Philippine Banking Reserves and Laws

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Questions and Answers

What is the primary purpose of the Batas Pambansa Bilang 22 (BP 22)?

To protect the public from bounced checks (correct)

To regulate the issuance of credit cards

To promote transparency in loan agreements

To prevent money laundering activities

Which stage of money laundering involves the introduction of illegal funds into the financial system?

Layering

Integration

Concealment

Placement (correct)

What type of returned check occurs when funds from deposited checks are not yet accessible for withdrawal?

Post-Dated Check

Stale Check

Drawn Against Insufficient Funds (DAIF)

Drawn Against Uncollected Deposits (DAUD) (correct)

What does the Truth in Lending Act (RA 3765) primarily require from lenders?

To disclose finance charges Signup and view all the answers

Which of the following is NOT a common type of returned check?

Insufficient Credit Check Signup and view all the answers

Which stage of money laundering focuses on disguising the origins of illicit funds?

Layering Signup and view all the answers

What is a common consequence of issuing a check without sufficient funds according to BP 22?

Criminal charge Signup and view all the answers

What characteristic defines a stale check?

Outstanding for more than six months Signup and view all the answers

What is the formula for total reserves in a bank?

Total reserves = Required reserves + Excess reserves Signup and view all the answers

Which statement best describes a credit crunch?

It describes a reduction in credit availability due to increased risk aversion. Signup and view all the answers

Who heads the Monetary Board of the Bangko Sentral ng Pilipinas?

BSP Governor Signup and view all the answers

What constitutes primary reserves in a banking context?

Cash in vaults and deposits with central banks. Signup and view all the answers

What is the penalty for a bank if the legal reserve is below the required minimum?

Interest penalty of 1/10 of 1% per day. Signup and view all the answers

Which of the following correctly distinguishes between monetary policy and fiscal policy?

Monetary policy focuses on money supply and interest rates, while fiscal policy involves taxation and spending. Signup and view all the answers

What is the significance of the Secrecy of Bank Deposits under RA 1405?

It mandates that all bank deposits are confidential except under certain conditions. Signup and view all the answers

What is the capital of the Bangko Sentral ng Pilipinas as per recent amendments?

Php 200 Billion Signup and view all the answers

What is the primary purpose of Private Mortgage Insurance (PMI)?

To insure the lender against major loss in case of borrower default Signup and view all the answers

Which of the following accurately describes a Fixed-Rate mortgage?

The interest rate remains constant for the duration of the loan Signup and view all the answers

What differentiates an Adjustable-Rate Mortgage from a Fixed-Rate mortgage?

The interest rate can change based on a published index Signup and view all the answers

In a 15-year mortgage, the borrower typically faces which of the following?

A shorter repayment period resulting in higher monthly payments Signup and view all the answers

What is the significance of a down payment when obtaining a mortgage?

It impacts whether private mortgage insurance is required Signup and view all the answers

What are discount points in the context of a mortgage?

A form of prepaid interest to reduce the loan's initial interest rate Signup and view all the answers

What is the primary risk associated with curtailment or prepayment in mortgage-backed assets?

The risk that the borrower will repay the loan in full before maturity Signup and view all the answers

What does the formula $Total,Periodic,Repayment = (1+i)^t x n - 1$ represent?

The total periodic repayment amount during the loan term Signup and view all the answers

What is the French term used to refer to slices of pooled mortgages?

Tranche Signup and view all the answers

Which statement correctly characterizes Conventional Mortgages?

They require PMI and are not federally guaranteed Signup and view all the answers

Which financial model is the simplest way to measure correlation in pricing CDOs and CMOs?

Gaussian Copula Model Signup and view all the answers

What are Collateralized Debt Obligations (CDOs) primarily composed of?

Slices of mortgage and non-mortgage loans Signup and view all the answers

What was the increase in federal deposit insurance per account per institution as defined by the Emergency Economic Stabilization Act of 2008?

$100,000 to $250,000 Signup and view all the answers

What major factor contributed to pressures resulting in the global financial crisis regarding mortgage lending?

Lax underwriting standards Signup and view all the answers

What significant change did the Gramm-Leach-Bliley Act introduce to bank holding companies?

They could become financial services holding companies. Signup and view all the answers

Which act requires full disclosure of the terms and costs involved in loans to ensure borrowers understand their agreements?

Truth in Lending Act Signup and view all the answers

What does the term 'Too big to fail' (TBTF) refer to in banking regulation?

A policy ensuring systemic institutions are supported to prevent their failure. Signup and view all the answers

What did the McFadden Act of 1927 restrict regarding banks?

The ability of banks to branch across state lines. Signup and view all the answers

What action must banks take if they want to merge or expand their branches according to the Community Reinvestment Act (CRA) of 1977?

Obtain CRA certification. Signup and view all the answers

What does the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 primarily focus on?

Enhancing consumer protection in financial markets. Signup and view all the answers

Which act regulates collections and use of consumer credit information and requires accurate reporting to credit bureaus?

Fair Credit Reporting Act Signup and view all the answers

Study Notes

Banking Reserves

Total reserves are the sum of required reserves and excess reserves.
Primary reserves consist of non-earning assets like cash in vaults, deposits with the central bank, deposits with other banks, and checks for collection.
Banks are required to maintain a minimum percentage of their deposits as reserves.
If a bank's legal reserve falls below the required minimum, it must pay the BSP 1/10 of 1% per day.
A credit crunch is a reduction in the availability of credit often due to increased risk aversion.

