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Afafafaf Cor Jesu College, Inc.

College of Accountancy, Business and Entrepreneurship
S.Y.2020-2021

Module Overview Module 2

The Philippine Financial System

In this Module
• Financial System Definition
• Financial System Participants
• Ang Bangko Sentral ng Pilipinas
• Monetary Policy and the Financial System
• Financial Intermediaries

Introduction
At the completion of this module, you should be able to:
1. Explain the components of a well-developed financial system
2. Illustrate the framework of the monetary policy
3. Differentiate monetary and fiscal policy
4. Appreciate credit as a primary means of economic activities
5. Enumerate examples of financial intermediaries and financial
markets

Are you ready? Then the lesson starts now!

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College of Accountancy, Business and Entrepreneurship
Instructor: Earlynne H. Villegas, MBA
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Afafafaf Cor Jesu College, Inc.
College of Accountancy, Business and Entrepreneurship
S.Y.2020-2021

Lesson 1 The Financial System:

Definition and Participants

Learning Outcomes:

1. Define what financial system is and illustrate the role it plays in the
economy of a nation.
2. Discuss on the roles the different participants in a financial system
play.
3. Elaborate on the role of BSP in the economic development of the
Philippines
4. Explain monetary policy and the role it plays in the economic
development of a country.
5. Discuss the relationship between monetary policy and the financial
system.
6. Illustrate how the tools of monetary policy are used to influence
money supply and interest rates.

ANALYSIS
What do you think?
• Watch the video presentation about the European Union and
its monetary and fiscal policy. What are your views on this?
• What is your personal reflection about the role of credit in the
movement of the economy?

Let’s Discuss

All members of society – households, businesses (more importantly the financial

institutions) non-profit organizations, the church, and the government are affected by
the financial system of the country to which the society belongs. The government is
primarily responsible for defining and regulating the financial system. It is because the
central bank and its Monetary Board determines the rules, regulations, and monetary
policies that need to be implements to ensure a stable and healthy financial system
for the country. Business firms, households, and governments play a wide variety of

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Afafafaf Cor Jesu College, Inc.
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S.Y.2020-2021
roles in our modern financial system. All of us, one way or another, will be involved in
the financial system either as a borrower or a lender or both.

A country’s financial system is not, however, solely determined by the country itself
because tother worldwide organizations like the World Bank, International Monetary
Fund, Asian Development Bank, New York Stock Exchange, Osaka Securities
Exchange, Australian Stock Exchange, BATS Global Markets, Chinese Shenen Stock
Exchange, among others, and transnational banks all affect the financial system of the
country. Our modern world has what may be called a complex and sophisticated
financial system.

This chapter will discuss what financial system is all about and the role it plays in the
economy of a nation, as a follow up of the preceding chapter on the financial
environment. In addition, it will discuss the roles the different participants in a financial
system plays. The monetary system, monetary policy, and its effect in the economic
system of a country, and the tools of monetary policy will be discussed and how they
affect money supply and interest rates.

Financial System Definition

Financial system describes collectively the financial markets, the participants, and
the instruments and securities that are traded in the said markets. The functions of the
financial system are to:
1. Channel the funds from the savings units (lenders) to the deficit units
(borrowers)
2. Provide a medium of exchange
3. Provide a mechanism for risk sharing; and
4. Provide a channel through which the central bank can influence the economy,
in general, and the financial system in particular.

Financial System Participants

There are six participants or sectors in the financial system. They are:
1. Households or consumers – are generally described as that group receiving
income, majority of which typically come from wages and salaries. Such income
is spent on goods and services and a part is saved (if there is enough to save).
➢ Gross savings are equal to current income less current expenditures. What is
spent is termed consumption.
➢ Non-durable consumer goods - goods that are consumed within a current
period.
➢ Durable goods (durables) – Goods that will last for more than a year.

2. Financial institutions/intermediaries – firms that bridge the gap between the

surplus units (Sus) or investors/lenders and the deficit units (DUs) or borrowers.
They channel the funds from the lenders to the borrowers.

