Dalora, Karen Joy B.

BSBA 3-A

MONETARY POLICY AND CENTRAL BANKING

PART ll - THE FINANCIAL SYSTEM

UNIT V - THE ESSENCE OF CENTRAL BANKING

Assessment:
5.1 Essay
(1) Explain the main role of the central bank in the economy. In the
discharge of its important function, what are the factors that it can
control?
Central banks can be considered as the engine of the economy, where like
the engine the power is controlled and regulated, any malfunction in the
engine creates a risk and problem in the system. Therefore; central banks are
extremely important tool, Wrightsman stated in defining monetary policy, “the
deliberate effort by the central bank to control money supply and credit
condition for the purpose of achieving certain broad economic objectives.
Central banks can control national money stocks in two ways: directly, by
limiting their issues of paper currency, and indirectly, by altering available
supplies of bank reserves and thereby influencing the value of the deposit
credits that banks are capable of maintaining. Generally speaking, however,
control is secured entirely though the market for bank reserves, with currency
supplied to banks on demand in exchange for existing reserve credits.

Assessment:
5.2 Essay
(1) What are the primary goals of Central Bank? Why is it important
for the Central Bank to attain these goals?

The Central Bank has been described as the "lender of last resort," which
means it is responsible for providing its nation's economy with funds
when commercial banks cannot cover a supply shortage. In other words, the
central bank prevents the country's banking system from failing.

However, the primary goal of central banks is to provide their countries'

currencies with price stability by controlling inflation. A central bank also acts
as the regulatory authority of a country's monetary policy and is the sole
provider and printer of notes and coins in circulation.
Assessment:
5.3 TRUE or FALSE. Write TRUE if the statement is correct. If not, write
FALSE and underline the word or group of words that make the
statement incorrect.
 5.4 Essay
(1) Do you agree that the classification of the Central Bank’s
different functions has been done properly? Do you are to said
grouping? If yes or no, explain your reason. If you disagree, how can
group the functions in a better manner?
Yes, I agree that the classification of the Central Bank’s different functions
has been done properly. Since, the central banks are to assist the government
in maintaining macroeconomic stability and to ensure financial stability in the
monetary system. Overall, it has one goal and objective to facilitate and do
the functions properly.

UNIT VI - THE PHILIPPINE FINANCIAL SYSTEM

Assessment:
6.1 Essay
(1) What are the major components of the Philippine Financial
System. How are each component involved in the money-creation
process.
The Philippine financial system consists of:
1. Banks and,
2. Non-bank financial Intermediaries.
And the the major types of financial institutions in the Philippines are the
commercial banks, rural banks, thrift banks, specialized government financial
institutions, offshore banks, insurance companies and non-bank financial
institutions.
The first four types of financial institutions take deposits from public.
Because of this, the Bangko Sentral ng Pilipinas supervises them.

(2) Having known the major functionalities of the financial system,

how do they perform their roles in the savings-investment process?
Explain your answer.
The financial system consists of the group of institutions in the economy
that help to match one person’s saving with another person’s investment. It
moves the economy’s scarce resources from savers to borrowers.
Financial markets coordinate the economy’s saving and investment in the
market for loanable funds. The market for loanable funds is the market in
which those who want to save supply funds and those who want to borrow to
invest demand funds.
Assessment:
6.2 Essay
(1) While non-financial institutions are also doing quasi-banking
functions and are involved in money creation and savings investment
process, how do banks perform their money creation function and
savings-investment function? Elaborate on your answer.
Diversified banks make money in a variety of different ways; however, at
the core, banks are considered lenders. Banks generally make money by
borrowing money from depositors and compensating them with a certain
interest rate. The banks will lend the money out to borrowers, charging the
borrowers a higher interest rate and profiting off the interest rate spread.
Additionally, banks usually diversify their business mixes and generate
money through alternative financial services, including investment
banking and wealth management. However, broadly speaking, the money-
generating business of banks can be broken down into the following:

1. Interest income
2. Capital markets income
3. Fee-based income
4.
Assessment:
6.3 Essay
(1) What are the component parts of the non-bank financial system?
Discuss briefly the salient feature of each.
Component Institutions:
1. Investment Houses
- Creating capital for businesses that deal in portfolio management,
stockbrokerage, financial consultancy and loan operations.
2. Financing Companies
- Specialized financial institution that supplies credit for the purchase
of consumer goods and services by purchasing the time-sales contracts of
merchants or by granting small loans directly to consumers.
3. Investment Companies
- Dealing in the business of investing or stock trading.
4. Securities Dealers and Brokers
- Obtaining stock of other corporation and retailing stocks to the public for
profit.
5. Venture Capital Corporations
- Helping small and medium scale businesses through providing loans in
exchange for equity in the business financed.
6. Pawnshops
- Engaged in lending money on personal property delivered as security or
pledge.
7. Lending Investors
- Those who are using their own funds, granting all types of loans mostly
on short term basis, and often offering it clean or without collateral.
8. Government Non-Bank Institutions
- Investment or financing companies created under special charters.
9. Mutual Building and Loan Associations
- Associations that tries to encourage diligence, savings and home
ownership among its members.
10. Savings and Loan Associations (SLAs)
- Associations operating under the Savings and Loan Association Act that
are licensed and supervised by the BSP.

(2) What is the role of non-bank financial institutions in maintaining

monetary stability in the economy?
NBFIs supplement banks in providing financial services to individuals and
firms. They can provide competition for banks in the provision of these
services. While banks may offer a set of financial services as a package deal,
NBFIs unbundle these services, tailoring their services to particular groups.
Additionally, individual NBFIs may specialize in a particular sector, gaining an
informational advantage. By this unbundling, targeting, and specializing,
NBFIs promote competition within the financial services industry.

Assessment
6.4 Essay
(1) So what is the role of the Central Bank in supervising and
regulating financial institutions? Elaborate on your answer.
A central bank is a financial institution given privileged control over the
production and distribution of money and credit for a nation or a group of
nations. In modern economies, the central bank is usually responsible for the
formulation of monetary policy and the regulation of member banks. They are
responsible for overseeing the monetary system and policy of a nation or
group of nations, regulating its money supply, and setting interest rates.

(2) What are the actions that the Central Bank can take to make
sure that financial institutions will abide its policy direction?
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 function.
They have made some duties and responsibilities through its three major
operating sectors. Those responsibilities are: supervising and conducting
periodic and special examinations of banks and quasi-banks,
tracking/monitoring foreign exchange transaction and external debt, currency
issue and retirement, loans and credit, government securities and branch
operations of the BSP. And lastly, for the accounting operations, information
technology systems, human resources, property management, and other
support services of BSP.

UNIT Vll - BANGKO SENTRAL NG PILIPINAS

Assessment:
7.1 Essay
(1) What are the different characteristics of a Central Bank? How is
each trait different from the others ?
Central Banks around the world share common characteristics:
1. Publicly owned
2. Bank of currency issues and ultimate source of money
3. Banker’s Bank
4. Custodian of the country’s reserves of foreign currencies
5. Regulation of monetary and financial activities
The critical feature of a central bank—distinguishing it from other banks—
is its legal monopoly status, which gives it the privilege to issue banknotes
and cash. Private commercial banks are only permitted to issue demand
liabilities, such as checking deposits.

