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krisna macabenta

on 11 October 2014

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Transcript of BANKING

Brief History of Banking


The history of banking began around
2000 B.C. in the temples of Babylonia.

During the reign of
King Nebuchadnezzar
, credit
transactions exist.
During the 9th century, credit transactions were found.

It was in Ancient Greece that the banking attained its height of development.


The first known registered banking institution as recorded was established in Venice in 1157 A.D.

Bank of Barcelona - 1401
Bank of Venice - 1587
Bank of Amsterdam - 1609
Bank of Hamburg - 1619
Bank of Nuremberg - 1621
Bank of Stockton - 1688
Bank of England - 1694

Wealthy Families that Influenced the Banking System
in Europe:
Medici family in Florence
Fugger family in Germany
Rothschild family in Germany
Bank of France
was organized in 1800 by
Napoleon Bonaparte
attributed to have started banking.

-at first, they issued promissory notes which were
payable on demand.

-the notes they issued are equivalent to the paper
we are using now.

Bank of Canada
- opened in 1835.

-it was greatly influenced by the
United States and Great Britain.

Bank of North America
- first important bank
in the United States.

-it was established In 1781.


- irredeemable paper money printed by the
Federal government during civil war.
National Banking Act of 1863

brought the change in the structure of
commercial banking in the United

- it was designed to create a national
banking system, float federal war loans,
and establish a national currency.

Federal Reserve Act of 1913

- is an Act of Congress that created
and set up the Federal Reserve
Federal Reserve System
the central banking system of the United States of America.
During the
1930’s depression
, many banks were closed.
Rodriguez Bank

organized by Francisco Rodriguez in 1930.
Monte de Piedad y Caja de Ahorros de Manila
(now known as the Monte de Piedad and Savings

the country’s first savings bank and was founded
by Father Felix Huertas.
American Period

The Philippine National Bank

established by the Philippine government on July 22, 1916, during the American Occupation.
The Philippine Bank of Commerce

- first private commercial bank in the
country owned by Filipinos. It was
opened for business in 1938.
Japanese Period
Three domestic banks that were allowed to resume during the Japanese occupation:

1. Philippine National Bank

2. Bank of the Philippine Islands

3. Philippine Bank of Commerce
Republic Act No. 265
(Central Bank Act) - an Act establishing the Central Bank of the Philippines. It was approved on June 15, 1948.
The New
Central Bank

Major Changes Incorporated in the Law:

1. Change in the composition of the Monetary Board: 2 members from the
government and 5 full time members from the private sector.
2. The adoption of price stability conducive to a balanced sustainable growth of the
economy and the maintenance of monetary stability and the convertibility of the
peso as its primary objectives.
3. Strengthening of the regulation and supervision framework for banks and quasi
4. Abolition of the suspense Monetary Adjustment Account (MAA) and Exchange
Stabilization Adjustment Account (ESAA) in the balance sheet.
5. The phase-out of fiscal agency function within a period of 5 years.
6. The phase-out of regulatory functions over finance companies without quasi-
banking functions within a period of 5 years.
7. Additional mandatory reports to assure accountability.
8. Financial restructuring of the CB upon effectivity of the law. The BSP will be
provided with an initial capital of P10 billion and absorbing only certain assets from
the old CB, which will be increased to P50 billion within the next 2 years.
9. The imposition of requirements on trust accounts by the Monetary Board or
authorized under the new law.
10. The imposition of interest on loans and advances made by the CB to any bank,
which has been placed under receivership, even after the bank is closed.


a financial institution charges with the responsibility of accepting deposits from the general public and lending these to those in need.
Roles of Banks:

1. Serve as depository of idle funds.

2. Serve as major source of
loanable funds.

3. Give counsel on financial matters.

4. Employ people who are experts
on various fields.

Commercial Banks
Commercial Bank

is a type of bank that provides services such as accepting deposits, making business loans, and offering basic investment products.
Thrift Banks
Thrift Banks-
these are banks established to encourage thriftiness, industry, frugality, and the accumulation of savings among people.
Classifications of Thrift Banks:

1. Savings and Mortgage Banks

2. Stock Savings and Loan

3. Private Development Banks

Rural Banks
Rural Banks-
are organized to promote and expand the rural economy in an orderly and effective manner by providing farmers and small businessmen with means of facilitating and improving their productive facilities.
Specialized Government Banks of the Philippines
Land Bank of the Philippines

its main purpose is to help implement the
land reform in the Philippines known as the
Comprehensive Agrarian Reform Program

