Banking and Financial

InstitutionsMahal Arce Lebanan

BankingBanking

Business activity of accepting and safeguarding money owned by other individuals and entities.

FinanceFinance

Concerned with resource allocation as well as resource management, acquisition and investment.

Deals with matters related to money and the markets.

MONEY A medium that

can be exchanged for goods and services and is used as a measure of their values on the market.

Legal tender

jiaozi

Types of Money

Bank Notes- Paper currencies

Coins- Made of precious

and/or semi-precious metals

Properties of MoneyUnit of AccountMedium of ExchangeStore of Value

Properties of Money

This means that goods and services can be valued easily in one term of measurement, such as dollars.

Unit of Account

Properties of Money

This means that we can use money to exchange for goods and services instead of barter.

Medium of Exchange

Properties of Money

This means that we can delay our purchases or save for future spending.

Store of Value

Characteristics of Money Durable Divisible Convenient and Portable Consistent Possess value in itself Limited in the quantity that is

available Has a long history of acceptance

Significance of Money

Money and ProductionMoney and TradeMoney and WagesMoney and Economic Growth

Categories of Money

M1 (Narrow Money) – money that circulates in the economy (used for daily transactions) – coins and paper bills.

M2 (Quasi – money) – M1 + other forms of money which may be used as a basis of exchange and store of value (money substitutes) – checks, savings deposits, time deposits, credit cards.

M3 (Broad Money) – M2 + government securities – Treasury Bills (T – bills), bonds, notes.

Monetary Theory

The Monetary Theory: Definition

The theory that relates changes in the quantity of money to changes in economic activity at the price level.

Money Supply

Money supply is the total value of money that circulates in the economy.

The Financial System

The financial system is a network of institutions allowed by law to create, circulate, and control money in a country.

Banking and the Money Supply

Banks create money…

… not by printing money but through lending.

Categories of Financial Institutions1. Banks – institutions that accept deposits from

more than 20 persons, organizations, and corporations.- Commercial banks – privately owned banks.- Rural banks – lending institutions for the rural areas.- Thrift banks – savings and loan associations- Specialized Government banks – maintained by the government to provide money for the development of the agri sector – LBP, DBP, AAIB

Categories of Financial Institutions2. Non – banks – pawnshops, insurance

companies, securities dealers, investment houses, lending investors

3. Non – banks maintained by the government – SSS, GSIS, Pag – ibig Fund

The Central Bank (BSP)

Government agency which has authority and responsibility over the entire financial system of the country.

Called the “bank of all banks”. Sets the general guidelines, rules and

regulations regarding the operations of banks and other financial institutions.

Incharge with the management of foreign currency reserves, gold, local and foreign debts.

Sole printer and responsible for the issuance of the Philippine currency.

Instruments (Tools) of the BSP NOTE: Use of these instruments may increase or

decrease money supply:1. Open Market Operations – BSP buys and sells

government securities.2. Reserve Requirement – certain percentage of the

bank’s assets are deposited in the BSP.3. Discount Rates/Discount Window/Rediscount Rate –

rate at which financial institutions can borrow from the BSP.

4. Moral Suasion – BSP begs from financial institutions not to charge higher interest rates to borrowers.

5. Printing or Minting Money6. Others: Trade*, Remittances*, Foreign Debt

Servicing

Monetary Instruments’ Effect on Money Supply Open Market Operations

BSP buys securities – increase in MsBSP sells securities – decrease in Ms

Reserve Requirement BSP increases RR – decrease in MsBSP decreases RR – increase in Ms

DR/DW/RdR BSP increases rate – decrease in MsBSP decreases rate – increase in Ms

Monetary Instruments’ Effect on Money Supply Moral Suasion

BSP increases Moral Suasion – increase in MsBSP decreases Moral Suasion – decrease in Ms

Printing or Minting MoneyBSP increases printing/minting money – increase in MSBSP decreases printing/minting money – decrease in MS

Monetary Instruments’ Effect on Money Supply Foreign Debt Servicing

BSP pays Local Debts – increase in MsBSP pays Foreign Debts – decrease in Ms

*Others: TradeX˃M – increase in MsM˃X – decrease in Ms

*Others: RemittancesMore Remittances – increase in MsLess Remittance – decrease in Ms