5

1944 during the Japanese occupation, but the arrival of the American

liberalization forces aborted its implementation.

Shortly after President Manuel Roxas assumed office in 1946, he instructed then

Finance Secretary Miguel Cuaderno, Sr. to draw up a charter for a central bank. The

establishment of a monetary authority became imperative a year later as a result of the

findings of the Joint Philippine-American Finance Commission chaired by Mr. Cuaderno.

The Commission, which studied Philippine financial, monetary and fiscal problems in

1947, recommended a shift from the dollar exchange standard to a managed currency

system. A central bank was necessary to implement the proposed shift to the new system.

Immediately, the Central Bank Council, which was created by President Manuel

Roxas to prepare the charter of a proposed monetary authority, produced a draft. It was

submitted to Congress in February1948. By June of the same year, the newly-proclaimed

President Elpidio Quirino, who succeeded President Roxas, affixed his signature on

Republic Act No. 265, the Central Bank Act of 1948. The establishment of the Central

Bank of the Philippines was a definite step toward national sovereignty. Over the years,

changes were introduced to make the charter more responsive to the needs of the

economy. On 29 November 1972, Presidential Decree No. 72 adopted the

recommendations of the Joint IMF-CB Banking Survey Commission which made a study

of the Philippine banking system. The Commission proposed a program designed to

ensure the system’s soundness and healthy growth. Its most important recommendations

were related to the objectives of the Central Bank, its policy-making structures, scope of

its authority and procedures for dealing with problem financial institutions.
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Subsequent changes sought to enhance the capability of the Central Bank, in the

light of a developing economy, to enforce banking laws and regulations and to respond to

emerging central banking issues. Thus, in the 1973 Constitution, the National Assembly

was mandated to establish an independent central monetary authority. Later, PD 1801

designated the Central Bank of the Philippines as the central monetary authority (CMA).

Years later, the 1987 Constitution adopted the provisions on the CMA from the 1973

Constitution that were aimed essentially at establishing an independent monetary

authority through increased capitalization and greater private sector representation in the

Monetary Board.

The administration that followed the transition government of President Corazon

C. Aquino saw the turning of another chapter in Philippine central banking. In

accordance with a provision in the 1987 Constitution, President Fidel V. Ramos signed

into law Republic Act No. 7653, the New Central Bank Act, on 14 June 1993. The law

provides for the establishment of an independent monetary authority to be known as the

Bangko Sentral ng Pilipinas, with the maintenance of price stability explicitly stated as its

primary objective. This objective was only implied in the old Central Bank charter. The

law also gives the Bangko Sentral fiscal and administrative autonomy which the old

Central Bank did not have. On 3 July 1993, the New Central Bank Act took effect.

(http://www.bsp.gov.ph/about/overview.asp)
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The BSP’s Legal Mandate

The BSP is the central bank of the Republic of the Philippines. It was established

on 3 July 1993 as the country’s independent central monetary authority, pursuant to the

Constitution and the New Central Bank Act. The BSP replaced the old Central Bank of

the Philippines, which was established on 3 January 1949, as the country’s central

monetary authority.

A government corporation with fiscal and administrative autonomy, the BSP is

responsible, among other things, for:

• Maintaining price stability conducive to a balanced and sustainable

growth of the economy;

• Formulating and implementing policy in the areas of money, banking

and credit; and

• Supervising and regulating banks and quasi-banks, including their

subsidiaries and affiliates engaged in allied activities.

Powers and Functions

The BSP’s Charter also provides that, as the country’s central monetary authority,

the BSP performs the following functions:

• Liquidity management. The BSP formulates and implements monetary policy aimed at

influencing money supply consistent with its primary objective of maintaining price

stability.
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• Currency issue. The BSP has the exclusive power to issue the national currency. All

notes and coins issued by the BSP are fully guaranteed by the Government and are

considered legal tender for all private and public debts.

• Lender of last resort. The BSP extends discounts, loans and advances to banking

institutions for liquidity purposes.

• Financial supervision. The BSP supervises banks and exercises regulatory powers over

non-bank institutions performing quasi-banking functions.

