THE PHILIPPINE FINANCIAL SYSTEM

CHAPTER 11
The Financial System of the Philippines serves as catalyst in the
country' s growth and development. It is the custodian of the country's
liquid reserves and based essentially on trust and confidence of the
public.
Financial institutions, particularly banks, perform two major roles:
1. as participants, particularly in the money creation process; and
2. as intermediaries in the Savings-Investment process.
Banks accept deposits from the general public and provide these
depositors with reasonable earnings as well as access to their funds.
Through their lending mechanism, they are able to create money and
provide finance to investors and entrepreneurs who in turn utilize this
fund to provide goods and services.
Philippine Banks During the Financial Crisis in 2008
As global markets reel from the impact of the financial crisis that has claimed
among its victim's corporate giants from the US to Europe, Philippine banks
have, thus far, emerged largely unscathed, as pointed out by top central
banker.

Former Bangko Sentral ng Pilipinas Governor, Amando Tetangco Jr. said that
the Philippine banking system is in a comfortably manageable state from
capital and liquidity standpoint, and the past investments in banking and other
financial reforms have helped shield the country from catastrophic fallouts that
the other jurisdictions have seen.

Mr. Tetangco explains that Philippine banks remain fundamentally sound and
insulated from the external turbulence due largely to their domestic orientation,
thus avoiding large exposures to foreign financial institutions.
History of the Philippine Financial System
The Philippine banking history traces its origin to the 16th century with the
organization of Obras Pias where religious foundations that accumulated large
funds from the legacies of wealthy Catholics who made out wills before going out on
dangerous expeditions bequeathing their estates to the Catholic church or to lay
confraternities.
The first bank, Español-Filipino de Isabel II (now the bank of the Philippine
Islands), was established in 1851, and since then the banking mechanism has
evolved into a complex system to parallel the development and growth of the
country's economy.
Non-bank financial institutions, as they are properly known today are
comparatively of recent vintage. These are the other parts of financial institutions
which, together with banks, redistribute the country's financial resources.
These institutions operate within the regulatory framework whose parameters
are set by the Bangko Sentral ng Pilipinas (BSP) and other regulatory and
supervisory authorities.
Financial Sector Reforms in Recent Years
A number of paths breaking reforms were undertaken in recent years to enhance
the performance of the financial system, viz:

The establishment in 1993 of the BSP as the central monetary authority of the
Philippines under R.A. 7653. The BSP replaced the Central Bank established in 1949
which saddled with untenable financial position arising from fiscal responsibilities in the
past. With a more policy-independent, financially solid and technically able monetary
authority, market participants are assured of a business environment characterized by
policy consistency and professionalism.

The liberalism of the entry of foreign banks under R.A. 7721 dated May 16, 1994 after
more than four decades of prohibition. The reform conforms to the continuing thrust for
globalization and internalization in finance, allowing the economy into the path of
sustainable growth. Presently there are 14 branches and three subsidiaries of foreign
banks performing commercial banking functions in the country.
 The deregulation of bank branching that made it easier for banks to
establish their office network nationwide. Thus, from a high 17,160 person per
banking office in 1990, the density ratio significantly declines to 11,442 by year
end of 1998.

The gradual reduction in legal reserve requirement from 25% in 1990 to the
present 14%. By July 4, 1997, the reserve requirement will be further reduced to
13%. The impact of such reserve cut has been translated to reduced
intermediation cost. However, as aftermath of the devaluation of the peso and to
moderate excess liquidity, the BSP, on August 14, 1997, decided to increase the
reserve requirements to 18%.

The liberalization of domestic borrowings of foreign firms with the abolition

of the Inter Agency Committee (lAC) on Domestic borrowings of foreign firms
last January 1, 1997. This effect eliminated the bureaucratic red tape or
securing prior government approval on peso borrowings by foreign companies.
The Financial System
The components of the Financial system are:
1. Banks (Banking Sector)
2. Non-Bank Financial Institutions (Non-Bank Sector)

A diagrammatic picture of the present financial system is shown in Figure 21. This shows
the Bangko Sentral ng Pilipinas at the apex and all the major institutions under its regulations.
Today, there are distinction established between banking institutions, which include commercial
banks, non-bank financial institutions and non-bank thrift institutions.

The commercial banks (with resources of P 4,464 billion) account for the 81% of total
resources of the financial system in 2005. Commercial banks account for P3,926 billion or 72%
of the assets of the banking system.

Non-monetary financial institutions such as Insurance companies and investment banks

account for a large component of the system (19% in 2005). Of these 18.6% is accounted for
the insurance companies.
 Thrift banks, which include savings and mortgage banks and stock savings banks and
loan associations, account for about 6.5% of the total resources of the banking system.
Despite the great number of these rural institutions, rural banks and private development
banks account for only 2.2% of the total financial resources.

