Philippine Financial System History

• The financial system is essential for allocating resources between those with surplus and deficit.

History of the Philippine Financial System

• Obras Pias, the first credit institution in the Philippines, began in 1754 by Father Juan Fernandez de Leon and ended in 1820.
• The first Philippine bank, Banco Español-Filipino de Isabela II, was established in 1851.
• Banco Español-Filipino de Isabela II is now known as Bank of the Philippine Islands (BPI).
• BPI is the oldest bank in the Philippines and Southeast Asia, established on August 1, 1851.
• The bank was named after the mother of Spanish King Alfonso XII, Isabella.
• The bank's establishment occurred 23 years after Ferdinand VII ordered the creation of a public bank in the Philippines.
• Operations began in 1852, with the bank having the honor of issuing the first paper money.
• In 1906, the First Agricultural Bank of the Philippines was established.
• In 1916, its assets and liabilities were transferred to the newly formed Philippine National Bank.

Resilient and Inclusive Financial Sector

• The financial sector acts as an intermediary between savings and investors.
• The stability of financial institutions and the instruments' attractiveness determine savings mobilization and allocation.
• The stability and performance of financial institutions like banks, markets, and insurance companies have a vital impact on investment and growth.
• The Philippine financial system has shown strength, even during global financial crises.
• Reforms focused on banking sector restructuring and corporate governance in the early 2000s.
• Remittances from OFWs and minimal investment exposure helped the system avoid difficulties during the 2007-2008 crisis.
• External validations and stress tests confirm the strength of the banking system.

Current Structure of the Financial System

• The Philippine financial system is primarily bank-based.
• The banking sector accounts for over 80% of the financial system's resources and GDP.
• Universal and commercial banks hold the largest share due to their maturity, network, and capitalization.
• Nonbank financial institutions remain relatively small, accounting for about 18% of total assets.
• Only 13.9% of the Philippine population has private life insurance coverage.
• In 2008, the private insurer penetration rate was only 1.1% of the country’s GDP.
• Low insurance coverage is attributed to a lack of priority and low financial literacy.
• The insurance industry's total assets reached P528.2 billion as of end-December 2009.
• Life insurers captured 79% of the insurance market, nonlife insurers 19%, and reinsurers 2%.
• The Philippine Stock Exchange (PSE) grew to 259 companies in 2011 from 12 in 2003.
• Market capitalization as a percentage of economic output remains small compared to other ASEAN-5 economies.
• In 2009, market capitalization dropped to 45.8% of GDP from 54% in 2002, reflecting illiquidity.
• Mutual funds are managed by broker-dealers and investment companies, often subsidiaries of banks.

Financial Structure and Monetary Policy in the Philippines

• The financial structure includes monetary authorities, commercial banks, rural banks, and specialized institutions.
• The public sector plays a significant role through government-owned financial institutions.

Role of Bangko Sentral ng Pilipinas (BSP)

• BSP aims to promote monetary stability and currency convertibility.
• BSP provides policy directions for money, banking, and credit.
• It supervises banks and regulates non-bank financial institutions with quasi-banking functions.

Structure of the Financial System

• A financial system consists of institutions, instruments, and markets that promote savings and channel them to efficient use.
• It includes savers, intermediaries, markets, and investors.

Three Parts of the Financial System

• Savers deposit money in financial institutions like banks.
• Banks lend money to investors.
• Investors generate profits and repay the investment with interest.

Functions of the Financial System

• The financial system intermediates and facilitates the flow of funds from surplus to deficit areas.
• It consists of institutions, markets, regulations, laws, practices, money managers, analysts, transactions, and claims & liabilities.

Four Different Types of Financial Institutions

• Bangko Sentral ng Pilipinas (BSP) is the regulatory body.

Universal and Commercial Banks

• Largest group of financial institutions resource-wise.
• Offer a wide range of financial services.
• Universal banks can engage in underwriting and invest in equities.

Rural and Cooperative Banks

• Popular in rural communities.
• Develop the rural economy by providing basic financial services.
• Rural Banks are privately owned.
• Cooperative Banks are owned by cooperatives.

Thrift Banking System

• Includes savings and mortgage banks, private development banks, associations, and microfinance thrift banks.
• Accumulate savings and invest them.
• Provide financing to businesses and individuals, especially SMEs.

Non-banks with Quasi-Banking Functions

• Borrow funds from 20 or more lenders.
• Re-lend or purchase receivables.

Private Banking

• Offers personalized financial services to high-net-worth individuals (HNWI).
• Includes wealth management services such as investing, tax services, insurance, and estate planning.
• Services are offered through special departments or divisions.

How Private Banking Works

• Provides personalized approach with an assigned relationship manager or private banker.
• Offers specialized services like investment strategy, financial planning, financing options, and retirement planning.

Advantages of Private Banking

• Privacy is a key benefit.
• Customer dealings remain anonymous.
• Offers tailored proprietary solutions.
• Clients receive preferential pricing on products and services.
• Access to exclusive hedge funds, private equity partnerships, and alternative investments.
• Provides consolidated services and acts as a liaison for clients.
• Benefits the bank through increased assets under management (AUM).

Disadvantages of Private Banking

• High employee turnover rates.
• Potential conflicts of interest.
• Limited to the bank's proprietary products.
• Legal, tax, and investment services may not be as specialized as those from independent professionals.
• Restrictive regulatory environment.

Public Banking

• A chartered depository bank where public funds are deposited
• Owned by a government unit and mandated to serve a public mission
• Involves government oversight of the credit system

How Public Banks Work

• Capitalized through initial investment and tax revenue.
• Can take tax revenues and government income as deposits.
• Can create money in the form of bank credit.
• Can lend at very low interest rates.
• Public banks have no shareholders to pay, so can pass low rates onto borrowers.
• Potential hidden subsidy as state deposits may earn more from a private bank.
• Can partner with local banks to fund projects.
• Public banks are partners, not competitors, with local private financial institutions.
• Public savings banks offer individual savings accounts, bonds, remittances, and other services.

Non-Banking Financial Institutions (NBFIs)

• Financial institutions that do not have a full banking license and are not supervised by a banking regulatory agency.
• Facilitate bank-related financial services like investment and market brokering.
• Examples include insurance firms, pawn shops, check issuers, and microloan organizations.
• Strengthen the economy by providing multiple alternatives to transform savings into capital investment.

Role in the Financial System

• Supplement banks by allocating surplus resources to individuals and companies with deficits.
• Introduce competition in the provision of financial services.
• Unbundle and tailor financial services to meet specific client needs.
• Specialize in particular sectors and develop an informational advantage.
• Offer banking services, such as loans, funding, planning, and trading.
• Provide wealth management services.
• Support investments in property and prepare feasibility studies.
• Typically cannot take deposits from the general public.

Stability

• A multi-faceted financial system with NBFIs can protect economies from financial shocks.
• NBFIs serve as backup facilities should the primary form of intermediation fail.
• The absence of effective financial regulations can destabilize the financial system.
• Shadow banking system may operate without supervision.
• May easily destabilize the entire financial system.