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FINANCE
100
FINANCIALSYSTEM,
MARKET &
MANAGEMENTThe Basics
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Chapters
Chapter 1-5
Chapter 6-10
Chapter 11-15
Chapter 16-20
Chapter 21-25
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Chapters
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5BACK
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Chapters
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10BACK
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Chapters
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15BACK
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Chapters
Chapter 16
Chapter 17
Chapter 18
Chapter 19
Chapter 20BACK
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Chapters
Chapter 21
Chapter 22
Chapter 23
Chapter 24
Chapter 25BACK
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Chapter
1
ROLE OF MONEYIN OUR
ECONOMICSYSTEM
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Development of
Monetary System
Money is something used by societyas a medium of exchange and is widelyacceptable for the payment of goodsand services w/o questioning theintegrity of the person offering it. The
primary function of money is tofacilitate the process of exchange.
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Barter System
first stage of monetarydevelopment.
it is the direct exchange orswapping of goods for goods,services for services, goods for
services or services for goods.
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Society abandoned the barter
system for the ff. reasons1. It was difficult to look for the person who has the things you
need and who also wants the things you are offering forexchange.
2. There is no common denominator to measure the value ofgoods and services sought for exchange.
3. Most of the goods traded have unequal values.
4. It is time consuming, cumbersome and very inconvenient forindividuals to use the barter system.
5. It lacks generalized purchasing power.
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Evolution of Money The goldsmiths were instrumental in the evolution
of money. Hundreds of years ago, the goldsmithshelped develop the use of money by accepting goldbullions to be converted into coins. They also
accepted deposit for safekeeping, which werereturned in another precious metal of the sameweight and fineness. They also helped in thetransfer of precious metals by means of receipts.Originally, a goldsmith was being paid a storage fee
for the gold but when people came to know that thegoldsmith was making money out of the golddeposited, they required him to share with them apart if the interest he earned. This is how bankingstarted.
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Minting of coins when gold bullions were converted into coins, coins were considered the
first type of modern money.
Significance of Money Money has become a very important moving factor in our society. It has
tremendous power over economic goods. Businessmen go into
production and trade because of money profit. When people deposittheir money in banks, and the banks in turn lend to borrowers forproductive purposes, this induces employment which generatesconsumption, thereby encouraging more production, which leads to amultiplier effect and results to progress in the economy. There are alsosome unfavorable effects of money. The excessive desire for money
profits sometimes induces businessmen and manufacturers to sacrificethe quality of their product. Money price and money income becomes alarge measure of judging people and things. Society has the tendency tobecome materialistic. The depletion of our natural resources can be aresult of the desire for too much money.
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Functions of Money
As a medium of exchange
As a standard to measure the value
of goods and services.As a stone of value
As a means of deferred payment
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Two Ways of Keeping
Money For Future Use
By saving
By investing
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Three Divisions of
Investment in Business
Industrial business
Commercial business
Servicing business
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Attributes of a Good
MoneyGeneral Acceptability
Stability of ValuePortabilityCognizabilityDivisibilityHomogeneityElasticityDurability
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Kinds of Money
Commodity Money- this type of money that hasa commodity value or value of its own.
Credit Money- this is the credit instrument that iswidely acceptable in payment for goods and services.
First Money- this is the kind of paper money issuedby a government edict or decree.
Legal Tender Money- this is the kind of moneythat circulates because of its legal tender power.
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Coinage it is the process of making uniform coins frommetals and stamping them with a specific design as
a quantity of its weight and fineness and theintegrity of the country it represents.
Fineness is defined as the ratio of pure gold and silver to the
total weight of the coin.
Mint is a place or a factory where coins are
manufactured or minted.
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Kinds of Coinage
Gratuitous Coinage
Brassage
Seignorage
Limited Coinage
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Detecting Counterfeiting BillsNOTES
Paper Portrait Watermark
Security Fiber Security Thread Background DesignColor of the
DenominationStyle and size of serial numberVignette Cleanness of print
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Detecting Counterfeiting Bills
COINS
1. Even flow of metallic coins.
2. High relief of letter and numerals3. Regularity of reedings and
beadings
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A. NOTES
GENUINE
The fingers can readily feel themain print.
Appears life-like.
Is the same as colored portrait
Placed vertically on the paper
Red and blue prints arescattered
Multi-colored.
COUNTERFEIT
Generally smooth.
Appears dead
Imitation of the paper is donewith finished portrait
Faked by placing verticallines on the inner side of thepaper
Stimulated by prints whichcannot be picked off.
Often blurred.
PAPER
PORTRAIT
WATERMARK
SECURITYFIBER
BACKGROUNDDESIGN
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A. NOTES
GENUINE
Generally, there is an irregularspattering of white spot
The prefix and number areclearly printed.
The lines and dots are distinctand sharp
The lines are clean and sharp
COUNTERFEIT
Have polychrome background
The letters and numbers arepoorly printed
Usually dull and poorly printed
It is dirty.
COLOR OFEACHDENOMINATION
SERIAL NUMBER
VIGNETTE
CLEANNESS OFPRINT
Show an overflow ofmetallic grains
B. COINS Feel greasy and appear slimy
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Chapter 1
ROLE OF MONEY IN OURECONOMIC SYSTEM
End of Chapter
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Chapter
2
HISTORY OF
PHILIPPINECURRENCY
&
PHILIPPINEMONETARYSTANDARDS
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Nature of Monetary
Standard
Standard money
is the monetary unit recognized bythe government as the ultimatebasic standard of value w/c all otherkinds of money are convertible.
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Monetary standard
refers to the currency systemadapted by a country to provide a
stable medium of exchange for thedomestic transactions and a meansof international payment for foreign
obligations
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Classification of
Monetary Standards
Commodity Standard or Metallic
StandardNon-commodity Standard or Fiat
Standard
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A. Commodity Standard
is a monetary in w/c the purchasingpower of value of the monetary unit
is equal to the value of a designatedquantity of a particular commodityor set of commodities. It may either
be monometallic or bimetallic.
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Monometallic Standard
is further divided into gold standardand silver standard. The gold standard
is further divided into gold coinstandard, golf billion standard and goldexchange standard. The silverstandard is also divided into silver coinstandard, silver bullion standard andsilver exchange.
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Classification of
Monometallic standard
Gold Coin Standard
Gold Bullion Standard
Gold Exchange Standard
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Classification of Gold
Exchange StandardAutomatic Gold Exchange Standard
Managed Gold Exchange Standard
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Bimetallic Standard
when each of two metals providesthe basis for the money in
calculation and the issues standsready to buy or sell either twometals at stated prices. The
monetary system is called abimetallic standard.
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Bimetallism
may also be defined as a monetarysystem in w/c coins of two different
metals at a fixed legal ration ofweights and fineness are used asthe monetary unit or the standard
unit value.
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Legal ratio refers to the ratio between theweights of gold coins and silver coins in the mint.
Market ratio refers to the ratio of value ofgold and silver as being bought and sold in the market.
Greshams Law refers to the bad orovervalued money drives out the good or under valuedmoney in circulation. When the value of the gold andsilver are equal, then mint ratio or legal ratio are equal.But when silver becomes abundant thus reducing its
value and becomes cheaper, silver would drive the goldcoins out of the circulation.
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B. Non-commodity or
Fiat Standardthis standard refers to a monetary
system in w/c the face value of themonetary unit is much higher thanthat of the value of material used as
money.
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Types of Fiat
StandardUtopian Standard or Pure Fiat
StandardInvoluntary Paper Standard
Managed currency Standard
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Pre-Spanish Regime
Piloncito it was made of crude gold coin with
flat rides with a diameter of about threeweights of an inch.
Commodity money
rice, coffee, sugar, rolled silver wires,gold dust, and gold crown money.
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Spanish RegimeHilis Kalamay irregular shaped coin hammered in Mexico
Spanish Barilla the first coin minted in the Philippines.