From the table, we can see that the

banking system accounts for P4,646.20
billion or 81% while the non-bank
financial institutions account for 1,047.6
billion or 19% of total financial assets.
Number of Financial Institutions
As of 2004, there were about 7,612 financial institutions. The biggest number is
accounted for by commercial banks with 4,329 followed by rural banks with 2003.
Thrift banks make up the rear with 1,280.
Types of Banks

Institutions comprising the banking sector are the commercial

banks, specialized government banks, thrift banks (consisting of
savings and mortgage banks, private development banks and stock
savings and loan association) and rural banks (including
cooperative banks).
Expanded Commercial Banks or Universal Banks
Expanded Commercial Banks offer the wide variety of banking services among
financial institutions. The banking reforms introduced expanded commercial bank
or Unibanks, which, in addition to the powers of commercial banks can engage in:
- underwriting activities
- equity investments in non-allied undertaking, and
- up to l00% equity investments in financial intermediaries other than commercial
banks.

Foreign banks fall under a broad category of Universal banks. With prior approval
of the monetary board, foreign banks may operate in the Philippines through: (a)
acquisition of up to 60% of an existing bank, (b) invest in up to 60% of a new
banking subsidiary incorporated in the Philippines; and (c) establishment of
branches with full banking authority. The last mode of entry, however, is closed
with the license granted to 10 (the maximum number allowed under R.A. 7721)
foreign banks to operate branches.
Commercial Banks
The commercial banks constitute the bulk of the banking system.
These are institutions that accept deposits, which are subject to
withdrawal by checks. But they also perform other functions
lending essentially on a short-term basis. They accept drafts and
letters of credit, can discount and negotiate promissory notes,
drafts, bills of exchange and other forms of indebtedness. They
can invest in allied undertaking up to a limit, including trading in
bonds and securities.
By and large, more commercial banks were allowed to be established since
1949. Under the original law on commercial banks foreign capital was not
allowed to participate in establishing commercial banks. While the existing
foreign branches were allowed to continue their operations all the new banks
were owned by Filipinos.

Rapid changes are expected among commercial banks as some of them are
graduating into expanded commercial banks, or universal banks. These banks
can perform the standard role of, or acquire, thrift banks and other non-bank
financial institutions.
Specialized Government Banks
These are unique government banks which are subject to the
supervision and regulation of the BSP. These are: The Veterans
Bank of the Philippines which was established as a commercial
bank. It specifically provides an opportunity for veterans of the
armed forces to work in the field of banking and finance, as
depositors, borrowers, as stockholders, and officers.

Two important specialized government institutions are the

Development Bank of the Philippines and the Land Bank.
(a) Development Bank of the Philippines (DBP)

The DBP was created by the government with the specific function of providing
long-term credit to finance private development projects. It was created shortly
after independence in 1946 and was named the Rehabilitation Finance
Corporation. It was initially designed to provide long-term finance for the
rehabilitation of agriculture, industry and property damaged after World War II. As
time proceeded, its development functions in providing long-term finance became
more significant, so it was natural to change its name. The DBP is also tasked to
promote the establishment of private development banks in provinces and cities.
The DBP is the second largest government financial institution, with about half the
resources of the PNB.

The PNB derives its fund from capital contributed by government, government
deposits, sale of bonds, borrowings from the Central Bank and other government-
guaranteed foreign borrowings.
(b) Land Bank of the Philippines (LBP)

The LBP was set up in the early 1970s as a financial arm of the
land reform program. It was the bank called upon to finance the
acquisition by the government of landed estates for division and
resale to small landholders, and the eventual purchase of the
landholding by the tenant-lessee. The bank, otherwise, could
undertake the role of commercial banks. To assist it in the land
reform program, it has been granted permission to issue bonds,
receive deposits, and borrow with government guarantee.
(C) Philippine Amanah Bank

The Philippine Amanah Bank was created only the mid-1970s. It

was especially designed to serve the banking needs of the Muslim
areas in the South. Its original conception was designed to suit the
peculiar financial needs of Muslims, but as experience evolved and
from the examples of banks in other Muslim countries, it became
clear that traditional banking practices are essential for the survival
of any bank. Beset by the unorthodox philosophies at the
beginning, the bank is reorienting its operation. The major
government financial institutions own the controlling stock of this
bank.
Thrift Banks

The Thrift Bank Act of 1995 provided for the establishment,

operation and supervision of thrift banks to include savings and
mortgage banks, private development banks, and stock savings
and loan associations.
a. Savings and Mortgages Banks (SMBs)

SMBs are organized primarily to accumulate the savings of depositors and to invest
them together. With their capital, in bonds or in loans secured by bonds, real estate
mortgages, and other forms of security, or in loans for personal consumption or for
long-term financing in home building and home development.

