UNIT 1: Introduction to Banking and the Philippine Financial System PDF

UNIT 1: Introduction to Banking and the Philippine Financial System  WHAT IS A BANK?  “Banks” shall refer to entities engaged in the lending of funds obtained in the form of deposit. (R.A 8791)  Can be defined in terms of its: Economic functions Products & Services it offers...

UNIT 1: Introduction to Banking and the Philippine Financial System  WHAT IS A BANK?  “Banks” shall refer to entities engaged in the lending of funds obtained in the form of deposit. (R.A 8791)  Can be defined in terms of its: Economic functions Products & Services it offers Legal basis  MAIN FUNCTIONS OF CENTRAL BANK  ECONOMIC FUNCTIONS A central bank is responsible for overseeing 1. Facilitate transfer of payments between the monetary system for a nation, or a group households, companies, and government of nations, with the goal of fostering economic entities. growth. 2. Act as financial intermediaries for people  In the Philippines, BSP is the central bank. and businesses that save money (surplus  Monetary Policy Functions units) and need loan (deficit units)  Financial Stability Functions 3. Pooling of assets- medium savings are  BSP MANDATE bundled to large loans. 1. maintain price stability, monetary stability 4. Maturity transformation- take in short-term and the convertibility of the peso. deposits from customers and turn them 2. promote financial stability and oversee the into long-term loans. payment and settlement systems 5. Risk transformation- minimizes the risk for 3. promote broad and convenient access to small savers and guarantee full repayment high quality financial services of the amounts deposited**  Major Central Banks  PRODUCTS & SERVICES The Federal Reserve System (The Fed)- 1. Depository functions (e.g., CASA and term United States of America deposits) European Central Bank- European Union 2. Trust function (e.g., escrow arrangements) Bank of England- United Kingdom 3. Collection and remittance function (e.g., Bank of Japan- Japan global remittance) Swiss National Bank- Switzerland 4. Loans and discount function- (e.g., Bank of Canada- Canada personal & business loans) Reserve Bank of Australia- Australia 5. Advisory function- (e.g., wealth management and estate planning) Reserve Bank of New Zealand- New  LEGAL BASIS Zealand 1. The General Banking Law (GBL) of 2000  Bangko Sentral ng Pilipinas (BSP) (R.A 8791)  BSP is the central bank of the Philippines. 2. Law on Secrecy of Bank Deposits (R.A  established on 3 July 1993 pursuant to 1405) the provisions of the 1987 Philippine 3. Foreign Currency Deposit Act (R.A 6426) Constitution and the New Central Bank 4. Unclaimed Balances Law (R.A 3936) Act of 1993. 5. Bouncing Check Law (Batas Pambansa  The BSP took over from Central Bank of 22) the Philippines, which was established on  Important concepts in Banking & Finance 3 January 1949, as the country’s central 1. Moral Hazard monetary authority. 2. Asymmetric Information  The BSP enjoys fiscal and administrative - Both are significant challenges for banks. autonomy from the National Government They can lead to poor decision-making, in the pursuit of its mandated increased risk, and potential financial losses. responsibilities. Banks must implement careful screening, monitoring, and risk management practices to mitigate these risks and ensure the stability of their operations.  “FISCAL AUTONOMY” was defined by the ARMM by promoting and utilizing Islamic Supreme Court as “freedom from outside banking, financing and investment in control” agricultural, commercial and industrial  BSP is exemplified by its authority to adopt its ventures in the ARMM based on the Islamic own budget and authorize its expenditures as concept of banking and subject to the rules of are in the interest of its operation. Islamic shari’a.  BSP does not depend on Congress for  RURAL AND COOPERATIVE BANKS budgetary appropriation unlike other  Are most familiar to those living in rural or government agencies. provincial areas. Their role is to “promote  “ADMINISTRATIVE AUTONOMY,” on the and expand the rural economy in an other hand, is defined as “freedom from orderly and effective manner” by providing intervention and interference” by other basic financial services. agencies.  Many rural and cooperative banks help  BSP decisions are not subject to farmers through the stages of production, administrative review within the executive from buying seedlings to marketing of their branch but can only be reviewed through the produce. judicial process.  These banks are also differentiated from  BSP has regulatory and supervisory power each other by ownership; while rural banks over the two general groups of financial are privately owned and managed, system: cooperative banks are organized/owned by 1) Banking institutions cooperatives or federations of 2) Non-bank financial institutions (NBFI). cooperatives.  