Spanish Galleon sailed across the pacific from Acapulo Mexico to Manila.
Colderillas a second coin minted in the Philippines.
Spanish Dos Mundos most famous coin.They came in various denominations :ocho, cuatro, and dos reales.
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First Republic of the
PhilippinesEmilio Aguinaldo issued a coin
minted in denominations of twocentimos.
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American RegimeThe principal currencies allowed to
circulate were as follows:
Mexican Silver Dollar
American Dollar
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Philippine Bank Note
El Banco De Las Islas Filipinasknown as the Bank of Philippine
Island was authorized to issue itsown bank notes.
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Japanese Regime
Japanese War Note
also known as Mickey Mouse
Money.
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Post War Period
The monetary unit during thisperiod was Victory Notes
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Hawalaregulators learned recently that one of theweak points in the payments chain through
which illicit funds can enter. it is Hindi meaning trust orexchange.
often used in relation with the word hundiwhich stands forbill ofexchange.unofficial alternative remittance and money
exchange system enabling the transfer offunds without their actual physical move.
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Chapter 2
HISTORY OF PHILIPPINE CURRENCY&
PHILIPPINE MONETARY STANDARDS
End of Chapter
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Chapter
3
MODERNMEASURESOF
MONEY
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Modern Measures of
Money The narrow definition f money
emphasizes on the medium-of-exchange function of money.
Negotiable order of withdrawalaccount are interest bearing savingsaccount on w/c limited number ofchecks may be written.
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Broader Measures of
Money:M2, M3 Although traditionally the Central Bank prefers the
M1 money supply measure, others have preferred thebroader measures of money. If one is inclined toemphasize the store-of-value function of money ratherthan the medium of exchange, broader measures areappropriate.
Asset may be classified on the basis of liquidity, orthe case and convenience with which they may beconverted into medium of exchange.
The principle involved in constructing thesemonetary aggregates is to combine assets ofcomparable levels of liquidity in each measure of money.Hence, in constructing M2, certain highly liquid assets areadded to M1.
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Weighted Measures of
Money M1, M2 and M3 are simple-sum
weights and give equal weight to eachof the items they include. For example,M2 gives the same weight to passbooksavings accounts and money market
mutual fund shares as to currency heldby the public and demand deposits inbank.
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Inflation is a sustained increase on the price level of commodities.
Criteria of inflation1. Whenever money supply or the level of credit increase by
more than 15%, which is a normal increase2. Whenever the level of price index number is more than 10%.
Disadvantages of inflation1. It is unfavourable for the fix income group.
2. It may induce the occurrence of recession in the economy.3. It may disrupts debtor-creditor relationship.
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Deflation
is characterized by an uncontrolled inthe general process level as a result ofundersupply of money.
Disadvantages of Deflation
Deflation induces curtailment in
production.It may cause a depression in
employment.
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Aggregate Demand -
Aggregate SupplyModel
the analysis of the relationshipbetween the nations money supplyand economic activity.
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Aggregate Demand-
Aggregate SupplyFramework
the basic model of total demands and total
supply the nations price level on the verticalaxis and its real output level on the horizontalaxis.
is defined as the relationship between thenations price level and the amount of realoutput demanded, other factors remainingconstant.
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Aggregate Supply
Curveis defined as the relationship
between the nations price level andthe amount of output termscollectively desire to produce either
factors remaining constant.
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Factors that shift
Aggregate Demand CurveConsumption (C)
Investment (I)Government Purchases of GoodsAnd Services (G)
Net exports of Goods and Services(X-M)
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Factors that shift the
AggregateSupply Curve
Quantity of output
Prices of Inputs
Technological Change
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Equilibrium Output versus
the Full EmploymentOutput Level
Natural Output- also called full employment
output level. It is the level of output correspondingto this natural unemployment rate.
Recessionary Gap- the magnitude by which theequilibrium output level falls short of fullemployment output.
Inflationary Gap- is the magnitude by whichoutput exceeds the full employment output level
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The Dilemma Posed by
Adverse Aggregate SupplyShocks
Stagflation- is a recession
combined with higher inflation.
Misery Index- is the sum ofunemployment and inflation rates.
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Inflationary Gap- the magnitude bywhich output exceeds the full employmentoutput level.
The Theory of the Value of
Money
Demand for Money
Lloyd B. Thomas says that the value ofmoney is measured by what a unit of money willbuy in terms of a representative group ofeconomic goods.
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The Velocity of Money Refers to the rate of the turnover of money.
Institutional Factors that Underlie theSynchronization between Receipt and
Expenditures More frequent paydays and increase of use of credit
cards reduce the demand for money and increase itsvelocity.
The State of Financial Technology Comprising the financial technology are the availability
of substitutes for money .
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Interest Rate LevelAn increase in interest rate reduces the demand for
money.
Economic Uncertainty Money is the safest of all assets in the sense that its
normal value remains constant no matter what happensin the stock, bond, or real market .
Inflation Expectation Inflation reduces the real value of money.
Income LevelAn increase in income usually increase expenditure by
individuals and firm.
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MVT'PT
M - average money supply
VT - transaction demand for
moneyP - average price of the
transaction
T - number of transactionoccurring during theday
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Velocity and Demand
for MoneyCurrency plus demand principle also applies
to the income velocity of money.
The Demand for MoneyFormula: Md=kPY,
where:Md - demandK - fraction of GDP or (PY)
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The Income Velocity
of MoneyFormula: MVYPY
where:M - average money supplyVT - income velocity of moneyP - average price of all final goodsY -number of final goods and
services
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Motives for Holding
MoneyTransaction Demand
use to finance ordinary expenditures.
Speculative Demand
is held for purpose of good investment inbusiness.
Precautionary Demand
it attribute its existence to the possibilityof unforeseen event.
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The Role of Interest Rate The price one pays for holding money iscalled opportunity cost.
Interest Rate and the Transaction Demand
transaction balances involve money which must beheld in order to bridge the gap the receipt of fundsand their later disbursement.
Interest Rates and the Precautionary Demand
precautionary money holdings may also be
somewhat sensitive to interest rate.Interest Rate and the Speculative Demand one of the most significant hypothesis is that people
and firm hold a significant amount of money forspeculative purposes.
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The Role of Interest in
the Demand for Money We have learned that the demand to
hold money may be responsive to theopportunity cost of holding money- themarket of interest.
Each motives of holding money may
depend in the part on the interest rate,and its increase makes holdingmoney more costly.
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Chapter 3
MODERN MEASURESOF MONEY
End of Chapter
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Chapter
4
CREDITS,
ITS USES,CLASSIFICATIONS
& RISKS
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Credit
is simply defined as the power orability to obtain money, goods or
services at the present time inexchange for a promise to pay withmoney upon demand or at a future
determinable time.
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Functions of Creditcredit includes people to save
credit avoids the use of money
is used as substitute for money
credit thus facilitates the productionconsumption of goods and usuallyresults in the growth economy
serves as the medium of a exchange.
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Characteristics of
CreditsCredit as Bipartite Contract
Credit as a Pecuniary ContractCredit as a Fiduciary Contract
In credit, risk is always involvedCredit always involves futurity
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Significance of Creditallows the possible production of goods
provides financial means for businessmenwho takes advantage of market opportunitiesin both domestic and foreign markets
allows the consumers to buy goods andservices beyond their ability to fulfill their
desire
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Credit and the
Business Cycle All credits function as stimulants or activators
of the fluctuations in the business cycle. During
recession when business activities decline,business and consumer products are reduced.Actually, the expansion 0f credit in a decliningphase of the business cycle softens the downwardtrend of business activity. Many creditors are notwilling to shoulder the risk especially during such
situation. Many of them tend to adopt strict creditpolicies to discourage borrowers.
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A. Personal Creditcredits obtained forones use.
