Financial Institutions: Types and Functions

• A financial institution (FI) engages in dealing with financial and monetary transactions like deposits, loans, investments, and currency exchange.
• These institutions exist to provide a wide variety of deposit, lending, and investment products to individuals and businesses.
• There are nine major types of financial institutions.

Central Banks

• Central banks oversee and manage all other banks.
• The central bank in the United States is the Federal Reserve Bank.
• The Federal Reserve Bank is responsible for the monetary policy, supervision, and regulation of financial institutions.

Retail and Commercial Banks

• Retail banks traditionally offered products to individual consumers.
• Commercial banks traditionally worked directly with businesses.
• Many large banks now offer deposit accounts, lending, and limited financial advice to both demographics.
• Products offered include checking and savings accounts, certificates of deposit (CDs), personal and mortgage loans, credit cards, and business banking accounts.

Internet Banks

• Internet banks function similarly to retail banks but operate through online platforms instead of physical locations.

Credit Unions

• Credit unions serve a specific demographic based on their field of membership, like teachers or military members.
• They offer products similar to retail banks.
• Credit unions are owned by their members and operate for their benefit.

Savings and Loan Associations

• Savings and loan associations are mutually held.
• They provide no more than 20% of total lending to businesses.
• They are used by individual consumers for deposit accounts, personal loans, and mortgage lending.

Investment Banks and Companies

• Investment banks help individuals, businesses, and governments raise capital through the issuance of securities; they do not take deposits.
• Investment companies, also known as mutual fund companies, pool funds from individual and institutional investors, providing access to the broader securities market.

Brokerage Firms

• Brokerage firms assist individuals and institutions in buying and selling securities among available investors.
• Customers can trade stocks, bonds, mutual funds, exchange-traded funds (ETFs), and alternative investments.

Insurance Companies

• Insurance companies help individuals transfer risk of loss.
• They are used by individuals and businesses to protect against financial loss due to death, disability, accidents, property damage, and other misfortunes.

Mortgage Companies

• Mortgage companies originate or fund mortgage loans.
• Most serve individual consumers, but some specialize in commercial real estate.

Banks and other Financial Institutions

• A bank is a financial institution licensed to receive deposits and make loans.
• Banks may also provide financial services like wealth management, currency exchange, and safe deposit boxes.
• Banks are regulated by the national government or central bank in most countries.

Common Types of Banks

• Retail banks provide services to the general public, including loans and credit cards, and have numerous branch locations.
• Commercial banks focus on business customers, providing complex services and managing payments and lines of credit.
• Investment banks help businesses raise capital in financial markets and advise on mergers and acquisitions.
• Private banks offer services exclusively to wealthy clients with at least $1 million in net worth, helping manage wealth and provide tax advice.
• Central banks manage the monetary system, like the U.S. Federal Reserve, which supervises banks and sets monetary policy.
• Credit unions are not-for-profit organizations owned by their customers offering similar products and services to retail banks.
• Online banks operate entirely online and often offer competitive rates on savings accounts and free checking.
• Mutual banks are owned by members or customers and tend to be active in only a single community.
• Savings and loans helped make homeownership mainstream by using savings deposits to fund home loans.

Historical Development of Banking in the Philippines

• Banking began in the 16th century with Obra Pias.
• Rodriquez Bank emerged in the early 19th century as a loan association.
• Banco Espanol-Filipino de Isabel II was the first state bank, established in 1851.
• In 1872, the chartered bank of India, Australia and China opened branches.
• British-Oriented banks opened branches following the opening of the Suez Canal in 1869.
• In 1875, Hong Kong and Shanghai Banking Corporation established a branch.
• Monte de Piedad y Caja de Ahorrosis was the first mutual savings in the country.
• In 1906 Postal Savings Bank was established and it was the first agricultural bank.
• Foreign banks dominated the scene until 1916 when the Philippine National Bank was granted its charter.
• The Philippine Bank of Commerce, the first private bank with Filipino capital, started operations in 1938.
• The Bureau of Banking was created in 1929 to supervise banks.
• The Manila Clearing House was established in 1930 by domestic banks.
• The Japanese occupation caused devastation in the banking sector.
• The Southern Development Bank opened a branch in Manila in 1942 as the fiscal agent of the Japanese government.
• Executive Order 96 invalidated all Japanese occupation deposits after the Post War Era.
• Commonwealth Act 725 enabled domestic banks to reopen in March 1946.
• In 1947, the Rehabilitation Finance Corporation was created through RA 85.
• In 1948, the General Banking Act was passed into law.
• In 1949, Republic Act no. 265, the Central Bank Act, was passed, creating the Central Bank of the Philippines.

