Financial Institutions Overview

Financial Institutions and Intermediaries

• Commercial banks provide deposit, lending, and investment products to individuals and businesses.
• Investment Banks offer services to large corporations and institutional investors.
• Credit Unions, Insurance Companies, and Central Banks are also examples of financial institutions.
• Depository institutions such as banks, savings and loan associations, mutual savings banks, and credit unions receive deposits.

Commercial Banking Basics

• Commercial banking institutions provide financial services in a marketplace for deposits, lending, and investments.
• Commercial banks work with individuals, businesses, and cooperative banks.
• Investment banks, brokerage firms, thrift institutions, mortgage companies, and regional rural banks are related institutions.

Types of Intermediaries

• Depository Institutions: Commercial banks collect deposits and provide loans. Savings and loan associations and credit unions also accept deposits.
• Contractual Savings Institutions: Life insurance companies and fire/casualty insurance companies receive premiums and invest. Pension funds and retirement funds accept employer and employee contributions.
• Investment Intermediaries: Mutual funds, hedge funds, finance companies and money market mutual funds deal with shares, bonds, and other securities.

Investment Banks vs. Commercial Banks

• Commercial banks work with many clients and usually offer a better work-life balance with less demanding work hours and salaries compared to investment bankers.
• Investment banks serve a smaller, niche clientele, focusing on large corporations and institutional investors, requiring longer work hours and higher pay.

Commercial Bank Functions

• Primary Functions: Accepting deposits, granting loans, and creating credit.
• Secondary Functions: Acting as an agent, providing overdraft facilities, discounting bills of exchange, offering locker facilities, and issuing traveler's cheques.

Bank Balance Sheet

• A bank balance sheet summarizes a bank's financial position at a specific point in time.
• Assets: Represents things the bank owns of value that can easily convert to cash (e.g., cash, loans, securities).
• Liabilities: Bank owes to others (e.g., deposits, borrowings).
• Capital: The difference between the bank's assets and its liabilities. It's a measure of the bank's financial strength.

Bank Assets

• Bank assets represent items of value owned by the bank, acquired from funds received from depositors, borrowings, shareholders' investments, or retained earnings.
• These include reserves and cash, securities, loans receivable, and other assets.

Bank Liabilities

• Bank liabilities refer to obligations or debts the bank owes to others.
• This includes demand deposits, non-demand deposits, and borrowings.

Illustrative Case

• This case shows a bank's balance sheet detailing assets and liabilities in millions of Philippine Pesos.

Philippine Banking Industry

• The banking system outlook is positive due to strong macroeconomic performance, ample liquidity, and rising capital buffers.
• The industry benefits from the growing economy and technological innovations.

BSP Financial Soundness Indicators

• Capital Adequacy Ratio is a key indicator for financial institution robustness which shows a bank's ability to withstand economic shocks.
• The stability of the Philippine Banking system is affected by global market conditions or policy actions from advanced economies that often impact global interest rates.

Recent Trends in the Philippine Financial System

• Total assets of the Philippine banking system increased in March 2024, surpassing the pre-pandemic average.
• The growth of the loan portfolio closely mirrors increases in other financial elements, including assets.
• The real estate sector remains the largest borrower within the Philippine banking sector.

Off-Balance Sheet Activities

• Activities such as loan commitments, letters of credit, loan sales, and trading activities don't directly impact the balance sheet because they don't add to assets or liabilities.

Investment Banks

• Investment banks provide more complex financial services than retail banks.
• They assist in the sale of securities in the primary market.
• Securities brokers and dealers handle secondary trading.

Types of Investment Banks

• Bulge Bracket Banks provide broad financial services, including asset management.
• Middle-Market Banks provide services relating to financial markets including equity and debt.
• Boutique Banks specialize in regional or specific financial areas.