Banking and financial institutions

• Financial system


  Composed of the myriad markets and institutions through which funds flow between lenders and borrowers
• Users of the financial system

  • Households
  • Businesses
  • Government
  • Other
• Suppliers of funds


  People with excess funds
• How the financial system works

  1. If people have excess funds, they invest it to banks who in return, loans it to borrowers

  2. Banks charge interests to borrowers and give a smaller interest back to their depositors
• Financial markets


  A marketplace where creation and trading of financial assets, such as shares, debentures, bond, derivatives, currencies, etc. take place
• Money market


  Institutions and procedures that provide for transactions in short term debt instruments that are generally issued by borrowers with good credit ratings
• Capital market


  Institutions and procedures that provide for transactions in long term financial instruments
• Primary market


  Where securities are created, where firms sell (float) new stocks and bonds to the public for the first time
• Secondary market


  Where already issued securities both shares and debt can be bought and sold by the investors
• Financial institutions


  Intermediaries that channel the savings of individuals, businesses and governments into loans and investment
• Banking institutions


  Financial institutions engaged in the lending of funds obtained from the public primarily through the receipt of deposits of any kind
• Non-banking institutions


  Financial institutions other than banks whose principal functions include lending, investing or placement of funds or evidence of indebtedness or equity
• Key services provided by the financial system

  • Risk sharing
  • Diversification
  • Liquidity
  • Information
• Direct lending


  Involves the transfer of funds from the ultimate lender to the ultimate borrower, most often through a third party
• Indirect lending


  Involves lending by the ultimate lender to a financial intermediary who pools the funds of many lenders in order to relend at a mark-up over the cost of funds
• Roles of financial institutions

  • Term transformation
  • Economies of scale and diversification in the use of funds
  • Technical expertise
• Bank


  An institution which deals in money and credit, accepts deposits from the public and grants loans and advances, can be a creditor and debtor at the same time, highly regulated by BSP
• Banking


  An activity which involves acceptance of deposits for the purpose of lending or investing, in addition to accepting deposits and lending funds, banking also involves providing various other services
• Financial intermediation


  The main operation of a bank, the savings of the depositor will be put in the bank then the bank will loan it to other people, bank charges a higher rate to borrowers compared to the rate they give to depositors
• Essentially, banking is about confidence or trust—the belief that the bank has the money to honor its obligations. Any crack in that confidence can trigger a run and potentially a bank failure, even bringing down solvent institutions
• Different roles banks play in the economy

  • Intermediation role
  • Payments role
  • Guarantor role
  • Risk management role
  • Savings/investment advisor role
  • Agency role
  • Safekeeping/certification of value role
  • Policy role
• Principle of liquidity


  The bank should have enough money for withdrawals (CIV = cash in vault)
• Principle of profitability


  Bank is a business entity who aims to gain profit
• Principle of solvency


  Banks should be sound and maintain the capital set by BSP
• Principle of safety


  Banks should make sure that they handle the money safely, because bank's money is depositor's money
• Principle of collection of savings


  Savings are lifeblood of banks so banks should get a certain amount of savings/deposits
• Principle of loan and investment policy

  They should have policies and that they put money on sound investments
• Principle of economy


  Banks never go for unnecessary expenditures
• Principle of providing services


  Service oriented business do they should be able to provide high quality services, customer service should be done efficiently and promptly
• Principle of modernization


  Through modernization, they improve the service they give to their clients, the bank has to adopt modern technical services like online banking, credit card etc.
• Principle of specialization


  Roles are carried out by different departments with different people, Banks segments their whole functions into various parts and place their human resources according to their efficiency
• Principle of location


  Factor to consider when opening a bank is good location
• Principle of relation


  Maintaining good relationship with clients and future ones
• Principle of publicity


  Marketing strategies of the bank like advertisements, promotional campaigns, etc.
• Principle of secrecy


  Both on the information of the bank and their clients, Signing of confidentiality/secrecy, Secrecy of bank deposits law, maintains and keeps the clients' accounts secretly
• Classification of banks


  • Universal banks
  • Commercial banks
  • Thrift banks
  • Rural banks
  • Cooperative banks
  • Islamic banks
  • Digital banks
• Universal banks


  Represent the largest single group, resource-wise, of financial institutions in the country, offer the widest variety of banking services among financial institutions, also authorized to engage in underwriting and other functions of investment houses, and to invest in equities of non-allied undertakings, Expanded commercial banks, Offer long term loans
• Commercial banks


  Represent the largest single group, resource-wise, of financial institutions in the country, offer the widest variety of banking services among financial institutions, Focused on short term loans, They can be turned to universal banks but they have to meet the regulations (capital and such)
• Thrift banks


  Are engaged in accumulating savings of depositors and investing them, They also provide short-term working capital and medium- and long-term financing to businesses engaged in agriculture, services, industry and housing, and diversified financial and allied services, and to their chosen markets and constituencies, especially small- and medium- enterprises and individuals, Savings and mortgage banks, Private development banks, Stock savings and loan associations, Microfinance thrift banks
• Rural banks


  Are the more popular type of banks in the rural communities, Their role is to promote and expand the rural economy in an orderly and effective manner by providing the people in the rural communities with basic financial services, Privately owned and managed