Chapter 1

An Overview of the
Philippine Financial System

Financial system is a complex structure and operation which every individual and business
organization in a civilized society are directly involved.

We use money in buying goods and services and we borrow money from banks, pawnshops,
credit unions or cooperatives to satisfy our needs.

Thus, financial system refers to the whole gamut of market dealings with financial assets.
More specifically, it is where the suppliers and users of funds meet to finance their needs and satisfy
their objectives. On the other hand, the suppliers can be individuals, businesses, institutions, and even
the government. The suppliers have available capital through savings and accumulated wealth and are
willing to lend their capital for a fee. On the other hand the users of funds can also be individuals,
businesses, institutions, and the government. The users are willing to pay a fee for the use of capital to
support their financing needs. When the suppliers and users meet, the suppliers (lenders) transform
their funds into financial assets, and the borrowers (users) receive the funds as their financial
liabilities. In theory, transactions in the financial system are realized when the rate of return the
suppliers seek equals the cost of financing the users are willing to pay (e.g. interest). Money, like any
other commodity, has a price.

Financial systems does not only include banks, credit unions or pawnshops but also other
financial institutions like money markets, investment houses, financing companies, securities dealers
and others. World Bank, the International Monetary Fund, the Asian Development Bank, the
transnational banks, the Bangko Sentral Ng Pilipinas, and other government agencies which are
associated with the laws affecting money, credit and banking are also part of the whole financial
system which had a tremendous influence in our economy.

Nature and Necessity of Finance

The financial system is a network of various institutions which generates, circulates, and
controls money and credit. It provides intermediation between suppliers and users of credit. It
provides loans to poor families, small producers, big businessmen, and industrialists to stimulate the
social and economic development of the country. Highly developed countries like the United States,
Japan, and those in Western Europe like Great Britain, France and Germany have become prosperous
because of the support of financial institutions during the initial stage of their industrial development.

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 These arises a need for financial institutions in a society where any individuals have surplus
incomes. People with excess incomes are inclined to place their extra funds in investments or
productive projects. Other intends to lend their money in order to earn interests. In a primitive
economy, the lenders can directly deal with the borrowers in transferring their savings. However, in a
larger market, middlemen are needed to facilitate the meeting of lenders and borrowers. But in a
developed economy, specialists are needed to satisfy the business interest of both suppliers and users
of funds which is the primarily job of the financial institutions. There is no more need for the lenders
to deal personally with the borrowers. Both parties transact their business with financial institutions
and this is more convenient, economical, and safer for the lenders.

From the point of economics, the transfer of funds from lenders to borrowers, through
financial institutions, creates several favorable effects in the economy as such transfer of money can
improve consumption pattern and resource allocation. People with surplus money which are not use
for production have no positive contribution to society and economy but if these idle financial
resources are lent out to individuals without financial capital but with business inclinations, then such
resources become tools of production. As a result, it will create more employment, income, and
consumption that will be beneficial to many other members of the society. These interdependent
economic activities, together with their linkage effects, simulate further economic growth for the
whole economy.

Elements of the Financial System

a. Financial claims. These comprise the money and the rights to receive money under
specific circumstances. These are evidenced by financial instruments which specify the terms of the
claims. It had two broad categories of claims: debts and equities. The latter conveys ownership rights
while the former does not. The debtor has an obligation to pay his loan plus interest. On the other
hand equities are investments like shares of stocks which earn dividends.

b. Financial institutions. These are private or government organizations whose assets consist
primarily of claims or incomes primarily derived from dealing in and/or performing services in
connection with claims. Institutions which deal with the creation and issuance of claims against
themselves, and use the proceeds to acquire and hold claims against others, are commonly referred to
as financial intermediaries. These institutions act as middlemen between suppliers and users of
money. This includes banks, savings and loan associations and finance companies.

Other financial institutions are primarily involved in services related to claims. They
provide financial information and advice, manage portfolios of financial assets on behalf of other
economic units, buy and sell claims on instructions from clients, and assist in finding sources for those
economic units seeking loans.

c. Financial markets. These are institutions which expedite transactions in financial claims.
Examples are the Philippine Stock Exchange and other organizations dealing with money market
operations. A financial market serves as a means of bringing the forces of demand and supply of
financial claims.

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 d. Government agencies. The Monetary Board is the policy-making body of the Bangko
Sentral Ng Pilipinas. Laws on money, credit, and banking are legislated by the Congress and through
executive orders issued by the President of the Philippines. The role of the government agencies has a
tremendous impact on the financial system. For example one very important goal of the Bangko
Sentral is to attain internal and external stability of our peso.

e. Laws and policies. The national government regulates and supervises the behavior of the
whole economy and the control of the financial system is a vital condition for the whole economic
behavior. Laws and policies have been formulated to ensure the desired levels of investment,
employment, production, income and consumption.

Specific Functions of Financial Institutions

a. Investigation and credit analysis. An individual who lends his money through a financial
institution is assured of a minimum risk. A careful investigation and credit analysis about the
application of the borrower is conducted. This is to ensure that the funds will be used efficiently
by the borrower, and to protect the interests of both the lender and the financial institution.

b. Matching the supply and demand for funds. Financial institutions perform a brokerage
function. They bring the lenders and borrowers together. They provide conveniently located
offices to make things available and economical for both parties. Some types of financial
institutions purchase securities in large quantities and then sell these in smaller lots. Financial
institutions specialize in matching the supply of savings with the demand for funds.

c. Provision for liquidity. Through financial institutions, the liquidity of financial assets can be
increased. Their brokerage function provides an organized market that the investor can find a
buyer for his debt or ownership claims. Some financial institutions accept savings from
individuals who in return acquire claims against the assets of the financial institutions. In case a
client of such institution decides to liquidate his claim, the latter can pay its client with its current
funds which it receives from other savers.

Development of the Philippine Financial System

The first credit institutions established in the Philippines were the Obras Pias which literally
mean pious works started by Father Juan Fernandez de Leon in 1754 with the funds coming from the
pious Catholics, together with those who made their wills before undertaking dangerous expeditions.
These institutions consisted of foundations, lent their money to traders to finance the Galleon Trade
and their profits are channeled to charitable works and are under the control of the friars.

The last of the obras pias came to an end in 1820 and ten years later, Francisco Rodriguez
organized the Rodriguez Bank which is more of a loan association than a bank. Most of the clients
were American and British merchants and when Francisco Rodriguez died, the bank’s funds were
turned over to the Queen of England.

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 In 1851 the Banco Espanol-Filipino de Isabela II was the first Philippine bank established.
Actually the bank had been granted a charter in 1528 but it started transacting business when several
Philippine ports were opened to foreigners and the bank handled mostly domestic transactions because
foreign trade outside Manila was not very substantial.

With opening of Suez Canal in 1869, the Philippine trade expanded as the European markets
became accessible to Philippine producers and this induced the country’s agricultural development.
The Banco Espanol-Filipino funded crops for exports and established correspondent relations in Spain
and France to help the European trade.

With the growth of trade with Europe that attract British capital to the Philippines, the
Chartered Bank of India, Australia and China set up a Manila branch in 1873. Two years later the
Hongkong and Shanghai Bank opened their branches in Manila and in 1883 these two banks opened
branches in Iloilo to finance the sugar industry.

The British banks dominated the economy during the Spanish colonial rule so with the British
merchants which controlled the economy. Their ships, connections with China and Europe, credit
resources, and technique and machinery for large scale crop production gave them an advantage over
the other merchants from 1820s to 1900s. However, American business interest started to expand
during this period.

Monte de Piedad was the first savings bank established in the Philippines by Spain despite of
the British domination in the banking industry whose funds came from the obras pias. One year later,
another Spanish bank, Banco Peninsula de Ultramirano set up a branch in Manila.

At the time the United States acquired the Philippines in 1898 through the Treaty of Paris, its
business interests were not as strong as those of the British and Chinese. However, with “free trade”
between the United States and the Philippines as provided by the Payne-Aldrich Act of 1902,
American control in the Philippines substantially increased. Because of the British involvement in
World War I (1914-1918) their commercial activities in Asia weakened which gave the Americans the
opportunity to promote their business interests in the Philippines.

In 1902, the International Banking Corporation of New York set up an office in the country
and was acquired in 1915 by the National Bank of New York. This is now called the First National
City Bank was presently one of the top five banks in the United States and the whole world. Other
branches of American banks were established such as the Guaranty Trust and American Bank.

Postal Savings Bank was established in 1904 and the First Agricultural Bank of the Philippine
Government in 1906. In 1916 the assets and liabilities of the agricultural bank were transferred to the
newly-organized Philippine National Bank. In 1916 the Catholic Church set up the Philippine Trust
Co. while a group of Manila –based American businessmen established the People’s Bank and Trust
Co. in 1926. China Banking Corporation was established in 1920 and the Mercantile Bank of China in
1926.

With the coming of the Japanese Imperial Forces in 1942, the PNB closed its doors and was
ordered to reopen for business after a few months and was under supervision by the Japanese military
advisers. The Southern Development Bank, a Japanese bank, put up a branch in the country to perform

4
the role of a central bank. War notes were then printed and circulated as money that caused the worst
inflation so far in the country.

Postwar Financial Institutions

In 1946, the Rehabilitation Finance Corporation was established to provide credit facilities for
the rehabilitation of agriculture, commerce, and industry, and the reconstruction of war-damaged
properties. Some years later, it became the Development Bank of the Philippines.

Another very important milestone in the development of the Philippine financial system
during this particular period was the creation of the Central Ng Pilipinas in 1948 whose operations,
however, started the following year.

By 1947, there were four branches of foreign commercial banks in the country and seven local
banks. Of these seven local banks, only one was owned by Filipinos. Most of the non-commercial
banks emerged after World War II and during the 1960s up to 1970s. The rural banking system was
organized in 1952.

Structure of the Philippine Financial System

A. Banking Institutions

1. Private banking institutions

a. Commercial banking institutions

 expanded commercial banks/universal banks or EKBs
 ordinary commercial banks or Non-EKBs

b. Thrift banks
 savings and mortgage banks
 private development banks
 stock savings and loan associations
 micro-finance banks

c. Rural banks, cooperative banks and micro-finance banks

2. Government banking institutions

a. Development Bank of the Philippines
b. Land Bank of the Philippines
c. Al-Amanah Islamic Investment Bank of the Philippines or Philippine Amanah Bank

B. Non-Bank Financial Institutions

1. Private non-bank financial institutions

a. Investment houses
b. Investment companies
c. Financing companies

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 d. Securities dealers/brokers
e. Non-stock savings and loan associations
f. Building and loan associations
g. Pawnshops
h. Lending investors
i. Fund managers
j. Trust companies/departments
k. Insurance companies
l. Venture capital corporations

2. Government non-bank financial institutions=

1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)

Definitions of institutions in the Philippine Financial System

a) Universal banks are expanded commercial banks with a capitalization of Php 5 billion or
more.

b) Commercial banks are banks with a minimum capitalization of Php 2.8 billion.

c) Thrift banks are banks with a minimum capitalization of Php 325 million for those whose
head office is within Metro Manila, and Php 25 million otherwise.

d) Rural banks are normally operating in the rural sector with minimum capitalization of Php 26
million in Metro Manila; Php 13 million in Cebu and Davao; Php 6.5 million for those in the
1st, 2nd and 3rd class cities and 1st class municipalities; Php 3.9 million for those in the 4 th, 5th
and 6th class cities and in 2nd , 3rd, and 4th class municipalities and Php 2.6 million for those in
the 5th and 6th class municipalities.

e) Specialized government banks government owned institutions engaged in specialized

lending/program for economic development.

f) Investment houses are involved in underwriting of securities, financial consultancy, among

others and have a minimum capital requirement of Php 300 million. (e.g. Unicapital)

g) Financing companies lend to business firms and individuals using equity capital and long-
term borrowed funds with minimum capital ranging from Php 2.5 to 10 million depending on
domicile. (e.g. BPI Leasing)

h) Investment companies sell its own securities to the public and invest the proceeds in stocks
and bonds. (e.g. Sun Life Bond Fund)

i) Insurance companies are engaged in property liability, life insurance, and/or multiple-line
products.

j) Securities dealers are involved in the buying and selling of securities and have a minimum
capital of Php 30 million (e.g. SB Equities)

k) Lending investors cater to the financial requirements of smaller firms/individuals.

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 l) Pawnshops provide immediate cash relief to individual customers but charge higher rates than
most banks. Pawnshops are capitalized at a minimum of Php 100,000.

m) Government non-bank financial institutions are not allowed deposit taking activities and
are limited to financing activities.

n) Venture capital corporation are engaged in financing start-up companies (e.g. Cashrounds,
Inc)

o) Mutual building and loan association and non-stock savings and loans associations are
companies catering to a niche market (e.g. AFP Savings and Loan Association)

BSP Supervised/Regulated Financial Institutions

As of December 31, 2012
Total Head Offices Other Offices

A – Banks 9,412 696 8,714

a. Universal and Commercial Banks 5,145 37 5,108

Universal Banks 4,622 21 4,601
Private Domestic Banks 4,147 12 4,135
Government Banks 453 3 435
Branches of Foreign Banks 17 6 11
Commercial Banks 523 16 507
Private Domestic Banks 432 6 426
Subsidiaries of Foreign Banks 78 2 60
Branches of Foreign Banks 13 8 5

b. Thrift Banks, including microfinance

oriented banks 1,619 70 1,549

c. Rural and Cooperative Banks 2,646 589 2,057

Rural Banks, including microfinance

oriented banks 2,482 550 1.932
Cooperative Banks 164 39 125

B – Non-Bank Financial Institutions

a. With Quasi-Banking Functions 72 14 63

b. Without Quasi-Banking Functions 17,590 6,418 11,172

Non-Stock Savings & Loans Association 195 71 124
Pawnshops 17,335 6,301 11,034
Others 1/ 60 46 14
B1 – Offshore Banking Units 4 4 -

1/
Includes Financing Co., Investment Co., Securities Dealer/Brokers., Lending Investors, Venture
Capital Corp., Credit Card Co., Gov’t NBFI, Investment House (with-out QB functions)

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Number of Automated Teller Machines (ATM)
As of March 2012
Total On-Site Off-Site
Universal Banks
Private Domestic Banks 7,269 4,367 2,902
Government Banks 1,210 721 489
Branches of Foreign Banks 28 28
Commercial Banks
Private Domestic Banks 864 477 387
Subsidiaries of Foreign Banks 87 71 16
Branches of Foreign Banks 20 20
Thrift Banks 1,301 856 445
Rural Banks 218 184 34

Number of Banks with Electronic Banking Facilities as approved by the BSP

As of March 2012
Universal and Cooperative Banks 33
Thrift Banks 23
Rural and Cooperative Banks 55

Transnational Banks or Foreign Banks in the Philippines

Global banking dominates the Third World including the Philippines. Transnational banks or
multinational banks operate in our country through their branches, offshore banking units,
representative offices, and/or equity investments in both Philippines financial institutions and non-
financial firms. Transnational banks are international financial institutions which operate in many
countries all over the world. They specialize in international finance, and their clients are primarily
the multinational corporations, government, big companies, and wealthy individuals in the developing
countries.

Transnational banks are owned by the industrialized countries like the United States, Japan,
France, and Great Britain. Such banks have huge resources which are several times bigger than the
international reserves of the central banks of the industrialized countries. Because of their enormous
credit resources, the transnational banks possess the tremendous power in deciding which country can
be bailed out.

