4.

Structure of the Philippine Financial System

The structure of the Philippine Financial system is dominated by a banking system.
Bangko Sentral (Central Bank) is the official central bank in the Philippines. The BSP
monitors and compiles various indicators on the Philippine banking system. The Philippine
banking system is composed of universal and commercial banks, thrift banks, rural and
cooperative banks. The structure of the financial system allows the option to take debts
and buy bonds or stocks.

The BSP likewise releases selected statistics on non-banks with quasi-banking

functions. This group consists of institutions engaged in the borrowing of funds from 20 or
more lenders for the borrower's own account through issuances, endorsement or
assignment with recourse or acceptance of deposit substitutes for purposes of relending or
purchasing receivables and other obligations.

FINANCIAL SYSTEM
The 'financial system' is a term used in finance to describe the system that allows
money to go between savers and borrowers.

PHILIPPINE FINANCIAL SYSTEM

The Philippine financial system is primarily bank-based rather than capital market
based. The banking sector, whose total assets accounted for more than 80 percent of the
total resources of the financial system and of GDP in 2010, plays the primary role in
financial intermediation and is the main source of credit in the economy

ELEMENTS OF A FINANCIAL SYSTEM

 Financial Systems
 Financial Institutions
 Financial Market
 Financial Instruments
 Financial Services
 Financial Practice
 Financial Transactions

COMPONENTS OF PHILIPPINE FINANCIAL SYSTEM

 Banks
 Non-bank financial intermediaries

CENTRAL BANK
The BANGKO SENTRAL NG PILIPINAS (BSP) is the Central bank of the Republic of
the Philippines. It was established on 3 July 1993 pursuant to the provisions of
the1987 Philippines Constitution and the New Central Bank Act of 1993.The BSP took
over from the Central Bank of Philippines, which was established on 3 January 1949,
as the country's central monetary authority. The BSP enjoys fiscal and administrative
 autonomy from the National Government in the pursuit of its mandated
responsibilities.

BANKING INSTITUTIONS: PRIVATE BANKING; COMMERCIAL BANKS

An institution, which accepts deposits, makes business loans, and offers related
services. Commercial banks also allow for a variety of deposit accounts, such as
checking, savings, and time deposit. These institutions are run to make a profit and
owned by a group of individuals, yet some may be members of the Federal Reserve
System. While commercial banks offer services to individuals, they are primarily
concerned with receiving deposits and lending to businesses.

PRIVATE BANKING; UNIVERSAL BANKS

Refers to those banks that offer a wide range of financial services, beyond
commercial banking and investment banking, insurance etc. Universal banking is a
combination of commercial banking, investment banking and various other
activities including insurance.

Universal and commercial banks represent the largest single group, resource-wise,
of financial institutions in the country. They offer the widest variety of banking
services among financial institutions. In addition to the function of an ordinary
commercial bank, universal banks are also authorized to engage in underwriting and
other functions of investment houses, and to invest in equities of non-allied
undertakings.

THRIFT BANKS
Mobilization of small savings, provide loans generally longer and easier terms. The
thrift banking system is composed of savings and mortgage banks, private
development banks, stock savings and loan associations and microfinance thrift
banks. Thrift banks are engaged in accumulating savings of depositors and
investing them. They also provide short-term working capital and medium- and
long-term financing to businesses engaged in agriculture, services, industry and
housing, and diversified financial and allied services, and to their chosen markets
and constituencies, especially small- and medium- enterprises and individuals.

RURAL BANKS
Banks entrenched to ensure sufficient institutional credit for agriculture
and other rural sectors. A mobilize financial resources from rural / semi-urban
areas, grant loans small farmers. Rural and cooperative banks are the more
popular type of banks in the rural communities. Their role is to promote and
expand the rural economy in an orderly and effective manner by providing the
people in the rural communities with basic financial services. Rural and
cooperative banks help farmers through the stages of production, from buying
seedlings to marketing of their produce. Rural banks and cooperative banks are
differentiated from each other by ownership. While rural banks are privately
 owned and managed, cooperative banks are organized/owned by cooperatives or
federation of cooperatives.

