Course Code BSBA303

Course Title Banking and Financial Institutions

Class BSBA III
Instructor Leylane D. Olan, CPA
Prepared by Leylane D. Olan
Date February 2018
 After this meeting, you should be able to:
1. Describe a bank and its role in the financial system
2. Outline the history of banking from a global setting
and in the Philippines
3. Describe the role of BSP under the New Central
Bank Act
4. Identify the different classifications of banks and
differentiate the services provided by each
5. Identify and describe the different functions of a
bank, banking products and services.

Banking Institutions 2
 Financial Institutions – entities that provide financial
services for members and clients such as banks,
financial intermediaries and other non-bank financial
institutions
• Acts simultaneously as borrowers and lenders
• Helps to meet the financial requirements of surplus
and deficit units
• Surplus units (investors/lenders) to find
opportunities to grow their money
• Deficit units (borrowers) to find the funding
needed to pursue productive activities

The Financial System 3

 Financial instruments are tradable financial assets of any kind.
They include money, evidence of ownership interest in an entity,
and contracts
 Financial Services– are the economic services provided by the
finance industry
• Finance industry - encompasses a broad range of businesses that
manage money, including credit unions, banks, credit card
companies, insurance companies, stock brokerages, and investment
houses.
 Financial Markets - is a market in which
people trade financial securities, commodities, and value at
low transaction costs and at prices that reflect supply and
demand.
The Financial System 4
 What is a Financial Market?
• General term used to refer to a market that is used to
raise need financing and does not necessarily refer to a
physical location
• Facilitates transfer of funds from surplus sector to deficit
sector
• Participants in the market are linked by formal trading
rules and communication networks for originating and
trading securities.
• Makes market operations free, fair, competitive and
transparent

The Financial System 5

 Central Bank – the bank of all banks. Central banks are
responsible for the oversight and management of all other
banks, for conducting monetary policy and supervision and
regulation of financial institutions.

 Retail and Commercial Banks – caters to the banking needs

of individuals and businesses by offering deposit accounts,
lending and limited financial advice. Products offered
include checking and savings accounts, certificates of
deposit (CDs), personal and mortgage loans, credit cards,
and business banking accounts.

The Financial System 6

 Credit Unions - serve a specific demographic per their field
of membership, such as teachers or members of the
military. While products offered resemble retail bank
offerings, credit unions are owned by their members and
operate for their benefit.

 Savings and Loan Associations - Financial institutions that

are mutually held and provide no more than 20% of total
lending to businesses fall under the category of savings and
loan associations. Individual consumers use savings and
loan associations for deposit accounts, personal loans, and
mortgage lending.

The Financial System 7

 Investment Banks and Companies - Investment banks do
not take deposits; instead, they help individuals, businesses
and governments raise capital through the issuance of
securities. Investment companies, more commonly known
as mutual fund companies, pool funds from individual and
institutional investors to provide them access to the
broader securities market.

 Brokerage Firms - assist individuals and institutions in

buying and selling securities among available investors.
Customers of brokerage firms can place trades of stocks,
bonds, mutual funds, exchange-traded funds (ETFs), and
some alternative investments.

The Financial System 8

 Insurance Companies - Financial institutions that help
individuals transfer risk of loss are known as insurance
companies. Individuals and businesses use insurance
companies to protect against financial loss due to death,
disability, accidents, property damage, and other
misfortunes.

 Mortgage Companies - Financial institutions that originate

or fund mortgage loans are mortgage companies. While
most mortgage companies serve the individual consumer
market, some specialize in lending options for commercial
real estate only.

The Financial System 9

 Pension funds - A financial institution that controls assets
and disburses income to people after they have retired. They
also perform important economic functions, such as
mobilizing and managing savings, providing income stability,
making labor markets more efficient and providing exposure
to systemic risk in the financial markets

 Finance companies - primary function is to make loans to

individuals and corporations. Finance companies do not
accept deposits, but borrow short- and long-term debt, such
as commercial paper and bonds, to finance the loans.

The Financial System 10

Financial instruments are financial contracts between
interested parties. They can be created, traded, modified and
settled.
Types of Financial Instruments
 Cash instruments - those whose value is determined directly by
the markets. They can be securities, which are readily
transferable and loans and deposits, where both borrower and
lender have to agree on a transfer.
 Derivative instruments - those which derive their value from the
value and characteristics of one or more underlying entities such
as an asset, index, or interest rate. They can be exchange-traded
derivatives and over-the-counter (OTC) derivatives.

The Financial System 11

Financial instruments can also be classified based on the
‘asset class’ into ‘equity-based’ or ‘debt based’. If the
instrument is debt, then they can be further categorized as
‘short-term debt’ and ‘long-term debt’. Foreign exchange
instruments and transactions are neither debt- nor equity-
based and belong in their own category.