As of 1977, almost 70% of the 300 biggest banks in the world were from six rich countries.
The transnational banks of the United States and Japan alone had 42.3% of the total assets of the
whole global banking system. In the Philippines, top Japanese, American, and European banks have
business affiliation in both financial and non-financial commercial institutions.

8
Lizel Morcilla

Review Questions

1. Give your own example of what the financial system can do to help the poor.

Answer: Card Bank is the example of financial system that can do to help poor in terms
of it provides inter-mediation between suppliers and users of credit.it provides loans to
poor families,small procedures.

2. Explain one element of the financial system.

Answer: The one Element of the financial system is Financial Institutions and clients,they
are typically regulated heavily as they provides market stability and consumers protection.
financial services for members for the purpose of this elements ,the term financial institution
includes and financial institution that is principally engaged in banking, financial services,or
other primarily financial activities,excluding insurance companies and real estate investment
trusts,these are private or government organizations whose assets consist primarily of claims
or incomes primarily derived from dealing in and or performing services in connection with
claims.institutions which deal with the creation and issuance of claims against themselves and
use the proceeds to acquire and hold claims against others, are commonly referred to as
financial intermediaries.

3. Explain one function of financial institution.

Answer: The one Function of Financial Institution is the Investigation ad Credit analysis
for an individual who lends his money through a financial institution assured of a minimum
risk.a careful investigation and credit analysis about the application of the borrower is
conducted.this is to ensure that the funds will be used efficiently by the borrower and to
protect the interest of both the lender and the financial institution.

4. State briefly the development of the Philippine financial system.

Answer: The first credit institutions established in the Philippines were the Obras Pias
which literally mean pious works started by father Juan Fernandez de leon in 1754 with the
funds coming from the pious Catholics. Together with those who made their wills before
undertaking dangerous expeditions.these institutions consisted of foundations,lent their
money to traders to finance the galleon trade and their profits are channeled to charitable
works and are under the control of the friars.In 1951 the Banco Espanol-Filipino de Isabella II
was the first Philippines bank established.actually the bank had been granted a charter in 1958
but it started transacting business when several Philippine ports were opened to foreigners and
the bank handled mostly domestic transaction, because foreign trade outside manila was not
very substantial . In 1869 the Philippine trade expanded as the European markets become
accessible to the Philippine producers and this induced the country agricultural
development.with the growth of trade with Europe that attract British capital to the
Philippines, the charted bank of India,Australia and china set up a manila branch in 1873. in
1883 these two banks opened branches in Iloilo to Finance the sugar industry. With the

9
coming of the Japanese Imperial Forces in 1942,the PNB closed doors and was ordered to
reopen for business after few months and was under supervision by the Japanese military
advisers. The Southern Development Bank, a Japanese bank, put up a branch in the country to
perform the role of a central bank.War notes then printed and circulated as money that caused
the worst inflation so far in the country.

5. What is wrong with our financial system?

Answer: In faced a challenging environment with risks shifting from advanced economies
to emerging market economies. Risks Arising from the confluence of external factors such as
diverging monetary policies and slowdown in global growth particularly.banks focused on
expanding its market reach through the establishment of branches and the use of financial
technology to boost deposit taking and lending activities.to manage emerging risks
consequently,banks re balanced their asset portfolio and relied on more lending sustaining a
positive performance.

6. Research from internet the banks the following:

A. the 12 universal private domestic banks
 Rizal Commercial Banking Corporation
 Security Bank Corporation
 Union Bank of the Philippines
 United Coconut Planters Bank
 Al-Amanah Islamic Investment Bank of The Philippines
 Development Bank of the Philippines
 Land Bank of the Philippines
 ANZ Banking Group ltd
 Deutsche Bank AG
 ING Bank NV
 Mizuho Bank ltd- Manila Branch
 Standard Charter Bank

B. the 3 universal government banks

 Al-Amanah Islamic Investment Bank of The Philippines
 Development Bank of the Philippines
 Land Bank of the Philippines

C. the 6 branches of foreign universal banks operating the Philippines

 ANZ Banking Group ltd
 Deutsche Bank AG
 ING Bank NV
 Mizuho Bank ltd- Manila Branch
 Standard Charter Bank
 The Hongkong & Shanghai Banking Corporation

D. the 6 commercial private domestic banks

 Bank of Commerce
 BDO Private Bank,Inc
 Philippines Bank of Communications
 Philippines Veterans Bank

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 Robinsons Bank Corporation
 Maybank Philippines,Inc

E. the 2 subsidiaries of foreign commercial banks in the Philippines

 CTBC Bank(Philippines) Corporation
 Maybank Philippines Inc

F. the 8 foreign commercial banks with branches in the Philippines

 Cathay United Bank Co,LTD Manila Branch
 Shinhan Bank- Manila Branch
 Industrial Bank of Korea Manila Branch
 United Overseas Bank Limited Manila Branch
 Bangkok Bank Public Co. LTD
 Bank of America,N.A
 Bank of China Limited-Manila Branch
 Citibank,N.A

References:

1. Financial Institutions, 3rd Edition, Copyright 1994, Feliciano R. Fajardo;

Manuel M. Manansala, Emilio C. Altarez
2. Central Banking, Revised Edition, Copyright 1994, Feliciano R. Fajardo,;
Manuel M. Manansala
3. Essentials of Investments in the Philippine Capital Market, 2 nd Edition, Copyright
2011, Rhoderick R. Santos, editor
4. Bangko Sentral Ng Pilipinas Updated 2013 Report on Internet – www.bsp.gov.ph
5. The New Central Bank Act (RA 7653) Approved on June 10, 1

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Chapter 2
CENTRAL BANKING:
DEVELOPMENT AND GROWTH

In the beginning, there were no central banks. There was a need for them anyway. Depositing
and lending activities were simple and limited. These were usually done in the temples like those in
Babylon. As years went by, the tools of production were improved and more colonies were discovered.
Consequently, trade and commerce expanded, and so with the banking system. These ushered in the
growth of the economy in Europe.

Evidently, in a growing economy, the supply of money is the most important element. It is the
entire banking system that can create a multiple expansion of money supply through its deposit-
lending operations. Apparently, there is nothing wrong about an oversupply of money in the economy.
But if the rate of increase in money supply – which almost always happens – then price level rises. In
short, there is inflation. This is a situation where there is plenty of money in circulation but only very
few goods are available. When people have more money, they buy more goods and services.
Whenever demand for and supply of goods are not equal, market prices change. Since demand is
greater than supply, then prices go up. Needless to say, such situation is not favorable to the people,
especially to the poor and fixed-income group.

To maintain economic stability, there is therefore a need to regulate properly money supply.
Such big responsibility falls on the government. Thus, central banks emerged not only to maintain
economic stability, but also to help promote economic growth.

Nature of Central Banking

A central bank is not the same as a universal or commercial bank, a thrift bank or a rural bank
or any private financial institutions. The difference lies in terms of objectives. Basically, a central bank
is not a profit maximization organization. It is organized precisely to pursue certain socioeconomic
goals which concern national interests or public welfare, such as price stability, full employment and
economic growth.

Without a coordinator and an impartial regulator, banks alone cannot efficiently conduct their
operations. For example, the economic viability of the smaller banks may not last due to unfair
business practices of the bigger banks. It is also possible that the interest of the depositors may not be
ensured. It can also happen that loan applicants or beneficiaries may be exploited. Obviously, there is a
need for government laws, policies, and regulations to guide the activities of the banking industry
towards the attainment of the goals of the government, like monetary stability and economic growth.
Hence, the need for a central bank to formulate monetary policies, and to regulate and supervise
activities related to money, credit and banking. According to a British economists, Walter Bagebot,
“Money will not manage itself.”

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 Management of the money supply is a vital factor in the whole economy. Money is certainly
needed for investment, such as putting up a factory, a piggery project or a business enterprise. Clearly,
more investments mean more employment, production, and income. And these are good to individuals
as well as to the whole economy. For example, high prices reduce the quantity demanded for goods.
Naturally, this is not good for producers or sellers. Their business goes down. Thus, the objectives of a
central bank to achieve full employment, price stability, and economic growth have not been realized.
Central Bank Defined

Under the Philippine law, a central bank is defined as the central monetary authority which
provides policy direction in the areas of money, credit and banking. It supervises the operations of
banks and exercise regulatory powers over non-bank financial institutions performing quasi-banking
functions.

The banking system constitutes a very large source of capital formation. Banks mobilize the
savings of the people, and lend these to businessmen for investments. More savings and more loans for
productive investments are good to the economy. Thus, a central bank of any country is interested to
promote the expansion of an efficient banking industry in view of its very important role in economic
development. Banks and other financial institutions provide funds for agricultural and industrial
project, and business operations.

On the other hand, unfavorable economic conditions prevailing in the country or inefficient
bank management is likely to cause bank failures. To avoid the closure of banks, the central bank acts
as the lender of last resort. It lends money to distressed banks, including management assistance.
Without such help from the central bank, banks may not be able to pay back their depositors.
Certainly, this destroys the people confidence in the banking system. And this eventually pushes the
whole economy backward.

Origin of Central Bank

Central banks have developed in two ways.

1. Through a slow process of evolution, and
2. Creation by governments

A - Evolution – From a private bank to a central bank

The development of early central banking has been a gradual process. The first central banks
evolved in Europe due to the great need to safeguard the interests of the bankers, and to improve
monetary conditions. Such banks were privately owned and were generally knows as banks of issue or
as national banks. In latter years, they gradually performed the functions of central banking. The state
granted them the sole right of note issue (issuance of money), and the authority to act as agent and
banker of the government. Here are some brief notes on the oldest central banks.

Bank of England. It was organized in 1694 as a joint-stock company. It extended financial

assistance to the distressed government of William III. In return, the government granted the Bank of
England the privilege of note issue. However, other banks were also conferred the same privilege. In

13
later years, the Bank of England enjoyed a partial monopoly of note issue and only its notes were
declared by the government to be legal tender. In addition, its functions gradually expanded as the
banker and agent of the government. Through the years the bank developed into a central bank. It
became a model to other countries. It was only in 1946 that the Bank of England was nationalized by
the British Parliament. Said bank has been considered the oldest real central bank.

The Riksbank of Sweden. It was established in 1656 as a private bank. However, it was
reorganized in 1668 as a State bank. It gradually developed into a central bank using the Bank of
England as a model. During the early years of Riksbank, it enjoyed the sole right of note issue. Such
monopoly of note issue was shared by other banks that were established in later years. It was only in
1830 that Riksbank regained its monopoly power of note issue.

The Bank of France. It was created in 1800 mainly from private capital and the rest from
government funds. The founder of said bank was Napoleon Bonaparte. It was the government’s banker
and it had the sole right of note issue. In later years, its functions expanded and developed into central
banking. The government participated in the operations of the bank through the appointment of the
governor and two sub-governors. In the case of the private stockholders, they were represented by a
board of fifteen (15) regents who were elected by the two hundred biggest stockholders.

Other central banks.

a) The Bank of the Netherlands was founded in 1814 with private capital. However, the
government appointed the president and secretary of the managing board while the
stockholders elected the other members of the managing board and the board of
directors.
b) The Bank of Norway was established in 1817 with private capital. Its further
development was similar with that of Riksbank of Sweden.
Although it was founded with a private capital, its top officials were appointed by the
king, and the others were elected by the members the legislature.
c) In subsequent years, Denmark, Belgium, Spain, Russia, Germany, Austria and Japan
put up their respective central banks

B - Creation of Central Banks

During the first decade of 1900 all of the countries in North America, South America, and
Central America had no central banks. Even countries with ancient civilization like China and India
were still without central banks. In the case of the United States, it has established its central bank only
in 1913 during the time of President Wilson. This was followed by South Africa which created its
South African Reserve Bank in 1921.

In view of the clearly perceived economic benefits of central banking, specifically in the areas
of monetary stability, international trade, and economic development, many of those countries without
central banks have instituted their own central banks during the last fifty years since 1921. Here is a
list of some of the more familiar places with the corresponding dates of the creation of their central
banks:
 Central Bank of China 1928
 National Bank of Iran 1928

14
  Bank of Canada 1935
 Reserve Bank of India 1935
 Bank of Thailand 1942
 State Bank of Pakistan 1948
 Central Bank of the Philippines 1949
 National Bank of Cuba 1950
 Bank of Korea 1950
 Union Bank of Burma 1952
 Bank of Indonesia 1953
 Bank of Israel 1954
 Central Bank of Malaysia 1958

The Central Bank and the Economy

There is no question that a central bank is a very important and powerful institution in any
economy: investment, employment, production, and income. Thus in the presentation and discussion
of central banking, it is only proper and relevant that it should be related to the activities of the
national economy.

Let us first review the definition of economics. It refers to the proper allocations and efficient
use of scares resources to satisfy human wants. It is a common knowledge that resources like wealth
and income are not only scarce in poor countries, but also not properly allocated. This is the basic
socio-economic problem in less developed countries. And in fact, it is the root cause of poverty. The
resources of the world are in the hands of the few. Therefore, most of the people are poor while only
very few are extremely rich.

The central bank of any country has a crucial role to play, especially in a poor country where
resources are not properly distributed and efficiently used. Through its powers and policies, a central
bank can direct flow of money and
credit into the various sectors of the economy, it can also improve the social and economic conditions
of the poor by making credit facilities accessible to them. With liberal bank loans, the poor can put up
their small business or income-producing projects. Since they constitute the foundation of our society
and the economy, the improvement of their standard of living would results to a more stable society
and a balanced economic growth. The principal trust of any economic program should be economic
efficiency with social justice. And the central bank can be a positive contributor if its vast resources
are utilized with competence and social responsibility.

Bangko Sentral Ng Pilipinas

The Bangko Sentral Ng Pilipinas (BSP) is the central monetary authority. It has a policy-
making body which provides direction in the fields of money, credits and banking. This is the
Monetary Board of the Bangko Sentral Ng Pilipinas. Through the various monetary tools of our
Bangko Sentral, such as open market operations, foreign exchange market, fixed income exchange
market and stock market can be stabilized, and that the economic growth can be further advanced.

15
 To achieve its major objectives – maintain price stability and balanced and sustainable
economic growth – the Bangko Sentral supervises the operations of the banking institutions and
regulates the activities of the non-banking financial institutions performing quasi-functions. Such
powers of the Bangko Sentral are important in order to be able to control within desirable limits the
supply of money circulating in the economy. As stated earlier, money can destroy or improve the
economy depending on how it is being used. Thus, the Bangko Sentral is primarily responsible for
proper monetary management in order to ensure better and equitable economic conditions.

Creating a Central Bank for the Philippines

A group of Filipinos led by Miguel Cuaderno, the first governor of the Central Bank, 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 Philippines 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 country’s monetary
system then was administered by the Department of Finance and the National Treasury. The
Philippines was on the exchange standard using the US dollar – which was backed by 100 percent
gold reserve – as 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
February 1948. 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 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 November 29, 1972, Presidential Decree No. 72 adopted the recommendations of
the Joint IMF-CB Banking Survey Commission which made a study of the Philippines banking
system. The Commission proposed a program designed to ensure the system’s 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.

16
 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 law Republic Act No. 7653, the new Central
Bank Act, on June 14, 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
July 3, 1993, the New Central Bank Act took effect.

