THE Philippine Financial System PDF

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CHAPTER 6 THE PHILIPPINE FINANCIAL SYSTEMINTRODUCTIONWell-functioning financial system is crucial to a country's economic health so much so that when the financial system breaks down, as it has in Russia and in Southeast Asia recently, severe economic hardship results.The financial system, through t...

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CHAPTER 6 THE PHILIPPINE FINANCIAL SYSTEM INTRODUCTION Well-functioning financial system is crucial to a country's economic health so much so that when the financial system breaks down, as it has in Russia and in Southeast Asia recently, severe economic hardship results. The financial system, through the various financial markets and financial intermediaries, has the basic function of moving funds from those who have a surplus to those who have a shortage of funds. To study the effects of financial markets and financial intermediaries on the economy, we need to acquire an understanding of their general structure and operation. STRUCTURE OF THE PHILIPPINE FINANCIAL SYSTEM I. II.

Bangko Sentral Ng Pilipinas Banking Institutions A. Private Banking Institutions. 1. Expanded Commercial Banks/Universal Banks (EKB/UB) 2. Commercial Banks (KB) 3. Thrift Banks (TB) a) Savings and Mortgage Banks (SMB) b) Private Development Banks (PDB) c) Stock Savings and Loan Associations (SSŁLA) 4. Rural Banks (RB) 5. Cooperative Banks B. Government banking institutions. 1. Development Bank of the Philippines (DBP) 2. Land Bank of the Philippines (LBP) 3. Philippine Al-Amanah Islamic Investment Bank III. Non-Bank Financial Institutions

A. Private non-bank financial institutions 1. Investment houses 2. Investment banks 3. Financing companies 4. Securities dealers/brokers 5. Savings and loan associations 6. Mutual funds 7. Pawnshops 8. Lending investors 9. Pension funds 10. Insurance companies 11. Credit union B. Government Non-bank financial institutions 1. Government Service Insurance System (GSIS) 2. Social Security System (SSS) 3. Pag-ibig BRIEF DESCRIPTION OF THE FINANCIAL INSTITUTIONS I. Bangko Sentral ng Pilipinas (discussed in Chapter 16) II. Banking Institutions A. Private Banking Institutions 1. Universal Bank (UB) or Expanded Commercial Bank (EXB) is any commercial bank, which performs the investment house function in addition to its commercial banking authority. It may invest in the equities of allied and non-allied enterprises) Allied enterprises may either be financial or non-financial. 2. Commercial Bank or Domestic Bank (KB) is any commercial bank that is confined only to commercial bank functions such as accepting drafts and issuing letters of credit, discounting and negotiating promissory notes, drafts and bills of exchange, and other evidences of debt, accepting or creating demand deposits, receiving other types of deposits and deposit substitutes, buying and selling foreign exchange, and gold or silver bullions, acquiring marketable bonds and other debt securities, and extending credit subject to such rules that the Monetary Board may promulgate. 3. Thrift Banks (TB)- shall include savings and mortgage banks, stock savings and loan associations and private development banks. Their function is to accumulate the savings of depositors and

