Finance 100.pptx

7/28/2019 Finance 100.pptx

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FINANCE

100

FINANCIALSYSTEM,

MARKET &

MANAGEMENTThe Basics


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Chapters

Chapter 1-5

Chapter 6-10

Chapter 11-15

Chapter 16-20

Chapter 21-25


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Chapters

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5BACK


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Chapters

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 10BACK


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Chapters

Chapter 11

Chapter 12

Chapter 13

Chapter 14

Chapter 15BACK


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Chapters

Chapter 16

Chapter 17

Chapter 18

Chapter 19

Chapter 20BACK


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Chapters

Chapter 21

Chapter 22

Chapter 23

Chapter 24

Chapter 25BACK


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Chapter

1

ROLE OF MONEYIN OUR

ECONOMICSYSTEM


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Development of

Monetary System

Money is something used by societyas a medium of exchange and is widelyacceptable for the payment of goodsand services w/o questioning theintegrity of the person offering it. The

primary function of money is tofacilitate the process of exchange.


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Barter System

first stage of monetarydevelopment.

it is the direct exchange orswapping of goods for goods,services for services, goods for

services or services for goods.


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Society abandoned the barter

system for the ff. reasons1. It was difficult to look for the person who has the things you

need and who also wants the things you are offering forexchange.

2. There is no common denominator to measure the value ofgoods and services sought for exchange.

3. Most of the goods traded have unequal values.

4. It is time consuming, cumbersome and very inconvenient forindividuals to use the barter system.

5. It lacks generalized purchasing power.


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Evolution of Money The goldsmiths were instrumental in the evolution

of money. Hundreds of years ago, the goldsmithshelped develop the use of money by accepting goldbullions to be converted into coins. They also

accepted deposit for safekeeping, which werereturned in another precious metal of the sameweight and fineness. They also helped in thetransfer of precious metals by means of receipts.Originally, a goldsmith was being paid a storage fee

for the gold but when people came to know that thegoldsmith was making money out of the golddeposited, they required him to share with them apart if the interest he earned. This is how bankingstarted.


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Minting of coins when gold bullions were converted into coins, coins were considered the

first type of modern money.

Significance of Money Money has become a very important moving factor in our society. It has

tremendous power over economic goods. Businessmen go into

production and trade because of money profit. When people deposittheir money in banks, and the banks in turn lend to borrowers forproductive purposes, this induces employment which generatesconsumption, thereby encouraging more production, which leads to amultiplier effect and results to progress in the economy. There are alsosome unfavorable effects of money. The excessive desire for money

profits sometimes induces businessmen and manufacturers to sacrificethe quality of their product. Money price and money income becomes alarge measure of judging people and things. Society has the tendency tobecome materialistic. The depletion of our natural resources can be aresult of the desire for too much money.


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Functions of Money

As a medium of exchange

As a standard to measure the value

of goods and services.As a stone of value

As a means of deferred payment


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Two Ways of Keeping

Money For Future Use

By saving

By investing


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Three Divisions of

Investment in Business

Industrial business

Commercial business

Servicing business


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Attributes of a Good

MoneyGeneral Acceptability

Stability of ValuePortabilityCognizabilityDivisibilityHomogeneityElasticityDurability


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Kinds of Money

Commodity Money- this type of money that hasa commodity value or value of its own.

Credit Money- this is the credit instrument that iswidely acceptable in payment for goods and services.

First Money- this is the kind of paper money issuedby a government edict or decree.

Legal Tender Money- this is the kind of moneythat circulates because of its legal tender power.


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Coinage it is the process of making uniform coins frommetals and stamping them with a specific design as

a quantity of its weight and fineness and theintegrity of the country it represents.

Fineness is defined as the ratio of pure gold and silver to the

total weight of the coin.

Mint is a place or a factory where coins are

manufactured or minted.


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Kinds of Coinage

Gratuitous Coinage

Brassage

Seignorage

Limited Coinage


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Detecting Counterfeiting BillsNOTES

Paper Portrait Watermark

Security Fiber Security Thread Background DesignColor of the

DenominationStyle and size of serial numberVignette Cleanness of print


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Detecting Counterfeiting Bills

COINS

1. Even flow of metallic coins.

2. High relief of letter and numerals3. Regularity of reedings and

beadings


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A. NOTES

GENUINE

The fingers can readily feel themain print.

Appears life-like.

Is the same as colored portrait

Placed vertically on the paper

Red and blue prints arescattered

Multi-colored.

COUNTERFEIT

Generally smooth.

Appears dead

Imitation of the paper is donewith finished portrait

Faked by placing verticallines on the inner side of thepaper

Stimulated by prints whichcannot be picked off.

Often blurred.

PAPER

PORTRAIT

WATERMARK

SECURITYFIBER

BACKGROUNDDESIGN


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A. NOTES

GENUINE

Generally, there is an irregularspattering of white spot

The prefix and number areclearly printed.

The lines and dots are distinctand sharp

The lines are clean and sharp

COUNTERFEIT

Have polychrome background

The letters and numbers arepoorly printed

Usually dull and poorly printed

It is dirty.

COLOR OFEACHDENOMINATION

SERIAL NUMBER

VIGNETTE

CLEANNESS OFPRINT

Show an overflow ofmetallic grains

B. COINS Feel greasy and appear slimy


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Chapter 1

ROLE OF MONEY IN OURECONOMIC SYSTEM

End of Chapter


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Chapter

2

HISTORY OF

PHILIPPINECURRENCY

&

PHILIPPINEMONETARYSTANDARDS


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Nature of Monetary

Standard

Standard money

is the monetary unit recognized bythe government as the ultimatebasic standard of value w/c all otherkinds of money are convertible.


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Monetary standard

refers to the currency systemadapted by a country to provide a

stable medium of exchange for thedomestic transactions and a meansof international payment for foreign

obligations


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Classification of

Monetary Standards

Commodity Standard or Metallic

StandardNon-commodity Standard or Fiat

Standard


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A. Commodity Standard

is a monetary in w/c the purchasingpower of value of the monetary unit

is equal to the value of a designatedquantity of a particular commodityor set of commodities. It may either

be monometallic or bimetallic.


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Monometallic Standard

is further divided into gold standardand silver standard. The gold standard

is further divided into gold coinstandard, golf billion standard and goldexchange standard. The silverstandard is also divided into silver coinstandard, silver bullion standard andsilver exchange.


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Classification of

Monometallic standard

Gold Coin Standard

Gold Bullion Standard

Gold Exchange Standard


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Classification of Gold

Exchange StandardAutomatic Gold Exchange Standard

Managed Gold Exchange Standard


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Bimetallic Standard

when each of two metals providesthe basis for the money in

calculation and the issues standsready to buy or sell either twometals at stated prices. The

monetary system is called abimetallic standard.


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Bimetallism

may also be defined as a monetarysystem in w/c coins of two different

metals at a fixed legal ration ofweights and fineness are used asthe monetary unit or the standard

unit value.


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Legal ratio refers to the ratio between theweights of gold coins and silver coins in the mint.

Market ratio refers to the ratio of value ofgold and silver as being bought and sold in the market.

Greshams Law refers to the bad orovervalued money drives out the good or under valuedmoney in circulation. When the value of the gold andsilver are equal, then mint ratio or legal ratio are equal.But when silver becomes abundant thus reducing its

value and becomes cheaper, silver would drive the goldcoins out of the circulation.


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B. Non-commodity or

Fiat Standardthis standard refers to a monetary

system in w/c the face value of themonetary unit is much higher thanthat of the value of material used as

money.