The Financial System 12

 Instrument type
Asset class Exchange-traded OTC
Securities Other cash
derivatives derivatives
Interest rate
swaps
Interest rate
Debt (long Bond futures
caps and floors
term) Bonds Loans Options on bond
Interest rate
> 1 year futures
options
Exotic
derivatives
Debt (short Bills, e.g. T-bills Deposits Short-term
Forward rate
term) Commercial Certificates interest rate
agreements
≤ 1 year paper of deposit futures

The Financial System 13

 Instrument type
Asset class Exchange-
Securities Other cash traded OTC derivatives
derivatives
Stock options Stock options
Equity Stock N/A
Equity futures Exotic derivatives
Foreign exchange
options
Foreign Spot foreign Currency Outright forwards
N/A
exchange exchange futures Foreign exchange
swaps
Currency swaps

The Financial System 14

 Long term Debts (More than one year)
1. Bonds: The bond is a debt security, under which the issuer
owes the holders a debt and (depending on the terms of
the bond) is obliged to pay them interest (the coupon) or to
repay the principal at a later date, termed the maturity
date.
2. Loans: In finance, a loan is the lending of money by one or
more individuals, organizations, and/or other entities to
other individuals, organizations etc. The recipient incurs a
debt, and is usually liable to pay interest on that debt until
it is repaid, and also to repay the principal amount
borrowed.
The Financial System 15
 Long term Debts (More than one year)
3. Bond Futures: A futures contract (more colloquially, futures)
is a standardized forward contract, a legal agreement to buy
or sell something at a predetermined price at a specified
time in the future. The asset transacted is usually a
commodity or financial instrument. In a bond futures, the
asset is a bond.
4. Options on bond futures: An option is a contract which gives
the buyer (the owner or holder of the option) the right, but
not the obligation, to buy or sell an underlying asset or
instrument at a specified strike price on a specified date,
depending on the form of the option. Here the asset is a
bond futures.
The Financial System 16
 Long term Debts (More than one year)
5. Interest rate swaps: An interest rate swap (IRS) is an interest
rate derivative (IRD). It involves exchange of interest rates
between two parties. In particular it is a linear IRD and one
of the most liquid, benchmark products.
6. Interest rate caps: type of interest rate derivative in which
the buyer receives payments at the end of each period in
which the interest rate exceeds the agreed strike price. An
example of a cap would be an agreement to receive a
payment for each month the LIBOR rate exceeds 2.5%.

The Financial System 17

 Long term Debts (More than one year)
7. Interest rate floor is a derivative contract in which the buyer
receives payments at the end of each period in which the
interest rate is below the agreed strike price. Caps and floors
can be used to hedge against interest rate fluctuations.
8. Interest rate options: An Interest rate option is a specific
financial derivative contract whose value is based on
interest rates. Its value is tied to an underlying interest rate,
such as the yield on 10-year treasury notes.
9. Exotic derivatives: An exotic derivative, in finance, is a
derivative which is more complex than commonly traded
“vanilla” products.
The Financial System 18
 Short Term Debts (Less than one year)
1. Bills: Treasury Bills or T-Bills is a government debt
instrument issued by the government to finance
government spending as an alternative to taxation. These
usually have a 90 or 180-day term.
2. Deposits: A deposit account is a savings account, current
account or any other type of bank account that allows
money to be deposited and withdrawn by the account
holder. These transactions are recorded on the bank’s
books, and the resulting balance is recorded as a liability for
the bank and represents the amount owed by the bank to
the customer.
The Financial System 19
 Short Term Debts (Less than one year)
3. Certificates of Deposit: A certificate of deposit (CD) is a time
deposit, a financial product commonly sold in the United
States and elsewhere by banks, thrift institutions, and credit
unions.
4. Short-term interest rate futures: An interest rate future is a
financial derivative with an interest-bearing instrument as
the underlying asset.
5. Forward Rate Agreement: A forward rate agreement (FRA)is
an interest rate derivative (IRD). In particular, it is a linear
IRD with strong associations with interest rate swaps (IRS)..

The Financial System 20

 Equity
1. Stock: The stock of a corporation is constituted of the equity
stock of its owners. A single share of the stock represents
fractional ownership of the corporation in proportion to the
total number of shares.
2. Stock Options: In stock options, the underlying asset is a
stock.
3. Equity Futures: In equity futures, the asset transacted is an
equity/share.
4. Exotic Derivatives: An exotic derivative, in finance, is a
derivative which is more complex than commonly traded
“vanilla” products. This complexity usually relates to
determination of payoff. The Financial System 21
 Short Term Debts (Less than one year)
3. Certificates of Deposit: A certificate of deposit (CD) is a time
deposit, a financial product commonly sold in the United
States and elsewhere by banks, thrift institutions, and credit
unions.
4. Short-term interest rate futures: An interest rate future is a
financial derivative with an interest-bearing instrument as
the underlying asset.
5. Forward Rate Agreement: A forward rate agreement (FRA)is
an interest rate derivative (IRD). In particular, it is a linear
IRD with strong associations with interest rate swaps (IRS)..

The Financial System 22

 Foreign Exchange
Foreign exchange instruments in the form of cash/currency
are Spot foreign exchange and those in form of exchange
traded derivatives are currency futures and over the
counter derivatives are foreign exchange options, outright
forwards, foreign exchange swaps and currency swaps.

The Financial System 23