• Management of foreign currency reserves. The BSP seeks to maintain sufficient

international reserves to meet any foreseeable net demands for foreign currencies in order

to preserve the international stability and convertibility of the Philippine peso.

• Determination of exchange rate policy. The BSP determines the exchange rate policy of

the Philippines. Currently, it adheres to a market-oriented foreign exchange rate policy

such that its role is principally to ensure orderly conditions in the market.

• Other activities. The BSP functions as the banker, financial advisor and official

depository of the Government, its political subdivisions and instrumentalities, and

Government owned and controlled corporations.

The New Central Bank Act imposes limitations and other conditions on the

exercise of such powers by the BSP. Among others, the Charter limits the circumstances

under which the BSP may extend credit to the Government and prohibits it from

engaging in development banking or financing.

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The Central Bank

Republic Act 7653 is known as the New Central Act. Section I of RA 7653 states

that the state shall maintain a central Monetary Authority (CMA) That shall function and

operate as an independent body in the discharge of its mandated responsibilities

concerning money, banking and credit. This established independent Central Monetary

Authority shall a corporate body known as the Bangko Sentral ng Pilipnas hereafter

referred to as the Bangko Sentral.

The Goals of Monetary Policy

Monetary Policy is not an end itself; rather, it is a means to various ends. These

ends are called goals of monetary policy.

• High Employment

• Economic Growth

• Stable Prices

• Interest Rate Stability

• Stability of Financial Markets

• Stability of Foreign Exchange Markets

High Employment

Monetary Policy is used to attain high employment; the resources of the monetary

authorities can be channeled toward the creation of more jobs. The financial system

can give liberal financing terms to labor – intensive companies.

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The concern for high employment is understandable because when people are not

employed, the economy is affected. They become a burden to society.

A person who is unemployed loses a source of income and experiences hardship

for himself and his family. He becomes an easy target for exploitation by bad

elements of the society. His children are more likely to stop going to school.

High employment prevents the ill effects of unemployment. When the economy

has many idle workers, idle resources like closed factories and unused machinery are

prevalent, resulting in a reduction of output. This unwanted effect is eliminated by

high employment.

Economic Growth

Economic growth refers to “the steady process of increasing productive capacity

of the economy, and hence of increasing national income”

Economic growth is usually measured as the annual rate of increase in the

nation’s real national product. Real GNP derived when inflation is incorporated in

computing for the value, at current market prices of all final goods and services.

As economic growth is perceived to bring benefits to various sectors of society, it

becomes a priority concern of monetary authorities.

Stable Prices

When prices of commodities rise, they bring uncertainty in the economy and

economic growth is placed at standstill. Business people become reluctant to expand

or even maintain their current level of operations. Consumers who want to buy life

insurance policies are worried about the wisdom of making such an investment.
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Interest Rate Stability

The stability of interest rates is a desirable feature of a growing economy. When

interest rate fluctuates, they create uncertainty among decision-makers and these

people find it hard to decide on which move to make.

The prices of commodities which include payments on interest on money

borrowed. When interest rate fluctuates, adjustment on prices become necessary.

These bring difficulties, however, for the seller who cannot provide advanced

information on the price of his products. I, turn, customers become hesitant to place

orders.

Stability of Financial Market

When financial markets are firmly placed, savers are assured of a channel for

investing their savings. Borrowers are, likewise, assured of a ready source of funds

whenever such funds are needed for productive economic activities. When this

relationship in affected. This leads to a sharp contraction in economic activity.

One of the important goals of monetary policy is the promotion of a more stable

financial system in which financial crises are avoided. The implication of a sound

monetary policy is conducive to the creation of a more stable and stronger and

banking system.

Stability in Foreign Exchange Market

What happens to foreign exchange markets affect the value of the Philippine

Peso. When the value of the peso goes down in relation to the other currencies, the

prices of commodities tend to increase. Conversely, when the value of peso rises

against foreign currencies, the prices of commodities tends to go down.