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Types of Fiat

StandardUtopian Standard or Pure Fiat

StandardInvoluntary Paper Standard

Managed currency Standard


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Pre-Spanish Regime

Piloncito it was made of crude gold coin with

flat rides with a diameter of about threeweights of an inch.

Commodity money

rice, coffee, sugar, rolled silver wires,gold dust, and gold crown money.


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Spanish RegimeHilis Kalamay irregular shaped coin hammered in Mexico

Spanish Barilla the first coin minted in the Philippines.

Spanish Galleon sailed across the pacific from Acapulo Mexico to Manila.

Colderillas a second coin minted in the Philippines.

Spanish Dos Mundos most famous coin.They came in various denominations :ocho, cuatro, and dos reales.


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First Republic of the

PhilippinesEmilio Aguinaldo issued a coin

minted in denominations of twocentimos.


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American RegimeThe principal currencies allowed to

circulate were as follows:

Mexican Silver Dollar

American Dollar


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Philippine Bank Note

El Banco De Las Islas Filipinasknown as the Bank of Philippine

Island was authorized to issue itsown bank notes.


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Japanese Regime

Japanese War Note

also known as Mickey Mouse

Money.


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Post War Period

The monetary unit during thisperiod was Victory Notes


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Hawalaregulators learned recently that one of theweak points in the payments chain through

which illicit funds can enter. it is Hindi meaning trust orexchange.

often used in relation with the word hundiwhich stands forbill ofexchange.unofficial alternative remittance and money

exchange system enabling the transfer offunds without their actual physical move.


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Chapter 2

HISTORY OF PHILIPPINE CURRENCY&

PHILIPPINE MONETARY STANDARDS

End of Chapter


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Chapter

3

MODERNMEASURESOF

MONEY


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Modern Measures of

Money The narrow definition f money

emphasizes on the medium-of-exchange function of money.

Negotiable order of withdrawalaccount are interest bearing savingsaccount on w/c limited number ofchecks may be written.


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Broader Measures of

Money:M2, M3 Although traditionally the Central Bank prefers the

M1 money supply measure, others have preferred thebroader measures of money. If one is inclined toemphasize the store-of-value function of money ratherthan the medium of exchange, broader measures areappropriate.

Asset may be classified on the basis of liquidity, orthe case and convenience with which they may beconverted into medium of exchange.

The principle involved in constructing thesemonetary aggregates is to combine assets ofcomparable levels of liquidity in each measure of money.Hence, in constructing M2, certain highly liquid assets areadded to M1.


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Weighted Measures of

Money M1, M2 and M3 are simple-sum

weights and give equal weight to eachof the items they include. For example,M2 gives the same weight to passbooksavings accounts and money market

mutual fund shares as to currency heldby the public and demand deposits inbank.


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Inflation is a sustained increase on the price level of commodities.

Criteria of inflation1. Whenever money supply or the level of credit increase by

more than 15%, which is a normal increase2. Whenever the level of price index number is more than 10%.

Disadvantages of inflation1. It is unfavourable for the fix income group.

2. It may induce the occurrence of recession in the economy.3. It may disrupts debtor-creditor relationship.


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Deflation

is characterized by an uncontrolled inthe general process level as a result ofundersupply of money.

Disadvantages of Deflation

Deflation induces curtailment in

production.It may cause a depression in

employment.


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Aggregate Demand -

Aggregate SupplyModel

the analysis of the relationshipbetween the nations money supplyand economic activity.


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Aggregate Demand-

Aggregate SupplyFramework

the basic model of total demands and total

supply the nations price level on the verticalaxis and its real output level on the horizontalaxis.

is defined as the relationship between thenations price level and the amount of realoutput demanded, other factors remainingconstant.


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Aggregate Supply

Curveis defined as the relationship

between the nations price level andthe amount of output termscollectively desire to produce either

factors remaining constant.


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Factors that shift

Aggregate Demand CurveConsumption (C)

Investment (I)Government Purchases of GoodsAnd Services (G)

Net exports of Goods and Services(X-M)


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Factors that shift the

AggregateSupply Curve

Quantity of output

Prices of Inputs

Technological Change


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Equilibrium Output versus

the Full EmploymentOutput Level

Natural Output- also called full employment

output level. It is the level of output correspondingto this natural unemployment rate.

Recessionary Gap- the magnitude by which theequilibrium output level falls short of fullemployment output.

Inflationary Gap- is the magnitude by whichoutput exceeds the full employment output level


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The Dilemma Posed by

Adverse Aggregate SupplyShocks

Stagflation- is a recession

combined with higher inflation.

Misery Index- is the sum ofunemployment and inflation rates.


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Inflationary Gap- the magnitude bywhich output exceeds the full employmentoutput level.

The Theory of the Value of

Money

Demand for Money

Lloyd B. Thomas says that the value ofmoney is measured by what a unit of money willbuy in terms of a representative group ofeconomic goods.


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The Velocity of Money Refers to the rate of the turnover of money.

Institutional Factors that Underlie theSynchronization between Receipt and

Expenditures More frequent paydays and increase of use of credit

cards reduce the demand for money and increase itsvelocity.

The State of Financial Technology Comprising the financial technology are the availability

of substitutes for money .


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Interest Rate LevelAn increase in interest rate reduces the demand for

money.

Economic Uncertainty Money is the safest of all assets in the sense that its

normal value remains constant no matter what happensin the stock, bond, or real market .

Inflation Expectation Inflation reduces the real value of money.

Income LevelAn increase in income usually increase expenditure by

individuals and firm.


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MVT'PT

M - average money supply

VT - transaction demand for

moneyP - average price of the

transaction

T - number of transactionoccurring during theday


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Velocity and Demand

for MoneyCurrency plus demand principle also applies

to the income velocity of money.

The Demand for MoneyFormula: Md=kPY,

where:Md - demandK - fraction of GDP or (PY)


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The Income Velocity

of MoneyFormula: MVYPY

where:M - average money supplyVT - income velocity of moneyP - average price of all final goodsY -number of final goods and

services


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Motives for Holding

MoneyTransaction Demand

use to finance ordinary expenditures.

Speculative Demand

is held for purpose of good investment inbusiness.

Precautionary Demand

it attribute its existence to the possibilityof unforeseen event.


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The Role of Interest Rate The price one pays for holding money iscalled opportunity cost.

Interest Rate and the Transaction Demand

transaction balances involve money which must beheld in order to bridge the gap the receipt of fundsand their later disbursement.

Interest Rates and the Precautionary Demand

precautionary money holdings may also be

somewhat sensitive to interest rate.Interest Rate and the Speculative Demand one of the most significant hypothesis is that people

and firm hold a significant amount of money forspeculative purposes.


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The Role of Interest in

the Demand for Money We have learned that the demand to

hold money may be responsive to theopportunity cost of holding money- themarket of interest.

Each motives of holding money may

depend in the part on the interest rate,and its increase makes holdingmoney more costly.


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Chapter 3

MODERN MEASURESOF MONEY

End of Chapter


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Chapter

4

CREDITS,

ITS USES,CLASSIFICATIONS

& RISKS


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Credit

is simply defined as the power orability to obtain money, goods or

services at the present time inexchange for a promise to pay withmoney upon demand or at a future

determinable time.


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Functions of Creditcredit includes people to save

credit avoids the use of money

is used as substitute for money

credit thus facilitates the productionconsumption of goods and usuallyresults in the growth economy

serves as the medium of a exchange.


