TERMS TO

REMEMBER

Deposits - money placed in a bank account for safekeepingReserve Requirement Ratio – the amount or proportion of

deposits set by the BSP that have to be kept as reserves. money placed in a bank account

Money Multiplier – tells us how much the money supply can expand for a given reserve requirement ratio. This occurs because money can be transferred from one bank to another.

Discount Rate – interest rate charged by the BSP to commercial banks

Rediscounting – the function of the BSP in lending to commercial banks

BSP – Bangko Sentral ng PilipinasBank Reserves - holdings of deposits in central banks plus

currency that is physically held in bank vaultsSeed Money – loans to help start off a businessDividends – a portion of a company’s earnings given to its

stockholders (people or group who owns a portion of the corporation due to its large investment)

Mortgage – is a form of security for the payment of an obligation

The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines.

Main Function: 1. to maintain stable prices in the economy 2. to safeguard the stability of the financial system in the country

Republic Act 7653 = to spell out the main functions of the country's central bank.

1. Set the Monetary Policy 

BSP = sets and carries put monetary policy.

*Monetary Policy - refers to the decreasing or increasing of money supply

SITUATION: 

1. Decrease in money supply: when people hold less money than they desire they will sell their assets inorder to have greater liquidity. So now money demand is greater than money supply, more people will want to sell theirassets to obtain liquidity that people willing to give up liquidity to buy assets.As a result, the interest rates get pushed up slowly.This can also affect the spending behavior of households and firms.

By managing the money supply, BSP is able to maintain stable prices. Maintaining the money supply is more than just printing more or less money. 

FOLLOWING METHODS ATE INSTRUMENTS THE

"BSP" USES TO CONTROL THE MONEY SUPPLY MORE EFFECTIVELY:

A. Open Market Operations

*Government Securities - Securities issued by a government to raise the funds necessary to pay for its expenses

- The buying and selling of government securities by a central bank, such as the Bangko Sentral ng Pilipinas in order tocontrol the money supply. - This is the Central Bank's most important stabilizing instrument

- When the central bank buys securities on the open market, it increases the reserves of commercial banks, making it possible for them to expand their loans and investments. It also increases the price of government securities, equivalent to reducing their interest rates, and decreases interest rates generally, thus encouraging investment. 

*Base Money - the amount of money in the economy- When there is an increased demand for base money, action is taken in order to maintain the short term interest rate (that is, to increase the supply of base money).

The central bank goes to the open market to buy a financial asset such as government bonds, foreign currency or gold. To pay for this, bank reserves in the form of new base money (for example newly printed cash) is transferred to the sellers bank, and the sellers account is credited. 

Thus, the total amount of base money in the economy has increased.

b. Setting Reserve Requirements

Banks serve both those who deposit money and those who make loans.Deposits - funds to give loans to businesses and households- kept as reserves to finance withdrawals that depositors make The BSP sets the amount or proportion of deposits that have to be kept as reserves. This is called the reserve requirement ratio.* If the reserve requirement ratio (RR) is 10%, this means that banks have to keep 10% of their deposits as reserves, and they can lend out 90% of their deposits*

HIGHER RESERVE REQUIREMENT RATIO = LESS LOANS = LESS FUNDS CIRCULATING IN THE ECONOMY = CONTROLLED MONEY SUPPLY

By setting reserve requirement ratios, the BSP can increase or decrease the money supply

Money Multiplier =1 ------

RRHOW THE MONEY SUPPLY CAN EXPAND (example)Reserve Requirement Ratio (RR) = 20%

Person Bank Deposits (Php) Loans (Php) Reserves (Php)

A W (original bank)

1000 800 200

B X 800 640 160

C Y 640 512 128

D Z 512 384 128

2, 952 2, 336 616

•The initial deposit of Php 1,000 was allowed to expand to Php 2,952

•If this process continues, the first deposit of Php 1,000 can be expanded to Php1, 000 x 5 = Php 5,000.

We got the value of 5 by using the money multiplier formula:

1 ---- = 5

20

This expansion in the money supply occurs because banks are allowed to keep only a fraction of the deposits, and can lend out the rest.

c. Rediscounting Function

-refers to the interest rate charged by the BSP when lending money to commercial banks. Lower discount rate = Bigger amount the banks can borrowHigher discount rate = Less amount the banks can borrow-allows the BSP to control money supply by:Raising discount rate = Tightens money supplyIncrease the amount of money borrowed = Expands money supply

Roles of the BSP:Printing and Issuing Money

Only the BSP can print the money used for our transactionsMoney is guaranteed by the government as accepted means on payment by households, firms, and the government.