Responsibility of the Central Bank of the Philippines

As mentioned earlier, the central bank of any country has a very vital role in the national
economy. Our own central bank was established in 1949 in order to make the monetary and banking
systems provide to the rehabilitation and development of our economy.

In 1949, when the Central Bank opened, there were only 11 head offices and 75 branches of
commercial banks in operation. During the 1950s, 7 commercial banks established and 44 branches
was created. At the end of 1959, there were 137 commercial banking offices in operation. The 1960s
have been known as the “decade of banks proliferation.” Additional 24 commercial banks with 483
branches were established.

There was rapid expansion in savings, development, and rural banks as well as in savings and
loan associations. Likewise, banking services increased to meet the special needs of various clients. It
was during the early 1970s that non-bank financial institutions, especially investment houses and
finance companies, cropped up. The full development of the money market took also took place. It
was also during this period that the Euro-currency banking began in the Philippines. The Central Bank
launched a program to bring back foreign currency holdings of residents abroad, and authorized the
creation of special foreign currency deposit (FCDUs) of local commercial banks. Said FCDUs became
the forerunner of offshore banking units (OBUs) which emerged in mid-1977 primarily to service the
increasing need of the country for foreign currencies for economic development. In view of the
changing and increasing conditions in the monetary, credit and banking systems, the Central Bank of
the Philippines has assumed a secondary role as a central monetary authority, aside from its central
banking activities. This was provided in 1973 Constitution but implemented only in 1981 through PD
No. 1801. Under this law, the Central Bank can regulate the activities of non-bank financial
institutions.

17
Objectives of the New Central Bank

The BSP’s primary objectives are to:

a) maintain price stability conducive to a balanced and sustainable economic growth.

b) Promote and preserve monetary stability and the convertibility of the national
currency.

Price stability means monetary stability. If there are wide fluctuations in price levels, there is
no price stability or monetary stability. For instance during inflation, that is when prices are very high,
the value of the peso is very low. Because the same amount of peso can buy lesser number of goods
and services. In other words, the purchasing power of the buyers decreases. Many years back, a peso
could buy 10 bottles of Coke. Today, it cannot even buy 1 bottle. Thus, monetary stability is directly
related to stability of purchasing power. In connection with the balanced and sustainable economic
growth, the BSP can attain this through its lending operations and its powers to control the money
supply. For instance, BSP can encourage productive investments in certain priority areas like farm
production, labor-intensive industries, and other socially-oriented projects. Such encouragement may
be in the form of soft loans and technical assistance. As explained earlier, more investments result to
more employments, productions and incomes.

The international value of the peso is its foreign exchange rate – its equivalent in dollars, yen,
pounds, francs, and other foreign currencies. If our peso can purchase more goods and services abroad,
then its international value is high. Convertibility of national currency which is the peso with other
currencies simply refers to foreign exchange. Could we exchange our money with the other freely
convertible currencies of other countries? If not, it would be a great problem in our trade relations with
other countries. Today, we can easily convert our peso to other foreign currencies; in fact some of our
Asian countries like Thailand accept our peso in buying goods.

Capitalization of the Bangko Sentral ng Pilipinas

The capital of the Bangko Sentral is Fifty billion pesos (P50,000,000,000), fully subscribed by
the Government of the Republic and Ten billion pesos (P10,000,000) fully paid by the Government.

Governors of the Central Bank

Miguel Cuaderno, Sr. Jan. 3, 1949 – Dec. 31, 1960

Andres V. Castillo
Alfonso Calalang
Gregorio S. Licaros
Jaime C. Laya
Jose B. Fernandez, Jr.
Jose L. Cuisia, Jr.
Jan. 6, 1961 – Dec/ 31, 1960
Jan. 1, 1968 – Jan. 9, 1970
Jan. 10, 1970 – Jan. 15, 1981
Jan. 16, 1981 – Jan. 18, 1984
Jan. 19, 1984 – Feb. 19, 1990
Feb. 20, 1990 – July 2, 1993

18
Governors of the Bangko Sentral Ng Pilipinas

Gabriel C. Singson July 6, 1993 – July 5, 1999

Rafael B. Buenaventura July 6, 1999 – July 3, 2005
Amando M. Tetangco, Jr. July 4, 2005 - Present

The BSP Monetary Board - 2015

Governor Amando M. Tetangco, Jr - Chairman

Cesar Purisima Member
Alfredo C. Antonio “
Juan D. de Zuńiga, Jr. “
Valentin A. Araneta “
Felipe M. Medalla “
Armando L. Suratos
“
Banko Sentral Ng Pilipinas, New Central Bank Act or 1993, RA 7653
Report – BSP at 22: Providing stability, sustainability for inclusive growth, supplement at
Philippine Daily Inquirer – July 3, 2015

In pursuit of its mandate, the BSP focuses on its pillar of central banking:
Price stability
A sound and stable banking system, and
A payments and settlement system that is safe, reliable and efficient

How Do BSP fared in these mandate?

Successful Inflation Management

Inflation rate for the month of May 2015 is 1.6% the lowest in 20 years.
In 2014 – inflation average 4.1%, the sixth consecutive year that inflation remained within the
official target range.

Sound, stable and liquid banking system

It has a strong balance sheet and capitalization above national and international requirements.
Loans continue to increase at double-digit levels and are directed mostly to productive sectors and
public confidence in the banking system continues to push deposits to record high levels.

Safe and reliable payments and settlement system

Operates the Philippines’ real-time gross settlement system called PhilPass is a vital part of the
economic and financial infrastructure. Its efficient functioning allows transactions to be completed
safely and on time, and thereby contributes to overall confidence in the financial system.

Improving lives through financial inclusion

Beyond the three pillars of central banking, the BSP is actively working on the development
of an inclusive financial system that will support inclusive growth. The objective of financial inclusion

19
is to provide access to responsive, responsible and fair financial services that will empower Filipinos,
particularly the marginalized sectors, to improve their quality of life.
This month, the BSP received the Global Forum on Remittances and Development (GFRD)
Public Sector Award for 2015 in recognition of its outstanding commitment, innovation and impact in
promoting remittances for social and economic development through its Economic and Financial
Learning Program (BSP- EFLP).

The Philippine regulatory framework for micro-finance has been consistently ranked as one of
the best in the world by the Economist Intelligence Unit (EIU) and ranked the Philippines as the top
country in Asia, and the 3rd in the world, with the most conducive environment for financial inclusion.

20
Lizel Morcilla

Review Questions:
1. Why is money important in the economy?
2.
Answer: Money is an economy is sort like oil engine. It takes it run more smoothly and
efficiently than it would without it.because money is the most viable option for purchasing
goods and services.it is fdic insured and can be used for anything and people don’t tend to go
for bartering anymore.

2. What is wrong if there is too much money in circulation?

Answer: There is wrong for too much money in circulation it’s because of the Inflation
happens,when the supply of money goes up,the value of money goes down and prices go up.
The Inflation is not the same as rising prices Inflation causes rising prices.

3. What is the difference between a central bank and a commercial bank?

Answer: a. Central Bank is not the same as a universal or commercial bank,a thrift bank
or rural bank any private financial institutions. The difference lies in terms of
objectives,basically,a central bank is not a profit maximization organization.it is organized
precisely to pursue certain socioeconomic goals which concern national interest or public
welfare,such as price stability,full employment and economic growth. A. Commercial Bank
is a type of financial institution that provides services such as accepting deposits,making
business loans,and offering basic investment products, it can also refer to a bank or a division
of a large bank,which more specifically deals with deposit and loan services provided to
corporation or large/middle sized business as opposed to individual members of the
public/small business-retail banking or merchant banks.

4. Define central bank. In what way can a central bank help the poor farmers or fishermen?

Answer: Central Bank is not the same as a universal or commercial bank, a thrift bank or
rural bank any private financial institutions.and its is a very important and powerful
institution in any economy. Central Bank can help the poor farmers or fishermen by means
by its refers to the Proper allocations and efficient use of scares resources to satisfy human
wants.It is a common knowledge that can resources like wealth and income are not only
scare in poor.and by the help of credit facilities it can also improve the social and
economic condition of the poor fisherman and with liberal bank loans,the poor can put put
a small business or income producing project.

5. What is inflation? Explain briefly one unfavorable effect of inflation?

Answer: Inflation is a sustained increase in the general price level of goods and services
in an economy over a period of time.When the price level rises, each unit of currency buys
fewer goods and services. Consequently, inflation reflects a reduction in the purchasing
power per unit of money – a loss of real value in the medium of exchange and unit of account
within the economy. A chief measure of price inflation is the inflation rate, the annualized

21
percentage change in a general price index, usually the consumer price index, over time. The
opposite of inflation is deflation.Inflation has affected many economies in various positive
and negative ways. Negative effects of inflation include an increase in theopportunity cost of
holding money, uncertainty over future inflation which may discourage investment and
savings, and if inflation were rapid enough, shortages of goods as consumers
begin hoarding out of concern that prices will increase in the future. Positive effects include
reducing the real burden of public and private debt, keeping nominal interest rates above zero
so that central banks can adjust interest rates to stabilize the economy, and reducing
unemployment due to nominal wage rigidity.Economists generally believe that high rates of
inflation and hyperinflation are caused by an excessive growth of the money supply.However,
money supply growth does not necessarily cause inflation. Some economists maintain that
under the conditions of aliquidity trap, large monetary injections are like "pushing on a
string".Views on which factors determine low to moderate rates of inflation are more varied.
Low or moderate inflation may be attributed to fluctuations in real demand for goods and
services, or changes in available supplies such as during scarcities. However, the consensus
view is that a long sustained period of inflation is caused by money supply growing faster
than the rate of economic growth.

6. State briefly the development of one of the earliest central bank.

Answer:A central bank, reserve bank, or monetary authority is an institution that manages
a state's currency, money supply, and interest rates. Central banks also usually oversee
the commercial banking system of their respective countries. In contrast to a commercial
bank, a central bank possesses a monopoly on increasing the monetary base in the state, and
usually also prints the national currency,which usually serves as the state's legal tender.The
primary function of a central bank is to control the nation's money supply (monetary policy),
through active duties such as managing interest rates, setting the reserve requirement, and
acting as a lender of last resort to the banking sector during times of bank insolvency
or financial crisis. Central banks usually also have supervisory powers, intended to
prevent bank runs and to reduce the risk that commercial banks and other financial institutions
engage in reckless or fraudulent behavior. Central banks in most developed nations are
institutionally designed to be independent from political interference.Still, limited control by
the executive and legislative bodies usually exists.

7. Describe the brief history of the Central Bank of the Philippines

Answer: The Bangko Sentral Ng Pilipinas (BSP) is the central monetary authority. It has a
policy-making body which provides direction in the fields of money, credits and banking.
This is the Monetary Board of the Bangko Sentral Ng Pilipinas. Through the various
monetary tools of our Bangko Sentral, such as open market operations, foreign exchange
market, fixed income exchange market and stock market can be stabilized, and that the
economic growth can be further advanced.To achieve its major objectives – maintain price
stability and balanced and sustainable economic growth – the Bangko Sentral supervises the
operations of the banking institutions and regulates the activities of the non-banking financial

22
institutions performing quasi-functions. Such powers of the Bangko Sentral are important in
order to be able to control within desirable limits the supply of money circulating in the
economy. As stated earlier, money can destroy or improve the economy depending on how it
is being used. Thus, the Bangko Sentral is primarily responsible for proper monetary
management in order to ensure better and equitable economic conditions.

8. What do you mean by central monetary authority?

Answers: In finance and economics, a monetary authority is the entity which controls
the money supply of a given currency, often with the objective of
controlling inflation or interest rates. With its monetary tools, a monetary authority is able to
effectively influence the development of the short-term interest rates for that currency, but can
also influence other parameters which control the cost and availability of money.Generally, a
monetary authority is a central bank with a certain degree of independence from the
government(s) and its political targets and decisions. But depending on the political set-up,
governments can have as much as a de facto control over monetary policy if they are allowed
to influence or control their central bank.Commonly, there is one monetary authority for one
country with its currency. However, there are also other arrangements in place, such as in the
case of the eurozone where the so-called Eurosystem, consisting of the European Central
Bank and the 19 European Union member states that have adopted the euro as their sole
official currency, is the monetary authority covering the eurozone.There are other
arrangements, for example democratic governance of monetary policy, a currency
board which restricts currency issuance to the amount of another currency, and free
banking where a broad range of entities (such as banks) can issue notes or coin.

9. Based on your personal observations, evaluate the performance of our Central Bank.

Answer: In my Personal observation I can evaluate the performance of our central bank it
is one of the Central banking Development to growth to help a growing up the economy to
supply of money is the most important element.and to maintain economic stability,there is
therefore a need to regulate properly money supply,such big responsibility falls on the
government.thus Central Banks emerged not only to maintain economic stability,but also to
help promote economic growth.

10. Enumerate and explain at least three functions of Bangko Sentral ng Pilipinas.

Answers:
 Liquidity Management. The BSP formulates and implements monetary policy aimed
at influencing money supply consistent with its primary objective to maintain price
stability. Its is a legal reserve requirement is imposed on the deposit liabilities of
banks.whenever circumstances warrant,the monetary Board permits the maintenance
of part of the required reserves in the form of assets other than peso deposits with BSP.
 Currency issue. The BSP has the exclusive power to issue the national currency. All
notes and coins issued by the BSP are fully guaranteed by the Government and are
considered legal tender for all private and public debts. To ensure uniformity in

23
 money,To effect government supervision over money supply,to give prestige on the
central banks,and to provide a source of income or reduce printing expenses on the
part of the government.
 Lender of last resort. The BSP extends discounts, loans and advances to banking
institutions for liquidity purposes. This function as a lender of last resort had been
derived from its re discounting function.A reason why central bank is called as the
lender of last resort.A Central Bank lends money to distressed banks on the basis of
their promissory notes.

References:

1. Financial Institutions, 3rd Edition, Copyright 1994, Feliciano R. Fajardo;

Manuel M. Manansala, Emilio C. Altarez

2. Central Banking, Revised Edition, Copyright 1994, Feliciano R. Fajardo,;

Manuel M. Manansala

3. Essentials of Investments in the Philippine Capital Market, 2 nd Edition, Copyright

2011, Rhoderick R. Santos, editor

4. Bangko Sentral Ng Pilipinas Updated 2013 Report on Internet – www.bsp.gov.ph

5. The New Central Bank Act (RA 7653) Approved on June 10, 1993

Chapter 3
Central Monetary Authority

24
 The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines.
It was established on July 3, 1993 pursuant to the provisions of the 1987 Philippine Constitution and
the New Central Bank of 1993. The BSP took over from the Central Bank of the Philippines, which
was established on January 3, 1949, as the country’s central monetary authority. The BSP enjoys fiscal
and administrative autonomy from the National Government in the pursuit of its mandated
responsibilities.

The New Central Bank Act declares as a policy that the State shall maintain a central
monetary authority that shall function and operate as an independent and accountable body corporate
in the discharge of its mandated responsibilities concerning money, banking and credit. Such central
monetary authority shall enjoy fiscal and administrative independence. The name of the
aforementioned central monetary authority is Bangko Sentral ng Pilipinas.(BSP)

With a huge capital based of Php 50 billion, the BSP is expected to perform efficiently its
responsibility and attain its primary objective.

