Philippine Monetary Policy PDF

FM 103 REVIEWER charter shifted from development-oriented to one focused on maintaining internal and CHAPTER 2- Philippine Monetary Policy external monetary sta...

FM 103 REVIEWER charter shifted from development-oriented to one focused on maintaining internal and CHAPTER 2- Philippine Monetary Policy external monetary stability in the Philippines WHAT IS MONETARY POLICY? Monetary policy is a set of tools used by a nation's central bank New Central Bank Act (June 14, 1993) The New to control the overall money supply and Central Bank Act passed into law reconstructed promote economic growth and employ and recapitalized central bank. Price Stability as strategies such as revising interest rates and overriding objective. changing bank reserve requirements RA 11211 - Amending Republic Act No. 7653 ACTIONS OF THE BSP The New Central Bank Act (February 14, 2019) Resolution of CB’s authority to issue debt  To manage the supply and cost of papers as part of its regular operation gives the money and credit BSP greater flexibility in determining the timing  To influence overall demand for goods and size of its monetary operations. The and services reinstatement of the CB’s authority to require  To attain price stability information from the non-bank private sector 2 Types of Monetary Policy expands and upgrades the quantity and quality of the information set used by the BSP in policy Contractionary - When there is “too much formulation money” in the economy supporting overall demands for goods and services which in turn Monetary Policy Framework (1985 - Q2 1995) - increases inflationary pressures, the BSP Monetary Aggregate Targeting “tightens” the faucet to reduce the money 1. Central Bank announces an annual supply. This action dampens demand which growth target of monetary aggregates could lead to lower inflation. 2. Central Bank determines the level of What can happen? Higher Interest rates, less money supply needed to achieve a lending/borrowing, More savings, Less spending desired level of inflation  Domestic liquidity serves as money Expansionary -When there is “too little money” supply in the economy which dampens overall demand  Base money as the operating target for goods and services, the BSP “loosens” the 3. Assumptions faucet to expand money supply.  There is a stable and predictable What can happen? Lowe Interest rates, more relationship between money, output, lending/borrowing, Less savings, More and inflation spending.  Change in money supply triggers change in price or inflation Policies Implemented  Stable velocity of money (rate at which The Central Bank Act (June 15, 1948)-Central money circulates or changes hands over Bank of the Philippines was given a given period of time developmental role to support recovery efforts  Central Bank controls domestic liquidity of the country. Monetary Policy Framework (Q3 1995 - 2001) – Amending Republic Act No. 265 The Central Modified Monetary Targeting Bank Act (November 29, 1972)-Central Bank  1. Greater emphasis on price stability  Monetary Authority in terms of instead of strictly attaining set targets managing country’s monetary policy for monetary aggregates  Regulator and Supervisor in terms of 2. Enhance effectiveness of monetary banking system and financial stability policy by complementing monetary  Lender of Last Resort in terms of aggregate targeting with some form of financial distress inflation targeting 3. Monetary targets could be exceeded as FUNCTION long as inflation targets are met  Implements Monetary Policy 4. Monitors larger set of economic  Issue of currency variables in making decisions regarding  Foreign Exchange and Reserves appropriate stance of monetary policy Management Banking Services Monetary Policy Framework (2022 - Present) - OBJECTIVES Inflation Targeting  Maintain Price Stability 1. Government sets inflation target (in  Influence Interest Rates and the Money consultation with BSP); BSP announces Supply to promote sustainable inflation target economic growth 2. 