There are three types, namely:
1. service credit- credits obtainedfrom professionals
2. retail credit- obtained mostly onretail
3. personal loan credit- granted forthe purchase of expensive consumeritems
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Criteria for Granting
Credit employment and personal resourceswealth and accumulated resources
operating expenses incurred by the borrower additional sources of income of family size of family paying habits of the borrower
Occupation length of employment and permanence length of time a person has lived in an area
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B. Commercial or
Mercantile Creditcredits extended by one businessman
to another businessman.A commercial credit transaction takes
place from the time goods are sold as
raw materials to the time they reachthe industrial consumer.
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C. Bank Credit or
Bank Loansare credits granted by banks to
businessman to finance their shortterm credit needs.
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D. Export and Import
Creditsobtained to finance the selling of
goods outside the country. Importcredits are also obtain to financethe buying of goods from other
countries.
Chart 1
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Chart 1
IMPORTER EXPORTER
IMPORTERS
BANKEXPORTERS
BANK
Ship of goods requestimporter to furnish Him with
bankers L/C
Notifies exporter
of L/C(4)
(7)PaysExporter
(2)
Pays Bank(8)
Open
L/C
Draws drafts against Importers Bank (6)
(1)
(5)
Sends Bankers L/C (3)
Financing an Export
SHIPPING COChart 2
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SHIPPING CO.
IMPORTER
LOCALBANK
EXPORTER
FOREIGNBANK
FINANCIALINTERMEDIARY
GOODSSHIPPEDUnder Bill ofLending
(4)
(3)Notifies
Draws a
draft thruhis Bank(8)
Pays
(5)
(9) Sellsaccepted to
(6) Sends draftsfor acceptance
(2) L/C sent
(7) Documents attached andDrafts returned
(8) Documents released underTrust Receipt
(1) Application forL/C
(11)PaysLocalBank
Chart 2
Financing an
Import
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E. Investment Credit
long term borrowing is one of the
most common forms of financingbusiness enterprise .
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F. Agricultural Credit
credits given to farmers for thedevelopment, improvement andcultivation of their lands. They may be in
the form of:
1. Crop loan2. Livestock Loan3. Agricultural Time Loan4. Commodity Loan
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G. Industrial Credit
are loans granted to industries
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H. Real Estate Credits
are loans to finance the purchaseand improvement of real estate
properties.
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I. Government or
Public Creditare credits obtained from any of the
government institutions or theirinstrumentalities
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J. Secured and
Unsecured CreditsSecured credits are those which are covered by properties of value called collaterals to guarantee loans.
Unsecured credits are those where the borrowers has mentioned the full trust and confidence of the
creditor.
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K. Short Term, Medium
Term and Long Term loans
Short Term- payable with in a
yearMedium Term- payable with in 5
years
Long Term- payable beyond 5
years
L Di L Di
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L. Direct Loan, Discount
Loan, Credit LinesDirect Loan- interest payments are
made at the time the loan matures
Discount Loan- interest paymentsare deducted at the time the loans aregranted.
Credit Lines- agreement betweenthe debtor and creditor
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Sources of CreditBanks most common sources of creditClassified into:
Commercial Banks- give commercial loans to
businessmenThrift Banks- give loans to individuals for personal
needs and to the industry for the enhancement of agricultureand economy.
Rural Banks- are organized to cater the needs of
farmers and small businessmen in the rural areas
Retail Stores give personal consumer loans to their consumers on an
open book account basis
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Credit Unions- cooperative organization thatlend savings of their member to other members
who are in need
Individual Money Lenders- individualswho have excess funds and who usually lend suchfunds to others who are in need
Insurance Companies- source of creditfor insured individuals
Sales Finance Companies- extend creditfacilities to industrial, commercial and agriculturalenterprises
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Credit Risk possibility of on-payment of the obligation when it falls due
Cs of Credit
Character- quality of credit risk which makes the debtorpay or intend to pay when his debt is due
Capacity- ability of a debtor to pay his obligation
Capital- financial strength of a business
Collateral- properties of value pledged to secure loan
Condition- environment in the customers industry,economically, legally and politically in relation to growth
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Chapter 4
CREDITS, ITS USESCLASSIFICATIONS & RISKS
End of Chapter
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Chapter
5
CREDIT
INSTRUMENTS&
ITS
NEGOTIATION
C di I
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Credit Instrument
DefinedA credit instrument is a document evidencing the
existence of a credit obligation.
Classification of Credit instrumentsCredit Instrument w/ General Acceptability
Credit Instruments w/ Limited Acceptability
A C dit I t t f
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A. Credit Instrument for
Investment PurposesCredit instrument for Investment Purposes
are subdivided into:
a) Stock Certificatesevidences of ownership in a corporation
b) Bond Certificate long term indebtedness on the part of an
issuing corporation.
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Kinds of Bonds Debenture BondsRedeemable Bonds Collateral BondsSerial Bonds
Mortgage Bonds Income BondsSinking BondsCoupon Bonds
Registered BondsProfit Sharing Bonds Guaranteed Bonds Convertible Bonds
A M M k Bill
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A. Money Market Bills negotiable financial instruments bought and sold inthe market
Kinds of Money Market Instruments
1.Interbank Call Loans2.Promissory Notes3.Repurchase Agreement4.Certificates of Assignments5. Certificates of Participation6.Commercial Papers7. C. B. C. I.s8. Treasury bills9. D.B.P. Progress Bonds
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B. Credit Instrument for
Commercial PurposesCredit instrument for commercial purposes, w/c is
better known as instruments are further subdividedinto promise-to-pay and order-to pay.
Promise to Pay A promissory note is a written promise of a
person to pay another a sum certain of money ondemand or at a determine future time.
A negotiable promissory note is one that istransferable.
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Non-negotiable Promissory Note
is non-transferable.Secured Promissory Notes are
guaranteed w/ properties of value.
Unsecured Promissory Notesgreatly depend upon the character ofthe borrower.
Financial Institution Depositsarepromises of certain institutions to
return money deposited with them.
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Letter of Credit is a letter made by one bank addressed to another
whether domestic or foreign.
1. commercial letter of credit
2. traveller letter of credit
Open Book Accountmost of our mercantile credit transactions are
evidenced but by credit obligations but by a mereentry made in the ledger of the creditor.
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Order to pay
are the second type of commercial creditinstruments. Checks, drafts and money orders fallunder this type of credit instruments.
Checks are the most commonly used bills of exchange.
Cl ifi ti f
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Classification of
Checks Crossed Checks Post Dated Checks Stale Checks Managers Check, Cashiers Check and Treasurers Check Bouncing or Robber Check Counter Check Certified Check Falsified Forged Check
Personal Check and Business Check Cancelled Check Returned Check
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The Giro System
is a technique in credit transaction w/c isnow being used. It features the use ofelectronic machines.
Draftsis a bill of exchange w/c is an
unconditional order made by the drawerrequesting the drawer to pay the payee asum certain in money on demand at adetermined time.
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Kinds of Drafts
Demand and time drafts
Bank Draft and the Commercial or
Trade DraftAcceptance Draft
Documented Draft
Clean Draft
M O
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Money Order
Two Types:
Bank Money Order w/c is an
order of one bank to another banksPortal Money Order w/c is an
order of a post office to another
post office.
Requisites for
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Requisites for
Negotiability It must be in writing signed by the maker or the drawer. It must be payable on demand or at a future determinable time. It must be payable to order or to bearer.
It must contain no conditions. If it is addressed to a drawee, the name of the drawee must be
indicated with certainty. Endorsement must be in the name appearing on the instrument. If, however, the name of the payee is misspelled or is
erroneously written, the endorser may endorse it in the samemanner as it was written but must indicate below theendorsement his real name with the word by.
Ki d f E d
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Kinds of EndorsementSpecial of full endorsement-
specifies the name of the person towhom, or to whose order, theinstrument made payable.Endorsement in Bank- specifies no
endorse.Restrictive Endorsement- prevents
the further negotiation of instruments.
