MODULE II

Monetary Policy, the Payment System and

Financial Intermediaries and Central Banking:
Development and Growth

Lesson 1 Monetary Policy Defined, Monetary Policy and Its

Objectives, Advantages and Disadvantages, Limitations
of Monetary Policy and Review of Monetary and Banking
Policy
Lesson 2 Payment System Defined, Composition of Money Supply,
the Payment System under the Philippine Laws, Clearing
of Checks, Efficiency of the Payment System, and
Financial Intermediation
Lesson 3 Brief History of Central Banks, Nature of Central
Banking, Definition of Central Bank
Lesson 4 Origin of Central Banking-Creating a Central Bank for
the Philippines/Brief History of the Bangko Sentral ng
Pilipinas, Objectives and Responsibilities of the Bangko
Sentral ng Pilipinas, and the New Central Bank Act
(RA 7653)

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MODULE II
Monetary Policy, the Payment System
and Financial Intermediaries, and Central
Banking: Development and Growth

 INTRODUCTION

This module presents the monetary policy defined, monetary

policy and its objectives, advantages and disadvantages, limitations
of monetary policy and review of monetary and banking policy,
payment system defined, composition of money supply, the payment
system under the Philippine Laws, clearing of checks, efficiency of
the payment system, and financial intermediation, brief history of
central banks, nature of central banking, definition of central bank,
origin of central banking-creating a central bank for the
Philippines/brief history of the Bangko Sentral ng Pilipinas, objectives
and responsibilities of the Bangko Sentral ng Pilipinas and the New
Central Bank Act (RA 7653).

OBJECTIVES

After studying the module, you should be able to:

1. explain how the value of money is measured

2. describe the monetary and banking policy
3. discuss monetary policy and define payment system
4. enumerate the composition of money supply
5. discuss the payment system under the Philippine laws
6. discuss the brief history of central banks
7. define central banks
8. discuss the brief history of the Bangko Sentral ng Pilipinas
9. discuss the objectives of the Bangko Sentral ng Pilipinas and RA
7653

 DIRECTIONS/ MODULE ORGANIZER

There are four lessons in the module. Read each lesson
carefully then answer the learning activities and summative test to
find out how much you have benefited from it. Work on these
exercises/activities carefully and submit your output to your
instructor/professor.

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In case you encounter difficulty, discuss this with your tutor

during the face-to-face meeting. If not contact your tutor at the
DOUS office.

Good luck and happy reading!!!

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Lesson 1

 Monetary Policy Defined,

Monetary Policy and Its
Objectives, Advantages
and Disadvantages
Limitations of Monetary
Policy, Review of Monetary
and Banking Policy

Monetary Policy

Monetary Policy is a process undertaken by the central bank,

currency board or the government to control the availability of
money and its supply as well as the interest rates on loans and the
amount of bank reserves. Its goals include addressing the problem of
unemployment, maintain balance in exchange rates and stabilize the
economy.

Monetary policy is the macroeconomic policy laid down by the

central bank. It involves management of money supply and interest
rate and is the demand side economic policy used by the government
of a country to achieve macroeconomic objectives like inflation,
consumption, growth and liquidity.

Monetary policy is the process by which a central bank manages

money supply in the economy.

Monetary policy is the monitoring and control of money supply by a

central bank, such as the Federal Reserve Board in the United States
of America, and the Bangko Sentral ng Pilipinas in the Philippines.
This is used by the government to be able to control inflation, and
stabilize currency.

Monetary Policy and Its Objectives

The objectives of monetary policy include ensuring inflation

targeting and price stability, full employment and stable economic
growth.

Examples of Monetary Policy

Some monetary policy examples include buying or selling

government securities through open market operations, changing the
discount rate offered to member banks or altering the reserve
requirement of how much money banks must have on hand that's not
already spoken for through loans.

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Types of Monetary Policy

1. Inflation Targeting – This approach is used to ensure that inflation

does not go over the desired limit and will be adjusted depending on
current interest rates.

2. Price Level Targeting – This strategy targets the Consumer Price Index
instead of inflation.

3. Monetary Aggregates – This approach is practiced by countries in

relation to money supply and affects credit and classes of money.

4. Fixed Exchange Rate – This is the set price, usually against other
currencies to ensure the U.S. dollar value is maintained within the
desired perimeter.

5. Gold Standard – This approach aims to keep the value of money the
same as the value of gold.

Advantages and Disadvantages of Monetary Policy

Advantages of Monetary Policy

1. Expansionary monetary policy makes it possible for more investments

come in and consumers spend more.

With the banks lowering the interest rates on mortgages and loans,
more business owners will be encouraged to expand their businesses
since they are more available funds to borrow with interest rates that
they can afford. On the other hand, prices of commodities will be
lowered and the buying public will have more reason to buy more
consumer goods. In the end, companies will profit while their
customers are able to afford what they need like basic commodities,
property and services.

2. Lowered interest rates also lower mortgage payment rates.

Another advantage of monetary policy in relation to lowered rates is

that it also affects the payments home owners need to meet for the
mortgage of their homes. Reduced mortgage fees will leave home
owners more money to spend. Also, they will be able to settle their
monthly payments regularly. This is a win-win situation for
merchandisers, creditors and property investors as well.

3. It allows the Central Bank to apply quantitative easing.

The Federal Reserve can make use of this policy to print or create
more money which enables it to purchase government bonds from

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banks. The end result is increased cash reserves in banks and also
monetary base. This also leads to reduced interest rates and more
money for the bank to lend its borrowers.

4. It promotes predictability and transparency.

Supporters say that policymakers are obliged to make announcements

that are believable to business owners and the consumers when it
comes to the type of monetary policy to be expected in the coming
months for it to be a success.

Disadvantages of Monetary Policy

1. Despite expansionary monetary policy, there is still no guaranteed

economy recovery.

Some economists who criticize the Federal Reserve on the policy say
that in times of recession, not all consumers will have confidence to
spend and take advantage of low interest rates. If this is the case,
then it is a disadvantage.

2. Cutting interest rates is not a guarantee.

Others also claim that even if the banks are given lower interest
rates by the Central Bank when they borrow money, some banks
might have the funds. If this happens, there will be insufficient funds
people can borrow from them.

3. It will not be useful during global recession.

Proponents of expansionary monetary policy say that even if banks

will lower interest rates and more consumers will spend money,
during a global crisis, the export industry might suffer. They say that
if this is the current situation, the losses of exporters are more than
what businesses can earn from sales.

4. Contractionary monetary policy can discourage businesses from

expansion.

Opponents claim that if the Federal Reserve will impose this policy,
interest rates will increase and businesses will not be interested to
expand their operations. This can lead to less production of
manufacturers and higher prices. Consumers might not be able to
afford goods and services. Worse, it might take a long time for these
businesses to recover and eventually force them to close shop. If this
continues, workers might lose their jobs.