2.BSP assesses monetary conditions and  Ensure financial stability forecasts inflation  Promote high level of employment and 3. Is the inflation forecast in line with reduce unemployment target? If YES, no change in policy settings If NO, BSP adjusts policy INDEPENDENCE AND ACCOUNTABILITY settings 4. BSP communicates through press  Can make decision based on economic statements, highlights of Monetary data and objectives rather than short- Board meetings, inflation reports, and term political considerations open letter to the President  Accountable to the public and government institutions. CHAPTER 3- Banking Institutions Central Banking: Growth and Development OPERATIONAL MECHANISMS NATURE OF CENTRAL BANK  Policy tools: Interest Rates, Open Market Operations, Reserve The nature of a central bank involves a blend of Requirements regulatory oversight, monetary management,  Communicate their policy decisions and and economic stabilization roles. Its design is economic outlooks to manage crucial for maintaining economic stability and expectations and guide economic fostering confidence in the financial system, behavior which is achieved through a combination of independence, strategic objectives, and a range CENTRAL BANK DEFINITION of operational tools. A central bank is a financial institution given INSTITUTIONAL ROLE 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 PAYMENT AND SETTLEMENT SYSTEMS - BSP formulation of monetary policy and the oversees the country’s payment and settlement regulation of member banks. systems, ensuring they are efficient, secure, and resilient. ORIGIN OF CENTRAL BANK ECONOMIC RESEARCH AND DATA - BSP Early Banking Systems - The earliest forms of conducts research and collects data on various central banking can be seen in the practices of economic indicators. ancient civilizations. CUSTOMER PROTECTION - BSP also works to The Bank of England - The modern central protect customers by ensuring transparency banking system began with the establishment and fairness in financial transactions and of the Bank of England in 1694. Created to help services. finance the government' s war efforts against France, the Bank of England was given the BANGKO SENTRAL NG PILIPINAS power to issue currency and manage the nation The Central Bank of the Republic of the ' s finances. Its role expanded over time to Philippines was established on July 3, 1993 include regulating other banks and overseeing monetary policy. The BSP took over the Central Bank of the Philippines, which was established on January 3, 19th Century Developments - During the 19th 1949 century, other countries established their own central banks, often inspired by the Bank of It enjoys fiscal and administrative autonomy England. from the National Government Functions and Evolution - The functions of NEW LOGO central banks have evolved significantly. Initially focused on managing government debt and The new BSP logo is a perfect round shape in issuing currency, central banks now play crucial blue that features three gold stars and a stylized roles in monetary policy, financial stability, and Philippine Eagle rendered in a white strokes. economic regulation 1. The Philippine Eagle, our national bird, is THE BANGKO SENTRAL AND THE ECONOMY the world’s largest eagle and a symbol of strength, clear vision, and freedom. MONETARY POLICY - Sets interest rates, Policy 2. The three stars represent the three rate, Control Inflation and Stabilize the currency pillars of central banking: price stability, stable banking system, and a safe and INFLATION CONTROL - One of the BSP’s primary reliable payments system. Also, it can objectives is to keep the manageable level. signify as a representation of BSP’s equal CURRENCY STABILITY - The BSP is responsible concern to Filipinos in Luzon, Visayas, for maintaining the stability of the Philippine and Mindanao. Peso. 3. Colors  Blue Background à Stability FINANCIAL SYSTEM STABILITY - BSP regulates  Gold Stars à Wisdom, Wealth, Idealism, and supervises banks and other financial and High Quality institutions to ensure their soundness and  White Eagle and Text for BSP à Purity, stability Neutrality, and Mental Clarity. 4. Font or Typeface, Non-Serif, bold for 1947 “BANGKO SENTRAL NG PILIPINAS” to suggest  The establishment of a monetary solidity, strength, and stability. The use of non- authority became imperative a year serif font portrays the no-nonsense professional later as a result of the findings of the manner of doing business at BSP. Joint Philippine-American Finance 5. Round Shape to symbolize the continuing and Commission chaired by Mr. Cuaderno. unending quest to become excellent monetary  The Commission recommended a shift authority. from the dollar exchange standard to a managed currency system. HISTORY OF CENTRAL BANKING IN THE PHILIPPINES 1947 1993  The Central Bank Council produce a draft and was submitted to Congress in  A group of Filipinos had conceptualized February 1948. a central bank for the Philippines as  By June of the same year, the newly early as 1933. proclaimed President Elpidio Quirino  According to Fajardo (1994), Miguel affixed his signature on Republic Act Cuaderno, initiated the development of No. 265, the Central Bank Act of 1948. the concept of central bank in 1933. 