Eco Devt Chapter7

The Financial System
9/3/20XX Presentation Title

The Financial System
Central Bank
 It is the most important player in any financial
system as it is its de facto overseer.
Function of Central Bank
1. Issue currency for circulation
2. Withdraw damaged currency from circulation
3. Clear checks
4. Issue banking regulations
5. Lend to bank
6. Conduct monetary policy
The Philippine Financial System
Bangko Sentral ng Pilipinas
 It was created through the enactment of
republic act no. 7653(The new Central bank
act of 1993).
 The BSP replaced the old Central bank
(republic act no. 265) of 1949.
 It is headquartered at he BSP complex in
Roxas Boulevard, Manila and has 3 regional
offices in Dagupan, Cebu and Davao.
Structure of the Philippine Financial System
BSP
Banking Non – Bank
System Quasi - Bank
Banking System
1. Commercial Bank
a. Universal Bank
b. Ordinary Commercial
2. Savings Bank
a. Savings and Mortgage
b. Stocks Savings and Loans
c. Private Development Bank
3. Government Bank
a. Land Bank of the Philippines
b. Development Bank of the Philippines
c. Philippine Islamic Bank
NBQB’s Financial Intermediaries
1. Insurance Companies
2. Investment houses
3. Building and loan association
4. Pawnshops
5. Non stocks savings and Loans
6. Investment companies
7. Trust companies
8. Venture capital corporations
9. Security Dealers and Brokers
10. Lending Investment
11. Financing Companies
12. Credit unions
13. Government NBQB
a. Social Security System
b. Government Service Insurance System
Non Bank / Quasi Banking Financial Institution
a. Investment Houses
 Constitute the largest group, in terms of
resources among the private, among the
non bank financial intermediaries.
b. Investment Companies
 Primarily engaged in investing and trading
securities.
c. Finance Companies
 Organized to extend credit lines to
consumers and individuals, commercial,
agricultural enterprises.
d. Security Dealer
 Company which buy and sell securities.
e. Security Broker
 Engaged in business of effecting
transactions in securities and earn their
income commission received.
f. Private Insurance Companies
 Under the direct supervision and regulation
of insurance commission.
g. Pawnshop
 Business establishment engaged in lending
money on property delivered as collateral.
H. Mutual and Building Loan Association
 Extending long – term mortgage loan to members.
I. Credit Unions
 Cooperatives composed of small producers who
voluntarily join together to form a business which
themselves control and patronized.
J. Trust and Pension Plan Manager
 Institutional and personal administration of funds
created or constituted for the benefits of others.
K. Lending Investor
 Pertain in individual entities engaged exclusively
in the business of extending secured and
unsecured direct loans to individual or enterprise.
What is Banking System?
 It plays a principal role in financial
intermediation.
Banks
 These are the financial intermediaries that
average person interacts with most
frequently.
Commercial Banks
 These are the financial intermediaries raise
funds principally by creating deposit liabilities
in the form of demand deposits, savings
deposit and time deposits.
Monetary Policy
 It is a set of guidelines and plans of action
designed to achieve stability and reliability of
financial system so that it automatically
responds and adjusts to the changes of an
economy.
 The primary objective of monetary policy is to
provide financial stability that promotes
growth and development of the economy
with minimal inflation.
Market for Money
1. Money Supply
a. this is set by the Central bank using
monetary Policy instrument.
Mˢ = Mₒ
2. Money Demand
a. interest rate is opportunity of holding
money
b. transaction demand depends on real
GDP, Y and on the level of Prices, P in the
Economy.
Mᵈ = P x L (r, Y)
3. Equilibrium
a. Keynesian Theory of Liquidity
preference says real interest rate moves to
equate the demand and supply at any level
of real GDP, L.
Mₒ = P x L (r, Y)
P
Measures of Money Supply
- Money supply is measured in three levels:
1. M1 – which is also called as “narrow money”,
it is comprised of money in circulation plus
demand and savings deposits.
2. M2 – which is also called the “broad money”,
it is comprised of money in circulation,
demands and savings deposit plus time
deposit.
3. M3 – which is also called the “expanded
money” in circulation, demand deposit,
savings deposit and time deposits plus
deposits substitutes.
Theory of Monetary Policy
- The principles of monetary theory as we know is
based principally on Cambridge University’s
Alfred Marshall and Yale’s Irving Fischer’s
treatise on “Income Velocity of Money and
Quantity theory of Prices.”
1.Income Velocity of Money
 It is the ratio of total nominal GNP to the stocks
of money.
Velocity
 It measures the rate of turnover of the stock of
money relative to the total income or output of
the economy
2. Quantity theory of Prices
 It is an extension of the income velocity of
money.
- With this insight, we can explain the
movement in prices in relation to money
supply.
Rewriting the Equation: P = MV
Q
- But since, V/Q tends to be constant, then,
the equation can be written as P = KM
K – being the constant ration of V / Q
Tools of Monetary Policy
- In the Philippines, the Bangko Sentral ng Pilipinas
exercise the authority in the implementation of monetary
policy. It uses 3 tools in implementing monetary policy, as
follows:
1. Open – Market Operation
 This is the BSP’s main tool in increasing and decreasing
money supply.
2. Rediscounting Facility
 It is the lending windows of central bank to commercial
banks.
3. Reserve requirement
 The most powerful tool of monetary policy is the reserve
requirement variation.
 It is the portion of bank deposits set aside by banks and
therefore not available for lending.
Seatwork:
Supply the necessary requirements:
1. What are the most important functions of the
Central Bank?
2. What are the components of the Following:
a. M1 (Narrow Money)
b. M2 (Broad Money)
c. M3 (Expanded Money)

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The Financial System

9/3/20XX Presentation Title

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