Comparison of the 1948, 1972 and 1993 objectives:

Central Bank Act of 1948
1. Maintenance of monetary
stability in the Philippines;
2. Preservation of the
international value of the peso
and its convertibility into other
freely convertible currencies;
and
3. Promotion of a raising level
of production, employment,
and real income in the
Philippines.
Amended by PD 72
1. Maintenance of internal and
external monetary stability in
the Philippines, and to preserve
the international value of the
peso and the convertibility of
the peso into other freely
convertible currencies; and
2. Foster monetary, credit, and
exchange conditions conducive
to a balanced and sustainable
growth of the economy.
New Central Bank Act of 1993
1. Maintain price stability
conducive to a balanced and
sustainable growth of the
economy;
2. Promote and maintain
monetary stability and the
convertibility of the peso.

Compared with the objectives of the Central Bank of the Philippines in 1948 and 1972, there is no
fundamental difference. Except in the present objectives, the focus is on price stability.

In a farewell speech, Central Bank Governor Jose Cuisia, Jr. said:

The new CMA promises to be an organization that is more effective in its primary role of
curbing inflation by virtue of its strengthened financial position and capital base and the
institutionalization of its policy of independence. It will also be equipped with new legal tools to
enable it to act expeditiously and thus more effectively discharge its bank supervisory role.

25
The fuel of economic growth

The emphasis of the government is the major role of the private sector as the engine of
economic growth and that is people empowerment. Evidently, money becomes the fuel of economic
growth. The government has numerous good economic and social projects. However, lack of funds has
prevented their implementation. Most people, particularly the poor, have been dreaming of good micro
business projects as sources of incomes. Likewise, lack of funds has frustrated their dreams. Such
unfortunate situation hampered the growth of our economy and the economic emancipation of the
poor.

With the proper sourcing and wise management of funds, the BSP can transform a stagnant
economy into a dynamic and progressive one. Thus poverty is eradicated. In 1960, Japan had a per
capital income of $300. Ours was close to it, being No. 2 in Asia. For the last 50 years our economy
has remained practically stagnant or just moving in a very slow pace while our neighboring countries
have surpassed our economic growth.

If only the credit facilities of the Bangko Sentral could be made accessible to the poor masses,
life for them would be much better. With seed capital coming from the government, the poor could put
up their micro businesses. Hence, they would become entrepreneurs. They would create jobs, incomes
and goods. Such situation would accelerate economic development. When most of the people have
more incomes, they buy more goods and services. This increases further the production of goods and
services. Again, more jobs and incomes are generated.

If only the BSP could accomplish its primary objective of maintaining price stability
conducive to a balanced and sustainable growth of the economy, it would be already a strong stepping
stone towards higher stages of economic growth. Inflation is a formidable enemy of the low-income
groups. It destroys their weak purchasing power. Their ability to buy even their most basic needs is
greatly reduced. And this creates a chain of social problems which affect the economy.

The Monetary Board

The powers and function of Bangko Sentral are exercised by its Monetary Board. There are
seven (7) members of the Monetary Board who are appointed by the President of The Philippines for a
term of six years. The members are the Governor of the Bangko Sentral who is the Chairman of the
Monetary Board, a member of the Cabinet and five from the private sector. Under the New Central
Bank Act, one of the government sector members of the Monetary Board must also be a member of
the Cabinet designated by the President.

The New Central Bank Act establishes certain qualifications for the members of the Monetary
Board. The members of the Monetary Board must be natural-born citizen; at least 35 years old, except
the Chairman, who should be at least 40 years old; of good moral character; or unquestionable
integrity; of known probity and patriotism; and with recognized competence in social and economic
disciplines. Member of the Monetary Board are disqualified from holding certain positions with other
governmental agencies and private institution such as directors, officers, employees, consultants,
lawyers, agents or stockholders of any bank, quasi-bank or any other institution which is subject to

26
supervision and examination by the Bangko Sentral Ng Philipinas. This is to avoid conflicts of
interest. The members coming from the private sectors shall not hold any other public office or public
employment during their tenure. With the exception of the member of the Cabinet, the Governor and
the other members of the Monetary Board serve terms of six years and may only be removed for
cause.

Comparison of the membership of the Monetary Board

New Central Bank Act-1993 Amended Membership-1972 Old Central Bank 1949
Governor of the BSP, Governor of the BSP Governor of the BSP

Secretary of Finance, NEDA President of the Philippines,

A member of the cabinet Director General, Chairman of Pres. Of Phil. National Bank,
the Board of Investment, and Chairman of DBP
Five from the private sector Budget and Management
Secretary

Two from the private sector Three from private sector

As shown in the table, the membership of the Monetary Board in the New Central Bank is
better than the original and the amended membership because the new membership is free from
political pressures. Clearly, the BSP governor is in a better position to maintain his independence than
a finance secretary who is an extension of the President of the country. Also only two come from the
government while five members come from the private sector. The development trust of the
government is to make the private business as the engine of economic growth. Thus, it is only logical
to give more representations to the private sector in the Monetary Board.

The Monetary Board meets at least once a week. The Board may be called to a meeting by the
Governor of the Bangko Sentral or by two (2) other members of the Board. Usually, the Board meets
every Thursday but on some occasions, it convenes to discuss urgent issues. The major functions of
the Monetary Board include the power to:

1. Issue rules and regulations it considers necessary for the effective discharge of the
responsibilities and exercise of the powers vested in it;
2. Direct the management, operations, and administration of Bangko Sentral, organize its
personnel and issue such rules and regulations as it may deem necessary or desirable for this
purpose;
3. Establish a human resource management system which governs the selection, hiring,
appointment, transfer, promotion, or dismissal of all personnel;

4. Adopt an annual budget for and authorize such expenditures by Bangko Sentral as are in the
interest of the effective administration and operations of Bangko Sentral in accordance with
applicable laws and regulations; and

27
 5. Indemnify its members and other officials of Bangko Sentral, including personnel of the
departments performing supervision and examination functions, against all costs and expenses
reasonably incurred by such persons in connection with any civil or criminal action, suit or
proceeding, to which any of them may be made a party by reason of the performance of his
functions or duties, unless such members or other officials is found to be liable for negligence
or misconduct.

Powers and Duties of the Governor

The Governor shall be the chief executive officer of the Bangko Sentral and supervise the
operations and internal administration of BSP. Specifically, the Governor:

 prepares the agenda for the meetings of the Monetary Board and submits policy
recommendations for consideration of the Board;

 execute and administers policies and measures approved by the Monetary Board;
 appoints and fixes the remunerations and other emoluments of personnel, as well as imposes
disciplinary measures upon personnel of the Bangko Sentral;
 renders opinions, decisions, or rulings, which shall be final and executory until reversed or
modified by the Monetary Board, on matters regarding application or enforcement of laws
pertaining to institutions supervised by the BSP and laws pertaining to quasi-banks, as well as
regulations, policies or instructions issued by the Monetary Board, and the implementation
thereof; and
 exercise such other powers as may be vested in him by the Monetary Board.

The Governor is the principal representative of the Monetary Board and the BSP. As such, the
Governor is empowered to:

 represent the Monetary Board and the BSP in all dealings with other offices, agencies and
instrumentalities of the Government and all other persons or entities, public or private,
whether domestic, foreign or international; and
 signed contracts entered into by the BSP, notes and securities issued by the BSP, all reports,
balance sheets, profits and loss statements, correspondence and other documents of the BSP.

Transparency of the Bangko Sentral

The Monetary Board shall publish and submit the following reports to the President and
Congress:
1. Quarterly reports on the analysis of economic and financial developments, including the
conditions of net international reserves and monetary aggregates;
2. Annual report on the preceding year’s budget and profit and loss statement of the Bangko
Sentral showing in reasonable detail the result of its operations;

3. Semestral report on the review of the state of the financial system;

4. As soon as practicable, a report on the abnormal movements in monetary aggregates and the
general price level, and the remedial measures in response to such abnormal movements; and

28
 5. Annual report on the condition of the Bangko Sentral including a review of the policies and
measures adopted by the Monetary Board during the past year and an analysis of the economic
and financial circumstances which gave rise to said policies and measures.

The annual report includes the following:

 Monthly movements of monetary aggregates and their component
 Monthly movements of purchases and sales of foreign exchange and of the international
 Balance of payments of the Philippines
 Monthly indices of consumer prices and of import and export prices
 Monthly movement of the accounts of the Bangko Sentral and other banks
 Principal data on government receipts and expenditures and on the status of the public debt,
both domestic and foreign
 Texts of the major legal and administrative measures adopted by the government and the
Monetary Board during the year which relate to the operations or functions of the Bangko
Sentral or of the financial system.

Domestic Monetary Stability

Monetary stability simply means price stability. Whenever there is an expansion or contraction
of money supply, there is a fluctuation in the price level. This is not good to the economy. Production,
employment, wage and other economic activity are affected. In our case, expansion of money supply
is the usual problem. When the rate of growth of the money supply is greater than the rate of
production of goods and services, price level increases. This means inflation. For instance, loans and
savings which are used for consumption and not for production have inflationary effects. Another,
printing of money by a central bank creates inflation.

The New Central Bank Act states that whenever abnormal movements in the monetary
aggregates, in credit, or in prices endanger the stability of the Philippine economy or other important
sectors, the Monetary Board shall:

a. Take remedial measures that are appropriate and within the powers granted to the Monetary
Board and Bangko Sentral; and
b. Submit to the President of the Philippine and Congress, and make public, a detailed report
which shall include, as a minimum, a description and analysis of the following:
 causes of the rise or fall of the money aggregates, credit or prices;
 the extent to which the changes have been reflected in changes in the level of
domestic output, employment, wages and economic activity in general, and the nature
and significance of such changes; and
 the measures which the Monetary Board has taken and the other monetary, fiscal or
administrative measures which it recommends to be adopted.

International Monetary Stability

29
 International monetary stability simply means stability of the foreign exchange rates of the
Peso against foreign currencies. For example, the exchange rate of the Peso is P40 against the U.S.
Dollar. Suddenly exchange rate becomes P35 or P45. This shows the exchange rate is not stable. Or
the international value of the Peso is not stable.
Whenever, there is a great demand for dollars or other foreign currencies, and the Bangko
Sentral has no adequate supply of such foreign currencies, then the value of foreign currencies
increases. In short, foreign exchange rates are basically determined by the law of supply and demand.

If a central bank has no sufficient international reserves, it imposes controls on demand, such
as import control, foreign exchange control and other similar measures. This is to prevent the
devaluation of the Peso.

Section 24 of the New Central Bank Act provides that the Bangko Sentral shall exercise its
powers to preserve the international value of the peso and to maintain its convertibility into other
freely convertible currencies primarily for current payments for foreign trade and services. To
maintain international stability and convertibility of the Philippine peso, the Bangko Sentral has to
maintain adequate international reserves to meet any foreseeable net demands on the Bangko Sentral
for foreign currencies.

Composition of the international reserves includes gold and assets in foreign currencies in the
form of:

1. Documents and instruments customarily employed for the international transfer of funds
2. Demand and time deposits in central banks, treasuries and commercial banks abroad
3. Foreign government securities
4. Foreign notes and coins

CB Reorganization

To enhance the efficiency of the new Bangko Sentral, the Central Bank has been restructured.
Redundant positions were abolished. Six operational sectors were merged into three. Several operating
departments were merged. Hierarchical levels of authority across all departments were reduced from
five to three.
In addition, a greater number of the organizational functions have been computerized. In this
connection, computer facilities were upgraded. The restructuring of the Central Bank has greatly
reduced cost of operations. Thus, the Central Bank has gained a net income of P37 billion in the three-
year period 1990-1992, in contrast to only P8 billion in the 1987089 period.

Clearly, many Central Bank personnel were adversely affected by the reorganization of the
Central Bank. As a matter of fact, 1,308 plantilla positions were abolished. However, a Separation
Incentive Plan (SIP) has been implemented for the interest of those who were affected. Not a few
applied for early retirement.
Lizel Morcilla

30
Review Questions

1. What is a central monetary authority? Why is it considered more effective than the previous
central bank?
Answer: In finance and economics a Central Monetary Authority is the entry which
controls the money supply of a given currency.often with the objective of controlling inflation
or interest and its is declares as a policy that the state shall maintain a central monetary
authority that shall function and operate s independent and accountable body corporate in the
discharge of its mandated responsibilities concerning money,banking and credit. .with it is
considered as effective than the previous central bank because of its monetary tools,a
monetary authority is able to effectively influence the development of the short-term interest
rates for the currency,but can also influence other parameters which controls the cost and
availability of money.

2. What are the qualifications of the members of the Monetary Board?

Answer:The members of the Monetary Board must be natural-born citizens of the

Philippines,at least thirty-five (35) years of age,with the exception of the Governor who
should at least be forty (40) years of age,of good moral charter,of unquestionable integrity,of
known probity and patriotism,and with recognized competence in social and economic
disciplines.

3. Who are the members of the Monetary Board? Compare the composition of the Monetary
Board of the Bangko Sentral with those of the previous membership under the Central Bank
Act of 1948 and 1972.

Answer: The members of the Monetary Board there are seven (7) members of the
Monetary Board who are appointed by the President of the Philippines for a term of six
years.The members are the Governors of the Bangko Sentral who is the Chairman of the
Monetary Board,a member of the Cabinet and five from the Private sector.The Comparison
between the composition of monetary board of the Bangko Sentral with the previous
Membership under Central Bank Act 1948-1972 are in the old central bank 1948 compose of
Governor of the BSP,President of the Philippines Pres.of Philippine National Bank and
Chairman of DBP and Three (3) is from the Private Sector while in the Amended
Membership-1972 Compose of Governors of BSP, Secretary of Finance,NEDA,Director
General,Chairman of the Board of investment ,Budget and Management Secretary and the
Two (2) is from the private sector.

4. Explain domestic and international monetary stability. How do you relate such stability to
economic development?

31
 Answer: The Domestic Monetary Stabilization is the Monetary Board shall endeavor to
control any expansion or contraction in monetary aggregates which is prejudicial to the
attainment or maintenance of price stability.For purpose of this article and of this act,the
Monetary Board shall formulate definitions of monetary aggregates, credit and prices and
shall make public such definitions and any changes thereof action when abnormal movements
occur in the monetary aggregates,credit,or price level,whenever abnormal movements in the
monetary aggregates,in credit or in prices endanger the stability of the Philippines economy or
important sectors. While the International Monetary Stabilization is The Bangko Sentral
shall exercise its powers under this Act to preserve the International value of the peso and
maintain its convertibility into other freely convertible currencies primarily for,although not
necessarily limited to,current payments for foreign trade and invisible.International Reserves
in order to maintain the International stability and Convertibility of the Philippine peso,the
Bangko Sentral shall maintain international reserves adequate to meet any foreseeable net
demands on the Bangko Sentral for foreign currencies.For me stability to economic
development in terms of the Domestic and International Monetary Stabilization is the
monetary aggregates,credit or cost of living represent a threat to stability of the Philippine
economy.and to exchange and trade transactions or by sacrifice of the domestic objectives of a
balanced and sustainable growth of the economy,the monetary board shall propose a
appropriate notice to the congress for the additional action as it necessary restore equilibrium
in the international balance for the economic development.

