Introduction to Financial Systems and Financial Markets

1. Nature and Importance of Financial System

2. Elements of Financial System
3. Nature and Importance of Financial Markets
4. Philippine Financial System Role of Bangko Sentral ng Pilipinas and Monetary Board
5. Conclusion

Nature and Importance of Financial System

1  Financial System - Complex mix of FINANCIAL INTERMEDIARIES, MARKETS,
INSTRUMENTS, POLICY MAKERS, and REGULATIONS that interact to expedite the
flow of financial capital from savings into investment.
 FINANCIAL INTERMEDIARIES - those that help the financial system operate
efficiently and transfer funds from savers and investors to individuals, businesses,
and gov’ts that seek to spend or invest the funds.

An entity that acts as the middleman between two parties in a financial transaction such as commercial
bank, investment bank, mutual fund or pension fund.

 FINANCIAL MARKETS - facilitate the interaction between those who need capital with those
who have capital to invest.

Financial Markets include any place or system that provides buyers and sellers the means to trade
financial instruments, including bonds, equities, the various international currencies, and derivatives.
These are the stock markets, bond markets, money markets, derivative markets, etc.
 INDIRECT FINANCE

Financial
Intermediaries

BORROWERS
SPENDE

LENDERS SAVERS
Financial
Markets
DIRECT FINANCE

Importance:
 Facilitate economic or industrial activity and growth.
 Helps accelerate the volume and rate of savings.
 Monitors the management of companies.
 Facilitates execution of monetary policy by the BSP.
Their primary role in any economy is to mobilize resources for productive investment.

Elements of Financial System

1. Policy makers, government agencies, laws, and policies
2  Regulatory bodies that pass laws and make decisions relating to fiscal policy
(taxation, government spending, and other associated borrowing) as well as
monetary policies (controlling the supply of money.

For any financial system to operate effectively and efficiently, it necessitates various components and
elements that work interdependently in order to facilitate the process of financial intermediation. The
elements of an effective financial systemin are composed of the following:

In the Philippines, the monetary board is the policy making body of the bangko sentral ng pilipinas. Laws
on money, credit, and banking are legislated by the congress and through executive orders issued by the
president. Furthermore, the gov’t regulates and supervises the behaviour of the whole economy.

2. Efficient Monetary System

  Comprised of a central bank and a banking system that can create and transfer a stable
medium of exchange called money.

3. Financial Institutions or Intermediaries

 Support capital formation either by channeling savings into investment in physical assets or
by fostering direct financial investments by individuals in financial institutions and
businesses.

The process of accumulating and then lending and investing savings is referred to as the savings-
investment process. Such institutions act as middlemen between suppliers and users of money. Some of
these are commercial banks, savings and loan associations, and finance companies.

4. Financial Assets, Instruments, or Financial Claims

 Comprise the money and the rights to receive money under specific circumstances.

These are necessary for the savings-investment process to work efficiently. Usually, these are evidenced
by financial instruments which specify the terms of the claims.

5. Financial Markets
 Facilitate the transfer of financial assets among individuals, businessmen, and governments.

Examples are the Philippine Stock Exchange and other organizations dealing with money market
operations. They serve as a means of bringing the forces of demand and supply of financial claims.

Nature and Importance of Financial Markets

Importance:
3 WHAT ARE FINANCIAL MARKETS AGAIN?
Definition: Facilitate the interaction between those who need capital with those who have
capital to invest

Financial markets match buyers and sellers to set a price for financial assets meaning shares, bonds or
currency. It basically exist to bring people together so money flows to where it is needed most.
 Philippine Financial System
4 Role of Bangko Sentral ng Pilipinas and Monetary Board
In the Philippines, the concept of the financial system being a complex structure and
operation that involves every individual and business organization within the financial environment is
emphasized in that the Philippine financial system comprises various financial institutions such as banks,
pawnshops, credit unions, money markets, investment houses, financing companies, securities dealers
and other non-bank financial institutions.
The financial system here in our country is viewed as a network of various institutions which
generates, circulates, and controls money and credit, with its policies and programs supporting the
country’s social and economic development.

 central monetary authority

 created by RA no. 7653 also known as the New Central Bank Act of 1993
 provides policy directions in the areas of money, banking, and credit.

