Functions and Operations of Central Banks

● Central banks are not primarily profit-driven. They are generally more concerned with
objectives like price stability.
● Central banks operate under more government regulation than other financial
institutions.
● Central banks typically do not conduct business directly with the public.
● Central banks are responsible for issuing a nation's currency.
● Central banks act as a banker, agent, and advisor to their government.
● Central banks hold the cash reserves of other banks.
● Central banks are responsible for managing a nation's foreign currency reserves.
● Central banks serve as a lender of last resort, offering emergency loans to banks
experiencing liquidity issues.
● Central banks manage central clearance and settlement systems.
● Central banks oversee and control credit.
● Activities undertaken by central banks include bank supervision, pawnshop supervision,
external debt regulation, involvement in the money market, foreign exchange
regulations, export-related measures, managing worker's remittances, and classifying
commodities.

The Bangko Sentral ng Pilipinas (BSP)

● The Bangko Sentral ng Pilipinas (BSP) was established on July 3, 1993, in accordance
with the 1987 Philippine Constitution and the New Central Bank Act of 1993.
● The BSP operates with fiscal and administrative autonomy from the National
Government, allowing it to independently pursue its mandated responsibilities.
● The BSP aspires to be globally recognized as a leading monetary authority and financial
system supervisor that supports a strong economy and promotes a high quality of life for
all Filipinos.
● The BSP's mission is to promote and maintain price stability, a robust financial system,
and a safe and efficient payment and settlement system that contributes to sustainable
and inclusive economic growth.
● The BSP's objectives include maintaining price stability conducive to balanced and
sustainable economic growth and promoting and preserving monetary stability and the
convertibility of the Philippine Peso.
● The BSP is responsible for providing policy direction in the areas of money, banking, and
credit. It also supervises the operations of banks and exercises regulatory powers over
non-bank financial institutions with quasi-banking functions.
● The BSP's primary monetary policy objective is to foster low and stable inflation
that is conducive to balanced and sustainable economic growth. The BSP uses an
inflation targeting framework to achieve this objective. This framework aims to
influence overall demand for goods and services and manage the supply and cost of
money and credit.
● The BSP utilizes several monetary policy instruments: open market operations,
acceptance of fixed-term deposits, standing facilities, and other liquidity
management facilities.
● The BSP uses a publicly announced inflation target set by the Philippine
government, which it aims to meet over a two-year horizon.
● The BSP offers emergency loans and conducts credit operations, which include
overdraft credit lines and rediscounting facilities.
● The BSP has established Regional Offices and Branches in various locations
across the Philippines, including: La Union (Batac and San Fernando Branches),
Cabanatuan, Dagupan, Naga, Lucena, Legazpi, Tuguegarao, Davao City (Butuan,
Cagayan De Oro, Cotabato, and General Santos Branches), Ozamiz, Zamboanga,
Cebu City (Bacolod, Iloilo, Roxas, and Dumaguete Branches), and Tacloban.
Structure and Leadership of the BSP

● The BSP's organizational structure is headed by the Monetary Board.

● The Monetary Board consists of a Chairman/Governor, a Deputy Governor, one
member from the Cabinet, and five members from the private sector.
● Current Monetary Board members from the private sector include Antonio S.
Abacan, Jr., V. Bruce J. Tolentino, Felipe M. Medalla, Peter B. Favila, and Anita
Linda Aquino.
● The current Cabinet member on the Monetary Board is Carlos Dominguez III.
● The BSP's current Governor, and the seventh to hold the position, also serves as
the Chairman of the Monetary Board.
● The BSP has five Deputy Governors:
○ Francisco Dakila Jr. oversees the Monetary Stability Sector, which focuses
on maintaining internal and external monetary stability, liquidity, and
preserving the convertibility of the Peso.
○ Mamerto E. Tongonan heads the Payments and Currency Management
Sector, tasked with managing the relationship between digital and physical
currency and supporting the digital transformation of the country’s
financial services.
○ Chuchi G. Fonacier leads the Financial Supervision Sector, responsible for
on-site examination and off-site surveillance of BSP supervised financial
institutions (BSFIs), including specialized supervision in areas like anti-
money laundering, trust operations, financial market operations, and
information technology. This sector also handles credit information system
infrastructure, policy studies and research, and supervisory data management.
Fonacier also serves as the permanent alternate for the BSP Governor on the
boards of the Philippine Deposit Insurance Corporation (PDIC) and the National
Development Corporation (NDC).
○ Eduardo G. Bobier heads the Corporate Services Sector. He was appointed
to this position on March 1, 2022, after serving as Assistant Governor of
the Comptrollership Sub-Sector.
○ One Deputy Governor is dedicated to the Regional Operations and
Advocacy Sector. The BSP's advocacies include initiatives in microfinance, anti-
money laundering, financial literacy, and economic education.