invest them together with their capital, loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgages, bonds and other forms of security or loans for personal or household finance, whether, secured or unsecured, or in financing for home building and home development; in readily marketable and debt securities; in commercial papers and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; and in such other investments and loans which the Monetary Board may determine as necessary in the furtherance of national economic objectives. a) Stock Savings and Mortgage Bank (SSMB) is any corporation organized for the purpose of accumulating the savings of depositors and investing them, together with its capital, in readily marketable bonds and debt securities; checks, bills of exchange, acceptances or notes arising out of commercial transactions or in loans secured by bonds, mortgages or real estate and insured improvements thereon and other forms of security or in loans for personal or household finances whether secured or unsecured, and financing for home building and home development. b) Private Development Bank (PDB) is a bank that exercises all the powers and assumes all the obligations of the savings and mortgage bank as provided in the General Banking Act except as otherwise stated. The private development bank helps construct, expand and rehabilitate agricultural and industrial sectors. The Development Bank of the Philippines is the government counterpart of the private development banks and helps the private development banks augment their capitalization as provided under R.A.4093 as amended. c) Stock Savings and Loan Association (SLA) is any corporation engaged in the business of accumulating the savings of its members or stockholders and using such accumulated funds, together with its capital for loans and investment in securities of productive enterprises, or in securities of the government and its instrumentalities, provided that they are primarily engaged in servicing the needs of households by providing personal finance and long term financing for home building_ and development. 4. Rural Bank (RB) is any bank authorized by the Central Bank to accept deposits and make credit available to farmers, businessmen and cottage industries in the rural areas, Loans may be granted by the rural banks on the security of land without Torrens title where the owner of private property can show five (5) years or more of peaceful continuous and uninterrupted possession of the land in the concept of ownership. This will include portions of friar land estates or other lands administered by the Bureau of Lands that are covered by sale contracts and purchases and have paid at least five (5) years installment thereon, without the necessity of prior approval and consent of the Director of Lands or portions of other estates under the administration of the Department of Agrarian Reform.

5. Cooperative Banks are banks established to assist the various cooperatives by lending those funds at reasonable interest rates. B. Government Banks or Specialized Government Banking Institutions 1. Development Bank of the Philippines- (DBP) provides loans for developmental purposes, gives loans to the agricultural sector, commercial sector and the industrial sector. 2. Land Bank of the Philippines (LBP) is a government bank, which provides financial support in the implementation of the Agrarian Reform Program (CARP) of the government. 3. Al-Amanah Islamic Investment Bank: Republic Act No. 6048 provides for the charter of the AlAmanah Islamic Investment Bank. This Act authorizes the bank to promote and accelerate the socio-economic development of the Autonomous Region of Muslim Mindanao by performing banking, tinancing and investment operations, and to establish ånd participate in agriculture, commercial and industrial ventures based on the Islamic concept of banking.

Ill. Non-bank Financial Institutions A. Private non-bank Financial Institutions 1. Investment House is any enterprise, which engages in underwriting securities of other corporations. It also generates income from sale of investments in securities. 2. Investment Banks Investment banks, such as Goldman Sachs and Morgan Stanley, differ from commercial banks in that they do not take in deposits and until very recently rarely lent directly to households. They provide advice to firms issuing stocks and bonds or considering mergers with other firms. They also engage in underwriting, in which they guarantee a price to a firm issuing stocks or bonds and then make a profit by selling the stocks or bonds at a higher price. 3. Financing Company is any business enterprise where the primary purpose is to extend credit facilities to consumers and to industrial, commercial or agricultural entities either by discounting or factoring commercial papers or accounts, or by buying installment contracts, leases, chattel mortgages, or other evidences of indebtedness, or by leasing motor vehicles, heavy equipment and industrial machineries and business and office equipment, appliance and other movable properties. 4. Securities Dealer is any person or entity engaged in the business of buying and selling securities for his own or its client’s account thereby making a profit from the difference between the purchase prices and selling price of securities.