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Characteristics of

CreditsCredit as Bipartite Contract

Credit as a Pecuniary ContractCredit as a Fiduciary Contract

In credit, risk is always involvedCredit always involves futurity


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Significance of Creditallows the possible production of goods

provides financial means for businessmenwho takes advantage of market opportunitiesin both domestic and foreign markets

allows the consumers to buy goods andservices beyond their ability to fulfill their

desire


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Credit and the

Business Cycle All credits function as stimulants or activators

of the fluctuations in the business cycle. During

recession when business activities decline,business and consumer products are reduced.Actually, the expansion 0f credit in a decliningphase of the business cycle softens the downwardtrend of business activity. Many creditors are notwilling to shoulder the risk especially during such

situation. Many of them tend to adopt strict creditpolicies to discourage borrowers.


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A. Personal Creditcredits obtained forones use.

There are three types, namely:

1. service creditcredits obtainedfrom professionals

2. retail credit- obtained mostly onretail

3. personal loan credit- granted forthe purchase of expensive consumeritems


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Criteria for Granting

Credit employment and personal resourceswealth and accumulated resources

operating expenses incurred by the borrower additional sources of income of family size of family paying habits of the borrower

Occupation length of employment and permanence length of time a person has lived in an area


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B. Commercial or

Mercantile Creditcredits extended by one businessman

to another businessman.A commercial credit transaction takes

place from the time goods are sold as

raw materials to the time they reachthe industrial consumer.


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C. Bank Credit or

Bank Loansare credits granted by banks to

businessman to finance their shortterm credit needs.


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D. Export and Import

Creditsobtained to finance the selling of

goods outside the country. Importcredits are also obtain to financethe buying of goods from other

countries.

Chart 1


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Chart 1

IMPORTER EXPORTER

IMPORTERS

BANKEXPORTERS

BANK

Ship of goods requestimporter to furnish Him with

bankers L/C

Notifies exporter

of L/C(4)

(7)PaysExporter

(2)

Pays Bank(8)

Open

L/C

Draws drafts against Importers Bank (6)

(1)

(5)

Sends Bankers L/C (3)

Financing an Export

SHIPPING COChart 2


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SHIPPING CO.

IMPORTER

LOCALBANK

EXPORTER

FOREIGNBANK

FINANCIALINTERMEDIARY

GOODSSHIPPEDUnder Bill ofLending

(4)

(3)Notifies

Draws a

draft thruhis Bank(8)

Pays

(5)

(9) Sellsaccepted to

(6) Sends draftsfor acceptance

(2) L/C sent

(7) Documents attached andDrafts returned

(8) Documents released underTrust Receipt

(1) Application forL/C

(11)PaysLocalBank

Chart 2

Financing an

Import


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E. Investment Credit

long term borrowing is one of the

most common forms of financingbusiness enterprise .


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F. Agricultural Credit

credits given to farmers for thedevelopment, improvement andcultivation of their lands. They may be in

the form of:

1. Crop loan2. Livestock Loan3. Agricultural Time Loan4. Commodity Loan


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G. Industrial Credit

are loans granted to industries


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H. Real Estate Credits

are loans to finance the purchaseand improvement of real estate

properties.


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I. Government or

Public Creditare credits obtained from any of the

government institutions or theirinstrumentalities


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J. Secured and

Unsecured CreditsSecured credits are those which are covered by properties of value called collaterals to guarantee loans.

Unsecured credits are those where the borrowers has mentioned the full trust and confidence of the

creditor.


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K. Short Term, Medium

Term and Long Term loans

Short Term- payable with in a

yearMedium Term- payable with in 5

years

Long Term- payable beyond 5

years

L Di L Di


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L. Direct Loan, Discount

Loan, Credit LinesDirect Loan- interest payments are

made at the time the loan matures

Discount Loan- interest paymentsare deducted at the time the loans aregranted.

Credit Lines- agreement betweenthe debtor and creditor


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Sources of CreditBanks most common sources of creditClassified into:

Commercial Banks- give commercial loans to

businessmenThrift Banks- give loans to individuals for personal

needs and to the industry for the enhancement of agricultureand economy.

Rural Banks- are organized to cater the needs of

farmers and small businessmen in the rural areas

Retail Stores give personal consumer loans to their consumers on an

open book account basis


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Credit Unions- cooperative organization thatlend savings of their member to other members

who are in need

Individual Money Lenders- individualswho have excess funds and who usually lend suchfunds to others who are in need

Insurance Companies- source of creditfor insured individuals

Sales Finance Companies- extend creditfacilities to industrial, commercial and agriculturalenterprises


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Credit Risk possibility of on-payment of the obligation when it falls due

Cs of Credit

Character- quality of credit risk which makes the debtorpay or intend to pay when his debt is due

Capacity- ability of a debtor to pay his obligation

Capital- financial strength of a business

Collateral- properties of value pledged to secure loan

Condition- environment in the customers industry,economically, legally and politically in relation to growth


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Chapter 4

CREDITS, ITS USESCLASSIFICATIONS & RISKS

End of Chapter


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Chapter

5

CREDIT

INSTRUMENTS&

ITS

NEGOTIATION

C di I


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Credit Instrument

DefinedA credit instrument is a document evidencing the

existence of a credit obligation.

Classification of Credit instrumentsCredit Instrument w/ General Acceptability

Credit Instruments w/ Limited Acceptability

A C dit I t t f


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A. Credit Instrument for

Investment PurposesCredit instrument for Investment Purposes

are subdivided into:

a) Stock Certificatesevidences of ownership in a corporation

b) Bond Certificate long term indebtedness on the part of an

issuing corporation.


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Kinds of Bonds Debenture BondsRedeemable Bonds Collateral BondsSerial Bonds

Mortgage Bonds Income BondsSinking BondsCoupon Bonds

Registered BondsProfit Sharing Bonds Guaranteed Bonds Convertible Bonds

A M M k Bill


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A. Money Market Bills negotiable financial instruments bought and sold inthe market

Kinds of Money Market Instruments

1.Interbank Call Loans2.Promissory Notes3.Repurchase Agreement4.Certificates of Assignments5. Certificates of Participation6.Commercial Papers7. C. B. C. I.s8. Treasury bills9. D.B.P. Progress Bonds


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B. Credit Instrument for

Commercial PurposesCredit instrument for commercial purposes, w/c is

better known as instruments are further subdividedinto promise-to-pay and order-to pay.

Promise to Pay A promissory note is a written promise of a

person to pay another a sum certain of money ondemand or at a determine future time.

A negotiable promissory note is one that istransferable.


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Non-negotiable Promissory Note

is non-transferable.Secured Promissory Notes are

guaranteed w/ properties of value.

Unsecured Promissory Notesgreatly depend upon the character ofthe borrower.

Financial Institution Depositsarepromises of certain institutions to

return money deposited with them.


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Letter of Credit is a letter made by one bank addressed to another

whether domestic or foreign.

1. commercial letter of credit

2. traveller letter of credit

Open Book Accountmost of our mercantile credit transactions are

evidenced but by credit obligations but by a mereentry made in the ledger of the creditor.


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Order to pay

are the second type of commercial creditinstruments. Checks, drafts and money orders fallunder this type of credit instruments.

Checks are the most commonly used bills of exchange.

Cl ifi ti f


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Classification of

Checks Crossed Checks Post Dated Checks Stale Checks Managers Check, Cashiers Check and Treasurers Check Bouncing or Robber Check Counter Check Certified Check Falsified Forged Check

Personal Check and Business Check Cancelled Check Returned Check


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The Giro System

is a technique in credit transaction w/c isnow being used. It features the use ofelectronic machines.

Draftsis a bill of exchange w/c is an

unconditional order made by the drawerrequesting the drawer to pay the payee asum certain in money on demand at adetermined time.


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Kinds of Drafts

Demand and time drafts

Bank Draft and the Commercial or

Trade DraftAcceptance Draft

Documented Draft

Clean Draft

M O


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Money Order

Two Types:

Bank Money Order w/c is an

order of one bank to another banksPortal Money Order w/c is an

order of a post office to another

post office.

