Monetary Policy and Central Banking (FM 4) Pre-Finals Coverage PDF

Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221...

Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ A Written Report on Monetary Policy and Central Banking (FM 4) – Pre-Finals Coverage Submitted by: Agad, Lemuel M. Ladroma, Gliz L. Limbing, Regine L. Malasaga, Karelle Jean S. Namalata, Brian Ven M. Ponlaon, Lovely Mae Serapion, Zaira M. 3FMB Submitted to: Dr. Floresito D. Calub In Partial Fulfillment of the Course FM4/Monetary Policy and Central Banking leading to the degree Bachelor of Science in Business Administration major in Financial Management Aug 29, 2024  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ TOPIC 1 CENTRAL BANKING: DEVELOPMENT AND GROWTH INTENDED LEARNING OUTCOMES: 1. Discuss the origin, nature of central banking and its functions, 2. Explain the characteristics of central bank and its objectives. 3. Discuss the brief history of BSP. CENTRAL BANK A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks. Nature of Central Banking 1. Not Profit-Oriented: The central bank focuses on national welfare and public interest rather than generating profits. 2. No Competition with Member Banks: It does not compete with commercial or private banks, as its role is regulatory rather than commercial. 3. Special Relationship: The central bank maintains a unique relationship with the government and commercial banks, guiding monetary and banking policies. 4. Free from Political Influence: It operates independently of political pressures to ensure impartial decision-making for the country’s economic health. 5. Apex Body: As the highest authority in the banking structure, it oversees and coordinates the operations of all banks within the country. 6. Control Over Financial System: The central bank has overall control and supervision of the entire financial system to ensure stability and proper regulation.  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ Origin of Central Banks Central banks have developed in two primary ways: by a gradual evolution (ex. Bank of England) or by direct government creation (ex. Federal Reserve System in the U.S. and the Bangko Sentral ng Pilipinas). Early central banks in Europe, initially private institutions known as banks of issue or national banks, evolved over time into central banks. These banks were granted the exclusive right to issue currency and gradually assumed the functions of central banking, such as acting as the government's banker. Bank of England: Founded in 1694 as a joint-stock company to provide financial support to the government of William III. In exchange, it gained the privilege of issuing notes. Over time, it became the sole issuer of legal tender and gradually expanded its role as the banker and agent of the government, becoming a model for other countries. It was nationalized in 1946. Riksbank of Sweden: Established in 1656 as a private bank and reorganized in 1668 as a state bank. It developed into a central bank, partly inspired by the Bank of England, and regained exclusive rights to issue notes in 1830. It is considered the oldest central bank still in operation. Bank of France: Created in 1800 by Napoleon Bonaparte, mainly with private capital and some government funds. It was granted the sole right of note issuance and functioned as the government’s banker. Its governance structure included government-appointed officials and private representatives, allowing it to balance public and private interests while expanding its central banking functions. Other Central Banks: o Bank of the Netherlands: Founded in 1814 with private capital but had significant government involvement in its management. o National Bank of Austria: Established in 1817 to restore monetary stability after financial turmoil, initially funded by private capital but managed with government oversight. o Bank of Norway: Established in 1817 with private capital; the king appointed top officials while others were elected by the legislature, mirroring the structure of Sweden’s Riksbank. - In subsequent years, Denmark, Belgium, Spain, Russia, Germany, and Japan put up their respective central banks. At the end of 1800, almost all countries in Europe and other parts have organized their own central banks.  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ Functions of the Central Bank Currency regulator or bank of issue: Central banks possess the exclusive right to manufacture notes in an economy. All the central banks across the world are involved in issuing notes to the economy. This is one of the most important functions of the central bank in an economy and due to this the central bank is also known as the bank of issue. Bank to the government: One of the important functions of the central bank is to act as the bank to the government. The central bank accepts deposits and issues funds to the government. It is also involved in making and receiving payments for the government. Central banks also offer short term loans to the government in order to recover from bad phases in the economy. In addition to being the bank to the government, it acts as an advisor and agent of the government by providing advice to the government in areas of economic policy, capital market, money market and loans from the government. Custodian of Cash reserves: It is a practice of the commercial banks of a country to keep a part of