Philippine Banking Today

• The Philippines emerged as among the most resilient economies in the region despite the Asian financial crisis in 1997.
• The Central Bank of the Philippines (BSP) initiated reforms even before the Asian crisis.
• A new and more independent central bank was created in 1993.
• Foreign bank entry was liberalized in 1994, leading to new foreign bank branches.
• Tighter prudential measures continued to be introduced.
• The BSP adopted a program of reforms to improve the capacity of banks to face adverse shocks which included:
• Increasing minimum capital requirements.
• Stricter requirements for new bank licenses.
• Higher qualification requirements for bank directors and senior officers.
• Regulations on insider loans and restructuring of loans.
• Redefinition of non-performing loans.
• Introduction of loan loss provisioning requirements.
• Higher specific provisioning for classified loans.
• Expansion of bank disclosure requirements.

Regulatory and Supervisory Practices

• Shift in supervisory focus to a forward-looking and risk-based framework.
• Consolidated supervision of banks and quasi-banks and monitoring of banks potentially in distress.
• Adoption of prompt corrective action policy and schedules of sanctions.
• Efficient resolution of problem banks.
• The Banking Law of 2000 (GBL) was signed into law on 23 May 2000, amending the countryís 52-year-old General Banking Act.
• The law was crafted to meet the challenges and provide safeguards for new risks attendant on globalization.
• Mergers and consolidation
• Liberalisation of foreign bank entry.
• Electronic banking

Central Bank of the Philippines (BSP)

• The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines, established on 3 July 1993.
• The BSP enjoys fiscal and administrative autonomy from the National Government.

BSP Seal

• Its round shape in blue features three gold stars and a stylized Philippine eagle.
• The stars represent price stability, a stable banking system, and a safe and reliable payments system.
• The blue background signifies stability.
• The eagle is national bird, representing strength and freedom.

Retail Banking

• Retail banks provide financial services to individuals and small businesses.
• Retail banks promote financial inclusion, help create jobs, and support economic growth.
• Services include checking and savings accounts, debit cards, credit cards, mortgages, and personal loans.

Commercial Banking

• Commercial banks provide financial services to businesses, institutions, and government entities.
• Commercial banks offer a wider range of products than retail banks.
• Services include checking and savings accounts, lines of credit, business loans, foreign exchange services, and wealth management services.

Types of Banks

• Banks can be categorized as retail, commercial or corporate, or investment banks.
• Big global banks often operate separate arms for each of these categories.
• Unlike other banks, central banks do not deal directly with the public, instead being independent institutions authorized to oversee the nation's money supply

