Unit 2 Supplemental Banking-Sweety PDF

UNIT II. PHILIPPINE FINANCIAL SYSTEM What is Financial System? A financial system is an economic arrangement wherein financial institutions facilitate the transfer of funds and assets between borrowers, lenders, and investors. Its goal is to efficiently distribute econo...

UNIT II. PHILIPPINE FINANCIAL SYSTEM What is Financial System? A financial system is an economic arrangement wherein financial institutions facilitate the transfer of funds and assets between borrowers, lenders, and investors. Its goal is to efficiently distribute economic resources to promote economic growth and generate a return on investment (ROI) for market participants. The market participants may include investment banks, stock exchanges, insurance companies, individual investors, and other institutions. It functions at corporate, national, and international levels and is governed by various rules dictating the eligibility of participants and the use of funds for different purposes. Aside from financial institutions, financial markets, financial assets, and financial services are the components of the financial system. In any functional economy, economic resources are limited, with individuals having unlimited wants and desires. This problem, referred to as scarcity, is one of the significant drivers of an economy. Consequently, it resulted in a financial system structure capable of efficiently allocating economic resources to stimulate growth. Also, it allows participants to benefit by: Providing a way of making payments (banks) Giving participants a way of earning interest in the form of time value (investment institutions) Protecting them against financial risks(insurance) Collecting and distributing financial information (credit agencies) Governing regulations to maintain stability (central banks and governments) Maintaining liquidity and converting investments into cash (banks and financial institutions) The money or funds flow from the lender to the borrower in one of two ways: 1. Market-Based In a market-based economy, borrowers, lenders, and investors can obtain funds by  trading securities, such as stocks and bonds in the financial markets. The law of supply and demand will determine the price of these securities. 2. Centrally Planned With a centrally planned economy, governing authority or central planner makes the investment decisions. In most instances, there will be a mix of both types of economies. Components of Financial Systems FINANCIAL INSTITUTIONS Financial institutions act as intermediaries between the lender and the borrower when providing financial services. These include: Banks (Central, Retail, and Commercial) Insurance Companies Investment Companies Brokerage Firms Financial Markets These are places where the exchange of assets occurs with borrowers and lenders, such as stocks, bonds, derivatives, and commodities. Financial markets help businesses to grow and expand by allowing investors to contribute capital. Investors invest in company stock with the expectation of it producing a return in the future. As the business makes a profit, it can then pass on the surplus to the investors. Financial Instruments Tradable or financial instruments enable individuals to trade within the financial markets. These can include cash, shares of stock (representing ownership), bonds, options, and futures. Financial Services Financial services provide investors a way of managing assets and offer protection against systemic risk. These also ensure individuals have the appropriate amount of capital in the most efficient investments to promote growth. Banks, insurance companies, and investment services would be considered financial services. Currency (Money) A currency is a form of payment to exchange products, services, and investments and holds value to society. Functions of Financial Systems STRUCTURE OF THE PHILIPPINE FINANCIAL SYSTEM I.BANGKO SENTRAL NG PILIPINAS Banking Institutions A. Private Banking Institutions 1. Expanded Commercial Banks/Universal Banks (ECB/UB) is any commercial bank, which performs the investment house function in addition to its commercial banking authority. 2. Commercial Bank or Domestic Bank (CB) is any commercial bank that is confined only to commercial bank functions such as accepting drafts and issuing letters of credit, discounting and negotiating promissory notes, drafts and bills of exchange, and other evidences of debt, accepting or creating demand deposits, receiving other types of deposits and deposit substitutes, buying and selling foreign exchange, and gold or silver bullions, acquiring marketable bonds and other debt securities, and extending credit subject to such rules that the Monetary Board may promulgate. 3.Thrift Banks (TB) – shall include savings and mortgage banks, stock savings and loan associations and private development banks. Stock Savings and Mortgage Bank (SSMB) is any corporation organized for the purpose of accumulating the savings of depositors and investing them, together with its capital, in readily marketable bonds and debt securities Private Development Banks (PDB) is a bank that exercises all the powers and assumes all the obligations of the savings and mortgage bank as provided in the General Banking Act except as otherwise stated. Stock Savings and Loan Associations (SSLA) is any corporation engaged in the business of accumulating the savings of its members or stockholders and using such accumulated funds, together with its capital for loans and investment in securities of productive enterprises 4. Rural Banks (RB) is any bank authorized by the Central Bank to accept deposits and make credit available to farmers, businessmen and cottage industries in the rural areas. Loans may be granted by the rural banks on the security of land without Torrens title where the owner of private property can show five (5) years or more of peaceful continuous and uninterrupted possession of the land in the concept of ownership. 5. Cooperative Banks are banks established to assist the various cooperatives by lending those funds at reasonable interest rates. B. Government banking institutions 1.Development Bank of the Philippines (DBP) - provides loans for developmental purposes, gives loans to the agricultural sector, commercial sector and the industrial sector. 