Requisites for


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Requisites for

Negotiability It must be in writing signed by the maker or the drawer. It must be payable on demand or at a future determinable time. It must be payable to order or to bearer.

It must contain no conditions. If it is addressed to a drawee, the name of the drawee must be

indicated with certainty. Endorsement must be in the name appearing on the instrument. If, however, the name of the payee is misspelled or is

erroneously written, the endorser may endorse it in the samemanner as it was written but must indicate below theendorsement his real name with the word by.

Ki d f E d


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Kinds of EndorsementSpecial of full endorsement-

specifies the name of the person towhom, or to whose order, theinstrument made payable.Endorsement in Bank- specifies no

endorse.Restrictive Endorsement- prevents

the further negotiation of instruments.


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Qualified Endorsement-

constitute the endorser a mereassignor of the instrument.

Conditional Endorsement- isconditional, the person required to

pay the instrument may disregardthe condition.


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Chapter 5

CREDIT INSTRUMENTS &ITS NEGOTIATION

End of Chapter


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CHAPTER

6

THEFINANCIAL

SYSTEM

Financial Intermediation


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One of the most familiar activities of financialfirms

Act simultaneously as BORROWERS and

LENDERSmiddleman between those who want to lend

and those who want to borrow.


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Its a financial institution that accepts moneyfrom savers or investors and loan those fundsto borrowers, thus providing a link betweenthose SEEKING EARNINGS on their funds

and those SEEKINGCREDIT.

Some depositors believe that they are usingthe bank to safe keep their deposit, not

realizing that they are the creditors of thebank.

Financial System


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Financial System

provides facilities for the transfer ofpurchasing power from individual to individualand from firm to firm both within the countryand internationally

Keep detailed set of records of transactions ,they are the primary source of statistics usedin analyzing national and international

economic activity

Gross National Product


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Gross National Product

The accepted measure of aggregate output ofthe economy

Value Added


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Value Added

Appropriate measure of the output of anysingle industry

The difference between the market value of

the product produced and sold by the industryby way of financial intermediaries

Primary Claims


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Primary Claims

Issued by the ultimate deficit spending units, mainly : BusinessesGovernment

EXAMPLES:Money market instrumentsGovernment securitiesCommercial papersCorporate and municipal bonds

MortgagesCommon stocks

Secondary Claims


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Secondary Claims

Banks, life insurance companies, and mutualfunds issue claims of their own to attractindividuals and firms

EXAMPLES:

Savings deposits

Life insurance policies

Shares of mutual funds

Economic Role Of Financial


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Economic Role Of Financial

Intermediaries If there are no financial institution or you and society

are penalized by the absence of financial institution,you are denied of the opportunity of having earningsand credits of funds.

Contributes materially to the economic process

Facilitate flow of funds from SURPLUS UNIT toSPENDING UNIT

Enhance the societys welfare Increase capital expenditures

Boosts productivity and living standard

Risks and Cost without


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Risks and Cost without


ASSYMETRIC INFORMATION

Means one has better understanding of thebusiness

Gives rise to problems that reduce thewillingness to allow lending:

1. Adverse Selection2. Moral Hazard

3. Transaction Cost

1 Adverse Selection


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1. Adverse Selection

the tendency for those persons with highestprobability of experiencing financial problemsto seek out and be granted loans

Individuals are more likely to borrow and arewilling to pay relatively high interest rates toobtain funds

2 Moral Hazard


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2. Moral Hazard

Occurs after the loan is madeThis arise because of the debt contract allows

the borrower to keep any and all the returns

that exceed the fixed payment called for inthe loan agreement

The borrower has an incentive to take on

more risks than is consistent with the bestinterests of the lender, in an attempt to reaphigh return

Major Rationale of Financial


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Major Rationale of Financial

IntermediariesThe ability to deal with asymmetric

information and the associated problems withadverse selection and moral hazards

Financial Institutions


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Financial Institutions Specialize in assessing credit risks of the potential borrowers

because:1. their access in private information such as loan applicants:

Deposit history Income Assets Liabilities

Credit history2. They are equipped to monitor the borrowers activities

*** they are in better position to make better loan decisionEXAMPLES:

Commercial banks Thrift institution Finance companies

3 Transaction Cost


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3. Transaction Cost

Involves the money and time spent carryingout the financial transactions

Important element in Transaction Cost :1. Search Cost

2. Time and Money

Benefits of Intermediation


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Benefits of Intermediation

1. Benefits to Surplus Units2. Benefits to Deficit Units

1 Benefits to Surplus Units


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1. Benefits to Surplus Units

SURPLUS UNITS (savers)Pooling the funds of thousands of individuals to

overcome the obstacles that stop savers frompurchasing primary claims directly

OBSTACLES:Lack of financial expertiseLack of informationLimited access to financial marketsAbsence of many financial instruments in small

denominationsRegressive transaction cost

Diversification


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Diversification

The spreading of risks made possible bypooling of funds that is important for thesavers

Financial intermediaries have the fund toacquire the large variety of claims needed tospread the risks

2. Benefits to Deficit Units


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2. Benefits to Deficit Units

Broaden the range of instruments,denominations and maturities an institutioncan issue , which significantly reducetransaction cost

THE PHILIPPINE


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FINANCIAL SYSTEMPlays a vital role in our society and economyas a whole.

It affect the lives of every person, family,

business and the government Is greatly affected by our political, social and

economic conditions in the country

Also influenced by :International Monetary Fund

Asean Development Bank

Other international institutions

Banko Sentral ng Pilipinas


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Supervises and regulates the financial system Provide policy directions in areas of money, banking

and credit

Shall have supervision over the operation of thebanks and exercise such regulatory powers and otherpertinent laws over the operations of financecompanies and non-bank financial institutionsperforming quasi-banking functions

Its primary objective is to maintain price stability

conducive to balanced and sustainable growth of theeconomy

Shall also promote and maintain monetary stabilityand convertibility of the peso

Commercial Banks


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Commercial Banks

Considered the heart of financial systemThey hold the deposits of millions of people,

government and business enterprisesThey play the role of channeling of funds

They make funds available through their lendingand investing activities to borrowers who couldbe businessmen, business firms, governmentand individuals

They facilitate the flow of goods and services

from producers to consumers including the ofthe governmentThey help in the flow of goods and services in

and out of the country

Banks


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Banks

Are conduits through which the Banko Sentralng Pilipinas implements its monetary policies

STRUCTURE OF THE PHILIPPINE


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FINANCIAL SYSTEMA. Bangko Sentral ng Pilipinas

B. Banking Institutions

1. Private Banking Institutionsa. Expanded Commercial Banks/ Universal Banks(EKB/UB)b. Commercial Banks (KB)

c. Thrift Banks (TB)

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 (DBP)


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b. Land Bank of the Philippines (LBP)

c. Philippine Al-amanah Islamic Investment BankC. 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 Associationsg. Pawnshops

h. Lending investors

i. Fund Managers

j. Trust Companies/ Departments

k Insurance Companies


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k. Insurance Companies

l. Venture Capital Corporations

2. Government Non-Bank Institutions

a. Government Service Insurance System (GSIS)

b. Social Security System (SSS)

c. Pag-ibig

A. Commercial Banks


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A. Commercial Banks

Is any corporation, which accepts or createsdemand deposits subject to withdrawal bymeans of checks

1.) Universal Bank/


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Expanded Commercial Bank

Is any commercial bank, which performs theinvestment house function in addition to itsCommercial Banking Authority

