feet on the the stars, and your Keep your eyes on 1 work for it ground. Dream big anc AU keloid At the end of this chapter, the students should be able to: Cee eeu an identify the different participants in the firiancial system and their roles; Ce Te ue Cel aaa ad Ce iCun oR UCL Cio eu ae ae ae discuss the relationship between monetary policy and financial system; and Tete Rr cae hea get eae eeeCarita MARKET INTRODUCTION The International Monetary Fund (IMF) and the World Bank (WB) conduct financig sector assessments of countries that they help. It is imperative that the IMF and WB monitor the financial standing of country borrowers. A study of the country’s financial system is crucia} in the study of capital markets because the financial market is central to the financial system The following report shows the standing of the Philippine financial sector. The Financial Sector Stability Assessment (FSSA) was based on the joint work of Ir and World Bank Financial Sector Assessment Program (FSAP) Update Mission to Manila from November 4 to 17, 2009. The initial FSAP took place in 2002. The Update team comprised of World Bank staff including Pamela Madrid, the main author of the report. The FSSA Update on the Philippines was prepared as background documentation for the periodic IMF consultation with the member country. It was based on the information available at the time it was completed last January 11, 2010. The views expressed in the document are those of the staff team and do not necessarily reflect the views of the government of the Philippines or the Executive Board of the IMF. (Madrid 2010) FSAP assessments are designed to assess the stability of the financial system as a whole and not that of individual institutions. It has been developed to help countries identify and remedy weaknesses in their financial sector structure, thereby enhancing their resilience to Macroeconomic shocks and cross-border contagion. FSAP assessments do not cover risks that are specific to individual institutions such as asset quality, operational or legal risks, or fraud. The main findings of this assessment are: * The banking sector has been strengthened considerably since the Asian crisis of the late 1990s and today appears generally resilient to a broad range of macroeconomic risks. The impact of the ongoing global crisis has thus far been milder than originally feared and the macroeconomic outlook is improving, although risks remain elevated in the near term. * Considerable progress has been made toward implementing the recommendations of the initial FSAP, particularly in banking supervision, but also in strengthening the bank resolution framework and nonbank supervision. * — Further strengthening of supervisory powers and Practices is needed to bring supervision and bank safety nets to the best international standards and practices. |n particular, it is critical to ensure adequate legal protection for supervisors and eliminate bank secrecy with respect to supervisory duties. Development of the nonbank financial sectors would help growth and risk diversification. Capital markets and the insurance sector would benefit from harmonizing various taxes and lowering the regulatory burden on some products and services. In the housing finance sector, the multitude of government interventions and institutions need to be rationalized, All members of society—households, businesses, and the government—are affected by the financial syste The government is primarily responsible for defining an Non-profit organizations, the church, m of the country to which they belong. id regulating the financial system itself.Cuarrer 1: Tue Finan $$$ Eivencst Sire The central bank and its Monetary Board determine the rules, regulations, and monetary olicies that need to be implemented to ensure a stable and healthy financial system for the country. Business firms, households, and governments play a wide variety of roles in our modern financial system. All of us, one way or the other, are involved in the financial system either as a borrower or a lender or both. A country’s financial system is not however solely determined by the country itself because other worldwide organizations like WB, IMF, Asian Development Bank, New York Stock Exchange (NYSE), Osaka Securities Exchange (OSE), Australian Stock Exchange (ASX), Bats Global Markets (Bats), and Shenzen Stock Exchange, among others and the transnational banks affect the financial system of the country. Our modern world has a complex and sophisticated financial system that has been and will always be affected by globalization This chapter will discuss what a financial system is and its role in the economy. It will also tackle the roles the different participants in a financial system play. The monetary system, the ‘monetary policy and its effect in the economic system of a country, and the tools of monetary Policy and how they affect money supply and interest rates will also be dealt with in this chapter. Lastly, the role of the Bangko Sentral ng Pilipinas (BSP) in the economic development of the Philippines will be elaborated. FINANCIAL SYSTEM: DEFINITION Financial system describes collectively the financial markets, the financial system Participants, and the financial instruments and securities that are traded in the financial markets. The functions of the financial system are * _ tochannel the funds from the savings units (lenders) to the deficit units (borrowers); * to provide a medium of exchange; * to provide a mechanism for risk sharing: and to provide a channel through which the central bank can influence the economy, in general and the financial system, in particular. With the advent of globalization, we have a multinational financial system, Multinational financial system refers to the collective financial transfer mechanisms that facilitate the movement of money and profits between and among financial system participants throughout the world. These mechanisms include transfer of prices on goods and services traded internally and internationally; intercompany loans and leading (speeding up) and lagging (slowing down) Payments, fees, and royalty charges wherever they are located in the world; and dividend Payments. Together, they lead to a “pattern of profits and movements of funds that would be | impossible in the world of Adam Smith” (Shapiro 2003). Kidwell et al, (2013) cited the inferences that we can draw about the financial system: * If the financial system is competitive, certificates of deposit (CDs) will bear at of CDs of similar maturity and risk. At the s the interest rate that the bank Pays on near the highest rate that you can earn on ame time, borrowers will have borrowed atGarrat Mangers Carrera MARKETS a le interest cost, given their risk class. Competition among or near the lowest possible n rates down, banks for deposits will drive CD rates up and loa «Banks and other depository institutions, such as Insurance comPan 6S, gather money from consumers in small dollar amounts, aggregate it and then make loans in much larger dollar amounts. ancial system is to allocate money to the most y. Ifthe financial system Is working tes of return are funded, and those One important function