their cash balances in the form of deposits with the central bank. The commercial banks can draw that balance when the requirement for cash is high and pay back the same when there is less requirement of cash. It is for this reason that the central bank is regarded as the banker’s bank. Custodian of International currency: An important function of the central bank is to maintain a minimum balance of foreign currency. The purpose of maintaining such a balance is to manage sudden or emergency requirements of foreign reserves and also to overcome any adverse deficits of balance of payments. Lender of last resort: The central bank acts as a lender of last resort by providing money to its member banks in times of cash crunch. It performs this function by providing loans against securities, treasury bills and also by rediscounting bills. This is regarded as one of the most crucial functions of the central bank wherein it helps in protecting the financial structure of the economy from collapsing. Clearing house for transfer and settlement: Central bank acts as a clearing house of the commercial banks and helps in settling of mutual indebtedness of the commercial banks. In a clearing house, the representatives of different banks meet and settle the inter bank payments Controller of credit: Central banks also function as the controller of credit in the economy. It happens that commercial banks create a lot of credit in the economy that increases the inflation. The central bank controls the way credit creation by commercial banks is done by engaging in open market operations or bringing about a change in the CRR to control the process of credit creation by commercial banks. Protecting depositors interests: Central bank also needs to keep an eye on the functioning of the commercial banks in order to protect the interests of depositors.  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ CHARACTERISTICS OF CENTRAL BANKS Place of the Profit Motive: A central bank’s primary focus is on public service rather than profit. Unlike commercial banks, which aim to stay fully “loaned up,” a central bank must manage the nation’s money supply according to economic needs and maintain reserve lending power to act as a lender of last resort. However, central banks can still generate profits. Disposition of Profits: If a central bank is government-owned, profit motives are naturally curbed. For banks with private stockholders, limits are typically placed on dividends to prevent profit- seeking behavior. Profits of the Federal Reserve System: The Federal Reserve’s stock is owned by member banks, with a capped return of 6% annual dividend. Surpluses are accumulated up to a set limit, with any remaining profits paid to the federal government. Relationships with National Governments: The relationship between central banks and their governments is generally close, complex, and varies across countries. These relationships have often evolved over time, with early central banks being privately owned before governments gradually assumed more control due to their critical function of money creation. Ownership and Control: While early central banks were mostly privately owned, modern central banks are generally government-owned. Regardless of ownership, governments typically exercise significant control by appointing governing officials and often claim the residual profits. Position in the Governmental Structure: Central banks hold a unique position within the government. Despite their crucial role in creating money, they are not typically treated as regular government bureaus like the treasury, to avoid conflicts of interest. This separation is important because governments manage both fiscal policy (raising funds, often through taxation) and monetary policy (maintaining a sound money system). Combining these functions could lead to undesirable financial outcomes. Central Bank Objectives Central banks, often referred to as the lender of last resort, operate as a critical government organ, overseeing major financial operations. Their multifaceted objectives aim to bolster a country’s economic policy by influencing the behavior of financial institutions. 1. Regulator of Currency: The central bank is exclusively authorized to print currency notes, playing a pivotal role in managing the nation’s currency supply. 2. Banker and Advisor to the Government: Functioning as a fiscal agent, the central bank manages government deposits, executes payments on behalf of the government, and provides valuable advice on monetary policies and economic matters. 3. Custodian of Commercial Banks: Mandated by law, commercial banks maintain reserves, with the central bank acting as a custodian and lender of cash reserves, facilitating interbank transactions.  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ 4. Custodian and Manager of Foreign Exchange Reserves: The central bank manages foreign exchange rates by buying and selling currencies internationally and serves as the official repository of foreign currencies and gold. 5. Lender of the Last Resort: In times of financial stress, the central bank extends collateral-based advances or re-discounts to various financial entities, preventing the collapse of the country’s financial structure. 6. Controller of Credit: Central banks control how much money banks create using different methods to avoid inflation. 