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Limitations of Monetary Policy

Since monetary policy has only one instrument, the Bank cannot use
interest rates to target more than one variable. “Ultimately, inflation is the
sole target of the policy”. Any changes affected in the bank rate do not
produce proportional changes in the other interest rates. The result is that
the central bank of the country is unable to control the money market in an
effective manner and monetary policy fails in its operation.

Review of Monetary and Banking Policy

Monetary Policy and Central Banking

Central banks play a crucial role in ensuring economic and financial

stability. They conduct monetary policy to achieve low and stable inflation.
In the wake of the global financial crisis, central banks have expanded their
toolkits to deal with risks to financial stability and to manage volatile
exchange rates. Central banks need clear policy frameworks to achieve
their objectives. Operational processes tailored to each country’s
circumstances enhance the effectiveness of the central banks’ policies. The
IMF supports countries around the world by providing policy advice and
technical assistance.

Monetary Policy

A key role of central banks is to conduct monetary policy to achieve

price stability (low and stable inflation) and to help manage economic
fluctuations. The policy frameworks within which central banks operate
have been subject to major changes over recent decades.

Since the late 1980s, inflation targeting has emerged as the leading
framework for monetary policy. Central banks in Canada, the euro area, the
United Kingdom, New Zealand, and elsewhere have introduced an explicit
inflation target. Many low-income countries are also making a transition
from targeting a monetary aggregate (a measure of the volume of money in
circulation) to an inflation targeting framework.

Central banks conduct monetary policy by adjusting the supply of

money, generally through open market operations. For instance, a central
bank may reduce the amount of money by selling government bonds under a
“sale and repurchase” agreement, thereby taking in money from
commercial banks. The purpose of such open market operations is to steer
short-term interest rates, which in turn influence longer-term rates and
overall economic activity. In many countries, especially low-income
countries, the monetary transmission mechanism is not as effective as it is
in advanced economies. Before moving from monetary to inflation targeting,
countries should develop a framework to enable the central bank to target
short-term interest rates.

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Following the global financial crisis, central banks in advanced

economies eased monetary policy by reducing interest rates until short-term
rates came close to zero, which limited the option to cut policy rates
further (i.e., limited conventional monetary options). With the danger of
deflation rising, central banks undertook unconventional monetary policies,
including buying long-term bonds (especially in the United States, the
United Kingdom, the euro area, and Japan) with the aim of further lowering
long term rates and loosening monetary conditions. Some central banks even
took short-term rates below zero.

Foreign Exchange Regimes and Policies

The choice of a monetary framework is closely linked to the choice of

an exchange rate regime. A country that has a fixed exchange rate will have
limited scope for an independent monetary policy compared with one that
has a more flexible exchange rate. Although some countries do not fix the
exchange rate, they still try to manage its level, which could involve a
trade-off with the objective of price stability. A fully flexible exchange rate
regime supports an effective inflation targeting framework.

Macroprudential Policy

The global financial crisis showed that countries need to contain risks
to the financial system as a whole with dedicated financial policies. Many
central banks that also have a mandate to promote financial stability have
upgraded their financial stability functions, including by establishing
macroprudential policy frameworks. Macroprudential policy needs a strong
institutional foundation to work effectively. Central banks are well placed
to conduct macroprudential policy because they have the capacity to
analyze systemic risk. In addition, they are often relatively independent and
autonomous. In many countries, legislators have assigned the
macroprudential mandate to the central bank or to a dedicated committee
within the central bank. Regardless of the model used to implement
macroprudential policy, the institutional setup should be strong enough to
counter opposition from the financial industry and political pressures and to
establish the legitimacy and accountability of macroprudential policy. It
needs to ensure that policymakers are given clear objectives and the
necessary legal powers, and to foster cooperation on the part of other
supervisory and regulatory agencies. A dedicated policy process and is
needed to operationalize this new policy function, by mapping an analysis of
systemic vulnerabilities into macroprudential policy action.

How the IMF Supports Effective Central Bank Frameworks?

The IMF promotes effective central bank frameworks through

multilateral surveillance, policy papers and research, bilateral dialogue with
its member countries, and the collection of data for policy analysis and
research.

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Multilateral surveillance, policy analysis and research can help

improve global outcomes:

• The IMF has provided policy advice on how to avoid potential side
effects from the implementation of and exit from unconventional
monetary policy, and established principles for evolving monetary
policy regimes in low income countries.

• The Fund has also examined interactions between monetary and

macroprudential policy, and provided principles for the establishment
of well-functioning macroprudential frameworks.

The IMF is in regular dialogue with member country central banks

through bilateral surveillance (Article IV consultation), FSAPs and technical
assistance:

• In its Article IV consultations, the IMF provides advice on monetary

policy action to achieve low and stable inflation, as well as on
establishing effective monetary policy and macroprudential policy
frameworks.

• The Financial Sector Assessment Program (FSAP) provides member

countries with an evaluation of their financial systems and in-depth
advice on policy frameworks to contain and manage financial stability
risks, including the macroprudential policy framework, which is now
often covered in dedicated technical notes (see for example Finland,
Netherlands, and Romania).

• Country programs supported by an IMF arrangement often include

measures to strengthen monetary policy and central bank
governance.

• Technical assistance helps countries develop more effective

institutions, legal frameworks, and capacity. Topics include monetary
policy frameworks, exchange rate regimes, moving from targeting a
monetary aggregate to inflation targeting, improving central bank
operations (such as open market operations and foreign exchange
management), and macroprudential policy implementation.

In order to inform policy development and research, the IMF is also

engaged with its members to develop and maintain databases:

• The IMF has for some time kept track of countries’ monetary policy
arrangements (AREAER), as well as central banks’ legal frameworks
(CBLD), and their monetary operations and instruments (MOID).

• The IMF has recently launched a new annual survey of

macroprudential measures and institutions. This survey will support
IMF advice and policymakers around the world, by providing details

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on the design of macroprudential measures, and enabling

comparisons across countries and over time

• The IMF also compiled a comprehensive historical database of

macroprudential measures that integrates the latest survey
information and allows for an assessment of the quantitative effects
of macroprudential instruments. This database is now being used by
IMF economists to measure policy effects, and it is also available to
researchers around the world.

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 LEARNING ACTIVITY

Answer the following:

1. Discuss the monetary policy and its objectives.

2. The Bangko Sentral ng Pilipinas used monetary policy to be able to

control inflation and stabilize currency. Explain and cite a situation.

3. Enumerate and describe the different types of monetary policy.

4. How the International Monetary Fund (IMF) supports effective central

bank frameworks?

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Lesson 2

 Payment System Defined, Composition

of Money Supply, the Payment System
under the Philippine Laws, Clearing of
Checks, Efficiency of the Payment
System, and Financial Intermediation

Payment System Defined

Payment System is any system used to settle financial transactions

through the transfer of monetary value. This includes the institutions,
instruments, people, rules, procedures, standards, and technologies that
make its exchange possible.

