ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1
THE MODULE

TITLE: THE FINANCIAL SYSTEM

WHAT IS THE MODULE ALL ABOUT?

Module 1 illustrates the financial system of the country and its participants and
role in the economy. It also discusses the relationship between monetary policy and
financial system.

LIST OF TOPICS TO BE STUDIED IN THE MODULE

 Lesson 1. Financial System: Definition

 Lesson 2. Financial System Participants
 Lesson 3. Bangko Sentral ng Pilipinas and the Philippine Financial
System
 Lesson 4. Monetary Policy and Financial System

INTENDED LEARNING OUTCOMES (ILO)

At the end of this module, the students would be able to:

1) Define what a financial system is and illustrate its role in the economy
2) Identify the different participants in the financial system and their roles
3) Elaborate on the role of BSP in the economic development of the Philippines
4) Explain monetary policy and its role in the economic development of the country
5) Discuss the relationship between monetary policy and financial system
6) Illustrate how the tools of monetary policy are used to influence money supply
and interest rates

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1
LEARNING CONTENT

THE FINANCIAL SYSTEM

INTRODUCTION

The International Monetary Fund (IMF) and the World Bank (WB) conduct
financial 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 crucial in the study of capital markets because the financial market
is central to the financial system.

All members of society – households, businesses, non-profit

organizations, the church and the government – are affected by the financial
system of the country to which they belong. The government is primarily responsible
for defining and regulating the financial system itself. The Central Bank and its
Monetary Board determine the rules, regulations, and monetary policies 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 Market (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
abd will always be affected by globalization.

THE PHILIPPINE FINANCIAL SYSTEM TODAY

“PH financial system to stay up and running amid virus pandemic, says BSP”

The central bank has put in place measures to ensure that the Philippine economy
remains humming by activating an alternate site from which local financial markets are
supervised and checks from banks are cleared.
“We have ensured, however, that vital BSP services needed by the financial system
continue,” BSP Governor Benjamin Diokno said. “Hence, open market operations, PhilPass
settlement, as well as the servicing of bank withdrawals are being performed business as
usual.”
“The BSP will continue to look after the welfare of its personnel as we provide the
requirements of the financial system and the broader economy,” he said, adding that going
forward, the central bank “will maximize the use of technology to limit physical contact in
performing our functions, while remaining proactive in carrying out the protocols advised by
health authorities on COVID-19.”
Source:https://business.inquirer.net/292378/ph-financial-system-to-stay-up-and-running-amid-virus-pandemic-says-bsp#ixzz6VGkbau2b

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1
LESSON 1: 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:

1) To channel the funds from the savings units (lenders) to the deficit units
(borrowers);
2) To provide a medium of exchange
3) To provide a mechanism for risk sharing; and
4) 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. The mechanisms include transfer of prices
on goods and services traded internally and internationally; intercompany loans and
lending (speeding up) and lagging (slowing down) payments, fess, and royalty
charges wherever they are located in the world; and dividend payments. (Shapiro
2003).

Kidwell et al. (2013) cited the inferences that we can draw about the financial
system:

 If the financial system is competitive, the interest rate that the bank pays on
certificates of deposits (CDs) will bear at or near the highest rate that you can
earn on CDs of similar maturity and risk. At the same time, borrowers will have
borrowed at or near the lowest possible interest cost, given their risk class.
Competition among banks for deposits will drive CD rates up and loan rates
down.
 Banks and other depository institutions, such as insurance companies, gather
money from consumers in small dollar amounts, aggregate it, and then make
loans in much larger dollar amounts.
 One important function of the financial system is to allocate money to the more
productive investment projects in the economy. If the financial system is
working properly, only projects with high-risk adjusted rates of returns are
funded, and those with low rates are rejected.
 Finally, banks are profit-making organizations, and the bank and other lenders
earn much of their profits from the spread between lending and borrowing
rates.