It may invest in the equities of allied and non-allied enterprises

ALLIED ENTERPRISES may either be:Financial

Non-Financial

2.) Commercial Bank/


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Domestic Bank is any commercial bank that is confined only to

commercial bank functions such as :Accepting drafts

Issuing letters of credit

Discounting and negotiating promissory notes , bills ofexchange and other evidences of debts

Accepting or creating demand deposits

Receiving other types of deposits and deposits substitutes

Buying and selling foreign exchange, gold and silver

bullionsAcquiring marketable bonds and other debt securities

Extending credit subject to such rules as the MonetaryBoard may promulgate

Thrift Banks


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Thrift Banks Shall include savings and mortgage banks, stocks savings and

loan associations and private development bank Their function is to Accumulate the savings of the depositors andInvesting together with capital loans secured by

bonds, mortgages in real estate and insured improvements thereon chattel mortgages bonds other forms of securities and loans for personal and household finance,

whether secured or unsecured, Financing for homebuilding and home improvement Readily marketable and debt securities Commercial papers Accounts receivables Drafts

Bills of exchange Acceptances or notes arising out of commercial transaction Other investment and loans which the Monetary Board may determine

as necessary I the furtherance of national economic objectives

1.) Stock-savings &


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Mortgage BanksAny corporation organized for the purpose of

accumulating the savings of depositors andinvesting them, together with its capital, in thereadily marketable bonds and debt securities;

checks, bills of exchange, acceptances or notesarising out of commercial transactions or in loanssecured by bonds, mortgages or real estate andinsured improvements thereon and other forms of

security or in loans for personal or householdfinances whether secured or unsecured , andfinancing for household building and housedevelopment.

2.) Savings & Loan


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AssociationAny corporation engage in the business of

accumulating the savings of its members orstockholders using such accumulation,together with its capital for the loans and

investment in the securities of productiveenterprises, or in securities of the governmentand its instrumentalities, provided that theyare primarily engaged in servicing the needs

of household by providing personal financeand long term financing for home buildingand development

3.)Private Development


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3 ) p

Banks a bank that exercises all the powers and

shall assume all the obligations of the savings

and mortgages bank as provided by in theGeneral Banking Act except otherwise stated

Helps construct, expand and rehabilitate ourAgriculture and Industry

It helps meet the needs of these sectors

Development Bank of the Philippines


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Development Bank of the Philippines

The government counterpart of the privatedevelopment banks

helps the private development banksaugment their capitalization as providedunder R.A. 4093 as amended

Rural Banks


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Any bank authorized by the Central Bank tomake credits available for farmers,businessmen and cottage industries in therural area

Loans may be granted by the rural banks onthe security of land without Torrents titlewhere the owner of private property can show

five (5) years or more peaceful continuousand uninterrupted possession of the land inthe concept of ownership

This includes:


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Portions of friar land estates or other landsadministered by the Bureau of Lands that arecovered by sale contracts and purchasesand have paid at least five (5) years

installment thereon, without the necessity ofprior approval and consent of the Director ofLands or;

Portions of other estates under theadministration of the Department of AgrarianReform

Cooperative Banks


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p

Banks established to assist the variouscooperatives by lending those fund atreasonable rates

B. Government Banks /


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Specialized Government Banks

LAND BANK OF THE PHILIPPINES

Government bank which provides financial

support in the implementation of the AgrarianReform Program(CARP) of the government

AL-AMANAH ISLAMIC INVESTMENT

BANK


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BANK

Republic Act No.6048 provides for the charterthat authorizes the bank to promote andaccelerate the socio-economic developmentof the Autonomous Region of Muslim

Mindanao by performing banking, financingand investment operations, and to establishand participate in agriculture, commercial andindustrial ventures based on the Islamicconcept of banking

DEVELOPMENT BANK OF THE


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PHILIPPINES

Provides loans for developmental purpose,gives loans to the agricultural sector,commercial sector and the industrial sector

C. Non- Banking Financial


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Institution

INVESTMENT HOUSE

Any business enterprise where the primarypurpose is to extend credit facilities to consumers

and to industrial , commercial and agriculturalentities either by :Discounting or factoring commercial papers or

accounts

Buying installment contract, leases, chattel

mortgages or other evidences of indebtednessLeasing motor vehicles, heavy equipment and

industrial machineries and office equipment,appliance and other movable property

SECURITIES DEALER

Any person engaged in the business of buying andselling securities for his own account thereby making a


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selling securities for his own account thereby making aprofit from the difference between his buying and selling

of securities

SECURITIES BROKER

Any person engaged in the business of effectingsecurities transaction and earns through commissionbasis

NON-STOCK SAVINGS AND LOAN ASSOCIATIONAND COOPERATIVE CREDIT UNIONS

Corporations engaged in the business of accumulatingthe savings of its members which are usually confined toa well-defined group of persons and uses suchaccumulated funds to lend to its own member-depositors

BUILDING AND LOAN ASSOCIATION

Any corporation whose Capital Stock is periodically


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Any corporation whose Capital Stock is periodicallypaid by its stockholder members

Its purpose is to encourage frugality, home buildingamong its members, and to loan its funds includingfunds it borrowed from its own members

It also uses the accumulated funds to repay itsstockholders upon surrender of their shares

PAWNSHOP

Refers to person or entity engaged in the businessof lending money or personal property, jewelry,television, radio, camera, appliance etc. delivered asa security for loan.

D. Government Non-Bank

Fi i l I tit ti


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Financial Institution SOCIAL SECURITY SYSTEM (SSS) Provides retirement benefits , funeral benefits, housing loans,

personal loans, and calamity loans to employees who areworking in private companies and offices

GOVERNMENT SERVICE INSURANCE SYSTEM(GSIS)

Provides retirement benefits, housing loans, personal loans,emergency and calamity loans to government employees

PAG-IBIG Provides housing loans to both government and private

employees


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Chapter 6

THE FINANCIAL SYSTEM

End of Chapter

Chapter


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Chapter

7

BANKING

INSTITUTIONS,HISTORY,

CLASSIFICATIONS&

FUNCTIONS

BANKS


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Duly authorized by the monetary board ofcentral bank

Lending fund

Financial institutionsAccepting deposits and lending

ROLE OF BANKS


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Depository of idle fundsMajor source of loanable funds

Give counsel on financial matters

BRIEF HISTORY


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2000 B.C. Babylon

9th Century- King Pharaoh Nebuchadnezzar

Ancient GreeceGreek Temples serve as depositories of wealth

Greek Priests loan money to people

1157 A.D.- Venice17th & 18th Century

1401- Bank Of Barcelona In Spain1587- Bank Of Venice1609- Bank Of Amsterdam

1619- Hamburg

1621 N b


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1621- Nuremberg

1688- Stockton1694- Modern Banking

Bank Of England

Private Owned Bank

1946-government Bank

Monetary Authority Of England

Medicci Family In FlorenceFuggers In Germany

Roothschild Family MostInfluential

1800- Bank Of FranceNapoleon Bonaparte


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Napoleon Bonaparte

1848- Dominant Financial Institution19th Century- Rapid Development In Germany

Goldsmiths- Best Facilities For Safekeeping OfValuables

Canadian Banking- U.S. & Great Britain

1822-Bank Of Montreal1835- Bank Of Canada1781- Bank Of North America1791- Serve Both Government And Public

1838- Free Banking Law


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1842- Louisana Enacted Legislation

Civil War- Greenbacks1865- Prices Grown

-Gold & Silver Coins Were Hoarded

- National Banking Act Of 18631907- Remedial Legislation

Commercial 26,000 (1928)

Banks 14000 (1933)

1934- Banking Systems Began To Recover

BANKING IN THE PHILIPPINES


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1594- Obras PiasFather Juan Fernandez De Leon

-Religious Foundation

1930- Rodriguez Bank- Francisco RodriguezGorricho Bank

-Bank Owned By Mariano Tuason Family

- El Banco Espanol-filipino De Isabel Ii

SPANISH TIME


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Monte De Piedad Y Caja De Ahorros De Manila(Monte De Piedad & Savings Bank)

Father Felix Huertas

1898- Roman Catholic Archbishop Of Manila

WORLD WAR II


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Under Japanese Imperial Forces Pnb,bpi & Pbc

CLASSIFICATION OF BANKS


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Commercial BanksOrdinary Commercial Bank

-Confined To The Simple

Functions Of Commercial Banks

-Capitalized At 2.8 Billion Pesos

Expanded Commercial Bank/Universal Bank

-It Does The Commercial Bank

Functions As Well As The Investment HouseFunctions

THRIFT BANK


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Banks Established To Encourage Thriftiness,

Industry, Frugality & The Accumulation OfSavings Among The People.

