Gelyn D.

BaldriasMKA22 The Philippine Financial System Structure Financial Institutions Financial Institutions are the intermediaries that mobilize savings and facilitate the allocations offunds in an efficient manner. a. Central Bank TheBANGKO SENTRAL NG PILIPINAS (BSP) is the C en tr al b an k of the Re pu bl ic of the Philippines. It was established on 3 July 1993 pursuant to the provisions of the1987 Philippines Constitution and the New Central Bank Act of 1993.The BSP took overfrom the Central Bank of Philippines, which was established on 3 January 1949, as thecountrys central monetary authority. The BSP enjoys fiscal and administrative autonomyfrom the National Government in the pursuit of its mandated responsibilities. . Banking Institutions Private Banking

Commercial banks An institution which accepts deposits, makes business loans, and offers related services.Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and timedeposit. These institutions are run to make a profit and owned by a group of individuals, yet somemay be members of the Federal Reserve System. While commercial banks offer services toindividuals, they are primarily concerned with receiving deposits and lending to businesses.An institution which accepts deposits, makes business loans, and offers related services.Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and timedeposit. These institutions are run to make a profit and owned by a group of individuals, yet somemay be members of the Federal Reserve System. While commercial banks offer services toindividuals, they are primarily concerned with receiving deposits and lending to businesses. Universal bank refers to those banks that offer a wide range of financial services, beyond commercialbanking and investment banking, insurance etc. Universal banking is a combination ofcommercial banking, investment banking and various other activities including insurance.

O rdinary C omm e rcial Banks Thrift Banks Mobilization of small savings, provide loans generally longer and easier terms.

The Definition of International Banking

Print this article

International banking is the process in which financial institutions allow foreign clients--both companies and individuals---to use their services. Perhaps the most talked-about international banks are located in Switzerland. However, many other countries have fully developed international banking infrastructures. Many individuals and companies participate in international banking to minimize (or evade) their tax liability. This strategy, however, has certain disadvantages. In addition, several international organizations have made recent efforts to curb the use of international banks as tax havens.

A foreign bank in the Philippines operates as either:

a branch or a subsidiary incorporated in the Philippines There are 16 foreign banks operating in the Philippines: 14 branches and 2 subsidiaries.

Branches of Foreign Universal Banks

ANZ Banking Group Ltd. Deutsche Bank AG Internationale Nederlanden Groep Bank NV Mizuho Corporate Bank Ltd. Standard Chartered Bank Hongkong and Shanghai Banking Corporation Contact info for above banks here: Branches of Foreign Banks in the Philippines -- Universal Banks

Branches of Foreign Commercial Banks

Bangkok Bank Public Co. Ltd. Bank of America NA Bank of China Limited The Bank of Tokyo-Mitsubishi UFJ, Ltd. Citibank, N.A. JP Morgan Chase Bank NA Korea Exchange Bank Mega International Commercial Bank Co. Ltd. Contact info for above banks here: Branches of Foreign Banks in the Philippines -- Commercial Banks

Subsidiaries of Foreign Commercial Banks

Chinatrust (Phils.) Commercial Bank Corp. Maybank Philippines, Inc.

Non-bank financial institution

From Wikipedia, the free encyclopedia

A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering.[1] Examples of these include insurance firms, pawn shops, cashier's check issuers, check cashinglocations, payday lending, currency exchanges, and microloan organizations.[2][3][4] Alan Greenspan has identified the role of

NBFIs in strengthening an economy, as they provide "multiple alternatives to transform an economy's savings into capital investment [which] act as backup facilities should the primary form of intermediation fail." [5]
Contents
[hide]

1 Role in Financial System

o o

1.1 Growth 1.2 Stability 2 Types of Non-Bank Financial

Institutions

o o

2.1 Risk Pooling Institutions 2.2 Contractual Savings Institutions

o o
Financiers

2.3 Market Makers 2.4 Specialized Sectoral

2.5 Financial Service Providers 3 In Asia 4 In the United States 5 See also 6 References 7 External links

[edit]Role

in Financial System

NBFIs supplement banks by providing the infrastructure to allocate surplus resources to individuals and companies with deficits. Additionally, NBFIs also introduces competition in the provision of financial services. While banks may offer a set of financial services as a packaged deal, NBFIs unbundle and tailor these service to meet the needs of specific clients. Additionally, individual NBFIs may specialize in one particular sector and

develop an informational advantage. Through the process of unbundling, targeting, and specializing, NBFIs enhances competition within the financial services industry. [6]