From the foregoing discussion, we can see that the financial system performs
four basic functions, which are also the functions of finance and financial managers:
a) Fund Acquisition – a way of getting deposits and necessary funds to finance
projects and investments
b) Fund Allocation – determining to which uses, projects, or investments the
acquired funds will be used
Course Code: Fin 157
Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1
c) Fund Distribution – the process by which necessary funds are given to the
uses, projects, or investments that need funds
d) Fund Utilization - using funds for its intended purpose

Lesson 2: FINANCIAL SYSTEM PARTICIPANTS

There are six (6) participants or sectors in the financial system:

1) Households or consumers
2) Financial institutions/intermediaries
3) Non-financial institutions
4) Government
5) Central Bank
6) Foreign participants

Households or Consumers
They are generally described as the group that receives income, majority of
which typically comes from wages and salaries. Such income is spent on goods and
services, and part is saved. Gross savings is equal to current income less current
expenditures. What is spent is termed consumption. Goods that are consumed
within a current period are termed non-durable consumer goods or non-durables.
Goods that will last for more than a year are termed durable consumer goods or
durables. 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
These 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
These are businesses other than financial institutions or intermediaries. They
include trading, manufacturing, extractive industries, construction, genetic industries,
and all other firms other than financial ones. Just kike 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; and when they issue the securities, they are 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 running the division they are responsible for. The
Course Code: Fin 157
Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1
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/savers/surplus
units.

Central Bank
The Bangko Sentral ng Pilipinas and all 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 them collect and clear checks and loaning
them funds as needed. As a lender and regulator, central bank oversees the health
of the banking system. central banks are the monetary policymakers of their
respective countries.

Foreign Participants
They are the participants from the rest of the world – households, government,
financial or non-financial firms, and central banks. Goods and services and 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 participant in the financial
system has become more important.

Lesson 3–THE BANGKO SENTRAL NG PILIPINAS AND THE

PHILIPPINE FINANCIAL SYSTEM

The BangkoSentralngPilipinas (BSP) is the central bank of the Republic of the

Philippines. It was established on
3 July 1993 pursuant to the
provisions of the 1987
Philippine 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.

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

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
the BSP, as represented by the Philippine eagle, to soar and fly
toward its goal. Putting all these elements together is a solid blue background to signify
stability.

Principal Elements:
1) The Philippine Eagle, our national bird, is the world’s largest eagle and
is a symbol of strength, clear vision and freedom, the qualities we aspire
for as a central bank.
2) The three stars represent the three pillars of central banking: price
stability, stable banking system, and a safe and reliable payments
system. It may also be interpreted as a geographical representation of
BSP’s equal concern for the impact of its policies and programs on all
Filipinos, whether they are in Luzon, Visayas or Mindanao.
Colors
1) The blue background signifies stability.
2) The stars are rendered in gold to symbolize wisdom, wealth, idealism,
and high quality.
3) The white color of the eagle and the text for BSP represents purity,
neutrality, and mental clarity.

Font or Type Face

Non-serif, bold for “BANGKO SENTRAL NG PILIPINAS” to suggest solidity,

strength, and stability. The use of non-serif fonts characterized by clean lines portrays
the no-nonsense professional manner of doing business at the BSP.

Shape

Round shape to symbolize the continuing and unending quest to become an

excellent monetary authority committed to improve the quality of life of Filipinos. This
round shape is also evocative of our coins, the basic units of our currency.

The BSP Main Complex in Manila houses the

offices of the Governor, the Monetary Board and the
different operating departments/ offices. The Complex
has several buildings, namely: 5-Storey building, Multi-
storey building, the EDPC building and the BSP Money
Museum, which showcases the Bank's collection of
currencies.

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

The Security Plant Complex which is located

in Quezon City houses a banknote printing
plant, a securities printing plant, a mint and a
gold refinery. The banknote printing plant and
the mint take care of producing currency notes
and coins, respectively.

The BSP has three regional offices

performing cash operations, cash administration,
loans and rediscounting, bank supervision and
gold buying operations. These regional offices
are located in La Union, Cebu City and Davao
City.