Financial Institutions Supervised and Regulated by the BSP

● The BSP supervises various banking institutions:

○ Universal banks/expanded commercial banks
○ Ordinary commercial banks
○ Savings and mortgage banks
○ Private development banks
○ Savings and loan associations (stock)
○ Rural banks
 ○ Government banks, including the Philippine National Bank (PNB), Development
Bank of the Philippines (DBP), Land Bank of the Philippines (LBP), and
Philippine Amanah Bank
● The BSP regulates several non-bank financial institutions:
○ Pawnshops
○ Investment houses
○ Investment companies
○ Financing companies
○ Securities dealers and brokers
○ Lending investors
○ Building and loan associations
○ Fund managers for retirement, provident, and pension funds
○ Savings and loan associations (non-stock)
● As of 2023, the BSP oversees a significant number of these financial institutions.

Supervision and Regulation of Financial Institutions by the BSP

● Supervision encompasses the issuance of rules and regulations, overseeing the

operations of financial institutions, and conducting examinations and
investigations to determine the financial health and compliance of institutions. It is
a broader concept than regulation because it examines the details of an institution's
operations, activities, and performance to assess its soundness and ability to meet its
obligations.
● Regulation involves establishing rules of conduct and standards of operation that
are uniformly applied to all financial institutions or functions within its purview.
This is primarily achieved through reviewing and analyzing reports submitted by financial
institutions to the BSP. To optimize efficiency, the BSP may communicate with
institutions regarding matters that could enhance regulatory effectiveness.

Purposes of Supervision and Regulation by the BSP

● The BSP's supervision and regulation aim to:

○ Ensure compliance with relevant laws, rules, and regulations by financial
institutions
○ Ensure financial institutions operate soundly and maintain stability and solvency
○ Protect the interests of depositors and money market investors, safeguarding
both their interest payments and their deposited funds
○ Protect government investments in financial institutions
○ Safeguard the interests of other creditors of financial institutions
○ Ensure the stability, solvency, and safety of the Philippine financial system to
contribute to the economic development of both urban and rural areas.
Types of Examination by the BSP

● The BSP utilizes three types of examinations:

○ General or regular examinations
○ Special or interim examinations
○ Special investigations

Benefits of Bank Controls

● Bank controls offer several key benefits:

○ Preventing the over-expansion or under-expansion of money and credit:
This is achieved by mitigating the risks associated with system-wide monopolies
or excessive competition.
○ Eliminating monopolies in the financial system: This ensures a level playing
field for all participants and promotes healthy competition.
○ Protecting depositors from the consequences of bank failures: This helps to
maintain public trust in the financial system and prevent widespread economic
disruption.

Insolvency Proceedings

● When the head of the BSP's supervising and examining department or their
examiners report a bank's potential insolvency to the Monetary Board, the
following steps are taken:
○ The Monetary Board confirms the report.
○ If the report is confirmed, the Monetary Board prohibits the bank from conducting
business in the Philippines.
○ The Philippine Deposit Insurance Corporation (PDIC) is appointed as the
receiver for the insolvent bank.
○ The Monetary Board has 90 days to determine if the bank can be reorganized
and resume operations safely for its depositors and creditors.
○ If the Monetary Board finds the bank insolvent or unable to resume business
within 90 days, it orders the bank's liquidation.
○ The courts have jurisdiction to adjudicate claims against the bank or non-bank
financial intermediary, enforce the liabilities of stockholders, and implement the
Monetary Board's approved liquidation plan.

