Chapter 13 : Bank as Financial Intermediary

General Banking Act

- Also known as Republic Act No. 33
- Specifies the powers, functions or services of a commercial bank in addition to its powers as a
corporation
Commercial Banking Corporation
- Any corporation which accepts or creates demand deposits subject to withdrawal by check
- May have all such powers as may be necessary to carry on the business of commercial bankin!,
by acceptin! drafts and issuin! letters of credit, by discountin! and ne!otiatin! promissory
notes, drafts, bills of e"chan!e, and other evidences of debts
- May ac#uire readily marketable bonds and other debts securities subject to such rules as the
Monetary $oard may promul!ate
Investment in Equities
A commercial bank may%
- invest in e#uities of the followin! allied undertakin!s
a. &arehousin! companies
b. 'easin! companies
c. Stora!e companies
d. Safe deposit bo" companies
e. (ompanies en!a!ed in the mana!ement of mutual funds but not in the mutual
funds themselves
f. $anks
- own more than 3) of the votin! stock of a thrift bank or a rural bank up to a majority or all of
the e#uity thereof
- Any commercial bank or!ani*ed under the laws of the +hilippines may, with approval of the
Monetary $oard, establish branches and a!encies in the +hilippines and outside the country
eal Estate
A commercial bank may%
- +urchase, hold, and convey real estate for such followin! purposes
,. May be necessary for its immediate accommodation in the transaction of business with
these conditions%
a. -otal investment in such real estate and improvements must not e"ceed .) of net
worth
b. Real estate used for bank purposes must be considered as part of the bank/s
investment in real estate
0. May be mort!a!ed to it in !ood faith by way of security for debts
3. May be conveyed to it in satisfaction of debts contracted in the course of its dealin!s
1. May purchase at sales under jud!ment, decrees, mort!a!es or trust deeds held by it
and such as it may purchase to secure debts due to it
!avings and "ortgage Bank
- Synonymous to savin!s bank and mort!a!e bank
- Any corporation or!ani*ed for the purpose of accumulatin! the savin!s of depositors and
investin! them in readily marketable bonds and debt securities
a. (ommercial papers and accounts receivable
b. 2rafts
c. $ills of e"chan!e
d. Acceptances
e. Notes arisin! out of commercial transactions or in loans secured by bonds
f. Mort!a!es on real estate and insured improvements
!. 3ther forms of security or in loans for personal or household finance
h. Such other investments and loans which the Monetary $oard may determine as necessary
- May issue a domestic letter of credit denominated in +hilippine currency
#ther !ervices o$ !avings and "ortgage Bank
- May perform commercial bankin! services or may operate under an e"panded commercial
bankin! authority
- May lend money a!ainst the security of jewelry, precious stones and etc.
- May invest in e#uities of allied undertakin!s as may be approved by the Monetary $oard for
banks of their cate!ory
- May issue mort!a!e and chattel mort!a!e certificates, buy and sell them, or accept and
receive them in payment or as amorti*ation
- Mort!a!e and chattel mort!a!es must be issued e"clusively in national currency and e"clusively
for financin! of e#uipment loans and other fi"ed installations
a. 4or construction, ac#uisition, e"pansion or improvement of rural and urban properties
b. 4or refinancin! of similar loans and mort!a!es
c. 4or other purposes authori*ed by the Monetary $oard
- May purchase, hold, and convey real estate under same conditions with commercial banks
ural Bank
- +owers, functions or services are embodied in republic Act No. 50 6Rural $anks Act7
- 8t is the declared policy of the State to promote and e"pand the rural economy in an orderly
and effective manner
- National 9overnment must take an active role to encoura!e and assist in the establishment
- Appropriate a!encies or instrumentalities of the National 9overnment in cooperation with the
Rural $ank must provide advice on business and proper use of credit for production and
marketin!