7. Transfer and Settlements: Acting as a clearinghouse, the central bank provides services for transferring and settling mutual claims among commercial banks, streamlining the clearing of cheques and facilitating fund transfers. The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines. It was established on 3 July 1993 pursuant to the provisions of the 1987 Philippine Constitution and the New Central Bank Act of 1993. The BSP took over from Central Bank of Philippines, which was established on 3 January 1949, as the country’s central monetary authority. The BSP enjoys fiscal and administrative autonomy from the National Government in the pursuit of its mandated responsibilities. BRIEF HISTORY OF BANGKO SENTRAL NG PILIPINAS (BSP) Before BSP, Central Bank of the Philippines (CBP) was the country’s monetary authority. It was inaugurated and formally opened on January 03, 1949. On November 1972 it was amended to make more responsive to changing economic conditions. On January 1981 further amendments were made to CBP to improve and strengthen the financial systems like increase in the capitalization from 10M to 10B. Year 1986 Executive Order No. 16 amended the Monetary Board membership to promote greater harmony and coordination of government monetary and fiscal policies, June 14, 1993 President Fedil V. Ramos signed Republic Act No. 7653, the New Central Bank Act. July 03, 1993 pursuant to the provision of the 1987 Philippine Constitution and New Central Bank Act of 1993, Bangko Sentral ng Pilipinas was established. And took over the Central Bank of Philippines as the country’s central monetary authority.  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ Objectives The BSP’s main primary objective is maintain price stability conducive to balanced and sustainable economic growth. The BSP also aims to promote and preserve monetary stability and the convertibility of the national currency. Responsibilities The BSP provides policy directions in the areas of money, banking and credit. It supervises operations of banks and exercises regulatory powers over non-bank financial institutions with quasi-banking functions. Functions of the BSP Under the New Central Bank Act of 1993, the BSP performs the following functions, all of which relate to its status as the Republic’s central monetary authority. Liquidity Management. The BSP formulates and implements monetary policy aimed at influencing money supply consistent with its primary objective to maintain price stability. Currency issue. The BSP has the exclusive power to issue the national currency. All notes and coins issued by the BSP are fully guaranteed by the Government and are considered legal tender for all private and public debts. Lender of last resort. The BSP extends discounts, loans and advances to banking institutions for liquidity purposes. Financial Supervision. The BSP supervises banks and exercises regulatory powers over non-bank institutions performing quasi-banking functions. Management of foreign currency reserves. The BSP seeks to maintain sufficient international reserves to meet any foreseeable net demands for foreign currencies in order to preserve the international stability and convertibility of the Philippine peso. Determination of exchange rate policy. The BSP determines the exchange rate policy of the Philippines. Currently, the BSP adheres to a market-oriented foreign exchange rate policy such that the role of Bangko Sentral is principally to ensure orderly conditions in the market. Other activities. The BSP functions as the banker, financial advisor and official depository of the Government, its political subdivisions and instrumentalities and GOCCs.  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ TOPIC 2 CENTRAL BANKING AUTHORITY INTENDED LEARNING OUTCOMES: 1. Describe monetary board and discuss central banking authority. 2. Explain the different powers of the monetary board. 3. Identify the powers and duties of the Governor. 4. Name the present officers pf the BSP. What is a Central Banking Authority? A central banking authority, or central bank, is a national institution responsible for managing a country's monetary policy and financial system. It oversees the money supply, sets interest rates, issues currency, and regulates banks to ensure economic stability and growth. Central banks also work to control inflation, manage exchange rates, and serve as a lender of last resort to the banking sector in times of financial crisis. MONETARY BOARD The Monetary Board exercises the powers and functions of the BSP, such as the conduct of monetary policy and supervision of the financial system. Its chairman is the BSP Governor, with five full-time members from the private sector and one member from the Cabinet. Different Powers of the Monetary Board The Monetary Board, which governs the Bangko Sentral ng Pilipinas (BSP), is vested with a range of powers to fulfill its mandate of maintaining price stability and promoting financial stability in the country. These powers include: 1. Issuing Rules and Regulations: The Board has the authority to formulate and implement rules, regulations, and guidelines necessary to effectively carry out its functions. This power enables  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ the Board to adapt to changing economic conditions and ensure the stability of the financial system. 