Payment System is a financial system supporting transfer of funds

from suppliers (savers) to the users (borrowers), and from payers to the
payees, usually through exchange of debits and credits among financial
institutions. It consists of a paper-based mechanism for handling checks and
drafts, and a paperless mechanism (such as electronic funds transfer) for
handling electronic commerce transactions. Also called payment
mechanism.

Composition of Money Supply

Money Supply refers to all the currency and other liquid instruments
in a country's economy on the date measured. The money supply roughly
includes both cash and deposits that can be used almost as easily as cash.

Included in money supply are M1, M2, and M3.

M1, M2 and M3 are measurements of the money supply, known as

the money aggregates.

M1 includes money in circulation plus checkable deposits in banks.

M2 includes M1 plus savings deposits and money market mutual

funds.
M3 includes M2 plus large time deposits in banks.

The money supply is the total quantity of money in the economy at

any given time.

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Economists measure the money supply because it is directly

connected to the activity taking place all around us in the economy. ... M2 =
M1 + small savings accounts, money market funds and small time deposits.

The Payment System under the Philippine Laws

The Philippines has recently passed Republic Act No. 11127,

otherwise known as the "National Payment Systems Act" (the NPSA),
legislation intended to promote the safe, secured, efficient and reliable
operation of payment systems within the Philippines.

Clearing of Checks

Check clearing is simply a process whereby funds move from one

account to another to settle a check payment. The amount is usually
credited to the bank account of deposit and an equivalent amount debited
at the bank from which it is drawn.

Efficiency of the Payment System

The Philippine Clearing House Corporation (PCHC) Multi- Transaction

Interbank Payment System (MIPS) was established in year 2000 for
interbank lending and borrowing, and the Philippine Domestic Dollar
Transfer System for moving US dollars across banks, & several other
payments systems.

Payment and Settlement Systems

Payment systems are essential to the effective functioning of
financial systems worldwide. They provide the channels through which funds
are transferred among banks and other institutions to discharge payment
obligations arising from economic and financial transactions across the
entire economy. An efficient, secure and reliable payment system reduces
the cost of exchanging goods and services, and it is an essential tool for the
effective implementation of monetary policy, and the smooth functioning of
money and capital markets. It is this key role played by payment and
settlement systems (PSS) in the smooth functioning of an economy in
general and its financial and monetary system in particular that gives the
central bank (CB) a strong incentive for ensuring that an effective, reliable
and secure payment and settlement system is in place.

In the Philippines, the BSP takes the lead in promoting an efficient

payments and settlements system by providing the necessary infrastructure
through the operations of the Philippine Real Time Gross Settlement System
or the “PhilPaSS”.
A Payment System is any system used to settle financial transactions

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through the transfer of monetary value. This includes the institutions,

instruments, people, rules, procedures, standards, and technologies that
make its exchange possible.

A common type of payment system is called an operational network

that links bank accounts and provides for monetary exchange using bank
deposits. Some payment systems also include credit mechanisms, which are
essentially a different aspect of payment.

Payment systems are used in lieu of tendering cash in domestic and

international transactions. This consists of a major service provided by
banks and other financial institutions. Traditional payment systems include
negotiable instruments such as drafts (e.g., cheques) and documentary
credits such as letters of credit.

With the advent of computers and electronic communications, many

alternative electronic payment systems have emerged. The term electronic
payment refers to a payment made from one bank account to another using
electronic methods and forgoing the direct intervention of bank
employees.[4] Narrowly defined electronic payment refers to e-commerce—a
payment for buying and selling goods or services offered through the
Internet, or broadly to any type of electronic funds transfer.
Modern payment systems use cash-substitutes as compared to
traditional payment systems. This includes debit cards, credit cards,
electronic funds transfers, direct credits, direct debits, internet
banking and e-commerce payment systems.

Financial Intermediation

Financial intermediation is a productive activity in which an

institutional unit incurs liabilities on its own account for the purpose of
acquiring financial assets by engaging in financial transactions on the
market; the role of financial intermediaries is to channel funds from
lenders to borrowers by intermediating.

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. Banks connect borrowers and lenders by
providing capital from other financial institutions.

Three Roles of Financial Intermediaries

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a. taking deposits from savers and lending the money to

borrowers;
b. pooling the savings of many and investing in a variety of
stocks, bonds, and other financial assets; and
c. making loans to small businesses and consumers.

According to the dominant economic view of monetary

operations, the following institutions are or can act as financial
intermediaries:

▪ Banks
▪ Mutual savings banks
▪ Savings banks
▪ Building societies
▪ Credit unions
▪ Financial advisers or brokers
▪ Insurance companies
▪ Collective investment schemes
▪ Others

 LEARNING ACTIVITY

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Identify the word or group of words that is being referred to in the

sentence.

1. This refers to any system used to settle

financial transactions through the transfer of monetary value and this
includes the institutions, instruments, people, rules, procedures, standards,
and technologies that make its exchange possible.

2. It is a financial system supporting transfer of

funds from suppliers (savers) to the users (borrowers), and from payers to
the payees, usually through exchange of debits and credits among financial
institutions.
3. These are measurements of the money supply,
known as the money aggregates.

4. It refers to all the currency and other liquid

instruments in a country's economy on the date measured. The

5. These are measurements of the money supply,

known as the money aggregates.

6. It includes money in circulation plus checkable

deposits in banks

7. It includes M1 plus savings deposits and money

market mutual funds.

8. It includes M2 plus large time deposits in

banks.
9. It is the total quantity of money in the
economy at any given time.

10. This includes debit cards, credit cards,

electronic funds transfers, direct credits, direct debits, internet banking
and e-commerce payment systems.

11. Otherwise known as the "National Payment

Systems Act" (the NPSA), legislation intended to promote the safe, secured,
efficient and reliable operation of payment systems within the Philippines.

12. It is simply a process whereby funds move

from one account to another to settle a check payment. The amount is
usually credited to the bank account of deposit and an equivalent amount
debited at the bank from which it is drawn.
13. This was established in year 2000 for
interbank lending and borrowing, and the Philippine Domestic Dollar
Transfer System for moving US dollars across banks, & several other
payments systems.

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14. They move funds from parties with excess

capital to parties needing funds.

15. It is a productive activity in which an

institutional unit incurs liabilities on its own account for the purpose of
acquiring financial assets by engaging in financial transactions on the
market; the role of financial intermediaries is to channel funds from lenders
to borrowers by intermediating.

Answer the following:

1. How effective and efficient is the payment system in the Philippines?

Discuss.

2. Enumerate and discuss the roles of financial intermediaries.

Lesson 3

 Origin of Central Banking-Creating a

Central Bank for the Philippines/
Brief History of the Bangko Sentral
ng Pilipinas, Objectives and
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Responsibilities of the Bangko
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A Brief History of Central Banks

A central bank is the term used to describe the authority responsible

for policies that affect a country’s supply of money and credit. More
specifically, a central bank uses its tools of monetary policy—open market
operations, discount window lending, changes in reserve requirements—to
affect short-term interest rates and the monetary base (currency held by
the public plus bank reserves) and to achieve important policy goals.