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Qualified Endorsement-
constitute the endorser a mereassignor of the instrument.
Conditional Endorsement- isconditional, the person required to
pay the instrument may disregardthe condition.
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Chapter 5
CREDIT INSTRUMENTS &ITS NEGOTIATION
End of Chapter
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CHAPTER
6
THEFINANCIAL
SYSTEM
Financial Intermediation
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Financial Intermediation
One of the most familiar activities of financialfirms
Act simultaneously as BORROWERS and
LENDERSmiddleman between those who want to lend
and those who want to borrow.
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Its a financial institution that accepts moneyfrom savers or investors and loan those fundsto borrowers, thus providing a link betweenthose SEEKING EARNINGS on their funds
and those SEEKINGCREDIT.
Some depositors believe that they are usingthe bank to safe keep their deposit, not
realizing that they are the creditors of thebank.
Financial System
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Financial System
provides facilities for the transfer ofpurchasing power from individual to individualand from firm to firm both within the countryand internationally
Keep detailed set of records of transactions ,they are the primary source of statistics usedin analyzing national and international
economic activity
Gross National Product
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Gross National Product
The accepted measure of aggregate output ofthe economy
Value Added
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Value Added
Appropriate measure of the output of anysingle industry
The difference between the market value of
the product produced and sold by the industryby way of financial intermediaries
Primary Claims
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Primary Claims
Issued by the ultimate deficit spending units, mainly : BusinessesGovernment
EXAMPLES:Money market instrumentsGovernment securitiesCommercial papersCorporate and municipal bonds
MortgagesCommon stocks
Secondary Claims
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Secondary Claims
Banks, life insurance companies, and mutualfunds issue claims of their own to attractindividuals and firms
EXAMPLES:
Savings deposits
Life insurance policies
Shares of mutual funds
Economic Role Of Financial
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Economic Role Of Financial
Intermediaries If there are no financial institution or you and society
are penalized by the absence of financial institution,you are denied of the opportunity of having earningsand credits of funds.
Contributes materially to the economic process
Facilitate flow of funds from SURPLUS UNIT toSPENDING UNIT
Enhance the societys welfare Increase capital expenditures
Boosts productivity and living standard
Risks and Cost without
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Risks and Cost without
Financial Intermediation
ASSYMETRIC INFORMATION
Means one has better understanding of thebusiness
Gives rise to problems that reduce thewillingness to allow lending:
1. Adverse Selection2. Moral Hazard
3. Transaction Cost
1 Adverse Selection
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1. Adverse Selection
the tendency for those persons with highestprobability of experiencing financial problemsto seek out and be granted loans
Individuals are more likely to borrow and arewilling to pay relatively high interest rates toobtain funds
2 Moral Hazard
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2. Moral Hazard
Occurs after the loan is madeThis arise because of the debt contract allows
the borrower to keep any and all the returns
that exceed the fixed payment called for inthe loan agreement
The borrower has an incentive to take on
more risks than is consistent with the bestinterests of the lender, in an attempt to reaphigh return
Major Rationale of Financial
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Major Rationale of Financial
IntermediariesThe ability to deal with asymmetric
information and the associated problems withadverse selection and moral hazards
Financial Institutions
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Financial Institutions Specialize in assessing credit risks of the potential borrowers
because:1. their access in private information such as loan applicants:
Deposit history Income Assets Liabilities
Credit history2. They are equipped to monitor the borrowers activities
*** they are in better position to make better loan decisionEXAMPLES:
Commercial banks Thrift institution Finance companies
3 Transaction Cost
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3. Transaction Cost
Involves the money and time spent carryingout the financial transactions
Important element in Transaction Cost :1. Search Cost
2. Time and Money
Benefits of Intermediation
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Benefits of Intermediation
1. Benefits to Surplus Units2. Benefits to Deficit Units
1 Benefits to Surplus Units
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1. Benefits to Surplus Units
SURPLUS UNITS (savers)Pooling the funds of thousands of individuals to
overcome the obstacles that stop savers frompurchasing primary claims directly
OBSTACLES:Lack of financial expertiseLack of informationLimited access to financial marketsAbsence of many financial instruments in small
denominationsRegressive transaction cost
Diversification
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Diversification
The spreading of risks made possible bypooling of funds that is important for thesavers
Financial intermediaries have the fund toacquire the large variety of claims needed tospread the risks
2. Benefits to Deficit Units
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2. Benefits to Deficit Units
Broaden the range of instruments,denominations and maturities an institutioncan issue , which significantly reducetransaction cost
THE PHILIPPINE
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FINANCIAL SYSTEMPlays a vital role in our society and economyas a whole.
It affect the lives of every person, family,
business and the government Is greatly affected by our political, social and
economic conditions in the country
Also influenced by :International Monetary Fund
Asean Development Bank
Other international institutions
Banko Sentral ng Pilipinas
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Banko Sentral ng Pilipinas
Supervises and regulates the financial system Provide policy directions in areas of money, banking
and credit
Shall have supervision over the operation of thebanks and exercise such regulatory powers and otherpertinent laws over the operations of financecompanies and non-bank financial institutionsperforming quasi-banking functions
Its primary objective is to maintain price stability
conducive to balanced and sustainable growth of theeconomy
Shall also promote and maintain monetary stabilityand convertibility of the peso
Commercial Banks
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Commercial Banks
Considered the heart of financial systemThey hold the deposits of millions of people,
government and business enterprisesThey play the role of channeling of funds
They make funds available through their lendingand investing activities to borrowers who couldbe businessmen, business firms, governmentand individuals
They facilitate the flow of goods and services
from producers to consumers including the ofthe governmentThey help in the flow of goods and services in
and out of the country
Banks
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Banks
Are conduits through which the Banko Sentralng Pilipinas implements its monetary policies
STRUCTURE OF THE PHILIPPINE
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FINANCIAL SYSTEMA. Bangko Sentral ng Pilipinas
B. Banking Institutions
1. Private Banking Institutionsa. Expanded Commercial Banks/ Universal Banks(EKB/UB)b. Commercial Banks (KB)
c. Thrift Banks (TB)
Savings and Mortgage Banks (SMB)
Private Development Banks (PDB)
Stock Savings and Loan Associations (SSLA)
d. Rural Banks (RB)
e. Cooperative Banks
2. Government Banking Institutions
a. Development Bank of the Philippines (DBP)
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b. Land Bank of the Philippines (LBP)
c. Philippine Al-amanah Islamic Investment BankC. Non-Bank Financial Institutions
1. Private Non-Bank Financial Institutions
a. Investment Houses
b. Investment Companies
c. Financing Companies
d. Securities Dealers/ Brokers
e. Non-stock Savings and Loan Associations
f. Building and Loan Associationsg. Pawnshops
h. Lending investors
i. Fund Managers
j. Trust Companies/ Departments
k Insurance Companies
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k. Insurance Companies
l. Venture Capital Corporations
2. Government Non-Bank Institutions
a. Government Service Insurance System (GSIS)
b. Social Security System (SSS)
c. Pag-ibig
A. Commercial Banks
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A. Commercial Banks
Is any corporation, which accepts or createsdemand deposits subject to withdrawal bymeans of checks
1.) Universal Bank/
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Expanded Commercial Bank
Is any commercial bank, which performs theinvestment house function in addition to itsCommercial Banking Authority
It may invest in the equities of allied and non-allied enterprises
ALLIED ENTERPRISES may either be:Financial
Non-Financial
2.) Commercial Bank/
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Domestic Bank is any commercial bank that is confined only to
commercial bank functions such as :Accepting drafts
Issuing letters of credit
Discounting and negotiating promissory notes , bills ofexchange and other evidences of debts
Accepting or creating demand deposits
Receiving other types of deposits and deposits substitutes
Buying and selling foreign exchange, gold and silver
bullionsAcquiring marketable bonds and other debt securities
Extending credit subject to such rules as the MonetaryBoard may promulgate
Thrift Banks
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Thrift Banks Shall include savings and mortgage banks, stocks savings and
loan associations and private development bank Their function is to Accumulate the savings of the depositors andInvesting together with capital loans secured by
bonds, mortgages in real estate and insured improvements thereon chattel mortgages bonds other forms of securities and loans for personal and household finance,
whether secured or unsecured, Financing for homebuilding and home improvement Readily marketable and debt securities Commercial papers Accounts receivables Drafts
Bills of exchange Acceptances or notes arising out of commercial transaction Other investment and loans which the Monetary Board may determine
as necessary I the furtherance of national economic objectives
1.) Stock-savings &
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Mortgage BanksAny corporation organized for the purpose of
accumulating the savings of depositors andinvesting them, together with its capital, in thereadily marketable bonds and debt securities;
checks, bills of exchange, acceptances or notesarising out of commercial transactions or in loanssecured by bonds, mortgages or real estate andinsured improvements thereon and other forms of
security or in loans for personal or householdfinances whether secured or unsecured , andfinancing for household building and housedevelopment.