- Monetary $oard is mandated to formulate rules and re!ulations !overnin! the establishment
and operations
!ervices o$ ural Banks
,. Accept savin!s and time deposits
0. Act as correspondent for other financial institutions
3. Act as collection a!ent
1. 3ffer bankin! services as provided in Sec 50 of the 9eneral $ankin! Act
&ith permission of the Monetary $oard, it may%
,. 3pen current and checkin! accounts
0. Act as trustee over estates or properties of farmers and merchants
3. Act as official depository of municipal, city or provincial funds
1. Rediscount paper with the +hilippine National $ank or the 2evelopment $ank of the +hilippines
or other banks
.. May perform all the services authori*ed for savin!s and mort!a!e banks or form commercial
banks oar may operate under an e"panded bankin! authority
Conditions $or Equity Investment
Rural banks may invest in e#uities of allied undertakin! as approved by the Monetary $oard with the
followin! conditions%
,. -otal investment is not to e"ceed 0.) of the net worth
0. :#uity investment in any sin!le operation is limited to ,.) of net worth
3. :#uity investment in any sin!le enterprise is to remain a minority holdin! e"cept where the
enterprise is not a financial intermediary
%rivate &evelopment Bank
- +owers, functions or services are specifically provided in Republic Act No. 1;3 6+rivate
2evelopment $anks/ Act
- 8t is the declared policy of the State to promote and e"pand the socio economic pro!ram of the
9overnment
a. -o e"pand industrial and a!ricultural !rowth
b. -o encoura!e the establishment of more private development in order to meet the needs
for capital and to meet the demands for ade#uate investment credit
- National 9overnment must take an active role to encoura!e and assist in the establishment
- 2$+, +N$, 9S8S, SSS, National :conomic 2evelopment Authority, 2epartment of A!riculture,
2epartment of -rade and 8ndustry may provide ade#uate assistance in a!riculture and industry
%o'ers o$ %rivate &evelopment (anks
- 8s to e"ercise all the powers and assume all the obli!ations of a savin!s and mort!a!e banks as
provided by law
- May en!a!e in commercial bankin! services or e"panded commercial bankin! <approved by M$=
- May invest in e#uities of such allied undertakin!s as may be approved by the (entral $ank with
the followin! conditions%
,. -otal investment is not to e"ceed 0.) of net worth
0. :#uity investment in any sin!le enterprise is to be limited to ,.) of net worth
3. -otal e#uity investment in any sin!le enterprise is to remain a minority holdin! e"cept
where the enterprise is a non>financial allied undertakin!
1. :#uity investment in other banks is to be subject to same provisions !overnin! similar
investments of commercial banks and must be deducted from the investin! bank/s net
worth
- May establish branches and a!encies subject to the approval of the Monetary $oard
!A)I*G! A*& +#A* A!!#CIA,I#*!
any corporation en!a!ed in the business of%
<,= accumulatin! the savin!s of its members?stockholders
<0= usin! such accumulation for investments and securities of the 9overnment
<3= providin! personal finance and lon!>term financin! for home>buildin! and development
its powers, functions or services are embodied in R.A. 355; or the Savin!s and 'oan
Associations Act
<,= to re!ulate and supervise the activities of savin!s and loan associations <S'As=
<0= to lay down the minimum re#uirements and the standards that !overn S'As
<3= to ma"imi*e the protection of the public, members, and stockholders
<1= to encoura!e industry, fru!ality, and the accumulation of savin!s amon! the public,
members, and stockholders
%o'ers o$ !avings and +oan Associations
@in addition to the powers !ranted under the (orporation (ode
!,#C- !+As *#*.!,#C- !+As
powers and obli!ations of a savin!s and mort!a!e
bank
!rant loans not e"ceedin! the member/s savin!s
and time deposits, plus 1>month salary?incomeA or
5) of the collateral/s 4B
char!e interest within the limits allowed by law
and incidental fees in the !rantin! of loans
discount with recourse commercial papers and
accounts receivable
invest its funds in any sound, non>speculative
enterprise, or securities issued by the 9overnment
with prior approval of the Monetary $oard, all the
services for commercial banks or for operatin!
under an e"panded bankin! authority
allow members to participate in the profit of S'A
on the basis of their deposits
borrow money or incur obli!ations not e"ceedin!