One of the world’s foremost economic historians explains the forces

behind the development of modern central banks, providing insight into
their role in the financial system and the economy.

A central bank is the term used to describe the authority responsible

for policies that affect a country’s supply of money and credit. More
specifically, a central bank uses its tools of monetary policy—open market
operations, discount window lending, changes in reserve requirements—to
affect short-term interest rates and the monetary base (currency held by
the public plus bank reserves) and to achieve important policy goals.

There are three key goals of modern monetary policy. The first and
most important is price stability or stability in the value of money. Today
this means maintaining a sustained low rate of inflation. The second goal is
a stable real economy, often interpreted as high employment and high and
sustainable economic growth. Another way to put it is to say that monetary
policy is expected to smooth the business cycle and offset shocks to the
economy. The third goal is financial stability. This encompasses an efficient
and smoothly running payments system and the prevention of financial
crises.

Beginnings

The story of central banking goes back at least to the seventeenth

century, to the founding of the first institution recognized as a central bank,
the Swedish Riksbank. Established in 1668 as a joint stock bank, it was
chartered to lend the government funds and to act as a clearing house for
commerce. A few decades later (1694), the most famous central bank of the
era, the Bank of England, was founded also as a joint stock company to
purchase government debt. Other central banks were set up later in Europe
for similar purposes, though some were established to deal with monetary
disarray. For example, the Banque de France was established by Napoleon in
1800 to stabilize the currency after the hyperinflation of paper money
during the French Revolution, as well as to aid in government finance. Early

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central banks issued private notes which served as currency, and they often
had a monopoly over such note issue.

While these early central banks helped fund the government’s debt,
they were also private entities that engaged in banking activities. Because
they held the deposits of other banks, they came to serve as banks for
bankers, facilitating transactions between banks or providing other banking
services. They became the repository for most banks in the banking system
because of their large reserves and extensive networks of correspondent
banks. These factors allowed them to become the lender of last resort in
the face of a financial crisis. In other words, they became willing to provide
emergency cash to their correspondents in times of financial distress.

Transition

The Federal Reserve System belongs to a later wave of central banks,

which emerged at the turn of the twentieth century. These banks were
created primarily to consolidate the various instruments that people were
using for currency and to provide financial stability. Many also were created
to manage the gold standard, to which most countries adhered.

The gold standard, which prevailed until 1914, meant that each
country defined its currency in terms of a fixed weight of gold. Central
banks held large gold reserves to ensure that their notes could be converted
into gold, as was required by their charters. When their reserves declined
because of a balance of payments deficit or adverse domestic
circumstances, they would raise their discount rates (the interest rates at
which they would lend money to the other banks). Doing so would raise
interest rates more generally, which in turn attracted foreign investment,
thereby bringing more gold into the country.

Central banks adhered to the gold standard’s rule of maintaining gold

convertibility above all other considerations. Gold convertibility served as
the economy’s nominal anchor. That is, the amount of money banks could
supply was constrained by the value of the gold they held in reserve, and
this in turn determined the prevailing price level. And because the price
level was tied to a known commodity whose long-run value was determined
by market forces, expectations about the future price level were tied to it
as well. In a sense, early central banks were strongly committed to price
stability. They did not worry too much about one of the modern goals of
central banking—the stability of the real economy—because they were
constrained by their obligation to adhere to the gold standard.

Central banks of this era also learned to act as lenders of last resort
in times of financial stress—when events like bad harvests, defaults by
railroads, or wars precipitated a scramble for liquidity (in which depositors
ran to their banks and tried to convert their deposits into cash). The lesson
began early in the nineteenth century as a consequence of the Bank of
England’s routine response to such panics. At the time, the Bank (and other

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European central banks) would often protect their own gold reserves first,
turning away their correspondents in need. Doing so precipitated major
panics in 1825, 1837, 1847, and 1857, and led to severe criticism of the
Bank. In response, the Bank adopted the “responsibility doctrine,” proposed
by the economic writer Walter Bagehot, which required the Bank to
subsume its private interest to the public interest of the banking system as a
whole. The Bank began to follow Bagehot’s rule, which was to lend freely on
the basis of any sound collateral offered—but at a penalty rate (that is,
above market rates) to prevent moral hazard. The bank learned its lesson
well. No financial crises occurred in England for nearly 150 years after 1866.
It wasn’t until August 2007 that the country experienced its next crisis.

The U.S. experience was most interesting. It had two central banks in
the early nineteenth century, the Bank of the United States (1791–1811) and
a second Bank of the United States (1816–1836). Both were set up on the
model of the Bank of England, but unlike the British, Americans bore a
deep-seated distrust of any concentration of financial power in general, and
of central banks in particular, so that in each case, the charters were not
renewed.

There followed an 80-year period characterized by considerable

financial instability. Between 1836 and the onset of the Civil War—a period
known as the Free Banking Era—states allowed virtual free entry into
banking with minimal regulation. Throughout the period, banks failed
frequently, and several banking panics occurred. The payments system was
notoriously inefficient, with thousands of dissimilar-looking state bank notes
and counterfeits in circulation. In response, the government created the
national banking system during the Civil War. While the system improved
the efficiency of the payments system by providing a uniform currency
based on national bank notes, it still provided no lender of last resort, and
the era was rife with severe banking panics.

The crisis of 1907 was the straw that broke the camel’s back. It led to
the creation of the Federal Reserve in 1913, which was given the mandate
of providing a uniform and elastic currency (that is, one which would
accommodate the seasonal, cyclical, and secular movements in the
economy) and to serve as a lender of last resort.

The Genesis of Modern Central Banking Goals

Before 1914, central banks didn’t attach great weight to the goal of
maintaining the domestic economy’s stability. This changed after World War
I, when they began to be concerned about employment, real activity, and
the price level. The shift reflected a change in the political economy of
many countries—suffrage was expanding, labor movements were rising, and
restrictions on migration were being set. In the 1920s, the Fed began
focusing on both external stability (which meant keeping an eye on gold
reserves, because the U.S. was still on the gold standard) and internal

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stability (which meant keeping an eye on prices, output, and employment).

But as long as the gold standard prevailed, external goals dominated.

Unfortunately, the Fed’s monetary policy led to serious problems in

the 1920s and 1930s. When it came to managing the nation’s quantity of
money, the Fed followed a principle called the real bills doctrine. The
doctrine argued that the quantity of money needed in the economy would
naturally be supplied so long as Reserve Banks lent funds only when banks
presented eligible self-liquidating commercial paper for collateral. One
corollary of the real bills doctrine was that the Fed should not permit bank
lending to finance stock market speculation, which explains why it followed
a tight policy in 1928 to offset the Wall Street boom. The policy led to the
beginning of recession in August 1929 and the crash in October. Then, in the
face of a series of banking panics between 1930 and 1933, the Fed failed to
act as a lender of last resort. As a result, the money supply collapsed, and
massive deflation and depression followed. The Fed erred because the real
bills doctrine led it to interpret the prevailing low short-term nominal
interest rates as a sign of monetary ease, and they believed no banks
needed funds because very few member banks came to the discount
window.