5. What is the composition of the international reserves?

Answer: The Composition of the International Reserves of the Bangko Sentral may
include but shall not be limited to the following Assets: (1) Gold and (2) assets in foreign
currencies in the form of; documents and instruments customarily employed for the
international transfer of funds;demands and time deposits in central banks,treasuries and
commercial banks abroad;foreign government securities;and foreign notes and coins.

References:

1. Financial Institutions, 3rd Edition, Copyright 1994, Feliciano R. Fajardo;

Manuel M. Manansala, Emilio C. Altarez
2. Central Banking, Revised Edition, Copyright 1994, Feliciano R. Fajardo,;
Manuel M. Manansala
3. Essentials of Investments in the Philippine Capital Market, 2 nd Edition, Copyright
2011, Rhoderick R. Santos, editor
4. Bangko Sentral Ng Pilipinas Updated 2013 Report on Internet – www.bsp.gov.ph .
5. The New Central Bank Act (RA 7653) Approved on June 10, 1993

Chapter 4

32
 Functions and Operations
of the Bangko Sentral ng Pilipinas

The Bangko Sentral Ng Pilipinas is not only engaged in central banking operations, but also, it
is a central monetary authority. Its main function is to maintain price stability conducive to a balanced
and sustainable growth of the economy. It has monetary tools to do this job. In the fulfillment of its
duties and responsibilities, the Bangko Sentral is primarily involved in the management of the money
supply. Hence, all financial institutions – whether these are banks or non-banks – that can influence
the volume and flow of money and credit are subject to the supervision and/or regulation of the
Bangko Sentral.

Professor Raymond Kent said: “A central bank is so called because it occupies a central or
pivotal position in the monetary and banking structure of the country in which it operates. It can be
described as an institution charged with the responsibility of managing the volume of money in
circulation to promote the general welfare.” In the Philippines, the operations of the Bangko Sentral
differ from those ordinary banking institutions. The Bangko Sentral does not, for instance accepts
deposits from the public or grant loans directly to individuals. It is designed mainly to serve the
banking institutions and the government. That is why the Bangko Sentral – and any other central bank
– is traditionally called the “banker’s bank.”

Characteristics of Central Banks

A central bank has an extra-ordinary position and role in developing economy. It is not only
concerned with the proper monetary and credit structure, but it has also a more important
responsibility or promoting the common good. In a poor country like ours, common good refers to the
general welfare of the poor masses.

The profit motive is only secondary in the operations of central banks. Although there are
central banks with private stockholders, their personal financial interest cannot go over and above the
national interests or public welfare. Thus, not a few profitable investments have been minimized if
these conflict with the objectives of monetary stability, and if these compete with private business.

The operations of central banks are more extensively controlled by government laws than
other financial institutions. The top officials of central banks are the finance and economic ministers
of their countries. In the case of the Philippines, the Monetary Board of the Bangko Sentral is the
policy-making body. It formulates monetary policies. However, the laws governing the operations of
central banks are made by legislative bodies. Likewise, presidents, prime ministers and other top
government officials participate directly or indirectly in the policy decisions of central bank.

In general, it is undesirable for central banks to deal directly with the public. Hence, in almost
all cases, central; banks do not directly serve the public. If a central bank deals directly with the
public, it competes with commercial banks and other financial institutions. Evidently, this is not a
favorable situation because a central bank is supposed to help financial institutions – and not to
compete with them. A central bank extends financial and technical assistance to banking and non-bank
financial institutions. It acts as lender of last resort. It is the bank of all banks. Obviously, a central

33
bank can only attain its goals of monetary stability and economic growth if there is a strong and stable
financial system. Hence, it is the basic responsibility of any central bank to use its various resources in
promoting a healthy and dynamic financial system.

Functions of the BSP

The BSP provides policy directions in the areas of money, banking and credit. It supervises
operations of banks and exercises regulatory powers over non-bank financial institutions with quasi-
banking functions. Under the New Central Bank, the BSP performs the following functions, all of
which relate to its status as the Republic’s central monetary authority.

 Liquidity Management. The BSP formulates and implements monetary policy aimed at
influencing money supply consistent with its primary objective to maintain price stability.

A legal reserve requirement is imposed on the deposit liabilities of banks. Whenever

circumstances warrant, the monetary Board permits the maintenance of part of the required
reserves in the form of assets other than peso deposits with BSP.

It shall not less than five percent (5%) or more than 25 percent (25%) for time deposit
and savings deposits and shall not be less than 10 percent (10%) or more than fifty percent
(50%) for demand deposits. The reason for such reserve requirements is to control the volume
of money generated by the credit operations of the banking system. During time of inflation,
reserves requirements are raised in order to reduce money supply. The BSP uses its monetary
tools in regulating credit. The reason for controlling credit is to maintain price stability or
monetary stability which is very vital in the growth of the whole economy.

 Currency issue. The BSP has the exclusive power to issue the national currency. All notes and
coins issued by the BSP are fully guaranteed by the Government and are considered legal
tender for all private and public debts. The BSP has a complete monopoly of note issue. The
main reasons for granting the central banks the sole power to issue notes are:

1. to ensure uniformity in money,

2. To effect government supervision over money supply,
3. To give prestige on the central banks, and
To provide a source of income or reduce printing expenses on the part of the
government.
Our own Bangko Sentral prints money for our own use. Thirty five years ago, our notes
were printed in England which when the BSP started operating the Security Plant in 1978 ,
saved the BSP an average of $5 million a year.
 Lender of last resort. The BSP extends discounts, loans and advances to banking institutions
for liquidity purposes. The BSP’s function as a lender of last resort had been derived from its
rediscounting function. Any central bank has the duty to bail out banks in distress. However, it
lends money to such banks only if they have exhausted all available sources and means of
solving their financial problems. Thus, their last resort is to borrow funds from the central

34
 bank. A reason why a central bank is called as the lender of last resort. A central bank lends
money to distressed banks on the basis of their promissory notes. This function is connected
with its rediscounting function. It charges interests on its loans to such banks. This central
bank lending is called rediscounting because the documents of indebtedness of loan applicants
have been discounted twice.

 Financial Supervision. The BSP supervises banks and exercises regulatory powers over non-
bank institutions performing quasi-banking functions.

 Management of foreign currency reserves. The BSP seeks to maintain sufficient

international reserves to meet any foreseeable net demands for foreign currencies in order to
preserve the international stability and convertibility of the Philippine peso.
The international reserves as a support fund for balance of payments difficulties and
for the maintenance of external monetary stability. Needless to say, that a central bank which
can meet its domestic and foreign financial obligations easily generates both local and
international confidence in the financial system of its country.
Foreign currencies that are acceptable as part of the international reserves are: US
dollar, pound sterling, Swiss Franc, French Franc, Deutsche mark, Canadian dollar, Japanese
yen, Italian lira, among others.

 Determination of exchange rate policy. The BSP determines the exchange rate policy of the
Philippines. Currently, the BSP adheres to a market-oriented foreign exchange rate policy such
that the role of Bangko Sentral is principally to ensure orderly conditions in the market.

 Other activities. The BSP functions as the banker, financial advisor and official depository of
the Government, its political subdivision and instrumentalities and government-owned and
controlled corporations.

As a government banker, the BSP conducts the banking accounts of government

agencies and instrumentalities. It provides foreign exchange to the government for
importation/exportation of goods and services, and for payment of foreign debts.

As agent of the government, the BSP performs a variety of financial services for the
former. The BSP lends money to the government, buys and sells securities, administers and
manages national debs, among others.

As an adviser, the BSP informs the top officials like the President and the Finance
Secretary about the monetary and financial conditions of the economy, particularly in the area
of international finance. Governments rely strongly on the advice of their central banks.

Many of the financial contracts between governments are conducted through central
banks.

Monetary Policy

35
 Monetary policy is the monitoring and control of money supply by a central bank, such as the
Federal Reserve Board of the United States of America, and the Bangko Sentral ng Pilipinas in the
Philippines. This is used by the government to be able to control inflation, and stabilize currency.
Monetary Policy is considered to be one of the two ways that government can influence the economy
– the other one being Fiscal Policy (which makes use of government spending and taxes). Monetary
Policy is generally the process by which the central bank, or government controls the supply and
availability of money, the cost of money, and the rate of interest.

Inflation Targeting: The BSP’s Approach to Monetary Policy

The primary objective of the BSP’s monetary policy is “to promote price stability conducive
to a balanced and sustainable growth of the economy” The adoption of inflation targeting framework
of monetary policy in January 2002 at achieving this objective.

Inflation targeting is an approach to monetary policy that involves the use of a publicly
announced inflation target set by the Government, which the BSP commits to achieve over a two-year
horizon. Promoting price stability is the BSP’s main priority, and the target serves as a guide for the
public’s expectation about future inflation, allowing them to plan ahead with greater certainty.

Inflation targeting is focused mainly on achieving a low and stable inflation, supportive of the
economy’s growth objective. This approach entails the announcement of an explicit inflation target
that the BSP promises to achieve over a given time period.

The Inflation Target

The government’s inflation target is defined in terms of the average year-on-year

change in the consumer price index (CPI) over the calendar year. The inflation targets have
been set at 4 ± 1 Percentage Point for 2013 – 2014 and at 3 ± 1 Percentage Point for 2015 –
2016.

Consistent with the inflation targeting framework, the Monetary Board announced in
July 2010 the BSP’s shift to a fixed inflation target for the medium term of 4 ± 1 percent for
2012-2014. The shift to a fixed medium-term inflation target was approved by the
Development Budget Coordination Committee (DBCC) on July 9, 2010 under DBCC
Resolution No. 2010-3.

The BSP has a number of monetary policy instruments at its disposal to promote price
stability. To increase or reduce liquidity in the financial system, the BSP used open market
operations, accepts fixed-term deposits, offers standing facilities and requires banking institutions
to hold reserves on deposits and deposit substitutes.

36
Monetary Instruments

1. Open Market Operations

a. Repurchase and Reverse Repurchase
b. Outright Transactions
c. Foreign Exchange Swaps
2. Acceptance of Fixed-Term Deposits
3. Standing Facilities
4. Reserve Requirements

1. Open-Market Operations. These involve the buy and sale of government securities. The buy and
sale of government securities by the BSP is one of the major monetary instruments in regulating
money supply. For instance, in case of inflation, the BSP sells government securities in order to
remove the excess money supply. Conversely, whenever the national economy requires an
expansion of money supply, the BSP buys its own securities and other government securities.
Such action increases money supply. For example, the BSP purchases public works bonds worth
P500 million. This amount is spent in constructing roads and bridges. Those who supply their
labor and materials receive the aforementioned money. Open-market operations consist of
repurchase and reverse repurchase transactions, outright transactions, and foreign exchange
swaps.

Repurchased and reverse repurchase transactions are carried out through the repurchase (RP)
facility and the reverse repurchase (RRP) facility of the BSP. In a repurchase or repo transaction,
the BSP buys government securities from a bank with a commitment to sell it back at a specified
future date at a predetermined rate. The BSP’s payment to the bank increases the latter’s reserve
balances and has an expansionary effect on liquidity. Conversely, in a reverse repo, the BSP acts
as the seller of government securities and the bank’s payment has a contractionary effect on
liquidity. RP and RRP transactions have maturities ranging from overnight as well as two weeks
to one month. The interest rates for the overnight RRP and RP facilities signal the monetary
policy stance and serve as the BSP’s primary monetary policy instruments.

Outright transactions refer to the direct purchase/sale by the BSP of its holding of government
securities from/to banking institutions. In an outright transaction, the parties do not commit to
reverse the transaction in the future, creating a more permanent effect on money supply. The
transactions are conducted using the BSP’s holdings of government securities. When the BSP
buys securities, it pays for them by directly crediting its counterparty’s Demand Deposit Account
with the BSP. The transaction thus increases the buyer’s holdings of central bank reserves and
expands the money supply. Conversely, when the BSP sells securities, the buyer’s payment (made
by direct debit against his Demand Deposit Account with the BSP) causes the money supply to
contract.

Foreign exchange swaps refer to transactions involving the actual exchange of two currencies
(principal amount only) on a specific date at a rate agreed on the deal rate (the first leg), and a

37
 reverser exchange of the same two currencies at a date further in the future (the second leg) at a
rate (different from the rate applied to the first leg) agreed on deal date.

2. Acceptance of fixed-term deposits

To expand its liquidity management, the BSP introduced this method in 1998. The
Special Deposit Accounts (SDA) facility consists of fixed-term deposits by banks and by trust
entities of banks consists of fixed-term deposits by banks and by trust entities of banks and non-
bank financial institutions with the BSP. It was introduced in November 1998 to enable the BSP
to expand its toolkit in liquidity management. In April 2007, the BSP expanded access to the SDA
facility by allowing trust entities to deposit in the SDA facility in order to better manage liquidity
in the face of strong foreign exchange inflows.

3. Standing Facilities.

To increase the volume of credit in the financial system, the BSP extends discounts,
loans and advances to banking institutions. Rediscounting is a standing credit facility provided
by the BSP to help banks meet temporary liquidity needs by refinancing the loans they extend to
their clients. The rediscounting facility allows a financial institution to borrow money from the
BSP using promissory notes and other loan papers to its borrowers as collateral. There are two
types of rediscounting facilities available to qualified banks: the peso rediscounting facility and
the Exporter’s Dollar and Yen Rediscount Facility (EDYRF) which was introduced in 1995.

4. Reserve Requirements

In banking institutions, there are required amounts that banks cannot lend out to
people. Reserve requirements refer to the percentage of bank deposits and deposit substitute
liabilities that must keep on hand or in deposits with the BSP and therefore might not lend.
Changes in reserve requirements have a significant effect on money supply in the banking
system, making them a powerful means of liquidity management.

Reserve requirements apply to peso demand, savings, time deposit and deposit
substitutes (including long-term non-negotiable tax-exempt certificates of time deposit or
LTNCTDs) of universal banks, (UBs) and commercial banks (KBs) and may kept in the form of
cash in vault, deposits with the BSP and government securities.
Required reserves consist of two forms, regular or statutory reserves; and liquidity
reserves. Deposits maintained by banks with BSP up to 40 percent of the regular reserve
requirement are paid interest at 4 percent per annum, while liquidity reserves are paid the rate on
comparable government securities less half a percentage point. The use of liquidity reserves help
to reduce bank intermediation costs since they are paid market-based interest rates. In March
2006, the Monetary Board began to require banks to keep liquidity reserves in the form of term
deposits in the reserve deposit account (RDA) with the BSP instead of government securities
bought directly from the BSP.

38
Policy Rate Setting of Bangko Sentral Ng Pilipinas

The BSP formally adopted inflation targeting as the framework for monetary policy in January
2002. This policy move is aimed at providing the BSP with a more focused and forward-looking
approach in the pursuit of its primary mandate, which is to ensure price stability. Two intrinsic features
of the approach - transparency and accountability in monetary policy – expected to enhance the
credibility of the BSP in helping create a stable macroeconomic environment in which vital economic
reforms to raise the growth potentials of the economy can continue.

This approach involves the announcement of the explicit inflation target that the BSP promises
to achieve over a given time period. The target inflation rate is set and announced jointly by the BSP
and the government through an inter-agency rests primarily with the BSP, this joint announcement
reflects active government participation in achieving the goal of price stability and government
ownership of the inflation target.

