The Roles of Banks in the Economy.docx

**Study Notes on The Roles of Banks in the Economy** Topic 1: An Overview of the Philippine Financial System What is a Financial System? - **Definition**: A financial system is a set of institutions (e.g., banks, insurance companies, stock exchanges) that facilitate the exchange of fund...

**Study Notes on The Roles of Banks in the Economy** Topic 1: An Overview of the Philippine Financial System What is a Financial System? - **Definition**: A financial system is a set of institutions (e.g., banks, insurance companies, stock exchanges) that facilitate the exchange of funds. - **Components**: It includes financial markets, participants, instruments, and securities traded in these markets. - **Impact**: Affects all members of society (households, businesses, non-profits, government). - **Regulation**: The government is responsible for defining and regulating the financial system. Functions of the Financial System 1. **Channeling Funds**: Transfers funds from surplus units (savers) to deficit units (borrowers). 2. **Medium of Exchange**: Provides a means for transactions. 3. **Risk Sharing**: Offers mechanisms for sharing financial risks. 4. **Central Bank Influence**: Allows the central bank to influence the economy and financial system. Financial System Participants 1. **Households/Consumers**: - Receive income primarily from wages/salaries. - **Gross Savings Formula**: \[ \\text{Gross Savings} = \\text{Current Income} - \\text{Current Expenditures} \] 2. **Financial Institutions/Intermediaries**: - Bridge the gap between savers (surplus units) and borrowers (deficit units). - Types: Depository institutions (e.g., banks) and non-depository institutions. 3. **Non-Financial Institutions**: - Businesses outside the financial sector (e.g., manufacturing, trading). - Can act as borrowers or lenders. 4. **Government**: - Comprises national, provincial, city, and local government units. - Each level has its own governing body (e.g., President, Governor, Mayor). 5. **Bangko Sentral ng Pilipinas (BSP)**: - Central monetary authority in the Philippines. - Oversees the financial system and is known as the \"Bank of all Banks.\" 6. **Foreign Participants**: - Involved in international trade and finance, contributing to globalization. Overview of the Financial System - **Savings Sources**: Households, individuals, companies, and government agencies with cash inflows exceeding outflows. - **Role of Financial Intermediaries**: Channel savings to borrowers and investors. Early Years of Philippine Banking - **Importance**: The financial system is crucial for resource allocation, similar to the heart\'s role in the human body. - **Law of Supply and Demand**: Surplus and deficit resources exist in every society. **Spanish Period Highlights** - **1654**: Establishment of Obras Pias, a banking institution run by friars. - **1851**: First state bank, Banco Espanol-Filipino de Isabel II (now Bank of the Philippine Islands). - **1872**: Chartered Bank of India, Australia, and China opened a branch in Manila. - **1875**: Hongkong and Shanghai Banking Corporation established a branch. - **1882**: First savings bank, Monte de Piedad Y Caja de Ahorros de Manila, founded. **American Period Highlights** - **1906**: Creation of the Postal Savings Bank. - **1908**: Establishment of the Agricultural Bank with a capital of P1 million. - **1937**: Bank of Taiwan opened a branch in Manila. **Japanese Period Highlights** - **1942**: Southern Development Bank opened a branch in Manila. **New Society Period Highlights** - **1993**: Creation of BSP as an independent central monetary authority under R.A. 7653. Founding of a Central Monetary Authority - **1900**: Act No. 52 placed all banks under the Bureau of Treasury. - **1948**: Republic Act No. 265 established the Central Bank of the Philippines. - **1993**: Republic Act No. 7653 established the Bangko Sentral ng Pilipinas (BSP). The Bangko Sentral ng Pilipinas (BSP) - **Vision**: To be recognized globally as the monetary authority supporting a strong economy. - **Mission**: To maintain price stability and promote a strong financial system. Mandate of BSP 1. **Price Stability**: Maintain price stability conducive to balanced economic growth. 2. **Financial Stability**: Enhance resilience of the financial system against shocks. 3. **Payment Systems Oversight**: Ensure sound practices in payment and settlement systems. 4. **Access to Financial Services**: Promote broad access to high-quality financial services. Governance of BSP - **BSP Governor**: Dr. Eli M. Remolona, Jr. - **Monetary Board**: Conducts monetary policy and supervises the financial system. Core Functions of BSP 1. **Price Stability**: Formulate and implement monetary policy to preserve low inflation. 2. **Financial Stability**: Manage systemic risks to enhance financial system resilience. 3. **Efficient Payment System**: Ensure secure and reliable payment systems. 4. **Liquidity Management**: Influence money supply to maintain price stability. 5. **Currency Issue**: Exclusive power to issue national currency. 6. **Lender of Last Resort**: Provide liquidity to banking institutions. 7. **Management of Foreign Currency Reserves**: Maintain sufficient reserves for stability. 8. **Exchange Rate Policy**: Determine and manage the exchange rate policy.