruction of the then president Manuel Roxas.
Agricultural and Industrial Bank to absorb the Cuaderno was assigned the task of governor.
functions of the National Loan and Investment As governor, he chose the charter of the
Board and to harness government resources. central bank of Guatemala as the model for the
charter of the central bank of the Philippines
The Philippine Bank of Communication is because of the similar economic and social
the first bank with genuine Filipino private conditions of Guatemala and the Philippines.
capital. However, it was temporarily closed at The board that governs the central bank is
the outbreak of World war II. called the monetary board. Its members are
appointed by the president of the Philippines
Only Filipino- owned and Japanese banks were and the chairman is the governor of the central
allowed to operate during WWII; The Chartered bank. Five other members come from the
Bank of India, Australia, and china, HSBC, and private sector. The new central bank act took
the National City Bank of New York were all effect on june 14 1993 during the reign of then
treated as enemy properties and placed under president Fidel Ramos. It established an
liquidation by the Japanese Military independent central monetary authority which
Government. is now known as Bangko Sentral ng Pilipinas
with a capital of 50 million pesos.
On the other hand, the Nampo Kaihatsu Kinko
(Southern Development Bank) Opened a
Manila branch in 1942 and acted as the
Japanese government's fiscal agent in the
Philippines. After the liberation, all domestic
banks that operated during the Japanese
occupation were unable to reopen because the
BASIC STRUCTURE OF BANGKO SENTRAL
NG PILIPINAS: 2. Direct the management operations and
administration of Bangko Sentral,
1. The monetary board, which exercises organize its personnel and issues such
the powers and functions of the BSP rules and regulations as it may deem
such as the conduct of monetary policy necessary or desirable for this purpose
in supervision of the financial system 3. Establish a human resource
2. The monetary stability sector which management system which governs the
takes charge of the formulation and selection, hiring, appointment, transfer,
implementation of the BSP’s monetary promotion, or dismissal of all personnel
policy including serving the banking 4. Adopt an annual budget for and
needs of all banks through accepting authorized such by expenditures by
deposits, serving withdrawals, and Bangko Sentral as are in the interest of
extending credit through the the effective administration and
rediscounting facility operations of Bangko Sentral in
3. The supervision and examination sector accordance with applicable laws and
which enforces and monitors regulations and
compliance to banking laws to promote 5. Indemnify its members and other
a sound and healthy banking system officials of Bangko Sentral including
and personnel of the departments
4. The resource management sector which performing supervision and examination
serves the human financial and physical functions against all costs and expenses
resources needs of the BSP. reasonably incurred by such persons in
connection with any civil or criminal
The Monetary Board action suit or proceeding to which any of
them may be made a party by reason of
The powers and functions of banco central are the performance of his functions or
exercised by its monetary board which has 7 duties unless such members or other
members appointed by the president of the officials are found to be liable for
Philippines. Under the New Central Bank Act, negligence or misconduct
one of the government sector members of the
monetary board must also be a member of the THREE PILLARS OF BSP:
cabinet designated by the president. The New
Central Bank Act establishes certain 1. Price Stability
qualifications for the members of the monetary
board and also prohibits members from holding is achieved through the conduct of
certain positions with other governmental Monetary Policy. There is low and stable
agencies and private institutions that may give inflation (rate of change in the average prices
rise to conflicts of interest. With the exception of goods and services). The average prices of
of the members of the cabinet the governor goods and services do not change substantially
and other members of the monetary board over time. Stable prices preserve purchasing
serve terms of 6 years and may only be
power and allow consumers and businesses to
removed for a cause.
make sound economic and financial decisions.