There are also 19 BSP branches situated in

Batac (IlocosNorte), Tuguegarao City
(Cagayan), Dagupan City (Pangasinan),
Cabanatuan City (Nueva Ecija), San Fernando
City (Pampanga), Lucena City (Quezon), Naga
City (Camarines Sur), Legazpi City (Albay),
Dumaguete City (Negros Oriental), Bacolod City
(Negros Occidental), Iloilo City (Iloilo), Roxas
City(Roxas), Tacloban City (Leyte), Butuan City
(Agusan del Norte), Cagayan de Oro City
(Misamis Oriental), Ozamiz City (Misamis Occidental), Cotabato City, General Santos
City (South Cotabato) and Zamboanga City (Zamboanga del Sur). They perform cash
operations, cash administration, and in certain areas, gold buying operations.

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

The BSP Website

Organizational Structure (As of November 21, 2019)

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

*For a clearer view, visit BSP website

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1
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.

Responsibilities

The BSP provides policy directions in the areas of money, banking and credit.
It supervises operations of banks and exercises regulatory powers over non-bank
financial institutions with quasi-banking functions.

Under the New Central Bank Act, the BSP performs the following functions, all
of which relate to its status as the Republic’s central monetary authority.
1) Liquidity Management. The BSP formulates and implements monetary policy
aimed at influencing money supply consistent with its primary objective to
maintain price stability.
2) 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.
3) Lender of last resort. The BSP extends discounts, loans and advances to
banking institutions for liquidity purposes.
4) Financial Supervision. The BSP supervises banks and exercises regulatory
powers over non-bank institutions performing quasi-banking functions.
5) 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.
6) Determination of exchange rate policy. The BSP determines the exchange
rate policy of the Philippines. Currently, the BSP adheres to a market-oriented
foreign exchange rate policy such that the role of BangkoSentral is principally
to ensure orderly conditions in the market.
7) 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 Monetary Board

The powers and function of BangkoSentral are exercised by its Monetary

Board, which has seven members appointed by the President of The Philippines.
Under the New Central Bank Act, one of the government sector members of the
Monetary Board must also be a member of the Cabinet designated by the President.

The New Central Bank Act establishes certain qualifications for the members
of the Monetary Board and also prohibits members from holding certain positions with
other governmental agencies and private institutions that may give rise to conflicts of
interest. With the exception of the members of the Cabinet, the Governor and the other

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1
members of the Monetary Board serve terms of six years and may only be removed
for cause.
The Monetary Board meets at least once a week. The Board may be called to
a meeting by the Governor of the Bangko Sentral or by two (2) other members of the
Board. Usually, the Board meets every Thursday but on some occasions, it convenes
to discuss urgent issues.

In the exercise of its authority, the Monetary Board shall:

1. Issue rules and regulations it considers necessary for the effective discharge
of the responsibilities and exercise of the powers vested upon the Monetary
Board and the Bangko Sentral;
2. Direct the management, operations, and administration of the Bangko Sentral,
reorganize its personnel, and issue such rules and regulations as it may deem
necessary or convenient for this purpose. The legal units of the Bangko Sentral
shall be under the exclusive supervision and control of the Monetary Board;
3. Establish a human resource management system which shall govern the
selection, hiring, appointment, transfer, promotion, or dismissal of all personnel.
Such system shall aim to establish professionalism and excellence at all levels
of the Bangko Sentral in accordance with sound principles of management.
A compensation structure, based on job evaluation studies and wage
surveys subject to the Board's approval, shall be instituted as an integral
component of the Bangko Sentral's human resource development program.
On the recommendation of the Governor, appoint, fix the remunerations and
other emoluments, and remove personnel of the Bangko Sentral, subject to
pertinent civil service laws: Provided, That the Monetary Board shall have
exclusive and final authority to promote, transfer, assign, or reassign personnel
of the Bangko Sentral and these personnel actions are deemed made in the
interest of the service and not disciplinary: Provided, further, That the Monetary
Board may delegate such authority to the Governor under such guidelines as it
may determine;
4. Adopt an annual budget for and authorize such expenditures by the Bangko
Sentral in the interest of the effective administration and operations of the
Bangko Sentral in accordance with applicable laws and regulations; and
5. Indemnify its members and other officials of the Bangko Sentral, including
personnel of the departments performing supervision and examination
functions against all costs and expenses reasonably incurred by such persons
in connection with any civil or criminal action, suit or proceedings to which he
may be, or is, made a party by reason of the performance of his functions or
duties, unless he is finally adjudged in such action or proceeding to be liable for
negligence or misconduct.

