The Philippine

Financial System

Classification of
Banks

Central Banks
issuing currency
Leader of Banking system and money
market of the country.
Bankers to the Government.
Aim-to maintain price and stability.

 Commercial Banks
Undertakes all kinds of ordinary banking
business.
Provides money and credit for commercial
and trade activities.
Receives short and medium term deposits
from public and grant short term loans and
advances.
Supply working capital to industries.
Discount internal and foreign bills.
They
provides
agency
services
like
collection of cheques, dividends, interest on
investments, issue of drafts, letter of credit,

 Industrial Banks or Financial Institutions

Provides loans and fixed capital to
industries concerns.
Provide long-term loans and credits for
periods varying 5-15 years for industries to
acquire fixed assets.
They Finance infrastructural developmental
activities like construction of transport
facilities, building of power supply stations,
etc.

 Exchange Banks (authorized dealers in foreign

exchange)
Deal in foreign bills of exchange import and export of
bullion.
Do incidental services like opening of letters of credit,
issue of Foreign currency Drafts and Travelers
cheque, supply of information about foreign
customers.
Provide credit and loans and also accept Deposit in
Foreign Currency.
Requires huge capital and trained staff.
Maintain branches in foreign countries.
As per Foreign Exchange Regulation Act banks dealing
in Foreign Exchange require permission from RBI.

 Co-operative Banks
Co-operative principles of mutual help and
assistance.
Grant short term loans to agriculturalist.

 Land Mortgage Banks (presently known

as Agricultural and Rural Developmental
Banks)
Agriculture Development banks.
Supply long term loans for a period of 15
years.
Grant loan for permanent improvements in
agricultural lands.
Create negotiable bonds out of real estate
like land, building, etc.
They raise funds by floating debentures and
by borrowing from Government.

Basic Building Blocks

of a Financial System

Banking Regulation and Base

First, banking regulation, where the Basel III
framework represents the cornerstone of the
newly revised international regulatory
architecture. This framework envisages higher
minimum capital requirements, better risk
capture, stricter definition of eligible capital
elements and more transparency. It introduces
entirely new concepts, such as non-risk-based
leverage ratios and mandatory liquidity
requirements.

 Market Regulation
Second building block, namely regulation of financial
markets. One of the key lessons from the crisis is that the
risks to market returns did not come mainly from shocks to
the real economy. The risks came from the financial sector
itself.
The financial structures that we thought were in place to
assess, absorb and neutralize risk were either
dysfunctional or worked to magnify volatility. Key factors in
creating this risk were opaque financial structures and procyclicality in financial markets. The lack of transparency in
many financial instruments meant that some market
players could exploit for their own, private benefit
information that was not generally available. Pro-cyclicality
acts as a formidable accelerator of financial trends.

 Macro-Prudential Supervision and the ESRB

It has revealed the fallout from the failure of large financial
institutions.
It has revealed the fragility of the financial system to features
and trends that cut across institutions, markets and infrastructures.
And it has illustrated the amplitude of the consequences of the
adverse feedback loop between the financial system and the real
economy.
All these three elements are key features of systemic risk: first,
contagion; second, the build-up of financial imbalances and
unsustainable trends within and across the financial system; and
third, the close links with the real economy and the potential for
strong feedback effects. The strengthening of macro-prudential
oversight with the establishment of institutions devoted to that
task such as the ESRB, the US Financial Stability Oversight Council
and the UKs Financial Policy Committee should enhance our
ability to identify and address systemic risk.

Financial Decisions of
Household and
Corporations
Households in developing countries are not
simply consumers supplying factor inputs and
purchasing and consuming outputs. Many are also
engaged in production in both farm and non-farm
activities. There are often large timing differences
between inputs purchased and outputs sold, as
for farmers with infrequent harvests, and timing
differences between inputs acquired and revenue
received, as for businesses with trade credit. Thus
high frequency data are important for the study
of liquidity, the smoothing of consumption, the
protection of investment from cash flow
fluctuations, and the financing of budget deficits.

 I Still, we also wish to know the true

underlying financial situation of these
households. This necessitates the distinction
between cash flow as a measure of liquidity
and net income as a measure of performance.
Thus we apply, and modify where
appropriate, the standard financial
accounting, as these were invented to draw
this distinction. Specifically, we create the
balance sheet, income statement, and
statement of cash flows for households in
developing countries. The purpose is to better
measure productivity, risk, and the financial
situation in an analysis of high frequency

Roles of Financial
Markets

A financial market is a broad term describing

any market place where buyers and sellers
participate in the trade of assets such as
equities, bonds, currencies and derivatives.
Financial markets are typically defined by
having transparent pricing, basic regulations
on trading, costs and fees, and market forces
determining the prices of securities that
trade.

 Capital Markets
A capital market is one in which individuals
and institutions trade financial securities.
Organizations and institutions in the public
and private sectors also often sell securities on
the capital markets in order to raise funds.
Thus, this type of market is composed of both
the primary and secondary markets.

 Stock Markets
Stock markets allow investors to buy and sell
shares in publicly traded companies. They are
one of the most vital areas of a market
economy as they provide companies with
access to capital and investors with a slice of
ownership in the company and the potential of
gains based on the companys future
performance.