Issues in Government Financing in the Philippines

● Crowding out occurs when increased government spending fails to stimulate

overall aggregate demand because it causes a corresponding decrease in private
sector spending and investment. This happens because the government finances its
increased spending through either higher taxes, which reduces the disposable income of
 consumers and firms, or increased borrowing from the private sector, which leaves less
money available for private sector investment.
● Debt overhang describes a situation where an entity has such a large debt burden
that it cannot take on additional debt to finance future projects. This can severely
limit an entity's ability to invest and grow.

The International Monetary Fund (IMF)

● The IMF was conceived in July 1944 at the Bretton Woods Conference, held in
Bretton Woods, New Hampshire, USA. Representatives from 45 countries
gathered to establish a framework for international economic cooperation in the
post-World War II era. The global economy had been severely impacted by the Great
Depression and World War II. During the Depression, countries tried to protect their
economies by raising trade barriers, devaluing their currencies, and restricting citizens'
access to foreign exchange. After the war, countries needed significant economic
reconstruction and development. The collapse of international monetary cooperation
during these periods led to the IMF's creation.
● The IMF formally came into existence in December 1945 when the first 29 member
countries signed its Articles of Agreement. Operations began on March 1, 1947.
France was the first country to borrow from the IMF.
● Initially, the IMF operated under the Bretton Woods system, a par value system
where member countries pegged their currencies to the US dollar. The US dollar, in
turn, was pegged to gold to correct fundamental disequilibrium.
● The founders of the IMF envisioned a new international monetary system with the
following characteristics:
○ Democratic management and control
○ Universality
○ Establishment of an international currency
○ Creation of a new international monetary authority
● The IMF has 187 member countries, with headquarters in Washington, D.C. It
employs approximately 2,470 staff from 141 countries and has total quotas of US$ 383
billion. As of 2023, the IMF has 190 members: all UN member states except Cuba, North
Korea, Monaco, Taiwan, Vatican City, East Timor, and Liechtenstein, plus the Republic
of Kosovo.
● The IMF is governed by a 24-member Executive Board. Five Executive Directors are
appointed by the five members with the largest quotas, and the remaining nineteen are
elected by the other members. Each member country appoints a Governor to the IMF's
board of governors. Voting power is proportional to a country's population and economic
ranking. The Executive Board has significant decision-making authority within the IMF.
● All IMF members are also members of the International Bank for Reconstruction
and Development (IBRD), also known as the World Bank, and vice versa.
● The IMF manages funds in several ways:
○ The IMF holds about 90.5 million troy ounces (2,814.1 metric tons) of gold,
making it the third largest official holder of gold globally.
 ○ The IMF has a limited gold sales program to avoid market disruption, with sales
conducted at market prices.
○ Profits from gold sales are used to fund an endowment, part of the IMF's new
income model for financial sustainability.
○ The IMF can use its quota-funded holdings of currencies from financially strong
economies to finance lending to countries in need.
● The IMF utilizes Special Drawing Rights (SDRs), a supplementary international
reserve asset created by the IMF to supplement member countries' official
reserves.
● IMF member countries subscribe a quota, which determines their financial
commitment to the IMF and their voting power. 25% of the quota is paid in gold or
US dollars, and the rest is paid in the member's own currency. The IMF conducts
general quota reviews to assess the adequacy of quotas in terms of member countries'
balance of payments financing needs and the IMF's capacity to meet those needs.
These reviews also allow for quota increases to reflect changes in countries' relative
positions in the global economy. Quota changes require approval by 85% of the total
voting power, and a member's quota cannot be changed without their consent.
● The IMF offers various lending facilities to its members:
○ Normal facilities are available to all members under specific conditions.
○ Special facilities are designed for particular circumstances, such as the
Compensatory and Contingency Financing Facility, Buffer Stock Financing
Facility, and the Supplemental Reserve Facility (SRF).
○ Concessional facilities provide loans at lower interest rates to low-income
countries. These include the Enhanced Structural Adjustment Facility (ESAF).
● The IMF also implements other policies and procedures:
○ Support for currency stabilization funds: The IMF assists countries in
establishing and managing funds to stabilize their currencies.
○ Emergency assistance: The IMF provides rapid financial support to countries
facing sudden and severe economic crises.
○ Emergency Financing Mechanism (EFM): This mechanism provides faster
access to IMF resources for countries facing exceptional balance of payments
needs due to exogenous shocks.
● The IMF has been involved in numerous bailouts, providing financial assistance to
countries facing economic crises. One prominent example is the Asian financial crisis
of 1997, which severely impacted several Asian countries and had spillover effects on
other emerging markets. The IMF provided programs of economic stabilization and
reform to Indonesia, Korea, and Thailand during this crisis. Measures taken by the IMF
included temporary tightening of monetary policy, addressing weaknesses in the
financial system, removing impediments to growth, assisting in reopening lines of
external financing, and promoting sound fiscal policy.
● While the IMF plays a vital role in the global economy, it has also faced criticism
for some of its policies:
 ○ Governance: Critics argue that the IMF is dominated by the interests of wealthy
industrialized nations, particularly the G-7 countries, and commercial and
financial interests within those nations.
○ Capital market liberalization: The IMF's pressure on countries seeking loans to
open their markets to foreign investment has been criticized. Critics argue that
this can lead to sudden capital flight, causing economic instability.
● Despite criticisms, the IMF remains a crucial global economic institution.
Proponents emphasize the need for such an organization, particularly in managing
crises and assisting countries facing economic difficulties. They argue that the IMF's
focus should be on tailoring crisis resolution strategies to individual countries' specific
economic circumstances, especially for developing nations. The IMF's role in monitoring
trade exchange rates and related policies, particularly with the rise of economies like
China and India, is considered vital. Additionally, the IMF's ability to provide assistance
to countries facing disasters and other adversities is seen as a critical function.