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College of Accountancy, Business and Entrepreneurship
Instructor: Earlynne H. Villegas, MBA
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College of Accountancy, Business and Entrepreneurship
S.Y.2020-2021
3. Non-financial firms – the businesses other than the financial institutions or
intermediaries. They include the trading, manufacturing, extractive industries
construction, genetic industries, and all firms other than the financial ones.
4. The government – by government is meant the national, provincial, city and
barangays or towns comprising the Philippines as a whole. Each division has
its heads and agencies that help in running the division it is made responsible
for.
5. The Central Bank – Bangko Sentral ng Pilipinas (Central Bank of the
Philippine) and all the other central banks of the different countries are
mandated to assure that their respective countries have a stable and healthy
financial system. They oversee the operations of the entire financial system of
their respective countries and mandate the rules, regulations, and monetary
policies that will help their respective countries maintain a healthy and stable
economy.
6. Foreign participants – refer to the participants from the rest of the world –
households, governments, financial and non-financial firms, and central banks.
Goods and services and financial instruments/securities are exchanges across
national boundaries, as well as within these boundaries.

Bangko Sentral ng Pilipinas and the Philippine Financial System

The figure below shows BSP’s basic organizational structure. The Bangko Sentral ng
Pilipinas is at the top of the structure, the one mandated to oversee the financial
system of the country. It is the agency that is tasked to ensure that the country has a
healthy financial system and a healthy economy. It is the central monetary authority.

FIGURE 1. ORGANIZATIONAL STRUCTURE OF BSP

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Instructor: Earlynne H. Villegas, MBA
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College of Accountancy, Business and Entrepreneurship
S.Y.2020-2021
Under the Bangko Sentral are the different banking institutions, both private and
government-owned, and non-bank financial institutions, also both private and
government-owned. The private banking institutions are composed of the commercial
banking institutions, the thrift banks, and the rural banks.

FIGURE 2.OVERVIEW OF THE PHILIPPINE FINANCIAL SYSTEM

The Bangko Sentral ng Pilipinas is charged to supervise and regulate the financial
system of the Philippines. It is primarily responsible in regulating the flow of money
and credit into the whole economy in order to attain monetary stability and sustainable
economic growth. Its major task is to mobilize and direct the resources of the Philippine
financial system toward the social and economic growth of the economy, in particular,
and the country, in general. Of paramount importance is the improvement of the life of
the masses by alleviating poverty. Through its different monetary instruments, Bangko
Sentral ng Pilipinas is able to fashion a desirable level of prizes, investments,
production, incomes, and consumptions. The BSP has the ultimate social
responsibility of uplifting the economy and developing the country.

The Board that governs the Central Bank is called the Monetary Board. Its members
are appointed by the President of the Philippines and the Chairman is the Governor of
the Central Bank. Five other members come from the private sector. The New Central
Bank Act took effect on June 14,1993 during the reign of then-President Fidel Ramos.
It establishes an independent Central Monetary Authority, which known as Bangko
Sentral ng Pilipinas (BSP) with a capital of P50 Billion.

The Monetary Board, which exercises the powers and function of the BSP, such as
the conduct of monetary policy and supervision of the financial system.

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College of Accountancy, Business and Entrepreneurship
Instructor: Earlynne H. Villegas, MBA
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Afafafaf Cor Jesu College, Inc.
College of Accountancy, Business and Entrepreneurship
S.Y.2020-2021

The Monetary Stability Sector, which takes charge of the formulation and
implementation of the BSP’s monetary policy, including serving the banking needs of
all banks through accepting deposits, servicing withdrawals, and extending credit
through the rediscounting facility.
The Supervision and Examination Sector, which enforces and monitors compliance
to banking laws to promote a sound and healthy banking system.

The Resource Management Sector, which serves the human, financial, and physical
resources need of the BSP.

The Monetary Board

The power and functions of Bangko Sentral are exercised by its monetary board, which
has seven members appointed by the President of the Philippines. Under the New
Central Bank Act, one of the government sector members of the Monetary Board
must also be a member of the Cabinet designated by the President.

The New Central Bank Act establishes certain qualifications for the members of the
Monetary Board and also prohibits members from holding certain positions with other
governmental agencies and private institutions that may give rise to conflicts of
interest. With the exception of the members of the Cabinet, the Governor and the other
members of the Monetary Board serve terms of six years and may only be removed
for cause.