[edit]Growth
Some research suggests a high correlation between a financial development and economic growth. Generally, a market-based financial system has better-developed NBFIs than a bank-based system, which is conducive for economic growth.[7][8]

[edit]Stability
A multi-faceted financial system that includes non-bank financial institutions can protect economies from financial shocks and enable speedy recovery when these shocks happen. NBFIs provide multiple alternatives to transform an economy's savings into capital investment, [which] serve as backup facilities should the primary form of intermediation fail.[9] However, in the absence of effective financial regulations, non-bank financial institutions can actually exacerbate the fragility of the financial system. Since not all NBFIs are heavily regulated, the shadow banking system constituted by these institutions could wreak potential instability. In particular, CIVs, hedge funds, and structured investment vehicles, up until the 2007-2012 global financial crisis, were entities that focused NBFI supervision on pension funds and insurance companies, but were largely overlooked by regulators. Because these NBFIs operate without a banking license, in some countries their activities are largely unsupervised, both by government regulators and credit reporting agencies. Thus, a large NBFI market share of total financial assets can easily destabilize the entire financial system. A prime example would be the 1997 Asian financial crisis, where a lack of NBFI regulation fueled a credit bubble and asset overheating. When the asset prices collapsed and loan defaults skyrocketed, the resulting credit crunch led to the 1997 Asian financial crisis that left most of Southeast Asia and Japan with devalued currencies and a rise in private debt. [10] Due to increased competition, established lenders are often reluctant to include NBFIs into existing creditinformation sharing arrangements. Additionally, NBFIs often lack the technological capabilities necessary to participate in information sharing networks. In general, NBFIs also contribute less information to credit-reporting agencies than do banks.[11]

[edit]Types [edit]Risk

of Non-Bank Financial Institutions

Pooling Institutions

Main article: Insurance company

Insurance companies underwrite economic risks associated with illness, death, damage and other risks of loss. In return to collecting an insurance premium, insurance companies provide a contingent promise of economic protection in the case of loss. There are two main types of insurance companies: general insurance and life insurance. General insurance tends to be short-term, while life insurance is a longer-term contract, which terminates at the death of the insured. Both types of insurance, life and general, are available to all sectors of the community. Although insurance companies dont have banking licenses, in most countries insurance has a separate form of regulation specific to the insurance business and may well be covered by the same financial regulator that also covers banks. There have also been a number of instances where insurance companies and banks have merged thus creating insurance companies that do have banking licenses.

[edit]Contractual

Savings Institutions

Contractual savings institutions (also called institutional investors) give individuals the opportunity to invest in collective investment vehicles (CIV) as a fiduciary rather than a principal role. Collective investment vehicles pool resources from individuals and firms into various financial instruments including equity, debt, and derivatives. Note that the individual holds equity in the CIV itself rather what the CIV invests in specifically. The two most popular examples of contractual savings institutions are pension funds and mutual funds. The two main types of mutual funds are open-end and closed-end funds. Open-end funds generate new investments by allowing the public to purchase new shares at any time, and shareholders can liquidate their holding by selling the shares back to the open-end fund at the net asset value. Closed-end funds issue a fixed number of shares in an IPO. In this case the shareholders capitalize on the value of their assets by selling their shares in a stock exchange. Mutual funds are usually distinguished by the nature of their investments. For example, some funds specialize in high risk, high return investments, while others focus on tax-exempt securities. There are also mutual funds specializing in speculative trading (i.e. hedge funds), a specific sector, or cross-border investments. Pension funds are mutual funds that limit the investors ability to access their investments until a certain date. In return, pension funds are granted large tax breaks in order to incentivize the working population to set aside a portion of their current income for a later date after they exit the labor force (retirement income).