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1
The BSP Monetary Board
Chairman Benjamin E. Diokno
Members Carlos G. Dominguez III
Felipe M. Medalla
Juan De Zuniga, Jr.
Peter B. Favila
Antonio S. Abacan, Jr.
V. Bruce J. Tolentino

Lesson 4: MONETARY POLICY AND FINANCIAL SYSTEM

Monetary Policy refers to the manipulation of money supply to affect the

economy of a country as a whole. It largely impacts interest rates. Increases in the
money supply lower short-term interest rates and will encourage investments and
consumption. On the long run, however, an abundance of money supply leads to
increased prices or inflation and is undesirable. This is where BSP plays its role as
the balancer. Generally speaking, expansionary monetary policies and contractionary
monetary policies involve changing the level of the money supply of the country.
Expansionary monetary policy is simply a policy which expands (increases) the
supply of money, whereas contractionary monetary policy contracts (decreases)
the supply of a country’s currency. Money supply is the total amount of currency and
coins and demand deposits in the economy.

The primary objective of BSP's monetary policy is to promote a low and stable
inflation conducive to a balanced and sustainable economic growth. The adoption of
inflation targeting framework for monetary policy in January 2002 is aimed at
achieving this objective.

Source: https://youtu.be/hpFky6o0HRs

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

Source:https://www.bsp.gov.ph/SitePages/PriceStability/VisualMPR/MonetaryPolicy
Report_February2022.aspx

Moffatt (2016) discussed the effects of monetary policy in his article “What
Effects Does Monetary Policy Have?” Expansionary monetary policy that increases
the money supply causes an increase in bond prices and a reduction in interest rates.
Lower interest rates lead to higher levels of capital investment. They make domestic
bonds less attractive, so the demand for domestic bonds falls and the demand for
foreign bonds rises. All else being equal, a larger money supply lowers market interest
rates. Conversely, smaller money supplies tend to raise market interest rates.

When Central Bank wishes to increase money supply, it can do a combination

of three things:
1) Purchase securities in the open market, known as open market operations
2) Lower the government discount rate
3) Lower reserve requirement on banks

These directly impact the interest rate. When the National Treasury buys
securities in the open market, the price of those securities rises. Bond prices and
interest rates are inversely related. Government discount rate is an interest rate, so
lowering it is essentially lowering interest rates. If the National Treasury decides
instead to lower reserve requirements, this will cause banks to have an increase in
the amount of money they can invest or lend. This causes the price of investments
such as bonds to rise, so interest rates must fall. No matter what tool the central bank
uses to expand money supply, interest rates will decline and bond prices will rise.
Increases in bond prices will affect the exchange market.

Assuming an increase in Philippine bond prices, investors would want to sell

those bonds in exchange for other lower-priced bonds. Investors will sell the
Philippine bonds because they will receive higher proceeds. So an investor will sell
his Philippine bond, exchange his peso for dollar, and buy a US bond. This causes
the supply of peso in foreign exchange markets to increase and the supply of dollar
in the foreign exchange markets to decrease. This will cause peso to become less
Course Code: Fin 157
Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1
valuable relative to the dollar. The lower exchange rate makes Philippine-produced
goods cheaper in the US and US-produced goods more expensive in the Philippines.
Therefore, exports will increase and imports will decrease causing the balance of
trade to increase. When interest rates are lower, the cost of financing capital projects
is less. So all else being equal, lower interest rates lead to higher rates of capital
investment.

We can observe the following relative to contractionary monetary policy:

1) Contractionary monetary policy causes an increase in bond prices and a
reduction in interest rates.
2) Lower interest rates lead to higher levels of capital investment.
3) The lower interest rates make domestic bonds less attractive, so the demand
for domestic bonds falls and the demand or foreign bonds rises.
4) The demand for domestic currency falls and the demand for foreign currency
rises causing a decrease in the exchange rate. The value of the domestic
currency is now lower relative to foreign currencies.
5) Lower exchange rate causes exports to increase, imports to decrease, and
balance of trade to increase.