The Bangko Sentral ng Pilipinas (BSP) serves as the country’s central monetary authority. It was
created by RA no. 7653 also known as the New Central Bank Act of 1993. It provides policy directions in
the areas of money, banking, and credit.

This is the listing of the structure of the Phil. Financial System.

• Banking Institutions • Non-Banking Institutions
• Private Banking Institutions • Private Non-Bank Institutions
• Commercial/Universal Banking Institutions • Investment house/bank
• Thrift Banks, savings and mortgage banks, private development banks, • Securities brokers/dealers
stock savings and loan associations • Building and loan associations
• Rural banks • Credit unions
• Private Insurance Companies
• Government Banking Institutions • Pawnshops
• Phil. National Bank (PNB) • Trust Companies
• Development Bank of the Philippines (DBP) • Non-stock savings and loan associations
• Land Bank of the Philippines (LBP) • Lending Investors
• Al-Amanah Islamic Investment Bank of the Philippines • Retirement/Provident/Pension Fund Managers
• Credit Cooperatives

• Government Non-Bank Financial Institutions

• Government Service Insurance System (GSIS)
• Social Security System (SSS)
• Philippine Export and Foreign Loan Guarantee Corporation
• National Home Mortgage Financia Corporation (NHMFC)

• Non-banks with Quasi-

banking function:
Investment Houses and
Financing Companies
Phil. Financial • Non-banks without Quasi-
Banking Function:
System Investment houses,
financing companies,
investment companies,
securities, delears/brokers,
lending investors,
pawnshops, venture capital
BSP* and PDIC BSP, SEC and corporations, gov’t non-
bank FIs, Non-stock Savings
IC and Loan Associations,
Credit Card Companies
• Other FIs: Insurance
Companies and Mutual
Banking Non-Bank Funds
• Universal and Commercial Banking
System System Financial
• Thrift Banking System Institutions
• Rural and Cooperative Banking
System
*Other supervised entities of the BSP are off-shore
banking units and representative offices of foreign banks
 Based from the classification and presentation of the BSP, a diagrammatic illustration of the structure of the
Philippine Financial System would appear like this. Overall structure of the Phil. Financial System consists of two broad
classifications of financial institutions: banks and non-bank financial institutions. The banking system includes big, medium-sized
and small banks and also OBUs. While the Non-bank Financial Institutions consist of investment houses, financing companies
with quasi-banking functions, etc. These financial institutions are supervised by the BSP if they are subsidiaries or affiliates of
banks or by special laws. Those not falling in this group are under the supervision of SEC and IC.

Monetary Board
 exercises the powers and functions of
the BSP, such as the conduct of
monetary policy and supervision of the
financial system.
 has seven members appointed by the
President of The Philippines.
The Bangko Sentral ng Pilipinas (BSP) serves as the
country’s central monetary authority. It was created by RA
no. 7653 also known as the New Central Bank Act of 1993.
It provides policy directions in the areas of money,
banking, and credit.