*SAVING MORTGAGE BANKS

- Organized For The Purpose OfAccumulating The Savings Of Individuals &Investing Them Together With Their CapitalReadily Marketable Bonds.

- Specialize In Granting Industrial Loans

STOCK SAVINGS & LOAN

ASSOCIATIONS


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ASSOCIATIONS

- Primarily engaged in servicing the needsof household by providing personal finance

PRIVATE DEVELOPMENT BANKS-Banks organized to expand, develop,

construct, and rehabilitate our agriculture &industry

RURAL BANK


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Organized to promote and expand the ruraleconomy in an orderly and effective mannerby providing farmers and small businessmenwith means of facilitating and improving their

facilities.

SPECIALIZED GOVERNMENT

BANKS OF THE PHILIPPINES


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BANKS OF THE PHILIPPINES

1. Land Bank Of The Philippines

-Help implement the land reform in the

country-Established as a corporate and

government instrumentality

2. Development Bank Of The Philippines

-Government counter part of the privatedevelopment bank

3. Al-Amanah Islamic Investment Bank


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3

Of The Philippines

-Islamic bank; established to promote andaccelerate the socio-economic developmentof the autonomous region of Mindanao.

Offshore Banking Unit (OBU) Improve the access of the country to the worlds


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Improve the access of the country to the worlds

financial institutions.

FUNCTIONS:

1. Transaction with non-residents and or with other OBU

2. Transactions with foreign currency deposit units3. Transactions with residents other than FCDU and other

OBU subject to prior approval when required underCentral Bank regulation, and offshore banking unit mayinvest in foreign currency denominated debt

instruments of residents(other then FCDU and otherOBU) and or extend foreign currency loans andadvances to such residents.

CLASSIFICATION ACCORDING TO

FORM OF ORGANIZATION


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FORM OF ORGANIZATION

Unit Bank single banking corporation, which makes implements

its own policies.

Branch Banking Systemmultiple office banking

Group Banking majority shares of stock are held by a holding

company.Chain Banking independent unit bank which are owned by a group

of people.

TRADITIONAL

CLASSIFICATIONS OF BANKS


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CLASSIFICATIONS OF BANKS

Privately Owned Banks

Banks owned by private individuals

Government Owned Banks

Owned by state or banks with a minimum

private capital.

Branch Banking


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Adoption Reasons:Lack of capital

Idle funds in one area of the country can be

properly employed in other areasThe convenience of its customer

There is less overhead expense to run a

branch than to organize a new bank.

ACCORDING TO PLACE OF

INCORPORATION


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INCORPORATION

Domestic Bank

Bank incorporated under the laws of the

country where it is doing business.Foreign Banks

Incorporated under the laws of othercountries that do business in the Philippines

FUNCTIONS OF BANK


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DEPOSITORY FUNCTIONSTRUST FUNCTION

COLLECTION & REMITANCE FUNCTION

LOANS AND DISCOUNT FUNCTIONADVISORY FUNCTION

Depository Function*ACCORDING TO THE FORM OF WITHDRAWAL


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*ACCORDING TO THE FORM OF WITHDRAWAL

Savings Deposit accepted for safekeeping

Demand Deposit

maybe withdrawn anytime by presenting a check.

Negotiable Order of Withdrawal Account

Interest bearing deposit accounts that combine the

payable on demand feature of checks and investmentfeature of savings account

Term Savings Account Saving account that is not to be withdrawn for a

considerable period of time and allows the bank to lend


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considerable period of time and allows the bank to lend

it for a longer term.

Special Time DepositDeposit required by the government or central bank for

a depositor to maintain with the bank for a particular

purpose

Time Certificate of DepositDeposit evidenced by a certificate maturing at a definite

future time. It carries a higher interest rate than the savings deposit

since the depositor specifies the maturity date of thedeposit an the bank can plan carefully on how thedeposit is lent out or invested

AUTOMATED TELLER


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MACHINEUse for depositing and withdrawing money

opened a new method for banks to obtain

branches.

TYPE OF BANK ACCOUNTS


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SINGLE NAME INDIVIDUAL Simplest type of bank account where in an individual transacts

with the bank under his own name.

JOINT ACCOUNT Opened by two or more individuals,

SOLE PROPRIETORSHIP ACCOUNT Opened by an individual for his own business.

PARTNERSHIP ACCOUNT

Opened by a partner. It is an organization which is composed oftwo or more owners who agreed to conduct business & dividethe profits among themselves.

CORPORATE ACCOUNT Opened by corporations in the conduct of its

business


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business.

FIDUCIARY ACCOUNTOpened by a trustee in behalf of another person

UNINCORPORATED GROUP OF ACCOUNT Opened by association, social clubs, professionalsand etc.

INACTIVE DEPOSIT ACCOUNT

This is an account which does not have any activitythrough deposits or withdrawals over a period of time

Trust Function


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SAFE DEPOSIT BOX Rented out by the bank to a client who would

like to have a safe place to put his importantdocuments and precious jewelry.

Collection and Remittance

Function


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Function

CONCENTRATION BANKING

System that spreads collection ofcompanys

receivable among a number of banks locatedat strategic areas.

Loans and Discount Function


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Types of loans granted by the banksDemand or Callable Loans

Does not have definite maturity dates

Time Loan

Payable at specified future time

Classification of Bank Loans


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According to purposeAccording to the form on how credit is

granted

According to maturity

According to security

According to release of the loan

According to manner of repayment

According to purpose


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Commercial or mercantile credit Investment credit

Agricultural credit

Real estate creditPersonal credit

According to the form on

how credit is granted


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how credit is granted

Direct loan

Discount loan and rediscount loan

Overdraft line


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According to security


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Secured loan or collateralized loansUnsecured loans or character loans

According to release of the

loan


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loan

Lump sum release

Installment release as the project progresses

According to manner of

repayment


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repayment

Lump sum basis

Installment basis

Advisory Function


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Banks are experienced in helping outbusinesses because they have a variety offinancial assistance to offer


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Chapter 7

BANKING INSTITUTIONS, HISTORY,CLASSIFICATIONS & FUNCTIONS

End of Chapter

Chapter


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8

Central Banking &The Effects

of Its MonetaryPolicies

in our Economy

Brief History


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June 15, 1948Central bank act or the republic act no. 265 was

approved

This act provides for the creation of the centralbank of the Philippines

January 3, 1949The bank finally opened its doors to the public

The capital of the bank, as provided in the act,shall be ten billion pesos with the initial

subscription coming from the liquidated assets ofthe Exchange Standard Fund

Central Bank


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Responsible of administering the monetary ,banking and credit system of the Republic.

Bank Objectives

P i il t i t i i t l d t l


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Primarily to maintain internal and externalmonetary stability in the Philippines;

To preserve the international value of the pesoand the convertibility of the peso into other freely

convertible currencies;

To foster monetary, credit and exchangeconditions conducive to a balanced andsustainable growth of the economy; and

To maintain price stability in the economy.