Development Bank of the Philippines

it aims to develop, expand,
construct, and rehabilitate our
agricultural industry.
Al-Amanah Islamic Investment Bank of the Philippines

is the only bank in the Philippines authorized to offer Islamic banking.
Offshore Banking Unit
Offshore Banking Unit-
foreign commercial banks that were allowed to operate in our country.
Classification of Banks According to Form of Organization:

1. Unit Bank
2. Branch Banking System
3. Group Banking
4. Chain Banking

Traditional Classification of Banks:

1. Privately Owned Banks

2. Government Owned Banks

Classification of Banks According to Incorporation:

1. Domestic Bank

2. Foreign Bank

Functions of a Bank
1. Depository Function
2 Types of Deposits

1. Primary Deposits

2. Derivative Deposits

Classification of Deposits According to a Different Criterion:

1. Deposits from the Private Sector

2. Deposits from the Government

Classification According to the Form of Withdrawal:

1. Savings Deposit

2. Demand Deposit

The Automated
Teller Machine

Types of Bank Accounts

1. Single-Name Individual Account
2. Joint Account
a. “and” account
b. “or” account
3. Sole Proprietorship Account
4. Partnership Account
5. Corporate Account
6. Fiduciary Account
7. Unincorporated Group of Account
8. Inactive Deposit Account (Dormant Account)

2. Trust Function
3. Collection and Remittance Function
4. Loans and Discounts
Types of Loans Granted by Banks:

1. Demand or Callable Loan

2. Time Loan

Other Classifications
Bank Loans
1. According to purpose:

a. Commercial or Mercantile Credit
b. Investment Credit
c. Agricultural Credit
d. Real Estate Credit
e. Personal Credit
2. According to the form on how credit is

a. Direct Loan
b. Discount Loan and Rediscount Loan
c. Overdraft Line

3. According to maturity:

a. Short-term Loan
b. Medium-term Loan or
Intermediate-term Loan
c. Long-term Loan
4. According to security:

a. Secured Loan or Collateralized

b. Unsecured Loan or Character Loan
or Clean Loan

5. According to release of the

a. Lump sum release
b. Installment release as the
project progresses

6. According to manner of

a. Lump sum basis
b. Installment basis

5. Advisory Function
Banks Established in Europe:
Republic Act No. 7653
(New Central Bank Act) - is an Act signed by President Fidel V. Ramos on June 14, 1993 for the establishment of an independent Central Monetary Authority.
Spanish Period
El Banco Español Filipino de Isabel II
- the oldest
standing bank in the Philippines and in the whole
Southeast Asia.

-it is later changed to El Banco de Islas Filipinas
which is now known as the Bank of the Philippine
Islands (BPI).

Obras Pias
religious foundation organized by Father Juan Fernandez de Leon in 1594 that accumulated large funds from wealthy individuals for charitable purposes
Banking in the Philippines
Central Bangking
- The

Central Banking
June 15, 1948
, the Central Bank Act or the
Republic Act. No. 265 was approved.

January 03, 1949-
it was opened to the public.

The capital of the bank, as provided by the Act,
shall be ten billion pesos (P 10,000,000,000),
with the initial subscription coming from the
liquidated assets of the Exchange Standard Fund.

Bank Objectives
1st Primarily to maintain internal and external monetary stability in the Philippines.

2nd To preserve the international value of the peso and the convertibility of the peso into other freely convertible currencies.

3rd To foster monetary, credit and exchange conditions conducive to a balanced and sustainable growth of the economy.

4th To maintain price stability in the economy.

The Old Monetary Board
The policy- making body of the Central Bank is the Monetary Board, which composed of seven members.
The Seven members:

1st The Chairman of the Board is also the Governor of the Central

2nd The Secretary of Finance.

3rd The Director General of the National Economic Development
Authority ( NEDA).

4th The Chairman of the Board of investments.

5th The Secretary of Budget and Management.


The two (2) appointed representatives from the private sector.

The Chairman of the Board has a term of six years while the representatives from private sector have four years term.
The person to be appointed to the Board must be:

• A person of good moral character.

• Unquestionable integrity and responsibility.

• Competent in economics, banking, finance, commerce, agriculture or industry.

• All members of the Monetary Board must be a natural born Filipino citizen.