1949 1939  The Central Bank of the Philippines was  The Philippine legislature passed a law inaugurated and formally opened on establishing a central bank as required January 3, 1949 with the first governor, by Tydings-Mcduffie act. Migueal Cuaderno, Sr.  President Franklin D. Roosevelt disapproved it due to strong opposition BSP’S MISSION AND VISION from vested interests MISSION 1944 BSP is committed to promote and maintain price  A second law was passed during the stability and provide proactive leadership in Japanese occupation, but the arrival of bringing about a strong financial system the American liberalization forces conducive to a balanced and sustainable growth aborted its implementation. of the economy. Towards this end, it shall conduct sound monetary policy and effective 1946 supervision over financial institutions under its  President Manuel Roxas assumed jurisdiction. office. He instructed the then Finance VISION Secretary Miguel Cuaderno, Sr. to draw up a charter for a central bank. BSP aims to be a world-class monetary authority  He chose the charter of the Central and a catalyst for a globally competitive Bank of Guatemala as the model for the economy and financial system that delivers a charter of the Central Bank of the high quality of life for all Filipino Philippines. FUNCTIONS OF THE BSP 1.BANK OF ISSUE 6. BANK OF CENTRAL CLEARANCE AND SETTLEMENT  Ensure the uniformity of design and content of money;  The central bank serves as a clearing  Effect government supervision over house. This implies that banks send money supply; representatives to the central bank' s  Give prestige and honor to the central clearing house, where claims are bank; and demanded by one bank against another.  Become a good source of income for 7. CONTROLLER OF CREDIT the government  Controlling money supply requires 2. GOVERNMENT’S BANKER, AGENT, AND controlling credit. The higher the money ADVISER supply in circulation, the higher the  BSP handles the banking accounts of prices of goods and services, Limited government agencies and supply of money means lower prices, instrumentalities. which do not encourage production.  All government agencies deposit their Hence, it is imperative for the central funds with BSP bank to limit, not only the money supply, but also credit. 3. CUSTODIAN OF THE CASH RESERVES OF BANKS CHAPTER 4- The Monetary Board  All banks are regulated to have adequate Exercises the powers and functions of the BSP, reserves in proportion to their deposit such as the conduct of monetary policy and liabilities with BSP to ensure availability supervision of the financial system. Its chairman of cash to depositors who wish to is the BSP Governor, with five full-time withdraw deposits members from the private sector and one member from the Cabinet. 4. CUSTODIAN OF THE NATION’S RESERVES OF INTERNATIONAL CURRENCY The Governor is the chief executive officer of the BSP and is required to direct and supervise  The early years of Central Banking the operations and internal administration of required Central Banks to maintain a the BSP. minimum reserve of Gold, and later of International Currency, as Guarantee for A Deputy Governor heads each of the BSP's its Issuance of Currency, Bills, Notes, and operating sectors as follows: Deposit Liabilities Monetary and Economics Sector (MES) - 5. BANK OF REDISCOUNT AND LENDER OF LAST mainly responsible for the RESORT operations/activities related to monetary policy formulation,  The rediscounting function of the implementation, and assessment. Central Bank means the Central Bank lends money to Banks in distress on the Financial Supervision Sector (FSS) - basis of their promissory notes of bank mainly responsible for the regulation of borrowers. banks and other BSP-supervised financial institutions, as well as the  oversight and supervision of financial BSP MONETARY BOARD technology and payment systems. Benjamin E. Diokno Corporate Services Sector (CSS) – V. Bruce J. Tolentino mainly responsible for the effective management of BSP’s human, Anita Linda R. Aquino financial, and physical resources to support the BSP’s core functions, Romeo L. Bernardo including oversight of the Rosalia V. De leon operations of the New Clark City – Program Management Office. Eli M. Remolona Jr. the governor and chairman of the Monetary Board Payments and Currency Management Sector (PCMS) – THE SECTOR HEADS mainly responsible for maintaining Deputy Governor Monetary and economic the safety and integrity of the sector- Francisco G. Dakila Jr. Philippine currency and ensuring a well-functioning payments and Deputy Governor Financial Suspension