Monetary Policy

● There are different types of monetary policy that central banks can employ to
achieve their objectives.
● Advantages of monetary policy:
○ Inflation control: By targeting interest rates, central banks can effectively
manage inflation.
○ Ease of implementation: Monetary policy tools can be adjusted relatively easily.
○ Independence and political neutrality: Central banks typically operate
independently of political influence, allowing for more objective decision-making.
○ Boosting exports: Weakening a country's currency can make its exports more
competitive in international markets.
● Disadvantages of monetary policy:
○ Time lag: The effects of monetary policy changes are often not immediate and
can take time to materialize.
○ Technical limitations: There can be technical limitations to how effectively
monetary policy can be implemented and controlled.
○ General impact: Monetary policy tools are broad in their application and affect
the entire country, which can have unintended consequences for certain sectors
or regions.
○ Risk of hyperinflation: If not managed carefully, monetary policy can contribute
to excessive inflation, potentially leading to hyperinflation.
● Limitations of monetary policy:
○ Divergence in interest rates: Long-term market interest rates may not always
move in the same direction as short-term interest rates, limiting the effectiveness
of central bank intervention.
○ Money demand curve: The relationship between interest rates and the demand
for money may not always be predictable, making it difficult to accurately forecast
the impact of monetary policy changes.
● Types of inflation:
○ Demand-pull inflation: Occurs when demand for goods and services outpaces
supply, leading to rising prices.
○ Cost-push inflation: Arises from increases in production costs, such as wages
or raw materials, which are passed on to consumers as higher prices.
○ Structural inflation: Caused by inherent inefficiencies in the economy, such as
bottlenecks in production or distribution.