Monetary Policy and Central Banking Course

Module 1
The Philippine Financial System
MONETARY POLICY and CENTRAL
BANKING
PAMANTASAN NG LUNGSOD NG MARIKINA
COLLEGE OF MANAGEMENT & TECHNOLOGY

By:
NILO N. IGLESIAS, CPA, MBA, REA
The Philippine
Financial System
Learning Objectives:
• Understanding the concept of financial systems by defining and explaining the key
components and functions of financial system.
• Role and importance of financial institutions in facilitating economic activities
• Explore the different types of financial markets, including money markets, capital
markets and foreign exchange markets
• Explain the role of the government and regulatory bodies in overseeing financial
systems.
• Explore risk management strategies employed by financial institutions.
• Understand the role of central banks in implementing monetary policy and the
impact of monetary policy on the financial system and the economy.
• Explore the global aspects of financial systems, including international financial
markets and institutions.
• Examine the role of technology in shaping financial systems and understand the
impact of financial innovation on markets, institutions, and regulatory practices.
Financial System Definition:
• Network of various institutions which generates, circulates,
and controls money and credit.
• Provides intermediation between the suppliers and users of
credit.
• Provides loans to poor families, small producers, big
businessmen and industrialists.
• Stimulates the social and economic development of the
country
 Simply say, it refers to the set of institutions, markets, and
intermediaries that facilitate the flow of funds and capital
within an economy.
Elements of Financial System:
a) Financial Claims – right to receive money under
specific circumstances, as evidenced by financial
instruments that specify the terms of the claims.
- categories of claims: debts and equities
b) Financial Institutions – private or government
organizations whose assets consist primarily of
claims or incomes derived from performing services
in connection with claims.
Elements of Financial System:
- FinancialIntermediaries – Financial Institutions
which deal with creation and issuance of claims
against themselves and use the proceeds to acquire
and hold claims against others. They act as
middlemen between suppliers and users of money.
c) Financial
Markets – institutions which expedite
transactions in financial claims.
ex. Stock exchange market, Fx market, PDS
Elements of Financial System:
d) Government Agencies – the Bangko Sentral ng Pilipinas, the
Monetary Authority in the Philippines, that implements laws and
policies on money, banking and credit. Its primary goal are to
maintain stability of peso.
e) Laws and Policies – the national government regulates and
supervise the behavior of the whole economy, thru issuance of
laws and policies to ensure the desired level of investment,
employment, production, income and consumption.
Key Components of Financial System:
a) Financial Institutions – These include banks, non-bank
financial institutions (e.g. insurance companies, investment
houses, and pension funds), and other financial intermediaries.
b) Financial Markets – These encompass money markets, capital
markets, and foreign exchange markets where various financial
instruments such as stocks, bonds, and currencies are traded.
c) Regulatory Bodies – The Bangko Sentral ng Pilipinas and
primary regulatory authority, responsible for formulating and
implementing monetary policy, supervising financial institutions,
and maintaining financial stability.
Financial Institutions:
a) Banks – Universal banks, commercial banks, thrift
banks, rural and cooperative banks, digital banks form the
core of the banking sector. They offer various financial
services, including deposits, loans, and other banking
products.
b) Non-Bank Financial Institutions – This category includes
insurance companies, investment houses, securities dealers,
and pensions funds, contributing to the diversification of
financial services.
Financial Markets:
a) Money Markets – These deal with the short-term debt
instruments and securities, facilitating the borrowing and
lending of funds for periods usually less than one year.
b) Capital Markets – These involve the issuance and
trading of long-term financial instruments, such as stocks
and bonds, to raise capital for businesses and government
entities.
c) Foreign Exchange Markets – These markets facilitate the
buying and selling of different currencies, essential for
international trade and investments.
Regulatory Framework:
a) Bangko Sentral ng Pilipinas (BSP) – As the central bank,
the BSP is responsible for monetary policy, currency issue,
supervision of financial institutions, and maintenance of
monetary stability.
b) Securities and Exchange Commission (SEC) – Regulates
the securities industry, ensuring fair and transparent capital
markets.
c) Insurance Commission (IC) – Regulates the insurance
sector, protecting policyholders and ensuring the stability of
the industry.
Technology and Innovation:
• The financial system in the Philippines has witnessed
technological advancements, with the adoption of digital
banking, online payment systems, fintech solutions,
making financial services more accessible and efficient.