Sector- cash ecosystem that facilitates the Chuchi G. Fonacier economic activity and supports Deputy Governor Payments and currency long-run economic growth. management sector- Mamerto E. Tangonan Regional Operations and Advocacy Deputy Governor Regional operations and Sector (ROAS) - mainly responsible advocacy sector- Bernadette T. Romulo-Puyat for the management of activities related to regional operations, Deputy Governor corporate services sector- consumer empowerment and Eduardo G. Bobier advocacy, and communications. Domestic Monetary Policy of the BSP A Senior Assistant Governor/Assistant Governor involves strategies and actions taken to manage assists the Governor and/or the Deputy the economy through control of the money Governor in formulating and implementing supply and interest rates. The ultimate goal is to programs and policies, and manages the overall maintain price stability, foster economic operations of his/her Sub-Sector/Office. growth, and ensure a stable financial system. Key tools include adjusting the policy interest rate, setting reserve requirements for banks, and open market operations to influence liquidity. By delving into these mechanisms, the BSP aims to address inflation, support employment, and stabilize the currency. Price Stability: The BSP aims to keep inflation within a target range to maintain purchasing power and economic stability.  Economic Growth: By managing Policy Tools the money supply and interest Financial Stability rates, the BSP supports conditions conducive to sustainable economic Data Collection and growth. Dissemination Financial Stability: Ensuring a stable Monetary tools financial system to prevent crises and promote public confidence in Open Market Operations - The the banking sector. BSP buys or sells government securities to influence the INTERNATIONAL MONETARY STABILITY money supply and interest rates. International monetary stability refers to a stable and predictable global financial Policy Interest Rates - The BSP environment where exchange rates remain sets benchmark interest rates, relatively constant, trade flows are balanced, including the overnight and countries can conduct economic borrowing (repurchase) and transactions without excessive volatility. lending rates, which influence overall borrowing costs in the BSP’s Role economy. 1. Exchange Rate Management Reserve Requirements -The BSP 2. Inflation Control mandates the percentage of deposits that banks must hold 3. Foreign Reserves in reserve, either as cash or 4. Financial Regulation deposits with the BSP. 5. International Cooperation Liquidity Management Facilities - The BSP offers facilities such as the Term Deposit Facility CHAPTER 5- Functions and Operations of the (TDF) and the Reverse Bangko Sentral Repurchase (RRP) Facility to manage liquidity and control Characteristics of Central Bank short-term interest rates. Monetary authority Foreign Exchange Operations - Regulation and supervision The BSP intervenes in the foreign exchange market to lender of last resort stabilize the Philippine peso and manage foreign exchange Currency issuer reserves. Foreign Exchange and Gold Moral Suasion - The BSP Reserves Management engages in discussions with Economic Research financial institutions to influence their lending and Independence  investment behaviors without specific sectors or institutions, contributing formal regulatory measures. to overall financial stability. Statistical Reporting and 7. Implementation of Monetary Policy - Forecasting - The BSP collects through its credit operations, the BSP and analyzes economic data to influences interest rates and the money inform policy decisions and supply, aligning them with its monetary communicate with the public policy objectives. and financial markets. Security Plant Complex of the BSP Credit Operations 1. Currency Production: The SPC 1. Lending Facilities manufactures Philippine banknotes and coins, ensuring they meet the Overnight Lending Facility: The required standards for quality, BSP provides short-term loans security, and durability. to banks facing liquidity shortages. This helps stabilize 2. Security Features: It incorporates the banking system. advanced security features in currency design to prevent Term Lending Facility: Offers counterfeiting, including holograms, longer-term loans to banks for watermarks, and specialized inks. specific purposes, supporting their liquidity needs. 3. Research and Development: The SPC conducts ongoing research to 2. Repurchase Agreements - The BSP innovate and improve currency engages in repos, where it lends money to design and production techniques, banks with government securities as adapting to new security challenges. collateral. 