Central Banking PDF

**CENTRAL BANKING** **Overview** This unit will guide and educate the students on the history, objectives, operations and functions of a central bank. It will also provide students in depth knowledge on the Bangko Sentral ng Pilipinas (BSP) operations. At the end of the unit, higher-order thinking...

**CENTRAL BANKING** **Overview** This unit will guide and educate the students on the history, objectives, operations and functions of a central bank. It will also provide students in depth knowledge on the Bangko Sentral ng Pilipinas (BSP) operations. At the end of the unit, higher-order thinking skills activities will be given to assess their retention of the topic discussed. **Learning Objectives** At the end of the unit, the students should be able to: 1. Appreciate the history of central bank and explain their objectives of establishment; 2. Enumerate the functions of the central bank and assess it through article reading; and 3. Explain the Bangko Sentral ng Pilipinas (BSP) operations and their policies. **CENTRAL BANK** - A central bank is an independent national authority that conducts monetary policy, regulates banks, and provides financial services, including economic research. Its goals are to stabilize the nation\'s currency, keep unemployment low, and prevent inflation. - A central bank controls the supply of money as well as how it reaches the consumer. It can not only print and inject money into the economy but also regulate how commercial banks distribute it. - The central bank controls monetary policy, which includes power over inflation, exchange rates, and the money supply. It has a number of tools by which it uses to control such. **Introduction and History of Central Banks** [In **1668, Sweden founded the first ever central bank**, called **Sveriges Riksbank**]. Its foundation stems from the failure of Swedens first bank, **Stockholms Banco in 1656.** Shortly after its inception, **Stockholms Banco** became the first bank to formally introduced banknotes to **Europe in 1661.** **Objectives of Central Bank**  **Functions of Central Bank** - Base Rate - Open Market Operations - Reserve Requirements - Foreign Exchange Reserves **History of the BSP (HIGHLIGHTS)** - A group of Filipinos had conceptualized a central bank for the Philippines as early as **1933** - During the Commonwealth period **(1935-1941)**, the discussion about a Philippine central bank that would promote price stability and economic growth continued. - In **1939**, as required by the **Tydings-McDuffie Act**, the Philippine legislature passed a law establishing a central bank. As it was a monetary law, it required the approval of the United States president but was disapproved. - Shortly after **President Manuel Roxas assumed office in 1946, he instructed then Finance Secretary Miquel Cuaderno, Sr,** to draw up a charter for a central bank. Immediately, the Central Bank Council, which was created by President Manuel Roxas to prepare the charter of a proposed monetary authority, produced a draft. **History of the BSP (HIGHLIGHTS)** Subsequent changes sought to enhance the capability of the Central Bank, in the light of a developing economy, to enforce banking laws and regulations and to respond to emerging central banking issues. Thus, in the **1973 Constitution**, the National Assembly was mandated to establish an independent central monetary authority [President Fidel V. Ramos signed into law **Republic Act No. 7653, the New Central Bank Act, on 14 June 1993.**] The law also gives the Bangko Sentral fiscal and administrative autonomy which the old Central Bank did not have. **On 3 July 1993, the New Central Bank Act took effect.** **Organizational Structure and the Governance of BSP** ​​​​​​​​​​​​​​​​​**Governance of the Bank** 1.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. 2.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 finan​cial technology and payment systems. **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  **Under the New Central Bank Act, the BSP performs the following functions** 1. **Liquidity Management.** The BSP formulates and implements monetary policy aimed at influencing money supply consistent with its primary objective to maintain price stability. 2. **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. 3. **Lender of last resort.** The BSP extends discounts, loans and advances to banking institutions for liquidity purposes. 4. **Financial Supervision.** The BSP supervises banks and exercises Regulatory powers over non-bank institutions performing quasi-banking functions. **Under the New Central Bank Act, the BSP performs the following functions,** 1. **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. 2. **Determination of exchange rate policy.** The BSP determines the exchange rate policy of the Philippines. Currently, the BSP adheres to market-oriented foreign exchange rate policy such that the role of Bangko Sentral is principally to ensure orderly conditions in the market. 3. **Other activities**. The BSP functions as the banker, financial advisor and official depository of the Government, its political subdivisions and instrumentalities and government- owned and controlled corporations. **Bangko Sentral as a Fiscal Agent** **As a fiscal agent of the government, the Bangko Sentral has the following functions:** - To be the official representative of the government to financial entities; - To be the depository banker of the government; - To be the financial adviser of the government; and - To manage public debts. **BSP's role in Financial Stability** [The **Global Financial Crisis (GFC)**, however, highlighted how the financial system is more than just the sum of its parts.] There is a unique sense of **"systemic-ness"** that arises from the way each market player interacts with another party, creating a network of interconnected and sequenced transactions. This leads to risk choices being interlinked within the network and as a result, societal outcomes that can differ from the intentions of private entities. This provides the basis for the global initiative to manage the health of the financial system as an explicit and separate policy objective. Its focus is on managing so-called **"systemic risks"** and this is done through macroprudential policy. **BSP's role in Systemic Risk Management** The promotion of **"Financial Stability"** is a formal mandate that is uniquely ascribed to the Bangko Sentral ng Pilipinas (BSP). This is provided for in the amended [BSP Charter (Republic Act No. 11211) which was signed by President Duterte in February 2019.] The objective of "Financial Stability" is to enhance the resilience of the financial system, in its totality and in its components, from shocks. This is done by managing systemic risks that could affect the financial system so that finance continues to be a value proposition to consumers in normal times while remaining resilient when disruptions do arise. This is the overarching global norm in financial system oversight.