FIGURE 3. THE BSP MONETARY BOARD

The Major functions of the Monetary Board include the power to:

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1. Issue rules and regulations it considers necessary for the effective discharge of
the responsibilities and exercise of the powers vested in it.
2. Direct the management, operations, and administration of Bangko Sentral,
organize its personnel and issue such rules and regulations as it may deem
necessary or desirable for this purpose.
3. Establish a human resource management system which governs the selection,
hiring, appointment, transfer, promotion, or dismissal of all personnel.
4. Adopt an annual budget for an authorize such expenditures by Bangko Sentral
as are in the interest of the effective administration and operations of Bangko
Sentral in accordance with applicable laws and regulations.
5. Indemnify its members and other officials of Bangko Sentral, including
personnel of the departments performing supervision and examination
functions, against all costs and expenses reasonably incurred by such persons
in connection with any civil or criminal action, suit or proceeding, to which any
of them may be made a party by reason of the performance of his functions or
duties, unless such members or other officials are found to be liable for
negligence or misconduct.

Objectives of BSP

BSP, as the central monetary authority of the country, is expected to provide the
country with a safer, more flexible, and more stable and healthier monetary and
financial system that will help support a stronger economy. It is enjoined to:

1. Maintain monetary policies conducive to a balanced and sustainable growth of

the economy.
2. Maintain price stability in the country.
3. Promote and maintain monetary stability and the convertibility of the peso.
4. Maintain stability of the financial system.
5. Provide payment and other financial services to the government, the public,
financial institutions, and foreign official institutions
6. Supervise and regulate depository institutions.

To attain its objectives, the monetary and fiscal policies of the country need to be
closely and efficiently coordinated. The different agencies of the government, both
financial and fiscal, need to cooperate with one another. Moreover, it is important that
there be coordination and cooperation between the government and the private
sectors. These sectors are the partners in nation-building.

Functions of BSP

Being the primary monetary authority, BSP performs the following functions:
1. Bank of Issue – BSP has the monopoly of printing money bills and minting
money coins. This monopoly is designed to:
a. Ensure the uniformity in design and content of money

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College of Accountancy, Business and Entrepreneurship
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College of Accountancy, Business and Entrepreneurship
S.Y.2020-2021
b. Effect government supervision over money supply
c. Give prestige and honor to the central bank
d. Become a good source of income for the government
2. Government’s banker, agent, and adviser – BSP handles the banking
accounts of government agencies and instrumentalities. All government
agencies deposit their funds with BSP.
3. Custodian of the cash reserves of banks – All banks are regulated to have
adequate reserves with BSP in proportion to their deposit liabilities to ensure
availability of cash to depositors who wish to withdraw deposits.
4. Custodian of the nation’s reserves of international currency – the early
years of central banking required central banks to maintain a minimum reserve
of gold, and later of international currency, as a guarantee for tis issuance of
currency bills or notes and deposit liabilities (cash reserves of commercial
banks).
5. Bank of rediscount and lender of last resort – The rediscounting function of
the central bank means the central bank lends money to the banks in distress
on the basis of their promissory notes or the promissory notes of the bank
borrowers.
6. Bank of central clearance and settlement – The central bank acts as a sort
of clearing house at the central bank where claims are demanded by one bank
against another. The banks have their own boxes at the clearing house.
7. Controller of credit – controlling money supply requires controlling credit. The
higher the money supply in circulations is, the higher the prices of goods and
services are.
BSP can control credit by:

1. Increasing or decreasing interest rates

2. Increasing or decreasing the legal reserve of banks
3. Regulating the margin requirements of stock exchange securities
4. Open market operations (buying or selling government securities)
5. Imposing ceilings on total amounts bank can lend
6. Rationing central bank credit
7. Restricting imports
8. Selecting projects for funding
9. Moral suasion (encouraging people and business) to support and cooperate
with central bank policies and regulations

Monetary Policy and Financial System

Monetary policy refers to the manipulation of the money supply to affect the economy
f the country as a whole. It largely impacts interest rates. Increases in the money
supply lower short-term interest rates, encouraging investment and consumption. In
the long run, however, an abundance of money supply leads to increased prices or
inflation and is undesirable. This is where BSP plays its role as the balancer.
Expansionary monetary policy may lower interest rates and stimulate investment and

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College of Accountancy, Business and Entrepreneurship
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S.Y.2020-2021
consumption in the short run, hence, needs to be balanced. This is the task of the
BSP.