After the Great Depression, the Federal Reserve System was

reorganized. The Banking Acts of 1933 and 1935 shifted power definitively
from the Reserve Banks to the Board of Governors. In addition, the Fed was
made subservient to the Treasury. The Fed regained its independence from
the Treasury in 1951, whereupon it began following a deliberate
countercyclical policy under the directorship of William McChesney Martin.
During the 1950s this policy was quite successful in ameliorating several
recessions and in maintaining low inflation. At the time, the United States
and the other advanced countries were part of the Bretton Woods System,
under which the U.S. pegged the dollar to gold at $35 per ounce and the
other countries pegged to the dollar. The link to gold may have carried over
some of the credibility of a nominal anchor and helped to keep inflation
low.

The picture changed dramatically in the 1960s when the Fed began
following a more activist stabilization policy. In this decade it shifted its
priorities from low inflation toward high employment. Possible reasons
include the adoption of Keynesian ideas and the belief in the Phillips curve
trade-off between inflation and unemployment. The consequence of the
shift in policy was the build-up of inflationary pressures from the late 1960s
until the end of the 1970s. The causes of the Great Inflation are still being
debated, but the era is renowned as one of the low points in Fed history.
The restraining influence of the nominal anchor disappeared, and for
the next two decades, inflation expectations took off.

The inflation ended with Paul Volcker’s shock therapy from 1979 to
1982, which involved monetary tightening and the raising of policy interest
rates to double digits. The Volcker shock led to a sharp recession, but it was

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successful in breaking the back of high inflation expectations. In the

following decades, inflation declined significantly and has stayed low ever
since. Since the early 1990s the Fed has followed a policy of implicit
inflation targeting, using the federal funds rate as its policy instrument. In
many respects, the policy regime currently followed echoes the
convertibility principle of the gold standard, in the sense that the public has
come to believe in the credibility of the Fed’s commitment to low inflation.

A key force in the history of central banking has been central bank
independence. The original central banks were private and independent.
They depended on the government to maintain their charters but were
otherwise free to choose their own tools and policies. Their goals were
constrained by gold convertibility. In the twentieth century, most of these
central banks were nationalized and completely lost their independence.
Their policies were dictated by the fiscal authorities. The Fed regained its
independence after 1951, but its independence is not absolute. It must
report to Congress, which ultimately has the power to change the Federal
Reserve Act. Other central banks had to wait until the 1990s to regain their
independence.

Financial Stability

An increasingly important role for central banks is financial stability.

The evolution of this responsibility has been similar across the advanced
countries. In the gold standard era, central banks developed a lender-of-
last-resort function, following Bagehot’s rule. But financial systems became
unstable between the world wars, as widespread banking crises plagued the
early 1920s and the 1930s. The experience of the Fed was the worst. The
response to banking crises in Europe at the time was generally to bail out
the troubled banks with public funds. This approach was later adopted by
the United States with the Reconstruction Finance Corporation, but on a
limited scale. After the Depression, every country established a financial
safety net, comprising deposit insurance and heavy regulation that included
interest rate ceilings and firewalls between financial and commercial
institutions. As a result, there were no banking crises from the late 1930s
until the mid-1970s anywhere in the advanced world.

This changed dramatically in the 1970s. The Great Inflation

undermined interest rate ceilings and inspired financial innovations designed
to circumvent the ceilings and other restrictions. These innovations led to
deregulation and increased competition. Banking instability reemerged in
the United States and abroad, with such examples of large-scale financial
disturbances as the failures of Franklin National in 1974 and Continental
Illinois in 1984 and the savings and loan crisis in the 1980s. The reaction to
these disturbances was to bail out banks considered too big to fail, a
reaction which likely increased the possibility of moral hazard. Many of
these issues were resolved by the Depository Institutions Deregulation and
Monetary Control Act of 1980 and the Basel I Accords, which emphasized the
holding of bank capital as a way to encourage prudent behavior.

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Another problem that has re-emerged in modern times is that of asset

booms and busts. Stock market and housing booms are often associated with
the business cycle boom phase, and busts often trigger economic downturns.
Orthodox central bank policy is to not defuse booms before they turn to
busts for fear of triggering a recession but to react after the bust occurs and
to supply ample liquidity to protect the payments and banking systems. This
was the policy followed by Alan Greenspan after the stock market crash of
1987. It was also the policy followed later in the incipient financial crises of
the 1990s and 2000s. Ideally, the policies should remove the excess liquidity
once the threat of crisis has passed.

Challenges for the Future

The key challenge I see facing central banks in the future will be to
balance their three policy goals. The primary goal of the central bank is to
provide price stability (currently viewed as low inflation over a long-run
period). This goal requires credibility to work. In other words, people need
to believe that the central bank will tighten its policy if inflation threatens.
This belief needs to be backed by actions. Such was the case in the mid-
1990s when the Fed tightened in response to an inflation scare. Such a
strategy can be greatly enhanced by good communication.

The second policy goal is stability and growth of the real economy.
Considerable evidence suggests that low inflation is associated with better
growth and overall macroeconomic performance. Nevertheless, big shocks
still occur, threatening to derail the economy from its growth path. When
such situations threaten, research also suggests that the central bank should
temporarily depart from its long-run inflation goal and ease monetary policy
to offset recessionary forces. Moreover, if market agents believe in the
long-run credibility of the central bank’s commitment to low inflation, the
cut in policy interest rates will not engender high inflation expectations.
Once the recession is avoided or has played its course, the central bank
needs to raise rates and return to its low-inflation goal.

The third policy goal is financial stability. Research has shown that it
also will be improved in an environment of low inflation, although some
economists argue that asset price booms are spawned in such an
environment. In the case of an incipient financial crisis such as that just
witnessed in August 2007, the current view is that the course of policy
should be to provide whatever liquidity is required to allay the fears of the
money market. An open discount window and the acceptance of whatever
sound collateral is offered are seen as the correct prescription. Moreover,
funds should be offered at a penalty rate. The Fed followed these rules in
September 2007, although it is unclear whether the funds were provided at
a penalty rate. Once the crisis is over, which generally is in a matter of days
or weeks, the central bank must remove the excess liquidity and return to
its inflation objective.

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The Federal Reserve followed this strategy after Y2K. When no

financial crisis occurred, it promptly withdrew the massive infusion of
liquidity it had provided. By contrast, after providing funds following the
attacks of 9/11 and the technology bust of 2001, it permitted the additional
funds to remain in the money market once the threat of crisis was over. If
the markets had not been infused with so much liquidity for so long, interest
rates would not have been as low in recent years as they have been, and the
housing boom might not have as expanded as much as it did.

