1. Money has time value.2. Higher returns are expected for taking on more risk.3. Financial markets are efficient in pricing securities.4. Reputation matters.

The first three refers to the economic behavior of individuals and the fourth focuses on ethical behavior.Managers, investors, and others incorporate “time” and “risk” in their decisions as well as the desire to earn “excess” returns that leads to efficient financial markets. While “greed” associated with desire to earn excess returns causes individuals to risk their “reputations” by engaging in questionable ethical behavior.

Four Pillars/principles of Finance:

OVERVIEW OF THE PHIL FINANCIAL SYSTEMSPANISH PERIOD AMERICAN PERIODJAPANESE OCCUPATIONTHE EIGHTIES:UNIVERSAL BANKINGTHE POST MARCOS ERA

( BANGKO SENTRAL NG PILIPINAS)THE NINETIES:THE NEW CENTRAL

BANKREFORMING THE BANKING LAW

The Phil. Financial Structure Bangko Sentral ng Pilipinas (BSP)

Banking InstitutionsPrivate Banking InstitutionsGovernment Banking Institutions

Non-Bank Financial InstitutionsPrivate Non-Bank InstitutionsGovernment Non-Bank Financial Institutions

THE PHILIPPINE BANKING

HISTORY OF THE PHIL. BANKING SYSTEM

BANK ORGANIZATION AND MGNTBANK CREDIT INSTRUMENTSBANK FUNCTIONSPDICBANK RESERVES

LEARNING OBJECTIVESEnumerate the functions of the BSPExplain the classification of Phil Financial

InstitutionsDiscuss the Phil Banking system

The Philippine Financial Institutions a. Central Bank/BSP

b. Banking Institutions Private Banking

Commercial BanksExpanded Commercial

Bank/Universal Banks Ordinary commercial banks

Thrift banksSavings and mortgage bankPrivate Development bankStock savings and loan associations

Rural banks Cooperative banks Microfinance banks

Continuation….2. Government Banking Institutions

Development Bank of the Phils. Land bank of the Phils. Philippine Amanah Bank

II. Non-bank Financial Institutions1. Private Non-bank Financial Institutions

a. Investment housesb. Investment companiesc. Financing companiesd. Securities Dealers/Brokerse. Non-stock Savings and Loans

Associationsf. Building and Loan Associationsg. pawnshopsh. Lending Investorsi. Retirement/Provident/Pension Fund

Managerj. Trust companiesk. Insurance companiesl. Venture Capital Corporations

Cont. Cooperatives

2. Government Non-bank Financial InstitutionGovernment Service Insurance System (GSIS)Social Security System (SSS)Philippine Veterans Investment Dev. Corp.

(PHIVIDEC)National Home Mortgage Finance Corp. (NHMFC)National Development Company (NDC)

Brief overview of the Phil. Financial System The Financial System has a complex structure

and operation involving every individual and business org. in a civilized society. It is a network of various institutions w/c generates, circulates, and controls money and credit.

Spanish Period – “Obras Pias” established in 1954, and the 1st organized financial institution in Phils. “Monte De Piedad y Caja de Ahorros de Manila” -1st savings bank. Galleon Trade. Banco Peninsula Ultramarino of Madrid.

Cont. financial systemAmerican Period-International Banking

Corp.; Guaranty Trust Company, American Bank, Bank of Pangasinan, Bank of Zamboanga, Postal Savings Bank, Phil National Bank

Japanese Occupation-Jan. 02,1942 placed the operation of the 17 existing banks.

Post-war period -The scope of the Central Bank authority was broadened to include the banking and non-banking financial institutions covering the entire credit system.

The Eighties: Universal Banking (Expanded Commercial Banking)

It is the conduct of a variety of financial services such as trading of financial instruments; foreign exchange activities; underwriting new debt and equity issues; investment management; insurance; as well as extension of credit and deposit gathering. Advantages: Diversfication and Expanded Business Opportunities.

Universal bank can spread its costs over a broader base activities and generate more revenues by offering bundle of products and reduces risk.

Post-Marcos Era- Mrs. C. Aquino assumed presidency in 1986, after a successful People Power Revolution that ended 2 decades of Marcos rule. Aquino formulated the Asset Privatization Trust-whose goal was to dispose of govt.-owned and controlled properties.

OVERVIEW OF BSPBSP was created by the Rep. Act No. 7653

known as the New Central Bank Act of 1993. It was established on July 3, 1993.

It is the central monetary authority that provides policy directions in the areas of money, banking and credit.

It is empowered to exercise supervision and regulation on the operations of banks.

BSP’s Powers and FunctionsIt is exercised by its Monetary Board,

consisting of 7 members appointed by the President of the Phils.

The Governor of BSP is the chief executive officer of the BSP and is required to direct and supervise the operations and internal administration of BSP.