Acting as the Government’s BankBSP helps the government by:

Providing loans to fund government projects Sells government securities to conduct its open market operations

-BSP can lend out 20% of its yearly income based on three fiscal years

Foreign exchange reserves (also called Forex reserves)

In a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities.it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, such as the dollar, euro and yen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions.

Purpose:

In a flexible exchange rate system, official international reserve assets allow a central bank to purchase the domestic currency, which is considered a liability for the central bank (since it prints the money itself as IOUs). This action can stabilise the value of the domestic currency.

Central banks throughout the world have sometimes cooperated in buying and selling official international reserves to attempt to influence exchange rates.

Maintaining Foreign Exchange ReservesThe BSP protects the value of the peso compared to other currencies like the US dollar, Japanese yen and European euro. This is done by maintaining foreign exchange reserves. These are the BSP’s reserves of different currencies which are mostly in US dollars; some in yen and euro.

The BSP’s reserves also include gold bars and securities of other countries. When there is a huge demand for dollars and the BSP wants to maintain the peso-dollar exchange rate, it can use its foreign exchange reserves to sell dollars in the financial market. That is, it uses foreign exchange reserves to guard against huge decreases in the value of the peso relative to foreign currencies.

Regulating Financial Institutions

The BSP sets out policies that all banking institutions must follow. These include rules on interest rates, deposits and loans.

For example, the BSP limits the loans that banks can give to a single borrower; that is, a bank cannot lend all its funds to only one person or company. This allows the bank to limit its risks. If the borrower is not able to pay back, then the bank might go out of business. Regulations such as this are set by the BSP for all banks to follow.

Managing the Exchange Rate

The BSP also manages the value of the peso in relation to other currencies.It buys and sells foreign currencies from banks to build its foreign exchange reserves and to stabilize the exchange rate, mainly the peso-dollar exchange rate. It allows the exchange rate to change but not by large amounts.

Part of managing the exchange rate, as explained above, is to maintain foreign exchange reserves.

Institution Functions

A. Banking Institutions

-Accept deposits from households, businesses, and the government- These deposits are then loaned out by the banks

1. Bangko Sentral ng Pilipinas

-The country’s central bank- It sets out policies for the whole banking sector -It controls the operations of all banks in the country

2. Commercial Banks -Accept deposits like savings deposits, time deposits and demand deposits (ATM)- These are accepted from households or firms-They also give out loans-They provide loans to businesses as seed money to help them start the business

3. Thrift Banks - Smaller banks that accept deposits and provide limited loans to people

a. Savings and Loan Associations

-These are small savings groups whose members band together and save- The funds they come up with can be used to whoever needs loans- The interest earned is given back to the group in the form of dividends

b. Savings and Mortgage Banks

-These banks accept mortgages In exchange for loans- the interests earned from these loans are the income of the bank

c. Private Development Banks

-Sole purpose is to help small businesses develop and expand their production- supported by the Development Bank of the Philippines

4. Rural Banks - Established under Republic Act 720 to help farmers gain access to credit or loans- But they also accept deposits from non-farmers

- They also lend to cooperatives and businesses in the rural areas

5. Trust Companies -Manage the wealth and assets of those who no capacity to do so- Also manage the wealth of charities or churches

6. Some Specialized Banks

a. Land Bank of the Philippines

-Owned by the government-Was established under Republic Act No. 3844-To aid the land reform program of the government

b. Development Bank of the Philippines

-Lends mainly to small and medium-sized firms-To help develop agriculture and industry in the country

c. Amanah Investment Bank of the Philippines

-Established under Republic Act No. 6848-Mainly helps Filipino Muslims to gain access to credit, to help them acquire capital for business

B. Non-bank Financial Institutions

-They still accept contributions or deposits and give out loans-To provide income in retirement

1. Social Security System (SSS)

-Established under Republic Act No. 1992-Aims to help employees of the private sector gain income security after retirement-It is also the source of retirement pay and pensions for members

2. Government Service Insurance System (GSIS)

- It covers government employees than private workers

3. Pag-Ibig Fund -Mainly to help its members acquire financing for housing-Provides other loans