BSP uses several tools to implement its monetary policy. Among these tools are its
open market operations (buying and selling government securities), reserve
requirements on banks, the discount rate, the interest rate, credit control, money
supply, among others. The monetary policy seeks to influence either the demand for
or supply of excess reserves, resulting from the implementation of monetary policy,
triggering a sequence of events that affects economic factors such as short-term
interest rates, long-term interest rates, foreign exchange rates, the amount of money
and credit in the economy, and the levels of employment, output, and prices.

Monetary policy works largely through its impact in interest rates. Increases in the
money supply lower interest rates, which stimulate demand. As the money supply
increase, investors will be encouraged to buy more securities (stocks or bonds),
forcing securities and buy tangible assets, which stimulates consumption demand
directly.

In implementing monetary policy, BSP can take one of two basic approaches to affect
the market for bank excess reserves:
1. Target the quantity of reserves in the market based on BSP’s open market
operations’ objectives for the growth in the monetary base (the sum of money
in circulation and reserves) and, in turn, the money supply
2. Target the interest rate on those reserves that BSP is granting.
The approach taken varies depending on the need to combat inflation and the
desire to encourage sustainable economic growth.

APPLICATION

A. True or False

______________1. The financial system channels funds from the deficit units to the
savings units.
______________2. The financial system provides a medium of exchange.
______________3. Households are families which do not include single individuals in
terms of the financial system.
______________4. The powers and functions of Bangko Sentral are exercised by its
Monetary Board.
______________5. Under the New Central Bank Act, one of the government sector
members if the Monetary Board must also be a member of the cabinet designated by
t he President.
______________6. To attain its objectives, only the monetary policies of the country
need to be closely monitored and discharged.

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Instructor: Earlynne H. Villegas, MBA
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S.Y.2020-2021
______________7. Increases in the money supply push short-term interest rates up,
encouraging investment and consumption.
______________8. An abundance of money supply leads to increased prices or
inflation.
______________9. BSP may lower interest rates and stimulate investment and
consumption in the short run.
_____________10. When BSP sells securities, it increases money supply in the
economy.

B. Identification

______________1. Equal to current income less current expenditures.

______________2. Another word for expenditures.
______________3. Goods consumed within the current period.
______________4. Firms that bridge the gap between the surplus units and the deficit
units.
______________5. The Philippine Central Bank
______________6. The participants from the rest of the world – households,
governments, financial and non-financial firms, and central banks.
______________7. The body that governs the Central Bank.
______________8. The BSP sector that enforces and monitors compliance to banking
laws to promote a sound and healthy banking system.
______________9. Refers to the manipulation of the money supply to affect the
economy of the country as a whole.
____________10. Loans granted by banks with excess reserves to banks and deficit
reserves.
____________11. The BSP sector that takes charge of the formulation and
implementation of the BSP’s monetary policy, including serving the banking needs of
all banks through accepting deposits, servicing withdrawals, and extending credit
through the rediscounting facility.
____________12. The independent Central Monetary Authority in the Philippines.
____________13. The BSP sector that serves the human, financial, and physical
resource needs of BSP.
____________14. Refers to regulations that will affect money supply to benefit the
economy
____________15. Firms that act as the bridge between surplus units/lenders and
deficit units/borrowers.

Congratulations! You just finished lesson 1 in your module

Should there be some parts of the lesson which need
clarification, please ask your instructor during your session.

Get ready for the next lesson!

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College of Accountancy, Business and Entrepreneurship
Instructor: Earlynne H. Villegas, MBA
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Afafafaf Cor Jesu College, Inc.
College of Accountancy, Business and Entrepreneurship
S.Y.2020-2021

Lesson 2 Financial Intermediaries

Learning Outcomes:

1. Discuss financial intermediation and identify the different financial

intermediaries.
2. Appreciate the role financial intermediaries play in socio-economic
development of a nation.
3. Explain the economic bases for financial intermediation
4. Detail the changing nature of financial intermediaries
5. Discuss the different types of risk faced by the financial
intermediaries and investors in the business world.