Philippine Banking Laws

The New Central Bank Act (RA 7653, 1993, as amended by RA 11211, 2019) establishes the Bangko Sentral ng Pilipinas (BSP) as the country's central monetary authority.
BSP's goal is to maintain price stability and support balanced economic growth and employment.
The BSP's Monetary Board is composed of 7 members appointed by the President, with a term of 6 years.
The board includes the BSP Governor, a Cabinet representative from the government, and 5 private sector members.
BSP's capital is Php 200 Billion (as per RA 11211).
The Secrecy of Bank Deposits Act (RA 1405) protects the confidentiality of deposits, except in specific cases like impeachment, court orders, or bribery investigations.
The Anti-Money Laundering Act of 2001 (RA 9160) combats money laundering activities by criminalizing the movement of illegal proceeds. This act categorizes money laundering into three stages: placement, layering, and integration.
The Truth in Lending Act (RA 3765) ensures transparency in credit extensions by requiring full disclosure of finance charges.
BP 22 (Batas Pambansa Bilang 22) is the Anti-Bouncing Checks Law that penalizes the issuance of checks without sufficient funds.
The law aims to protect individuals from financial losses due to bounced checks.

Returned Checks

Returned checks, or bounced checks, occur when a bank dishonors a check due to insufficient funds or other reasons.
Common types of returned checks include:
- Drawn Against Insufficient Funds (DAIF): insufficient balance to cover the check amount.
- Drawn Against Uncollected Deposits (DAUD): insufficient balance even with outstanding, yet unverified deposits.
- Post-Dated Check: dated in the future, not valid until the specified date.
- Stale Check: an old check exceeding six months, potentially posing security risks.

US Financial Laws

The Emergency Economic Stabilization Act of 2008 increased FDIC's deposit insurance from $100K to $250K per account per institution.
The Glass-Stegall Act of 1933 separated commercial banking, investment banking, and insurance industries.
The Gramm-Leach-Bliley Act (Financial Modernization Act) allowed bank holding companies to expand into "financial services holding companies".
The McFadden Act of 1927 restricted federally chartered banks from branching across state lines.
The Riegle-Neal Interstate Banking Act (1994) reversed this restriction, allowing nationwide bank mergers and branching.
The Truth in Lending Act of 1968 mandated comprehensive disclosure of loan terms and costs to borrowers.
The Community Redlining Act (CRA) of 1977 encouraged banks to serve underserved communities and promoted fair lending practices.
The Fair Credit Reporting Act of 1970 regulated the collection and use of consumer credit information, ensuring accuracy and imposing penalties for violations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 focused on consumer protection in financial markets, curbing unfair lending practices and promoting equal treatment in finance.

Regulatory Systems and Policies

Regulatory systems play a crucial role in maintaining financial stability and mitigating risks in the banking sector.
Common policies used by regulators include:
- Pay off and Liquidate: involves closing a failed institution and distributing its assets to creditors.
- Purchase and Assume: a healthy bank acquires a failing institution, assuming its liabilities.
- Too Big to Fail (TBTF): designates systemically important institutions as too crucial to the financial system to be allowed to fail, prompting regulatory intervention to ensure their survival.

Mortgage Markets

Basic Mortgage Concepts:
- Down Payment: the initial amount of the purchase price paid upfront by the buyer.
- Private Mortgage Insurance (PMI): insurance purchased by borrowers with less than 20% down payment, protecting the lender against losses in case of default.
- Fixed-Rate Mortgage: the interest rate remains constant throughout the loan term.
- Adjustable-Rate Mortgages (ARMs): the interest rate can change based on market indexes like T-Bills, LIBOR, or COFI, shifting interest rate risk from lender to borrower.
- Insured Mortgages: mortgages backed by either government or government-controlled entities, potentially offering lower interest rates.
- Conventional Mortgages: not insured by the government and may require private mortgage insurance.
- Discount Points: upfront interest payments, which can reduce the overall interest rate.
Mortgage Payments & Amortization:
- Amortization: repaying the loan principal and interest over a specified period through equal payments.
- The total periodic repayment formula is used to calculate payment amounts.
- Interest payment is calculated as principal multiplied by interest rate and time.
- Principal repayment is the difference between the total repayment and the interest payment.
Mortgage Term Comparisons:
- 15-Year Mortgage: higher monthly payments but lower overall interest cost.
- 30-Year Mortgage: lower monthly payments but higher overall interest cost.

Mortgage-Backed Assets

Mortgage-Backed Securities:
- Participation Certificates: the oldest and most basic form of mortgage-backed assets, representing direct ownership in a pool of mortgages.
- Curtailment or Prepayment Risk: risk that borrowers will pay off their mortgages earlier, reducing the overall interest earned.
- CMOs (Collateralized Mortgage Obligations): mortgage pools sliced into different segments (tranches) with varying risk-reward profiles.
CDOs (Collateralized Debt Obligations): tranches of non-mortgage loans, similar to CMOs.
Securitization: process of transforming illiquid assets into marketable securities.
Gaussian Copula Model: a method used to assess correlation and price CMOs and CDOs.
Copulas: mathematical tools to transform probabilities of default.
Securitized Mortgages: considered low-risk securities with higher returns than government bonds.
Subprime Mortgages: offered to borrowers with poor creditworthiness, higher risk, and often associated with lax underwriting standards.
Lax Underwriting Standards: lenient lending practices contributing to the subprime mortgage crisis.
Misalignment of Incentives: conflicting incentives (e.g., banks prioritizing loan origination over loan quality) played a role in the crisis.

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Description

This quiz covers the key concepts of banking reserves, including the distinctions between required and excess reserves, as well as the implications of Philippine banking laws like the New Central Bank Act. Test your understanding of how banks maintain reserves and the role of the Bangko Sentral ng Pilipinas in economic stability.