[edit]Market

Makers

Main article: Market Maker Market makers are broker-dealer institutions that quote a buy and sell price and facilitate transactions for financial assets. Such assets include equities, government and corporate debt, derivatives, and foreign currencies. After receiving an order, the market maker immediately sells from its inventory or makes a

purchase to offset the loss in inventory. The differential between the buying and selling quotes, or the bid-offer spread, is how the market-maker makes profit. A major contribution of the market makers is improving the liquidity of financial assets in the market.

[edit]Specialized

Sectoral Financiers

They provide a limited range of financial services to a targeted sector. For example, real estate financiers channel capital to prospective homeowners, leasing companies provide financing for equipment andpayday lending companies that provide short term loans to individuals that are Underbanked or have limited resources.

[edit]Financial

Service Providers

Financial service providers include brokers (both securities and mortgage), management consultants, and financial advisors, and they operate on a fee-for-service basis. Their services include: improving informational efficiency for the investors and, in the case of brokers, offering a transactions service by which an investor can liquidate existing assets.

[edit]In

Asia

According to the World Bank, approximately 30% total assets of South Korea's financial system was held in NBFIs as of 1997.[12] In this report, the lack of regulation in this area was claimed to be one reason for the 1997 Asian Financial Crisis.

Overview of the BSP

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

Creating a Central Bank for the Philippines

A group of Filipinos had conceptualized a central bank for the Philippines as early as 1933. It came up with the rudiments of a bill for the establishment of a central bank for the country after a careful study of the economic provisions of the Hare-Hawes Cutting bill, the Philippine independence bill approved by the US

Congress. During the Commonwealth period (1935-1941), the discussion about a Philippine central bank that would promote price stability and economic growth continued. The countrys monetary system then was administered by the Department of Finance and the National Treasury. The Philippines was on the exchange standard using the US dollarwhich was backed by 100 percent gold reserveas the standard currency. In 1939, as required by the Tydings-McDuffie Act, the Philippine legislature passed a law establishing a central bank. As it was a monetary law, it required the approval of the United States president. However, President Franklin D. Roosevelt disapproved it due to strong opposition from vested interests. A second law was passed in 1944 during the Japanese occupation, but the arrival of the American liberalization forces aborted its implementation. Shortly after President Manuel Roxas assumed office in 1946, he instructed then Finance Secretary Miguel Cuaderno, Sr. to draw up a charter for a central bank. The establishment of a monetary authority became imperative a year later as a result of the findings of the Joint Philippine-American Finance Commission chaired by Mr. Cuaderno. The Commission, which studied Philippine financial, monetary and fiscal problems in 1947, recommended a shift from the dollar exchange standard to a managed currency system. A central bank was necessary to implement the proposed shift to the new system. Immediately, the Central Bank Council, which was created by President Manuel Roxas to prepare the charter of a proposed monetary authority, produced a draft. It was submitted to Congress in February1948. By June of the same year, the newly-proclaimed President Elpidio Quirino, who succeeded President Roxas, affixed his signature on Republic Act No. 265, the Central Bank Act of 1948. The establishment of the Central Bank of the Philippines was a definite step toward national sovereignty. Over the years, changes were introduced to make the charter more responsive to the needs of the economy. On 29 November 1972, Presidential Decree No. 72 adopted the recommendations of the Joint IMF-CB Banking Survey Commission which made a study of the Philippine banking system. The Commission proposed a program designed to ensure the systems soundness and healthy growth. Its most important recommendations were related to the objectives of the Central Bank, its policy-making structures, scope of its authority and procedures for dealing with problem financial institutions. Subsequent changes sought to enhance the capability of the Central Bank, in the light of a developing economy, to enforce banking laws and regulations and to respond to emerging central banking issues. Thus, in the 1973 Constitution, the National Assembly was mandated to establish an independent central monetary authority. Later, PD 1801 designated the Central Bank of the Philippines as the central monetary authority (CMA). Years later, the 1987 Constitution adopted the provisions on the CMA from the 1973 Constitution that were aimed essentially at establishing an independent monetary authority through increased capitalization and greater private sector representation in the Monetary Board. The administration that followed the transition government of President Corazon C. Aquino saw the turning of another chapter in Philippine central banking. In accordance with a provision in the 1987 Constitution, President Fidel V. Ramos signed into law Republic Act No. 7653, the New Central Bank Act, on 14 June 1993. The law provides for the establishment of an independent monetary authority to be known as the Bangko Sentral ng Pilipinas, with the maintenance of price stability explicitly stated as its primary objective. This objective was only implied in the old Central Bank charter. The law also gives the Bangko Sentral fiscal and administrative autonomy which the old Central Bank did not have. On 3 July 1993, the New Central Bank Act took effect.