The New Central Bank

Republic Act. 7653 is known as the New Central Bank Act.

Section I of RA 7653 states that the state shall maintain a Central Monetary Authority(CMA) that shall function and operate as an independent body in the discharge of its mandated responsibilities concerning money, banking, and Credit.

The Bangko Sentral shall be capitalized at fifty billion pesos (P 50,000,000,000) to be fully subscribed by the Government of the Philippines.

The Bangko Sentral shall provide policy and directions in areas of money, banking and credit. It shall have supervision over the operations of banks and exercise such regulatory powers as provided in this Act.
Composition of the New Monetary Board of Bangko Sentral

The powers and function of the Bangko Sentral shall be exercise by the Bangko Sentral Board composed of seven (7) members appointed by the President of the Philippines for a term of six (6) years.

The Seven members are:

1st The Governor of the Bangko Sentral who shall be the Chairman of the Monetary Board.
• Deputy Governor- to act as an alternative.

2nd A member of the Cabinet
• Undersecretary in his Department to attend as his alternate.
The five(5) members who shall come from the private sector, all of whom shall serve full-time.
Qualification of the Monetary Board

The member of the Monetary Board must be:

- a natural born citizen of the Philippines at
least thirty five (35) years of age, with
exception of the Governor who shall at
least be forty (40) years of age,
- with good moral character,
- with unquestionable integrity
- of known probity and patriotism, and
- with recognized competence in social and
economic disciplines.
Bangko Sentral ng Pilipinas
as Bank of Issue

The Bangko Sentral is the only bank authorized to manufacture and issue money. As the bank of issue, it has the monopoly of note issue. Thus, anyone who makes money without the authority given by the Bangko Sentral is guilty of counterfeiting.

Instruments of Bangko Sentral’s Action

In order to maintain monetary stability within and out of the country the Bangko Sentral endeavors to control the expansion of contraction of the money supply, the level of credit, or any rise or fall in prices. Monetary authorities are empowered to institute a number of devices for purposes of proper regulations of the volume of money supply.

The devices may be as follows:

1st control of legal reserve requirement
2nd control of discount and re-discount rates
3rd open market operation
4th control of collateral’s required
5th imposition of portfolio ceiling
6th minimum capital ratio
7th margin requirement for L/C
8th moral suasion

Legal Bank Reserve Requirements

Legal Bank Reserve refers to that portion of the bank deposit liability that cannot be available for lending.

During inflation
, the objective of the Bangko Sentral is to decrease the volume of money supply.

During deflation
, when money supply is insufficient, the percentage of legal Bank preserve is decrease to induce greater credit expansion.

Purposes of Imposing Legal Bank Reserve

1. As a monitory device for credit expansion and contraction.

2. To protect the interest of depositor by not allowing the bank to
use all the deposits for lending operation.

3. The pool of legal reserve maybe use by the Bangko Sentral to
help banks and financial distress.

4. The pool of Legal Bank Reserve deposit may also be used by
banks and their “Internal Bank Loan System”. This System is
why whereby, a bank with deficiency and its bank reserve
deposits could borrow from a bank with exist reserve deposits.
The lending Bank imposes a percent of interest.

5. The pool of bank reserve deposit is also utilize and the
settlement of bank claims and counter claims against each
other arising from the operation of checking account system
where the Bangko Sentral acts as clearing house.
In order to control the volume of money created by the credit operation of the banking system, all banks operating in the Philippines shall be required to maintain reserves against their deposit liabilities.
Bank Legal Reserve Requirement and Its Effect on
Banks Excess Reserves and Money Supply

The kind of money held by the public expandable
form consists of notes and coins issued by the Bangko Sentral and the net checking accounts in commercial banks, which we sometimes call deposit money.

To increase money supply, banks either make new loans or buy fewer securities. To decrease money supply, banks either make fewer loans or sell more securities to the public or accept repayment of loans.

Control of the Discount and Rediscount Rates of

The Bangko Sentral extends credit to banks, it imposes interest or discount rates, primarily, to it as a device for credit control, and secondarily, to earn income for the Central Bank.

During inflation
, the Bangko Sentral increases the percentage of its rediscounts and discount rates on credits extended to banks.

During deflation
, the Bangko Sentral decreases the percentage of discounts or interests on credit extended to the banking institutions, which encourage the banks to borrow from the Bangko Sentral.