The governor may delegate certain admin responsibilities to the Deputy Gov and Managing directors of the depts. within the BSP.

Functions of BSPLiquidity ManagementCurrency IssueLender of last resortFinancial supervisionManagement of foreign currency reservesDetermination of exchange rate policyOther activities e.g. banker, financial advisor,

official depository of the govt.

PHIL. BANKINGInstruments used to provide e-banking

services /e-money:1. Access devices – e.g.

withdraw/deposit, transfer funds, pay bills thru ATM and home banking by tel/computer

2. Card-based products- e.g. prepaid cards stored in electronic form on a computer chip or stored-value card (SVC) products.

3. Prepaid software products/network money- are transferred over communications networks (internet)

Bank mergers and consolidations Merger is the absorption of one or more

corporations by another existing corporation w/c retains its identity and takes over the rights, privileges, franchises, and properties, and assumes all the liabilities and obligations of the absorbed corporation in the same manner as if it had itself incurred such liabilities or obligations.

Consolidation is the union of two or more corporation into a single new corporation, called the consolidated corporation.

PERSPECTIVE ON BANK Bank is an institution w/c deals primarily in the

receipt of deposits and the loaning of funds.Types of Banks1. As to ownership- privately owned, publicly

owned2. As to place of incorporation-domestic, foreign3. As to structure- stock corp., nonstock corp.4. As to function –commercial bankn, trust co.,

savings bank, rural bank, development bank, cooperative bank, investment bank, central bank

5. As to management- unit bank, group banking, branch banking, chain banking

Bank OrganizationGeneral Aspects in Establishing Banks1. Economic justification for banks2. Selection of stockholders3. Determination of the kind of bank to be formed4. Determination of the amount of capital to be

raised

ORGANIZATION, MANAGEMENT AND ADMINISTRATION of BANKS It is a stock corporation

Its funds are obtained from the public (20 or more persons)

The minimum capital requirements prescribed by the Monetary Board for each category of banks are satisfied

Issuance of stocks a bank may issue in compliance with laws and regulations governing capital structure of banks

Certificate of Authority to register The SEC shall not register the articles of

incorporation of bank w/o accompanied certificate of authority issued by the Monetary Board of BSP.

BANK CREDIT INSTRUMENTS

Negotiability of Credit Instruments1. must be in writing and signed by the drawer/maker2. must be payable to order/bearer3. must be payable on demand or at future determinable time4. there must be unconditional order or promise to pay

DIVISION OF CREDIT INSTRUMENTS

Promises to payPromissory noteBank noteBanker’s acceptanceLetter of credit

ORDERS TO PAYBill of ExchangeCheckNOW (Negotiable Order of Withdrawal)DraftPromises to Pay Versus Order to Pay In promissory note – 2 parties involved – the

maker who makes the promise and the payee who is to receive payment.

In order to pay- 3 parties involved- the drawer, the drawee, and the payee.

MONEY MARKET INSTRUMENTTreasury billsBanker’s Acceptance/Letter of CreditNegotiable Certificates of DepositsCommercial PaperBank Guarantees

RESERVE REQUIREMENT Reserve Requirement refers to the proportion of bank’s

deposits and deposit substitute liabilities that banks are required to hold reserves.

Two types of reserves are:1.Liquidity/Primary Reserve-refers to the option given to

banks in complying with the reserve requirement. It is the sum of currency in circulation and reserves of bank which include cash in banks’ vault and reserve balances or deposits with the BSP including bank’s balances under the reserve deposit account.

2.Statutory/Legal Reserves/Secondary Reserve-pertain to the proportion of deposits and deposit substitute liabilities w/c must be held as deposits with the BSP in part, with the remaining balance allowed to be kept in banks’ vaults as cash or as reserve-eligible government securities.

Corporate Governance in Banking Business

DOSRI loans (Directors, Officers, stockholders and related interests) and AMLA (Anti-money laundering Act (RA 9160) on DOSRI loans – the responsibility of the Board of Directors & management to act primarily in the interest of the stockholders or bank owners and as good corporate citizens in the interest also of their stakeholders e.g. Customers, suppliers, community, and other who have direct economic link to the firm/bank.

The potential conflict of interest when a bank lends to its directors, officers and stockholders (called DOSRI loans) in order to minimize this risk the BSP set limits the amount of DOSRI loans at a maximum 15% net worth. (Ex. Orient Bank/Development Bank –owners were charged of fraud)

AMLA (Anti-Money Laundering Act RA 9160)

Banking Integrity to keep the bank function properly and make the savings and investment process more efficient. Banks may use as conduits of “Dirty Money” or money obtained from illegal activities called money laundering which turns “dirty money” to “good money”.

RA 9160 was passed to keep banks become aware of “suspicious transactions”.

End of lesson.Good Day!

Dr. Aurora DC Santarin