The major functions of the monetary board
include the power to:  Monetary policy is a set of actions
1. Issue rules and regulations considered used by a nation's central bank to
necessary for the effective discharge of control the overall money supply and
the responsibilities and exercise of the promote economic growth and employ
power vested in it strategies such as revising interest rates
and changing bank reserve
requirements. Monetary policy is a set
 of actions to control a nation's overall  maintain monetary policies conducive to
money supply and achieve economic a balanced and sustainable growth of
growth. Monetary policy strategies the economy
include revising interest rates and  maintain price stability in the country
changing bank reserve requirements.  promote and maintain monetary stability
and the converted convertible of the
2. Financial Stability peso
 maintain stability of the financial system
Managing systemic risks and promoting a provide payment and other financial
secure and reliable banking system by services to the government, the public,
ensuring the safe and sound operation of financial institutions, and foreign official
banks and other BSP Supervised Financial institutions and
Institutions (BFSIs)  supervise and regulate depository
institutions
Financial Stability (FS) is about managing
financial system risks so that these risks do not To attain its objectives, the monetary and fiscal
create negative consequences to the rest of policies of the country need to be closely and
the economy. It is about managing risks that efficiently coordinated. the different agencies of
can disrupt the availability and effective the government, both financial and fiscal need
delivery of Systemic risk management financial to operate with one another. Moreover, it is
products and services. important that there be coordination and
cooperation between the government and the
3. Efficient Payments and Settlements private sectors. These sectors are the partners
System in nation building

Providing channels through which funds are Functions of BSP

transferred among banks and other institutions.
It includes institutional and infrastructure Being the primary monetary authority, BSP
arrangements and processes through which performs the following functions:
money is transferred from one party to another.
1. BANK OF ISSUE
A safe, sound, & efficient payment system
is a critical market infrastructure of a stable BSP has the monopoly of printing money
financial system What is an efficient payments bills and maintain money coins. this
and settlements system? o provides channels monopoly is designed to
through which funds are transferred to
discharge payment obligations arising from a. ensure the uniformity in design
economic and financial transactions (includes and content of money
digital transactions such as use of online facility b. effect government supervision
and electronic wallet) over money supply
c. give prestige and honor to the
Objectives of BSP central bank and
d. become a good source of income
BSP, as the central monetary authority of the for the government
country, is expected to provide the country with
the safer, more flexible, and more stable and
healthy monetary and financial system that will
help support a stronger economy. it is enjoined
to:
2. GOVERNMENTS BANKER, AGENT 4. CUSTODIAN OF THE NATIONS
AND ADVISER RESERVE OF INTERNATIONAL
CURRENCY
BSP handles the banking accounts
of government agencies and The early years of central banking
instrumentalities. All government agencies required central banks to maintain a
deposit their funds with BSP. It provides minimum reserve of gold, and later of
foreign exchange to the government for the international currency, as a guarantee for its
importation of goods and services and for influence of currency bills or notes and
payment of foreign loans. If not available in deposit liabilities (cash reserves of
the country BSP borrows from international commercial banks). Accepted as
financial institutions like world bank and international currencies in the past were the
international monetary fund US dollars. Swiss francs, Japanese yen,
German mark, and the British pound. This
3. CUSTODIAN OF THE CASH is designed to meet problems relevant to
RESERVES OF BANKS balance of payments and maintain the
external value of the local currency. A
All banks are regulated to have an central bank needs to meet its domestic
adequate reserves with BSP in proportion and international payments to create
to their deposit liabilities to ensure confidence in the people it serves and
availability of cash to depositors who wish countries it deals with abroad.
to withdraw deposits. These reserve
requirements create the interbank call 5. BANK OF REDISCOUNT AND
loans, i.e., when one bank lacks funds to LENDER OF LAST RESORT
comply with the reserve requirement of
BSP, it borrows money from other banks The rediscounting function of the
reserves with BSP for, say, overnight. In central bank means the central bank lends
case of oversupply of money creating money to the banks in distress on the basis
inflation, the legal reserve requirement is of their promissory notes or the promissory
made higher to cut down liquidity or too notes of the bank borrowers. when banks
much money in circulation. The reserve grant loans to borrowers, at the borrowers
requirement, say 20%, means that for every execute a promissory note, which the bank
peso of deposit the bank can lend only 80 discount interest is immediately deducted
centavos because the 20 centavos is from the proceeds of the loans. The
deposited with BSP. The reserves process is known as discounting. These
deposited at BSP only earn minimal, unlike notes are presented by these banks to
the loans granted by the banks to obtained a loan from the central bank; that
borrowers. This is the reason banks to not is why it is termed rediscounting, i.e., the
like a high reserve requirement i.e., they are discounted notes are again discounted.
unable to earn more because the amount
they can lend is limited by the reserve 6. BANK OF CENTRAL CLEARANCE
requirement. The cash reserves aside from AND SETTLEMENT
regulating money supply, are able to help
the government in times of financial crisis The central bank acts as a sort of
clearing house. This means that banks
send representatives to the clearing house
at the central bank where claims are
demanded by one bank against another.