2. Directing Operations and Administration: It oversees and manages the overall operations and administration of the BSP. This includes directing its day-to-day activities, reorganization of its personnel, and ensuring the efficient execution of its functions. The Board has the authority to make decisions on the internal structure and management practices of the BSP. 3. Establishing a Human Resource Management System: The Board is responsible for creating and maintaining a human resource management system that governs the hiring, promotion, transfer, and dismissal of personnel. This system is designed to foster professionalism and excellence at all levels of the organization, ensuring that the BSP is staffed by qualified and competent individuals. 4. Adopting an Annual Budget: The Monetary Board has the power to adopt the BSP’s annual budget, authorizing expenditures necessary for its operations. This includes allocating resources efficiently to ensure that the BSP can fulfill its mandate and responsibilities effectively. 5. Indemnifying Members and Officials: The Board has the authority to indemnify its members, officers, and personnel against any costs or expenses incurred in civil or criminal actions related to the performance of their duties, provided they are not found liable for negligence or misconduct. This power protects those who serve the BSP, ensuring that they can perform their functions without fear of personal liability. The Monetary Board The powers and function of Bangko Sentral are exercised by its Monetary Board, which hasseven members appointed by the President of The Philippines. Under the New Central BankAct, one of the government sector members of the Monetary Board must also be a member of the Cabinet designated by the President. The Governor is the chief executive officer of the BSP and is required to direct and supervise the operations and internal administration of the BSP. A Deputy Governor heads each of the BSP’s operating sectors as follows: Monetary and Economics Sector (MES) – mainly responsible for the operations/activities related to monetary policy formulation, implementation, and assessment. Financial Supervision Sector (FSS) – mainly responsible for the regulation of banks and other BSP- supervised financial institutions, as well as the oversight and supervision of financial technology and payment systems.  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ Corporate Services Sector (CSS) – mainly responsible for the effective management of BSP’s human, financial, and physical resources to support the BSP’s core functions, including oversight of the operations of the New Clark City – Program Management Office. Payments and Currency Management Sector (PCMS) – mainly responsible for maintaining the safety and integrity of the Philippine currency and ensuring a well-functioning payments and cash ecosystem that facilitates the economic activity and supports long-run economic growth. Regional Operations and Advocacy Sector (ROAS) – mainly responsible for the management of activities related to regional operations, consumer empowerment and advocacy, and communications. A Senior Assistant Governor/Assistant Governor assists the Governor and/or the Deputy Governor in formulating and implementing programs and policies, and manages the overall operations of his/her Sub- Sector/Office. Office of the general counsel and legal services Office of the secretary monetary board Monetary policy sub-sector Internal Audit office Powers & Functions of Governor The Governor of the Bangko Sentral, who shall be the Chairman of the Monetary Board. The Governor of the Bangko Sentral shall be head of a department and his appointment shall be subject to confirmation by the Commission on Appointments. He shall be BSP Chief Executive Officer; He shall be the principal representative of the Monetary Board and of the BSP. The Governor of Bangko Sentral is vested the responsibility of executing and administering the policies and measures approved by the board and empowered to: Represent the Monetary Board and the BSP in all dealings; sign contracts entered into by the BSP, notes and securities issued by the BSP all reports and statements, and other reports of the BSP; rl Represents the BSP either personally or through counsel, as may be authorized by the Monetary Board; and delegate his power to represent the BSP, to other officers upon his own responsibility.  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ Domestic Monetary Policy refers to the actions taken by a country’s central bank to manage the nation’s money supply and interest rates in order to achieve specific economic objectives. In the Philippines, the Bangko Sentral ng Pilipinas (BSP) is responsible for implementing the country’s domestic monetary policy. The primary goals of domestic monetary policy include promoting price stability, controlling inflation, fostering economic growth, and managing unemployment levels. Objectives of Domestic Monetary Policy Price Stability: Ensuring stable prices is a key objective, as high or volatile inflation can erode purchasing power, discourage investment, and disrupt economic planning. The BSP sets an inflation target to guide its policy decisions, aiming to keep inflation within a manageable range that supports economic growth. Full Employment: The policy aims to maintain low levels of unemployment by creating favorable conditions for business investment and economic