Banking and Financial Institutions

Lesson 1:

Barter - A system of exchange in which individuals trade goods and services directly for other
goods and services.

Disadvantages of Barter:

1. double coincidence of wants

2. goods could not store purchasing power
3. price inequality

Money - anything that is commonly used and generally accepted as medium of exchange and
standard of value and generally accepted for exchange of good or services or payment of debts.

Key Functions of Money:

1. medium of exchange (payment for goods and services)

2. unit of account (way of measuring value in an economy)
3. store of value (wealth that can be used to buy goods/services)
4. standard of deferred payment (facilitates exchange over time)

4 Types of Money:

1. Commodity Money (similar to barter)

2. Fiat Money (approved by the government/legal tender)
3. Fiduciary Money (liquidity available to economic actors)
4. Commercial Bank Money (creation of credit by banks)

Financial Institutions – bridge between fund sources and fund sources.

Banking Institutions:

1. Commercial Banks (accept savings, check, & time deposits)

2. Thrift Banks (specializes in offering savings accounts and originating home mortgages
for consumers)
3. Rural Banks (based in rural areas, rural-based economic factors)
4. Non-banking inst (can collect contributions, invest in stocks, business)
Central Bank of the Philippines - was given sole authority to issue the country's paper money;
regulate and supervise the country's banking system.

Lesson 2:

Financial Institutions – involved in collecting and distributing money.

Financial Intermediaries – middleman between two parties.

Depository Inst – collect from depositors then lend to debtors. Mitigate the lending risks.

Services provided by banks:

1. The provide safekeeping services and liquidity.

2. They provide a payment system.
3. Pool money of many savers, then lending it.
4. They invest in securities.

Transaction/Checkable Deposits – withdraw money anytime, and anywhere.

Non-transaction Deposits – withdrawals are limited.

Non-depository inst – collect money as premiums, contributions, or selling securities.

Insurance Companies – protect customers from financial distressed caused by unforeseen events.

Pension Funds – workers can retire with an income provided from invested funds.

Securities Firms – allows investors to invest in various financial markets.

1. Investment companies - pool the investments of many people into a single portfolio that
is managed by professional managers.
2. Brokerages – allows retail investors to invest.
3. Investment Banks - help businesses and other organizations to sell their own stocks and
bonds to the investing public.
4. Finance Companies – provide loans using the issuance of short-term securites.
Lesson 3:

Classification of Financial Systems

Depository Institutions:

1. Universal Banks (combines investment and commercial bank)

2. Commercial Banks
3. Thrift Banks
4. Rural Banks
5. Specialized Banks (financing the rural asset less and landless people)
6. Offshore Banking Units (subsidiaries of affiliates of foreign banks)

Non-depository Institutions:

1. Pawnshops or pawnbrokers
2. Non-stock savings and loan associations (provide short-term loans)
3. Mutual and building loan associations (extending long-term mortgage loans)
4. Credit Unions (small producers or consumers join together)

External Financing – business funds acquired outside the company.

Direct Finance – funds obtained by selling stocks.

Indirect Finance – funds obtained from banks.

Internal Financing – business funds obtained inside the company (business owners, income from
business)

Financial Instruments – legal agreements that require one party to pay money in exchange for
acquisition of rights, premiums...

Types of Financial Instrument

(for future interest payments and repayment of principal)

1. Loans and Bonds - A lender gives money to a borrower in exchange for regular payments
of interest and principal.
 2. Asset-backed securities - Lenders pool their loans together and sell them to investors.

(for possible capital gains or interest)

1. Stocks – company sells ownership interests

2. Funds - fund buys other securities earning interest and capital gains which increases the
share price of the fund

(for possible capital gains or to offset risks)

1. Options - there is a writer, the person who is selling the right, and a holder, the person
who is buying the right.
2. Futures - both parties are obligated to buy or sell.

(for protection against risks)

1. Insurance - contracts promise to pay for a loss event in exchange for a premium

Financial Markets – where financial securities are bought and sold.

Financial Market Structure

1. Over-the-counter - is the largest market both in the number of transactions and in the
number of securities sold.
2. Electronic Communication Network – electronic networks where buyers and sellers can
directly interact with each other. (Future of trading)

Financial Market Categories

1. Primary – securities are created, selling new stocks and bonds to the public, e.g. Initial
Public Offering (company to investor)
2. Secondary Market – securities are traded, higher price of stocks, investor to investor.