The banks have their own boxes at the
clearing house. all checks placed in the
boxes are payable to the banks which
cashed them.
 For example, a representative of BANKS AND BANKING PERSPECTIVES
bank A has in his possession the check of
bank B. the representative places the check I. Historical Perspective Worldwide
of bank B in the box of bank B. This means 2000 B.C
that bank A demands payment from bank B.
Through the process of bookkeeping (debits - the development of the banking system
and credits), banks’ claims against other and early banking practices started in
banks are settled and cleared. These the temples of Babylon.
settlements are done through the reserves - They store their valuable commodities
that all the banks have with the central such as grains and golds in religious
bank. temples because they believed that
those valuable commodities were being
7. CONTROLLER OF CREDIT
watched over and protected by gods
Controlling money supply requires from thieves.
controlling credit. the higher the money the - This is their way of “safekeeping” of their
supply in circulation is, the higher the prices possession.
of goods and services are. Limited supply of - The records of transactions were
money means lower prices, which do not discovered by historians in the tablets of
encourage production. Hence, it is clay.
imperative for the central bank to limit not
only the money supply, but also the credit. 4th Century B.C
This is because credit is in addition to the - temples, public bodies, and private firms
money supply in circulation. The more
were dealing in deposits and the loaning
credit there is available, the more
of funds
production is encouraged because the
consumers can also spend more if they are - There is an improvement on their so-
able to obtain credit. called banking wherein they also
practice depositing and lending of funds
BSP can control credit by: as well as money changing business
and supplying of foreign and domestic
1. Increasing or decreasing interest rates coin.
2. Increasing or decreasing legal reserve
requirements of banks 8th Century B.C
3. Regulating the margin requirements of - Earlier versions of bank drafts and
stock exchange securities
checks were in wide use in Assyria.
4. Open market operations (buying or
- One of the rules is that men are the one
selling government securities)
5. Imposing ceilings and total amounts who handles the lending and
bank can lend safekeeping money transactions.
6. Rationing central bank credit 2nd Century B.C
7. Restricting imports
8. Selecting products for funding and - loans can be officially discharged by
9. Moral suasion (encouraging people and paying the appropriate sum into the
business) to support and cooperate with banks
central bank policies and regulations - Transactions were registered by public
notaries.
- payment of interest on loans and
charging of fees for safekeeping money
were also evident.
13th century 16th Century
- bankers from north Italy, known as - the greatest moneylenders were the
Lombards, replaced the traditional way Fugger family. Fugger family are
of recording of transactions - the double- European bankers, and they controlled
entry bookkeeping much of the European economy.
- double-entry bookkeeping- every - In 1587 the Banco della Piazza di Rialto
transaction is recorded in two separate opened in Venice as a state initiative. Its
columns; one is the effect on the debit purpose is to carry out the important
side and the other one is on the credit function of holding merchants' funds on
side. safe deposit and enabling financial
transactions in Venice and elsewhere to
14th century
be made without the physical transfer of
- there are two families in the city, the coins.
Bardi and the Peruzzi, which have - The development of cheque.
grown immensely wealthy by offering
17th century
financial services.
- They arrange the collection and transfer - The development of Paper currency
of money and facilitate trade by which makes it as the first paper money
providing merchants with bills of in Europe.
exchange instead of the actual coins.
- Bills of exchange is short-term II. Philippine Banking History
negotiable financial instrument which
Obras Pias - The first organized credit
consists of an agreement between a
institutions were established in the Philippines
debtor and lender, requiring the debtor
during the 16th century Spanish colonial era.
to pay this amount of money at a certain
This was the OBRAS PIAS.
time.
- was a charitable foundation during the
15th century
Spanish period. The word itself means
- The Medici which has this Italian works of piety in Spanish.
banking family and political dynasty - The Church directed a share of personal
called the House of Medici are Europe's fortunes to its charities such as the
greatest banking dynasty, but their Obras Pias.
political power was later distracts them - Donors had specified that the funds to
from the highly focused business of be used for charitable, religious, and
making money and that's when Lorenzo educational purposes. However, some
the Great was terminated. of the funds were managed.
- Lorenzo Magnificent, he is the ruler of
Suez Canal - In 1869, the opening of the Suez
Florence for 20 years who brought
Canal facilitated trade between the Philippines
stability.
and Europe.
