CHAPTER 5: The Bangko Sentral ng Pilipinas ensure the system’s soundness and healthy growth.

Its most important

recommendations were related to the objectives of the Central Bank, its policy-making
5.1 BRIEF HISTORY structures, scope of its authority and procedures for dealing with problem financial
institutions.
CREATING A CENTRAL BANK FOR THE PHILIPPINES Subsequent changes sought to enhance the capability of the Central Bank, in
the light of a developing economy, to enforce banking laws and regulations and to
AMERICAN ERA AND WORLD WAR II respond to emerging central banking issues. Thus, in the 1973 Constitution, the
A group of Filipinos had conceptualized a central bank for the Philippines as National Assembly was mandated to establish an independent central monetary
early as 1933. It came up with the rudiments of a bill for the establishment of a central authority. Later, PD 1801 designated the Central Bank of the Philippines as the central
bank for the country after a careful study of the economic provisions of the Hare- monetary authority (CMA). Years later, the 1987 Constitution adopted the provisions
Hawes Cutting bill, the Philippine independence bill approved by the US Congress. on the CMA from the 1973 Constitution that were aimed essentially at establishing an
independent monetary authority through increased capitalization and greater private
During the Commonwealth period (1935-1941), the discussion about a sector representation in the Monetary Board.
Philippine central bank that would promote price stability and economic growth
continued. The country’s monetary system then was administered by the Department PRESENT
of Finance and the National Treasury. The Philippines was on the exchange standard The administration that followed the transition government of President
using the US dollar—which was backed by 100 percent gold reserve—as the standard Corazon C. Aquino saw the turning of another chapter in Philippine central banking. In
currency. accordance with a provision in the 1987 Constitution, President Fidel V. Ramos signed
into law Republic Act No. 7653, the New Central Bank Act, on 14 June 1993. The law
In 1939, as required by the Tydings-McDuffie Act, the Philippine legislature provides for the establishment of an independent monetary authority to be known as
passed a law establishing a central bank. As it was a monetary law, it required the the BangkoSentralngPilipinas, with the maintenance of price stability explicitly stated
approval of the United States president. However, President Franklin D. Roosevelt as its primary objective. This objective was only implied in the old Central Bank charter.
disapproved it due to strong opposition from vested interests. A second law was The law also gives the BangkoSentral fiscal and administrative autonomy which the old
passed in 1944 during the Japanese occupation, but the arrival of the American Central Bank did not have. On 3 July 1993, the New Central Bank Act took effect.
liberalization forces aborted its implementation.