Historical and Development Bank

• The DBP's history can be traced back during the Commonwealth.
• 1935-The National Loan and Investment Board (NLIB) was created to coordinate and manage government trust funds.
• 1939 – The Agricultural and Industrial Bank (AIB) absorbed the functions of the NLIB.
• 1946 - The government created the Rehabilitation Finance Corporation (RFC) which absorbed the assets and took over the functions of the AIB.
• 1958 – The RFC was reorganized into the Development Bank of the Philippines.
• 1963 - Congress broadened DBP's powers by increasing its capitalization.
• 1966-DBP marked its debut as an investment bank.
• 1967 – DBP raised its agricultural lending by 80 percent.
• 1969 - Construction of the DBP Head Office Building began.
• 1970 – The devaluation of the peso caught DBP at a vulnerable time.
• 1971 - DBP shifted its focus to countryside development.
• 1973 – DBP's capitalization was increased from P2-billion to P3-billion.
• 1977 – DBP celebrated its 30th anniversary.
• 1978 – DBP launched its “Study Now, Pay Later" program.
• 1979 - DBP spent P1.304-billion for the refinancing.
• 1980 - Amid the oil crises, DBP provided support to energy and transport services.
• 1981 – DBP served as one of the primary conduits of funds.
• 1984 - Affected by worldwide economic difficulties, DBP suffered a loss of P1.2-billion.
• 1986 - Former President Corazon C. Aquino issued Executive Order No. 81.
• 1988 - DBP resumed full development banking operations.
• 1992 - DBP was recognized as one of the World's Top Ten Banks by The Banker.
• 1994 –DBP ranked 11th in terms of overall leadership.
• 1995 – DBP was granted an expanded banking license.
• 1997 - DBP floated a 20 Billion Asian Yen Bond (US$169-million).
• 1998-Former President Fidel V. Ramos signed Republic Act 8523.
• 1999- DBP launched the LGU-Urban Water and Sanitation Project.
• 2002 - The Bank became the first Philippine bank to be ISO 14001-certified.
• 2003- The Asian Banker ranked DBP as the Strongest Bank in the Philippines.
• 2005 - The Bank's loan portfolio reached an all-time high of P79.3-billion.
• 2007 – DBP was conferred an Outstanding Corporate Governance award.
• 2008 – DBP stepped up its Overseas Filipino Workers Assistance Program.
• 2010 – DBP's Quality Management System received ISO 9001:2008 certification.
• 2012 – DBP successfully raised US$300-million in global dollar notes.
• 2015 - Largely fueled by loans, DBP's total assets crossed the half-trillion mark.
• 2017 - DBP was named "SME Bank of the Year".
• 2020 – DBP joined the ranks of trillion-peso banks in the country.
• 2021 – DBP was conferred by the Department of Trade and Industry.
• DBP supports towards building a stronger and more resilient Philippine economy

Personal Finance

• Personal finance is the process of managing personal financial activities such as income, spending, saving, investing, and protection, typically through a budget or financial plan.

Income

• Income is a cash inflow that an individual receives, including salaries, bonuses, hourly wages, pensions, and dividends.

Spending

• Spending includes all types of expenses, split into purchases made with cash or credit.
• Rent, mortgage payments, and taxes are common spending sources.

Saving

• Saving refers to excess cash that is retained for future use.
• Common forms of savings include physical cash, savings accounts, checking accounts, and money market securities.

Investing

• Investing relates to the purchase of assets that are expected to generate a rate of return.
• Common forms of investing are:
• Stocks
• Bonds
• Mutual funds
• Real estate
• Private companies
• Commodities
• Art

Protection

• Personal protection products guard against unforeseen events, including life insurance, health insurance, and estate planning.

Personal Finance Planning

• The personal finance planning process involves assessment, goals, plan development, execution, and monitoring and reassessment.

Public Finance

• Public finance is the management of a country's revenue, expenditures, and debt load through various government institutions.
• Main components include collecting revenue, making expenditures, and implementing a financing strategy.
• Tax collection is the main revenue source; examples include sales tax, income tax, estate tax, and property tax.
• The budget is a plan of what the government intends to have as expenditures in a fiscal year which needs to be approved.
• Expenditures are everything that a government actually spends money on.
• If government spends more then it collects that's a deficit, if the government collects more then it spends that's a surplus.
• If there is a deficit the government borrows money and issues national debt.

Microfinance

• Microfinance, is a type of banking service provided to low-income individuals or groups.

Trade Finance

• Trade finance represents the financial instruments and products that are used by companies to facilitate international trade and commerce. -Lending lines of credit can be issued -Letters of credit reduce the risk -Working capital can be supplied to exporters.

Dept-to-equity ratio

• The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity.

Financial Statements

• Financial statements are reports compiled by businesses that detail the company's financial activities and health.
• The primary financial statements of for-profit businesses include the balance sheet, income statement, statement of cash flow, and statement of changes in equity.