4. Printing and Minting: The facility 3. Discount Window - This facility allows encompasses both printing banks to borrow funds from the BSP at a operations for banknotes and specified discount rate, usually on a short- minting operations for coins, term basis, to meet their immediate managing the entire production liquidity needs. process. 4. Term Deposit Facility - The TDF allows 5. Inventory Management - The SPC is banks to place deposits with the BSP for a responsible for managing the specified term, earning interest. inventory of currency in circulation, 5. Credit Risk Management - The BSP ensuring an adequate supply while assesses the creditworthiness of borrowing preventing excess production. institutions and sets terms and conditions to mitigate risks associated with lending. 6. Quality Control - Rigorous quality control measures are implemented 6. Financial Stability Support - During times at every stage of production to of financial distress, the BSP can provide maintain high standards for all targeted credit support to strengthen issued currency. 7. Environmental Compliance - The 7. Investment Diversification - Precious complex adheres to environmental metals serve as a hedge against regulations, focusing on sustainable inflation and currency fluctuations, practices in its operations. contributing to a diversified investment portfolio for the BSP. 8. Training and Education- The SPC provides training for staff and 8. Transparency and Reporting - The BSP stakeholders on currency security maintains transparency in its reserve features and handling procedures. management practices and regularly reports on the status of its gold and Gold and Silver Plant Reserve Management silver reserves to the public. 1. Reserve Accumulation - The BSP is responsible for accumulating and managing CHAPTER 6- Regulations and Supervisions of gold and silver reserves to strengthen the financial Institutions country’s financial stability and provide a buffer against economic shocks. Non-Bank Financial Institutions 2. Purchasing Precious Metals - The BSP Are Financial Institutions that offer various purchases gold from local miners and banking services but do not have banking traders, promoting the development of the license. Generally, these institutions are not domestic mining industry while ensuring a allowed to take traditional demand deposits reliable source of gold for reserves. from the public. Example: Investment banks, mortgage lenders, money market funds, 3. Assaying and Refining - The BSP has insurance companies etc. facilities to assay (test) and refine gold and silver to ensure they meet specific purity Role of BSP in Regulating NBFI standards before being added to reserves. 1. Licensing and Registration - The 4. Storage and Security - Precious metals BSP requires NBFIs to be are stored in secure facilities with strict licensed or registered before security measures to safeguard these they can operate in the financial valuable assets against theft or loss. market. 5. Monetary Policy Support - The 2. Prudential Regulation - The BSP management of gold and silver reserves sets prudential standards that supports the BSP’s monetary policy NBFIs must follow to ensure objectives, providing an additional layer of financial stability. Standards security for the country’s currency. include: Capital Adequacy Requirement 6. Market Operations - The BSP may engage in buying or selling gold and silver Liquidity Requirements in the global market to manage its reserves and respond to market Risk Management Frameworks conditions. 3. Risk-Based Supervision - BSP adopts a risk- based approach to supervision, focusing on institutions that pose higher risks to the financial system. It assesses how well NBFIs 2. Protecting Consumers - The BSP protects manage risks and ensures that they take consumers by ensuring that NBFIs follow necessary actions to mitigate potential transparent, fair, and responsible practices. financial instability. This includes preventing deceptive practices, ensuring that customers are properly 4. Consumer Protection - The BSP ensures informed, and addressing grievances. that NBFIs comply with consumer protection laws by monitoring their practices regarding 3. Promoting Accountability and Good transparency, fairness, and the handling of Governance - BSP supervision ensures that customer complaints. NBFIs adhere to sound governance principles, such as transparency, accountability, and ethical 5. Compliance and Monitoring - BSP business conduct. conducts on-site examinations and off-site monitoring of NBFIs to