THIRD REPUBLIC AND MARTIAL LAW CHRONOLOGY OF EVENTS: CENTRAL BANKING IN THE PHILIPPINES
Shortly after President Manuel Roxas assumed office in 1946, he instructed
then Finance Secretary Miguel Cuaderno, Sr. to draw up a charter for a central bank. 1900
The establishment of a monetary authority became imperative a year later as a result Act No. 52 was passed by the First Philippine Commission placing all banks
of the findings of the Joint Philippine-American Finance Commission chaired by under the Bureau of Treasury. The Insular Treasurer was authorized to
Mr.Cuaderno. The Commission, which studied Philippine financial, monetary and fiscal supervise and examine banks and banking activities.
problems in 1947, recommended a shift from the dollar exchange standard to a
managed currency system. A central bank was necessary to implement the proposed February 1929
shift to the new system. The Bureau of Banking under the Department of Finance took over
the task of banking supervision.
Immediately, the Central Bank Council, which was created by President
Manuel Roxas to prepare the charter of a proposed monetary authority, produced a 1939
draft. It was submitted to Congress in February1948. By June of the same year, the A bill establishing a central bank was drafted by Secretary of Finance
newly-proclaimed President ElpidioQuirino, who succeeded President Roxas, affixed his Manuel Roxas and approved by the Philippine Legislature. However, the bill
signature on Republic Act No. 265, the Central Bank Act of 1948. The establishment of was returned by the US government, without action, to the Commonwealth
the Central Bank of the Philippines was a definite step toward national sovereignty. Government.
Over the years, changes were introduced to make the charter more responsive to the
needs of the economy. On 29 November 1972, Presidential Decree No. 72 adopted the
recommendations of the Joint IMF-CB Banking Survey Commission which made a study
of the Philippine banking system. The Commission proposed a program designed to
1946 1986
A joint Philippine-American Finance Commission was created to study Executive Order No. 16 amended the Monetary Board membership to
the Philippine currency and banking system. The Commission recommended promote greater harmony and coordination of government monetary and fiscal
the reform of the monetary system, the formation of a central bank and the policies.
regulation of money and credit.The charter of the Central Bank of Guatemala
was chosen as the model of the proposed central bank charter. 3 July 1993
Republic Act No. 7653 was passed establishing the BangkoSentralngPilipinas
August 1947 (BSP), replacing CBP as the country's central monetary authority.
A Central Bank Council was formed to review the Commission’s
report and prepare the necessary legislation for implementation.
14 February 2019
February 1948 Republic Act No. 11211 was passed amending RA No. 7653. The charter
President Manuel Roxas submitted to Congress a bill “Establishing the Central amendments bolster the capability of the BSP to safeguard price stability and financial
Bank of the Philippines, defining its powers in the administration of the system stability.
monetary and banking system, amending pertinent provisions of the
Administrative Code with respect to the currency and the Bureau of Banking, THE BSP SEAL
and for other purposes.
The new BSP logo is a perfect round shape in blue that features three gold
15 June 1948 stars and a stylized Philippine eagle rendered in white strokes.
The bill was signed into law as Republic Act No. 265 (The Central Bank These main elements are framed on the left side with the text
Act) by President ElpidioQuirino. inscription “BangkoSentralngPilipinas” underscored by a gold
line drawn in half circle. The right side remains open, signifying
3 January 1949 freedom, openness, and readiness of the BSP, as represented
The Central Bank of the Philippines (CBP) was inaugurated and by the Philippine eagle, to soar and fly toward its goal. Putting
formally opened with Hon. Miguel Cuaderno, Sr. as the first governor.The all these elements together is a solid blue background to signify
broad policy objectives contained in RA No. 265 guided the CBP in the stability.
implementation of its duties and responsibilities, particularly in relation to the
promotion of economic development in addition to the maintenance of PRINCIPAL ELEMENTS
internal and external monetary stability. 1. The Philippine Eagle, our national bird, is the world’s largest eagle and is a symbol of
strength, clear vision and freedom, the qualities we aspire for as a central bank.
November 1972 2. The three stars represent the three pillars of central banking: price stability, stable
RA No. 265 was amended by Presidential Decree No. 72 to make the banking system and a safe and reliable payments system. It may also be interpreted
CBP more responsive to changing economic conditions. as a geographical representation of BSP’s equal concern for the impact of its policies
PD No. 72 emphasized the maintenance of domestic and international and programs on all Filipinos, whether they are in Luzon, Visayas or Mindanao.
monetary stability as the primary objective of the CBP. Moreover, the CBP’s
authority was expanded to include not only the supervision of the banking COLORS
system but also the regulation of the entire financial system. 1. The blue background signifies stability.
2. The stars are rendered in gold to symbolize wisdom, wealth, idealism, and high
January 1981 quality.
Further amendments were made with the issuance of PD No. 1771 to improve 3. The white color of the eagle and the text for BSP representspurity, neutrality, and
and strengthen the financial system, among which was the increase in the mental clarity.
capitalization of the CBP from P10 million to P10 billion.

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FONT OR TYPE FACE
Non-serif, bold for “BANGKO SENTRAL NG PILIPINAS” to suggest solidity, strength, THE BSP MISSION
and stability. The use of non-serif fonts characterized by clean lines portrays the no- To promote and maintain price stability, a strong financial system, and a safe
nonsense professional manner of doing business at the BSP. and efficient payments and settlements system conducive to a sustainable and
SHAPE inclusive growth of the economy.
Round shape to symbolize the continuing and unending quest to become an
excellent monetary authority committed to improve the quality of life of Filipinos. This BSP VALUES
round shape is also evocative of our coins, the basic units of our currency.