5. Savings and Loan Associations (S&Ls) which have traditionally served individual savers and residential and commercial mortgage borrowers accumulate the funds of many small savers and then lend this money to home buyers and other types of borrowers. Because the savers obtain a degree of liquidity that would be absent if they bought the mortgages or other securities directly, perhaps the most significant economic function of the S&Ls is to create liquidity". Also, the S&Ls have more expertise in analyzing credit, setting up loans, and making collections than individual savers, so they reduce the transaction costs and increase the availability of real estate loans. 6. Mutual funds are corporations which accept money from savers and then use these funds to buy stocks, long-term bonds, or short- term debt instruments issued by businesses or government units. These organizations pool funds and thus reduce risks by diversification. They also achieve economies of scale, which lower the costs of analyzing securities, managing poruo1o, and buying and selling securities. Different funds are designed to meet the objectives of different types of savers, Hence; there are bond funds for those who desire safety, stock funds for savers who are willing to accept significant risks in the hope of higher returns, and still other funds that are used as interest-bearing checking accounts (the money market funds). There are literally hundreds of different mutual funds with dozens of different goals and purposes. 7.Pawnshops refer to persons or entities engaged in the business of lending money with personal property, jewelry, and other durable goods as collateral for the loans given. 8. Lending investor is any person or entity engaged in the business of effecting securities transactions, giving loans and earns interest from them. 9. Pension funds are retirement plans funded by corporations or government agencies for their workers and administered primarily by the trust departments of commercial banks or by life insurance companies. Pension funds invest primarily n bonds, stocks, mortgages, and real estate. I0. Insurance companies take savings in the form of annual premiums, then invest these funds in stocks, bonds, real estate, and mortgages, and finally make payments to the beneficiaries of the Insured parties. In recent years, life insurance companies have also 0ffered a variety of taxdeferred savings plans designed to provide benefits to the participants when they retire. 11. Credit unions are cooperative associations whose members have a Common bond, such as being employees of the same firm. Member’s savings are loaned only to other members, generally for auto purchases, home improvement loans, and even home mortgages. Credit unions often are the cheapest source of funds available to individual borrowers.

B. Government Non-bank financial institutions 1.Government Service Insurance System (GSIS). Provides retirement benefits, housing loans personal loans, emergency and calamity loans to government employees. 2. Social Security System (SSS). Provides retirement benefits, funeral benefits, housing loans, personal loans and calamity loans to employees who are working in private companies and offers. 3. Pag-Ibig. Provides housing loans to both government and private employees.

THE EVOLVING PHILIPPINE FINANCIAL SYSTEM The Philippine financial system continues to experience growth against" a backdrop of strengthening domestic economy. Political reforms, i.e., tax reforms and greater infrastructure spending, are projected to drive the domestic growth in 2018 as these lead to higher spending by both the government and households. The domestic economy is also seen to gain from the momentum of global economic recovery, based on the upward revisions of growth projections by third party analysts. However, despite the positive outlook for the Philippines, there are internal and external developments that pose downside risks to the domestic financial system. To counteract the downside risks and smooth functioning of the Philippine financial system more stringent initiatives are being pursued by the four regulatory agencies, namely 1. Bangko Sentral ng Pilipinas (BSP 2. Securities and Exchange Commission (SEC) 3. Insurance Commission (TC) Philippine Deposit Insurance Commission (PDIC)

SIGNS OF GROWTH IN THE DOMESTIC MARKET In recent years, growth in financial intermediation is observed in the three major segments of the Philippine financial system. a. The Philippine banking system has been consistently posting double-digit asset growth since January 2016. Latest data show that totalresources of the banking system amounted to PHP15.3 trillion as of end-March 2018, an 11.3 percent increase from the previous year's level ofPHPI3.8 trillion. This asset growth trend is mirrored by the growth in liabilities (see Figure A). b. Meanwhile, total assets of the insurance industry more than doubled from 2008 to 2016 (see FigureB. Although there was a two-year slowdown after 2013, the growth rebounded in 2016, posting an 11.2 percent increase. Moreover, there has been a steady increase in the industry's revenues relative to GDP after the GFC, with a break in the year proceeding typhoon Yolanda in 2013. The life insurance segment continues to be the driver of the insurance companies' revenues. c. The securities market has also exhibited growth. The bond market, in particular, is comprised mostly of peso-denominated government issued securities, to which outstanding amount as of end-March 2018 grew by 7.1 percent to reach USDI17.2 billion (see Figure C). The equities market, on the other hand, registered 12 additional companies with the PSE in the past three years, bringing the total listed companies to 268, equivalent to PHPi7.31 trillion market capitalization as of endOctober 2017. REGULATORY LANDSCAPE A. Alignment with global standards a. The BSP has released Circular No. 975 in October 2017 to streamline the requirements on the issuance of bonds and commercial papers by banks and quasi-banks and Circular Nos. 984 and 985 in December 2017 in furtherance of liberalizing the foreign exchange (FX) regulatory framework. It has also set the target to 01 September 2018 for banks to comply with the revised rules on liquidity risk management anchored on the Principles for Sound Liquidity Risk Management and Supervision under the Basel III reform agenda.