2.) Savings & Loan
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AssociationAny corporation engage in the business of
accumulating the savings of its members orstockholders using such accumulation,together with its capital for the loans and
investment in the securities of productiveenterprises, or in securities of the governmentand its instrumentalities, provided that theyare primarily engaged in servicing the needs
of household by providing personal financeand long term financing for home buildingand development
3.)Private Development
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3 ) p
Banks a bank that exercises all the powers and
shall assume all the obligations of the savings
and mortgages bank as provided by in theGeneral Banking Act except otherwise stated
Helps construct, expand and rehabilitate ourAgriculture and Industry
It helps meet the needs of these sectors
Development Bank of the Philippines
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Development Bank of the Philippines
The government counterpart of the privatedevelopment banks
helps the private development banksaugment their capitalization as providedunder R.A. 4093 as amended
Rural Banks
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Any bank authorized by the Central Bank tomake credits available for farmers,businessmen and cottage industries in therural area
Loans may be granted by the rural banks onthe security of land without Torrents titlewhere the owner of private property can show
five (5) years or more peaceful continuousand uninterrupted possession of the land inthe concept of ownership
This includes:
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Portions of friar land estates or other landsadministered by the Bureau of Lands that arecovered by sale contracts and purchasesand have paid at least five (5) years
installment thereon, without the necessity ofprior approval and consent of the Director ofLands or;
Portions of other estates under theadministration of the Department of AgrarianReform
Cooperative Banks
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p
Banks established to assist the variouscooperatives by lending those fund atreasonable rates
B. Government Banks /
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Specialized Government Banks
LAND BANK OF THE PHILIPPINES
Government bank which provides financial
support in the implementation of the AgrarianReform Program(CARP) of the government
AL-AMANAH ISLAMIC INVESTMENT
BANK
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BANK
Republic Act No.6048 provides for the charterthat authorizes the bank to promote andaccelerate the socio-economic developmentof the Autonomous Region of Muslim
Mindanao by performing banking, financingand investment operations, and to establishand participate in agriculture, commercial andindustrial ventures based on the Islamicconcept of banking
DEVELOPMENT BANK OF THE
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PHILIPPINES
Provides loans for developmental purpose,gives loans to the agricultural sector,commercial sector and the industrial sector
C. Non- Banking Financial
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Institution
INVESTMENT HOUSE
Any business enterprise where the primarypurpose is to extend credit facilities to consumers
and to industrial , commercial and agriculturalentities either by :Discounting or factoring commercial papers or
accounts
Buying installment contract, leases, chattel
mortgages or other evidences of indebtednessLeasing motor vehicles, heavy equipment and
industrial machineries and office equipment,appliance and other movable property
SECURITIES DEALER
Any person engaged in the business of buying andselling securities for his own account thereby making a
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selling securities for his own account thereby making aprofit from the difference between his buying and selling
of securities
SECURITIES BROKER
Any person engaged in the business of effectingsecurities transaction and earns through commissionbasis
NON-STOCK SAVINGS AND LOAN ASSOCIATIONAND COOPERATIVE CREDIT UNIONS
Corporations engaged in the business of accumulatingthe savings of its members which are usually confined toa well-defined group of persons and uses suchaccumulated funds to lend to its own member-depositors
BUILDING AND LOAN ASSOCIATION
Any corporation whose Capital Stock is periodically
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Any corporation whose Capital Stock is periodicallypaid by its stockholder members
Its purpose is to encourage frugality, home buildingamong its members, and to loan its funds includingfunds it borrowed from its own members
It also uses the accumulated funds to repay itsstockholders upon surrender of their shares
PAWNSHOP
Refers to person or entity engaged in the businessof lending money or personal property, jewelry,television, radio, camera, appliance etc. delivered asa security for loan.
D. Government Non-Bank
Fi i l I tit ti
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Financial Institution SOCIAL SECURITY SYSTEM (SSS) Provides retirement benefits , funeral benefits, housing loans,
personal loans, and calamity loans to employees who areworking in private companies and offices
GOVERNMENT SERVICE INSURANCE SYSTEM(GSIS)
Provides retirement benefits, housing loans, personal loans,emergency and calamity loans to government employees
PAG-IBIG Provides housing loans to both government and private
employees
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Chapter 6
THE FINANCIAL SYSTEM
End of Chapter
Chapter
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Chapter
7
BANKING
INSTITUTIONS,HISTORY,
CLASSIFICATIONS&
FUNCTIONS
BANKS
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Duly authorized by the monetary board ofcentral bank
Lending fund
Financial institutionsAccepting deposits and lending
ROLE OF BANKS
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Depository of idle fundsMajor source of loanable funds
Give counsel on financial matters
BRIEF HISTORY
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2000 B.C. Babylon
9th Century- King Pharaoh Nebuchadnezzar
Ancient GreeceGreek Temples serve as depositories of wealth
Greek Priests loan money to people
1157 A.D.- Venice17th & 18th Century
1401- Bank Of Barcelona In Spain1587- Bank Of Venice1609- Bank Of Amsterdam
1619- Hamburg
1621 N b
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1621- Nuremberg
1688- Stockton1694- Modern Banking
Bank Of England
Private Owned Bank
1946-government Bank
Monetary Authority Of England
Medicci Family In FlorenceFuggers In Germany
Roothschild Family MostInfluential
1800- Bank Of FranceNapoleon Bonaparte
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Napoleon Bonaparte
1848- Dominant Financial Institution19th Century- Rapid Development In Germany
Goldsmiths- Best Facilities For Safekeeping OfValuables
Canadian Banking- U.S. & Great Britain
1822-Bank Of Montreal1835- Bank Of Canada1781- Bank Of North America1791- Serve Both Government And Public
1838- Free Banking Law
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1842- Louisana Enacted Legislation
Civil War- Greenbacks1865- Prices Grown
-Gold & Silver Coins Were Hoarded
- National Banking Act Of 18631907- Remedial Legislation
Commercial 26,000 (1928)
Banks 14000 (1933)
1934- Banking Systems Began To Recover
BANKING IN THE PHILIPPINES
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1594- Obras PiasFather Juan Fernandez De Leon
-Religious Foundation
1930- Rodriguez Bank- Francisco RodriguezGorricho Bank
-Bank Owned By Mariano Tuason Family
- El Banco Espanol-filipino De Isabel Ii
SPANISH TIME
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Monte De Piedad Y Caja De Ahorros De Manila(Monte De Piedad & Savings Bank)
Father Felix Huertas
1898- Roman Catholic Archbishop Of Manila
WORLD WAR II
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Under Japanese Imperial Forces Pnb,bpi & Pbc
CLASSIFICATION OF BANKS
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Commercial BanksOrdinary Commercial Bank
-Confined To The Simple
Functions Of Commercial Banks
-Capitalized At 2.8 Billion Pesos
Expanded Commercial Bank/Universal Bank
-It Does The Commercial Bank
Functions As Well As The Investment HouseFunctions
THRIFT BANK
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Banks Established To Encourage Thriftiness,
Industry, Frugality & The Accumulation OfSavings Among The People.