Old Monetary Board


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the policy making body of the Central BankComposed of seven members

Seven Members of Old

Monetary Board


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Monetary Board

Chairman of the Board/ Governor of the bank

Secretary of Finance

Director General of the NEDA (National Economic Development Authority)

Chairman of the Board of Investments

Secretary of Budget and Management

Two (2) appointed representatives from theprivate sectors

Qualifications:


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Must be a good person of good moralcharacter and of unquestionable integrity andresponsibility

Must be competent in: Economics

Banking

Finance

Commerce

Agriculture Industry

Must be natural born Filipino Citizen

The New Central Bank


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Republic Act 7653 known as the Central Bank Act. Section I of R.A.

7653

it states that :

the state shall maintain a Central MonetaryAuthority (CMA) that shall function and operateas an independent body in discharge of itsmandated responsibilities concerning banking

and credit.

Central Monetary

Authority (CMA)


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Authority (CMA)

It shall be a corporate body of known asBanko Sentral ng Pilipinas refered to asBanko Central

Banko Central

Shall be capitalized at fifty billion pesos


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Shall be capitalized at fifty billion pesos(P50,000,000.00) to be fully subscribed by theGovernment of the Republic of the Philippines.

The Ten Billion(P10,000,000.00) shall be fully

paid for the Government upon effectivity of theAct and the balance to be paid for within aperiod of two (2) years from the effectivity of theAct in such manner and form as the Secretary ofFinance and the Secretary of Budget and

Management may thereafter be determined

Banko Central


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Shall provide policy directions in areas ofmoney, banking and credit

It shall have supervision over the operation ofbanks and exercise such regulatory powers

as provided in the Act and other pertinentlaws over the operations of financecompanies and non-bank financialinstitutions in performing quasi-bankingfunctions, referred to as Quasi-Banking

Composition


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of the New Monetary Boardof Bangko Sentral

The powers and functions of the Banko

Sentral shall be exercised by the BANKOCENTRAL BOARD:

Seven (7) members appointed by the Presidentof the Philippines

For a Six(6) year term

Banko Sentral Board

One (1) Governor of the Banko Sentral/ Chairman of


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One (1) Governor of the Banko Sentral/ Chairman ofthe Monetary Board

Shall be head of a department and his appointment shall be subjectto confirmation by the Commission of Appointment

One (1) Deputy Governor Acts as an alternate if the Governor of the Banko Sentral is not

Present The Monetary Board shall designate one of its member as the

Acting Chairman

One (1) Cabinet Member Designated by the President of the Philippines

A designated Undersecretary in his Department will attend asalternate

Five (5) Members from Private Sector whom shallserve full-time.

Qualifications of Monetary

Board


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Board

Must be natural born citizens of thePhilippines

At least thirty-five (35) years of age, with the

exception of the Governor who shall be atleast forty (40) years of age

Of good moral character

Of unquestionable integrityOf known probity and patriotism

With recognized competence in social andeconomic disciplines


as Bank of Issue


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The only bank authorized to manufacture andissue money

It has monopoly of notes issueAnyone who makes money without the authority

given by the Banko Sentral is guilty ofCounterfeiting.

CounterfeitingThe manufacture of money without due authorityA criminal offense punishable by law

Banko Central as Lender of

Last Resort


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In case the banks need fund for lending to theirclients, they may avail of the rediscount facilitiesat Central Bank

They may borrow through the RediscountWindow of the Central Bank by using their notesand having them rediscounted

It charges interest money lent to borrowing banksWhen banks are distressed, the Banko Sentral

comes to their rescue by lending to themextraordinary loans as to prevent banks fromlosing confidence of the general public

Domestic Monetary

Stabilization


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Stabilization

whenever abnormal movements in themonetary aggregates, in credit, or in pricesendanger the stability of the Philippineeconomy or important sectors thereof, theMonetary Board shall:

A.


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take such remedial measures are appropriateand within the powers granted to theMonetary Board and the Banko Sentral underthe provisions of Article I, Chapter III, Section

63, of the New Central Bank Act (Republic Act7653)

B.


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Submit to the President of the Philippines andthe Congress and make public, a detailedreport which shall include, as a minimum, adescription and analysis

the causes of the rise and fall of monetary


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the causes of the rise and fall of monetaryaggregates, of credit or of prices

the extent to which the changes in the monetaryaggregates, in credit or in prices have been reflectedin the level of domestic output, employment, wagesand economic activity in general , and the nature andsignificance of any such changes

the measures which the Monetary Board has takenand other monetary, fiscal or administrative measureswhich it recommends to be adopted


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The monetary Board shall submit reportsmentioned in this section and shall state thereinwhether, in the opinion of the Board, saidchanges in the monetary aggregates, credit or

cost of living represent a threat to the stability ofthe Philippine economy or of important sectorsthereof.

The Monetary Board shall continue to submitperiodic reports to the President of thePhilippines and to Congress.

Instrument of Central Bank

Actions


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ct o s

In order to maintain monetary stability withinand out of the country, the Bangko Sentralendeavors to control the expansion orcontraction of the money supply, the level ofcredit, or any rise or fall in prices

Devices


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Control of legal reserve requirementControl of discount and rediscount rates

Open market operation

Control ofcollaterals required

Imposition of portfolio ceiling

Minimum capital ration

Margin requirements for L/C

Moral suasion

Legal Bank Reserve

Requirements


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q

Legal Bank reserve- refers to the portion of thebanks deposit liability that cannot be availablefor lending, to meet the withdrawal needs of thedepositors.

Inflation decrease the volume of money supply; increase

the percentage of the legal reserve required

Deflation decrease the percentage of the legal bank

required

Purposes of Imposing Legal

Bank reserve


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As a monetary device for credit expansion andcontraction

To protect the interest of depositors

The pool of legal reserve deposits may be used

by the Banko Sentral to help banks in financialdistress

The pool of legal bank reserve deposits may alsobe used by banks in their inter-bank call loan

system.The pool of bank reserve deposits is also utilized

in the settlement of bank claims and counterclaims

Laws Covering Legal Bank Reserves

(RA 7653, Sec. 96 to Sec. 102)


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Required Reserves Against Peso Deposit

Required Reserves Against Foreign

Currency Deposit

Requires Reserves Against UnusedBalances Of Overdraft Line

Increase In Reserve Requirements

Computation On ReservesReserve Deficiencies

Inter-bank Settlement

Bank Legal Reserve Requirement


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and its Effect on Banks ExcessReserves and Money Supply

The kind of money held by the public in

expandable form consists of notes and coinsissued by the Banko Sentraland the netchecking accounts in the commercial banks ,

which may sometimes call DEPOSIT MONEY.

Example

Total Currency In The Economy P 38 Billion


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Total Currency In The Economy P 38 Billion

Plus Total Demand Deposits In Bank 130 Billion

P168 Billion

Deduct:Currency In Banks P 2 Billion

Currency In Government 1 Billion

Demand Deposits Of Government 8 BillionP 11 Billion

Total Money Supply P 157 Billion


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To increase money supply, banks either:Make new loans

Buy fewer securities

To decrease money supply, banks either:Make fewer loans

Sell more securities to the public

Accept repayment of loans

Example

Suppose PNB has the following statement and the required


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g

reserve imposed by Banko Sentral is 20 %.

ASSETS LIABILITIESReserves P 2,000 Demand Deposits P 9,500Other Assets 8,000 Net Worth 500

Total P10,000 Total P 10,000

Looking at the previous statement, the PNB has an excessreserve of P100.