In the Philippines, the interest rates applied on the overnight repurchase agreement/reverse
repurchase (RP/RRP) signals the stance of BSP’s monetary policy. The BSP created an Advisory
Committee which deliberates, discusses and recommends to the Monetary Board the appropriate
monetary policy stance that will enable the BSP to achieve the desired inflation target. The Advisory
Committee meets every six weeks and in between regular meetings, whenever it is deemed necessary.

Policy Instruments – Monetary Tools

The BSP implements monetary policy using various instruments to influence the level of liquidity in
the market and thereby steer inflation towards the target level. These instruments can be classified into
two types:

1. Direct instruments enable the BSP to control directly certain items in bank’s balance sheets
which may be in the form of financial prices of quantities. Direct instruments have a strong
coercive element as in the case of reserve requirements and direct lending requirements.
2. Indirect instruments work through the market to influence the behavior of financial
institutions, usually through the pricing of central bank facilities. Indirect instruments include
adjustments in short-term policy interest rates and the conduct of open market operations.
(OMO)

BSP Financial Markets

a. Open Market Operations

b. Foreign Exchange Market
c. Fixed Income Exchange Market
d. Stock Market

39
Mechanics of Open Market Operations (OMO)

OMO is a monetary tool which involves the BSP publicly buying or selling government
securities from banks and financial institutions in order to expand or contract the supply of money. By
controlling the money supply, the BSP is able to exert some influence on the prices of goods and
services and achieve its inflation objectives.

When the BSP buys securities, it pays for them by directly crediting its counterparty’s
Demand Deposit Account that is being maintained with the BSP. Effectively, the transaction increases
the buyer’s level of reserves and on an aggregate level, expands the system’s money supply.
Conversely, when the BSP sells the securities, the buyer’s payment (via direct debit against the buyer’s
Demand Deposit Account with the BSP) reduces his reserve account causing money supply to
contract.

In conducting OMO, the BSP uses two instruments:

1. Repurchase (repo)/reserve purchase (reverse repo) agreements and
2. Outright purchases and sales of securities

 Repurchase (repo) / reverse repurchase (reverse repo) agreements. The BSP purchases
government securities from a bank with a commitment to sell it back at a specified future date
at a predetermined rate. In effect, a repo transaction expands the level of money supply as it
increases the bank’s level of reserves. Under a reverse repo, the BSP acts as the seller of
government securities, thus, the bank’s payment reduces its reserve account resulting in a
contraction in the system’s money supply. For both repos, the BSP can only affect the level of
money supply temporarily, given that the parties involved commit to reverse the transaction at
an agreed future date. At present, the BSP enters into repo agreements for a minimum of one
(1) day (overnight) for both repos and a maximum of 91 days and 364 days for repo and
reverse repo agreements, respectively.

 Outright purchase and sales of securities. An outright contract involves direct purchase/sale
of government security by the BSP from/to the market for the purpose of
increasing/decreasing money supply on a more permanent basis. In such a transaction, the
parties do not commit to reverse the transaction in the future, creating a more permanent effect
on the banking system’s level of money supply.

The BSP may also use other monetary policy tools such as reserve requirements and
rediscounting to expand or contract money supply. The BSP may also grant loans and advances to
banking institutions to influence the volume of credit consistent with the objective of price stability.
In addition, the BSP can employ moral suasion as a last resort when existing market mechanisms
cannot adequately and promptly ensure the attainment of specific monetary objectives.

Advantages of Open Market Operations

However, among the tools available to the BSP, OMO offers advantages and continues to be the most
practical tool for the following reasons:

40
  First, it works within BSP’s initiative and control. Having the authority to steer market interest
rates, the BSP can influence money supply by changing the monetary policy rates.
Consequently, OMO gives the BSP greater flexibility in terms of the amount and timing of
intervention.

 Secondly, it is fast to implement and gives back results. Any change in the policy rates is
readily implemented, i.e. on the same day that the Monetary Board makes the resolution.
Thus, any effect on the market is evident right after the overnight trading for the day.

Call Loans and the Interbank Call Loan Market

Call money are amounts traded in the interbank call loan market that correspond to the excess
or deficiency of each bank in terms of reserves. These can be overnight placements.

Interbank Call Loan Market (IBCL) transactions among banks are done primarily to correct
reserve requirements. The reserve position of each bank or quasi-bank is calculated daily on the basis
of the amount of the institution’s reserves at the close of business for the day and the amount of its
liability accounts against which reserves are required to be maintained. The reserve positions of banks
are normally known after the check clearing results are known only by late afternoon, interbank call
loans are currently done from 4:45 PM to 5:30 PM.

The interbank market can either be securitized (collateralized) or unsecured (clean)

lendings/borrowings, as well as repurchase agreements. Repurchase Agreements (RPs) are generally
short-term sale of government securities with an agreement to repurchase on the agreed maturity date.
Repurchase agreements are extensively used as a means of short-term financing by government
securities dealers and by banks. Banks establish credit lines with its counterparties for these
transactions.

Managing Risk in OMO transactions

A valuation scheme for securities used in repos is adopted by the BSP to help manage the
credit risk inherent in OMO transactions. Eligible securities are valued based on their current market
yields as well as the applicable cut based on remaining life of securities involved.

To avoid exposing the BSP to undue risks arising from purchases of securities, Section 91,
Article V of RA 7653 (The New Central Bank Act) sets the type of securities that can be bought or
sold by the BSP for its own domestic portfolio, as follows:

 Evidences of indebtedness issued directly by the Government of the Philippines or by

its political subdivisions; and
 Evidences of indebtedness issued by government instrumentalities and fully
guaranteed by the Government.

41
 Section 92 of the same article also provides the BSP with effective instruments for OMO, that
is, it may, subjected to such rules and regulations as the Monetary Board may prescribe and in
accordance with the principles stated in Section 90, issue, place, buy and sell freely negotiable
evidences of indebtedness of the BSP, provided that such issuance shall be made only in cases of
extraordinary movement in price levels. Said evidences of indebtedness may be issued directly against
the international reserves of the BSP or against securities, which it has acquired under the provisions
of Section 91 or may be issued without relation to specific types of assets of the BSP.

Foreign Exchange Market

The BSP maintains a floating exchange rate system. Exchange rates are determined on the
basis of supply and demand in the foreign exchange market. The role of the BSP in the foreign
exchange market is principally to ensure orderly conditions in the market. The market-determination
of the exchange rate is consistent with the Government’s commitment to market-oriented reforms and
outward-looking strategies of achieving competitiveness through price stability and efficiency.

In the Philippines, peso-dollar trading among Bankers Association of the Philippines (BAP)
member-banks and between these banks and the BSP are done through the Philippine Dealing System
(PDS). Most of the BAP-member banks which participate in the peso-dollar trading use an electronic
platform called the Philippine Dealing and Exchange Corp. (PDEx). The BAP appointed PDEx as the
official service provider for the USD/PHP spot trading (which involve the purchase or sale of the US
dollar for immediate delivery, i.e. within one day for US dollars), and Reuters, as the exclusive
distributor of all PDEx data. Trading through the PDEx allows nearly instantaneous transmission of
price information and trade confirmations. 1 Meanwhile, banks which do not subscribe to PDEx can
continue to deal peso-dollar spot transactions via their Reuters Dealing screens.

Commercial banks in the Philippines are allowed to engage in spot, outright forward, and
swap transactions in Philippine pesos/US dollar and other third currency transactions. 2 Interbank
trading is conducted among member-banks of the BAP, and between these banks and the BSP,
Member-banks of the PDS can also deal through brokers. At present, there are two foreign exchange
brokers in the Philippines, Tulett Prebon (Philippines), Inc. and ICAP Philippines, Inc. For third
currency trading, most commercial banks use the Reuters Dealing and the Bloomberg Financial
Services.

The US dollar and Philippine peso legs of the PDS transactions are settled in a Payment-versus-
Payment (PvP) electronic system for the local interbank spot and forward foreign exchange market. 3
The PvP links two real-time gross settlements systems – the BSP’s Philippine Payments and
Settlement System (PhilPaSS) for the peso transactions and the Philippine Domestic Dollar Transfer
System (PDDTS) for dollar transactions-with the Philippine Depository and Trust Corporation
(PDTC) as designated clearing entity for peso-dollar transactions of commercial banks under the BAP.

The PDDTS is a local clearing and electronic communications system operated by the BAP, the
Philippine Clearing House Corporation (PCHC), Philippine Securities and Settlements Corp. (PSSC)
and Citibank, Manila. The PDDTS provides the banking industry with a facility to move US dollar
funds from one Philippine bank to another on the same day without having to go through

42
correspondent banks in the US. The system allows online, real-time gross settlement of domestic
interbank US dollar transfer and third party account-to-account US dollars transfers. In addition, it
provides a facility for online inquiry and settlement of foreign exchange transactions, where the
PDDTS participants enter interbank US dollar and Philippine peso transfer instruction in a single
screen.

The PDS has both-on-line, real time and end-of-day batch netting transfer capabilities with
final settlement on the same day. This compares favorably with the most sophisticated domestic funds
transfer systems around the world in terms of speed/flexibility of delivery and settlement finality.

Trading at the PDS starts at 9:00 AM and ends at 4:00 PM. A lunch break from 12:00 noon up
to 2:00 PM is observed. The BSP reference dollar exchange rate (included in the foreign exchange rate
bulletin) for the day represents the weighted average of all done deals at the PDS during the preceding
day.

Currently a summary of the results of the daily transactions done at the PD is available at the
FX summary page of the website at PDEx (www.PDEx.com.ph), Reuters page PHPESO1 and
Bloomberg BASPH1. These pages contain the following information: open, high, low, close, weighted
average rates and volume.

________________________________________________________________
1
The idea behind the PDS is the development of a market-determined exchange rate. Banks are
encouraged to always give two-way quotes with the normal interbank bid-offer spread at 0.005 peso.
Identities of quoting banks remain anonymous, except the transacting banks.

2
Banks trade for their clients, as well as for commercial requirements and their own account. When
they trade for their own accounts, banks are guided by the allowable overbought and oversold foreign
exchange positions set by the BSP. Per Circular No. 561 issued on March 8, 2007, Bank’s long
(overbought) and short (oversold) foreign exchange position should not exceed 20 percent of their
unimpaired capital or US 50 million, whichever is lower
3
Under the Payment-versus-Payment (PvP), final transfer in one currency takes place only if a final
transfer in the other currency occurs.

Convertible Currencies

The Bangko Sentral has 19 currencies directly convertible with the Philippine Peso, which
serves as a benchmark for all Philippine banks:
 Australian dollaR (AUD) Korean won (KRW)
 Bahraini dinar (BHD) Kuwaiti dinar (KWD)
 British pound (GBP) Saudi riyal (SAR)
 Brunei dollar (BND) Swiss franc (CHF)
 Canadian dollar (CAD) Singapore dollar (SGD)
 Chinese yuan (CNY) Thai baht (THB)
 Euro (EUR) New Taiwan dollar (TWD)
 Hong Kong dollar (HKD) - United Arab Emirates dirham (AIED)
 Indonesian rupiah (IDR) United States dollar (USD)

43
  Japanese yen (JPY)

Fixed Income Exchange Market

The Fixed Income Exchange (FIE), the country’s first centralized electronic infrastructure for
trading of fixed-income securities, was launched in March 2005. The FIE is a comprehensive financial
market infrastructure that aims to provide an electronic platform for trading, clearing and settlement,
and depository and custodianship fixed-income securities and its derivatives. The creation of the
exchange was spearheaded by the Bankers’ Association of the Philippines (BAP) and is owned and
managed by the Philippine Dealing System Holdings Corporation (PDS Holdings) and its three
subsidiaries namely, PDEx, Philippine Securities Settlement Corp. (PSSC) and Philippine Depository
and Trust Corp. (PDTC).
The establishment of the FIE plays a key role in the development of the local capital market
by providing an online inter-dealer trading platform for the secondary trading of government
securities. The exchange is also expected to improve the price discovery process by providing dealers-
bankers the instantaneous ability to scan for the best prices in the market to better manage positions,
risks and yields.

The virtual platform is supported by the “X-Stream” system, an electronic computer system
designed and developed by Australian firm Computershare Technology Services Pty, Ltd., and
Computershare Technology Services, Philippines, Inc., who are responsible for the system running the
Shanghai Stock Exchange and Swiss Stock Exchange. The X-Stream is housed in the PDEx office in
the Makati Central business district.

Trading at the FIE, which starts at 9:00 a.m. and ends at 4 p.m. (with a lunch break at 12:00
noon to 2:00 pm), is similar to the operations of the PSE except that the trading floor is not physical
but virtual. Traders can communicate, negotiate and deal transactions from their respective offices via
Application Protocol Interface (API) or through screen terminals of the fixed workstations (FITW) of
FDEx, thereby eliminating errors in verbal or telephone confirmations of transactions between and
among traders. After completion of the transaction and the appropriates clearing/settlement procedures
have been made, the sold securities are then either delivered physically to the purchaser, or to the
designated custodian duly accredited by the BSP, or by means of book-entry transfer to the appropriate
securities account of the purchaser or his assigned BSP-accredited custodian in a registry for said
securities.

To maintain confidentially of transaction, the system ensures that all information sent to each
transacting party are kept confidential and cannot be viewed by the public. In addition, the system is
equipped with a safety feature that prevents double/multiple selling of the same bonds. Fixing rates for
benchmarks and statistics on done traders are subsequently posted as www.pdex.com.

In February 2008, the PDEx launched its Public Market Trading platform were brokering
participants of PDEx may now post the orders they receive from retain investors through this new
platform. Retail investors may now have equal access to the price for each of the various fixed-income
securities listed on the trading board given that trade transactions are captured automatically and
broadcasted on real-time basis on the platform. Such platform is capable of functioning both for the
quote-driven market providing instantaneous price discovery mechanism. In an order-driven market,

44
prices are determined by the publication of orders to buy or sell shares while in a quote-driven market,
prices are determined from quotations made by market makers or dealers.

The launching of the platform for retail market was in conjunction with the opening of the
Inter-Professional market in November 2007, which aims to expand the specialized inter-dealer market
to include other participants such as insurance companies and contractual savings institutions. The
expanded roster is critical in attaining a centralized trading market since these institutions are expected
to be active providers of market liquidity. In terms of listing, debt securities issued by corporations
and financial institutions may now be listed in the PDEx. The enrollment of Ayala Bond due in 2012
marked the maiden enrollment of a corporate issue in PDEx.

Going beyond the spot market, the PDEx also provided electronic platforms for Securities
Lending/Borrowing Transactions (SLT) and Repurchase Agreements (Repo). The SLT program aims
to give dealers and market makers a chance to borrow securities, and thereby support their ability to
quote firm offer prices to all other market participants. This program shall also help PDEx trading
participants to avoid settlement failures because participants that do not enough securities to fulfill a
sale can n borrow the securities through the program. The BSP issued a no-objection letter allowing its
regulated entities to participate in the SLT program in July 2007.

Meanwhile, the Inter-Professional Repurchase Agreement (Repo) Market program shall allow
dealers and market makers to borrow cash using their securities holdings as collateral. Aside from
providing cash liquidity to the spot market, this program is envisioned to improve the ability of trading
participants to quote firm bid prices for securities. The SEC approved the rules governing the PDEx
Repo Market Program in September 2007, while the BSP expressed officially that it poses no
objection to the participation of its regulated entities in the program in January 2008.