THE BSP MAIN COMPLEX

The BSP Main Complex in Manila houses the offices of the Governor, the
Monetary Board and the different operating departments/ offices. The Complex has
several buildings, namely: 5-Storey building, Multi-storey building, the EDPC building
and the BSP Money Museum, which showcases the Bank's collection of currencies.

THE BSP SECURITY PLANT COMPLEX

The Security Plant Complex which is located in Quezon City houses a banknote
printing plant, a securities printing plant, a mint and a gold refinery. The banknote
printing plant and the mint take care of producing currency notes and coins,
respectively.

THE BSP REGIONAL OFFICES AND BRANCHES

The BSP has three regional offices performing cash operations, cash ORGANIZATION AND GOVERNANCE OF THE BANK
administration, loans and rediscounting, bank supervision and gold buying operations.
These regional offices are located in La Union, Cebu City and Davao City.
There are also 18 BSP branches situated in Batac (IlocosNorte), Tuguegarao
City (Cagayan), Dagupan City (Pangasinan), Cabanatuan City (Nueva Ecija), Angeles City
(Pampanga), Lucena City (Quezon), Naga City (Camarines Sur), Legazpi City (Albay),
Dumaguete City (Negros Oriental), Bacolod City (Negros Occidental), Iloilo City (Iloilo),
Kalibo (Aklan), Tacloban City (Leyte), Cagayan de Oro City (Misamis Oriental), Ozamiz
City (Misamis Occidental), Cotabato City, General Santos City (South Cotabato) and
Zamboanga City (Zamboanga del Sur). They perform cash operations, cash
administration, and in certain areas, gold buying operations.

THE BSP VISION AND MISSION

THE BSP VISION

The BSP aims to be recognized globally as the monetary authority and primary
financial system supervisor that supports a strong economy and promotes a high
quality of life for all Filipinos.
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The Monetary Board exercises the powers and functions of the BSP, such as the
conduct of monetary policy and supervision of the financial system. Its chairman is the
BSP Governor, with five full-time members from the private sector and one member
from the Cabinet.
The Governor is the chief executive officer of the BSP and is required to direct
and supervise the operations and internal administration of the BSP. A deputy governor
(or a Senior Assistant Governor in the case of the Currency Management Sector) heads
each of the BSP's operating sector as follows:
 Monetary and Economics Sector is mainly responsible for the
operations/activities related to monetary policy formulation,
implementation, and assessment
 Financial Supervision Sector is mainly responsible for the regulation
of banks and other BSP-supervised financial institutions, as well as
the oversight and supervision of financial technology and payment
systems
 Currency Management Sector is mainly responsible for the
forecasting, production, distribution, and retirement of Philippine
currency, as well as security documents, commemorative medals, and
medallions
 Corporate Services Sector is mainly responsible for the effective
management of corporate strategy, communications, and risks, as
well as the BSP's human, financial, technological, and physical
resources to support the BSP's core functions

5.2 THE BSP’s BALANCE SHEET

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5.3 MAJOR POWERS OF BSP: MONETARY POLICY

MONETARY POLICY – measures or actions taken by the central bank to influence the
general price level and the level of liquidity in the economy. Monetary policy actions of
the BSP are aimed at influencing the timing, cost and availability of money and credit,
as well as other financial factors, for the main objective of stabilizing the price level.
Expansionary Monetary Policy – monetary policy setting that intends to
increase the level of liquidity/money supply in the economy and which could also result
in a relatively higher inflation path for the economy. Examples are the lowering of
policy interest rates and the reduction in reserve requirements. Expansionary monetary
policy tends to encourage economic activity as more funds are made available for
lending by banks. This, in turn, increases aggregate demand which could eventually fuel
inflation pressures in the domestic economy.
Contractionary Monetary Policy - monetary policy setting that intends to
decrease the level of liquidity/money supply in the economy and which could also
result in a relatively lower inflation path for the economy. Examples of this are
increases in policy interest rates and reserve requirements. Contractionary monetary
policy tends to limit economic activity as fewer funds are made available for lending by
banks. This, in turn, lowers aggregate demand which could eventually temper inflation
pressures in the domestic economy.