- After his reign, the bank's finances of
Florence downfallen. - The Philippines then attracted British
capital, and in the years that followed,
the Chartered Bank of India, Australia,
and China (now known as the Standard
Chartered Bank) and the Hong Kong
and Shanghai Banking Corporation
 (HSBC), both British-owned banks, The Bangko Sentral ng Pilipinas (BSP) issued
opened their branches in Manila. the implementing rules and regulation for the
Bayanihan Act RA11469. The law requires all
Philippine National Bank - In 1916, the
lenders under BSP supervision to grant a 30-
Philippine National Bank was established with
day grace period or extension for the payment
the Philippine Government as the majority
of loans due within the enhanced community
stockholder. This is to break the foreign
quarantine (ECQ) period, without imposing
banking monopoly and remedy the lack of
additional interest, penalties, or charges on
credit facilities.
their borrowers.
- The PNB was meant to function as a
By BSP definition, e-KYC refers to the use of
government enterprise that would widen
electronic or digital methods in the customer
the variety of banking services “beyond
identification and verification process. The draft
trade finance in exportation and
circular said BSFIs are allowed to use different
importation, money changing of foreign
methods to conduct customer identification and
currency, and fund transfers, all of
verification including e-KYC through digital ID
which, while useful in the short term,
system.
failed to mobilize capital in the
development of natural resources.” Emerging business segments in banking
- It’s charter at that time empowered PNB industry include:
to issue bank notes and act as a
A form of partnership or association
depository of government funds.
between a financial institution and an insurance
Pesos Fuertes - By the end of the Spanish company, where banks offer insurance
regime, the banks in existence were: El Banco products through their platform to their
Español Filipino de Isabel II (now the Bank of customers.
Philippine Islands or BPI) which was given the
IV. Principles of Banking Business
sole mandate under a Spanish Royal Decree of
1854 to issue banknotes called Pesos Fuertes.
1. Principle states that a certain amount
- The Chartered Bank of India, a branch deposited will support several times as
of the HSBC; the Monte de Piedad; and much in credit.
the Banco Peninsular Ultamarino de
This principle is known as the partial reserve
Madrid.
system or furtherly defined as a system that
Citibank - At the turn of the 20th century, the allows banks to keep only a portion of
Americans established the Guaranty Trust customer deposits on hand while lending out
Corporation (GTC) and International Banking the rest. This system allows more money to
Corporation (IBC). The existence of GTC was circulate in the economy. Its history can be
short-lived, while IBC was eventually taken traced back to the time when goldsmiths were
over by the National City Bank of New York initially trusted with the security of precious
(now known as Citibank). metals like gold. Because the goldsmiths
lacked skill, they dared not reduce the gold
III. Philippine Banking Today
deposits out of concern that the people who
The Philippine banking industry has always had left them for safekeeping may come
played a substantial role in sustaining the pace looking for them right away. The goldsmiths
of growth of the country’s economy. The entire later discovered that the gold stacks grew taller
banking sector is supervised by the Central and that their owners didn't claim them all at
bank of the Philippines, Bangko Sentral ng once. They had a thought: "Why not lend a
Pilipinas. portion of the gold to those in need of money
and keep a certain portion to meet the claims the legal reserves or the creation of money, it
of depositors?" would bring unfavorable influences on the
economic situation.
The system has been tested, and the
commercial banking system is still influenced TYPES OF BANKS
by ittoday. its application, too, proved profitable
As to ownership
to the money lenders of yesteryears as it does
today with our bankers. For a greater amount a. Privately owned- these are the banks
could be utilized as loans with only a certain whose majority of stake is organized
percentage to back up deposits. As it is and capitalized by private corporation,
implemented today, the central bank imposes a individual or citizens.
legal reserve on deposit liabilities of all banks b. Publicly owned- governed by state and
or the minimum amount of bank deposits. occasionally has a significant portion of
private ownership.
A higher percentage, however, is required for
on-demand deposits because the depositor As to place of Incorporation
can withdraw any or all funds at any time
without any penalty. The range will conform to a. Domestic- it will be considered as
the minimum and maximum percentages as domestic bank when it is incorporated
contained in the law. As the requirement is under the laws of the PH and most
increased, the lending capacity of the banks is stocks are owned by Filipino people.
decreased; The reason behind the imposition b. Foreign- A bank that doing business in
of a partial reserve serves to control the credit our country but incorporated under the
operations of the banking system. law of other countries.