Savings banks are the most obvious of the thrift banks. These are institutions
designed to accumulate the savings of depositors (in the case of savings and
mortgage banks) and of their members of stockholders (in the case of stock
savings and loan associations). These savings are then invested in various ways to
earn income through loans, interest-bearing deposits, real estate investments,
personal finance, and home building and home development activities. Some
aggressive thrift banks have contributed to home-building and real estate
development. Banco Filipino is an example of a thrift bank that expanded in the
home building and financing industry.
Small Private Banks

Two major innovations undertaken in the Philippine financial

system are the creation of small rural or town units that did not
have the services provided by normal banking institutions. The
first are rural banks, for short-term financial requirements and the
private development banks.
a. Rural Banks and Cooperatives

The role of rural banks is to promote comprehensive development with the end in
view of attaining a more equitable distribution of opportunities, income and wealth,
and sustained increase in the amount of goods and services.

Rural banks were designed primarily to mobilize rural savings by accepting savings
and time deposits and to provide a channel for funds from urban areas and the
government sector for agriculture and individual activities in the countryside. Rural
banks provide credit to small-scale farmers and enterprises in the rural sector. They
receive government assistance mainly for the support of the food productions
program. The government has given support to the rural banks through generous
terms of support for securing their qualified loans.

Through the years, rural banks have grown in numbers. A whole unit of the Central
Bank in the Philippines is in charge of the supervision of the rural banking system.
b. Private Development Banks (PDBs)

PDBs cater particularly to the medium and long-term financing needs

of Filipino entrepreneurs. Private development banks are modeled to
serve like the DBP at the community or provincial level. They are
allowed to accept time and savings deposits and to provide medium
and long-term credit to small and medium scale industries.

The DBP provides private development banks financial assistance. At

the community level, they assist in the financing development projects
by providing loan assistance to entrepreneurs.
THE BANKING SECTOR
Banking Laws

The principal laws governing banks in the Philippines are the New Central Bank
Act, which defines the power of the Bangko Sentral ng Pilipinas (BSP) in the
administration of the monetary, banking and credit system, and the General Banking
Act which regulates the operations of the Banks and the other financial institutions.

Other banking laws are the Thrift Banks Act of 1995, which regulates the
organization and operation of rural banks; Cooperative Code of the Philippines,
which governs the organization and operations of cooperative banks; Savings and
Loan Association Act, which governs the organization and operation of non-stock
savings and loans associations and R.A. 7721, which liberalized the entry and scope
of operations of foreign banks in the Philippines.

The specialized government banks are governed by their respective charters.

The Bangko Sentral ng Pilipinas
At the helm of the Philippine Financial System is the BSP. It provides
policy directions in the areas of money, banking and credit. It has
supervision over the operations of banks and exercise regulatory
powers over the operations of non-bank financial institutions
performing quasi-banking functions.

Its objectives are:

a. To maintain price stability conducive to a balanced and
sustainable growth in the economy.
b. To promote and maintain monetary stability and the
convertibility of the peso to other freelyconvertible currencies.
 The BSP supports activities that serve to strengthen the
country's commercial linkages with the world economy by

a. helping to create a stable financial environment,

b. promoting liberal foreign exchange rules, and
c. enhancing access to local and foreign capital to support
investments.
The Philippine Deposits Insurance Corporation (PDIC)

The PDIC is the official insurance corporation of the

banking system. It requires insured banks to pay an
assessment rate so that their deposits are insured up to
P500,000 per depositor.
It may also conduct independent information and reports
from insured banks wherever deemed necessary by the
PDIC's board of directors.
The Securities and Exchange Commission (SEC)

Specifically, the SEC issues certificate of incorporation

to financial corporation, votes on and approves
amendments thereto, discharges other functions in
connection with the licensing of financing companies and
investment houses, and supervises and regulates their
specific areas of operation. Any corporation desiring to
issue commercial papers is required to apply tor
registration with the SEC.
 HISTORICAL BACKGROUND

The Securities and Exchange Commission (SEC) was established on October 26, 1936 by the
virtue of the Commonwealth Act No. 83 or the Securities Act. Its establishment was prompted by
the need to safeguard public interest in view of the local stock market boom at that time.
Operations began on November 11, 1936 under the leadership of Commissioner Ricardo
Nepomuceno. Its major functions included registration of securities, analysis of every registered
security, evaluation of the financial condition and operations of applicants for security issue,
screening of applications for broker's or dealer's exchanges. The agency was abolished during
the Japanese occupation and was replaced with the Philippine Executive Commission. It was
reactivated in 1947 with the restoration of the Commonwealth Government. Due to the changes
in the business environment under President Ferdinand Marcos, the agency was reorganized on
September 29, 1975 as a collegial body with three commissioners and was given quasi-judicial
powers under P.D. 902-A.
In 1981, the Commissioner was expanded to include two (2) additional commissioners and two
(2) departments, one for prosecution and enforcement and the other for supervision and
monitoring. Then on December 1, 2000, the SEC was reorganized as mandated by R.A. 8799
also known as the Securities Regulation Code
MISSION-VISION

Mission
To strengthen the corporate and capital market infrastructure of the Philippines, and
to maintain a regulatory system, based on international best standards and
practices, that promotes the interests of investors in a free, fair and competitive
business environment.
We shall be guided in this mission by the values ot Integrity, Professionalism,
Accountability, Independence and Initiative.
Integrity
We are morally upright, honest and sincere in our private and public lives.

