>>>>>>>> Chapter 17

The Financial System

1 Outline the structure and 5 Discuss the organization and
importance of the financial functioning of financial institutions.
system.

6 Explain the functions of the Federal

List the various types of Reserve System and the tools it
2
securities. uses to control the supply of money
and credit.
Define financial market, and
3
distinguish between primary and Evaluate the major features of
7
secondary financial markets. regulations and laws affecting the
financial system.

4 Describe the characteristics of the

major stock exchanges. Describe the global financial
8
system.
The financial system is the
process by which money
flows from savers to users.
• Financial System
– Savers
– Users
– Financial Institutions
– Financial Markets

• Savings is a function of many variables.

• Funds can be transferred between users and
savers directly or indirectly.
• Securities
– Financial instruments
– Obligations on the part of the issuer
• Businesses and Governments
– Provide rate of return to purchasers
• Money Market Instruments
• Bonds
• Stock
• Short-term Debt Securities
– Issued by governments, financial institutions
and corporations
• Investors are paid interest for the use of
their funds.
• Generally low-risk
• U.S. Treasury bills, commercial paper, and
bank certificates of deposit
• Government Bonds
– Bonds sold by the U.S. Department of the
Treasury.
• Municipal Bonds
– Bonds issued by state or local governments
• Revenue bonds are used toward a project that will
produce revenue, General Obligation Bonds are
not.
• Price is determined by risk and interest
rate.
• Several firms rate bonds
– Standard & Poor’s (S&P)
– Moody’s
• Investment-grade
• Speculative/Junk
• Common stock – ownership claims in
corporations.
– Vote on major company decisions
– Cash dividends
– Price appreciation

• Preferred stock – stockholders with

preference in the payment of dividends.
 Stockholder has the
right to exchange the
bond or preferred
stock for a fixed
number of shares of
common stock.
• Primary Market – firms and governments
issue securities and sell them initially to
the public.
– When a firm offers a stock for sale to the
general public for the first time.

• Secondary Market – collection of financial

markets in which previously issued
securities are traded among investors.
Stock market (exchange) –
market in which common
stocks are traded, such as the
Philippine Stock Exchange.
 https://edge.pse.com.ph/compa
nyDirectory/form.do

Company Name Stock Symbol Sector Subsector Listing Date

Transportation
2GO Group, Inc. 2GO Services May 15, 1995
Services
8990 Holdings, Inc. HOUSE Property Property Dec 09, 2010

A Brown Company,
BRN Property Property Feb 08, 1994
Inc.
A. Soriano
ANS Holding Firms Holding Firms Oct 25, 1973
Corporation
ABS-CBN
ABS Services Media Jul 08, 1992
Corporation
ABS-CBN Holdings
ABSP Services Media Oct 07, 1999
Corporation

AC Energy Electricity, Energy,

ACEPH Industrial Jan 05, 1970
Philippines, Inc. Power & Water

APC Group, Inc. APC Services Other Services Mar 08, 1994

ATN Holdings, Inc. ATN Holding Firms Holding Firms Sep 24, 1970

AbaCore Capital
ABA Holding Firms Holding Firms Oct 28, 1987
Holdings, Inc.
• Investors use brokerage firms, they:
1) Establish an account
2) Enter orders
3) Trade stock

• The brokerage firm executes the trade

on behalf of the investor, charging a fee
for the order
– Market Order
– Limit Order
Commercial Banks
Savings Banks and Credit Unions
Non-depository Institutions
 An increasing amount of funds move through electronic
funds transfer (EFTs).
 Millions of businesses and consumers now pay bills and
receive payments electronically.
 Most employees directly deposit employee paychecks.
 Social security and other federal payments are made
each year electronically.
 Automated Teller Machines (ATMs) continue to grow in
popularity.
 More than 1/3 of American households use some online
banking.
• Offer a variety of consumer services

• 85% of their loans are real estate loans

• Credit unions are cooperative financial

institutions that are owned by
depositors/members.

• Credit unions are created to serve consumers.

– Insured by National Credit Union Administration
(NCUA) which functions the same as the FDIC
Insurance Companies

Pension Funds

Finance Companies
• 12 Federal reserve districts
– Own federal reserve bank
• District banks are run by a nine-member board
of directors.
• The board of governors is the governing body.
• Politically independent
• Federal Open Markets Committee (FOMC)
sets most policies concerning monetary policy
and interest rates.
• Which regulatory authorities are primarily
responsible for overseeing banks?
• The BSP, through its Monetary Board, is
primarily responsible for overseeing banks. The
Philippine Deposit Insurance Corporation (PDIC)
can also conduct examination of banks, with the
prior approval of the Monetary Board, provided
that no examination can be conducted by the
PDIC within 12 months of the previous
examination date.
• Describe the extent to which deposits are insured by
the government. Describe the extent to which the
government has taken an ownership interest in the
banking sector and intends to maintain, increase or
decrease that interest.
• Banks must insure their deposit liabilities with the PDIC.
Each depositor is a beneficiary of the insurance for a
maximum amount of 500,000 Philippine pesos or its
foreign currency equivalent.
• There are very few remaining government-owned or
controlled banks (currently, only seven), owing to the
government’s privatisation programme.
• BSP Report on the Philippine Financial System
Highlights Sound and Stable Banking System
• 05.10.2019
• The Report on the Philippine Financial System
for the second semester of 2018 highlights that
with the banking system at its core, the financial
system remains resilient amid evolving domestic
and global environment.
Positive performance was evident across banking
groups which posted sustained growth in assets,
loans, deposits and capital. The universal and
commercial bank industry primarily financed the
growth of the major economic sectors such as real
estate, wholesale and retail trade and
manufacturing. Meanwhile, the thrift bank and rural
and cooperative bank industries supported the retail
lending segment, particularly in providing loans to
consumers, the micro, small and medium
enterprises and the agri-agra sector.
The financial soundness indicators affirm that the banking system is
stable and resilient despite global uncertainties. Capital, mainly
comprised of common equity and retained earnings, remained well
above domestic and global benchmarks; credit quality was satisfactory
notwithstanding double-digit loan growth; profits generated primarily
from core income were at record high; and the banks’ high quality liquid
assets were sufficient to absorb shocks while adequately providing the
financing needs of the growing economy. The BSP’s surveillance
activities are complemented with proactive engagement with
supervised financial institutions promoting effective management and
monitoring of incipient risk to the system.
Likewise, foreign bank branches and
subsidiaries, the foreign currency
deposit system, trust operations, quasi-
banks and other non-bank financial
institutions all registered positive
growth contributing to the resilience of
the overall financial system.
The Report also includes two box articles pertaining to the impact of
prudential regulations on bank lending rates and the application of
proportionality in domestic banking regulations. The results of the study
in Box Article 1 indicate that the lending rate charged by banks has only
marginally risen following the adoption of bank regulations and
prudential reforms. The article emphasizes that such increase is a
necessary adjustment to maintain stability of the banking system.
Meanwhile, Box Article 2 shows that the BSP adheres to the application
of the principle of proportionality in the regulation and supervision of the
banking system. The approach ensures the suitability of policies and
creates an enabling ecosystem where regulatory and business
objectives converge.
As a whole, the strong fundamentals of the
financial system provided a solid foundation
for its sustained positive performance in
2018. These, together with the BSP’s
sustained implementation of financial sector
reforms and support from industry
participants, will enable the financial system
to remain in the growth trajectory moving
forward.
• The financial system is
more connected.
• Financial institutions are
more global.
• Most nations have a
central bank.