2. Principle states that a greater portion of As to structure

deposits in commercial banks arises out a. Stock Corporation and Non-Stock
of the proceeds of loans. Corporation
This principle can be applied after the Stock corporations are normally structured
borrower's loan application has been properly for profit and can generate funds for their
reviewed and accepted, the borrower may operations or expansion by issuing company
easily arrange to have the loan profits stock to those willing to invest in the company,
converted into a deposit. This has already been whereas nonstock corporations aren't
illustrated in how the entries are made in this organized for profit and aren't permitted to
regard. As a result, the bank simply creates an issue company stock they much focus on the
asset against a liability. No cash is involved mutual benefits.
until the loan borrower suddenly turned into a
depositor who will now draw checks against the As to function and line development
bank. This is the situation where a bank Banks may be classified as commercial,
becomes a creditor and debtor at the same fiduciary, and savings. Aside from these
time. The new money, which is in the form of classifications, there are the rural bank, the
demand deposits, will further increase the development bank, the cooperative bank, the
bank's lending capacity. The power of investment bank, the central bank, and others,
commercial banks in the granting of credit which specify the primary aims for the
certainly centers on these two main principles. organization.
When the partial reserve system allows the
multiple expansion of credit, it also increases
the bank's ability to provide loans. But under
this situation if something abusive happened to
a. Commercial Banks e. Development Bank
- one that receives demand deposits and - takes care of giving loans to be used for
gives out short-term loans. developing the economy and may
- nowadays, however, the commercial therefore engage in medium and long-
bank does not only concentrate on these term lending.
functions but also attends to numerous - organization and operation of private
services. This is possible due to the development banks shall be under the
process of departmentalization. control and supervision of the
- Examples: BDO and Robinson’s Bank Development Bank of the Philippines
Corporation (formerly Rehabilitation Finance
b. Trust Company Corporation).
- an institution which deals in fiduciary f. Cooperative Bank.
activities such as administrator of - organized to furnish the credit needs of
estates, guardian of minors' interest, duly registered and operating
executor of last wills and testaments, cooperative associations of different
registrar and transfer agent of stocks kinds.
and bonds, and similar activities. - Philippine National Cooperative Bank is
- this function, which is now done by most a good example of this type.
banks, was originally a legal function - It was only organized to answer the
and was handled by a legal officer or need of cooperative associations to
lawyer rather than a banker. meet the diverse problems connected
- Examples: Security banks does not only with their operations.
offer savings of funds but also stock g. Investment Bank
brokerage - one which assists government bodies
c. Savings Bank and newly organized corporations to
- one which primarily receives for raise funds for capital through the sale
safekeeping funds from persons who of stocks and bonds.
have no immediate need for cash and - handles a business of high risk and
investments, these funds in long-term therefore necessitates a large amount of
investments. capital.
- should not be mistaken for the savings - it underwrites the sale of securities and
and loan associations which may either also conducts an economic survey to
be organized as stock or non-stock determine the market for securities.
corporations and are largely friendship - Examples: Private Development
organizations for mutual benefits. Corporation of the Philippines (PDCP)
- Examples: BDO and BPI deals in the function attendant to
d. Rural Bank investment banking.
- organized primarily to cater to the needs - some government institutions also deal
of small farmers, small businesses, in investment functions.
small cottage industries, and h. Central Bank
cooperative associations. - a bank of banks, as it does not deal
- they also receive deposits and loan out directly with the public.
funds. - it is usually the supervisory and
- operation and organization of rural regulatory agency, which makes all
banks are governed by Republic Act banks "tow the line, so to speak.
720, as amended. - Bangko Sentral ng Pilipinas is a good
- Example: East West Rural Bank example of this type.
 - it is rather unique as compared with deposits and to engage in extensive
other central banks since it is purely lending.
governmentowned and operated. - element of monopoly led to some
- Bank of England, the Bank of France, criticism on this type.
the Reich bank of Germany, and the - preventive measures had to be taken to
Federal Reserve System of the United discourage group banking, if not to
States are also central banks in their entirely discard it.
respective countries. c. Branch banking
- one where there is a head office and two
As to management
or more branches.
Banks may either be a unit, chain, group, or - single corporate entity "fans out" its
branch bank. banking services to different strategic
locations.
a. Unit bank
- head office and its branches are
- it is one where ownership is
controlled by one board of directors.
concentrated on one corporation which
- delegation of power is done by the
does banking business independent of
employment of branch managers who
others.
are guided by the policies of the head
- it has one place of business and its own
office.
board of directors.