Open Market Operations in Government

This refers to the buying and selling of government securities by the Bangko Sentral for the purpose of credit control. Government Securities refer to evidencies of indebtedness of the government.

There are two purposes of Government

1. To raise revenue.

2. To control credit.

The Central Bank plays a significant role in the issue and placement of Government Securities. It also maintains the security stabilization fund, which a reserve intended to be use in the buying and selling of government securities to stabilize the value and liquidity of such government securities.
During inflation,
the Central Bank sells government securities to:

a. The public to absorb excess cash holdings

b. Banking institutions to divert investment in loans to investment in securities. The effects are: a decrease in available funds for loans, a decrease in lending operations for banks, and a decrease in credit expansion.

During deflation,
the sale of government securities to the banks decreases money supply by the amount it would have increased if the funds have been used by the bank in their lending operation where they undergoes a multiplier effect.

Purchase in Sales Government Securities
(R.A 7653 Sec. 91)

In order to achieve the monetary policy, the Bangko Sentral may, in accordance with the principle stated in which such rules and regulations as may be prescribed by the Monetary Board, buy and sell in the open market for its own account.

Evidences of indebtedness issued directly by the government of the Philippines or by its political subdivisions; and

Evidences of Indebtedness issued by government instrumentalities and fully guarantee by the government.
Issue and Negotiation of Bangko Sentral
Obligations (R.A 7653 Sec. 92)

In order to provide the Bangko Sentral instruments of open market operations, the Bangko Sentral may, subject to such rules and regulations as the Monetary Board may prescribe and in accordance with the principles stated in section 90 of R.A 7653, issue, place, by and sell freely negotiable evidencies of indebtedness of the Bangko Sentral.

Provided, that issuance of such certificates of indebtedness shall be made only in cases of extra ordinary movement in price levels.

Control of the Collaterals Required on Bank

The Bangko Sentral has the power impose conditions or requirements on the securities against the loans extended by the bank.
During inflation, the Bangko Sentral may increase collaterals require on the loans, which in effect decreases the loan value of the collaterals. This may discourage public borrowings from the banks decrease lending operation of the bank, and decrease expansion.

Required Security Againts Banks Loans (R.A 7653
Sec. 106)

In order to promote liquidity con solvency of the banking system, the Monetary Board may issue such regulations as it may deen necessary with respect to the maximum permissible maturities of the loans and investments which the banks may make, and the kind and amount of security to be required against the various types of credit operations of the bank.

Imposition of Porfolio Ceiling

This refers to the upper limit that the Bangko Sentral may place on the loans and investments of banks. It is instituted only during inflation. It is a direct limitation on the volume of loans, and investments that banks may extend. Such restrictions may not be instituted during deflation.

To do this, the Bangko Sentral sets a date and whatever is the total amount of loans and investment the Bank has on that date is its limit.
Portfolio Ceiling (R.A 7653 Sec. 107)

Whenever the Monetary Board considers it advisable to prevent or check an expansion of the bank credit, the Board may place an upper limit on the amount of loans and investment which banks may hold, or may place a limit on the rate of increase of such assets within specified periods of time. The Monetary Board may apply such limits with the loans and investments of each bank or specific categories thereof.
Minimum Capital Ratio

It is the maximum ratio that the combine capital account of surplus may bear on the bank’s corporate assets. The Bangko Sentral requires 10% of the risk assets of the bank as its minimum capital required. Thus, total assets- non risks asset = risk assets.

Section 108 of R.A 7653 states that the Monetary Board may prescribe minimum ration which the capital and surplus of the banks must bear to the volume of their assets, or to specific categories thereof, and may alter said ratios whenever it deems necessary.
Margins Requirements Against Letters of Credit (R.A 7653 Sec. 105)

The Monetary Board may at any time prescribe minimum cash margins per the opening of letter of credit, and may relate the size of the required margin to the nature of the transaction to be finance.

Moral Suasion

This is more of the psychological approach in which the Bangko Sentral may use its persuasive power to make the banks follow or support credit policies without direct imposition of restriction.

There are cases when the Bangko Sentral shies away from imposition of credit restrictions because of possible unfavorable repercussions such that, The Bangko Sentral may just use their influence among banks for voluntary support of a credit policy.

For instance, during the imposition of free clothing exchange rate in 1970, the Central Bank was able to avoid buying and selling of US $ at very high speculative rates. The banks agreed among themselves to limit their trading in foreign transactions to an agreed foreign exchange rate.
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