0) of its total assets
maintain deposits with banks and other S'As
*#/ Accounts
savin!s accounts from which funds may be withdrawn by means of ne!otiable orders of
withdrawal
embodied in (entral $ank (ircular No. C;.
any thrift bank desirin! to offer 6N3&7 Accounts must submit a letter>re#uest addressed to the
Monetary $oard
Factors to (e considered:
<,= capital, financial condition, and profitability of the applicant bank
<0= e"istin! systems, procedures, and internal control safe!uards of the applicant
<3= ability of the bank/s personnel to handle 6N3&7 Accounts
<1= !eneral compliance by the applicant with bankin! laws, rules and policies
%0I+I%%I*E BA*C0E! #F F#EIG* BA*-!
head office of such branches is re#uired to fully !uarantee the prompt payment of all liabilities
of its +hilippine branch
+hilippine residents and citi*ens who are creditors are !iven preferential ri!hts to the assets of
such branch
#ther !ervices o$ Banks
<,= receive in custody funds, documents, and valuable objects, and rent safety deposit bo"es
<0= act as financial a!ent, and buy and sell shares and all types of securities
<3= make collections and payments for the account of others and such other services
1*I)E!A+ BA*-I*G
as provided in the 9eneral $ankin! Act, the Monetary $oard may authori*e a commercial bank
or a !overnment>owned and controlled bank to operate under an e"panded commercial bankin!
authority and therefore%
<,= e"ercise the powers of an 8nvestment Douse
<0= invest in the e#uity of a non>allied undertakin!
<3= own a majority or all of the e#uity in a financial intermediary other than a commercial
bank or a bank authori*ed to provide commercial bankin! services
*ature o$ 1niversal Banking
1niversal (ank > a mi"ture or combination of separate and distinct business entities
Investment 0ouse E any enterprise which en!a!es in the underwriting of securities of other
corporations
2under'riting3 E the act or process of !uaranteein! the distribution and sale of securities of
any kind
2securities3 E written evidences of ownership, interest, or participation in an enterprise, or
written evidences of indebtedness of a person or enterprise
Functions of Investment House
1. Arrange to distribute on a guaranteed basis securities of other corporations and
of the Government or its instrumentalities;
2. Participate in a syndicate undertaking to purchase and sell, distribute or arrange
to distribute on a guaranteed basis securities of other corporations and of the
Government or its instrumentalities;
. Arrange to distribute or participate in a syndicate undertaking to purchase and
sell on a best-e!orts basis securities of other corporations and of the Government or
its instrumentalities;
". Participate as soliciting dealer that deals options, rights or #arrants relating to
securities and such other po#ers #hich a dealer may e$ercise under the %ecurities
Act
&. Promote, sponsor, and assist and implement ventures, pro'ects and programs
that contribute to the economy(s development
). Act as *nancial consultant, investment adviser, or broker
+. Act as portfolio manager, and,or *nancial agent, but not as trustee of a trust fund
or trust property as provided for in -hapter .// of 0epublic Act 1o. +
2. 3ncourage companies to go public, and initiate and,or promote, #henever
#arranted, the formation, merger, consolidation, reorgani4ation, or recapitali4ation
of productive enterprises, by providing assistance or participation in the form of
debt or e5uity *nancing or through the e$tension of *nancial or technical advice or
service
6. 7ndertake or contract for researches, studies and surveys on such matters as
business and economic conditions of various countries, the structure of *nancial
markets, the institutional arrangements for mobili4ing investments
18. Ac5uire, o#n, hold, lease or obtain an interest in real and,or personal property
as may be necessary or appropriate to carry on its ob'ectives and purposes
11. 9esign pension, pro*t-sharing and other employee bene*ts plans
12. %uch other activities or business ventures as are directly or indirectly related to
the dealing in securities and other commercial papers, unless other#ise governed or
prohibited by special la#s, in #hich case the special la# shall apply.
Trust Corporation
- /t acts as trustee.
