Understanding Financial Systems

Financial System

• A financial system facilitates the exchange of funds through institutions like banks and insurance companies.
• Financial systems exist at firm, regional, and global levels.
• Borrowers, lenders, and investors exchange funds for projects, aiming for returns on financial assets.
• It includes rules for borrowers and lenders to decide on project funding and deal terms.

Financial Stability for a Country

• Financial systems connect present aspirations with future economic outcomes for consumers and corporations.
• Historically, they developed through the banking system, rooted in fiat money.
• Ensuring banks' safe operation is essential for the public interest, as they manage savings, transfer funds, facilitate payments, and enable entrepreneurship.
• Banking authorities establish regulations to foster innovation while overseeing banks, ensuring responsible operation.

Global Financial Crisis

• Highlighted "systemic-ness."
• Market players interact, creating interconnected and sequenced transactions.
• Risk choices interlink; societal outcomes may deviate from private intentions.
• An initiative manages the financial system's health as a specific policy objective, focusing on "systemic risks" through macroprudential policy.

Financial Stability

• The goal is to enhance financial system resilience, protecting it and its components from shocks.
• Achieved by managing systemic risks, ensuring finance benefits consumers in stable times and remains resilient during disruptions.
• "Financial Stability" becomes a global standard in overseeing financial systems.

Bank-Specific vs. Macroprudential

• Not all institution-specific vulnerabilities are "systemic."
• Macroprudential issues extend beyond institutions.
• Macroprudential policy is concerned with interwoven risk behaviors, surpassing liquidity and inflation.
• Welfare considerations are handled distinctively because adverse outcomes impact society more than buoyant ones.

Handling Financial Stability

• It is managed by an organizational structure centered at the BSP (consistent with their Charter)
• The BSP works with other financial authorities for a holistic view of the financial system.
• Since 2009, the BSP has concentrated on financial stability, with recent developments being notable.
• The BSP and FSCC's initiatives collectively pursue Financial Stability.

Macroprudential Policy Strategy Framework

• It is used to sustain and enhance the health of the financial system.
• It considers financial authorities' views, institutional arrangements, and tools.
• It emphasizes the collaborative nature inherent to the FSCC.

Systemic Risk Crisis Management Framework

• Involves assessing, categorizing, managing, and communicating systemic risks.
• Is a preemptive measure for crisis readiness, demonstrating the Council's systemic risk management commitment.

Financial Stability Agenda

• Defined in a perimeter paper published by the OSRM.
• It outlines the understanding of its scope, depth, and coverage.

Functions of the Financial System

• Financial systems foster economic development, as they encourage savings by offering attractive interest rates.
• Savings are directed into productive business ventures through lending.
• It monitors corporate performance.
• Links savers and investors through capital formation.
• Lowers transaction costs, increases return rates, and motivates people to save.
• Helps governments decide monetary policy.

Elements of a Financial System

• There are 6 Essential elements:
• Ultimate lenders (surplus economic units) and borrowers (deficit economic units) encompass non-financial entities engaging in lending and borrowing, directly or through intermediaries
• Financial intermediaries mediate lending/borrowing, earning a margin for intermediation benefits like reduced risk for lenders
• Financial instruments, or assets, are created/issued by borrowers/intermediaries, satisfying diverse participant needs as marketable (treasury bills) or non-marketable assets (retirement annuities).
• Money Creation by banks with bank deposits satisfies the demand for new Credit
• Financial Markets embody institutional arrangements for financial instrument issuance and trading.
• Price Discovery, is the establishment of money prices, i.e. interest and share prices in financial markets.
• Financial institutions bridge savings and investment gaps, regulated by governments, and acting as intermediaries between savers and borrowers.

Role of Financial Institutions

• Regulation of Monetary Supply
• Banking Services
• Insurance Services
• Capital Formation
• Investment Advice
• Brokerage Services
• Pension Fund Services
• Trust Fund

Components of the Financial System

Financial Institutions

• These corporations deal with financial and monetary matters like deposits, loans, investments, and currency exchange to provide services for economic development by issuing financial instruments.
• Banking institutions form the core of economic progress, facilitating savings and investments from the public and lending to businesses.
• Non-banking institutions provide specific financial services, similar to banks, without holding a banking license (e.g., IFCI, IDBI, LIC).