A second challenge related to the first is for the central bank to keep
abreast of financial innovations, which can derail financial stability.
Innovations in the financial markets are a challenge to deal with, as they
represent attempts to circumvent regulation as well as to reduce
transactions costs and enhance leverage. The recent subprime crisis
exemplifies the danger, as many problems were caused by derivatives
created to package mortgages of dubious quality with sounder ones so the
instruments could be unloaded off the balance sheets of commercial and
investment banks. This strategy, designed to dissipate risk, may have
backfired because of the opacity of the new instruments.

A third challenge facing the Federal Reserve in particular is whether

to adopt an explicit inflation targeting objective like the Bank of England,
the Bank of Canada, and other central banks. The advantages of doing so
are that it simplifies policy and makes it more transparent, which eases
communication with the public and enhances credibility. However, it might
be difficult to combine an explicit target with the Fed’s dual mandate of
price stability and high employment.

A fourth challenge for all central banks is to account for globalization

and other supply-side developments, such as political instability and oil
price and other shocks, which are outside of their control but which may
affect global and domestic prices.

The final challenge I wish to mention concerns whether implicit or

explicit inflation targeting should be replaced with price-level targeting,
whereby inflation would be kept at zero percent. Research has shown that a
price level may be the superior target, because it avoids the problem of
base drift (where inflation is allowed to cumulate), and it also has less long-
run price uncertainty. The disadvantage is that recessionary shocks might
cause a deflation, where the price level declines. This possibility should not
be a problem if the nominal anchor is credible, because the public would
realize that inflationary and deflationary episodes are transitory and prices
will always revert to their mean, that is, toward stability.

Such a strategy is not likely to be adopted in the near future because

central banks are concerned that deflation might get out of control or be
associated with recession on account of nominal rigidities. In addition, the
transition would involve reducing inflation expectations from the present

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plateau of about 2 percent, which would likely involve deliberately

engineering a recession—a policy not likely to ever be popular.

The Basic Nature of Central Banking can be enumerated as follows:

1. The Central Bank does not aim at profits but aims at national welfare.
2. The Central Bank does not compete with the member banks.
3. The Central Bank has special relationship with government and with
commercial banks.
4. The Central Bank is generally free from political influence.
5. The Central Bank is the apex body of the banking structure of the
country.
6. The Central Bank should have overall control over the financial
system.

Definition of Central Bank

A Central Bank is simply a bank which other bank have in common.

Central Bank - is an independent national authority that conducts

monetary policy, regulates banks, and provides financial services including
economic research. Its goals are to stabilize the nation’s currency, keep
unemployment low, and prevent inflation.

Central Bank - a national bank that provides financial and banking

services for its country's government and commercial banking system, as
well as implementing the government's monetary policy and issuing
currency.

Central Bank, (reserve bank, or monetary authority) - is an

institution that manages the currency and monetary policy of a state or
formal monetary union, and oversees their commercial banking system.

 LEARNING ACTIVITY

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Answer the following:

1. Briefly discuss the history of central banks.

2. Explain the following:

a) The Central Bank does not aim at profits but aims at national
welfare.

b) The Central Bank does not compete with the member banks.

c) The Central Bank has special relationship with government and

with commercial banks.

d) The Central Bank is generally free from political influence.

e) The Central Bank is the apex body of the banking structure of the
country.

f) The Central Bank should have overall control over the financial
system.

Lesson 4

Module II
 Origin of Central Banking-Creating a
Central Bank for the Philippines/Brief
History of the Bangko Sentral ng Pilipinas,
Objectives and Responsibilities of the
Bangko Sentral ng Pilipinas
 27

ORIGIN of CENTRAL BANKING

Creating a Central Bank for the Philippines

A group of Filipinos had conceptualized a central bank for the

Philippines as early as 1933. It came up with the rudiments of a bill for the
establishment of a central bank for the country after a careful study of the
economic provisions of the Hare-Hawes Cutting bill, the Philippine
independence bill approved by the US Congress. During the Commonwealth
period (1935-1941), the discussion about a Philippine central bank that
would promote price stability and economic growth continued. The
country’s monetary system then was administered by the Department of
Finance and the National Treasury. The Philippines was on the exchange
standard using the US dollar—which was backed by 100 percent gold
reserve—as the standard currency.

In 1939, as required by the Tydings-McDuffie Act, the Philippine

legislature passed a law establishing a central bank. As it was a monetary
law, it required the approval of the United States president. However,
President Franklin D. Roosevelt disapproved it due to strong opposition from
vested interests. A second law was passed in 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 February 1948 President
Manuel Roxas submitted to Congress a bill “Establishing the Central Bank of

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the Philippines, defining its powers in the administration of the monetary

and banking system, amending pertinent provisions of the Administrative
Code with respect to the currency and the Bureau of Banking, and for other
purposes.

15 June 1948. The bill was signed into law as Republic Act No. 265
(The Central Bank Act) by President Elpidio Quirino.

3 January 1949. The Central Bank of the Philippines (CBP) was

inaugurated and formally opened with Hon. Miguel Cuaderno, Sr. as the first
governor.

The broad policy objectives contained in RA No. 265 guided the CBP
in the implementation of its duties and responsibilities, particularly in
relation to the promotion of economic development in addition to the
maintenance of internal and external monetary stability.

November 1972. RA No. 265 was amended by Presidential Decree

No. 72 to make the CBP more responsive to changing economic conditions.

PD No. 72 emphasized the maintenance of domestic and

international monetary stability as the primary objective of the CBP.
Moreover, the CBP’s authority was expanded to include not only the
supervision of the banking system but also the regulation of the entire
financial system.

January 1981. Further amendments were made with the issuance of

PD No. 1771 to improve and strengthen the financial system, among which
was the increase in the capitalization of the CBP from P10 million to P10
billion.

1986. Executive Order No. 16 amended the Monetary Board

membership to promote greater harmony and coordination of government
monetary and fiscal policies.

3 July 1993. The Bangko Sentral ng Pilipinas (BSP), Republic Act No.
7653, the New Central Bank Act, was established to replace the Central
Bank of the Philippines as the country’s central monetary authority.

5 July 2005 – July 2, 2017. President Gloria Macapagal Arroyo

appointed Amado M. Tetangco, Jr. as the 3 rd Governor of the BSP. The first
BSP governor to serve two terms.

8 May 2017 President Rodrigo Duterte has named Deputy Governor

Nestor Espenilla, Jr. the new governor of the Bangko Sentral ng Pilipinas
effective July 2, 2017.

Objectives

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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.

• Liquidity Management. The BSP formulates and implements

monetary policy aimed at influencing money supply consistent with
its primary objective to maintain price stability.

• 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, the BSP adheres to
a market-oriented foreign exchange rate policy such that the role of
Bangko Sentral 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
corporation.