- in form of corporation
- may do commercial banking but must be kept separate
- may be authori4ed to engage in business
Powers of Trust Corporation
1. Acts as a trustee
2. Acts as a guardian, receiver, trustee of any minor, insane person, idiot, habitual
drunkard under the 'urisdiction of the court
. Acts as a e$ecutor of last #ill
". Acts as administrator of the estate of any deceased person
&. :o e$ecute any legal trust
Ofshore Banking
3stablished by Presidential 9ecree 1o. 18" #hich took e!ect on %eptember 8,
16+)
:he conduct of banking transactions in foreign currency
Motivations for issuance
1. -ondition is conducive to o!shore banking like political stability
2. /nterest - :o have #ide access to the sources of capital funds for economic
development
. ;ene*cial to country - increases links to other countries, facilitate the <o# of
investment
". :he geographical location, physical and human resources
Ofshore Banking Unit
;ranch of a foreign banking corporation #hich is authori4ed by -entral ;ank of the
Philippines to transact banking business in the country.
Reuirements for Ofshore Banking Unit
1. ;anks from other countries organi4ed under the la#
2. =ust have certi*cate of authority from the =onetary ;oard
!" must be li5uid and solvent
B" =ust contribute to Philippine economy
Corporate Un#ertakings
=ust submit *rst to -entral ;ank of the Philippines a s#orn undertaking of its head
o>ce or parent
1. Provide necessary currencies to cover li5uidity needs
2. ?perations of the ?!shore ;anking 7nit should be managed soundly
. :rain and educate @ilipinos in international banking
". =aintain a fund in its ?;7 in the minimum of 7%A 1,888,888
&. %tart of operations is #ithin 128 days from receipt of its certi*cate of authority
$aws not app%ica&%e
Ba#s not applicable to transactions in o!shore banking unit in the PhilippinesC
1. Act 1o. 2)&& - 7sury Ba#
2. 0epublic Act 1o. &26 - 7niform -urrency Ba#
. 0epublic Act 1o. &61 9eposit /nsurance Ba#
:he -entral ;ank of the Philippines is authori4ed to collect a fee not less than
7%A28,888 upon issuing any certi*cate of authority.
Foreign Currenc' (eposit
- parties #ho may deposit foreign currencies
!ccepta&%e Foreign Currencies
:he -ircular " of the -entral ;ank of the Philippines makes a list of foreign
currencies acceptable as part of the international reserve of the PhilippinesC
7% 9ollar
Pound %terling
%#iss @ranc
@rench @ranc
-anadian 9ollar
/talian Bire
Dapanese Een
!uthorit' of Banks
1. :o accept deposits and to accept foreign currencies in trust
2. :o issue certi*cates as evidence if deposit
. :o discount
". :o accept deposit as collateral for loans
&. :o pay interest in foreign currency on deposits
Chapter 14 : Central Banking
Central Bank &e$ined
(entral $ank is defined in Sections ,, 0, C1 and C5 of Republic Act. no. 0C.. -o summari*e, central
bank is a corporate body entrusted to administer the money, bankin! and credit system of the country
efficiently to help the economy/s !rowth.
#(5ective o$ the Central Bank
8t is the duty of the (entral $ank to use the powers vested to it to achieve the followin!%
,. -o maintain internal and e"ternal monetary stability in the +hilippines and to preserve the
international value of the peso.
0. -o encoura!e money, credit and e"chan!e conditions conducive to a positive !rowth of the
economy.
(entral $ank is e"pected to perform its role to brin! economic stability and !rowth.
Functions o$ the Central Bank
,. 4iscal a!ent of the !overnment. -his means that ($ is a representative of the !overnment
when it comes to money matters.
0. (aretaker of commercial banks/ reserves
3. Mana!er of international reserve of the country. Reserves that ($ mana!es are !old and forei!n
e"chan!e.
1. 8ssuer of notes
.. Re!ulator or controller of credit. ($ has policies or re!ulations that concern credit. -his is to
prevent e"treme fluctuations in credit that may affect the economy.