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Violent fluctuations in the value of the peso make it harder for exporters and

importers to plan ahead. A desirable goal of monetary policy is to keep the value of

the peso as stable as possible in foreign exchange market.

Instruments of Central Bank Actions

In order to maintain monetary stability within and out of the country, the BSP

endeavors to control the expansion or contraction of the money supply, the level of

creditor, or any rise or fall in prices. Monetary authorities are empowered to institute a

number of devices for purpose of proper regulations of volume of money supply.

The devices may be as follows:

• Control of Legal Reserve Requirement. (RA 7653, Sec. 96 to Sec. 102)

• Control of discount and rediscount rates. (RA 7653, Sec. 85)

• Open Market Operation. (RA 7653, Sec. 91)

• Control of Collateral’s Required (RA 7653 Sec. 106)

• Imposition of Portfolio Ceiling. (RA 7653 Sec. 107)

• Minimum Capital Ratio.

• Margin requirements for Letters of Credit (RA 7653 Sec. 105)

• Moral suasion.

Control of Legal Reserve Requirement (RA 7653, Sec. 96 to Sec. 102)

Legal bank reserve refers to that portion of the bank’s deposit liability that cannot

be available for lending. Instead, it will have to be set aside a reserve in the Bangko

Sentral, vaults of the bank or temporarily invested in government securities to meet

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the withdrawal needs of the depositors. The control of the percentage of the bank

reserve is powerful and effective instrument that the Bangko Sentral may use in order

to effect an expansion or contraction of money supply.

During inflation, the objective of Bangko Sentral is to decrease the volume of

money supply. I order to do this, it will increase the percentage of the legal reserve

required on banks. This action will give an effect of reducing the loanable funds of

the banks because they will have to set aside a bigger portion of their deposit

liabilities as reserve to meet depositors’ withdrawals. Furthermore, this action

decreases credit expansion.

During deflation, when money supply is insufficient, the percentage of legal bank

reserve is decreased to induce greater credit expansion. When the percentage of the

legal bank reserve is decreased, the effects is an increase in investible funds, which

may induce greater lending operations and consequently higher credit expansion.

Control of Discount and Rediscount Rates (RA 7653, Sec. 85)

The Bangko Sentral extends credit to banking institutions for the following

purposes:

a, Using it as device for credit control;

b. Increase the liquidity of the banks through credit whenever necessary.

When the Bangko Sentral Extends credits to banks, it imposes interest or discount

rates, primarily to use it as credit control, and secondarily to earn income for the

Central bank.

During inflation, the Bangko Sentral increases the percentages of its rediscount

rates on credit extended to banks. Its purpose is to discourage the banks from
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borrowing from the Central Bank. The effect is that the banks will have less loanable

funds, which will limit their lending operations and credit expansion.

During deflation, the Bangko Sentral Decreases the percentage of rediscount or

interest on credit extended to the banking institutions, which encourage the banks to

borrow from the Bangko Sentral. Increase in the banks’ loanble funds will enable

them to expand their operations to promote greater expansion.

Open Market Operation (RA 7653, Sec. 91)

This refers to the buying and selling of government securities by the

BangkoSentral for the purposes of credit control. Government securities refer to the

evidences of indebtedness of the government.

There are two purposes of government securities:

1. To raise revenue

2. To control credit

The Central Bank plays a significant role in the issue and placement of

government securities. It also maintains the security stabilization fund, which is a

reserve intended to be used in buying and selling of government securities to stabilize

the value and liquidity of such government securities.

During inflation, the Central Bank will undertake the following remedies:

a. Sell to the public government securities to absorb excess cash holdings and to

b. Sell to the banking institutions governments securities, as to divert investment

in loans to investment in securities. The effects are: a decrease in available

funds for loans, a decrease in lending operations for banks, and a decrease in

credit expansion.
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During deflation the sale of government securities to the banks decreases money

supply by the amount it would have increased if the funds have been used by the

banks in their lending operation where they undergo a multiplier effect.