Assessment:
7.2 Essay
(1) What is the organizational structure of the Bangko Sentral
starting from the top?
 (2) What is the law that created the Bangko Sentral ng Pilipinas?
What does it purpose to accomplish?
Republic Act No. 7653, The law provides for the establishment of an
independent monetary authority to be known as the Bangko Sentral ng
Pilipinas, with the maintenance of price stability explicitly stated as its primary
objective. This objective was only implied in the old Central Bank charter. The
law also gives the Bangko Sentral fiscal and administrative autonomy which
the old Central Bank did not have. On 3 July 1993, the New Central Bank Act
took effect.
 7.3 Essay
(1) You are now thoroughly familiar with the organizational
structure of the Bangko Sentral ng Pilipinas. Based on our lesson,
where does the policy directions on monetary policy originate? Trace it
from the source of information from which decisions are based, to the
one that conceptualizes the regulations and policies, and to
implementing arm.
The Central Bank of the Philippines was established in June 1948 and
began operation the following January. It was charged with maintaining
monetary stability; preserving the value and covertibility of the peso; and
fostering monetary, credit, and exchange conditions conducive to the
economic growth of the country. In 1991 the policy-making body of the Central
Bank was the Monetary Board, composed of the governor of the Central Bank
as chairman, the secretary of finance, the director general of the National
Economic and Development Authority, the chairman of the Board of
Investment, and three members from the private sector. In carrying out its
functions, the Central Bank supervised the commercial banking system and
managed the country's foreign currency system. 
From the time it began operations until the early 1980s, the Central Bank
intervened extensively in the country's financial life. It set interest rates on
both bank deposits and loans, often at rates that were, when adjusted for
inflation, negative. Central Bank credit was extended to commercial banks
through an extensive system of rediscounting. In the 1970s, the banking
system resorted, with the Central Bank's assistance, to foreign credit on terms
that generally ignored foreign-exchange risk. The combination of these factors
mitigated against the development of financial intermediation in the economy,
particularly the growth of long-term saving. The dependence of the banking
system on funds from the Central Bank at low interest rates, in conjunction
with the discretionary authority of the bank, has been cited as a contributing
factor to the financial chaos that occurred in the 1980s.
At the start of the 1980s, the government introduced a number of monetary
measures built on 1972 reforms to enhance the banking industry's ability to
provide adequate amounts of long-term finance. Efforts were made to
broaden the capital base of banks through encouraging mergers and
consolidations. A new class of banks, referred to as "expanded commercial
banks" or "unibanks," was created to enhance competition and the efficiency
of the banking industry and to increase the flow of long-term saving.
Qualifying banks--those with a capital base in excess of P500 million--were
allowed to expand their operations into a range of new activities, combining
commercial banking with activities of investment houses. The functional
division among other categories of banks was reduced, and that between
rural banks and thrift banks eliminated. 
Monetary and fiscal policies that were set by the government in the early
1980s, contributed to large intermediation margins, the difference between
lending and borrowing rates. In 1988, for example, loan rates averaged 16.8
percent, whereas rates on savings deposits were only slightly more than 4
percent. The Central Bank traditionally maintained relatively high reserve
requirements (the proportion of deposits that must remain in reserve), in
excess of 20 percent. In 1990 the reserve requirement was revised upward
twice, going from 21 percent to 25 percent. In addition, the government levied
both a 5 percent gross tax on bank receipts and a 20 percent tax on deposit
earnings, and borrowed extensively to cover budget deficits and to absorb
excess growth in the money supply.
Money supply growth has been highly variable, expanding during
economic and political turmoil and then contracting when the Philippines tried
to meet IMF requirements (see table 7, Appendix). Before the 1969, 1984,
and 1986 elections, the money supply grew rapidly. The flooding of the
economy with money prior to the 1986 elections was one reason why the
newly installed Aquino administration chose to scrap the existing standby
arrangement with the IMF in early 1986 and negotiate a new agreement. The
Central Bank released funds to stabilize the financial situation following a
financial scandal in early 1981, after the onset of an economic crisis in late
1983, and after a coup attempt in 1989. The money was then repurchased by
the Treasury and the Central Bank--the so-called Jobo bills, named after then
Central Bank Governor Jose Fernandez--at high interest rates, rates that
peaked in October 1984 at 43 percent and were approaching 35 percent in
late 1990. The interest paid on this debt necessitated even greater borrowing.
By contrast, in 1984 and 1985, in order to regain access to external capital,
the growth rate of the money supply was very tight. IMF dictates were met,
very high inflation abated, and the current account was in surplus. Success,
however, was obtained at the expense of a steep fall in output and high
unemployment.

Source:
https://photius.com/countries/philippines/economy/philippines_economy_monetary_policy.html