activity. This is often achieved by adjusting interest rates to influence borrowing, spending, and investment. Economic Growth: The policy supports sustainable economic growth by managing liquidity in the economy. By adjusting the money supply, the BSP can influence the overall economic activity, promoting growth during slowdowns and tempering overheating during periods of rapid expansion. Financial Stability: It aims to ensure the stability of the financial system by overseeing and regulating financial institutions, managing systemic risks, and maintaining public confidence in the financial system. Types of Domestic Monetary Policy 1. Expansionary Monetary Policy: This policy aims to increase the money supply and lower interest rates to stimulate economic activity. It is typically used during periods of economic recession or low growth to encourage borrowing, spending, and investment, which can help reduce unemployment and promote growth. However, if used excessively, it can lead to inflation. 2. Contractionary Monetary Policy: This policy seeks to reduce the money supply and raise interest rates to slow down economic activity. It is often implemented to control high inflation, stabilize the currency, or prevent an overheated economy from causing asset bubbles. While effective in controlling inflation, it can also slow down economic growth and increase unemployment if not carefully managed.  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ International Monetary Stability International monetary stability is a crucial component of the global financial ecosystem. It refers to the predictability, reliability, and resilience of the international monetary system, which encompasses exchange rates, capital flows, and the functioning of financial markets. In an increasingly interconnected world, the stability of international monetary systems impacts economic growth, trade relations, and global development. The Importance of International Monetary Stability 1.Facilitating Trade and Investment: A stable international monetary system fosters an environment conducive to international trade and investment. When exchange rates are stable, businesses and investors can make long-term plans without the additional risk of currency fluctuations. This predictability leads to increased investment flows, innovation, and job creation globally. 2.Mitigating Financial Crises: Financial instability can have catastrophic effects on economies, leading to recessions, unemployment, and social unrest. International monetary stability acts as a buffer against speculative attacks and capital flight, reducing the chances of financial crises. Strong international cooperation can enhance risk management and maintain stability in turbulent times. 3.Supporting Sustainable Development: International monetary stability supports sustainable development goals by promoting stable economic growth, reducing poverty, and encouraging equitable resource distribution. Access to stable currencies enables poorer nations to borrow and invest in essential infrastructure and services, contributing to better living standards. Present officer of the BSP President Ferdinand R. Marcos Jr. Appoints Eli M. Remolona as the next BSP Governor June 23, 2023  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ The current members of the Monetary Board are: Eli M. Remolona, Jr. – BSP Governor and Chairman of the Monetary Board Francisco G. Dakila, Jr. – Deputy Governor for Monetary and Economics Sector Chuchi G. Fonacier – Deputy Governor for Financial Supervision Sector Mamerto E. Tangonan – Deputy Governor for Payments and Currency Management Sector Eduardo G. Bobier – Deputy Governor for Corporate Services Sector Bernadette Romulo-Puyat – Deputy Governor for Regional Operations and Advocacy Sector Ralph Recto - Secretary of the Department of Finance Benjamin Diokno - Monetary Board Member Rosalia V. De Leon - Monetary Board Member, former National Treasurer Romeo L. Bernardo - Monetary Board Member, former undersecretary of the Department of Finance Walter C. Wassmer - Monetary Board Member REFERENCES https://www.investopedia.com/terms/c/centralbank.asp https://www.studocu.com/ph/document/laguna-university/monetary-policy/module-31-central- banking-development-and-growth/36199283 https://www.scribd.com/document/706370479/Central-Banking-Development-and-Growth https://byjus.com/commerce/functions-of-the-central-bank/  Republic of the Philippines North Eastern Mindanao State University Formerly Surigao del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.sdssu.edu.ph ______________________________________________________________________________ https://www.pw.live/exams/bank-jobs/central-bank- functions/?fbclid=IwZXh0bgNhZW0CMTEAAR2ecc7eLzHpGdy4M__OpCtvNT0pVlUXRCL Wd5CLqAndrBXINHD9JJ40iVY_aem_Qc0y8YV9mQHffXr2ByaHEA https://fraser.stlouisfed.org/files/docs/publications/frbrichreview/pages/65381_1960-1964.pdf https://www.bsp.gov.ph/SitePages/AboutTheBank/AboutTheBank.aspx#:~:text=The%20Bangko %20Sentral%20ng%20Pilipinas,Central%20Bank%20Act%20of%201993. https://www.coursehero.com/file/106728441/Brief-History-of-BSPpptx/ https://lawphil.net/administ/bsp/bsp.html https://www.bsp.gov.ph/Pages/AboutTheBank/WhoWeAre/OrganizationAndGovernance/Gover nanceOfTheBank.aspx https://www.slideshare.net/slideshow/bsp-bankinglaw/51771501 https://en.m.wikipedia.org/wiki/Bangko_Sentral_ng_Pilipinas