Fin1: Topic 4

• Financial System


  A network of financial institutions such as insurance companies, stock exchanges, and investment banks that work together to exchange and transfer capital from one place to another
• Functions of the Financial System

  • Credit
  • Payments
  • Money Creation
  • Savings
• Credit


  Supplied by the financial system to consumers, businesses, and government
• Payments


  The financial system offers convenient modes of payment for goods and services, such as the check system and credit card systems
• Money Creation


  Banks create new money whenever they make loans
• Savings


  The financial system serves as a venue for savings, which then flow to those in production, resulting in better goods and services and an increase in society's living standards
• Components of the Financial System

  • Financial instruments
  • Financial sector consisting of financial markets and financial institutions
  • Rules governing the conduct of trade
• Financial instruments


  Evidences of debt that are bought and sold in the market, consisting of money, loans, and ownership shares
• Financial markets


  A mechanism by which savings in one sector of the economy flows to another sector
• Financial institutions


  Organizations through which funds in the form of money or claims are assembled and transferred from individuals and firms needing extra funds
• Rules governing the conduct of trade

  • Pertinent laws concerning financial institutions
  • Memoranda, circulars and issuances of concerned government agencies
  • Pertinent ordinances of local government units where the financial institution is situated
  • Customs and traditions inherent to the area where the financial institution is situated
• Sectors of the economy engaged in borrowing and lending

  • Households
  • Firms
  • The Government
  • Foreigners
• Household income


  Comes from wages, dividends, royalties, and interest paid by firms
• Firm's revenue


  Comes from household expenditures and investment of other firms
• Firm's expenses


  Paid out to households in the form of wages, dividends, royalties and interest
• Benefits of Household Saving

  • Put enough funds for use in the future
  • Advantage of liquidity
• Disadvantages of Household Saving

  • Loss of purchasing power due to inflation
  • Opportunity to make income from investment
• Surplus Spending Units (SSU)


  Lenders whose revenues exceeded their expenditures
• Deficit Spending Units (DSU)


  Borrowers whose expenditures exceeded their revenues
• Direct Financing


  Borrowing money directly from investors by selling stocks or bonds
• Indirect Financing


  Borrowing funds from the financial market through financial intermediaries such as commercial banks, mutual savings banks, credit unions, insurance companies and pension plans
• Financial Intermediary


  A company that transfers funds from savers to borrowers by receiving funds from savers and investing in securities issued by borrowers
• Functions of Financial Intermediaries

  • Help savers diversify their financial investment
  • Pool the funds of many people
  • Take short-term deposits and make long term loans
  • Gather information on the credit-worthiness of borrowers
  • Reduce the costs of transacting
• Structure of the Philippine Financial System

  • Bangko Sentral ng Pilipinas
  • Banking Institutions (Private and Government)
  • Non-Bank Financial Institutions (Private and Government)
• Commercial Bank (KB)


  Any corporation that accepts or creates demand deposits subject to withdrawal by means of checks
• Universal Bank (UB) or Expanded Commercial Bank (EKB)


  Any commercial bank that performs the investment house function in addition to its Commercial Banking Authority
• Thrift Banks (TB)


  Include savings and mortgage banks, stock savings and loan associations and private development banks, with the function of accumulating the savings of depositors and investing them
• Intermediaries help savers diversity their financial investment: Diversification: ownership of variety of securities by an investor. It enables investors to avoid "putting all their eggs in one basket"
• Intermediaries pool the funds of many people: The intermediary could collect the resources of people who are willing to lend to make loans and thus match borrower with savers who otherwise would not be able to get together
• Intermediaries take short-term deposits and make long-term loans: Intermediaries are able to match borrowers and savers who have different time horizons.
• Intermediaries play an important role in the economy by gathering information: Intermediaries specialize in making loans and therefore are willing to spend substantial resources investigating the credit-worthiness of borrowers.
• Intermediaries reduce the cost of transacting: reduce transaction costs, which involves the money and time spent carrying out financial transaction.
• Mutual Fund: sells equity shares in itself to many investors and pools their money to buy many different securities.
• Stock Savings and Mortgages Bank: any corporations organized for the purpose of accumulating the savings of depositors and investing them together with its capital in readily marketable bonds and debt securities, checks, and bills of exchange.