Challenges:
• Challenges facing financial system include addressing
income equality, enhancing cybersecurity measures, and
ensuring the resilience of the financial sector in the face of
external shocks.
Financial Inclusion Initiatives:
• The Philippines has been actively promoting financial
inclusion to ensure that a larger segment of the population
has access to formal financial services. Initiatives include the
promotion of microfinance, mobile banking, and financial
education programs.

International Linkages:
• The Philippines actively participates in the regional and
global financial systems, collaborating with international
organizations and adhering to international standards and
best practices.
Concept of a Financial System
• Understanding the detailed concept of the
financial system in the Philippines involves
recognizing the interconnectedness of its
various components, the regulatory framework
that governs them, and the ongoing efforts to
promote financial inclusion and technological
innovation.
 Concept of a Financial System

RISK
SHARING Financial LIQUIDITY
System

Financial
Households Funds Markets Funds Households
Firms Firms
Governments Financial Governments
Intermediaries
Returns Returns

Savers Borrowers

Source: Hubbard, R.G. (1997) INFORMATION

Money, the Financial System and
the Economy. Addision-Wesley
Longman, Inc.
Risk Sharing
• Distribution of financial risks among various participants in the financial
systems.
• In a well-functioning financial system, different entities, such as banks,
investors, and insurance companies, share and manage risks to avoid
concentration and reduce the impact of adverse events on any single
participants.
• By spreading risks across a diverse set of participants, the financial
system promotes stability.
• When a bank issues loans, it transfers credit risk to borrowers.
• Similarly, financial instruments like insurance policies allow individuals
and businesses to share risks with insurance companies.
• This diversification of risks helps prevent the failure of any one
institutions from causing a systemic crises
Liquidity
• Refers to the ease with which assets can be bought or sold in the
market without significantly affecting their prices.
• It is a measure of the market’s ability to absorb large transactions
without causing substantial price fluctuations.
• Liquidity is vital for the efficient functioning of financial markets.
• It ensures that participants can quickly convert their assets into cash
when needed.
• Central banks often play a role in providing liquidity to the financial
system during period of stress to prevent panic selling and maintain
stability.
• Adequate liquidity also facilitates price discovery and contributes to
the overall efficiency of markets.
Information
• Refers to the availability, accuracy, and transparency of data related
to financial instruments, market participants, and economic
conditions.
• Timely and reliable information is essential for making informed
investment and lending decisions.
• Information is the cornerstone of financial markets.
• Investors and financial institutions rely on accurate information to
assess risks, make investment decisions, and allocate capital efficiently.
• Transparency in financial reporting and disclosure is critical to
building trust and confidence in the financial system.
• Regulatory bodies often play a role in setting standards for
information disclosure to ensure fair and transparent markets.
Flow of Funds in the Financial System

Bank Deposits Purchase or

Investment in
Bonds/Bills
INVESTORS

Purchase/ Investment in
Investment in Shares
Bonds
BANKS GOVERNMENTS

Bank Loans
COMPANIES
 Link of the Financial System to the
Economy
Stable Financial System
Increased
production
and
investment
activities

Efficient flow
of funds in
the economy

Sustainable Economic Growth

Functions of Financial Institutions
• General function is to facilitate the transfer of
funds from the savers to the users
• Specific functions includes:
- investigation and credit analysis
- matching the supply and demand for funds
- provisions for liquidity
 Financial Intermediation Process
(Banking System)
Deposit Taking Lending
75% Corporate
13% Consumer
0.5 deposit account per
person

Returns
Returns on loans
on deposits

Banking System
12 % SMEs

Pooling Allocating
capital from capital to the
many savers most
important
uses
Structure of the Philippine Financial System