20% of 9,500 = 1,900

2,000 1,900 = 100

Example

Now the PNB makes new loans on its excess reserves.


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Now the PNB makes new loans on its excess reserves.The balance statement of PNB is as follows

ASSETS LIABILITIES

Reserves P 2,000 Demand Deposits P 9,600Other Assets 8,100 Net Worth 500


Example

After the burrower spends the P100 by writing out checks


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After the burrower spends the P100 by writing out checksand after the checks are deposited in, for example,SBTC, the PNB Balance sheet is as follows:

ASSETS LIABILITIES

Reserves P 1,900 Demand Deposits P 9,500

Other Assets 8,000 Net Worth 500


Example

For simplicity, suppose that the check for p100 is


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p y, pp pdeposited in SBTC. The SBTC, having been requiredalso to set a reserve of 20%, has the followingstatement before checks are deposited. SBTCstatement is as follows:

ASSETS LIABILITIES



Total P 5,300 Total P 5,300

Example

At this point, SBTC has no excess reserve . As the check


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p ,of P100 is deposited in SBTC and it collects it fromPNB, SBTC has the following statements:

ASSETS LIABILITIES




Example

Since SBTC ahs an excess reserve of P80, it can increase


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,money supply by P80. the balance sheet is as follows:

ASSETS LIABILITIES




Example

Again the borrower now spends the money and issues a


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g p ycheck against SBTC. SBTC statement of condition is asfollows:

ASSETS LIABILITIES




Example

We just presume the spent money has found its way in


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j p p y yanother bank, for example RCBC. The statement of RCBCbefore the money is deposited is as follows:

ASSETS LIABILITIES




Example

After the money has been deposited, RCBCs statement is


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y pas follows:

ASSETS LIABILITIES




Example

RCBC can now safely increase money supply by its


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y y pp y yexcess reserve of P64. When RCBC increase its loansby P64, its balance statement as follows:

ASSETS LIABILITIES




Example


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As a result, money supply increases. Now let asbreak the chain and see where we started:

BANKS EXCESS RESERVES INCREASE INMONEY SUPPLY

PNB P100 P 100

SBTC 0 80

RCBC 0 64

Total P 244

Explanation


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So far the money supply has been increasedby P244 and it can still be further increased ifthe P64 finds its way to another banks

With a reserve of 20%,

from how many more pesos


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of demand deposits will P100

serve as the required reserve?

Answer: P 500

20% of P 500 = P 100

The size of Multiplier is

determined by dividing 1 by


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the required reserve ratioRESERVE RATIO % DEPOSIT MULTIPLIER

40 2

33 3 30 3

25 4

20 5

16 2/3 6 15 6 2/3

10 10

Assume that the balance statement

below is the consolidated balance

statement from commercial banks in


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the economy

ASSETS LIABILITIES

Reserves P 35 billion Demand Deposits P 150 billion

Other Assets 120 billion Net Worth 5 billion

Total P 155 billion Total P 155 billion

With every reserve ratio of 20%, thecommercial banking system has an excess


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reserve of P5 BillionThe actual reserve of P35 billion is 20% of

P175 billion

The commercial bank can increase themoney supply from P150 billion to P175billion

Changing Reserve

Requirements


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a decrease in the reserve ratio will serve toincrease the excess reserve, the depositmultiplier and the money supply.

The relationship is inverse between :

Reserve ratio and deposit multiplier

Excess money reserve and money supply

Spending in relation to

Economy


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Too much spending = inflation

Too little spending = unemployment

Control of the Discount and

Rediscount Rates on Loans


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The Banko Sentral extends credit to bankinginstitutions for the following purposes:

a) Using it as a device for credit control

b) Increase the liquidity of the banks through credit,whenever necessary

Interest and Rediscount Rates

(R.A. 7653 section 85)


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The Banko Sentral shall collect interest andother appropriate charges on all loans andadvances it extends, the closure, receivership

or liquidation of the debtor-institution notwithstanding.

Open Market Operation in

Government Securities


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Refers to the buying and selling of governmentsecurities by the Banko Sentral for the purpose ofCredit Control

GOVERNMENT SECURITIES

Evidences of indebtedness of the government

2 Purposes of Government Securities:

1. To raise revenue2. To control credit

Central Bank

Plays a significant role in the issue and


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placement of government securities

It maintains the security stabilization fund,which is a reserve intended to be used in the

buying and selling of government securities tostabilize the value and liquidity of suchgovernment securities.

Remedies during Inflation

1. Sell to the public government securities to


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absorb the excess cash holdings

2. Sell to the banking institutions governmentsecurities, so as to divert investment in

loans to investment in the securities. Theeffects are:

a) Decrease in available funds for loans

b) Decrease in lending operations for bank

c) Decrease in credit expansion

Purchases and Sales of

Government Securities

(R A 6 i )


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(R.A. 7653 section 91)

In order to achieve monetary policy, the

Banko Sentral may, in accordance with theprinciple stated in Section 90 of RA 7653 andwhich such rules and regulations as may beprescribed by the Monetary Board, buy and

sell in the open market for its own account:

a) Evidences of indebtedness issued directly


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by the Government of the Philippines or byits political Subdivisions

b) Evidences of indebtedness issued by thegovernment instrumentalities and fullyguaranteed by the Government

Issue and Negotiation of

Banko Sentral Obligations

(R A i )


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(R.A. 76536 section 92)

The Banko Sentral may , subject to rules and

regulations as the Monetary Board mayprescribe , issue, place, buy and sell freelynegotiable evidences of indebtedness ofBanko Sentral: provided, the issuance of such

certificates of indebtedness shall be madeonly in cases of extraordinary movement inprice level.

Open Market Operations,

and its effect on Banks

R d M S l


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Reserve and Money Supply

To eliminate inflationary pressures, the

Banko Sentral may increase reserve ratio,increase discount rates or sell governmentsecurities in the open market

During the unemployment in the economy,

the Banko Sentral tends to decrease thereserve ratio, discount rates, and buygovernment securities in the open market.

Control of the Collaterals

Required on Bank Loans Th B k S t l h th t i diti


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The Banko Sentral has the power to impose conditionsor requirements on the securities against the loansextended in the banks. Thos in effect increases theloan value of collateral.

INFLATION= Banko Sentral increase collateral= decrease the loan value of collaterals

=discourage public from borrowing fromthe bank, decrease lending operations of banks anddecrease credit expansion

DEFLATION= Banko Sentral may decrease collateral

= incentives to borrowers

Imposition of Portfolio

Analysis


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The upper limit that the Banko Sentral mayplace on the loans and investment of banks

It is instituted only during inflation

It is a direct limitation on volume of loans, andinvestment that banks may extend

Portfolio Ceilings

(R.A. 7653 section 107)


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Whenever the Monetary Board considers itadvisable to prevent or check an expansion ofbank credit , the Board may place an upperlimit on the amount of loans and investmentswhich banks may hold, or may place a limiton the rate of increase of such assets withinspecified period of time. The Monetary Boardmay apply such limits to the loans and

investment of each bank or to specificcategories thereof.

Minimum Capital Ratio

(R.A. 7653 section 108)


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Maximum ratio that the combined capitalaccounts may bear on the banks corporateassets

RISK ASSET

= TOTAL ASSETS NON- RISK ASSETS

Margin Requirements

against Letter of Credit

(R A 7653 ti 105)


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(R.A. 7653 section 105)

The Monetary Board may at any time

prescribe a minimum cash margins for theopening of letters of credit, and may relate thesize of the required margin to the nature ofthe transaction to be financed


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Other Monetary Policies To

Stabilize Banking Operations


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Banko Sentral may fix maturities in the bankloans for the purpose of credit control or as ameans of pay

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