Professionalism
We consistently implement the law, provide timely and accurate information to investors,
and render efficient and competent service to the public.

Accountability
We abide by prescribed ethical and work standards in government service.

Independence
We act without fear or favor, and render sound judgment in the performance of our duties
and responsibilities.

Initiative
We are strategic and forward-looking in the fulfillment of our developmental and regulatory
functions.
VISION

We foresee that, by December 31, 2008, the Self-Regulatory Organizations will be able to
function effectively and maintain discipline within their ranks with minimal intervention from
the Securities and Exchange Commission.
By December 31, 2009, the Securities and Exchange Commission shall have laid down
the policies and procedures that will encourage Philippine business enterprises to be
conscious of and responsive to their corporate social responsibility to their employees,
community stakeholders and our country.
By December 31, 2010, the Securities and Exchange Commission shall have the
appropriate arrangements with its counterpart in the ASEAN countries, individually or
collectively, for the formulation and implementation of uniform rules on sharing of
formation, good corporate governance, and cross-border enforcement of capital market
regulations.
Powers and Functions of SEC
The Commission shall have the powers and functions provided by the Securities
Regulation Code, Presidential Decree No.902-A, as amended, the Corporation ode,
the Investment Houses Law, the Financing Company Act, and other existing laws.

Under Section 5 of the Securities Regulation Code, Rep. Act 8799, the
Commission shall have, among others the following powers and functions:
a) Have jurisdiction and supervision over all corporations, partnerships or
associations who arethe grantees of primary franchises and or license or permit
issued by the Government;
b) Formulate policies and recommendations on issues concerning the securities
market, adviseCongress and other government agencies on all aspects of the
securities market and propose legislation and amendments thereto
c) Approve, reject, suspend, revoke or require amendments to registration
statements, andregistration and licensing applications;
d) Regulate, investigate or supervise the activities of exchanges, clearing agencies
and otherSROS;
e) Supervise, monitor, suspend or take over the activities of exchanges, clearing
agencies andother SROS
f) Impose sanctions for the violation of laws and the rules, regulations and
ordersissued pursuant thereto:
g) Prepare, approve, amend or repeal rules, regulations and orders issue
opinionsand provided guidance on and supervise compliance with such rules,
regulations and others.
(h) Enlist the aid and support of and/or deputize any and all enforcement agencies
of the government, Civil or military as well as any private institution, corporation, firm,
association or person in the implementation of its powers and functions under this code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
(j) Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent
provisions of and penalties prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association to call meetings of stockholders or
members thereof under its supervision,
(l) Issue subpoena deuces tecum and Summon witnesses to appear in any proceedings of the Commission
and in appropriate cases, order the examination, search and seizure of all documents, papers, files and
records, tax returns, and books of accounts of any entity or person under investigations as may be
necessary for the proper dispositions of the cases before it subject to the provisions of existing laws
(m) Suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by laws; and
(n) Exercise such other powers as may be provided by law as well as those which may be implied from, or
which are necessary or incidental to the carrying out of the express powers granted the Commission to
achieve the objectives and purposes of these laws.
 Under Section 5.2 of the Securities Regulation Code the Commission's
jurisdiction over all cases enumerated under Section 5 of PD 902-A has been
transferred to the Courts of general jurisdiction of the appropriate Regional
Trial Court. The Commission shall retain jurisdiction over pending cases
involving intra-corporate disputes submitted for final resolution which should
be resolved within one year from the enactment of the Code. The
Commission shall retain jurisdiction over pending suspension of payments
rehabilitation cases filed as of June 30, 2000 until finally disposed.
Considering that only Sections 2,4 and 8 of P.D. 902-A, as amended
have been expressly repealed by the Securities Regulation Code, the
Commission retains the powers enumerated in Section 6 of said Decree,
unless these are inconsistent with any provision of the Code.
Status Performance of SEC

The last advisory released by the

Securities and Exchange Commission
was dated
June 14, 2004 saying that the SEC got
the highest sincerity among government
agencies in fighting corruption.

The released results from the Social

Weather Station (SWS) 2003/04
Transparent and Accountable
Governance (TAG) Enterprises first
among 24 government agencies in both
gross and net sincerity rating in fighting
corruption.
The Securities and Exchange Commission consistently increases their positive
results since year 2000 when the Securities Regulation Code had been
passed. Here are the cornerstones of the reforms:

(1) Reorganization of the SEC (focusing on its regulatory core functions)

(2) Demutualization of the Philippine Stock Exchange

(3) Issuance and enforcement of the Code of Corporate Governance

(4) SEC Computerization program Individual circumstances of each jurisdiction

must be taken into account in the consideration of a model.