SECTION 50.EXCLUSIVE ISSUE POWER. — The BangkoSentral shall have the sole power
and authority to issue currency, within the territory of the Philippines. No other person
or entity, public or private, may put into circulation notes, coins or any other object or
document which, in the opinion of the Monetary Board, might circulate as currency,
nor reproduce or imitate the facsimiles of BangkoSentral notes without prior authority
from the BangkoSentral.
The Monetary Board may issue such regulations as it may deem advisable in
order to prevent the circulation of foreign currency or of currency substitutes as well as
to prevent the reproduction of facsimiles of BangkoSentral notes.
The BangkoSentral shall have the authority to investigate, make arrests,
conduct searches and seizures in accordance with law, for the purpose of maintaining
the integrity of the currency.
Violation of this provision or any regulation issued by the BangkoSentral
pursuant thereto shall constitute an offense punishable by imprisonment of not less
than five (5) years but not more than ten (10) years. In case the Revised Penal Code
provides for a greater penalty, then that penalty shall be imposed.

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5.4 OTHER POWERS encouraging/discouraging deposits in the overnight deposit facilities (ODF) and term
deposit facilities (TDF) by banks; (d) increasing/decreasing its rediscount rate on loans
According to Section 2 of Republic Act (RA) 7653 or the New Central Bank Act, extended to banking institutions on a short-term basis against eligible collaterals of
the BSP functions as the Philippines' central monetary authority. banks’ borrowers; and (e) outright sales/purchases of the BSP’s holdings of government
The BSP operates as an independent and accountable body that enjoys fiscal securities. The BSP’s main policy instrument used to signal the stance of monetary
and administrative autonomy, despite being a government corporation. Nonetheless, policy is the overnight reverse repurchase (borrowing) rate.
its functions and privileges are established and protected by law.
The BSP also enjoys corporate powers. As stated in Section 3 of RA 7653, this 1. Open Market Operations (OMO) – the sale or purchase of government securities by
means that the central bank is allowed to do the following: the BSP to withdraw liquidity from or inject liquidity into the system.

• Adopt, alter, and use a corporate seal, which is judicially noted • Reverse Repurchase/Repurchase transactions
• Enter into contracts In a repurchase transaction, the BSP buys government securities (GS)
from a bank with a commitment to sell them back at a specified future date at a
• Lease and/or own real and personal property
predetermined rate, resulting in an expansionary effect on liquidity. Conversely, in
• Acquire and hold assets a reverse repurchase (RRP) operation, the BSP also acts as the seller of GS and the
• Incur liabilities in connection with its functions bank’s payment to the BSP has a contractionary effect on liquidity.
• Compromise, condone, or release any claim of or settled liability,
regardless of the amount involved. The Monetary Board determines the • Outright purchases and sales of securities
terms and conditions under which this may be done, to protect the An outright contract involves direct purchase/sale of government
interest of the BSP. securities by the BSP from/to the market for the purpose of increasing/decreasing
• To perform any and all actions that may be necessary to carry out the money supply on a more permanent basis. In such a transaction, the parties do not
purpose of the BSP commit to reverse the transaction in the future, creating a more permanent effect
on the banking system’s level of money supply.
• Expanded supervisory powers to cover more types of financial
institutions, like money service businesses, credit granting businesses, and
payment system operators and more power to sanction dubious financial • Foreign exchange swaps
transactions. It now also has the power to demand the forfeiture of Foreign exchange swaps refer to transactions involving the actual
profits from unauthorized financial transactions, among other exchange of two currencies (principal amount only) on a specific date at a rate
administrative and criminal sanctions. It can now impose sanctions on agreed on the deal date (the first leg), and a reverse exchange of the same two
unapproved transfers and acquisitions of shares by banks and quasi- currencies at a date further in the future (the second leg) at a rate (different from
banks. (Republic Act No. 11211) the rate applied to the first leg) agreed on deal date.