 Bond Markets
A bond is a debt investment in which an
investor loans money to an entity (corporate or
governmental), which borrows the funds for a
defined period of time at a fixed interest rate.
Bonds are used by companies, municipalities,
states and U.S. and foreign governments to
finance a variety of projects and activities.

 Money Market
The money market is a segment of the
financial market in which financial instruments
with high liquidity and very short maturities are
traded. The money market is used by
participants as a means for borrowing and
lending in the short term, from several days to
just under a year.

 Cash or Spot Market

Investing in the cash or spot market is
highly sophisticated, with opportunities for both
big losses and big gains. In the cash market,
goods are sold for cash and are delivered
immediately. By the same token, contracts
bought and sold on the spot market are
immediately effective.

 Derivatives Markets
The derivative is named so for a reason: its
value is derived from its underlying asset or
assets. A derivative is a contract, but in this
case the contract price is determined by the
market price of the core asset.

 Forex and the Interbank Market

The interbank market is the financial system
and trading of currencies among banks and
financial institutions, excluding retail investors
and smaller trading parties. While some
interbank trading is performed by banks on
behalf of large customers, most interbank
trading takes place from the banks own
accounts.

 Primary Markets vs. Secondary Markets

A primary market issues new securities on an
exchange. Companies, governments and other
groups obtain financing through debt or equity
based securities.
The secondary market is where investors
purchase securities or assets from other
investors, rather than from issuing companies
themselves.

 The OTC Market

The over-the-counter (OTC) market is a type
of secondary market also reffered to as a dealer
market. The term over-the-counter refers to
stocks that are not trading on a stock exchange
such as the Nasdaq, NYSE or American Stock
Exchange (AMEX).

 Third and Fourth Markets

you might also hear the term third and
fourth
markets.
These
dont
concern
individual investors because they involve
significant volumes of shares to be transacted
per trade. These markets deal with transactions
between broker-dealers and large institutions
through over-the-counter electronic networks.

Bangko Sentral ng Pilipinas and Its Role

in Deposit Expansion and Money Supply

Effects of Monetary Policy on the

Financial Institutions and Markets

Non-Bank Financial
Institutions

These are other financial Institutions which

engage in specific functions. They provide
services
related
to
claims,
financial
information and advice, manage portfolios of
financial assets on behalf of other economic
units, buy and sell claims on institutions from
clients and assists in finding sources for those
economic units seeking loans. These are
either private or government non-bank
financial institutions.

Private Non-Bank
Institutions
Investment House/Bank
The term investment house is defined to
mean as any enterprise which engages in the
underwriting securities of other corporations.
Underwriting is the act or process of
guaranteeing the distribution and sale of
securities of any kind issued by another
corporation.

 Securities Brokers/Dealers
Pursuant to the provisions of the revised
securities Act, no broker, dealer, or salesman
must engage in business in the Philippines as
such broker, dealer, or salesman or sell any
securities, including securities exempted under
the said law, except in exempt transactions,
unless he has been registered as a broker,
dealer, or salesman.

 Building and Loan Associations

A building and loan association is a special
type of savings institution. Because of its very
nature, however, it falls under this category in
view of the fact that it also receives savings
from members and lends fund to them. Hence,
it is basically a mutual aid organization.

 Credit Unions
A credit union is another type of savings
institution. It also has for its purpose the
inculcation of the habit of thrift, frugality, and
the idea of helping one another. A credit union
is also a membership institution. In some
instances it also does banking functions,
although its operations are under the
supervision and control of the cooperatives
Administration Office, it being one of the
different types of cooperatives existing in this
country.

 Private Insurance Companies

Private insurance companies contribute to
the countrys socio-economic development as
well as to the insured. They provide loans,
funds, and are engaged in the business of
investments. The operations and business
transactions of insurance companies are
governed by the Insurance Code.

 The Pawnshops
Provide credit to small borrowers who are not
qualified to obtain small loans from other
financial institutions. In pawnshops, the cost of
borrowing and the terms of payment are
generally fair. Thus, as one of the components
of the countrys financial system, pawnshops
play a vital role in socio-economic development.

 Trust Companies
A trust company is any corporation formed or
organized for the purpose of acting as trustee or
administering any trust or holding property in
trust or on deposit for the use, benefit or behoof
of others. Such corporation, with the approval of
others.

 Non-Stock
Savings
and
Loan
Associations
A non-stock savings and loan association is a
corporation engaged in the business of
accumulating the savings of its members. The
membership of a savings and loan association
organized as a non-stock corporation is confined
to a well-defined group of persons. Such entity
is not authorized to transact business with the
general public.

 Financing Companies
Financing companies are corporations or
partnerships, except those regulated by the
Bangko Sentral, the Insurance Commissioner,
and the Cooperative Administration Office which
are primarily organized for the purpose of
extending credit facilities to consumers and to
industrial,
commercial,
or
agricultural
enterprises.

 Other Non-Bank Financial Institutions

These are financial institutions that are
unknown to many people. Fund managers,
lending
investors,
and
venture
capital
corporations are among these institutions.
Though unpopular, they perform important
functions and services, particularly in the
financial system and, generally, in the economy.

Government Non-Bank Financial

Institutions
The Government Service Insurance
System
On 13 May 1937, the Government Service
Insurance system (GSIS) started its operations,
with an initial capital of
Php 200,000 for
operating expenses and a personnel force of
fifty (50) employees.

 The social Security System

 Philippine Export and Foreign Loan

Guarantee Corporation