Regardless of structural models, enabling statutes must provide greater

flexibility to regulators to cope up with fast changes in the market.
Non-Banking Financial Institutions
The Philippine banking system has grown in great diversity with banking system being
specialized.

Government Non-Bank Financial Institutions

As the banking system was evolving, there was a parallel development of the
other financial institutions. Insurance for workers under the Government Service
Insurance System was in operation by 1936. Compulsory social security insurance in
the private sector was founded in 1957 with the creation of the Social Security
System. These institutions were created essentially to protect the welfare of
employees. But in consequence, they set up large funds that were generated from
the insurance premium of members and their counterpart institutions. A logical result
was the corresponding effort to administer the welfare programs and to protect the
insurance funds that are generated.
 The GSIS and SSS generate forced savings, which are intended to fund the retirement
benefits of its members. Funds that are collected from members which are the contribution
of employers and of employees are plowed into the other parts of the financial system.
Both systems provide benefits for their members. They extend for policy holders and
they invest the trust funds generated from the periodic social security contributions from
their members. The two systems utilized different methods of investing their funds. GSIS is
more heavily engaged in direct purchase of bonds of government institutions, phasing out
its housing loans to expand its business and direct investments. SSS on the other hand has
invested 60% of its portfolio in interest earning notes receivables (mostly issued by PNB
and DBP and the treasury), the balance devoted to other loans for its members including
housing loans.
With the advent of other social welfare programs, new social insurance institutions are
created. The Workmen's Compensation Programs generate and administer a trust fund to
insure workers against accidents. Medicare also generates funds to pay for medical care
programs of its members.
 Among the latest of these financial institutions is the PAG-IBIG fund, which
means Pagtutulungan sa Kinabukasan-Ikaw, Bangko, Industriya, Gobyerno. The
PAG-IBIG fund, like the social insurance schemes, is based on a payroll deduction
for a specific purpose, which in this case is to provide housing loans to its
members.
In conjunction with the promotion of housing, the government also recently
created the National Home Mortgage Financing Corporation, which is designed as
a national mortgage bank that could refinance the mortgage papers of other
financial institutions. This type or institution has been successfully developed in
other countries.
These large funds in the system provide primary savings that are plowable into
other parts of the financial system. The private insurance companies, whether for
life or non-life insurance, also generate savings that can be mobilized into other
forms of investment.
The Non-Bank Financial Institution Sector
Component institutions are not banks, but currently are subject to
regulation by the BSP. These are sub-divided into two groups:

1. those that engage in the lending of funds obtained from the public by issuance
of their owndebt instruments (quasi-banking), and
2. those that engage in the lending of funds from sources other than the public.
However, thenew Central Banks Acts (R.A. No. 7653) provides the phase out
of the BSP regulatory powers over nonbank financial institutions without quasi-
banking function within a period of 5 years from 1993.
 Component Institutions

1. Investment Houses
Investment houses are stock corporations engaged in the underwriting of
securities of other corporations on a guaranteed basis. Their principal role is capital
formation that can engage in portfolio management, stockbrokerage, financial
consultancy and lending operations.

2. Financing Companies
These are corporations or general partnerships extending credit facilities to
consumers and to industrial, commercial or agricultural enterprises and leasing
movable properties.
3. Investment Companies
These are issuers of securities primarily engaged in the business of investing or
trading in securities. There are two types of investment companies: (1) the open-end
company, also known as the mutual fund, which offers for sale or has outstanding
redeemable securities of which it is the issuer; and
(2) the close company, which is an investment company whose shares issued are
not redeemable.

4. Securities Dealers and Brokers

A securities dealer buys and sells shares of stock of another, or acquires
securities for profit. In contrast, a securities broker facilitates transactions between a
buyer and seller of securities for a commission.

5. Venture Capital Corporations

These are organized jointly by private banks, the National Development
Corporation and the Technology Livelihood Research Center and/or other
government agencies to develop, promote and assist small and medium scales
enterprises through debt to equity financing.
6. Pawnshops
There are businesses engaged in lending money on personal property delivered as
security or pledge. These may be organized as sole proprietorship by Filipinos, or a
partnership with 70% of the capital subscribed by Filipinos or as a corporation with
70% of the equity owned by Filipinos. 7. Lending Investors
Lending investors are those who make a practice of lending money for themselves
or others. They extend all types of loans, generally short term, often without
collateral, using their own capital.