The effects of a contractionay monetary policy are precisely the opposite of an

expansionary monetary policy. When the central bank wishes to decrease money
supply, it can do a combination of three things:
1) Sell securities in the open market, known as open market operations
2) Raise the discount rate
3) Raise the reserve requirements

These cause interest rates to rise, either directly or through the increase in the
supply of bonds in the open market through sales by the national treasury or by banks.
This increase in supply of bonds reduces the price for bonds. These bonds will be
bought by foreign investors, so the demand for domestic currency will rise and the
demand for foreign currency will fall. Thus, the domestic currency will appreciate in
value relative to foreign currency. The higher the exchange rate makes domestically
produced goods more expensive in foreign markets and foreign goods cheaper in
domestic market. Since this causes more foreign goods to be sold domestically and
less domestic goods sold abroad, the balance of trade decreases. The interest rates
cause the cost of financing capital projects to go higher, so capital investment will be
reduced.

We can observe the following relative to contractionary monetary policy:

1) Contractionary monetary policy causes a decrease in bond prices and an
increase in interest rates
2) Higher interest rates lead to lower levels of capital investment
3) Higher interest rates make domestic bonds more attractive, so demand for
domestic bonds rises and the demand for foreign bonds falls
4) The demand for domestic currency rises and the demand for foreign currency
falls, causing an increase in the exchange rate. The value of the domestic
currency is higher relative to foreign currencies
5) Higher exchange rate causes exports to decrease, imports to increase and
balance of trade to decrease.
Course Code: Fin 157
Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1
If you want additional information about Monetary Policy, you may watch the
following and copy the URL indicated below the photo in the Youtube, for references.

Source: https://www.youtube.com/watch?v=qgC5m47TM0I

Source: https://www.youtube.com/watch?v=nKW3x6NvWq0

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

SUMMARY OF MODULE 1 – The Financial System

Financial System describes collectively the financial markets, the financial

system participants, and the financial instruments and securities that are traded in the
financial markets.

4 Functions of Financial System

a) Fund Acquisition – a way of getting deposits and necessary funds to finance
projects and investments
b) Fund Allocation – determining to which uses, projects, or investments the
acquired funds will be used
c) Fund Distribution – the process by which necessary funds are given to the
uses, projects, or investments that need funds
d) Fund Utilization - using funds for its intended purpose

There are six (6) participants or sectors in the financial system:

1) Households or consumers
2) Financial institutions/intermediaries
3) Non-financial institutions
4) Government
5) Central Bank
6) Foreign participants

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 the
1987 Philippine Constitution and the New Central Bank Act of 1993.

The BSP has three regional offices performing cash operations, cash
administration, loans and rediscounting, bank supervision and gold buying operations.
These regional offices are located in La Union, Cebu City and Davao City.

There are also 19 BSP branches situated in Batac (IlocosNorte), Tuguegarao

City (Cagayan), Dagupan City (Pangasinan), Cabanatuan City (Nueva Ecija), San
Fernando City (Pampanga), Lucena City (Quezon), Naga City (Camarines Sur),
Legazpi City (Albay), Dumaguete City (Negros Oriental), Bacolod City (Negros
Occidental), Iloilo City (Iloilo), Roxas City(Roxas), Tacloban City (Leyte), Butuan City
(Agusan del Norte), Cagayan de Oro City (Misamis Oriental), Ozamiz City (Misamis
Occidental), Cotabato City, General Santos City (South Cotabato) and Zamboanga
City (Zamboanga del Sur). They perform cash operations, cash administration, and in
certain areas, gold buying operations.

Under the New Central Bank Act, the BSP performs the following functions, all
of which relate to its status as the Republic’s central monetary authority.
1) Liquidity Management
2) Currency issue
3) Lender of last resort
4) Financial Supervision
Course Code: Fin 157
Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1
5) Management of foreign currency reserves
6) Determination of exchange rate policy
7) Other activities

The powers and function of Bangko Sentral are exercised by its Monetary
Board, which has seven members appointed by the President of The Philippines.
Under the New Central Bank Act, one of the government sector members of the
Monetary Board must also be a member of the Cabinet designated by the President
with a term of six years and may only be removed for cause.

