TOPIC 2: Financial Regulation

 Role of regulation in Financial System

a. Regulatory bodies are established by governments or other organizations to
oversee the functioning and fairness of financial markets and the firms that
engage in financial activity.
b. The goal of regulation is to prevent and investigate fraud, keep markets efficient
and transparent, and make sure customers and clients are treated fairly and
honestly.
c. Several different regulatory bodies exist from the Federal Reserve Board which
oversees the commercial banking sector to FINRA and the SEC which monitor
brokers and stock exchanges
d. Regulations was designed to set rules and guidelines to be followed that is
designed to ensure balance among the individuals, firms and/or citizens as the
case maybe.
e. Assigned to reconcile conflicting interests
f. Is a process whereby the designated government authority provides oversight and
establishes rules for firm in an industry.
g. Financial Regulation is a type of regulation whereby rules and standards were
set to oversight the ability of the companies to establish and maintain appropriate
level of capital to sustain its operation.
h. It also includes setting controls over the market factors that will affect the
financial sustainability of the firms and players in the industry
i. World Bank sets regulatory measures to address certain risks and social
factors.
 Systematic risks
a. The probability of a firm to fail its objective that will result
to ripple effect
 Consumer protection
a. A factor to consider that policies enforced assumes the
effects to the consumers welfare
 Efficiency enhancement
a. A factor that is considered to ensure the dynamism and
agility of the policy to adopt in a fast-changing
environment

 Philippine Financial Regulators

o Philippine Securities and Exchange Commission (SEC)
 National government regulatory agency to administer oversight on the
corporate sector, capital market participants and securities and investment
instrument and promote corporate governance over these.
 Created on October 26, 1936 under Commonwealth Act No. 83.
 In the Republic Act 8799 or the Securities Regulation Code, widens the
responsibility and scope of the SEC to include the following:
o Insurance Commission (Komisyon ng Seguro)
 mandated by virtue of Executive Order No. 192 s. 2015 to ensure
enforcement of the provisions of the Insurance Code or Republic Act
10607 to regulate and supervise the insurance, pre-need and health
maintenance organization industry
 governed by Department of Finance that supervises and regulates the
operations of life and non-life companies, mutual; benefit associations and
trusts for charitable uses.
  Functions of IC are as follows:

o Bangko Sentral ng Pilipinas (Central Bank in the Philippines)

 Created under the New Central Bank Act or Republic Act 7653 and an
attached agency of the Department of Finance, Under the Philippine Law,
this will act as the central monetary authority which will act as a corporate
body that is responsible concerning money, banking and credit.
 It was constructed since January 3, 1993
 Provide policy directions in these areas
 It is also responsible for the supervision of financial institutions and
exercise regulatory powers
 Governed by the Monetary Board
1. Composed of 7 members
 Governor
 Acts as the Chief Executive Officer
  In order to carry its function, it is supported by 4
sectors
Financial Supervision Sector
o Responsible mainly for the
supervision and regulation of banks
and other financial institution under
the scope of BSP
Monetary and Economics
o Aims to conduct the formulation of
monetary policy, ensure its
implementation and assess its
effectiveness
Currency Management Sector
o Responsible in the production,
distribution, disposal or retirement of
currencies in the Philippines
including security documents
commemorative medals and
medallions
Corporate Services Group
o Which is the support group of the
BSP that conducts the human capital
management, financial services,
information technology support and
other corporate resource
management.
 1 member of the cabinet designated by the President of the
republic
 5 members shall be coming from the private sectors
 3 members shall serve for term of 6 months
 2 members will serve for 3 months
 The function of BSP are following:
 Liquidity management
a. Formulates and issues monetary policy aimed at
influencing money supply in order to maintain price
stability.
 Currency issue.
a. the sole responsibility to issue notes and coins
representing the national currency for the Philippines.
b. All issuances made by the BSP are with sovereign
guarantee and shall be considered legal tender in
exchange for private and public debts
 Lender of last resort
 a. Acts as the provider of discounts, advances and
financial support of financial institution for them
to maintain their liquidity
 Financial supervision
a. BSP regularly supervises the financial institutions and
is empowered to exercise regulatory powers over
non-bank institutions conducting quasi-banking
functions
 Management of foreign currency reserves
a. Manages the financial foreign currency requirement of
the Republic by ensuring sufficient international reserves
will be made available on time.
b. This is to preserve the international stability and position
of the Philippine peso
 Determination of exchange rate policy
a. BSP sets the policy that will determine the rate of
exchange of Philippine peso over different currency.
b. Currently, BSP subscribes to a market-oriented foreign
rate policy hence the rates are dependent in the behavior
of the market