8. Government Non-Bank Institutions

There are investments or financing companies created under special charters.
These consist of the National Development Corporation, Philippine Veterans
Investment Development Philippine Export and Foreign Loan Guarantee
Corporation, National Home Mortgage Finance Corporation, and Small Business
Guarantee and Finance Corporation.
9. Mutual Building and Loan Associations
These are corporations whose capital stock must be subscribed by the
stockholders in regular equal installments with the purpose of
accumulating the stockholder’s savings and repaying them with their
accumulated savings and profits upon surrender of their shares in
order to encourage industry, savings and home building among its
stockholders.

10. Stock Savings and Loan Associations (SSLAs)

There are associations operating under the Savings and Loan
Association Act and are licensed and supervised by the BSP. Their
membership is confined to a well-defined group of persons. SSLAs are
not allowed to do business with the general public but accept deposits
from and grant loans top their member depositors only.
 Investment houses specialized in performing the function of dealing and
underwriting both the capital market for debt and equity issues of companies and their
short-term money market borrowings. Much of these debt and equity issues were for
domestic use, but there were instances when these issues were dominated in foreign
currencies.
The investment houses are also called quasi-banks or investments banks because
they behave like deposit taking companies-- borrowing funds for their own borrower's
account, through the issuance, endorsement or acceptance of debt instruments. In
England, investment houses are known as merchant banks.
Growth of money market: interbank call market. Soon, the market concentrated
on short-term instruments. Although investment houses were promoting still longer term
issues of companies, the short-term markets became more profitable. A money market
developed initially in the 1960s out of the interbank transfer of funds needed to adjust
bank reserve positions. This was done on a limited interbank call market basis, that is,
loans are negotiated largely on a bank-to-bank and daily basis.
 The investment houses saw this as a new opportunity and aggressively
promoted money market for short-term instruments (that is, "commercial papers"),
both for banks and highly rated corporations. This was assisted further by the entry
of the government with the introduction of a Treasury bill program. The first 90-day
treasury bills were issued in September 1966 and subsequent treasury bills of
longer maturities were issued. Added to these were the variety of government bonds
of much longer maturities-
DBP progress bonds, which had 10-year issues, and CBCI's (Central Bank
certificates of Indebtedness) issued on a three-year basis. Together with these
government issues, there also evolved an interbank call money from commercial
papers. Basically, all these funds are deposit substitutes. There are funds issued,
endorsed, or accepted as debt instruments for the borrowers own account, or the
purpose of meeting their temporary cash requirements.
The growth of these non-bank institutions like investment houses has been
remarkable. The last 20 years has seen an increase in resources and number of
these institutions, reflecting the growing complexity of the economic and financial
environment. Interrelated non-bank institution grew.
Investment and Finance Companies

The investment houses, of course, played a significant part of this

development. Investment companies or entities primarily engaged in investing,
reinvesting or trading the securities, also grew with these financial developments. In
addition, since they exist largely to extend credit to consumers and the other
enterprises through discounting commercial papers or leasing equipment, finance
companies were stimulated by the growing requirements for credit of consumers
and the other enterprises, including those in agriculture, which were without normal
access to bank credit.

In other economies where economic growth has been rapid, it is normal to

observe this kind of transformation of the financial sector. Institutional development
is not rapid process. Trial and error- in short, experience is required as a part of the
development.
Influence of Interest Rate Ceilings on Money Market

Peculiar aspects of Philippine financial policies further stimulated the rapid growth
of non-bank financial institutions. The existence of ceilings on lending, due to anti-usury
law, hampered the growth of the deposit-taking base of banks. The non-bank institutions
were not covered by this usury law. Therefore, these institutions provided an opportunity
to fill in the gaps in financing needs required by the economy.

On the other hand, institutions and individuals with surplus funds naturally preferred
to earn higher rates of return on their funds than what the banking system could afford in
terms of interest rates on savings accounts and time deposits (both of which are
interest- bearing services offered by the banks).
Financial Dualism

This situation created a marked dualism within the financial system -

the normal market for funds in the banking system on the one-end, and
the usury exempt, i.e., unregulated, money market and other lending in
the unorganized credit market at the other end. The money market was
being developed by the legitimate financial institutions.

The unorganized credit market is the one which flourishes between

money lenders and other individuals, normally in rural com- munities and
even in urban area of personal financing of very small economic
activities, such as farming, consumption finance, or trading in market
stalls.
Europe's Bank Scare

