 FINANCIAL INTERMEDIARY

- An entity that that acts as the middleman between two parties in a

financial transaction, such as a commercial bank, investment bank,
mutual fund, or pension fund
 TYPES OF FINANCIAL INTERMEDIARIES
a. Mutual Funds - provide active management of capital pooled by
shareholders. The fund manager connects with shareholders through
purchasing stock in companies he anticipates may outperform the
market
 BENEFITS OF FINANCIAL INTERMEDIARIES
a. Reducing costs on several fronts and financial transactions
b. Have access to economies of scale to expertly evaluate the credit
profile of potential borrowers and keep records and profiles cost-
effectively
 WHAT IS A BANK?
- a financial institution that is licensed to accept checking and savings
deposits and make loans
- provide related services such as individual retirement accounts (IRAs),
certificates of deposit (CDs), currency exchange, and safe deposit
boxes
- a heavily regulated industry worldwide
 UNDERSTANDING BANKS
- have existed since at least the 14th century
- provide a safe place for consumers and business owners to stow their
cash and a source of loans for personal purchases and business
ventures
 BASIC BANK SERVICE
- offer various ways to stash your cash and various ways to borrow
money
 CHECKING ACCOUNTS
- are deposits used by consumers and businesses to pay their bills and
make cash withdrawals. They pay little or no interest and typically
come with monthly fees, usage fees, or both
 SAVINGS ACCOUNTS
- pay interest to the depositor
- Depending on how long account holders hope to keep their money in
the bank, they can open a regular savings account that pays a little
interest or a certificate of deposit (CD) that pays a little more interest
- The CDs can earn interest for as little as a few months or as long as
five years or more
 LOAN SERVICES
- Banks make loans to consumers and businesses
 - The cash that is deposited by their customers is lent out to other
customers at a higher rate of interest than the depositor is paid
 TYPES OF BANKS
a. Retail banks – offer services to the general public and usually have
branch offices as well as main offices for the convenience of their
customers
b. Commercial/Corporate banks - tailor their services to business
clients, from small business owners to large, corporate entities; also
offer credit services, cash management, commercial real estate
services, employer services, and trade finance
c. Investment banks - focus on providing corporate clients with complex
services and financial transactions such as underwriting and
assisting with merger and acquisition (M&A) activity
d. Central banks - banks does not deal directly with the public; an
independent institution authorized by a government to oversee the
nation's money supply and its monetary policy
 RISKS FACED BY REGULATION
a. Credit Risk - the biggest risk for banks; occurs when borrowers or
counterparties fail to meet contractual obligations
b. Operational Risk - the risk of loss due to errors, interruptions, or
damages caused by people, systems, or processes; risk is low for
simple business operations such as retail banking and asset
management, and higher for operations such as sales and trading
c. Market Risk - mostly occurs from a bank’s activities in capital
markets; due to the unpredictability of equity markets, commodity
prices, interest rates, and credit spreads
d. Liquidity Risk - refers to the inability of a bank to access cash to meet
funding obligations
 BANKING REGULATION
- Imposes various requirements, restrictions, and guidelines on banks
- the process by which a government or other institution supervises the
activities of banks
 MAIN PURPOSE OF A BANKING REGULATION
- to protect consumers, ensure the stability of the financial system, and
prevent crime
- promotes safe and sound banking practices by banning certain fees
and limiting interest rates
 WHO REGULATES BANKS?
- bank regulation varies from country to country
- typically, there is more than one regulatory agency per country
 IMPORTANCE OF A BANKING REGULATION
 - a critical tool for ensuring the stability and efficiency of the banking
sector
- protects consumers by ensuring that banks maintain adequate capital
levels, disclose risks inherent in their business activities, and follow
sound risk management practices
- promotes financial stability by limiting the ability of banks to engage
in activities that could lead to a systemic crisis
- helps to ensure that banks can serve as reliable sources of credit for
businesses and households
 WHY ARE BANKS HIGHLY REGULATED?
- banks deal with large amounts of money, which makes them a prime
target for crime
- banks play a crucial role in the economy, and their failure could have
devastating consequences
- banks act as intermediaries between borrowers and lenders, helping
to allocate capital to its most productive uses
- to prevent bank failures and protect the economy
 SOME EXAMPLES OF BANKING REGULATIONS
a. Reserve requirements – dictate how much money banks must keep on
hand
b. Capital requirements – dictate how much money banks can lend
c. Liquidity requirements – dictate how easily banks can cover their
assets into cash
 BANKING OPERATIONS IN THE PHILIPPINES
1. The Philippine banking industry has always played a substantial role in
sustaining the pace of growth of the country’s economy
2. The entire banking sector is supervised by the Central bank of the
Philippines, or most commonly known as the Bangko Sentral ng Pilipinas
3. 45 Commercial and Universal banks together hold around 90% of the
total market share of banking industry in the Philippines
4. Area of services: wholesale, retail and corporate banking to treasury,
trade, underwriting and investment advisory
5. Commercial banks – provide basic banking services and products to the
general public; services: checking and savings accounts, loans and
mortgage, basic investment services such as CDs, safe deposit boxes
6. Universal banks – offer credit loans, deposits, asset management,
investment advisory, payment processing, securities transactions,
underwriting, and financial analysis; services: deposit accounts, variety
of investment services, insurance services
7. There are 406 Rural and Cooperative banks in the Philippines
8. Rural banks - grant loans and make investments, accept savings and
time deposits, and acts as official depository of municipal, city or
provincial funds where the bank is located
9. Cooperative banking - retail banking carried out by credit unions,
mutual savings banks, building societies and cooperatives
10. Thrift banks - further categorized into Private development banks,
Savings and mortgage banks, Loan associations, stock savings and