NBFI (without quasi banking function) such  NON-BANK FINANCIAL INSTITUTIONS as insurance companies and investment (NBFIS) houses are overseen by the Insurance  INVESTMENT HOUSES - enterprises Commission and Securities and Exchange engaged in guaranteed underwriting of Commission, respectively. securities of any kind issued by another  BANKING INSTITUTIONS corporation, person, or enterprise, 1. UNIVERSAL BANKS including securities of government and its Under the General Banking Law of 2000 instrumentalities. (GBL), a universal bank is defined as a  FINANCING COMPANIES - corporations commercial bank with the additional or partnerships organized primarily for authority to exercise the powers of an these purposes: extend credit to investment house and invest in non-allied consumers and agricultural enterprises enterprises. An ordinary commercial bank either by discounting or factoring does not have that authority. commercial papers, account receivables, 2. COMMERCIAL BANKS or other evidence of indebtedness; and Accept deposits, offer checking account lease motor vehicles, heavy equipment, services, and make various loans. They industrial machinery and equipment, and operate on a branch banking organizational appliances. structure Most of the universal banks are  INVESTMENT COMPANIES - entities the larger commercial banks. primarily engaged in investing, reinvesting,  LBP is established as a corporate and or trading in securities. government instrumentality. Its purpose is to  NON-STOCK SAVINGS AND LOAN help implement the land reform (CARP). ASSOCIATIONS - corporations organized primarily for mutual self-help and the  DBP's policy mandate is to finance the common interest of its members who must agricultural and industrial sectors in the belong to a well-defined group and shall Philippines, with a focus on rural areas and not transact business with the public. SMEs. It is the counterpart of the private These associations are businesses that development banks. accumulate the funds of their members  AAIIBP’s mandate is primarily to participate in through earnings or capital contributions the socio-economic development of the  and relend these accumulated funds to their members or invest them in either government securities or other productive enterprises.  PAWNSHOPS - business establishments engaged in lending money for personal property delivered as security or pledge.  SECURITIES DEALERS - institutions organized either as partnerships or corporations that buy and sell securities of another for the purpose of reselling or offering them for sale to the public for their own accounts. They do not earn commissions but derive income from trading (the difference in the buying and selling prices of securities).  SECURITIES BROKERS - institutions engaged in the business of effecting transactions in the sale of securities for the account of others. They earn commissions out of these intermediary transactions.  TRACES OF BANKING PRACTICES ROTHSCHILD FAMILY (the most influential banker in Europe during19th century)  History traces that the banking practices date  During 1800 the BANK OF FRANCE was back as early as 2000 B.C. in the temples of organized by NAPOLEON BONAPARTE and Babylon where lending of gold, silver, and became the dominant financial institution in other items of wealth were left for France in 1848, when it obtained the sole note safekeeping. issue privilege.  In Babylon at the time of Hammurabi, there  BANQUE DE FRANCE, national bank of are records of loans made by the priests of France, created to restore confidence in the the temple. Temples took in donations and tax French banking system after the financial revenue and amassed great wealth. Then, upheavals of the revolutionary period. they redistributed these goods to people in  The GOLDSMITHS were attributed to have need such as widows, orphans, and the poor. started banking because during their time,  In was in ancient Greece that banking they were accredited to have the best attained the height of development because facilities to safekeep valuables such as Greeks kept traces of good records. money, gold coins, bullions, or objects ✓ Greek temples become depositories of made of gold. community wealth.  They had an idea of lending a portion of ✓ Greek priests loaned money to the people. whatever deposits they received because, by The body of laws covering the activities experience, the merchant-depositors did not regarding financial transactions was withdraw all their deposits at one time. developed.  This lending business spread out and  In fact, the word ‘MORATORIUM’, which developed. (The goldsmiths are exercising the means a legal authorization to debtors to basic functions of the modern banking postpone payment was already used in system.) financial transactions.  