ANALYSIS
What do you think?
• Have you been in a bank? If yes, name banks you have been to.
• What transaction/s or service/s have you experienced?

ABSTRACTION

Let’s Discuss

Definition of Financial Intermediaries

Financial Intermediaries are financial institutions that act as the bridge between
investors or servers (surplus units or Sus) and borrowers or security issuers (deficit
units or DUs), which issue their own financial instruments called secondary
instruments. The original issuers or borrowers who borrow funds issue what is termed
as primary securities.

A bank gets deposits from depositors. In this case, the depositor is he lender and the
bank is the borrower. Original borrowers issue primary securities. The buyer of the
primary security is the lender. In this case, the primary security is the deposit account,
say, the checking account. The check represents the checking account, an asset that
the buyer of the security can use to pay his/her account. In the same manner, the

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buyer of marketable securities can sell the marketable securities or use them to pay
for his/her account if the lender to the owner of the securities is willing to accept them
as payment.

The bank as a financial intermediary, can create secondary securities that it can sell.
It can pool deposits to have a bigger amount available to be sold as a secondary
security, say commercial papers or negotiable certificates of deposits, that it can now
sell to interested investors, or it can simply lend accumulated deposits to borrowers as
a loan. The commercial papers or negotiable certificate deposits that the bank issue,
as a financial intermediary, are now secondary securities. The loan is a secondary
security. The primary security is now transformed into a secondary security. This is
the asset transformation role of the financial intermediary.

Financial intermediaries have brought into existence several of the financial products
or securities now available in the financial markets. Financial intermediaries are
generally large and have economies of scale in terms of operation and specifically in
analyzing creditworthiness or borrowers to ensure that securities issued by these
borrowers are worth investing into or purchasing for the buyers/investors.

Financial intermediaries are differentiated from other businesses in that their assets
and liabilities are overwhelmingly financial. They have very small amounts of tangible
assets. This is because intermediaries simply move funds from one sector to another.
Financial intermediaries do not only sell securities issued by other companies, but also
issue their own securities to raise funds to purchase securities of other corporations
they wish to buy either as their own investment or for resale in cases where selling
them will bring them better profit. These secondary securities issued by financial
intermediaries include life insurance policies, money market mutual funds, and
pensions and pre-need plans.

Classification of Financial Intermediaries

Financial intermediaries are caried, but they all have one characteristic in common. All
of them (except market specialists) issue secondary securities to be able to purchase
primary securities issued by deficit units. They can, however, be grouped into two
basic categories:
1. Depository institution
2. Non-depository institution

Depository Institutions, as the name implies, refers to financial institution that

accepts deposits from surplus units. It issues checking or current account, savings,
and time deposit and help depositors with money market placement.

The assets of depository institutions are the loans that they grant borrowers. On the
other hand, these loans are the liabilities of the financial and non- financial entities,
including households. For depositors and investors, which are the financial and non-

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financial entities, their deposits or investments in securities are their assets. These
assets are the liabilities of the depository institutions or other security issuers actin gas
borrowers.

Non-financial/
Depository Institution Other Financial Institutions

Assets Liabilities Assets Liabilities & Equity

& Equity

Loans Deposits Deposits Loans

Depository institutions include:

1. Commercial banks
a. Ordinary commercial banks -perform the more simply functions of
accepting deposits and granting loans
b. Expanded commercial or universal banks (unibanks)- perform
investment services. They are expanded because they function as an
investment house and investing in stocks and bonds of non-allied
businesses.
2. Thrift banks-banks which encourage the habit of thrift and savings and provide
loans at reasonable rates.
a. Savings and mortgage banks- banks specializing in granting mortgage
loans other than the basic functions of accepting deposits
b. Private development banks- cater to the needs of agriculture and industry
providing them with reasonable rate loans for medium-and long-term
purposes
c. Savings and loan associations (SLAs, S&Ls)- accumulate savings of their
depositors/ stockholders (the depositors are the stockholders) and use
these accumulated savings, together with their capital for the loans that they
grant and for investments in government and private securities. These
associations provide personal finance and long-term financing for home
building and improvement.
d. Microfinance thrift banks- small thrift banks that cater to small, micro, and
cottage industries, hence, the term micro”. They grant small loans to small,
micro, and cottage businesses.
e. Credit unions – although not belonging to banks, are cooperatives
principally functioning to pool savings and grant loans like depository
institutions. Loans granted are multiples (two or three times) of the
member’s savings with the union.