*SAVING MORTGAGE BANKS
- Organized For The Purpose OfAccumulating The Savings Of Individuals &Investing Them Together With Their CapitalReadily Marketable Bonds.
- Specialize In Granting Industrial Loans
STOCK SAVINGS & LOAN
ASSOCIATIONS
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ASSOCIATIONS
- Primarily engaged in servicing the needsof household by providing personal finance
PRIVATE DEVELOPMENT BANKS-Banks organized to expand, develop,
construct, and rehabilitate our agriculture &industry
RURAL BANK
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Organized to promote and expand the ruraleconomy in an orderly and effective mannerby providing farmers and small businessmenwith means of facilitating and improving their
facilities.
SPECIALIZED GOVERNMENT
BANKS OF THE PHILIPPINES
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BANKS OF THE PHILIPPINES
1. Land Bank Of The Philippines
-Help implement the land reform in the
country-Established as a corporate and
government instrumentality
2. Development Bank Of The Philippines
-Government counter part of the privatedevelopment bank
3. Al-Amanah Islamic Investment Bank
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3
Of The Philippines
-Islamic bank; established to promote andaccelerate the socio-economic developmentof the autonomous region of Mindanao.
Offshore Banking Unit (OBU) Improve the access of the country to the worlds
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Improve the access of the country to the worlds
financial institutions.
FUNCTIONS:
1. Transaction with non-residents and or with other OBU
2. Transactions with foreign currency deposit units3. Transactions with residents other than FCDU and other
OBU subject to prior approval when required underCentral Bank regulation, and offshore banking unit mayinvest in foreign currency denominated debt
instruments of residents(other then FCDU and otherOBU) and or extend foreign currency loans andadvances to such residents.
CLASSIFICATION ACCORDING TO
FORM OF ORGANIZATION
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FORM OF ORGANIZATION
Unit Bank single banking corporation, which makes implements
its own policies.
Branch Banking Systemmultiple office banking
Group Banking majority shares of stock are held by a holding
company.Chain Banking independent unit bank which are owned by a group
of people.
TRADITIONAL
CLASSIFICATIONS OF BANKS
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CLASSIFICATIONS OF BANKS
Privately Owned Banks
Banks owned by private individuals
Government Owned Banks
Owned by state or banks with a minimum
private capital.
Branch Banking
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Adoption Reasons:Lack of capital
Idle funds in one area of the country can be
properly employed in other areasThe convenience of its customer
There is less overhead expense to run a
branch than to organize a new bank.
ACCORDING TO PLACE OF
INCORPORATION
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INCORPORATION
Domestic Bank
Bank incorporated under the laws of the
country where it is doing business.Foreign Banks
Incorporated under the laws of othercountries that do business in the Philippines
FUNCTIONS OF BANK
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DEPOSITORY FUNCTIONSTRUST FUNCTION
COLLECTION & REMITANCE FUNCTION
LOANS AND DISCOUNT FUNCTIONADVISORY FUNCTION
Depository Function*ACCORDING TO THE FORM OF WITHDRAWAL
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*ACCORDING TO THE FORM OF WITHDRAWAL
Savings Deposit accepted for safekeeping
Demand Deposit
maybe withdrawn anytime by presenting a check.
Negotiable Order of Withdrawal Account
Interest bearing deposit accounts that combine the
payable on demand feature of checks and investmentfeature of savings account
Term Savings Account Saving account that is not to be withdrawn for a
considerable period of time and allows the bank to lend
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considerable period of time and allows the bank to lend
it for a longer term.
Special Time DepositDeposit required by the government or central bank for
a depositor to maintain with the bank for a particular
purpose
Time Certificate of DepositDeposit evidenced by a certificate maturing at a definite
future time. It carries a higher interest rate than the savings deposit
since the depositor specifies the maturity date of thedeposit an the bank can plan carefully on how thedeposit is lent out or invested
AUTOMATED TELLER
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MACHINEUse for depositing and withdrawing money
opened a new method for banks to obtain
branches.
TYPE OF BANK ACCOUNTS
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SINGLE NAME INDIVIDUAL Simplest type of bank account where in an individual transacts
with the bank under his own name.
JOINT ACCOUNT Opened by two or more individuals,
SOLE PROPRIETORSHIP ACCOUNT Opened by an individual for his own business.
PARTNERSHIP ACCOUNT
Opened by a partner. It is an organization which is composed oftwo or more owners who agreed to conduct business & dividethe profits among themselves.
CORPORATE ACCOUNT Opened by corporations in the conduct of its
business
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business.
FIDUCIARY ACCOUNTOpened by a trustee in behalf of another person
UNINCORPORATED GROUP OF ACCOUNT Opened by association, social clubs, professionalsand etc.
INACTIVE DEPOSIT ACCOUNT
This is an account which does not have any activitythrough deposits or withdrawals over a period of time
Trust Function
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SAFE DEPOSIT BOX Rented out by the bank to a client who would
like to have a safe place to put his importantdocuments and precious jewelry.
Collection and Remittance
Function
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Function
CONCENTRATION BANKING
System that spreads collection ofcompanys
receivable among a number of banks locatedat strategic areas.
Loans and Discount Function
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Types of loans granted by the banksDemand or Callable Loans
Does not have definite maturity dates
Time Loan
Payable at specified future time
Classification of Bank Loans
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According to purposeAccording to the form on how credit is
granted
According to maturity
According to security
According to release of the loan
According to manner of repayment
According to purpose
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Commercial or mercantile credit Investment credit
Agricultural credit
Real estate creditPersonal credit
According to the form on
how credit is granted
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how credit is granted
Direct loan
Discount loan and rediscount loan
Overdraft line
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According to security
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Secured loan or collateralized loansUnsecured loans or character loans
According to release of the
loan
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loan
Lump sum release
Installment release as the project progresses
According to manner of
repayment
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repayment
Lump sum basis
Installment basis
Advisory Function
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Banks are experienced in helping outbusinesses because they have a variety offinancial assistance to offer
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Chapter 7
BANKING INSTITUTIONS, HISTORY,CLASSIFICATIONS & FUNCTIONS
End of Chapter
Chapter
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8
Central Banking &The Effects
of Its MonetaryPolicies
in our Economy
Brief History
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June 15, 1948Central bank act or the republic act no. 265 was
approved
This act provides for the creation of the centralbank of the Philippines
January 3, 1949The bank finally opened its doors to the public
The capital of the bank, as provided in the act,shall be ten billion pesos with the initial
subscription coming from the liquidated assets ofthe Exchange Standard Fund
Central Bank
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Responsible of administering the monetary ,banking and credit system of the Republic.
Bank Objectives
P i il t i t i i t l d t l
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Primarily to maintain internal and externalmonetary stability in the Philippines;
To preserve the international value of the pesoand the convertibility of the peso into other freely
convertible currencies;
To foster monetary, credit and exchangeconditions conducive to a balanced andsustainable growth of the economy; and
To maintain price stability in the economy.
Old Monetary Board
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the policy making body of the Central BankComposed of seven members
Seven Members of Old
Monetary Board
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Monetary Board
Chairman of the Board/ Governor of the bank
Secretary of Finance
Director General of the NEDA (National Economic Development Authority)
Chairman of the Board of Investments
Secretary of Budget and Management
Two (2) appointed representatives from theprivate sectors
Qualifications:
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Must be a good person of good moralcharacter and of unquestionable integrity andresponsibility
Must be competent in: Economics
Banking
Finance
Commerce
Agriculture Industry
Must be natural born Filipino Citizen
The New Central Bank
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Republic Act 7653 known as the Central Bank Act. Section I of R.A.