• To exercise regulatory powers and supervision over the operations of POLICY INSTRUMENTS
Islamic banks, and to issue the implementing rules and regulations on The BSP implements monetary policy using various instruments to influence
Islamic banking. (Republic Act No. 11439) the level of liquidity in the market and thereby steer inflation towards the target level.
These instruments can be classified into two types:

• Direct instruments enable the BSP to control directly certain items in

5.5. BSP CONTROL OF THE MONEY SUPPLY banks’ balance sheets which may be in the form of financial prices or quantities.
Direct instruments have a strong coercive element as in the case of reserve
MONETARY POLICY INSTRUMENTS – the various instruments used by the BSP to requirements and directed lending requirements.
achieve the desired level of money supply. These include (a) raising/reducing the BSP's • Indirect instruments work through the market to influence the
policy interest rates; (b) increasing/decreasing the reserve requirement; (c) behavior of financial institutions, usually through the pricing of central bank
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 facilities. Indirect instruments include adjustments in short-term policy interest ADVANTAGES OF OPEN MARKET OPERATIONS
rates and the conduct of open market operations (OMO). However, among the tools available to the BSP, OMO offers
advantages and continues to be the most practical tool for the following reasons:
MECHANICS OF OMO
OMO is a monetary tool which involves the BSP publicly buying or selling • First, it works within the BSP’s initiative and control. Having the
government securities from banks and financial institutions in order to expand or authority to steer market interest rates, the BSP can influence money supply by
contract the supply of money. By controlling the money supply, the BSP is able to exert changing the monetary policy rates. Consequently, OMO gives the BSP greater
some influence on the prices of goods and services and achieve its inflation objectives. flexibility in terms of the amount and timing of intervention.
When the BSP buys securities, it pays for them by directly crediting its counterparty’s • Secondly, it is fast to implement and gives quick results. Any change
Demand Deposit Account that is being maintained with the BSP. Effectively, the in the policy rates is readily implemented, i.e., on the same day that the Monetary
transaction increases the buyer’s level of reserves and on an aggregate level, expands Board makes the resolution. Thus, any effect on the market is evident right after the
the system’s money supply. Conversely, when the BSP sells the securities, the buyer’s overnight trading for the day.
payment (via direct debit against the buyer’s Demand Deposit Account with the BSP)
reduces his reserve account causing money supply to contract. CALL LOANS AND THE INTERBANK CALL LOANS MARKET
In conducting OMO, the BSP uses two instruments: (1) repurchase Call money are amounts traded in the interbank call loan market that
(repo)/reverse repurchase (reverse repo) agreements and (2) outright purchases and correspond to the excess or deficiency of each bank in terms of reserves. These can be
sales of securities. overnight placements.
IBCL transactions among banks are done primarily to correct reserve
• Repurchase (repo) / reverse repurchase (reverse repo) agreements. requirements. The reserve position of each bank or quasi-bank is calculated daily on
The BSP purchases government securities from a bank with a commitment to sell it the basis of the amount of the institution’s reserves at the close of business for the day
back at a specified future date at a predetermined rate. In effect, a repo transaction and the amount of its liability accounts against which reserves are required to be
expands the level of money supply as it increases the bank’s level of reserves. Under a maintained. The reserve positions of banks are normally known after the check clearing
reverse repo, the BSP acts as the seller of government securities, thus, the bank’s results have been transmitted. As the check clearing results are known only by late
payment reduces its reserve account resulting in a contraction in the system’s money afternoon, interbank call loans are currently done from 4:45 PM to 5:30 PM.
supply. For both repos, the BSP can only affect the level of money supply temporarily, The interbank market can either be securitized (collateralized) or
given that the parties involved commit to reverse the transaction at an agreed future unsecuritized (clean) lendings/borrowings, as well as repurchase agreements.
date. At present, the BSP enters into repo agreements for a minimum of one (1) day Repurchase Agreements (RPs) are generally short-term sale of government securities
(overnight) for both repos and a maximum of 91 days and 364 days for repo and with an agreement to repurchase on the agreed maturity date. Repurchase agreements
