Mae Finance

Chapter VI
The Financial
System
Financial Intermediation
One of the most familiar activities of
financial firms is acting as financial
intermediaries.
The financial intermediaries act
simultaneously as borrowers and
lenders.
They actually borrows from one group
in society. Some depositors believe
that they are using the bank to safe
keep their deposits, not realizing that
they are creditors of the bank.
Gross National Product- is the accepted
measure of the aggregate output of the
economy.
Value added- is defined as the difference
between the market value of the product
produced and sold by the industry by
way of financial intermediaries.
The funds from savers to deficit spending
spenders flow.
Money market instruments, government
securities, commercial paper, corporate
and municipal bonds, etc. are known as
primary claims. This is because they are
issued by the ultimate deficit spending
units, mainly business and government.
Banks, life insurance companies, and
mutual funds issue claims of their own
called secondary claims to attract the
funds of individuals and firms.
Financial intermediaries used these funds
attracted through this claims to purchase
the primary claims issued by the deficit
spending units.
Risks and Costs without Financial
Intermediation
Asymmetric Information - It gives rise to
two problems that reduce your willingness to
lend to the creditor: adverse selection and
moral hazard.
Adverse Selection- this is the tendency for
those persons with the highest probability of
experiencing financial problems to seek out
and be granted loans.
Moral Hazard- It occurs after a loan is made.
This arises because the debt contract allows
the borrower to keep any and all returns that
exceed the fixed payments called for in the
load agreement.
Transaction Costs- involves the money and
time spent carrying out financial
transactions.
An important element of this cost is the
search cost, time and money.
Benefits of Intermediation
The process of intermediation does not
only benefit both surplus and deficit
spending units but also the society at
large that is because it increases
economic efficiency and raises living
standards.
Benefits of Surplus Units
From the point of view of surplus units (savers),
financial intermediaries provide certain benefits
by pooling the funds of thousands of individuals
to overcome the obstacles that stop savers from
purchasing primary primary claims directly.
Some of these obstacles are lack of financial
expertise, lack of information, limited access to
financial markets, the absence of many financial
instruments in small denominations, and
regressive transaction costs.
Diversification, the spreading of risk
made possible by pooling of funds is
extremely important for the individual
saver.
Benefits to Deficit Units
From the viewpoint of deficit spenders,
financial intermediaries also broaden the
range of instruments, denominations,
and maturities an institution can issue,
which significantly reduces transaction
costs.
Uses and Sources of Financial
Intermediaries
Type of Principal Liabilities Principal Asstes
Intermediary (Source of Funds) (Uses of Funds)
Depository Mortgages, loans,

Institutions : government
Commercial Banks Deposits securities
Saving and Loan Deposits Mortgages,
Associations Government
securities
Mutual Saving Deposits Mortgages,
Banks Government
securities
Contractual Savings Corporate bonds,
Institutions: mortgages
Life insurance Premiums
Companies
Fire and casualty Premiums Bonds, stocks,
insurance government
Companies securities
Private pension Employee and Corporate stocks
funds and contributions and bonds
government
retirement funds
Investment
Intermediaries:
Mutual Funds Shares Stocks, bonds
Finance Companies Stocks, bonds, Consumer and
commercial paper business loans
Money market Shares Money market
mutual funds instruments
The Philippine Financial System
It plays a vital role in our society and
economy as a whole. It affects the lives
of every person, family, business and the
government.
The financial system is greatly affected by
our political, social and economic
conditions in the country.
It is also greatly influenced by
International entities such as the
International Monetary Fund (IMF), the
Asean Development Bank (ADB) and
other international institutions.
The Bangko Sentral ng Pilipinas supervises and
regulates the financial system. It shall provide
policy directions in the areas of money, banking
and credit. It shall have supervision over the
operation of banks and exercises such
regulatory powers and other pertinent laws
over the operation of finance companies and
non-bank financial institutions performing
quasi-banking functions. Its primary objective is
to maintain price stability conducive to a
balanced and sustainable growth of the
economy. It shall also promote and maintain
monetary stability and convertibility of the
peso.
Commercial Banks are considered the heart of
our financial system. They hold the deposits of
millions of people, governments, and business
enterprises. They play a key role in the
channeling of funds. They make funds available
through their lending and investing activities to
borrowers who could be businessmen, business
firms, governments and individuals. In so doing
they facilitate the flow of goods and services
from producers to consumers including the
financial activities of the government. They help
in the flow of goods and services in and out of
the country.
The ability of a bank to perform its task
efficiently and harmoniously with the
economic needs and economic goals
depends in a large extent on the
efficiency of management. Banks, just
like any other type of organization must
be managed efficiently. They must be
managed prudently, profitably and safely.
Commercial banks are the heart of our
financial structure since they have the
ability, in cooperation with the Bangko
Sentral ng Pilipinas, to add to the money
supply of the nation and thus create
additional purchasing power. When
commercial banks extend new loans,
money is created in the form of new
checking accounts.
Whenever banks reduce loans, the
money supply declines as checks are
written to pay off those loans thus
reducing the amount of funds in the
checking accounts.
The Bangko Sentral ng Pilipinas strongly
influences the ability and willingness of
banks to make loans by setting certain
regulations and by utilizing certain policy
tools.
Banks are the conduits through which
the Bangko Sentral ng Pilipinas
implements its monetary policies.
Heading Financial System is the Bangko
Sentral ng Pilipinas followed by the
Banking Institutions and the Non-Bank
Financial Intermediaries.
Structure of the Philippine
Financial System
A. Bangko Sentral ng Pilipinas
B. Banking Institutions
1. Private Banking Institutions
a. Expanded Commercial Banks/
Universal Banks (EKB/UB)
b. Private Development Banks
c. Thrift Banks
Savings and Mortgage Banks (SMB)
Private Development Banks (PDB)
Stock Savings and Loan Associations
(SSLA)
d. Rural Banks (RB)
e. Cooperative Banks
2. Government Banking Institutions
a. Development Bank of the
Philippines (DPB)
b. Land Bank of the Philippines (LBP)
c. Philippine Al-Manah Islamic
Investment Bank
C. Non-Bank Financial Institutions
1. Private Non-bank Financial
Institutions
a. Investment houses
b. Investment companies
c. Financing companies
d. Securities dealers/brokers
e. Non-stock savings and loan
associations
f. Building and loan associations
g. Pawnshops
h. Lending investors
i. Fund managers
j. Trust companies/ departments
k. Insurance companies
l. Venture capital corporations
2. Government Non-bank Financial Institutions
a. Government System Insurance System
(GSIS)
b. Social Security System (SSS)
c. Pag-ibig

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Chapter VI

Depository Mortgages, loans,

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