of the fin: productive investment projects in the econom properly, only projects with high-risk adjusted ra with low rates are rejected. and the bank and other lenders earn «Finally, banks are profit-making organizations, orrowing rates. much of their profits from the spread between lending and b} joing discussion, we can see that financial system performs four basic From the foreg anager. functions, which are also the functions of finance and financial m. «Fund acquisition —a way of getting deposits and necessary funds to finance projects and investments * Fund allocation — determining to which uses, projects, or investments the acquired funds will be used * Fund distribution — the process by which necessary funds are given to the uses, projects, or investments that need funds * Fund utilization — using the funds for its intended purpose FINANCIAL SYSTEM PARTICIPANTS There are six participants or sectors in the financial system: households or consumers financial institutions/intermediaries non-financial institutions government central bank 2 ewene foreign participants Households or Consumers Households or consumers are generally described as majority of which typically comes from wages and salaries, services, and a part is saved. Gross savings is equal to cure! ue ‘Broup that receives income, £ Me income is spent on goods and Income less current expenditures. What is spent is termed consumption. Goods th: ed : is that are consumed withi in a currey iod are : nt period art ‘at will last for more than a termed non-durable consumer goods or non-durables. Goods th:Curren L: Tit FINANCIAL SysreMt year are termed durable consumer goods or durables. According to the Hadjimichalakises (1995), “the standard definition of consumer durables, however, is that they are consumption goods with a life of three or more years. The assumption is that all consumer goods with shorter lives are used up in the year in which they are purchased.” Typically, consumers or households purchase non-durables from current income and borrow for the durables like cars, washing machines, air conditioners, or houses, Financial Institutions/intermediaries Financial institutions/intermediaries are the firms that bridge the gap between surplus units (SUs) or investors/lenders and deficit units (DUs) or borrowers. They channel funds from lenders to borrowers. They include depository institutions and non-depository institutions Other than being channels, they are lenders and borrowers at times. When they underwrite securities or acts as brokers or dealers, they are intermediaries. If they buy securities, they are investors or lenders, and when they are the ones issuing the securities, they are borrowers Non-Financial Institutions Non-financial institutions are businesses other than financial institutions or intermediaries. They include trading, manufacturing, extractive industries, construction, genetic industries, and all firms other than the financial ones. Just like households and financial institutions, these are also borrowers or lenders or both at one time or another. When these non-financial institutions buy securities, they are lenders, investors, or savers; when they issue the securities, they are the borrowers, Government . The government means the national, provincial, municipal or city governments, and barangays or towns comprising the Philippines as a whole. Each division has its heads and agencies that help in running the division they are responsible for. The president is responsible for the entire country, the governor is responsible for his own province, the mayor is responsible for his own city, and the barangay captain is responsible for his own barangay. Each of them has his own agencies. The Bureau of the Treasury (BTR) is part of the government that is a Participant in the financial system. When BTR or any other subdivisions of government issue their own securities, they act as borrowers/deficit units, and when the BTR or any other subdivisions of government buy securities, they act as investors or savers/surplus units. Central Bank The Bangko Sentral ng Pilipinas and all the other central banks of the different countries are mandated to ensure that their respective countries have a stable and healthy financial system. They oversee the operations of their entire financial system and mandate the rules, regulations, and monetary policies that will help them maintain a healthy and stable economy. Central bank is the “banker” to banks. It provides various services to banks such as helpingCarita MARKETS them collect and clear checks and loaning them funds as needed. As a lender and a regulato, central bank oversees the health of the banking system. Central banks are the Monetary policymakers of their respective countries. Foreign Participants Foreign participants refer to the participants from the rest of the world—households, governments, financial and non-financial firms, and central banks. Goods and services ang financial instruments/securities are exchanged across national boundaries, as well as within these boundaries. International trade and finance are parts of globalization. As globalization affects the entire world, the role of foreign participants in the financial system has become more important BANGKO SENTRAL NG PILIPINAS AND THE PHILIPPINE FINANCIAL SYSTEM The details in this section about BSP and the different organizational structures come from BSP.gov.ph. Banko Sentral ng Pilipinas (BSP) is the Central Bank of the Republic of the Philippines. It was established on January 3, 1949 as the country’s central monetary authority The Bangko Sentral ng Pilipinas (BSP) was established on July 3, 1993 pursuant to the provisions of the 1987 Philippine Constitution and Republic Act No. 7653, the New Central Bank Act of 1993 to replace the Central Bank of the Philippines. BSP enjoys fiscal and administrative autonomy in the pursuit of its mandated responsibilities. New Logo The new BSP logo is a perfect round shape in blue that features three gold stars and a stylized Philippine eagle rendered in white strokes. These main elements are framed on the left side with the text inscription “Bangko Sentral ng Pilipinas” underscored by a gold line drawn in half circle. The right side remains open, signifying freedom, openness, and readiness of BSP as represented by the Philippine eagle (signifying strength, clear vision, and freedom) to soar and fly toward its goal. Putting all these elements together in a solid blue background signifies stability. The stars are rendered in gold to symbolize wisdom, wealth, the eagle and the text for BSP represent purity, idealism, and high quality. The white color of neutrality, and mental clarity, Principal Elements 1 The Philippine eagle, our national bird, is the world’s | , " largest e. strength, clear vision, and freedom, the qualities we aspire far, eee i se - ntral bank. 2. The three stars represent the three pillars of c; entral stable banking system, and a safe and reliable pa banking: price stability, Ments 5) interpreted as a geographical representation of BSP’s equal ee ea va a ir the impat of its policies and programs on all Filipinos, wheth Mindanao er they are in Luzon, Visayas, oF Ee |