7653
it states that :
the state shall maintain a Central MonetaryAuthority (CMA) that shall function and operateas an independent body in discharge of itsmandated responsibilities concerning banking
and credit.
Central Monetary
Authority (CMA)
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Authority (CMA)
It shall be a corporate body of known asBanko Sentral ng Pilipinas refered to asBanko Central
Banko Central
Shall be capitalized at fifty billion pesos
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Shall be capitalized at fifty billion pesos(P50,000,000.00) to be fully subscribed by theGovernment of the Republic of the Philippines.
The Ten Billion(P10,000,000.00) shall be fully
paid for the Government upon effectivity of theAct and the balance to be paid for within aperiod of two (2) years from the effectivity of theAct in such manner and form as the Secretary ofFinance and the Secretary of Budget and
Management may thereafter be determined
Banko Central
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Shall provide policy directions in areas ofmoney, banking and credit
It shall have supervision over the operation ofbanks and exercise such regulatory powers
as provided in the Act and other pertinentlaws over the operations of financecompanies and non-bank financialinstitutions in performing quasi-bankingfunctions, referred to as Quasi-Banking
Composition
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of the New Monetary Boardof Bangko Sentral
The powers and functions of the Banko
Sentral shall be exercised by the BANKOCENTRAL BOARD:
Seven (7) members appointed by the Presidentof the Philippines
For a Six(6) year term
Banko Sentral Board
One (1) Governor of the Banko Sentral/ Chairman of
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One (1) Governor of the Banko Sentral/ Chairman ofthe Monetary Board
Shall be head of a department and his appointment shall be subjectto confirmation by the Commission of Appointment
One (1) Deputy Governor Acts as an alternate if the Governor of the Banko Sentral is not
Present The Monetary Board shall designate one of its member as the
Acting Chairman
One (1) Cabinet Member Designated by the President of the Philippines
A designated Undersecretary in his Department will attend asalternate
Five (5) Members from Private Sector whom shallserve full-time.
Qualifications of Monetary
Board
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Board
Must be natural born citizens of thePhilippines
At least thirty-five (35) years of age, with the
exception of the Governor who shall be atleast forty (40) years of age
Of good moral character
Of unquestionable integrityOf known probity and patriotism
With recognized competence in social andeconomic disciplines
Banko Sentral ng Pilipinas
as Bank of Issue
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The only bank authorized to manufacture andissue money
It has monopoly of notes issueAnyone who makes money without the authority
given by the Banko Sentral is guilty ofCounterfeiting.
CounterfeitingThe manufacture of money without due authorityA criminal offense punishable by law
Banko Central as Lender of
Last Resort
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In case the banks need fund for lending to theirclients, they may avail of the rediscount facilitiesat Central Bank
They may borrow through the RediscountWindow of the Central Bank by using their notesand having them rediscounted
It charges interest money lent to borrowing banksWhen banks are distressed, the Banko Sentral
comes to their rescue by lending to themextraordinary loans as to prevent banks fromlosing confidence of the general public
Domestic Monetary
Stabilization
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Stabilization
whenever abnormal movements in themonetary aggregates, in credit, or in pricesendanger the stability of the Philippineeconomy or important sectors thereof, theMonetary Board shall:
A.
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take such remedial measures are appropriateand within the powers granted to theMonetary Board and the Banko Sentral underthe provisions of Article I, Chapter III, Section
63, of the New Central Bank Act (Republic Act7653)
B.
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Submit to the President of the Philippines andthe Congress and make public, a detailedreport which shall include, as a minimum, adescription and analysis
the causes of the rise and fall of monetary
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the causes of the rise and fall of monetaryaggregates, of credit or of prices
the extent to which the changes in the monetaryaggregates, in credit or in prices have been reflectedin the level of domestic output, employment, wagesand economic activity in general , and the nature andsignificance of any such changes
the measures which the Monetary Board has takenand other monetary, fiscal or administrative measureswhich it recommends to be adopted
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The monetary Board shall submit reportsmentioned in this section and shall state thereinwhether, in the opinion of the Board, saidchanges in the monetary aggregates, credit or
cost of living represent a threat to the stability ofthe Philippine economy or of important sectorsthereof.
The Monetary Board shall continue to submitperiodic reports to the President of thePhilippines and to Congress.
Instrument of Central Bank
Actions
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ct o s
In order to maintain monetary stability withinand out of the country, the Bangko Sentralendeavors to control the expansion orcontraction of the money supply, the level ofcredit, or any rise or fall in prices
Devices
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Control of legal reserve requirementControl of discount and rediscount rates
Open market operation
Control ofcollaterals required
Imposition of portfolio ceiling
Minimum capital ration
Margin requirements for L/C
Moral suasion
Legal Bank Reserve
Requirements
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q
Legal Bank reserve- refers to the portion of thebanks deposit liability that cannot be availablefor lending, to meet the withdrawal needs of thedepositors.
Inflation decrease the volume of money supply; increase
the percentage of the legal reserve required
Deflation decrease the percentage of the legal bank
required
Purposes of Imposing Legal
Bank reserve
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As a monetary device for credit expansion andcontraction
To protect the interest of depositors
The pool of legal reserve deposits may be used
by the Banko Sentral to help banks in financialdistress
The pool of legal bank reserve deposits may alsobe used by banks in their inter-bank call loan
system.The pool of bank reserve deposits is also utilized
in the settlement of bank claims and counterclaims
Laws Covering Legal Bank Reserves
(RA 7653, Sec. 96 to Sec. 102)
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Required Reserves Against Peso Deposit
Required Reserves Against Foreign
Currency Deposit
Requires Reserves Against UnusedBalances Of Overdraft Line
Increase In Reserve Requirements
Computation On ReservesReserve Deficiencies
Inter-bank Settlement
Bank Legal Reserve Requirement
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and its Effect on Banks ExcessReserves and Money Supply
The kind of money held by the public in
expandable form consists of notes and coinsissued by the Banko Sentraland the netchecking accounts in the commercial banks ,
which may sometimes call DEPOSIT MONEY.
Example
Total Currency In The Economy P 38 Billion
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Total Currency In The Economy P 38 Billion
Plus Total Demand Deposits In Bank 130 Billion
P168 Billion
Deduct:Currency In Banks P 2 Billion
Currency In Government 1 Billion
Demand Deposits Of Government 8 BillionP 11 Billion
Total Money Supply P 157 Billion
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To increase money supply, banks either:Make new loans
Buy fewer securities
To decrease money supply, banks either:Make fewer loans
Sell more securities to the public
Accept repayment of loans
Example
Suppose PNB has the following statement and the required
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g
reserve imposed by Banko Sentral is 20 %.
ASSETS LIABILITIESReserves P 2,000 Demand Deposits P 9,500Other Assets 8,000 Net Worth 500
Total P10,000 Total P 10,000
Looking at the previous statement, the PNB has an excessreserve of P100.
20% of 9,500 = 1,900
2,000 1,900 = 100
Example
Now the PNB makes new loans on its excess reserves.