- in some cases, the services engaged in
- this individualistic trend seems to be
by the branches vary to its extent.
apparent.
- this type, too, is believed to have some
- in the Philippines, the rural banks could
element of monopoly. However, it is
come under this category.
quite of common knowledge that in the
- it was envisioned in the law to set up Philippines this seems to be the trend
one bank in one locality so that the today as we see bank branches of the
people could have a bank of their own. different banking institutions in our
- unit bank may, however, associate with towns, provinces, districts, department
a clearing house. stores, and other places.
b. Group banking d. Chain banking
- when a majority portion of the stocks of - when one or more persons control the
two or more banks are held by a holding activities of banks, it is known as chain
company, this is considered as group banking.
banking. - it has not gained wide adherents due to
- members of the group may be unit the difficulties in operating the same on
banks or banks with branches, or both an economical basis and because of its
types. instability or lack of continuance.
- it is mostly for the purposes of control
that the stocks are held. V. Economic Significance of Banks
- board of directors of each member,
however, continues to be responsible to The demand to facilitate trade transactions,
the supervisory or regulatory agencies, particularly credit transactions, gave rise to
to the depositors and to the stockholders banks.
as far as the operations of the bank is
Bank was known for facilitating the dealings
concerned.
between debtors and creditors because bank
- this seems to be favorable for small
acts like an intermediary or a middleman
stockholders whose bank faces the
between the two in terms of the flow of credit
problem of limited capital to attract
funds. It allows others the use otherwise idle
funds of the community in productive activities. upon which banking practice is
For the persons depositing money are usually ingrained.
those who have no immediate need for the
These are the reasons why the state
funds and the bank, in turn, lends these funds
supervises banks:
to those who are momentarily in need of them.
In allowing the flow of credit funds, the bank 1. Banks are entrusted with other
becomes significant in the economy because it people's money.
can create money out of loan proceeds. o their mismanagement or
malfeasance in the duties of the
If a bank abuses this power, it will create havoc
board of directors will result in
on the economy / a situation in which things
banking failure.
are seriously damaged. In vice-versa if the
bank exercises wise judgment in this aspect, it
2. The state wants to assure that the
would contribute tremendously to the economic
banks will perform their functions in
well-being of the commercial, industrial, and
the best interest of their clients
even agricultural endeavors. Banks, therefore,
through the honest and efficient
may or may not contribute to the development
conduct of their functions.
of the country.
In business its function is by giving expert o the state must be vigilant in order
advice to businessmen, the bank may to forestall any misconduct or
contribute to the success (or failure) of the inefficient banking methods.
country. Since banks exercise prudence in
giving such advice, it usually turns out that they 3. Banks may either abuse their power
contribute to wise decisions and proper or use them prudently.
incentives in business and trade. Without
banks, foreign trade would perhaps not flow o since in modern economic affairs,
smoothly. For some reason that the major link banks tend to direct the course of
between international buyers and sellers is the progress or otherwise, the state
banks. They influence and allow the continuous stands guard in order that banks
and successful flow of foreign trade. This is will exercise their power with the
more evident when the banks doing business necessary prudence.
in the international network are world-
renowned. International trade necessitates 4. Banks are quasi-public corporations
letters of credit and acceptances which banks and as in all other corporations of
handle with the greatest care due to their this calling, the state must exert its
wealth of experience in dealings on credit. restraining influence to safeguard the
welfare of its constituents.
VI. Why the state supervises banks
- Primarily to protect the depositing public,
o in the granting of a charter to a
safeguard financial stability, and have a
corporate entity, the state is one
safe and sound financial and banking
of the parties whose duty is to
system.
protect the interest of the citizens.
- The state not only supervises banks but
also controls the banks' operations with
the advent of central banking.
- Banks exert a significant influence on
the economic setup, not to mention the
maintenance of trust and confidence
 VII. The Bank Liberalization 1986 - The economy normalized only in the
second half of the 1980s after the 1986 People
Philippine commercial banking sector has been
Power Revolt installed Corazon C. Aquino as
opened to competition, both local and
the new President.
overseas, largely through a series of
government-initiated liberalization measures. 1994 - Philippines passed Republic Act (RA)
7721, which liberalized the entry and scope of
1940s-1960s - In the post-war era, the sector
operations of foreign banks.
catered largely to the domestic market and had
a limited role in the foreign exchange market. Republic Act 7721 allowed the entry of foreign
banks through any of the three modes:
1970s - the government allowed foreign
financial institutions to set up offshore banking 1. Acquisition, purchase, or ownership of
units while commercial banks were authorized up to 60% of the voting stock of an
to accept foreign currency deposits. existing domestic bank.