Monetary Policy refers to the manipulation of money supply to affect the

economy of a country as a whole. Monetary policy can be either expansionary or
contractionary. Expansionary monetary policy is simply a policy which expands
(increases) the supply of money, whereas contractionary monetary policy
contracts (decreases) the supply of a country’s currency. Money supply is the total
amount of currency and coins and demand deposits in the economy.

References:

Capital Markets, Norma Dy Lopez-Mariano, Ph.D., First Edition, 2017

Fabozzi&Modgliani, Capital Markets, Institutions & Instruments, Prentice Hall, 2009
Medina, Roberto G., Business Finance,2007
Keown, Arthur J., et. al., Financial Management, Pearson 2005
www.pse.com.ph
www.bsp.gov.ph
http://www.investopedia.com

You may now proceed to the next module of this course. I hope you have
learned some information if not a lot in the
lessons discussed earlier.

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1
Name: _______________________________ Score: _______
Year and Section: __________ Date: ________

INTENDED LEARNING ACTIVITY

(To be accomplished using a sheet of paper)

“Observation to the Existing Environment”

Instruction: In a sheet of paper, write down your own personal observation with
regards to the financial system of the country. You may watch
televisions, read magazines or newspapers, surf the internet or social
media or any sources of information.

Scoring Rubrics:
Content 20
Grammar 5
Organization 10
Total 30 points

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

Name: _______________________________ Score: _______

Year and Section: __________ Date: ________

ACTIVITY 1
(To be accomplished using a sheet of paper)

The following table shows the department/division that will be assigned to research
on based from the first letter of your surname (Example: Abaniz, Mary Rose, which
is A – Monetary and Economics Sector). Submit your findings in a hardcopy to be
submitted on the scheduled date of submission.

Scoring Rubrics:
Content 20
Grammar 5
Organization 10
Total 30 points

Surname Department/Division of BSP Points to Research

A-F Monetary and Economics Sector Current monetary policies and
how BSP aims to improve the
economy using the said policies,
monetary tools, and
monetary/economic plans for the
future
G-L Financial Supervision Sector How BSP monitors banking and
non-banking institutions and how
they rate banks and protect
depositors
M-R Corporate Services Sector Roles and functions of the sector
and what they cover
S-Z Security Plant Complex Bank notes and securities
printing and the mint and refinery
operations

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE

Tagudin Campus

MODULE 1

Name: _______________________________ Score: _______

Year and Section: __________ Date: ________

QUIZ 1

(To be accomplished via google form which will be posted at the

google classroom)

I. TRUE or FALSE. Write T in the space provided before the number if the statement
is correct, otherwise, write F.

1) Financial system channels funds from deficit units to savings units.

2) Financial system provides a medium of exchange.
3) Households and individuals do not include single individuals in terms of
financial system.
4) The powers and functions of BSP are exercised by its Monetary Board.
5) Under the Republic Act No. 7653, the New Central Bank Act, one of the
government sector members of the Monetary Board must also be a member of
the Cabinet appointed by the President.
6) Increases in the money supply push short-term interest rates up, encouraging
investments and consumption.
7) In the long run, an abundance of money supply will lead to increase in prices.
8) BSP may lower interest rates and stimulate investment and consumption in the
short run.
9) When BSP sells securities, money supply increases.
10) The Monetary Board has nine members.

II. IDENTIFICATION. Write what is being asked. CAPITAL LETTERS only.

________________1. It describes collectively the financial markets, the participants,
and the instruments and securities that are traded in the said
markets.
________________2. It is the financial system participant that receives income,
majority of which typically comes from wages and salaries.
________________3. It is equal to the current income less current expenditures.
________________4. These are goods that are consumed within a current period.
________________5. These are goods that will last for more than a year.
________________6. It is the Philippine’s central bank.
________________7. It is the manipulation of money supply to affect the economy of
the country.
________________8. A policy which increases the supply of money of the country.
________________9. A policy which decreases the supply of money of the country.
________________10. It is the total amount of currency and coins and demand
deposits in the economy

Course Code: Fin 157

Descriptive Title: Capital Markets Instructor: Mary Rose Supsup Abaniz