COOPERATIVE BANKS
Is a business organization owned and operated by a group of individuals
for their mutual benefit. Cooperatives are defined by the International Co-
operative Alliance's Statement on the Co-operative Identity as autonomous
associations of persons united voluntarily to meet their common economic, social,
and cultural needs and aspirations through jointly owned and democratically
controlled enterprises. A cooperative may also be defined as a business owned
and controlled equally by the people who use its services or by the people who
work there. Cooperative enterprises are the focus of study in the field of
cooperative economics.

MICROFINANCE BANKS
Is the provision of financial services to low-income clients, including consumers
and the self-employed, who traditionally lack access to banking and related services.
More broadly, it is a movement whose object is a world in which as many poor and near-
poor households as possible have permanent access to an appropriate range of high
quality financial services, including not just credit but also savings, insurance, and fund
transfers. Those who promote microfinance generally believe that such access will help
poor people out of poverty.

OTHER TYPES OF BANKS:

 "External" Sector
 Nonbank Thrift Institutions
 Government Specialized Nonbank Financial Intermediaries
 Private Nonbank Financial Intermediaries
 Specialized Government Banks
5. FINANCIAL INTERMEDIARY
WHAT IS A FINANCIAL INTERMEDIARY?
A financial intermediary is an entity that acts as the middleman between two parties in a
financial transaction, such as a commercial bank, investment banks, mutual funds and
pension funds. Financial intermediaries offer a number of benefits to the average consumer,
including safety, liquidity, and economies of scale involved in commercial banking,
investment banking and asset management. Although in certain areas, such as investing,
advances in technology threaten to eliminate the financial intermediary, disintermediation is
much less of a threat in other areas of finance, including banking and insurance.

 A financial intermediary is a financial institution such as bank, building society,

insurance company, investment bank or pension fund.

 A financial intermediary offers a service to help an individual/ firm to save or borrow

money. A financial intermediary helps to facilitate the different needs of lenders and
borrowers.

 For example, if you need to borrow £1,000 – you could try to find an individual who
wants to lend £1,000. But, this would be very time consuming and you would find it
difficult to know how reliable the lender was.
  Therefore, rather than look for individuals to borrow a sum, it is more efficient to go
to a bank (a financial intermediary) to borrow money. The bank raises funds from
people looking to deposit money, and so can afford to lend out to those individuals
who need it.

BREAKING DOWN FINANCIAL INTERMEDIARY

A non-bank financial intermediary does not accept deposits from the general public. The
intermediary may provide factoring, leasing, insurance plans or other financial services. Many
intermediaries take part in securities exchanges and utilize long-term plans for managing and
growing their funds. The overall economic stability of a country may be shown through the
activities of financial intermediaries and growth of the financial services industry.

FUNCTIONS OF FINANCIAL INTERMEDIARIES

Financial intermediaries move funds from parties with excess capital to parties needing
funds. The process creates efficient markets and lowers the cost of conducting business. For
example, a financial advisor connects with clients through purchasing insurance, stocks,
bonds, real estate and other assets. Banks connect borrowers and lenders by providing capital
from other financial institutions and from the Federal Reserve. Insurance companies collect
premiums for policies and provide policy benefits. A pension fund collects funds on behalf of
members and distributes payments to pensioners.

MUTUAL FUNDS AS FINANCIAL INTERMEDIARIES

Mutual funds provide active management of capital pooled by shareholders. The fund
manager connects with shareholders through purchasing stock in companies he anticipates
may outperform the market. By doing so, the manager provides shareholders with assets,
companies with capital and the market with liquidity.

BENEFITS OF FINANCIAL INTERMEDIARIES

Through a financial intermediary, savers can pool their funds, enabling them to make
large investments, which in turn benefits the entity in which they are investing. At the same
time, financial intermediaries pool risk by spreading funds across a diverse range of
investments and loans. Loans benefit households and countries by enabling them to spend
more money than they have at the current time.

Financial intermediaries also provide the benefit of reducing costs on several fronts. For
instance, they have access to economies of scale to expertly evaluate the credit profile of
potential borrowers and keep records and profiles cost-effectively. Last, they reduce the
costs of the many financial transactions an individual investor would otherwise have to make
if the financial intermediary did not exist.