What is the Significance of Banking in an Economic System?

Print this article

The role of banks.

Banks in the modern economy are profit maximizing businesses. The simple explanation is that banks allow for the secure depositing of money for individuals and businesses. However, when banks receive a substantial amount of deposits, it becomes irrational to simply let the money sit there. As a result, banks then invest this money and have it earn interest for the bank and the depositor. From this, banks became central actors in the modern economic system.
Read more: What is the Significance of Banking in an Economic System? | eHow.com

Systematic Risk - Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the assets in your portfolio. It is virtually impossible to protect yourself against this type of risk.

Unsystematic Risk - Unsystematic risk is sometimes referred to as "specific risk". This kind of risk affects a very small number of assets. An example is news that affects a specific stock such as a sudden strike by employees. Diversification is the only way to protect yourself from unsystematic risk. (We will discuss diversification

later in this tutorial).

Now that we've determined the fundamental types of risk, let's look at more specific types of risk, particularly when we talk about stocks and bonds. Credit or Default Risk - Credit risk is the risk that a company or individual will be unable to pay the contractual interest or principal on its debt obligations. This type of risk is of particular concern to investors who hold bonds in their portfolios. Government bonds, especially those issued by the federal government, have the least amount of default risk and the lowest returns, while corporate bonds tend to have the highest amount of default risk but also higher interest rates. Bonds with a lower chance of default are considered to be investment grade, while bonds with higher chances are considered to be junk bonds. Bond rating services, such as Moody's, allows investors to determine which bonds are investment-grade, and which bonds are junk. (To read more, see Junk Bonds: Everything You Need To Know, What Is A Corporate Credit Rating and Corporate Bonds: An Introduction To Credit Risk.) Country Risk - Country risk refers to the risk that a country won't be able to honor its financial commitments. When a country defaults on its obligations, this can harm the performance of all other financial instruments in that country as well as other countries it has relations with. Country risk applies to stocks, bonds, mutual funds, options and futures that are issued within a particular country. This type of risk is most often seen in emerging markets or countries that have a severe deficit. (For related reading, see What Is An Emerging Market Economy?) Foreign-Exchange Risk - When investing in foreign countries you must consider the fact that currency exchange rates can change the price of the asset as well. Foreign-exchange riskapplies to all financial instruments that are in a currency other than your domestic currency. As an example, if you are a resident of America and invest in some Canadian stock in Canadian dollars, even if the share value appreciates, you may lose money if the Canadian dollar depreciates in relation to the American dollar.

Interest Rate Risk - Interest rate risk is the risk that an investment's value will change as a result of a change in interest rates. This risk affects the value of bonds more directly than stocks. (To learn more, read How Interest Rates Affect The Stock Market.)

Political Risk - Political risk represents the financial risk that a country's government will suddenly change its policies. This is a major reason why developing countries lack foreign investment.

Market Risk - This is the most familiar of all risks. Also referred to as volatility, market risk is the the day-to-day fluctuations in a stock's price. Market risk applies mainly to stocks and options. As a whole, stocks tend to perform well during a bull market and poorly during a bear market - volatility is not so much a cause but an effect of certain market forces. Volatility is a measure of risk because it refers to the behavior, or "temperament", of your investment rather than the reason for this behavior. Because market movement is the reason why people can make money from stocks, volatility is essential for returns, and the more unstable the investment the more chance there is that it will experience a dramatic change in either direction.

Types of Risk
Unfortunately, the concept of risk is not a simple concept in finance. There are many different types of risk identified and some types are relatively more or relatively less important in different situations and applications. In some theoretical models of economic or financial processes, for example, some types of risks or even all risk may be entirely eliminated. For the practitioner operating in the real world, however, risk can never be entirely eliminated. It is ever-present and must be identified and dealt with. In the study of finance, there are a number of different types of risk the been identified. It is important to remember, however, that all types of risks exhibit the same positive risk-return relationship. Some of the most important types of risk are defined below.