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3. Rural banks and cooperative banks are the banks in the rural communities
which help in the development of the country by providing them with loans and
other basic financial services.

Non depository Institutions include:

a. Insurance companies
(1) Life insurance companies – provide protection over a contracted period
of time or over the life of the insured in exchange of premium paid. Life
insurance policies have face values, the amount to be received if the insured
dies. Life insurance policies also have loan values, amount that can be
borrowed against the policy. In addition, they have cash surrender values,
amount to be received if the policy is cancelled or surrendered.
(2) Property/casualty insurance companies -provide protection against
injury or property loss resulting from accidents, work-related injuries,
malpractice, and natural calamities.
b. Fund managers – include pension fund companies and mutual fund
companies. Pension fund companies sell contracts to provide income to
policyholders upon retirement. Mutual fund companies accept investments in
small amounts to be pooled together to buy securities that will form the portfolio
of investments.
c. Investment banks/house/companies- underwrite new issues of stocks and
bonds. They are also called merchant banks.
d. Finance companies -borrow and lend funds to households and businesses.
They engage in borrowing and lending, but they are not banks. They could be
sales finance companies providing installment credit to purchasers of big items
like cars and appliances, consumer finance companies granting credit to
consumers, or commercial finance companies granting credit to businesses.
e. Securities dealers and brokers- Securities brokers are only compensated
by means of commission. They act as a financial intermediary in that they look
for investors or savings units for the benefit of the borrowers or deficit units.
They help in meeting of these units. They also earn commission on any sale
they make. Securities dealers, on the other hand, buy securities and resell
them and make a profit on the difference between their purchase price and their
selling price.
f. Pawnshops – agencies where people and some small businesses “pawn” their
assets in exchange of an amount much smaller than the value of the asset or
use their assets as collateral for a loan.
g. Trust companies and departments-corporations organized for the purpose of
accepting and executing trusts and acting as trustee under wills, as executor,
or as guardian.
h. Lending investors are like finance companies, but usually smaller, that grant
loans to households.

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Role of Financial Intermediaries in Socio-Economic Development

In a developing country or a less developed country like the Philippines, financial

intermediaries play an important role in its socio-economic development. It is the
financial intermediaries that bring the available funds from the urban areas to the rural
areas, which are mostly in need of such funds. Rural and cooperative banks and
microfinance thrift banks have been a great help in these less fortunate areas. They
are the ones doing the lending to farmers and other rural residents that need to
improve their status in life. They can borrow from the rural and cooperative banks
and/or from the microfinance thrift banks and start their own small business or send
their children to school.

In addition to rural and cooperative banks and microfinance thrift banks, the growth of
commercial banks in the rural areas have greatly helped areas by making credit
available to rural residents so they can use such credit to advance. Entrepreneurship
and micro and cottage industries had been pushed in these areas to help these areas
develop and improve, not only the economic aspects of the residents’ lives but also
their social life. Financial intermediaries had been influential and helpful in the
establishment of schools and businesses in these areas aiding in their socio-economic
development. They had helped the government in securing funds for infrastructure
development of these areas. They had helped individuals pursue education or
businesses and livelihood projects to attain economic independence.

Changing Nature of Financial Intermediaries

The nature of financial intermediation has changed from the old, more regulated and
specialized institutions to the newer, more diversified institutions we now have.