C. 3ther functions that have come about due to the advancement of the economy therefore the
demand for them arose.
Features o$ a Central Bank
,. (entral $ank is not allowed to interact directly with individuals or the public. -here are some
isolated cases wherein this is allowed.
0. (entral $ank is not or!ani*ed for profit>makin!
3. 8t is e"pected to act as a fiscal a!ent of the !overnment which means it must help in upholdin!
public policies.
1. (entral $ank, in a way, is subordinated with other banks because it supervises the monetary,
credit and bankin! system of the country as whole.
.. (entral $ank is the brid!e between the bankin! system of one country and the rest of the
world.
Central Bank o$ the %hilippines
(entral $ank of the +hilippines, now $an!ko Sentral n! +ilipinas, was inau!urated on Fanuary 3,
,;1;. 8t now has a staff of over 3 employees and also has more than a billion dollars international
reserves. Restructurin! of the bankin! system happened in the ,;Gs to make way to Hniversal $ankin!.
ole o$ the Central Bank
Accordin! to then 9overnor 9re!orio S. 'icaros, the role on the (entral $ank is to ensure stron!
monetary foundation and ade#uate resource inputs to the development process.
,. $ank capital build>up
0. Re!ional dispersal of credit and financial institutions.
3. Rationali*ation of interest rate structure
1. (redit allocation to a!ro>industrial development
.. (areful international debt mana!ement
C. 3ther components of monetary innovation
,he Central Bank today
(entral $ank has the uni#ue ri!ht to !ive advice and to press such advice.> Monta!u (ollet Norman
Central "onetary Authority
+residential 2ecree No. ,G,
o constituted the (entral $ank of the +hilippines as the (entral Monetary Authority
"onetary Board
- policy>makin! body of the (entral $ank of the +hilippines
- vested with monetary and credit authority
- mem(ers:
o (hairman
o (abinet Member
o . members from the private sector
- po'ers:
o prepare rules and re!ulations for the effective dischar!e of the responsibilities and
e"ercise of the powers vested in the (entral $ank
o direct the mana!ement, operation and administration of the (entral $ank and
prepare the necessary rules and re!ulations for the purpose
o appoint, fi" the remuneration and other emoluments, and decide on the removal of
(entral $ank personnel, e"cept the 9overnor
o authori*e such e"penditures of the (entral $ank in the interest of its effective
administration and operations
"onetary %olicy
- formulated by the "onetary Board
- implemented by the Central Bank
- process whereby the monetary authority attempts to achieve a desired set of economic
!oals by controllin! money supply, cost and availability of credit or the allocation of credit
to its various uses
- should6should (e:
o fle"ible and dynamic
o conducive to the chan!in! needs and problems of the economy
o promote not only the economic !rowth of the economy but also the social justice
of the credit system
- 'eakness: not effective without the cooperation and support of fiscal policies
!ervices o$ the Central Bank
,. Supervises and re!ulates operations of bankin! institutions
0. Re!ulates operations of non>bank financial intermediaries
3. Re!ulates forei!n e"chan!e
1. Re!ulates credit
.. 8ssues money
C. Mints coins and prints paper money
5. Ieeps reserves
G. (lears checks
;. +rints checks
,. +rints !overnment securities
,,. 9rants loans and advances
,0. $uys and sells !overnment securities
,3. (ollects revenues for the !overnment
Imperative o$ "onetary "anagement
Mana!ed (urrency System
o currency that is subject to !overnmental control with respect to the amount in
circulation and the rate of e"chan!e with other currencies
o fle"ible and responsive for the chan!in! needs of the economy
o importance is felt if there is an actual want or absence of it
+rovisions of (entral $ank Act
o provides the sufficient means of action for the (entral $ank of the +hilippines to
achieve the domestic and international objectives of the national monetary policy
"a5or ,ools o$ "onetary "anagement
#pen.market #perations
o principles are found in Section ;C
3pen>market operations be made e"clusively for the purpose of achievin! the
objectives of the national monetary policy and shall be limited to the purchase
and sales of 9overnment securities, as well as, the issue and ne!otiation of
(entral $ank obli!ations
Guidelines in Government !ecurities
!ection 177
o the issue of securities representin! obli!ations of the 9overnment is coursed throu!h
the (entral $ank, actin! as a!ent of, and for the account of, 9overnment or its
respective subdivisions or instrumentality, as the case may be
!ection 173
o authori*es the (entral $ank to place the !overnment securities throu!h%
direct sale of financial institutions and the public
outri!ht sale to syndicate, brokers or dealers for the purpose of resale to the
public of their own account
brokers or banks contracted to place the securities with the public for the
account of the (entral $ank
(entral $ank
o mandated by law to administer 6Securities Stabili*ation 4und7 for the account of the
9overnment
Securities Stabili*ation 4und
o directed in the purchases and sales in the open market, of bonds and other evidences
of indebtedness issued or fully !uaranteed by the !overnment
o purpose is to increase the li#uidity and stabili*e the value of said securities in order
thereby to promote investment in 9overnment obli!ations
!A+E #F G#)E*"E*, !EC1I,IE!