Money Markets vs. Capital Markets | Primary Markets vs. Secondary Markets
Money Markets Primary Markets
 The financial markets in which A primary market is a source of
funds are borrowed or loaned for new securities. Often on an exchange, it's
short periods (less than one year) where companies, governments, and other
 a short-term lending and borrowing groups go to obtain financing through debt
system for its various participants, based or equity-based securities.
who benefit from either gaining Primary markets are facilitated by
access to funds or earning interest underwriting groups consisting of
on their investments. investment banks that set a beginning price
 only short-term liquid financial range for a given security and oversee its
instruments are exchanged sale to investors.
 holds a range of operational
characteristics Types of Primary Markets
 allow customers to deposit money There's a primary market for just about
and earn interest, and can be used every sort of financial asset out there. The
to write checks or use a debit card biggest ones are the primary stock market,
to make purchases or withdrawals. the primary bond market, and the primary
mortgage market.
Features of Money Markets  Initial public offering (IPO): when a
 It is fund-term market funds. company issues shares of stock to
 It’s maturity period of up to the public for the first time
one year.  Rights issue/offering: an offer to
 It trades with assets that can be the company’s current stockholders
transformed into cash easily. to buy additional new shares at a
 All the transactions take place discount.
through phone, email, text, etc.  Private placement: an issue of
 Broker not required for the company stock shares to an
transaction individual person, corporate entity,
 The components of a money or a small group of investors—
market are the Commercial usually institutional or accredited
Banks, Nonbanking financial ones—as opposed to being issued
companies and Central Bank, in the public marketplace.
etc.  Preferential allotment: shares
offered to a particular group at a
Examples of Money Markets special or discounted price,
 Bankers acceptances different from the publicly traded
 Certificates of Deposit (CDs) share price
 Commercial Paper
 Treasury Bills (T-Bills) Secondary Markets
A secondary market is a market in which
These instruments can be traded among banks, existing, already outstanding securities are
financial institutions, and brokers over the counter, meaning
the underlying securities are not listed on a trading
traded among investors. Or it is a market in
exchange like the New York Stock Exchange (NYSE) or the which other financial assets are traded
Nasdaq. among investors after they have been
issued by corporations.
Types of Money Markets
 Call Money- It portrays a short
term loan with maturities starting
from one day to fourteen days, and
it can be repaid on demand.
 Treasury Bill- It is the oldest and
traditional money market
instrument and is practiced across
the globe. The instrument is
declared by the Government and
does not have to pay any interest.
This is available at a discounted
rate at the time of issue.
 Ready Forward Contract (Repo)-
The word repo is acquired from the
phrase “repurchase agreement”. It
is an agreement that specifies the
sale and purchase of an asset.
 In India, this agreement is prepared The dealers hold an inventory of
between different banks and security, then stand ready to buy or
sometimes between bank and RBI sell with market participants.
for short term loans.
 Money Market Mutual Fund-This is
the alternative name for liquid
funds and are the lowest risk debt
funds.
 Interest Rate Swaps- This is the
latest money market instrument in
India. Here, two parties sign an
agreement, where one decides to
pay a fixed rate of interest, and the
other pays a floating rate of
interest.

Capital Markets
 The financial markets for stocks and
for intermediate or long term debt
(one year or longer)
 It allows companies and other
entities to raise capital through
publicly-traded stocks, bonds, and
other securities, it provides a
platform for mobilizing the funds
 It usually boils down to three
things: liquidity, duration, and risk
 It can deliver higher returns,
though investors may assume
greater risk
 Participants in the capital market
can use it to raise capital by issuing
shares of stock, bonds, and other
long-term securities. As an investor,
you can benefit from
buying and selling stocks and
derive current income from stocks
that pay out dividends. Types of Secondary Markets
 An auction market, an open
Features of Capital Markets outcry system where buyers and
 Unites entrepreneurial borrowers sellers congregate in one location
and savers and announce the prices at which
 Deals with long-term investments. they are willing to buy and sell
 Agents are required. their securities
 It is controlled by government rules  A dealer market, in which
and regulations. participants in the market are
 Deals in both commercial and joined through electronic
noncommercial securities. networks.
 Foreign Investors.
Examples of Capital Markets
 Stocks
 Bonds
 Debentures
 Euro issues

Types of Capital Markets

The Capital Market instrument involves
both the auction market and dealer market.
It is classified into two sections: Primary
Market and Secondary Market.
 Primary Market: Here, fresh
contracts are given to the people
for the subscription purpose.
 Secondary Market: The securities
that have already been issued are
exchanged among investors. The
entity that issued the stocks or
bonds is not necessarily involved in
this transaction.