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The New Central Bank Act (RA 7653)

CHAPTER I
ESTABLISHMENT AND ORGANIZATION OF THE
BANGKO SENTRAL NG PILIPINAS

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ARTICLE I - CREATION, RESPONSIBILITIES AND CORPORATE POWERS OF

THE BANGKO SENTRAL

SECTION 1. Declaration of Policy. — The State shall maintain a central

monetary authority that shall function and operate as an independent and
accountable body corporate in the discharge of its mandated responsibilities
concerning money, banking and credit. In line with this policy, and
considering its unique functions and responsibilities, the central monetary
authority established under this Act, while being a government-owned
corporation, shall enjoy fiscal and administrative autonomy.

SECTION 2. Creation of the Bangko Sentral. — There is hereby established

an independent central monetary authority, which shall be a body corporate
known as the Bangko Sentral ng Pilipinas, hereafter referred to as the
Bangko Sentral.

The capital of the Bangko Sentral shall be Fifty billion pesos

(P50,000,000,000), to be fully subscribed by the Government of the
Republic, hereafter referred to as the Government, Ten billion pesos
(P10,000,000,000) of which shall be fully paid for by the Government upon
the effectivity of this Act and the balance to be paid for within a period of
two (2) years from the effectivity of this Act in such manner and form as the
Government, through the Secretary of Finance and the Secretary of Budget
and Management, may thereafter determine.

SECTION 3. Responsibility and Primary Objective. — The Bangko Sentral

shall provide policy directions in the areas of money, banking, and credit. It
shall have supervision over the operations of banks and exercise such
regulatory powers as provided in this Act and other pertinent laws over the
operations of finance companies and non-bank financial institutions
performing quasi-banking functions, hereafter referred to as quasi-banks,
and institutions performing similar functions.

The primary objective of the Bangko Sentral is to maintain price stability

conducive to a balanced and sustainable growth of the economy. It shall
also promote and maintain monetary stability and the convertibility of the
peso.

SECTION 4. Place of Business. — The Bangko Sentral shall have its principal
place of business in Metro Manila, but may maintain branches, agencies and
correspondents in such other places as the proper conduct of its business
may require.

SECTION 5. Corporate Powers. — The Bangko Sentral is hereby authorized

to adopt, alter, and use a corporate seal which shall be judicially noticed;
to enter into contracts; to lease or own real and personal property, and to
sell or otherwise dispose of the same; to sue and be sued; and otherwise to
do and perform any and all things that may be necessary or proper to carry

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out the purposes of this Act.

The Bangko Sentral may acquire and hold such assets and incur such
liabilities in connection with its operations authorized by the provisions of
this Act, or as are essential to the proper conduct of such operations.
The Bangko Sentral may compromise, condone or release, in whole or in
part, any claim of or settled liability to the Bangko Sentral, regardless of
the amount involved, under such terms and conditions as may be prescribed
by the Monetary Board to protect the interests of the Bangko Sentral.

ARTICLE II - THE MONETARY BOARD

SECTION 6. Composition of the Monetary Board. — The powers and

functions of the Bangko Sentral shall be exercised by the Bangko Sentral
Monetary Board, hereafter referred to as the Monetary Board, composed of
seven (7) members appointed by the President of the Philippines for a term
of six (6) years.

The seven (7) members are:

(a) the Governor of the Bangko Sentral, who shall be the Chairman of the
Monetary Board. The Governor of the Bangko Sentral shall be head of a
department and his appointment shall be subject to confirmation by the
Commission on Appointments. Whenever the Governor is unable to attend a
meeting of the Board, he shall designate a Deputy Governor to act as his
alternate: Provided, That in such event, the Monetary Board shall designate
one of its members as acting Chairman;

(b) a member of the Cabinet to be designated by the President of the

Philippines. Whenever the designated Cabinet Member is unable to attend a
meeting of the Board, he shall designate an Undersecretary in his
Department to attend as his alternate; and

(c) five (5) members who shall come from the private sector, all of whom
shall serve full-time: Provided, however, That of the members first
appointed under the provisions of this subsection, three (3) shall have a
term of six (6) years, and the other two (2), three (3) years.
No member of the Monetary Board may be reappointed more than once.

SECTION 7. Vacancies. — Any vacancy in the Monetary Board created by the

death, resignation, or removal of any member shall be filled by the
appointment of a new member to complete the unexpired period of the
term of the member concerned.

SECTION 8. Qualifications. — The members of the Monetary Board must be

natural-born citizens of the Philippines, at least thirty-five (35) years of
age, with the exception of the Governor who should at least be forty (40)
years of age, of good moral character, of unquestionable integrity, of known
probity and patriotism, and with recognized competence in social and

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economic disciplines.

SECTION 9. Disqualifications. — In addition to the disqualifications imposed

by Republic Act No. 6713, a member of the Monetary Board is disqualified
from being a director, officer, employee, consultant, lawyer, agent or
stockholder of any bank, quasi-bank or any other institution which is subject
to supervision or examination by the Bangko Sentral, in which case such
member shall resign from, and divest himself of any and all interests in such
institution before assumption of office as member of the Monetary Board.
The members of the Monetary Board coming from the private sector shall
not hold any other public office or public employment during their tenure.
No person shall be a member of the Monetary Board if he has been
connected directly with any multilateral banking or financial institution or
has a substantial interest in any private bank in the Philippines, within one
(1) year prior to his appointment; likewise, no member of the Monetary
Board shall be employed in any such institution within two (2) years after
the expiration of his term except when he serves as an official
representative of the Philippine Government to such institution.

SECTION 10. Removal. — The President may remove any member of the
Monetary Board for any of the following reasons:

(a) If the member is subsequently disqualified under the provisions of

Section 8 of this Act; or

(b) If he is physically or mentally incapacitated that he cannot properly

discharge his duties and responsibilities and such incapacity has lasted for
more than six (6) months; or

(c) If the member is guilty of acts or operations which are of fraudulent or

illegal character or which are manifestly opposed to the aims and interests
of the Bangko Sentral; or

(d) If the member no longer possesses the qualifications specified in Section

8 of this Act.

SECTION 11. Meetings. — The Monetary Board shall meet 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.

The presence of four (4) members shall constitute a quorum: Provided, That
in all cases the Governor or his duly designated alternate shall be among the
four (4).
Unless otherwise provided in this Act, all decisions of the Monetary Board
shall require the concurrence of at least four (4) members.

The Bangko Sentral shall maintain and preserve a complete record of the
proceedings and deliberations of the Monetary Board, including the tapes
and transcripts of the stenographic notes, either in their original form or in

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 34

microfilm.

SECTION 12. Attendance of the Deputy Governors. — The Deputy

Governors may attend the meetings of the Monetary Board with the right to
be heard.

SECTION 13. Salary. — The salary of the Governor and the members of the
Monetary Board from the private sector shall be fixed by the President of
the Philippines at a sum commensurate to the importance and responsibility
attached to the position.