Stock Market

The PSE is a private organization created to provide and maintain a fair, efficient, transparent
and orderly market for the purchase and sale of stocks and other securities. It was formed out of the
merger of the country’s two former stock exchanges, the Manila Stock Exchange, created on August 8,
1927, and the Makati Stock Exchange, created on May 27, 1963. The two bourses were considered as
separate entities for nearly 30 years, despite basically trading the same listed issues, until they merged
into the present-day PSE on December 23, 1992 to achieve uniform pricing of stocks and eliminate
sarbitrage transactions.

Initially established as a non-stock, member-governed organization, the PSE has since then
reorganized and transformed into a shareholder-based, revenue-generating corporation following the
enactment of the Securities Regulation Code of 2000. Along with this rebirth came the separation of
the Exchange’s ownership and trading rights, which opened the doors for the entry of new market
participants. On December 15, 2003, PSE shares were listed by way of introduction.

Since its unification up until July 2010, the PSE maintained two trading floors: one at the PSE
Centre in Pasig City and another at the PSE Plaza in Makati City. These two trading floors were linked
electronically to enable brokers and traders to execute orders and clear transactions within the day, and

45
maintain a “one-price, one market” Exchange. In July 2010, however, the PSE relocated its offices
from Ortigas Cnter in Pasig to Tower One in Makati. The move, which unifies the PSE physically,
aims to increase the efficiency of the Exchange’s operations and reduce its operational costs.

The unified office is intended as a first step before the PSE moves to a permanent headquarters
at the Bonifacio Global City in Taguig by 2014.The PSE also switched to the New Trading System
(NTS) in July, finally replacing the Marktrade system that dates back to the unification of the trading
operations of the Manila and Makati stock exchanges 15 years ago. Under the NTS, the PSE will be
able to offer new products like derivatives and commodity trading.

Presently, the PSE is the country’s only stock exchange with 250 listed firms and 132 active
trading participants. Companies are listed at the PSE on the First Board, the Second Board of the
Small and Medium Enterprises Board. Listed issues are then classified into one of six sectors:
Financials, Holding Firms, Industrial, Mining and Oil, Property, and the Services Sector. The main
barometer of stock price movements is measured by the PSE Index (PSEI).

General Types of Monetary Policy –

1. Inflation Targeting
2. Price Level Targeting
3. Monetary Aggregates
4. Fixed Exchange Rate
5. Gold Standard

Inflation Targeting – Revolves around meeting publicly announced, preset rates of inflation. The
standard used is typically a price index of a basket of consumer goods, such as the Consumer Price
Index. It intends to bring actual inflation to their desired numbers by bringing about changes in interest
rates, open market operations and other monetary tools.

Price Level Targeting - It involves keeping overall levels stable, or meeting a predetermined price
level. Similar to inflation targeting, the central bank alters interest rates to be able to keep the index
level constant throughout the years. Flourishing and advanced economics opt not to use this method as
it is generally perceived to be risky and uncertain.

Monetary Aggregates – This approach focuses on controlling monetary quantities. Once monetary
aggregates grow too rapidly, central banks might be triggered to increase interest rates, because of the
fear of inflation.

Fixed Exchange Rate – It is also called “Pegged Exchange Rate”, The currency’s value is pegged to
the value of a single currency, or to a basket of other currencies or measure of value, such as gold. The
focus of this monetary system is to maintain a nation’s currency within a narrow band.

Gold Standard – The government allows its currency to be converted into fixed amounts of gold, and
vice versa. This may be regarded as a special kind of Fixed Rate Exchange policy, or of Price Level
Targeting. This monetary policy is considered flawed because of the need for large gold reserves of

46
countries to keep up with the demand and supply for money. It is no longer used in any country,
thought it was widely used in the mid-18th century through 1917.

Activities of the Central Bank

In the performance of its functions, the BSP undertakes various activities to ensure the steady
growth of the financial system, keep the external debt at a manageable level, and maintain a stable
foreign exchange position. These activities include:

Bank Supervision/Pawnshop Regulation

In addition to monetary management, the BSP has played an essential role in the development
of the banking system. It actively uses its supervisory and regulatory powers over the financial
institutions to guide the direction and pace of the growth of the financial system. Bank supervision
does not only include the issuance of appropriate rules and regulations but also the overseeing of the
banking system to ascertain that regulations are complied with; examining banking institutions to
determine whether they are conducting their business on a sound financial basis; and inquiring into the
solvency and liquidity of banks. Likewise, the BSP is charged with the supervision and periodic
examination of pawnshops. This is to ensure that the credit operations of pawnshop through the
lending of funds to the public are consistent with the BSP’s credit policies, and at the same time
safeguard the interest of the public, in the same fashion that the interest of depositors in banks is
safeguard.

External Debt Regulation

The foreign debts of the country is strictly monitored by the BSP to ensure that payments of
the principal and interest do not exceed the statutory service ratio of 20% of gross foreign exchange
receipts of the preceding year, and that foreign obligations are promptly paid. As a general rule foreign
borrowings are approved by the BSP only if they conform to a set of priorities, which favor preferred
areas of activities, such as loans with repayment schedules, and loans with liberal financing terms. The
BSP establishes yearly ceilings on the amount of foreign borrowing approvals to ensure that the
international debt is maintained at manageable levels.

Money Market Involvement

In coordination with the Securities and Exchange Commission, money market reforms were
initiated by the old Central Bank in 1981. Under this reform program, the commercial paper market in
the country has been limited to prime paper and to the issues of prime companies. To protect further
investor, corporate entities which intend to borrow from the money market are generally required to
observe 3:1 debt-to-equity ratio and to secure credit line information bureau has been created through
the support of the BSP to provide vital information on the activities and track record of borrowers.

Foreign exchange regulations

47
 In accordance with the policies of the Monetary Board, the Bangko Sentral administers the
foreign exchange regulations. These are designed mainly to achieve the objectives of the BSP of
maintaining external stability and ensuring that foreign exchange resources are available at all time for
the foreign exchange requirements of the country. The BSP carries out the administrative function
with the assistance of specially authorized commercial banks which may issue export permits and
retain all foreign exchange accruing from limitations for socio-economic reasons, a generally
unrestricted import policy exists. Capital transfers abroad by residents and capital transactions
between residents and non-residents are subject to approval by the BSP. At present, the exchange rate
policy is a floating rate system. This means the exchange rate of the peso is determined by the supply
of and demand for foreign currencies, like the U.S. dollar.

Export related measures

The BSP extends financial assistance to exporters through its rediscount window in support of
the export promotion program of the government. Rediscount policies have been modified to favor
non-traditional exports, although the extension of credit to traditional products like sugar and coconut
has remained very substantial. The development of manufactured export products is designed to
reduce the vulnerability of the country’s exports to price and demand fluctuations in the international
markets.

Workers’ remittances

In coordination with the Secretary of Department of Labor and Employment, the BSP has
taken up steps to improve the earnings of Filipino overseas workers. The remittance of salaries of said
workers to the country has been streamlined. Off-shore banking units, many of which have links with
Middle East banks, local universal banks with branches abroad and other remittances company are
permitted to act as conduits in the remittance process. The BSP has also put up a rediscount window
for manpower exporting firms and for loans extended to overseas contract workers.

Commodity classification

In coordination with other government agencies, the BSP periodically reviews and revises the
Philippine Standard Commodity Classification Manual which serves as the standard reference in
classifying commodities affected under all modes of exchange. This scheme of classification of
commodities is basically patterned after the Standard International Trade Classification of the United
Nations and synchromesh with the Brussels Trade Nomenclature of the Customs Cooperation Council.

48
Philippine Monetary Policy Framework I – 1980s to early 1990s

In the past, the BSP followed the monetary aggregate targeting approach to monetary policy.
This approach is based on the assumption that there is a stable and predictable relationship between
money, output and inflation.

In particular, all money aggregates, with the exception of reserve money, are incorporated with
output and interest rate. This means that there is a long-run relationship between money on one hand
and output and interest rate on the other so that even if there are shocks in the economy, the variables
will return to their trend of equilibrium levels.

This means that changes in money supply (on the assumption that velocity is stable over time)
are directly related to price changes or to inflation. Thus, it is assumed that the BSP is able to
determine the level of money supply that is needed given the desired level of inflation that is
consistent with the economy’s growth objective. In effect, under the monetary targeting framework,
the BSP controls inflation indirectly by targeting money supply.

Philippine Monetary Policy Framework II: June 1995 to Present

The BSP employs a modified framework beginning the second semester of 1995 in attempt to
enhance the effectiveness of the monetary policy by complementing monetary aggregate targeting with
some form of inflation targeting placing greater emphasis on price stability.

Certain key modifications include

 Allows base money levels to go beyond target as long as the inflation rates are met.

 An excess of one or more percentage points of inflation over the program induces mopping
up operations by the BSP to bring down base money to the previous month level.

Under monetary aggregate targeting framework, the BSP fixes money growth so as to
minimize expected inflation. On the other hand, under the new framework, BSP sets monetary policy
so that price level is not just zero in expectation but is also zero regardless of latter shocks. Moreover,
the framework was changed because BSP wanted to address the fact that aggregate targeting did not
account for the long-run effects of monetary policy on the economy.

With this approach, the BSP can exceed the monetary targets as long as the actual rate is kept
within program levels and policymakers monitor a larger set of economic variables in making
decisions regarding the appropriate stance of monetary policy.

Current Approach: Inflation Targeting

As mentioned earlier, Inflation Targeting requires a public announcement of an inflation rate

that a country will target for the coming years, or in a given period of time. It focuses on maintaining a

49
low level of inflation, that which is considered to be optimal, or at least would allow the country to
have ample economic growth. Its main desire is to achieve price stability as the ultimate end goal of
the monetary policy. The Philippines formally adopted Inflation Targeting as the framework of
Monetary Policy in January 2002.

The Philippines’ inflation target is measured through the Consumer Price Index (CPI). For
2009, inflation target has been set to be 3.5 percent, having a 1% tolerance level, and 4.5 percent for
2010, also having 1% tolerance. Also, the Monetary Board of the Philippines announced a target of
around 4±1 percent from 2012 to 2014.

Monetary Policy Issues

Exchange Rate

Exchange rates play a significant role in monetary transmission mechanism and at the same
time, it can have a large impact on inflation rates. Although the BSP has adopted the inflation targeting
approach, it may be tempted to inexplicitly target exchange rate to achieve its low inflation target. The
issue here is the extent of the exchange rate pass through or ERPT to domestic prices since higher
ERPT would require the BSP to shift its attention to exchange rate movement to stabilize prices.

Roles of Monetary Aggregates

Since the shift to inflation targeting, BSP has abandoned monetary aggregates because its
information content has apparently declined in the recent years. Moreover, it is also assumed that a
shift of approach was necessary because money aggregates are normally not good indicators of future
economic policy requirements due to unreliability of measurement.

Measurement of Inflation and Liquidity Trap

Since inflation targeting lead to lower and stable inflation rates more improvement should then
be given to the measurement of the consumer price index since few percentage points have greater
repercussions when ratio are low. Errors in CPI measurement could lead to ineffective and unsuitable
monetary response by the BSP which definitely result to detrimental effects to the economy.

Another issue arising from monetary policies is the liquidity trap. This happens when inflation
rate declines too much lending to a threat of deflation. Liquidity trap is defined as a situation in which
there are zero nominal interest rates, persistent deflation and deflation expectations. In the event this
occurs, bonds and money earn the same real rate of return thus making people indifferent to holding
bonds or excess money.

Budget Deficit and External Debts

Given high budget deficits, the government is concerned about two closely related issues: it
does not want to pay very high interest on its borrowings and it does not want to crowd out the market.
Ideally, the government could raise tax revenues to avoid borrowing huge some from the market.
However, the government opted to borrow from the international capital market and though rates are

50
low, these have shorter maturity and country’s outstanding external debt has continued to move toward
a less ideal position.

Fiscal Dominance

According to the fiscal theory of the price level, it is not the non-interest bearing money but
the total nominal liabilities including interest bearing notes and future fiscal surpluses that matter for
price-level determination. In the absence of fiscal discipline, an independent central bank such as the
BSP cannot guarantee a stable nominal anchor. In other words, for the BSP to successfully focus on
price stability there must be a credible commitment on the part of the National Government to reduce
total fiscal deficits by a meaningful amount.

Lizel Morcilla

Test Questions

1. Why is profit motive only secondary in the operation of central banks?

51
 Answer: Profits Motive is only secondary in the operations of central banks,although there
are central banks with private stockholders, their personal financial interest cannot go over
and above the national interest or public welfare.thus not a few profitable investments have
been minimized if these conflict with the objectives of monetary stability and if these
complete with private business.

2. Differentiate banking institution from central bank?

Answer: The Difference between Banking Institution from Central Bank is. Central Bank
is it occupies a central or pivotal position in the monetary and banking structure of the country
in which it operates.it can be describe as an institution charged with the responsibility of
managing the volume of money in circulation to promote the general welfare.while in
Banking Institution is it instance accepts deposits from the public or grant loans directly to
individuals.it is designed mainly to serve the banking institutions and the government.that is
why the bangko sentral and any other central bank is traditionally called the “banker’s bank.

3. BSP had a complete monopoly of note issue, why?

Answer: The BSP had a complete monopoly of note issue its because of to ensure
uniformity in money , to effect government supervision over money supply,and to give
prestige on the central banks,and to provide a source of income or reduce printing expenses
on the part of the government.

4. Explain why does central bank called bank of last resort.

Answer: The Central Bank Called bank of last resort its because its is the function as a
lender of last resort had been derived from its re-discounting function.any central bank has the
duty to bail out banks in distress.however it lends money to such banks only if they have
exhausted all available sources and means of solving the financial problems.thus,their last
resort is to borrow funds from the central bank.this is the reason why central bank is called as
the lender of last resort.l
5. In your opinion, is inflation targeting is better in achieving the objective of BSP in promoting
price stability than the monetary aggregates?

Answer: In my opinion the Inflation Targeting is better in achieving the objective of BSP
in promoting price stability than the monetary because of the Inflation targeting is an
approach to monetary policy that involves the use of a publicly to commits to achieve over a
two year horizon. To promoting price stability is the BSP main priority and the target serves
as a guide for the public expectation about future inflation allowing them to plan ahead with
greater certainly.in Inflation targeting is focused mainly on achieving a low and stable
inflation,supportive of the economy growth objective.while the Monetary Aggregates it is the
policy is generally the process by which the central bank or the government controls the
supply and availability of money,the cost of money,and the rate of the interest.

6. Explain open market operation of BSP.

Answer: The Open Market Operation of BSP it is the monetary tool which BSP publicly
buying or selling government securities from banks and financial institutions in order to

52
expand or contract the supply of money. By controlling the money supply the BSP is able to
exert some influence on the prices of goods and services and achieve its inflation objectives.

Chapter 5

REGULATION AND SUPERVISION OF

53
 CREDIT & ASSET MANAGEMENT

The services of financial institutions are for sale to the public. In fact, they even employ
various forms of promotions in their efforts to acquire more customers. But they are selling services
which have more significant event effects on the whole economy and the buyers of such services. In
case serious anomalies are involved, it may likely result to inflation, collapse of the financial system or
loss of the money of depositors or investors. Hence, the greet need to regulate and supervise the
operations of the financial institutions.