Warren Buffett, the legendary Ameri- can investor, likes to say that it's only when
the tide goes out that you find out who's been swimming naked. In the long-sheltered
world of European banking, the tide has gone out very fast in the past few days, and it's
expos- ing some stark truths: a worrying number of banks are outsized risks, and the
system of banking regulation that is supposed to watch over them is too narrowly
focused for comfort.
 On September 29, 2008, governments from Germany to Iceland
rushed to prop up five ailing financial institutions with huge cash infusions
or full-blown nationalization, making it one of the grimmest days in the
history of Germany's profile casualties were Fortis, Belgium's venerable
lender Bradford & Bingley; and Hypo Real Estate, which has a massive
$560 billion balance sheet and is a big player in the domestic securities
market. As the governments stepped in, the message they sent to the
public was supposed to be assuring: Don't panic, your money is safe.
Most Euro pean nations have some sort of deposit insurance that would
reimburse account holders at least up to a point, in the event of a default,
although by their rescue actions, the authorities sought to make it clear
that it wouldn't come to that.
 But a lot more convincing still needs to be done. Financial stocks plunged on
news of the bailouts, and Datastream's index of European Bank stocks has now
fallen by 45% in a year. Even shares of some of the big- gest and seemingly
solid financial land have been mauled. Some of the depositors have taken first,
too. A day after the U.K. Treasury announced the nationalization of Brad- ford &
Bingley and the sale of its branches to Spain's Banco Santander, Kunsum Patel,
a 50-year-old chef from Ilford, a gritty com- muter suburb 9 miles (14.5 km)
northeast of central London, withdrew all her savings and closed her account, as
did several other customers. "They say it's going down. I've been hearing it on
the radio," Patel fretted. "I haven't got a great amount of money, but the little bit I
have is enough to make it scary."
 Fortunately, that sort of a panic, which brought down British lender
Northern Rock a year ago, was the exception. But the loss of confidence
underlying it is every banker's worst nightmare and every bank regulator's too.
At Bradford & Bingley, staff were given forms to hand out to customers
explaining what had happened and how their money was safe. Elsewhere, it
was national authorities who sought to reassure, most notably in Ireland,
where the government announced an unprecedented $560 billion guarantee to
cover the deposits and debts of the nation’s six biggest banks for the next two
years
 While calming the general public is critical fundamental cause of this
crisis: critical, nobody has yet figured out how to deal with of confidence in
each other. They are so nervous about so-called "counterparty bank's loss
risk the possibility have of not being repaid that stopped lending to one
another, ringing credit markets to a grinding halt. "We know who the strong
banks are exposed to." explains Simon Maughan. "A bank doesn't just worry
about its counterparty," he adds. hut about its counterparty's counterparty."
The European Central bank, working together with the Federal Reserve and
other central banks has reacted by making hundreds of bil- lions of dollars
readily available to financial institutions, but so far that hasn't broken the
vicious cycle, and interbank lending remains gummed up. "It's like pushing on
a string," says Maughan. He points out that bank are hoarding the money
they can borrow over night from central banks rather than using it to lend to
others; as a result, "You're not ret ally achieving anything at all."
 The troubles were exacerbated when the U.S. House of Representatives
rejected a $700 billion rescue package for banks across the Atlantic on Sept. 29.
For all the difficulties the Bush Administration has encountered as it tries to push
through that package, there's a crucial difference between the U.S. response and
the European one: in Washington, Treasury Secretary Hank Paulson has been
working closely with Fed Chairman Ben Bernanke to craft a systematic response to
what has turned into a systematic crisis. In the 27-nation European Union, by
comparison, there is no single bank regulator and no mechanisms by which to craft
a comprehensive solution that crosses national borders. The result is what Daniel
Gros of the Centre for European Policy studies calls the "balkanization" of the
European banking, with national authorities struggling on their own or, at best, with
one or two neighbors. as in the case of Fortis, to put together pieces meal local
solutions. Gros and many others want a more comprehensive, pan-European
regulatory framework to be put in place, a plan the European Commission in
Brussels is eager to promote. Among other measures, the Commission is proposing
a reform of banking-capital requirements.
It's still too early to know if Europe's patchwork regulations will be transformed.
Hans Martens, chief executive of the Euro- pean Policy Centre, for one, says
the current crisis could actually push governments in the opposite direction,
toward more national intervention: "I don't think the mood is for more Europe."

Source: Time, October 13, 2008

SUPERVISION AND REGULATION OF FINANCIAL INSTITUTIONS

Supervisory and Regulatory Authority

The powers and functions of BSP are exercised by the Monetary Board and
chaired by the Governor. It carries out of its duties and responsibilities through
its three major operating sectors, each headed by-a Deputy Governor.
1. Supervision and Examination Sector (SES)
This sector has supervision and conducts periodic and special
examinations of banking
institutions and quasi-banks, including their subsidiaries and affiliates
engaged in allied undertakings.