EXAMPLE OF A FINANCIAL INTERMEDIARY

In July 2016, the European Commission took on two new financial instruments for
European Structural and Investment (ESI) fund investments. The goal was creating easier
access to funding for startups and urban development project promoters. Loans, equity,
guarantees and other financial instruments attract greater public and private funding
sources that may be reinvested over many cycles as compared to receiving grants.

One of the instruments, a co-investment facility, was to provide funding for startups to
develop their business models and attract additional financial support through a collective
investment plan managed by one main financial intermediary. The European Commission
projected the total public and private resource investment at approximately $16.5 million
per small- and medium-sized enterprise.

Other Examples:
1. Insurance Companies
If you have a risky investment. You might wish to insure, against the risk of
default. Rather than trying to find a particular individual to insure you, it is easier
to go to an insurance company who can offer insurance and help spread the risk
of default.

2. Financial Advisers
A financial adviser doesn’t directly lend or borrow for you. They can offer
specialist advice on your behalf. It saves you understanding all the intricacies of
the financial markets and spending time looking for best investment.

3. Credit Union
Credit unions are informal types of banks, which provide facilities for
lending and depositing within a particular community.

4. Mutual funds/Investment trusts

These are mutual investment schemes. These pool the small savings of
individual investors and enable a bigger investment fund. Therefore, small
investors can benefit from being part of a larger investment trust. This enables
small investors to benefit from smaller commission rates available to big
purchases.

BENEFITS OF FINANCIAL INTERMEDIARIES

a. Lower search costs. You don’t have to find the right lenders, you leave that to a
specialist.
b. Spreading risk. Rather than lending to just one individual, you can deposit money
with a financial intermediary who lends to a variety of borrowers – if one fails, you
won’t lose all your funds.
c. Economies of scale. A bank can become efficient in collecting deposits, and
lending. This enables economies of scale – lower average costs. If you had to
sought out your own saving, you might have to spend a lot of time and effort to
investigate best ways to save and borrow.
d. Convenience of Amounts. If you want to borrow £10,000 – it would be difficult to
find someone who wanted to lend exactly £10,000. But, a bank may have 1,000
 people depositing £10 each. Therefore, the bank can lend you the aggregate
deposits from the bank and save you finding someone with the exact right sum.
POTENTIAL PROBLEMS OF FINANCIAL INTERMEDIARIES
a) There is no guarantee they will spread the risk. Due to poor management, they
may risk depositors money on ill-judged investment schemes.
b) Poor information. A financial intermediary may become complacent about
spreading the risk and invest in schemes which lose their depositors money (for
example, banks buying US mortgage debt bundles, which proved to be nearly
worthless – precipitating the global credit crunch.)
c) They rely on liquidity and confidence. To be profitable, they may only keep
reserves of 1% of their total deposits. If people lose confidence in the banking
system, there may be a run on the bank as depositors ask for their money bank.
But the bank won’t have sufficient liquidity because they can’t recall all their long-
term loans. (This can be overcome to some extent by a lender of last resort, such
as the Central Bank and / or government)

6. FINANCIAL MARKETS
WHAT IS A FINANCIAL MARKET?
 A financial market is a broad term describing any marketplace where trading of
securities including equities, bonds, currencies, and derivatives occur. Some
financial markets are small with little activity, while some financial markets like
the New York Stock Exchange (NYSE) trade trillions of dollars of securities daily.

 A financial market is a market where buyers and sellers trade commodities,

financial securities, foreign exchange, and other freely exchangeable items
(fungible items) and derivatives of value at low transaction costs and at prices that
are determined by market forces.

 The money markets, where large-scale, short-term debts are arranged, and capital
markets, where longer-term debts are traded, make up the financial market.

 Securities include bonds and shares, while commodities might be gold, silver and
other metals, or agricultural products such as coffee, cocoa, wheat, corn, etc.

UNDERSTANDING THE FINANCIAL MARKET

Financial market prices may not indicate the true intrinsic value of a stock due to
macroeconomic forces like taxes. In addition, the prices of securities are heavily reliant
on informational transparency to ensure efficient and appropriate prices are set by the
market.