Control of Collateral’s Required (RA 7653 Sec. 106)

“ In order to promote liquidity and solvency of banking system, the Monetary

Board may issue such regulations as it deem necessary with respect to the maximum

permissible maturities of loans and investment which the banks may make, and the

kind and amount of security to be required against the various types of credit

operations of the banks.”

The Bangko Sentral has the power to impose condition or requirements on the

securities against the loans extended by the bank. This in effect increases the loan

value of the collateral.

During inflation, the Bangko Sentral may increase collaterals required on loans,

which in effect decreases loan value of the collaterals. This may discourage public

borrowings from the bank, decreases lending operations of the banks, and decrease

credit expansion. During deflation, the Bangko Sentral may decrease collaterals,

which may be an incentive to borrowers.

Imposition of Portfolio Ceiling (RA 7653 Sec. 107)

Imposition of portfolio ceiling to the upper limit that the Bangko Sentral may

place on the loans and investment of banks. It is instituted only during inflation. It is

the direct limitation on the volume of loans, and investment that the bank may extend.

Such restrictions may not be instituted during deflation. To do this, Bangko

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Sentral sets a date and whatever is the total amount of loans and investment the bank

on that date is its limit.

Minimum Capital Ratio

It is the maximum ratio that the combined capital account of surplus may bear on

the banks’ corporate assets. The Bangko Sentral requires 10% of the risk assets of the

bank as its minimum capital. Thus total assets minus non-risk assets equals risk

assets.

Section 101 of RA 7653 states, the Monetary Board may prescribe the minimum

ratios which the capital and surplus of the banks must bear to the volume of their

assets, or to specific categories thereof, and may alter said ratios whenever it deems

necessary.

Margin requirements for Letters of Credit (RA 7653 Sec. 105)

The Monetary Board may at anytime prescribe minimum cash margins for the

opening of letters of credit, and may relate the size of the required margin to the

nature of the transactions to be financed.

Moral Suasion

This more of psychological approach in which the Bangko Sentral may use its

persuasive power to make the banks follow or support credit policies without direct

imposition of restrictions. These are case when the Bangko Sentral shies away from

imposition of credit restrictions because of possible repercussions such that, the

Bangko Sentral just use their influence among banks for voluntary support of credit

policy. For instance, during the imposition of free floating exchange rate in 1970, the

Central Bank was able to avoid buying and selling of US $ at very high speculative
 17

rates. The banks agreed among themselves to limit their trading in foreign

transactions to an agreed foreign exchange rate.

Vision

The BSP aims to be a world-class monetary authority and a catalyst for a globally

competitive economy and financial system that delivers a high quality of life for all

Filipinos.

Mission

BSP is committed to promote and maintain price stability and provide proactive

leadership in bringing about a strong financial system conducive to a balanced and

sustainable growth of the economy. Towards this end, it shall conduct sound monetary

policy and effective supervision over financial institutions under its jurisdiction.

Core Values

• Integrity
• Excellence
• Patriotism
• Solidarity
• Dynamism

Objectives

The BSP’s primary objective is to maintain price stability conducive to a balanced

and sustainable economic growth. The BSP also aims to promote and preserve monetary

stability and the convertibility of the national currency.

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Organizational Structure

Figure 1 shows the organizational Chart Bangko Sentral ng Pilipinas. The chart

embodied how the bank work and act to the need of managing and developing the

organization as well as observing the functions and line of receiving commands.

The topmost part is the executive management system, which is the central

decision making body. Followed by the four functional sector – Monetary Stability

Sector, Supervision and Examination Sector, Resource Management Sector and Office of

the Security Plant Chief Superintendent.

Executive Management Services

1. Office of the Secretary, Monetary Board

• Provides administrative and secretarial services to the Monetary Board.

2. Office of the General Counsel and Legal Services

• Prepares opinions and rulings for the MB, the Governor, and the Deputy

Governors on matters relating to policies, functions, operations and

regulations of the Bank; and

• Prosecutes or defends cases involving the BSP, the MB, and Management in

judicial and administrative proceedings.

3. Office of Special Investigation

•Evaluates bank irregularities and anomalies noted in the examination reports

submitted by examining departments.