Financial Market

• Markets for financial instruments including shares, debentures, and bonds. And services like merchant banking and underwriting, split into:

Capital Market

• Involves institutional arrangements for borrowing medium and long-term funds, enabling securities trading with:
  • Primary Market: Offering securities for initial public subscription.
  • Secondary Market: Trading pre-issued securities between investors.

Money Market

• Focuses on short-term funds with financial assets maturing within a year, maintaining high liquidity and ease of trading, e.g. treasury bills or commercial paper.

Financial Services

• Services usually revolve around customers and need to be provided by the finance industry.
• Financial strategies that are decided upon consider various aspects in great detail.
• They regard the cost, liquidity, and maturity like insurance company or credit rating facility.

Financial Instruments

• Agreements generate monetary assets for an entity alongside monetary burdens or equity tools for another institution.
• Various shares, bond, deposit certificates, corporate financial markets, or repos are examples of money market instruments.

Capital Market

• Capital market facilitates lending and borrowing for intermediate and long-term durations.
• It involves tradable instruments like equity, stocks, bonds or preferred shares.
• Capital markets uphold formal structure.
• Given reduced liquidity and longer durations, their risk is comparatively high.
• It meets ongoing business needs relating to medium to long term credit.
• It drives economic stability due to persistent capital savings.
• Returns remain elevated given longer durations.

Money Market

• The market enables lending and borrowing on a short-term basis, up to a year
• It deals with instruments like treasury bills, commercial/deposit bills etc.
• It is informal in nature
• Provided amplified liquidity combined with quicker dates to maturity within a year
• risk is comparatively low
• it meets current capital needs for business
• It bolsters liquidity
• yields tend to be low

Remarks

• The money market is often used with the capital market to park funds for short-term requirements.
• Money markets provide entities including individuals and corporations with variety of mechanisms including heightened liquidity and working capital.
• Those with fixed incomes are likely going to use them given safety associated with investments.
• Movements in established capital markets dictate economy stability of these conditions of business.
• Institutions use these instruments for long term needs including mergers.

Development of the Financial System in the Philippines

Barter System

• It was the financial system used in the early days

Spanish Era

• Obras Pias provided first banking structure for the Philippines. They were established by clergymen like Juan fernandez de Leonin in 1594.
• Trade occurred in Acapulco Mexico, and facilitated lifetime of economic benefit for Manila's merchants.
• Obras Plias capital supported the creation of Banco Espanol Filipino and Monte de Piedad in 1851, 1882 and facilitated galleon operations

El Banco Español Filipino de Isabel II

• Founded August 1, 1851. Also named "Bank of Philippine islands."
• It became the first public Filipino Bank and third to operate in the Philippines throughout Spanish occupation.
• Ynchausti of Ynchausti y Cía served as originator, and prominent Philippine multinational firm.
• From 1868 until 1873, then in 1876 through 1884 José controlled operations.
• Peso came into existence as authorized through royal means giving currency rights for country within their decree
• It circulated since 1851, while silver Mexican coin served, until original issue dating May 1, 1852 upon printing for currency value purposes.
• Ayala assumed control then transferred assets making financial banner to the company come 1969

Monte de Piedad and Savings Bank, Sta. Cruz, Manila

• Philippines oldest store as savings source.
• Felix huertas of order within Franciscan order oversaw organization utilizing wealth assets then launched 1882

American Era

• China banking evolved led by Dee C.Chuan alongside other leaders launching offices within Binondo within Philippines.

Post World War II Banks

• DBP or Development Bank of Philippines in 1935
• National Loan and Investment Board established coordinate or manage governments investment.

Retirement Fund

• In 1939, the NLIB's responsibilities went to the AIB during wartime.
• The AIB then harnessed all resources
• Following the war from 1946 ahead RFC through act number 85 and provided facilities as source to improve devastated places during fighting.
• Change then led modernized look of banks as they shifted from initial purposes including expansion.
• 500 million in assets came from government while DBP tapped all money with branches then used international institution
• Then 1963 legislation broadened range from 2 billion in equity or borrowed capacity.
• The targeted merger, however, now will occur first half of next year, said an appointed officer.