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Now the PNB makes new loans on its excess reserves.The balance statement of PNB is as follows
ASSETS LIABILITIES
Reserves P 2,000 Demand Deposits P 9,600Other Assets 8,100 Net Worth 500
Total P10,100 Total P 10,100
Example
After the burrower spends the P100 by writing out checks
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After the burrower spends the P100 by writing out checksand after the checks are deposited in, for example,SBTC, the PNB Balance sheet is as follows:
ASSETS LIABILITIES
Reserves P 1,900 Demand Deposits P 9,500
Other Assets 8,000 Net Worth 500
Total P10,000 Total P 10,000
Example
For simplicity, suppose that the check for p100 is
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p y, pp pdeposited in SBTC. The SBTC, having been requiredalso to set a reserve of 20%, has the followingstatement before checks are deposited. SBTCstatement is as follows:
ASSETS LIABILITIES
Reserves P 1,000 Demand Deposits P 5,000
Other Assets 4,300 Net Worth 300
Total P 5,300 Total P 5,300
Example
At this point, SBTC has no excess reserve . As the check
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p ,of P100 is deposited in SBTC and it collects it fromPNB, SBTC has the following statements:
ASSETS LIABILITIES
Reserves P 1,100 Demand Deposits P 5,100
Other Assets 4,300 Net Worth 300
Total P 5,400 Total P 5,400
Example
Since SBTC ahs an excess reserve of P80, it can increase
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,money supply by P80. the balance sheet is as follows:
ASSETS LIABILITIES
Reserves P 1,100 Demand Deposits P 5,180
Other Assets 4,380 Net Worth 5300
Total P 5,480 Total P 5,480
Example
Again the borrower now spends the money and issues a
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g p ycheck against SBTC. SBTC statement of condition is asfollows:
ASSETS LIABILITIES
Reserves P 1,020 Demand Deposits P 5,100
Other Assets 4,380 Net Worth 300
Total P 5,400 Total P 5,400
Example
We just presume the spent money has found its way in
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j p p y yanother bank, for example RCBC. The statement of RCBCbefore the money is deposited is as follows:
ASSETS LIABILITIES
Reserves P 1,200 Demand Deposits P 6,000
Other Assets 5,000 Net Worth 200
Total P 6,200 Total P 6,200
Example
After the money has been deposited, RCBCs statement is
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y pas follows:
ASSETS LIABILITIES
Reserves P 1,280 Demand Deposits P 6,080
Other Assets 5,000 Net Worth 200
Total P 6,280 Total P 6,280
Example
RCBC can now safely increase money supply by its
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y y pp y yexcess reserve of P64. When RCBC increase its loansby P64, its balance statement as follows:
ASSETS LIABILITIES
Reserves P 1,280 Demand Deposits P 6,144
Other Assets 5,064 Net Worth 200
Total P 6,344 Total P 6,344
Example
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As a result, money supply increases. Now let asbreak the chain and see where we started:
BANKS EXCESS RESERVES INCREASE INMONEY SUPPLY
PNB P100 P 100
SBTC 0 80
RCBC 0 64
Total P 244
Explanation
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So far the money supply has been increasedby P244 and it can still be further increased ifthe P64 finds its way to another banks
With a reserve of 20%,
from how many more pesos
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of demand deposits will P100
serve as the required reserve?
Answer: P 500
20% of P 500 = P 100
The size of Multiplier is
determined by dividing 1 by
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the required reserve ratioRESERVE RATIO % DEPOSIT MULTIPLIER
40 2
33 3 30 3
25 4
20 5
16 2/3 6 15 6 2/3
10 10
Assume that the balance statement
below is the consolidated balance
statement from commercial banks in
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the economy
ASSETS LIABILITIES
Reserves P 35 billion Demand Deposits P 150 billion
Other Assets 120 billion Net Worth 5 billion
Total P 155 billion Total P 155 billion
With every reserve ratio of 20%, thecommercial banking system has an excess
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reserve of P5 BillionThe actual reserve of P35 billion is 20% of
P175 billion
The commercial bank can increase themoney supply from P150 billion to P175billion
Changing Reserve
Requirements
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a decrease in the reserve ratio will serve toincrease the excess reserve, the depositmultiplier and the money supply.
The relationship is inverse between :
Reserve ratio and deposit multiplier
Excess money reserve and money supply
Spending in relation to
Economy
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Too much spending = inflation
Too little spending = unemployment
Control of the Discount and
Rediscount Rates on Loans
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The Banko Sentral extends credit to bankinginstitutions for the following purposes:
a) Using it as a device for credit control
b) Increase the liquidity of the banks through credit,whenever necessary
Interest and Rediscount Rates
(R.A. 7653 section 85)
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The Banko Sentral shall collect interest andother appropriate charges on all loans andadvances it extends, the closure, receivership
or liquidation of the debtor-institution notwithstanding.
Open Market Operation in
Government Securities
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Refers to the buying and selling of governmentsecurities by the Banko Sentral for the purpose ofCredit Control
GOVERNMENT SECURITIES
Evidences of indebtedness of the government
2 Purposes of Government Securities:
1. To raise revenue2. To control credit
Central Bank
Plays a significant role in the issue and
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placement of government securities
It maintains the security stabilization fund,which is a reserve intended to be used in the
buying and selling of government securities tostabilize the value and liquidity of suchgovernment securities.
Remedies during Inflation
1. Sell to the public government securities to
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absorb the excess cash holdings
2. Sell to the banking institutions governmentsecurities, so as to divert investment in
loans to investment in the securities. Theeffects are:
a) Decrease in available funds for loans
b) Decrease in lending operations for bank
c) Decrease in credit expansion
Purchases and Sales of
Government Securities
(R A 6 i )
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(R.A. 7653 section 91)
In order to achieve monetary policy, the
Banko Sentral may, in accordance with theprinciple stated in Section 90 of RA 7653 andwhich such rules and regulations as may beprescribed by the Monetary Board, buy and
sell in the open market for its own account:
a) Evidences of indebtedness issued directly
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by the Government of the Philippines or byits political Subdivisions
b) Evidences of indebtedness issued by thegovernment instrumentalities and fullyguaranteed by the Government
Issue and Negotiation of
Banko Sentral Obligations
(R A i )
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(R.A. 76536 section 92)
The Banko Sentral may , subject to rules and
regulations as the Monetary Board mayprescribe , issue, place, buy and sell freelynegotiable evidences of indebtedness ofBanko Sentral: provided, the issuance of such
certificates of indebtedness shall be madeonly in cases of extraordinary movement inprice level.
Open Market Operations,
and its effect on Banks
R d M S l
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Reserve and Money Supply
To eliminate inflationary pressures, the
Banko Sentral may increase reserve ratio,increase discount rates or sell governmentsecurities in the open market
During the unemployment in the economy,
the Banko Sentral tends to decrease thereserve ratio, discount rates, and buygovernment securities in the open market.
Control of the Collaterals
Required on Bank Loans Th B k S t l h th t i diti
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The Banko Sentral has the power to impose conditionsor requirements on the securities against the loansextended in the banks. Thos in effect increases theloan value of collateral.
INFLATION= Banko Sentral increase collateral= decrease the loan value of collaterals
=discourage public from borrowing fromthe bank, decrease lending operations of banks anddecrease credit expansion
DEFLATION= Banko Sentral may decrease collateral
= incentives to borrowers
Imposition of Portfolio
Analysis
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The upper limit that the Banko Sentral mayplace on the loans and investment of banks
It is instituted only during inflation
It is a direct limitation on volume of loans, andinvestment that banks may extend
Portfolio Ceilings
(R.A. 7653 section 107)
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Whenever the Monetary Board considers itadvisable to prevent or check an expansion ofbank credit , the Board may place an upperlimit on the amount of loans and investmentswhich banks may hold, or may place a limiton the rate of increase of such assets withinspecified period of time. The Monetary Boardmay apply such limits to the loans and
investment of each bank or to specificcategories thereof.
Minimum Capital Ratio
(R.A. 7653 section 108)
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Maximum ratio that the combined capitalaccounts may bear on the banks corporateassets
RISK ASSET
= TOTAL ASSETS NON- RISK ASSETS
Margin Requirements
against Letter of Credit
(R A 7653 ti 105)
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(R.A. 7653 section 105)
The Monetary Board may at any time
prescribe a minimum cash margins for theopening of letters of credit, and may relate thesize of the required margin to the nature ofthe transaction to be financed
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Other Monetary Policies To
Stabilize Banking Operations
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Banko Sentral may fix maturities in the bankloans for the purpose of credit control or as ameans of pay
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