The stock market is a financial market that enables investors to buy and sell shares
of publicly traded companies. The primary stock market is where new issues of stocks are
first offered. Any subsequent trading of stock securities occurs in the secondary market.
 Some financial markets are small with little activity, while some financial markets
like the NYSE trade trillions of dollars of securities daily.

TYPES OF FINANCIAL MARKETS

1) Over-the-Counter Markets
The over-the-counter (OTC) market is an example of a secondary market.
An OTC market handles the exchanging of public stocks not listed on the NASDAQ,
New York Stock Exchange or American Stock Exchange. Companies with stocks
trading on the OTC market are usually smaller organizations, as this financial
market requires less regulation and is less expensive to be traded on.

2) Financial Markets for Bonds

A bond is a security in which an investor loans money for a defined period
of time at a pre-established rate of interest. Bonds are not only issued by
corporations but may also be issued by municipalities, states, and federal
governments from around the world. Also referred to as the debt, credit or fixed-
income market, the bond market sells securities such as notes and bills issued
from the United States Treasury.

3) Money Markets
A money market is a portion of the financial market that trades highly
liquid and short-term maturities. The intention of the money market is for short-
term borrowing and lending of securities with a maturity typically less than one
year. This financial market trades certificates of deposit, banker’s acceptances,
certain bills, notes, and commercial paper.

4) Derivatives Market
The derivatives market is a financial market that trades securities that
derive its value from its underlying asset. The value of a derivative contract is
determined by the market price of the underlying item. This financial market
trades derivatives including forward contracts, futures, options, swaps, and
contracts-for-difference.

5) Forex Market
The forex market is a financial market where currencies are traded. This
financial market is the most liquid market in the world, as cash is the most liquid
of assets. The interbank market is the financial system that trades currency
between banks.

FINANCIAL MARKETS AFFECT ECONOMIC PERFORMANCE

According to the Federal Reserve Bank of San Francisco, well-developed, properly-
run financial markets play a crucial role in contributing to the health and efficiency of a
country’s economy.
There is a close, positive relationship between financial market development and
economic growth.

The Federal Reserve Bank of San Francisco writes on its website:

“Financial markets help to efficiently direct the flow of savings and investment in the
economy in ways that facilitate the accumulation of capital and the production of goods
and services. The combination of well-developed financial markets and institutions, as
well as a diverse array of financial products and instruments, suits the needs of borrowers
and lenders and therefore the overall economy.”

The financial market starts with your savings

Your savings account provides a secure and convenient place (a bank) to keep money you
do not immediately need, plus you earn interest on it.

However, that savings account money does not just sit in a giant safe in the bank. Banks
use that money to help other people and entities purchase homes, buy cars, go to
university or borrow money for hundreds of different purposes.

When banks lend money, they are drawing on all the money people have deposited in it.
In this way, banks act as financial marketplaces for money.

Bank loans can help promote economic growth, but one day that money will have to be
paid back, and with interest and a fee to cover the administration costs.

Lending money and buying part-ownership

People use money to make investments. When we buy bonds, we are giving companies
or governments a loan. When we purchase shares, we are buying part-ownership of
companies.

Companies may use that money to grow, buy new equipment, increase their advertising
expenditure, hire new employees, or research new products.

In financial markets, investors seek to buy at the lowest available price, while sellers aim
for the highest available price.

Money can be invested in many different types of financial markets, including stock
exchanges, over-the-counter markets, currency exchanges, commodity markets, and
futures markets.

Investments today can be purchased twenty-four hours a day. When a New York market
opens, the Tokyo market has just closed, while the London market is half-way through its
working day.
What happens in one financial market affects prices in all markets across the world.

KEY TAKEAWAYS
 "Financial market" is a broad term, and there are many kinds of financial
markets, including (but not limited to) forex, money, stock, and bond markets.
 Some financial markets are small with little activity, while some financial
markets like the New York Stock Exchange (NYSE) trade trillions of dollars of
securities daily.
 Financial market prices may not indicate the true intrinsic value of a stock due
to macroeconomic forces like taxes.