o Board of Investments (BOI)

 lead agency to promote investment in country and thereby generate
local and foreign investment in the country
 it is attached an agency of the Department of Trade and Industry
 the agency provides advisory, actualization and post services to the
investors
 BOI provides the following services to encourages new investments:
a. Providing information for the knowledge-based research
b. Incentive the investors through the provisions of tax holidays,
tax and duty exemption of imported capital equipment etc.
c. Participate through policy advocacy initiatives to ensure that
the laws and regulation are investment friendly

 Drivers of Financial sustainability

o In financial markets, some players of firms failed to survive even they comply
with the regulation set.
o The reason being is that these firms respond to the following market drivers
 Competitiveness
 Market Behavior
 Consistency
 Stability
 Managing Credit Risk in Money Market
o Credit Ratings
  A credit rating is a quantified assessment of the creditworthiness of a
borrower in general terms or with respect to a particular debt or
financial obligation
 A credit rating not only determines whether or not a borrower will be
approved for a loan or debt issue but also determines the interest rate at
which the loan will need to be repaid.
 A credit rating or score can be assigned to any entity that seeks to
borrow money—an individual, corporation, state or provincial
authority, or sovereign government.
 individual credit is rated on a numeric scale based on the FICO
calculation, bonds issued by businesses and governments are rated by
credit agencies on a letter-based system.
o Credit Information System
 a government-owned and controlled corporation providing credit
information system in the Philippines. It was created in 2008 by
the Credit Information System Act (CISA) to construct a centralized,
comprehensive credit information system for the collection and
dissemination of accurate and fair information relevant to, or arising
from, credit and credit-related activities of all entities participating in
the financial system
 this credit information is to be collected from various sources such as
banks, financial institutions, insurance companies, financing
companies, credit cooperatives, as well as utility companies and other
businesses that extend loans.
o Cost of Debt
 the cost of debt is the rate a company pays on its debt, such as bonds
and loans. 
 the key difference between the cost of debt and the after-tax cost of
debt is the fact that interest expense is tax-deductible.
 cost of debt is one part of a company’s capital structure, with the other
being the cost of equity. 
 calculating the cost of debt involves finding the average interest paid
on all of a company’s debts. 
o Managing Liquidity and Solvency
 A liquidity management strategy means your business has a plan for
meeting its short-term and immediate cash obligations without
experiencing significant losses. It means your company
is managing its assets, including cash to meet all liabilities, cover all
expenses and maintain financial stability.
 While solvency represents a company’s ability to meet all of its
financial obligations, generally the sum of its
liabilities, liquidity represents a company's ability to meet its short-
term obligations. This is why it can be especially important to check a
company’s liquidity levels if it has a negative book value.
 One of the easiest and quickest ways to check on liquidity is by subtracting short-term
assets minus short-term liabilities. This is also the calculation for working capital, which shows
how much money a company has readily available to pay its upcoming bills.

Short-term assets and short-term liabilities are those that have a one-year time frame. For
example, cash and equivalents is a common short-term asset. Short-term accounts payable is a
common short-term liability.

A company can survive with insolvency for a reasonable time period, but a company
cannot survive without liquidity. Some interesting ratios that can be helpful in more deeply
assessing liquidity can include:

1. Quick ratio
2. Current ratio
3. Working capital turnover
o Valuation of Collaterals
 collateral value refers to the amount of assets that have been put up to
secure a loan.
 this value is often used by lenders to estimate the level of risk
associated with a particular loan application.
 various methods are used to estimate collateral value. These can
include reviewing comparable transactions, relying on tax assessments,
and consulting with subject-matter experts.