assess their 4. Fostering Market Confidence - By ensuring compliance with regulatory requirements. that NBFIs operate soundly and transparently, the BSP fosters confidence in the financial 6. Anti-Money Laundering (AML) and system. Counter-Terrorism Financing (CTF) - BSP enforces strict rules to ensure that NBFIs are 5. Preventing Financial Crime - Through anti- not used for illegal activities like money money laundering (AML) and counter-terrorism laundering or terrorism financing. It requires financing (CTF) measures, the BSP ensures that institutions to implement know-your- NBFIs are not used as vehicles for illegal customer (KYC) procedures and report activities. suspicious transactions to the Anti-Money 6. Encouraging Innovation and Inclusion - The Laundering Council (AMLC). BSP regulates NBFIs to ensure they continue to 7. Enforcement of Sanctions - In cases of innovate and provide services that reach non-compliance, the BSP has the authority underserved populations, thus promoting to impose sanctions, such as fines, financial inclusion. restrictions on operations, or even the 7. Mitigating Risk - The BSP’s supervision revocation of licenses. ensures that NBFIs identify and manage various 8. Promoting Financial Inclusion - BSP plays a risks (credit, liquidity, operational, etc.) role in promoting financial inclusion by effectively. Proper risk management reduces encouraging NBFIs to provide accessible and the likelihood of financial failures and affordable financial services to underserved contributes to the overall stability of the sectors, particularly in rural and low-income financial sector. areas. 8. Uphold Legal and Regulatory Compliance - Purpose of Supervision and Regulation of The BSP ensures that NBFIs comply with NBFI by the BSP relevant laws, rules, and regulations. This includes monitoring for adherence to financial 1. To ensure Financial Stability - The BSP's reporting standards, prudential requirements, regulation and supervision aim to prevent and industry best practices. systemic risks and financial crises by ensuring that NBFIs operate within a 9. Facilitating Efficient Financial Markets - By framework that promotes stability. regulating NBFIs, the BSP helps create an environment where financial markets function 6. Technological Innovation and Digital Finance efficiently, with clear rules that foster - BSP has been effective in facilitating the competition, reduce transaction costs, and growth of financial technology (fintech) and provide better access to credit and other digital finance within NBFIs, while ensuring financial services. compliance with regulations. This balance has promoted innovation in the financial Effectiveness of the BSP in Regulating NBFI sector without compromising regulatory 1. Maintaining Financial Stability - The BSP's safeguards. regulation and supervision have been largely effective in maintaining financial stability 7. Preventing Systemic Risks - The BSP’s within the non-bank financial sector. macroprudential supervision—which focuses on the stability of the entire financial 2. Enhancing Risk Management Practices - BSP system—has helped prevent systemic risks has effectively enforced regulations that from materializing. require NBFIs to implement strong risk management frameworks. These include 8. Enforcement and Corrective Action - The requirements for capital adequacy, liquidity effectiveness of the BSP’s supervision is management, and stress testing, all of which demonstrated by its ability to take corrective have contributed to NBFIs' ability to manage actions when necessary. their risks more effectively. 9. International Recognition and Standards - 3. Promoting Consumer Protection and The BSP has aligned its supervisory and Transparency - The BSP has been successful regulatory framework with international in improving transparency and consumer standards set by bodies such as the Basel protection in NBFIs through strict rules on Committee on Banking Supervision (BCBS) disclosure, fair treatment of clients, and and the Financial Action Task Force (FATF). grievance mechanisms. 4. Strengthening Compliance with AML/CTF Standards - The BSP’s supervision of Anti- Money Laundering (AML) and Counter- Terrorism Financing (CTF) measures has been effective in mitigating risks associated with financial crimes. 5. Promoting Financial Inclusion - The BSP’s regulatory framework has enabled NBFIs to expand their services to previously underserved sectors of the population. This is evident in the growth of microfinance institutions, pawnshops, and fintech platforms offering financial services to low- income households and small businesses.