2.Land Bank of the Philippines (LBP) is a government bank, which provides financial support in the implementation of the Agrarian Reform Program (CARP) of the government. 3.Philippine Al-Amanah Islamic Investment Bank: Republic Act No. 6048 provides for the charter of the Al-Amanah Islamic Investment Bank. III. Non-Bank Financial Institutions A.Private non-bank financial institutions 1. Investment house is any enterprise, which engages in underwriting securities of other corporations. It also generates income from sale of investments in securities. 2. Investment banks. Investment banks, such as Goldman Sachs and Morgan Stanley, differ from commercial banks in that they do not take in deposits and until very recently rarely lent directly to households. 3. Financing Company is any business enterprise where the primary purpose is to extend credit facilities to consumers and to industrial, commercial or agricultural entities either by discounting or factoring commercial papers or accounts, 4.Securities dealers/brokers - any person or entity engaged in the business of buying and selling securities for his own or its client’s account thereby making a profit from the difference between the purchase prices and selling price of securities. 5. Savings and Loan Associations (S&Ls), which have traditionally served individual savers and residential and commercial mortgage borrowers, accumulate the funds of many small savers and then lend this money to home buyers and other types of borrowers. 6. Mutual funds are corporations which accept money from savers and then use these funds to buy stocks, long-term bonds, or short-term debt instruments issued by businesses or government units. 7. Pawnshops refer to persons or entities engaged in the business of lending money with personal property, jewelry, and other durable goods as collateral for the loans given. 8. Lending investor is any person or entity engaged in the business of effecting securities transactions, giving loans and earns interest from them. 9. Pension funds are retirement plans funded by corporations or government agencies for their workers and administered primarily by the trust departments of commercial banks or by life insurance companies. 10. Insurance companies take savings in the form of annual premiums, then invest these funds in stocks, bonds, real estate, and mortgages, and finally make payments to the beneficiaries of the insured parties. 11. Credit unions are cooperative associations whose members have a common bond, such as being employees of the same firm. B. Government Non-bank financial institutions 1. Government Service Insurance System (GSIS). Provides retirement benefits, housing loans personal loans, emergency and calamity loans to government employees. 2. Social Security System (SSS) Provides retirement benefits, funeral benefits, housing loans, personal loans and calamity loans to employees who are working in private companies. 3. Pag-ibig. (Pagtutulungan sa Kinabukasan: Ikaw, Bangko, Industriya at Gobyerno) Provides housing loans to both government and private employees. Financial System Regulators A.Bangko Sentral ng Pilipinas (BSP) On June 14, 1993, President Fidel V. Ramos signed into law R.A. 7653 entitled “The New Central Bank Act”, pursuant to the requirement of the 1987 Constitution for the establishment of an independent Central Monetary Authority. Primary Objective Of The BSP The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable economic growth. The BSP also aims to promote and preserve monetary stability and the convertibility of the national currency. Responsibilities The BSP provides policy directions in the areas of money, banking and credit. It supervises operations of banks and exercises regulatory powers over non-bank financial institutions with quasi-banking functions. Under the New Central Bank Act, the BSP performs the following functions, all of which relate to its status as the Republic’s central monetary authority. A. Liquidity Management. The BSP formulates and implements monetary policy aimed at influencing money supply consistent with its primary objective to maintain price stability.  B. 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. C. Lender of last resort. The BSP extends discounts, loans and advances to banking institutions for liquidity purposes. D. 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, all of which relate to its status as the Republic’s central monetary authority. 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. 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. 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 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. B. Philippine Deposit Insurance Commission (PDIC) PDIC is a government instrumentality created in 1963 by Republic Act 3591, as amended, to ensure the deposits of all banks. PDIC exists to protect depositors by providing deposit insurance coverage for the depositing public and help promote financial stability  Deposit Insurance. The corporation provide the maximum deposit insurance coverage ₱500,000.00 per depositor per bank. Risk Mitigation The PDIC works closely with financial regulators in strengthening and maintaining the stability of the banking system. Receivership and Liquidation The PDIC is the statutory receiver and liquidator of closed banks. C.Securities and Exchange Commission (SEC) The Commission shall have the powers and functions provided by the Securities Regulation Code, Presidential Decree No. 902-A, as amended, the Corporation Code, the Investment Houses Law, the Financing Company Act, and other existing laws. Under Section 5 of the Securities Regulation Code, Rep. Act. 8799, the Commission shall have, among others. D.Insurance Commission Mandate To regulate and supervise the insurance, pre-need, and HMO industries in accordance with the provisions of the Insurance Code, as amended, Pre-Need Code of the Philippines, and Executive Order No. 192 (s. 2015) Objectives To promote growth and financial stability of insurance, pre-need, and HMO companies. To professionalize insurance, pre-need, and HMO service and develop insurance, pre-need, and HMO consciousness among the general populace. To establish a sound national insurance market. To safeguard the rights and interest of the insuring public, pre-need and HMO customers.