Development of Philippines Financial System

History of Financial System

• The financial system is as crucial to an economy as the heart is to a human.
• In the Philippines the financial system comprises banking and nonbank financial intermediaries.
• The Bangko Sentral ng Pilipinas and SEC provide regulatory oversight.

Credit Institutions

• "The Obras Pias" was the first credit insitution (1754-1820)
• "Banco Espanol Filipino de Isabela II" was established in 1851

Banco Español-Filipino de Isabela II

• Is the oldest standing bank in the Philippines and Southeast Asia.
• It was established on August 1, 1851 and named after Queen Isabella.
• It was established 23 years after public banks were formerly approved.
• They started paper operation in 1852 receiving honor in Philippines.

First Agricultural Bank

• Was established with 1906. Assets and liabilities later passed to the Philippines National Bank

Financial Sector

• Mediates claims between savings and investors.
• Borrows and lenders alike determine savings levels and how much is allocated or invested.
• Stability among these affects investment.

Assesssment

• The financial system displayed strength over last decade, including time period relating global financial crises.

Post-war Financial System's positive reviews

• Positively impacted growth with rapid liberalization

1970s

• the government allowed foreign financial institutions to set up offshore banking units.
• the commercial banks were authorized to accept foreign currency deposits.

1980s

• The anti-usury law became obsolete with the deregulation of interest rates.
• Big banks were encouraged to go to "universal" in operations. This was by IMF
• The traditional “differentiation" of functions among banks was removed.
• Universal banks held non-financial institution equity.
• The interest rate deregulation and universal banking policy created crisis and recession.

Aquino administration

• Huge liabilities accumulated by the two government banks were transferred to the government.
• In 1994 RA 7721, liberalized the entry and scope of operations of foreign banks.

1994 Bullish Economy

• The Philippines happened to be bullish in 1994.
• Rapid liberalization of the banking and other sectors of the economy.

Relief

• Three days after Manila fell, the military relinquished control of civil affairs to President Osmena.
• War caused wanton destruction, economic dislocation, and financial bankruptcy to the nation at large. Relief and Rehabilitation Requirements

• War Relief Efforts
• Immediate relief
• Army provided basis needs
• Army conducted base-level projects
• Main relief work done by volunteer associations

Government Banking Institutions

• Include commercial banks, thrift or savings banks, rural and cooperative banks, all collecting savings and time deposits while providing credit/Payment assistance

Legal Basis

• Guidelines come with mandate
• Sound and efficient management
• Governmental Resources and Instrumentalities

Scope

• NGAs, GOCCs/Government Financial Institutions/Government Instrumentalities with Corporate Powers ,Government Corporate Entities , Local Government Units

Definitions

• "Authorized Governmental Depository Bank" refers to governmental depository accounts.
• "Governmental Funds include funds of sorts or natures controlled within agency.

List of government financing

• AIBP.
• Development banks
• DBP Data Centers.
• Landbank.

Objectives

• Main goal: to provide banking services primarily to cater of medium and long range needs of enterprises.

Function

• Serves small sector via social license

1935

• National Loan and invest board founded.

1939

• functions moved after end NLIB

1947

• Gov created RFC.

DBP

• Transformed from former RFC in 1958.
• Shift then included national economy

Aquino

• Overhauled company.
• Transferred all past liabilities to organization.
• Now offers various new resources

Status

• Approved banks lending access
• Is state funded banks
• Provides resources for both sides

Organisation

• Is managed by officers
• President appointed via directorates.
• The DBP chairman presides at meetings of the board

Landbank

• Is Philippine investment
• Provides resources to customers.
• Oversees client operations
• Has a History in the code
• Established with the new board
• Is being merged.

Al-Amanah Islamic Investment Bank

• Is the only type in Philippine.
• Serves Muslim Communities
• Was then taken in from DBPs

Objectives:

• To understand what banking entities are.
• To explore the distinct type within banking.
• To determine the governmental functions within banking.