Principles of Finance

1
ST
SEMESTER AY 2013-2014
UNIVERSITY OF SANTO TOMAS
FACULTY OF ARTS AND LETTERS
Bangko Sentral ng Pilipinas
central monetary authority of the
Philippines
Enjoys fiscal and administrative
autonomy from the National
Government in the pursuit of its
mandated responsibilities.


Functions of BSP
1) Issue currency
efficient issuance of currency
geared in minimizing inflationary
and exchange rate effects
issuance of currency should occur
if these is an asset that will be
gained from it

Functions of BSP
2) Determine and implement monetary policy in the
Philippines
BSPs mandate:
To maintain price stability conducive to a balanced
sustainable growth of the economy.

Price stability:
prices do not go up or down uncontrollably
NEDA
consulting body of the BSP in projecting
macroeconomic targets such as inflation rate,
interest rate and money supply.

Functions of BSP
3) Safeguard the soundness and integrity of the financial
system
supervision and regulatory authority over banks and some
financial institutions and non-bank institutions performing
quasi-banking functions
Events that happen during financial system failure:
Bank runs: depositors simultaneously want to take out
most of their deposits from banks.
Bank losses: when it is not earning anymore maybe
because of defaulted payments from borrowers or major
losses in its investment activities.


Functions of BSP
Examples of BSP policies to banks
1) Requiring banks to offset the losses incurred through Non-
Performing Loans (NPLs)

2) Ensuring that banks comply to minimum capital
requirement
3) Monitoring the amount of its risky investments
4) Regulation of DOSRI lending (directors, officers,
stockholders and related interest lending)

5) Preventing banks to be conduits of dirty money such as
money obtained from terrorism, drug trafficking, gambling,
kidnapping, etc.


Functions of BSP
4) Banker of banks or lender of last resort of banks and financial
institutions under its charge
Banks normally borrow short term and lend long term (tenor mismatch).
If depositors withdraw and if the bank will have difficulties in providing
for the fund, this will become a liquidity problem.
5) Custodian of funds of the National Government
The BSP acts as the official depository of the national government
Cash balances are kept in the BSP
Some small balances are kept on other government banks such as DBP and
Landbank.

6) Ensures the convertibility of the Peso to other currencies
The BSP must have sufficient foreign exchange to supply the forex
market when there is an apparent shortage.


Banks
an institution whose current operations consist in
receiving deposits from the public and granting
loans to the public (Freixas and Rochet).
Functions of a bank
(aside from safekeeping money):
3) Offering access to a payment system
2) Shouldering risk of borrowers default
1) Serves as the financial intermediary between the
lender and borrower of funds
4) Processing information and monitoring of borrowers
Other policies adhered to by banks
Reserve Requirement: part of customer deposits that each
commercial bank holds as reserves. They are kept physically at
the banks vaults.

18%
(as of April 2013)
Capital Adequacy Ratio : percentage of the banks investment on
risky assets to the total stockholders equity
Risky assets: loans and investments not in Government Securities.


10%
(as of April 2013)
Commercial Banks (KBs)
represent the largest single group of financial
institution in the country in terms of assets.

Two types:

Ordinary Commercial Banks
Expanded Commercial Banks or Universal Banks
Ordinary Commercial Banks
POWERS LIMITATIONS
(with regards to investment)
1) Accept deposits specifically demand
deposits, savings and time deposits and
deposit substitutes
1) Total investment to another company
(whether financial or non-financial) shall
not exceed 35% of the net worth of the
bank

2) Lend money on a secured or unsecured
basis

3) Acquire marketable bonds or other
short-term debt securities

4) Issue promissory notes and other forms
of indebtedness

5) Buy and sell foreign currency, gold and
silver

Expanded Commercial Banks or Universal Banks
POWERS LIMITATIONS
(with regards to investment)
1) Exercise power of investment
houses

1) Invest up to 40% of a quasi bank
institution

2) Invest and own 100% of unrelated
business



3) Invest and own up to 100% of
allied financial institutions, such as
investment banks, stock brokerage,
leasing companies, credit card
companies.
Commercial Banks (KBs)
the only banks that can buy and sell foreign currency in
the Philippine Dealing System (PDS).

It is primarily a company that caters to the wholesale
buying and selling of Foreign Currencies.


Commercial Banks (KBs)
Commercial banks may also offer trust services, like handling
the funds of an investor in different kinds of financial
instruments.

Trust Funds: funds, usually taken out of an employees
salary, which is intended to provide monetary benefits to an
individual in the future.
Unit Investment Trust Fund: ready-made investments that
allow the pooling of funds from different investors with
similar investment objectives
Mutual Funds: a diversified portfolio consisting of a
collection of stocks, bonds and other securities.
Pension Funds: fund established by an employer to
facilitate and organize the investment of employees'
retirement funds contributed by the employer and
employees
Commercial Banks (KBs)
Primary Sources of Revenue

Interest Income: net amount earned from the lending of
money.
Service Fee income: Revenue taken in by financial
institutions from account-related charges to customers.
Trading Income: net income from the trading of securities
whether stocks or bonds.
Commercial Banks (KBs)
Primary Sources of Expenses:

Bad debts expense: percentage of loans that
defaulted

Interest expense: amount spent for its
accountholders or to its lenders

Operational expenditures: fund used in running a
bank such as salaries, marketing, utilities, machines
etc.

Assessing Financial Condition of Banks
Cash to total assets ratio: the percentage of cash that the bank
has to the total assets it possess

Investments to total assets ratio: the percentage of
investments that the bank has to the total assets it possess


Repossessed Assets (ROPOA) to assets: the percentage of
collateral owned by the bank to the total assets it possess
Non-Performing loans (NPL) to loans ratio: the percentage
of defaulted loans to the total loan portfolio of the bank

IMF Report
The IMF reported that the ownership of
the corporate sector is highly
concentrated to few players. The same
groups that own the major
manufacturing and service sectors also
control most of the major banks. This
led to high concentration of loans- the
top 100 corporate borrows in the
Philippines account for 30% of loans
outstanding in the banking system.