In 1822, the BANK OF MONTREAL was  The first known registered banking institution chartered based on the charter of the Bank as recorded in the history was established in of the United States. (Canadian banking is VENICE IN 1157 AD. greatly influenced by the United States and  During the 17th and 18th centuries, banking Great Britain because of Canada’s close started to develop in Europe : historical relationship with both countries.) ✓BANK OF BARCELONA (SPAIN, 1401)  In 1781, the BANK OF NORTH AMERICA was established, it is the first important ✓BANK OF VENICE (ITALY, 1587) bank in the United States as it gave the United States a firmer financial foundation. ✓BANK OF AMSTERDAM (NETHERLANDS,  In 1791, the federal government of America 1609) chartered the First Bank of the United ✓BANK OF HAMBURG (GERMANY, 1619) States to serve both the government and the public ✓BANK OF NUREMBERG (GERMANY,  In 1838, the New York State passed a FREE 1621) BANKING LAW where banks can be chartered without special act of the state ✓BANK OF STOCKTON (SWEDEN, 1688) legislature. ✓BANK OF ENGLAND (PRIVATELY  In 1842, the STATE OF LOUISIANA enacted OWNED 1694, GOVERNMENT BANK 1946) legislation to limit the number of banks and require them to maintain one-third of its  Banking in the European continent was in the assets in cash and two-thirds in short term hands of a powerful statesmen and wealthy obligations. private bankers for three centuries:  During the civil war, the federal government MEDICI FAMILY in Florence financed its outlays or expenses in part by FUGGERS FAMILY in Germany printing irredeemable paper money called GREENBACKS.  PAPER MONEY is government-issued  Formal banking in the Philippines started with currency that is not backed by a physical the establishment of the El Banco Español- commodity, such as gold or silver, but rather Filipino de Isabel II (later changed to El by the government that issued it. Banco de Islas Filipinas) which is now  The American Civil War brought about the known as Bank of the Philippine Islands. NATIONAL BANKING ACT OF 1863, it  BPI is the first commercial bank organized brought fundamental change in the in the Far East. It financed the production structure of commercial banking and of abaca, sugar, tobacco, and copra for became successful in correcting failings of export. the pre-civil war commercial banking  It established a relationship with Spain and system. Paris to facilitate trade and foreign exchange  National Banking Act produced a UNIFIED transactions with Europe. NATIONAL PAPER CURRENCY consisting of US notes issued by the treasury and  The Monte de Piedad y Caja de Ahorros de national bank. Manila was founded by FATHER FELIX  Bank crises were not eradicated. In 1907 HUERTAS. there was a panic which resulted in the In 1994 it was closed and reopened as remedial legislation provided by the Keppel Bank. Federal Reserve Act of 1913. This act In 2005, General Electric Co. acquired recognized the importance of having a stable Monte de Piedad or Keppel Bank and credit condition to the health of the In 2007, incarnated as GE Money Bank national economy. In 2009, BDO acquired GE Money Bank  The 1913 Federal Reserve Act created THE FEDERAL RESERVE SYSTEM. Congress  During American period: passed the Federal Reserve Act to establish  Banks, which already existed, were allowed to economic stability in the US by introducing a continue operations central bank to oversee monetary policy.  More banks were opened to finance the  The 12 FEDERAL RESERVE BANKS, each increasing demand of trade in the country in charge of a regional district, are in Boston,  But most banks were practically dominated by New York, Philadelphia, Cleveland, foreign banks, until 1916 UNDER ACT NO. Richmond, St. Louis, Atlanta, Chicago, 2612, PHILIPPINE NATIONAL BANK was Minneapolis, Kansas City, Dallas, and San organized. Francisco. - It was made the sole depository of government funds and authorized to issue currency notes. BRIEF HISTORY OF BANKING IN PHILIPPINES  The PHILIPPINE BANK OF COMMERCE,  During Spanish period which was the first private commercial bank  In 1594, OBRAS PIAS was organized BY in the country wholly owned by Filipinos, FATHER JUAN FERNANDEZ DE LEON. It was opened for business in 1938. was a religious foundation that The bank was absorbed by the Philippine accumulated large funds from the legacies Commercial and Industrial Bank (PCI of wealthy individuals. The funds were Bank) invested in loans to traders to finance the PCI Bank merged with Equity Banking galleon trade in Acapulco, Mexico. Corporation incarnating the Equitable PCI  In 1930, FRANCISCO RODRIGUEZ Bank. organized the RODRIGUEZ BANK which In 2007, Equitable PCI Bank merged with operated more as a loan association rather Banco de Oro Universal Bank and is now than a regular bank. branded as BDO  The GORRICHO BANK was also established, and a bank owned by the family of MARIANO TUASON.  During Japanese occupation:  At the outbreak of WWII, the Philippines was occupied by the Japanese Imperial Forces. Three banks were allowed to resume their operation; BPI, PNB, and Phil. Bank of Commerce.  Japanese occupation left the banking system in a state of collapse, immediate rehabilitation was made through the creation of the REHABILITATION AND FINANCE CORPORATION  In 1947, the government created the Rehabilitation Finance Corporation (RFC) under R.A. No. 85 which absorbed the assets and took over the functions of the Agricultural and Industrial Bank (AIB).  The RFC provided credit facilities for the development of agriculture, commerce, and industry and the reconstruction of properties damaged by the war.  In 1958, the RFC was reorganized into the Development Bank of the Philippines. The change in corporate name marked the shift from rehabilitation to broader activities