b. A key priority of the Insurance Commission (IC) is the adoption of international reporting practices. The IC is preparing for the implementation of the Philippine Financial Reporting Standards by the Financial Reporting Standards Council that will be applied to insurance companies. For subsidiaries and. branches of Global Systemically Important Insurers operating in the Philippines, the IC requires keeping reserves to pay policyholders in the event of insolvency and has set the guidelines for the orderly acquisition, merger, consolidation, sale of insurance portfolio, and exit from the domestic insurance business should another financial crisis global in scale triggers a sell-off. c. The SEC approved amendments to the Securities Regulation Code (SRC) and the Corporation Code as well as supporting the bills on regulating Collective Investment Schemes to enhance local regulations and conform to international best practices. Considering the rising popularity of crypto currency, the SEC is also studying the ideal regulatory treatment of virtual currencies (VCs) from the perspective of investor protection. For internetbased scams, the SEC coordinates with the Philippine National Police and the National Bureau of Investigation which possess the resources and expertise to assist in the investigation of cybercrimes committed by online organizations. d. For its part, the PDIC has entered into a cross-border partnership by way of a Memorandum of Understanding (MOU) with eight deposit insurance agencies from Asia, the UK and the US. The MOU fosters enhanced cooperation through exchange of information, prompt response to technical inquiries, effective support for exchange of experts and staff, conduct of bilateral meetings, and other collaborations to the extent permitted by each country's laws, rules and regulations B. Deepening capital markets Various financial products have been introduced to the different segments of the domestic market aimed at providing alternative options for raising funds or for investing money. These include: (1) dollar-denominated securities, (2) exchange-traded funds, (3) green bonds (upcoming), (4) Personal Equity and Retirement Account, (5) PHP government fund forward, (6) public-private partnership shares, and

(7) real estate investment trust. Furthermore, the SEC has initiated reforms on minimum public ownership, repurchase agreements and shelf registration that underscore the need for improved liquidity in the market and the importance of price discovery. The SEC is also finalizing its rules governing the crowd funding market. Meanwhile, the BSP, Bureau of the Treasury and SEC, with the support of the DOF, rolled out in August 2017 the roadmap to accelerate the development of the Philippine debt market. The three agencies, which comprise the Capital Market Working Group, agreed to prioritize deepening of the local bond market, creating reliable financial benchmarks and valuation of financial instruments, and establishing an integrated financial market infrastructure (FMI). C. Strengthening surveillance a. The BSP has recently completed the requirements of becoming a BIS-reporting country. This will allow access to detailed information on cross-border exposures of other countries to the Philippines. The BSP through the FSCC has also initiated collaborations with the Housing and Land Use Regulatory Board to develop a maiden reportorial template targeted to real estate companies. b.To further its conduct of surveillance and understanding of the underlying developments in the insurance industry, the IC is in the process of building a database from the quarterly reports required from insurance companies and developing analytical tools for data mining purposes. a. Currently, the SEC is proposing the creation of a unit for handling the rules, regulations, policies, and guidelines concerning anti-money laundering (AML) and counter terrorist financing (CTF) for covered entities. With the implementation of the 2015 Revised Implementing Rules and Regulations of the SRC, the SEC intends to amend and update its guidelines on the preparation of the AML manual of covered entities. Additionally, the SEC aims to prepare an audit plan and program regarding the conduct of regular audits on covered entities, focusing on the compliance with AML/CTF requirements....