2. Banking Service Sector (BSS)

This sector is responsible for tracking/ monitoring foreign
exchange transaction and external debt, currency issue and
retirement, loans and credit, government securities and branch
operations of the BSP

3. Resource Management Sector (RMS)

This sector is responsible over accounting operations, information
technology systems, human resources, property management, security and
other support services of the BSP.
Actions the BSP may take to protect depositors and bank creditors in cases where
banks get into financial difficulties

a. Appointment of a conservator in a bank

Whenever, on the basis of a report submitted by the appropriate supervising
or examining department, the Monetary Board finds that a bank or a quasi-bank
is in the state of continuing inability or unwillingness to maintain a condition of
liquidity deemed adequate to protect the interest of depositors and creditors, the
Monetary Board may appoint a conservator with such powers as the Monetary
Board shall deem necessary to take change of the asset, liabilities and the
management thereof, reorganize the management, collect all the monies and
debts due said institutions, and exercise all powers necessary to restore viability.
b. Placement of a bank under receivership whenever, upon report of the head of the
supervising or examining department. Monetary Board finds that a bank or quasi bank:

- is unable to pay its liabilities as they become due in the ordinary course of a business:
Provided,that this shall not include inability to pay caused by extraordinary demands induced by
financial panic in the banking community
- has insufficient realizable assets, as determined by the BSP, to meet its liabilities; or
- cannot continue in business without involving probable loses to its depositors or creditors, or
- has willfully violated a cease-and-desist order under Section 37 that has become final, involving
acts or transaction which amount to fraud or dissipation of the asset of the institution; in which
cases, Monetary Board may summarily and without need for prior hearing forbid the institution
from doing business in the Philippines and designate the Philippine Deposits Insurance
Corporation as receiver of the banking institution.

c. Placement under liquidation upon determination of a receiver that the

institution cannot be rehabilitated or permitted to resume business with the
depositors, creditors and general public.
Readings: RP Inoculated by 1997 Crisis

Philippine banks have no reason so far to react to the U.S. crisis the way U.S. and
European banks have reacted.
Despite sporadic exposures here and there, the banking sector is actually quite
sturdy, emerging stronger from the 1997 Asian crisis.
The only real casualty has been Philam life Co., since its parent company,
American International Group, went belly up. But even for Philamlife, being
fundamentally strong and actually quite profitable, the whole episode would be just
a momentary distraction.
“We learned our lesson and we learned it well," said Central Bank Deputy Governor
Nestor Espenilla. "We've been there before and because we didn't have the cash to
pour into the problem, we have had to recover from it the hard way."
 Thus far, Espenilla said the BSP was fairly confident that the industry, as a whole, had already built-
up adequate resources over the last decade after learning from the 1997 Asian crisis.

“The mechanism of the U.S. crisis is no different from the 1997 Asian crisis when we went through
the same problem," he said.

At the time, Espenilla said the entire wanking sector sustained bad assets of about billion exposure
and even then, the size of this was not considered significant.

This time around, he said the banking buildup that it had gone through during the industry years that
followed the Asian crisis.

“We're optimistic that this bailout plan will still push through but if it doesn't, the 11.5. would still be
ground zero and the impact on us would be on trade, especially if economy slips into recession”,
Especially said.

There were fears of thinning credit in the local market but Espenilla said this should be no worry
since the country had over $36 billion in reserves and the balance of pay- ments had a rolling surplus of
over $2 billion.

“A $2 billion surplus is nothing to sneeze at," he said. He added that there was added comfort level
from remittances, a re- newable source of inflows that was expected grow by only 10% but growing 18%.
WHAT NOW

The only serious impact that Philippine officials were anticipating was trade and labor related.

The U.S., after all, is still the country's biggest export market, buying up 15% of all our exported
goods. Moreover, the goods we export elsewhere to China, for example-ultimately wind up in
the U.S.

But the U.S. economy is now widely expected to go into recession and when this happens, the
Philippine economy would slow down from its 7.2% growth rate in 2007 to only 3.8% this year.

According to Finance Secretary Margarito Teves, an economist, the repercussions of a U.S.

recession would be felt not just immediately but possibly long after the market turmoil has
receded.

As the global labor market contracts from the economic slowdown, overseas Filipinos would be
hurt by either displacement or salary losses.

“There are overseas Filipinos, particularly in the U.S., holding two or three jobs," Teves said.
"They could lose those jobs and their families would fall into hard times."
The ultimate effect is the possible decline in remittances from overseas Filipinos, the
pillar of the economy that has so far been consistently resilient. These remittances fund
inflows would mean limited growth.

These factors would lead to a slowdown in growth here.

Fortunately, according to former Finance Secretary Jose Isidro Camacho, the

Philippines is now less dependent on the external sector and more driven by domestic
consumption.

“It should be therefore less affected by a global slowdown," he said. "But it will still be
affected to the extent that exports will slow down, deployment of OFW's may be
reduced, and financial capital flow will be negative."

So what should ordinary people do? Does this mean banks are not safe places to put
savings in?
 “Banks have to be looked upon based on their individual situations and financial
condition as well as on a systematic basis," Camacho said. "But remember that
Asian banks have been going through restructuring and consolidation as a
consequence of the Asian financial crisis."

Camacho said this positioned Asian banks well in coping with the current credit
crisis unless they have specific exposures to the affected institutions.

But to the Central Bank, this was not a worry. "We're facing challenging times, but
we are not necessarily in bad shape," Especially said. "Even if the bailout plan
doesn't work and I still think it will - we'll have to rely on our own resilience."