Shared Oversight of the Philippine Financial System

BSP* and PDIC BSP, SEC and IC

Non-Bank Financial Institutions

Banking System
 Non-banks with Quasi-Banking Function: Investment
Houses and Financing Companies
 Universal Banking System
 Non-banks without Quasi-Banking Function:
 Commercial Banking System
Investment Houses, Financing Companies,
Investment Companies, Securities Dealers/Brokers,
 Thrift Banking System
Lending Investors, Pawnshops, Venture Capital
Corporations, Government Non-Bank FIs, Non-stock
 Rural and Cooperative Banking System
Savings and Loan Associations, Credit Card
Companies

 Other FIs: Insurance Companies and Mutual Funds

* Other supervised entities of the BSP are off-

shore banking units and representative offices
of foreign banks.
Banking Institutions
• Private Banking
• Government Banking
- Land Bank of the Philippines
- Development Bank of the Philippines
- Al Amanah Islamic Bank
Non-Bank Financial Institutions
• Private Non-Bank FI
• Government Non-Bank FI
- GSIS
- SSS
- Pag-Ibig Fund
 BSP Supervised/Regulated Financial Institutions
Physical Network: Number of Offices (29,885)
As of December 2023

Philippine Banking System

Universal Banks 6,842
Private 5,987
Government 844
Foreign Banks 11
Commercial Banks 349
Private 232
Foreign Bank Subsidiaries 98
Foreign Banks 19
Thrift Banks 2,595
Rural and Cooperative Banks 3,543
Total 13,329
 BSP Supervised/Regulated Financial Institutions
Physical Network: Number of Offices (29,885)
As of December 2023

Non-Bank Financial Institutions With Quasi-Banking Functions

Investment Houses 1
Financing Companies 17
Other 1

Total 19

Non-Bank Financial Institutions Without Quasi-Banking Functions

Investment House with Trust Functions 2
Non-Stocks Savings & Loan Association 192
Pawnshops 16,038
Others 305

Total 16,537
Key Statistics:

Bank density ratio = 7 banks per

city/municipality

Geographic penetration = 7 banks

per 100 square kilometers

Customer ratio = 9,933 persons

per banking office

ATM network = 11 ATMs per 10,000

customers
Role of World Bank in the Philippine Financial System
World Bank performs the following functions:
• Granting reconstruction loans to war devastated countries.
• Granting developmental loans to underdeveloped countries.
• Providing loans to governments for agriculture, irrigation, power, transport, water
supply, educations, health, etc
• Providing loans to private concerns for specified projects.
• Promoting foreign investment by guaranteeing loans provided by other organizations.
• Providing technical, economic and monetary advice to member countries for specific
projects
• Encouraging industrial development of underdeveloped countries by promoting eco­
nomic reforms.
Resources:
• The World Bank had initially authorized capital of $10 billion subscribed by the
member countries in accordance with their economic strength. The United States of
America is the largest subscriber. The Bank collects funds from members as well as by
issue of international bonds.
Role of IMF in the Philippine Financial System
IMF performs the following functions.
• Providing short terms credit to member countries for meeting temporary
difficulties due to adverse balance of payments.
• Reconciling conflicting claims of member countries.
• Providing a reservoir of currencies of member-countries and enabling
members to bor­row on another's currency.
• Promoting orderly adjustment of exchange rates.
• Advising member countries on economic, monetary and technical matters.
Resources
• IMF is a pool of central bank reserves and national currencies that are
available to member countries under specified conditions.
• The capital of the IMF consists of the aggregate of the quotas allotted to the
member countries member can pay its quota in its national currency.
• The IMF utilizes its gold holdings to acquire dollars and other currencies for
its opera­tions.
Role of ADB in the Philippine Financial System

The ADB was established by Asian countries to foster the

economic growth and cooperation in the region of Asia and
the Far East, including the South Pacific.
Asia has about 30 per cent of world population, But the pace of
development is slow and inadequate to support the
population.
There was need for institution to mobilize additional resources
and to attract investment from outside the region.
ADB was set up to meet this need. It started functioning on
December 19, 1966.
The objectives of the ADB are as under:
• To promote economic cooperation and growth in Asia and
the Far East.
• To encourage member countries to work both collectively
and individually.
• To promote economic growth of member countries by
reducing poverty.
• To provide technical assistance in the planning and
execution of projects of member countries.
• To support human development activities such as
education, health, nutrition, popula­tion planning, etc.
• To provide support for policy reforms in order to create
more opportunities for the poor.
Role of the Bangko Sentral in the Philippine Financial System
The main functions of the Bangko Sentral are:

