Introduction to Banking Systems

What is a Bank?

• A bank is a financial institution that lends money, primarily through deposits.
• Banks perform economic functions like facilitating payments between people or institutions, acting as financial intermediaries for savings and loans, pooling assets, and transforming short-term deposits into long-term loans.
• Other services include providing depository functions for various accounts, trust functions, collection and remittance, loan services, and financial advisory.
• Banks operate under legal frameworks like the General Banking Law (GBL) of 2000, the Law on Secrecy of Bank Deposits, the Foreign Currency Deposit Act, and the Unclaimed Balances Law.
• Banks face challenges due to moral hazard and asymmetric information, which can lead to poor decision-making and financial risks.

Central Bank

• The central bank regulates and oversees the monetary system of a nation or group of nations, promoting economic growth.
• The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Philippines.
• The BSP's key mandates include maintaining price stability, monetary stability, currency convertibility, promoting financial stability, and overseeing payment and settlement systems.
• The BSP enjoys fiscal and administrative autonomy from the National Government.
• The BSP has regulatory and supervisory power over banking institutions and non-bank financial institutions.

Banking Institutions

• Universal Banks are a type of commercial bank with additional authority to exercise investment house powers and invest in non-allied enterprises.
• Commercial Banks accept deposits, offer checking account services, and make various loans.
• Land Bank of the Philippines (LBP) is a government-owned bank focused on implementing land reform.
• Development Bank of the Philippines (DBP) finances agricultural and industrial sectors, particularly in rural areas and for small and medium enterprises (SMEs).
• Agricultural Credit Policy Council (ACPC) promotes financial services in the agricultural sector.
• The Association of Development Financing Institutions in Asia and the Pacific (ADFIAP) promotes financial services in the region.

Non-Bank Financial Institutions (NBFIs)

• Investment Houses engage in guaranteed underwriting of securities issued by corporations, individuals, or enterprises.
• Financing Companies provide credit to consumers and agricultural enterprises through discounting, factoring, or leasing.
• Investment Companies focus on investing, reinvesting, or trading securities.
• Non-Stock Savings and Loan Associations accumulate funds from members and provide loans or invest in government securities or productive enterprises.
• Pawnshops lend money secured against personal property pledges.
• Securities Dealers buy and sell securities for their own account, generating income from trading.

History of Banking in the Philippines

• The El Banco Español-Filipino de Isabel II, later known as El Banco de Islas Filipinas (now Bank of the Philippine Islands - BPI), marked the beginning of formal banking in the Philippines.
• BPI was the first commercial bank established in the Far East, financing agricultural exports and facilitating trade with Europe.
• The Monte de Piedad y Caja de Ahorros de Manila was founded by Father Felix Huertas.
• The National Banking Act of 1863 in the US introduced a unified national paper currency and addressed failures in the pre-Civil War banking system.
• The Federal Reserve Act of 1913 created the Federal Reserve System, aiming to establish a stable credit environment.