-he (entral $ank adopted the 6auction method7 in September ,;5G in sales of ($ (ertificates
of 8ndebtedness.
> to provide the sparkplu! in the attainment of the broad objectives of the yields
rationali*ation
> the !reater effectiveness and fle"ibleness of the 6open>market operation7 as a tool of
#uantitative monetary re!ulation
eserve equirements:
%urpose% to enable the (entral $ank of the +hilippines to control the volume of money
created by the credit operations of the said bankin! institutions.
eserve equirement%
> +roportion to the volume of its deposit liabilities
> Applicable to all banks.
"inimum eserve atios (y the "onetary Board:
-ime and Savin! 2eposits
> not less than .) or more than 0.)
2emand 2eposits
> not less than ,J or more than .)
"1+,I%+E E8%A*!I#* #* BA*- &E%#!I,!
A linka!e between open>market operations and the re#uired reserves ration a!ainst deposits.
CEA,I#* #F "#*E9 B9 ,0E BA*-I*G !9!,E"
An e"pansion of bank deposit involved various financial institutions, most commonly are banks. 8n
this topic it is evident that more primary deposits can !enerate more loans in the bankin! system.
"oral suason
> moral influence
> the law provides that the Monetary $oard 6shall rely on its moral influence7 for the
re!ulation of money, credit and e"chan!e.
> key idea% persuasion
!%ECIFIC %E*A+,IE!
!EC,I#* 37: EF1!A+ ,# "A-E E%#,! # %E"I, E8A"I*A,I#*:
%1*I!0"E*,: 4ine not more than ten thousand pesos or by imprisonment of not more than one
year, or both.
!EC,I#* 33: FA+!E !,A,E"E*,
%1*I!0"E*,: 4ine not to e"ceed fifteen thousand pesos, or by imprisonment for a term not to
e"ceed two years, or both.
!EC,I#* 3;: )I#+A,I#* #F +A/! A*& EG1+A,I#*!:
%1*I!0"E*,: 4ine not more than twenty thousand pesos and by imprisonment of not more
than five years.
!EC,I#* 3;.A: A&"I*I!,A,I)E !A*C,I#* #* BA*-!:
%1*I!0"E*,:
,. 4ine not in e"cess of five hundred pesos
0. Suspension or removal of directors and?or officers
3. Suspension
> rediscountin! privile!es
> lendin! or forei!n e"chan!e operations or authority to accept new deposits or
make new investments
> interbank clearin! privile!es
> authority to operate
!EC,I#* 3;.B: A&"I*I!,A,I)E !A*C,I#* #* *#*.BA*- FI*A*CIA+ I*,E"E&IAIE!
%EF#"I*G <1A!I.BA*-I*G F1*C!,I#*!
,. 4ines not in e"cess of five hundred pesos
0. Suspension or removal of directors and?or officers
3. Suspension of access to (entral $ank credit facilities
1. Suspension or revocation of #uasi>bankin! license