Companies that issue stocks are interested in raising

capital for the long-term, which can be used to fund
growth and expansion projects or simply to meet
operating needs. The difference between capital and
money market investments is liquidity, duration, and
risk. Capital markets can deliver higher returns, but
investors may assume greater risk. Understanding
the capital market is important because it helps to
create stability and create jobs.

SIMILARITIES:
 Both are important components of
the international finance market
 Both markets permit investors to
purchase debt securities
 Businesses and governments
depend on both for raising money
for operations
 Both are important pillars of the
economy
PHILIPPINE FINANCIAL SYSTEM
ROLE OF BANGKO SENTRAL NG PILIPINAS AND MONETARY BOARD

HISTORY:
 The cobs or macuquinas of colonial mints were the earliest coins, bearing the
Spanish royal coat-of-arms.

 The Spanish dos mundos was a popular coin from 1732-1772, featuring twin crowned globes
representing Spanish rule over the Old and New World.

 The barrilla was the first coin struck in the Philippines, inspiring the Filipino term "barya".

Coins from other Spanish colonies were counterstamped to legalize their circulation in the Philippines.

FINANCIAL REPORTING OF BANKING INSTITUTION:

The banking and finance sector plays a critical role in the Philippine economy, mobilizing
domestic savings and converting them into directly productive investments. It is important to encourage
households to save their unspent income in financial assets so that these resources can be used to
finance the expansion of directly productive business ventures.

Banking institutions include universal banks, commercial banks, thrift or savings banks and
rural
and cooperative banks. Non-bank financial institutions are composed of insurance
companies, pension
fund institutions, investment banks, financing companies, pawnshops and mutual
fund institutions.

The Bangko Sentral ng Pilipinas (BSP) is the independent central monetary authority of the Philippines
that supervises the nation's banking system.

The role of financial intermediation in the Philippine economy continues to expand and is expected to
create greater prospects for employment over the next several years.

The Philippine economy grew by 7.3% in 2010, 3.7% in 2011, and 6.6% in 2012, resulting in an
increase in the number of employed persons in the financial sector from 369,000 in 2009 to 400,000 in
2010, 434,000 in 2011 and 437,000 workers by the end of 2012.

MONETARY POLICY:
Monetary Policy - It refers to the measures or actions taken by the central bank to influence the general
price level and the level of liquidity in the economy.

BSP's Primary Objective:

 To maintain price stability conducive to a balanced and sustainable growth of the economy and
employment.

TOOLS OF CONTRACTIONARY MONETARY POLICY:

1.

1.
Increase interest rates
- Interest rates are the
primary monetary policy
tool of a central bank.
Commercial banks can usually
take short- term loans from
the central bank to meet
 short-term liquidity shortages. In return for the loans, the central bank charges the short-
term interest rate.
In order to reduce the money supply, the central bank can opt to increase the cost of
short-term debt by increasing the short-term interest rate. The increase in interest rates will
also affect consumers and businesses in the economy as commercial banks will raise the interest
rates they charge their clients.
2. Raise the reserve requirements
- Commercial banks are obliged to hold the minimum amount of reserves with the central
bank and a bank’s vault. A rise in the required reserve amount would decrease the money
supply in the economy.
3. Expand open market operations
- The central bank is involved in open market operations by selling and purchasing
government-issued securities. They can reduce the money circulated in the economy by
selling large portions of the government securities to investors.