1. Liquidity management, by formulating and implementing monetary policy

aimed at influencing money supply, consistent with its primary objective to
maintain price stability
2. 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,
3. Lender of last resort, by extending discounts, loans and advances to banking institutions for
liquidity purposes,
4. Financial supervision, by supervising banks and exercising regulatory powers over non-bank
institutions performing quasi-banking functions,
5. Management of foreign currency reserves, by maintaining 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,
6. Determination of exchange rate policy, by determining the exchange rate policy of the
Philippines. Currently, the BSP adheres to a market-oriented foreign exchange rate policy, and
7. Being the banker, financial advisor and official depository of the Government, its political
subdivisions and instrumentalities and GOCCs.
Role of the Anti-Money Laundering Council - AMLC
 The Anti-Money Laundering Council is
composed of the Governor of the Bangko
Sentral ng Pilipinas (BSP) as Chairman and the
Commissioner of the Insurance Commission (IC)
and the Chairman of the Securities and
Exchange Commission (SEC) as members.
 It acts unanimously in the discharge of its
functions.
 The AMLC is assisted by a Secretariat headed by
an Executive Director
Functions of AMLC

• Require and receive covered or suspicious transaction reports from

covered institutions (banks and all other institutions and their
subsidiaries and affiliates supervised or regulated by the BSP; insurance
companies and all other institutions supervised or regulated by the IC;
and securities dealers and other entities supervised or regulated by the
SEC);
• Issue orders addressed to the appropriate Supervising Authority (the
BSP, IC or SEC) or the covered institution to determine the true identity
of the owner of any monetary instrument/property subject of a covered
or suspicious transaction report or request for assistance from a foreign
State, or believed by the AMLC, on the basis of substantial evidence, to
be representing, involving, or related to the proceeds of an unlawful
activity;
• Institute civil forfeiture proceedings and all other remedial proceedings
through the Office of the Solicitor General;
• Cause the filing of complaints with the Department of Justice or the
Ombudsman for the prosecution of money laundering offenses;
• Investigate suspicious transactions and covered
transactions deemed suspicious after an investigation
by AMLC, money laundering activities, and other
violations of the AMLA, as amended;
• Apply before the Court of Appeals, ex parte, for the
freezing of any monetary instrument/property alleged
to be proceeds of any unlawful activity as defined in the
AMLA;
• Implement such measures as may be necessary and
justified to counteract money laundering;
• Receive and take action in respect of any request for
assistance from foreign states in their own anti-money
laundering operations;
• Develop educational programs on the pernicious effects of
money laundering, the methods and techniques used in money
laundering, the viable means of preventing money laundering
and the effective ways of prosecuting and punishing offenders;
• Enlist the assistance of any branch, department, bureau, office,
agency or instrumentality of the government, including
government-owned and –controlled corporations in
undertaking any and all anti-money laundering operations,
which may include the use of its personnel, facilities and
resources for the more resolute prevention, detection and
investigation of money laundering offenses and prosecution of
offenders;
• Impose administrative sanctions for the violation of laws, rules,
regulations and orders and resolutions issued pursuant
thereto; and
• Inquire or examine any particular deposit or investment,
including related accounts, with any banking institution or
non-bank financial institution upon order of any court based
on an ex parte application in cases of violation of the AMLA,
as amended, when it has been established that there is
probable cause that the deposits or investments, including
related accounts involved, are related to an unlawful activity
or a money laundering offense under the AMLA as amended.

To ensure compliance with the AMLA, as amended, the BSP

may, in the cause of a periodic or special examination, check
the compliance of a covered institution with the
requirements of the AMLA and its implementing rules and
regulations.
Questions/Reactions………

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