2. Investment in up to 60% of the voting
1980s - the Anti-usury law became obsolete
stock of a new banking subsidiary
with the deregulation of interest rates.
incorporated under the law of the
- On the recommendation of the Philippines.
International Monetary Fund (IMF) the 3. Through the establishment of a
interest rate deregulation was Philippine branch with full banking
accompanied by programs allowing big authority.
commercial banks to go “universal”, that
1994-1997 - country registered high GDP
is to undertake traditional banking
growth which also saw the rapid liberalization
functions (including, accept deposits,
of the banking and other sectors of the
issue letters of credit, engage in foreign
economy.
exchange transactions, etc.) alongside
investment banking. 1997-1998 - The Asian financial epidemic in
- In addition, traditional “differentiation” of Thailand year 1997–1998 suddenly stopped
functions among banks (including rural, development. Although compared to the 1980-
savings, thrift, development and 1985 financial crisis, the Philippine financial
commercial) was removed, with the sector survived this new crisis without any
commercial and universal banks allowed major bank closures, contrary to what
to undertake any or all these functions. happened in Indonesia and Thailand.
1980-1983 - Philippine economy was in 2014 - Twenty years after RA 7721 in 2014
recession. government further liberalized the entry of
foreign banks with the issuance of RA 10641.
1983-1985 - Due to the economy's negative
GDP growth, the recession quickly turned into RA 10641 allows foreign banks to operate
a crisis. within the Philippine banking system by:
- Banking sector was badly hit by the 1. Acquiring, purchasing, or owning up to
recession-depression, with the 100% of the voting stock of an existing
Philippines’ banks unable to issue letters bank.
of credit on behalf of the country’s 2. By investing in up to 100% of the voting
importers-exporters. stock of a new banking subsidiary
- Also, they are unable to service its debt, incorporated under Philippine laws.
the government was forced to negotiate 3. By establishing branches with full
for a debt service moratorium. banking authority.
  The new law includes a new provision  CIMB Bank of Malaysia
on participation in foreclosure  Beijing-based Industrial and Commercial
proceedings of a foreign bank. Bank of China (ICBC)
 Foreign banks that are authorized to do
BSP has allowed 13 foreign banks to establish
banking business in the Philippines
representative or liaison offices in the country.
through any of the three modes of entry
Foreign banks that opened representative
shall be allowed to bid and take part in
offices include:
foreclosure sales of the real property
mortgaged to them, as well as to avail of  State Bank of India
enforcement and other proceedings, and  Ogaki Kyoritsu Bank Ltd.
accordingly take possession of the  Wells Fargo Bank
mortgaged property, for a period not  Korea Development Bank
exceeding five years from actual  Bank of Singapore Ltd.
possession.  DBS Bank Ltd.
 However, the title to the property shall  Japan Bank for International
not be transferred to a such foreign Cooperation
bank. If the said bank is the winning
 Rothschild (Singapore) Ltd.
bidder, it shall during the said 5-year
 Bank of New York Mellon
period, transfer its rights to a qualified
 Korea Eximbank
Philippine national, without prejudice to
a borrower’s rights under applicable  UBS AG
laws.  Zurich-based Credit Suisse
 Bank of Taiwan
2019 - update reports disclose that more
foreign banks are looking at establishing their
presence in the Philippines on the back of the
country’s sound macroeconomic environment
and stable investment climate.
- Three banks from South Korea,
Indonesia, and Hong Kong have
signified their interest in putting up
branches in the Philippines.
BSP has so far allowed 12 foreign banks,
including the world’s largest bank, to open
branches in the Philippines. These include:
 Taiwan’s Hua Nan Commercial Bank
Ltd.
 Cathay United Bank
 Yuanta Bank
 First Commercial Bank
 Chang Hwa Bank Commercial Bank Ltd.
 Korea’s Shinhan Bank
 Industrial Bank of Korea
 Woori Bank
 Sumitomo Mitsui of Japan
 United Overseas Bank Ltd. of Singapore