TOOLS OF EXPANSIONARY MONETARY POLICY:

1. Decrease interest rates
- The adjustments to short-term interest rates are the main monetary policy tool for a central
bank. Commercial banks can usually take out short term loans from the central bank to
meet their liquidity shortages. In return for the loans, the central bank charges a short-term
interest rate. By decreasing the short-term interest rates, the central bank reduces the cost
of borrowing to commercial banks.
Subsequently, the banks lower the interest rates they charge their consumers for loans.
Therefore, whenever the central bank lowers interest rates, the money supply in the
economy increases.
2. Reduce reserve requirements
- Commercial banks are obliged to hold a minimum amount of reserves with a central bank.
To increase the money supply, the central bank may reduce reserve requirements. Thus,
they would have extra funds to be lent out to their clients
3. Expand open market operations
- The central bank may also use open market operations with government issued securities to
affect the money supply in the economy. It may decide to buy large amounts of the
government-issued securities from institutional investors to inject additional cash into the
domestic economy.

FINANCIAL REGULATIONS:
Financial Regulations - It refers to the rules and laws firms operating in the financial industry, such as
banks, credit unions, insurance companies, financial brokers and asset managers must follow.
Regulations of financial institutions basically focus on providing stability to the financial
system, fair competition, consumer protection, and the prevention and reduction of financial crimes.

Financial Regulations aims to:

 Enforce applicable laws
 Prosecute cases of market misconduct
  License providers of financial services
 Protect clients
 Investigate complaints
 Maintain confidence in the financial system

The Bangko Sentral ng Pilipinas (The Philippine Central Bank)

 The central monetary authority in charge of regulating money, banking and credit in the
Philippines.
 An independent government-owned corporation with the primary responsibility of supervising
and regulating finance companies bank operations, nonbank financial institutions performing
quasi-banking functions, and other institutions performing similar functions.

BSP's Primary Objective:

 To promote and preserve monetary stability and the convertibility of the national currency
(Philippine peso).

The BSP is governed by the Monetary Board, composed of seven members appointed by the
president of the Philippines, with the governor as its chair. Through the Monetary Board, the BSP issues
rules and regulations in the exercise of its regulatory powers and directs the management, operations
and administration of the BSP.

Under the New Central Bank Act, the BSP performs the following functions, all of which relate to its
status as the Philippines’ central monetary authority:
1. Liquidity Management - The BSP formulates and implements monetary policy aimed at
influencing money supply consistent with its primary objective to maintain price stability.
2. Currency issue - The BSP has the exclusive power to issue the national currency. All notes and
coins issued by the BSP are fully guaranteed by the government and are considered legal tender
for all private and public debts.
3. Lender of last resort - The BSP extends discounts, loans and advances to banking institutions for
liquidity purposes.
4. Financial supervision - The BSP supervises banks and exercises regulatory powers over non-bank
institutions performing quasi-banking functions.
5. Management of foreign currency reserves - The BSP seeks to maintain sufficient international
reserves to meet any foreseeable net demands for foreign currencies in order to preserve the
international stability and convertibility of the Philippine peso.
6. Determination of exchange rate policy - The BSP determines the exchange rate policy of the
Philippines. Currently, the BSP adheres to a market-oriented foreign exchange rate policy,
principally to ensure orderly conditions in the market.
7. Other activities - The BSP functions as the banker, financial advisor and official depository of the
government, its political subdivisions and instrumentalities, and of government-owned and -
controlled corporations.
The Philippine Deposit Insurance Corporation (PDIC)
 It has the power to conduct examinations of banks with the prior approval of the Monetary
Board and within terms and conditions determined by law. All banks are obligated to insure deposit
liabilities with the PDIC up to a maximum amount of PHP 500,000 or its foreign equivalent.

The Anti-Money Laundering Council (AMLC)

 It has the power to conduct investigations of money laundering and other violations of (RA
9160) for the protection of the integrity and
confidentiality of bank accounts and to prevent the Philippines from
being used as money laundering site for the proceeds of any
unlawful activity.
 It monitors and receives covered or suspicious transaction reports
from covered institutions under the law, investigates suspicious
transactions and covered transactions deemed suspicious after an investigation, applies before
the Court of Appeals, ex parte, for the freezing of any monetary instrument/property alleged to
be proceeds of any unlawful activity, and implements such measures as may be necessary and
justified to counteract money laundering.