NOTES-HISTORY-OF-BSP.pdf

Group 2 History of BSP Notes: The BSP, also known as the Bangko Sentral ng Pilipinas, has undergone a significant transformation throughout its history, from the American colonial government to its current status as an independent monetary authority. Its establishment, development, and mode...

Group 2 History of BSP Notes: The BSP, also known as the Bangko Sentral ng Pilipinas, has undergone a significant transformation throughout its history, from the American colonial government to its current status as an independent monetary authority. Its establishment, development, and modernization reflect not just the evolution of the Philippine economy but also the country’s journey towards sovereignty and self-reliance. Its development is a testament to the nation’s economic aspirations and the vision of its leaders, who recognized the need for a robust financial institution. Early Years and the Path of Independence (1900–1948) The origins of central banking in the Philippines date back to the early 20th century under American colonial rule. In 1900, the First Philippine Commission passed Act No. 52, which placed all banks under the Bureau of the Treasury, with the Insular Treasurer supervising and examining banking activities. This marked the first step toward organized financial regulation in the Philippines. In February 1929, the Department of Finance, through the Bureau of Banking, assumed responsibility for overseeing the banking system. During this period, the idea of establishing a central bank started to gain traction. In 1933, a group of Filipinos, inspired by the Hare-Hawes-Cutting Act, began conceptualizing a central bank to align with the country's move toward independence. However, the act was rejected by the Philippine Senate, delaying progress on this front. The movement toward central banking saw renewed hope during the administration of President Manuel L. Quezon in 1939, when the National Assembly passed a law establishing a central bank. Unfortunately, this law required the approval of US President Franklin D. Roosevelt, which was not granted. In 1944, under the Japanese-occupied Second Republic, another law was passed to create a central bank, but its implementation was aborted with the return of American forces in 1945. The post-war era, however, brought decisive steps toward realizing this goal. In 1946, President Manuel Roxas tasked Finance Secretary Miguel Cuaderno, Sr. with drafting a charter for a central bank. A year later, the Joint Philippine-American Finance Commission recommended a shift from the dollar exchange standard to a managed currency system, making the establishment of a central bank even more necessary. In 1948, President Roxas formed the Central Bank Council, which submitted the charter for the Central Bank of the Philippines (CBP). President Elpidio Quirino, who succeeded Roxas, signed the charter into law as Republic Act No. 265. Central Bank of the Philippines (1949-1987): On January 3, 1949, the Central Bank of the Philippines was formally inaugurated, with Miguel Cuaderno, Sr., serving as its first governor. Its primary mandate was to promote economic development and ensure both internal and external monetary stability. Under the administration of President Ferdinand Marcos Sr., the role of the Central Bank was further expanded. In order to guarantee the soundness and healthy expansion of the system, Marcos enacted Presidential Decree No. 72 in November 1972, amending Republic Act No. 265 and emphasizing the significance of maintaining both domestic and international monetary stability. The Joint IMF-CB Banking Survey Commission's adoption served as the foundation for the modification. It centered on the goals of the Central Bank, the frameworks applied to create policies, the scope of its authority, and the procedures for handling troubled financial institutions. Thus, the CBP’s authority extended beyond regulating the banking system to overseeing the entire financial system. This significant expansion aimed to address the growing complexity of the Philippine economy during that time. Later adjustments aimed to improve the Central Bank's capability to respond to emerging central banking issues and to enforce banking laws and regulations in the context of a rising economy. As a result, the National Assembly was given the authority to establish an independent central bank in the 1973 Constitution. Eventually, the Central Bank of the Philippines was named the central monetary authority (CMA) by Presidential Decree 1801. In January 1981, further amendments were made to improve and strengthen the financial system. The objectives of Presidential Decree No. 1771 were to strengthen the CBP's regulatory authority, financial instruments, foreign exchange controls, and auditing and supervision of banks. One of the revisions was the rise in the CBP's capitalization from P10 million to P10 billion. Several years later, in 1986, under the administration of President Corazon Aquino, Executive Order No. 16 amended the composition of the Monetary Board of the CBP. This executive order was a response to the post-Marcos era reforms aimed at restoring confidence in government institutions. It also aimed to promote greater harmony and coordination of government monetary and fiscal policies. By 1987, the provisions of the newly adopted Constitution sought to fortify the Central Bank’s independence, mandating increased capitalization and enhanced private sector representation on the Monetary Board. These reforms were aimed at safeguarding the institution’s autonomy and ensuring it could serve the broader needs of the national economy. The Bangko Sentral ng Pilipinas: A New Era of Independence (1993-Present): The most significant change to the institution came on July 3, 1993, under the administration of President Fidel V. Ramos. With the passage of Republic Act No. 7653, also known as the New Central Bank Act, the Central Bank of the Philippines was replaced as the Bangko Sentral ng Pilipinas (BSP). This legislation explicitly established the BSP as an independent monetary authority with a primary focus on maintaining price stability. In addition to fiscal and administrative autonomy, the BSP was granted the tools it needed to effectively manage the country’s monetary policy. On February 14, 2019, under the presidency of Rodrigo Duterte, Republic Act No. 11211 was signed into law, increasing the BSP’s capitalization to P200 billion. This marked another significant step in strengthening the institution’s financial capacity to supervise the country’s financial system and implement monetary policy effectively. What was the reason why the Central Bank of the Philippines (CBP) changed into the Bangko Sentral ng Pilipinas (BSP)? 1. Financial Insolvency of the CBP: The Central Bank of the Philippines became financially insolvent due to its extensive bailout of troubled banks and other financial issues during the 1980s. This insolvency undermined its ability to effectively manage monetary policy and financial stability. The BSP was established with a fresh balance sheet and recapitalization to address these weaknesses and restore credibility. 2. Enhanced independence and autonomy: The old CBP struggled with limited autonomy and conflicting roles, which affected its effectiveness in implementing monetary policy. The creation of the BSP aimed to provide a more independent central bank with clearer legal and operational mandates. This shift allowed the BSP to focus exclusively on maintaining price stability and supporting economic growth without government/political interference. 3. Improved Monetary Policy Framework: The BSP was designed with a modern framework that emphasized a clear mandate for controlling inflation and ensuring financial stability. This new structure allowed for more effective monetary policy implementation and crisis management, improving the overall stability and efficiency of the financial system compared to the previous system under the CBP.