SECTION 14. Withdrawal of Persons Having a Personal Interest. — In

addition to the requirements of Republic Act No. 6713, any member of the
Monetary Board with personal or pecuniary interest in any matter in the
agenda of the Monetary Board shall disclose his interest to the Board and
shall retire from the meeting when the matter is taken up. The decision
taken on the matter shall be made public. The minutes shall reflect the
disclosure made and the retirement of the member concerned from the
meeting.

SECTION 15. Exercise of Authority. — In the exercise of its authority, the

Monetary Board shall:

(a) 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. The rules and regulations issued
shall be reported to the President and the Congress within fifteen (15) days
from the date of their issuance;

(b) 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;

(c) 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

and subject to the Board's approval, shall be instituted as an integral
component of the Bangko Sentral's human resource development program:
Provided, That the Monetary Board shall make its own system conform as
closely as possible with the principles provided for under Republic Act No.
6758: Provided, however, That compensation and wage structure of
employees whose positions fall under salary grade 19 and below shall be in
accordance with the rates prescribed under Republic Act No. 6758.

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 35

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.

(d) adopt an annual budget for and authorize such expenditures by the
Bangko Sentral as are in the interest of the effective administration and
operations of the Bangko Sentral in accordance with applicable laws and
regulations; and

(e) 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.

In the event of a settlement or compromise, indemnification shall be

provided only in connection with such matters covered by the settlement as
to which the Bangko Sentral is advised by external counsel that the person
to be indemnified did not commit any negligence or misconduct.

The costs and expenses incurred in defending the aforementioned action,

suit or proceeding may be paid by the Bangko Sentral in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of the member, officer, or employee to repay the amount
advanced should it ultimately be determined by the Monetary Board that he
is not entitled to be indemnified as provided in this subsection.

SECTION 16. Responsibility. — Members of the Monetary Board, officials,

examiners, and employees of the Bangko Sentral who willfully violate this
Act or who are guilty of negligence, abuses or acts of malfeasance or
misfeasance or fail to exercise extraordinary diligence in the performance
of his duties shall be held liable for any loss or injury suffered by the Bangko
Sentral or other banking institutions as a result of such violation,
negligence, abuse, malfeasance, misfeasance or failure to exercise
extraordinary diligence.
Similar responsibility shall apply to members, officers, and employees of the
Bangko Sentral for: (1) the disclosure of any information of a confidential
nature, or any information on the discussions or resolutions of the Monetary
Board, or about the confidential operations of the Bangko Sentral, unless
the disclosure is in connection with the performance of official functions
with the Bangko Sentral, or is with prior authorization of the Monetary

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 36

Board or the Governor; or (2) the use of such information for personal gain
or to the detriment of the Government, the Bangko Sentral or third parties:
Provided, however, That any data or information required to be submitted
to the President and/or the Congress, or to be published under the
provisions of this Act shall not be considered confidential.

 LEARNING ACTIVITY

Identify the word or group of words that is being referred to in the

sentence.

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 37

1. The year when a group of Filipinos had

conceptualized a central bank for the Philippines.

2. The U.S. president who disapproved the

Philippine legislature when they passed a law establishing a central bank in
1939.
3. The Central Bank Act of 1948 which was the
establishment of the Central Bank of the Philippines and it was a definite
step toward national sovereignty.

4. The date when the bill was signed into law as

Republic Act No. 265 (The Central Bank Act) by President Elpidio Quirino.

5. The date when the Central Bank of the

Philippines (CBP) was inaugurated and formally opened with Hon. Miguel
Cuaderno, Sr. as the first governor.

6. This law guided the Central Bank of the

Philippines CBP in the implementation of its duties and responsibilities,
particularly in relation to the promotion of economic development in
addition to the maintenance of internal and external monetary stability.

7. The date when RA No. 265 was amended by

Presidential Decree No. 72 to make the CBP more responsive to changing
economic conditions.

8. It emphasized the maintenance of domestic

and international monetary stability as the primary objective of the CBP and
the authority was expanded to include not only the supervision of the
banking system but also the regulation of the entire financial system.

9. The date when further amendments were

made with the issuance of PD No. 1771 to improve and strengthen the
financial system, among which was the increase in the capitalization of the
CBP from P10 million to P10 billion.

10. In 1986 this E.O. amended the Monetary

Board membership to promote greater harmony and coordination of
government monetary and fiscal policies.

11. This law known as the New Central Bank Act,

was established to replace the Central Bank of the Philippines as the
country’s central monetary authority.

12. He was the 3rd Governor of the BSP to serve

two terms and appointed by then President Gloria Macapagal Arroyo.

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13. On May 8, 2017, he was appointed by

President Rodrigo Duterte as the new governor of the Bangko Sentral ng
Pilipinas effective July 2, 2017.

14. The BSP formulates and implements monetary

policy aimed at influencing money supply consistent with its primary
objective to maintain price stability.

15. 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.

16. The BSP extends discounts, loans and

advances to banking institutions for liquidity purposes.

7. The BSP supervises banks and exercises

regulatory powers over non-bank institutions performing quasi-banking
functions.

8. 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.

19. 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 Bangko Sentral is principally to
ensure orderly conditions in the market.

20. It functions as the banker, financial advisor

and official depository of the Government, its political subdivisions and
instrumentalities and government-owned and -controlled corporation.

Answer the following:

1. Discuss briefly the Bangko Sentral ng Pilipinas objectives.

2. The BSP provides policy directions in the areas of money, banking and
credit. Explain

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 39

3. Discuss briefly R.A. 7653-The New Central Bank Act.

4. The BSP is the “lender of last resort”. Explain.

 MODULE SUMMARY

Module II
 40

In module II, you have learned about monetary policy, the payment
system and financial intermediaries and central banking: development and
growth

There are four lessons in module II.

Lesson 1 consists of monetary policy its definition, monetary policy

and its objectives, advantages and disadvantages, limitations of monetary
policy, review of monetary and banking policy.

Lesson 2 deals with the payment system its definition, composition of

money supply, the payment system under the Philippine Laws, clearing of
checks, efficiency of the payment system, and financial intermediation.

Lesson 3 is the brief history of central banks, nature of central

banking, and definition of central banks.

Lesson 4 consists of origin of central bankingcCreating a central bank

for the Philippines/brief history of the Bangko Sentral ng Pilipinas,
objectives and responsibilities of the Bangko Sentral ng Pilipinas, and the
New Central Bank Act (RA 7653).

Congratulations! You have just studied Module II. now you are ready
to evaluate how much you have benefited from your reading by answering
the summative test. Good Luck!!!

 SUMMATIVE TEST

Answer the following:

1. Explain how the value of money is measured.

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 41

2. Describe the monetary and banking policy.

3. Discuss monetary policy and define payment system.

4. Enumerate the composition of money supply.

5. Discuss the payment system under the Philippine law.

6. Briefly discuss the history of the Bangko Sentral ng Pilipinas.

7. State RA 7653-The New Central Bank Act.

Module II