The US congress, after the Great Depression of the 1930s, devises a host of measures
to promote a highly specialized (each type of financial institution has to perform certain
functions peculiar only to it) financial system. Banks were set up to take in deposits
and grant only short-term loans. Creation of branches was limited and interest rates
were duly regulated. Thrift institutions, to protect banks, were prohibited to grant
consumer and commercial loans and issue checking accounts (which were prohibited
to grant interest) and were forced to specialize in long-term fixed-rate mortgages. Life
insurance companies were allowed only to issue policies and purchase corporate
bonds, not stocks. In 1993, the Banking act of 1993 or Glass Steagall Act separated
commercial and investment banking. Commercial banks were no longer allowed to
underwrite corporate stocks and bonds, which function became dominion of
investment banks, and they were not allowed to hold common stocks in their
investment portfolios. On the other hand, investment banks were not allowed to accept
household deposits or grant commercial loans, which became the domain of
commercial banks. Financial institutions, therefore, became highly specialized.
Households could no longer go to one financial institution and transact all their
businesses there. They had to go to banks to open checking accounts, got o an

Gen Ed 12- Business Logic

College of Accountancy, Business and Entrepreneurship
Instructor: Earlynne H. Villegas, MBA
16
Afafafaf Cor Jesu College, Inc.
College of Accountancy, Business and Entrepreneurship
S.Y.2020-2021
insurance company to purchase insurance policies, go to thrift institution to mortgage
their house and lot, among others. Companies who issue stocks and bonds had tog o
to an investment bank for underwriting of their issues and go to a commercial bank for
a loan. Severe restrictions were placed on the portfolios of depository institutions,
especially thrifts. This was know as the old financial environment (OFE).

OFE began to change in the mid-1970s when increase in market rates of interest,
accompanied by high and rising rates of inflation clashed with the existing regulatory
structures. The new financial environment (NFE) is a market-determines or
deregulated rates on assets and liabilities of financial intermediaries and by greater
homogeneity among financial institutions (no longer specialization) which emerged in
the 1980s. Financial institutions can now perform various financial business.

Risk of Financial Intermediation

Risk is the possibility that actual returns will deviate or differ from what is expected. If
one expects prices to go up and he buys securities, he is taking a risk because prices
could go up or down. If prices go up, he gains; if prices go down, he loses. Financial
intermediation is highly market sensitive, i.e. changes with changes in the market
environment. As such, financial intermediaries face several risks including:

a. Interest rate/market value (price) risk

b. Reinvestment risk/ refinancing risk
c. Default/credit risk
d. Inflation/purchasing power risk
e. Political risk
f. Off-balance sheet risk
g. Technology/operation risk
h. Liquidity risk
i. Currency/foreign exchange risk
j. Country/sovereign risk

APPLICATION

A. True or False

_____________1. Financial intermediaries are all banks.

_____________2. All banks are financial intermediaries.
_____________3. Deficit units buy securities.
_____________4. Financial intermediaries only sell other companies’ securities.
_____________5. Original issues of securities are primary securities.
_____________6. A current account is a savings account.
_____________7. The assets of depository institutions are the loans they grant.

Gen Ed 12- Business Logic

College of Accountancy, Business and Entrepreneurship
Instructor: Earlynne H. Villegas, MBA
17
Afafafaf Cor Jesu College, Inc.
College of Accountancy, Business and Entrepreneurship
S.Y.2020-2021
_____________8. The assets of non-financial institutions are their deposits.
_____________9. Universal banks are commercial banks.
_____________10. Demand deposits are checking accounts also known as current
accounts.

B. Identification

________________1. Also known as expanded commercial banks.

________________2. Smaller commercial banks with assets of less than $1 billion
________________3. A system of banking where banks are allowed to provide a
variety of services to their customers.
________________4. Deals with ensuring the soundness and safety of banks
________________5. Consists of the administration of laws in the form of rules and
regulations that govern the conduct of banking and the structure of the banking
industry.
________________6. An older measure of the soundness of a bank evaluated a
bank’s management, asset quality, capital adequacy, risk management, and operating
results.
________________7. Measure of the soundness of a bank evaluated a bank’s
management, asset quality, capital adequacy, risk management, and operating results
used beginning in 1994.
________________8. Another name for savings bank.
________________9. Banks specializing in granting mortgage loans other than the
basic function of accepting deposits.
________________10. Banks that cater to the needs of agriculture and industry
providing them with reasonable rate loans for medium-and long-term purposes.

Well done! You are done with the second module. Should there be
some parts of the topics which need clarification, please ask your instructor during
your session.

Gen Ed 12- Business Logic

College of Accountancy, Business and Entrepreneurship
Instructor: Earlynne H. Villegas, MBA