Default Risk The uncertainty associated with the payment of financial obligations when they come due. Put simply, the risk of non-payment. Interest Rate Risk

The uncertainty associated with the effects of changes in market interest rates. There are two types of interest rate risk identified; price risk and reinvestment rate risk. The price risk is sometimes referred to as maturity risk since the greater the maturity of an investment, the greater the change in price for a given change in interest rates. Both types of interest rate risks are important in investments, corporate financial planning, and banking. Price Risk The uncertainty associated with potential changes in the price of an asset caused by changes in interest rate levels and rates of return in the economy. This risk occurs because changes in interest rates affect changes in discount rates which, in turn, affect the present value of future cash flows. The relationship is an inverse relationship. If interest rates (and discount rates) rise, prices fall. The reverse is also true.

Since interest rates directly affect discount rates and present values of future cash flows represent underlying economic value, we have the following relationships.

Reinvestment Rate Risk The uncertainty associated with the impact that changing interest rates have on available rates of return when reinvesting cash flows received from an earlier investment. It is a direct or positive relationship.

Liquidity risk The uncertainty associated with the ability to sell an asset on short notice without loss of value. A highly liquid asset can be sold for fair value on short notice. This is because there are many interested buyers and sellers in the market. An illiquid asset is

hard to sell because there there few interested buyers. This type of risk is important in some project investment decisions but is discussed extensively in Investment courses.

Inflation Risk (Purchasing Power Risk) The loss of purchasing power due to the effects of inflation. When inflation is present, the currency loses it's value due to the rising price level in the economy. The higher the inflation rate, the faster the money loses its value. Market risk Within the context of the Capital Asset Pricing Model (CAPM), the economy wide uncertainty that all assets are exposed to and cannot be diversified away. Often referred to as systematic risk, beta risk, non-diversifiable risk, or the risk of the market portfolio. This type of risk is discussed extensively in Investment courses.

Firm specific risk The uncertainty associated with the returns generated from investing in an individual firms common stock. Within the context of the Capital Asset Pricing Model (CAPM), this is the investment risk that is eliminated through the holding of a well diversified portfolio. Often referred to as un-systematic risk or diversifiable risk. This type of risk is discussed extensively in Investment courses.

Project risk In the advanced capital budgeting topics, the total risk associated with an investment project. Sometimes referred to as stand-alone project risk. In advanced capital budgeting, project risk is partitioned into systematic and un-systematic project risk using the same theoretical risk framework that the CAPM uses.

Financial risk The uncertainty brought about by the choice of a firms financing methods and reflected in the variability of earnings before taxes (EBT), a measure of earnings that

has been adjusted for and is influenced by the cost of debt financing. This risk is often discussed within the context of the Capital Structure topics.

Business risk The uncertainty associated with a business firm's operating environment and reflected in the variability of earnings before interest and taxes (EBIT). Since this earnings measure has not had financing expenses removed, it reflect the risk associated with business operations rather than methods of debt financing. This risk is often discussed in General Business Management courses.

Foreign Exchange Risks Uncertainty that is associated with potential changes in the foreign exchange value of a currency. There are two major types: translation risk and transaction risks. Translation Risks Uncertainty associated with the translation of foreign currency denominated accounting statements into the home currency. This risk is extensively discussed in Multinational Financial Management courses. Transactions Risks Uncertainty associated with the home currency values of transactions that may be affected by changes in foreign currency values. This risk is extensively discussed in the Multinational Financial Management courses.

Total Risk
While there are many different types of specific risk, we said earlier that in the most general sense, risk is the possibility of experiencing an outcome that is different from what is expected. If we focus on this definition of risk, we can define what is referred to as total risk. In financial terms, this total risk reflects the variability of returns from some type of financial investment.

Measures of Total Risk The standard deviation is often referred to as a "measure of total risk" because it captures the variation of possible outcomes about the expected value (or mean). In financial asset pricing theory the Capital Asset Pricing Model (CAPM) separates this "total risk" into two different types of risk (systematic risk and unsystematic risk). Another related measure of total risk is the "coefficient of variation" which is calculated as the standard deviation divided by the expected value. It is often referred to as a scaled measure of total risk or a relative measure of total risk. The following notes will discuss these concepts in more detail.