The business of a financial institution like a bank is imbued with public trust and public
interest. This is precisely the reason why the government, through the Bangko Sentral and other
agencies of the government, is very much concerned in the viability of financial institutions. The BSP
sees to it that the operations of financial institutions are consistent with the objectives of monetary
policies such as price stability, full employment, and economic growth. Thus, the activities of
financial institutions are closely monitored by the BSP. In fact, to organize a bank, it must obtain first a
certificate of authority from the BSP. This is granted only if there is sufficient capital, and that the
integrity of the organizers can reasonable assures public trust.

Supervision and Regulation Distinguished.

Supervision includes not only the issuance of rules and regulations but also the overseeing of
operations of financial institutions. This is to ascertain that such rules and regulations are complied
with. It is also includes examination and investigation to determine whether the financial institution is
conducting its business in a sound financial basis, that is, whether the institution is liquid and solvent.

Supervision is broader in scope than regulation because the former seeks to look into details of
operations, activities, and performance of a particular institution as they affect both private and public
interests. Moreover, supervision intends to determine the soundness of operations and ability of the
financial institutions to meet its obligations to creditors upon proper demand when due.

In the case of regulation, it refers to the issuance of rules and conduct or the establishment of
modes or standards of operation for uniform application to all financial institutions or functions
covered. In determining such coverage, the distinctive character of the operations of financial
institutions and the substantive similarities of specific functions to which such rules, modes, or
standards are to be applied are taken into consideration.

Regulation is basically undertaken through review and analysis of reports submitted by a

financial institution to a government agency concerned. Upon receipt of the reports, an employee of
the government agency concerned looks into their contents and if such reports are financial statements,
the employee checks the mathematical accuracy, and determines the changes and ascertains the causes
of such changes. The checking process also seeks to determine the compliance of the financial
institution with existing rules and regulations being enforced by the government agency concerned. If
the representative of a regulating office visits the financial institutions, it is to secure reports which the
former may not have received or seek some explanations on certain specific matters not clear to the
regulation government agency. To save time and unnecessary expenses, the regulating agency writes
the financial institution concerned about certain matters which may be useful in improving the manner
by which regulation can be undertaken more effectively.
Types of Examination

The BSP uses three types of examination in supervising the banking institutions:

54
 1. General or regular examination. This is undertaken once a year. Such examination covers the
verification of assets, liabilities and capital accounts to determine the stability and solvency of
the financial institution. It also reviews the incomes and expenses of said institution to
determine the probable profit that stockholders would expect from their investments.

2. Special or interim examination. This is conducted as often as necessary. It includes a review

of a special account or groups of accounts such as loans or deposits. Such examination is
usually of short duration since the purpose is limited to specific area of activity or operation. If
follows-up findings in a previous examination to determine whether the institution has
implemented the recommendations of the BSP or whether the errors have been corrected as
suggested by the BS examiners.

3. Special investigation. Although this is not an examination, its procedure sometimes involves
some steps of what are being done in regular and special examinations. Said investigation is
conducted when a complaint is received by the BSP from a borrower, stockholder, depositor,
or an employee, or even an employee, or even from anybody regarding the operation of a
financial institution. If found guilty, a positive action or remedial measure is made to correct
an erroneous or illegal practice of the institution, its officers, or employees.

Purposes of Supervision and Regulation

Supervision and regulation of financial institutions are being undertaken by the government
for the following purposes:
1. To ensure full compliance with laws, rules and regulations affecting the operations and
activities of financial institutions.
2. To ensure that the financial institutions being supervised and regulated are operating on a
sound financial basis (that is, they are solvent and stable), so that their stockholders are
assured of a fair return on their capital investments.
3. To act as guardian of depositors and money market investors in order to ensure that they get
not only the interest payments but also their deposits and placements.
4. To protect the interest of the investments of the government.
5. To protect the interest of other creditors of financial institutions.
6. To ensure the stability, solvency and safety of our financial system towards the economic
development of urban and rural areas.

Effectiveness of Supervision and Regulation

The supervisory and regulatory agencies of the government, such as the BSP, SEC, and other
offices, perform their functions on a continuing basis. In the past, the BSP did not hesitate to place
under close supervision or controllership banks which have committed, even at the slightest indication,
management and fraud in their operations. The reason for such strict supervision is mainly to protect
the interests of the depositors or controllership, the BSP suspends its financial privileges. Some of its
activities, like the granting of loans for certain purposes and the declaration of dividends unit its
operations shall have improved or the errors have been corrected, are restricted. When a bank becomes
insolvent – obligations are bigger than assets – it is closed by the BSP and placed under receivership
or liquidation. As additional action, a bank under close supervision, controllership or receivership is
under prosecution. The BSP files cases against the directors, officers and/or employees who are
responsible for mismanagement and frauds.

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 In case of financing companies under the supervision and regulation of the SEC, the latter
issues cease and desist order which, in effect, stops the lending operation of the financial institution
concerned. Its operation shall resume if it has improved or its errors shall have been corrected. The
SEC has also the power to place a financial institution under receivership as a means of protecting the
interests of the creditors and stockholders.

Figures and data on the financial conditions and results of operations of financial institutions
are being monitored on a regular and systematic basis to the supervisory and regulatory agencies of the
government. These are evaluated and they form the basis of formulating policies, rules and regulations
in improving the quality of supervision and regulation of financial institutions in the country.

Benefits of Bank Supervision

Putting a bank business is not just like starting another business. A proposed bank will not be
allowed to operate if its existence will not contribute to public interest or improvement of economic
conditions in the community. For instance, if starting a new bank in the community would seriously
weaken an existing bank, then such bank would not be given the authority to operate. The government
imposes laws and regulations to reduce competition. The reason is that unregulated banking would
take too many risks.

In many other industries, free competition is being encouraged by the government because it
is good for individual consumers and for the whole economy. The products of these industries can be
evaluated properly by buyers on the basis of their quality. If they do not like one brand of product, like
a car or pair of shoes, they choose another one. Another way of purchasing a product is through the
recommendations of friends. Unfortunately, neither of these two ways works well for deciding
whether to buy the deposit services of a bank. Once a bank has failed, depositors realize that they
should have not entrusted their funds to it. But by then it is too late. The damage has been done. And if
their deposits are not insured, their losses are even greater.

Clearly, there is a need to prevent financial institutions from taking too much risk. One
possibility would be extensive consumer information through reading of reports of financial
institutions evaluated and analyzed by experts. However, these may not be reliable and these are time-
consuming to read. Another way to protect depositors would be to have banks or other financial
institutions insured by private insurance companies. But there would be an economic danger in this
mechanism. In case many big financial institutions would fail, the insurance company concerned
would also fail. Thus, a feasible way is for the government to insure bank deposits. The government
can protect its own interest and that of the depositors by prohibiting financial institutions from
purchasing certain risky assets, and inspect them to see that they comply with such regulations.

The supervision of the banking system by the BSP designed to protect public interests as well
as the banking system. The benefits of bank supervision must surpass the cost of controls. The major
benefits of bank controls are:
1. Prevention of over-expansion or under-expansion of money and credit through a system—
monopoly or through excessive competition;
2. Elimination of monopoly; and
3. Protection of depositors against the consequences of bank failures.

Supervision and Examinations of Banking Institutions

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 The BSP, through the Supervision and Examination Sector, conducts supervision and
examinations of banking institutions by means of:
1. Examining the books, documents and records of banking institutions operating in the
Philippines, including all government credit institutions (together with their subsidiaries and
affiliates), and non-bank financial intermediaries including their subsidiaries and affiliates
performing quasi-banking functions if special examination is needed as determined by the
Monetary Board.
2. The department heads and examiners of the supervising and/or examining departments are
authorized to administer oaths to any director, officer, or employee of the banking institution
under their respective supervision or subject to their examination.
3. Compel the presentation of all books, documents, papers and records necessary to ascertain as
well as the books and records of persons and entities in connection with the operations,
activities or transactions of the concerned institutions.
4. No restraining order or injunction is to be issued by the Court enjoining the BSP from
examining any institution subject to the supervision and/or examination by the BSP, unless
there is a convincing proof that the action of the BSP is arbitrary and made in bad faith.
5. Department heads and examiners are authorized by the Monetary Board to examine, inquire or
look into all deposits of whatever nature with banking institutions in the Philippines, including
investment in debt instruments issued by the national government, its political subdivisions
and its instrumentalities, after being satisfied that there is reasonable ground to believe that a
bank fraud or serious irregularity has been committed and that it is necessary to look into the
deposits to establish such fraud or irregularity.

Appointment of a Conservator

On the basis of the report of supervising and examining department, the Monetary Board
appoints a conservator to manage a banking institution which cannot adequately protect the interest of
the depositors and creditors. As much as practicable, the conservator should not be connected with the
BSP. He would be competent in bank operation and management. Once the banking institution
becomes viable, the position of the conservator is no longer required by the Monetary Board. In the
same manner, if the continuance in business of such banking institution results to loss to its depositors
and creditors, conservatorship is terminated. The salary of the conservator and other expenses
attendant to the conservatorship are paid by the bank concerned.

The powers of conservator are:

1. Take charge of the assets, liabilities and management of depressed of depressed banking
institution;
2. Collect all monies and debts due said bank and exercise all powers necessary to preserve the
assets of the bank;
3. Reorganize the management of the bank and restore its viability; and
4. Overrule or revoke the actions of the previous management and board of directors of the bank,
any provisions of law to the contrary notwithstanding, and such other powers granted by the
Monetary Board which are deemed necessary.

Insolvency Proceedings

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 A bank or non-bank financial intermediary performing quasi-banking functions which is
insolvent is reported by the head of the supervising and examining department or by his agents or
examiners to the Monetary Board. Upon confirmation of the report, the Monetary Board forbids said
bank to do business in the Philippines. It designates an official of the PDIC. For a quasi-bank, any
person of recognized competence in banking may be designated as receiver. He immediately takes
charge of the assets and liabilities of the bank under receivership. He collects all existing debts. He
gathers all the assets and pay corresponding taxes due to the government and obligations to creditors
of record. Furthermore, the receiver preserves the assets as much as possible by filing suits and
foreclosing mortgages in the name of the bank or non-bank financial intermediary performing quasi-
banking functions.

Within 90 days, the Monetary Board determines whether the bank may be reorganized to
resume business with safety to its depositors, creditors and the general public, then it orders its
liquidation, indicates the manner of its liquidation, and approves a liquidation plan.. The Receiver files
a petition for liquidation in the name of Bangko Sentral with the Regional Trial Court praying the
assistance of the court in the liquidation of the bank. In the same proceedings, the court has the
jurisdiction to adjudicate claims against the bank or non-bank financial intermediary performing quasi-
banking functions and enforce individual liabilities of the stockholders, and to implement the
liquidation plan approved by the Monetary Board.

Designation of a Liquidator

The Monetary Board designates an official of the Bangko Sentral as liquidator. He takes over
the functions of the aforementioned receiver. The liquidator speedily converts the assets of the bank or
non-banking functions to money or sell, assign or dispose them to creditors and other parties for the
purpose of paying the debts of the bank concerned.

The actions of the Monetary Board are final and executor. However, these can be set aside by
the court only if there is convincing proof that such actions have been plainly arbitrary and made in
bad faith.

A bank is said to be insolvent or any non-bank financial intermediary performing quasi-

banking functions for that matter if the realizable assets as determined by the BSP are insufficient to
meet its liability.

CAMELS Rating

CAMELS Rating stands for: Capital Adequacy; Asset Quality; Management; Earnings;
Liquidity and Sensitivity to Market Risk.

It is a composite rating given by the Supervisory and Examination Institute of the BSP on their
general examination conducted yearly on bank to:

a. ascertain the overall financial condition and results of operations for evaluating the soundness of
the financial institution on a uniform basis;

b. asses the risk management system, including policies, procedures and internal control and audit
for identifying those institutions requiring special attention or concern; and

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c. determine compliance with pertinent laws, BSP rules, regulations and directives.

The CAMELS rating is also based on performance, its weaknesses, ability to respond and
compliance with laws and regulations, risk management process and supervisor concern. It is graded
accordingly from one to five and the average rating represents:
Rating of 5 – Strong
Rating of 4 - Satisfactory
Rating of 3 - Fair
Rating of 2 - Marginal
Rating of 1 - Unsatisfactory

Lizel Morcilla

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Test Questions
1.Cite examples of financial institutions under the supervision of the BSP.

Answer: The Landbank of The Philippines is an example of Financial Institution under the
supervision of the BSP. Because of the service of financial institutions are for sale to the
public.in fact Landbank of the Philippines they even employ various forms of promotions in
their efforts to acquire more customers.but they are selling services which have more
significant event effects on the whole economy and the buyers of such services.Landbank of
the Philippines it is a institution to imbued with public trust and public interest.this is
precisely the reason why government banks is under the Supervision of Bangko Sentral.

2.What is the difference between supervision and regulation?

Answer: The Difference between supervision and regulation are the Supervision is The
issuance of regulations but also the overseeing of operations of financial institutions.and it is a
boarder in scope to ascertain that such rules and regulations are complied with. And it is also
include the examination and investigation to determine whether the financial institution is
conducting its business in a sound financial basis and it is the institution is liquid and
solvent.While the Regulation is the basically undertaken through review and analysis of
reports submitted by a financial institution to government agency concerned.

3.Explain special examination.

Answer: The Special Examination is conducted as often as necessary.it is includes a

review of special account or groups of accounts such as loans or deposits.and it is usually of
short duration since the purpose is limited to specific area of activity or operation.

4.What activities of a bank under controllership are restricted?

Answer: The Activities of Bank under Controlled-ship are restricted is the Authority to
Obtain Data and information because of the bangko Sentral shall have a authority to request
from government offices and instrumentalist or government owned or controlled
corporations,any data which it may require for proper discharge of its functions and
responsibilities.

5.What are the duties of a conservator, receiver, and liquidator?

Answer: The duties of Conservator with such powers as the monetary board shall deem
necessary to take charge of the assets, liabilities,and the management there of reorganize the
management,collect all monies and debts due said institution,and exercise all powers
necessary to restore its viability. The Receiver shall immedietlly gather and take charge of all
assets and liabilities of the institution,administer the same for the benefits of its creditors and
exercise the general powers of receiver under the revised rules of court but shall not with the
exception of administrative expenditures,pay or commit any act that will involve the transfer
or disposition of any assets of the institution. The Liquidators is is unable to pay its l abilities
as they become due in the ordinary course of business provided that this shall not include
inability to pay caused by extraordinary demands induced by financial panic in the banking

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community;has sufficient realizable assets as determined by the bangko sentral to meet its
liabilities or cannot continue in business without involving prob looses to its depositors or
creditors.

6.WHAT ARE THE BENIFITS OF BANK CONTROLS?

Answer: The Benefits of Bank Controls are.(a) Prevention of over-expansion or under-

expansion of money and credit through a system-monopoly or through excessive competition
(2) elimination of monopoly and (3) protection of depositors against the consequences of bank
failures.

7.WHEN IS A BANK INSOLVENT?

Answer: Bank Insolvent it is a bank or non bank financial intermediary performing quasi-
banking functions which is reported by head of supervising and examining department or by
his agents or examiners to the monetary board.it is bank failure occurs when bank is unable to
meet its obligations to its depositors or other creditors because it has become insolvent or too
ill quid to meet its liabilities.

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