microfinance saving banks; engaged in providing trade services to small
and medium-sized enterprises and individual entrepreneurs; major
activities: collection of deposits from small savers and investing them
into profitable portfolios
11. Mobile banking/Branchless banking - A relatively new form of
service where banks or financial institutions allow their customers to
conduct financial transactions through their mobile devices
12. Retail wealth management - Provided to young or new investors
showing interest in mutual fund units and other such financial products
13. Microfinance - financial services provided to low-income
individuals or groups who are typically excluded from traditional banking
 BANGKO SENTRAL NG PILIPINAS (BSP)
a. Mission – To promote and maintain price stability, a strong financial
system, and a safe and efficient payments and settlements system
conducive to a sustainable and inclusive growth of the economy
b. Vision - The BSP aims to be recognized globally as the monetary
authority and primary financial system supervisor that supports a
strong economy and promotes a high quality of life for all Filipinos
c. Core Values – Excellence, Patriotism, Integrity, Solidarity,
Accountability
d. Organizational Structure
 SECURITIES MARKET
1. Security – a fungible and tradable financial instrument that holds
some type of monetary value; can be in the form of stock, bond, or
option
2. Five main categories of Securities
a. Equity securities – represents ownership interest held by
shareholders in an entity realized in the form of shares of capital
stock
b. Debt securities – represents borrowed money that must be repaid
with terms such as size of the loan, interest rate, and maturity
date; typically issued or fixed
c. Derivatives securities - type of financial contract whose price is
determined by the value of some underlying asset such as stock,
bond, or commodity
d. Hybrid securities - combine some of the characteristics of both
debt and equity securities; examples: equity warrants, convertible
bonds, preference shares
e. Asset-backed securities - Represents a part of a large basket of
similar assets such as loans, leases, credit card debts, mortgages,
or anything else that generates income
3. Securities Market – where trades of securities such as stocks and
bonds take place based on demand and supply
a. Primary Market – where new securities are created and issued;
companies set the price of their stock
b. Secondary Market – where existing securities are bough and sold
or traded; the price of the stock is set by supply and demand
4. Bond Market - often called the debt market, fixed-income market, or
credit market; collective name to trades and issues of debt securities
5. Bond – certificate of debt issued by a company; debt security; similar
to IOU
6. Three components of Bond Market
a. Principal of the Bond - refers to the amount of the money the
issuer agrees to pay to the lender at the bond’s expiration
b. Coupon Rate - the percentage of the principal paid back to the
investor as interest
c. Maturity Date - refers to the date when the principal amount of an
investment becomes due and is repaid to the investor
7. Credit Rating – opinion of a particular credit agency regarding the
ability and willingness of an entity to fulfill its financial obligations in
completeness and established due dates
8. Types of Credit Rating
a. Investment grade – ratings mean the investment is considered
solid by the rating agency; low risk
b. Speculative grade – high risk; offers higher interest rate to reflect
the quality of the investment/s
9. Users of Credit Rating
a. Investors
b. Intermediaries: investment banks
c. Issuers of debt
d. Businesses and Corporations
10. Stock exchange – a centralized location to buy and sell equities or
shares
11. Derivatives – security whose value depends on the value of the
underlying assets; can be used for hedging and for speculation
12. Groups of Derivatives
a. Forward Contract – mutual commitment of two parties to buy/sell
the underlying asset at a specified price on some future date; only
trade over-the-counter (OTC)
b. Option Contract - similar to a futures contract in that it is an
agreement between two parties to buy or sell an asset at a
predetermined future date for a specific price; the buyer is not
obliged to exercise their agreement to buy or sell
c. Swap Contract - often used to exchange one kind of cash flow with
another
d. Future Contract - an agreement between two parties for the
purchase and delivery of an asset at an agreed-upon price at a
future date; special types of forward contracts traded in future
markets
 PHILIPPINE STOCK EXCHANGE INC. (PSE)
- a private organization that provides and ensures a fair, efficient,
transparent, and orderly market for the buying and selling of
securities
- Functions
1. As a Regulator – watchdog of the market; regulates and monitors al
stock market transactions
a. Companies – support a reliable environment for new and
existing equity insurances
b. Stockbrokers – maintain and enhance as needed the market
regulation of trading participants
c. Investors – encourage investments and protect the local and
foreign investor base
2. As a Company
a. A publicly listed company w/ a stable shareholder base
b. To make efficient use of the company’s resources and remains
steadfast in pursuing reforms and initiatives for improvement of
investor’s confidence and enhancement of shareholder value
c. Lined up key programs for the stock market and push the
Exchange to new heights
- Strategic Initiatives
1. List more companies and securities
2. Expand and educate the investor base
3. Value and enforce corporate governance standards
4. Enhance shareholder value
5. Launch new products and services
6. Upgrade market infrastructure and human resources
7. Partner with government and other stakeholders
- Updates and Developments
1. Tighter Disclosure Rules – Blackout Rule, Selective Disclosure
Rule, 10-minute rule access to the Online Disclosure System
2. Personal Equity Retirement Account (PERA) – enacted into law
on August 22, 2008
3. Real Estate Investment Trust (REIT) – enacted into law on
December 2009
4. Creation of the Philippine Securities Regulatory Corporation
5. Continuous Implementation of CHED Memorandum Order 39
6. CHED stand-alone subject for all college students by 2010
7. Stock market topics integrated in high school curriculum
8. New Trading System (NTS) – launched in July 26, 2010
9. Office Integration plan
10. ASEAN Linkage
11. Governance (CG) Improvement Plan – improvement of
transparency, listing and disclosure policies, practices and
market regulation; creation of Special CG Segment known as
Maharlika Board