reverse repo agreements, respectively. are extensively used as a means of short-term financing by government securities
• Outright purchases and sales of securities. An outright contract dealers and by banks.
involves direct purchase/sale of government security by the BSP from/to the market for
the purpose of increasing/decreasing money supply on a more permanent basis. In Managing Risks in OMO Transactions
such a transaction, the parties do not commit to reverse the transaction in the future, A valuation scheme for securities used in repos is adopted by the BSP to help
creating a more permanent effect on the banking system’s level of money supply. manage the credit risk inherent in OMO transactions. Eligible securities are valued
The BSP may also use other monetary policy tools such as reserve requirements and based on their current market yields as well as the applicable cut based on remaining
rediscounting to expand or contract money supply. The BSP may also grant loans and life of securities involved.
advances to banking institutions to influence the volume of credit consistent with the To avoid exposing the BSP to undue risks arising from purchases of securities,
objective of price stability. In addition, the BSP can employ moral suasion as a last Section 91, Article V of RA 7653 (The New Central Bank Act) sets the type of securities
resort when existing market mechanisms cannot adequately and promptly ensure the that can be bought or sold by the BSP for its own domestic portfolio, as follows:
attainment of specific monetary objectives.  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
guaranteed by the Government.
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 Section 92 of the same article also provides the BSP with effective instruments CHAPTER 6: Deposit Expansion and Money Supply
for OMO, that is, it may, subject to such rules and regulations as the Monetary Board
may prescribe and in accordance with the principles stated in Section 90, issue, place, 6.1. RESERVE AND DEPOSIT TRANSFERS
buy and sell freely negotiable evidences of indebtedness of the BSP, provided that such
issuance shall be made only in cases of extraordinary movement in price levels. Said
evidences of indebtedness may be issued directly against the international reserves of RESERVE
the BSP or against securities, which it has acquired under the provisions of Section 91 - profits that have been appropriated for a particular purpose.
or may be issued without relation to specific types of assets of the BSP.
-sometimes set up to purchase fixed assets, pay an expected legal settlement, pay
2. Acceptance of term deposits bonuses, pay off debt, pay for repairs and maintenance, and so forth.
The BSP, like other central banks, offers term deposits as one of the monetary
tools to absorb liquidity. In November 1998, the BSP offered the Special Deposit - done to keep funds from being used for other purposes, such as paying dividends or
Accounts (SDA) to banks and later expanded the access in April 2007 to trust entities of buying back shares. The board of directors is authorized to create a reserve
banks and non-bank financial institutions. With the adoption of the IRC system in 2016,
the SDA facility was replaced by the term deposit facility (TDF). - Something of an anachronism, because there are no legal restrictions on the use of
funds that have been designated as being reserved. Thus, funds designated as a reserve
 Term Deposit Facility (TDF) can actually be used for any purpose.
The TDF is a liquidity absorption facility used by the BSP for active
liquidity management. Counterparties are asked to submit bids (volume and In accounting, reserve should be accounted as:
rate) for term placements with the BSP. Currently, the BSP offers three
tenors—seven, 14, and 28 days—in term deposit auction. Debit the retained earnings for the amount to be segregated in a reserve account, and
Credit the reserve account for the same amount.
3. Standing Liquidity Facilities
The BSP offers standing liquidity (lending and deposit) windows to provide or When the activity has been completed that caused the reserve to be created, just
absorb liquidity at the initiative of the counterparty. These standing overnight facilities reverse the entry to shift the balance back to the retained earnings account.
are available on demand to qualified counterparties during BSP business hours. The
two standing facilities that form the upper and lower bound of the corridor are set at ± Example:
50 basis points (bps) around the policy rate (the overnight RRP rate under the new IRC
structure). A business wants to reserve funds for a future building construction project,
 Overnight Deposit Facility and so credits a Building Reserve fund for $5 million and debits retained earnings for
The standing overnight deposit facility will absorb any residual system the same amount. The building is then constructed at a cost of $4.9 million, which is
liquidity to prevent market interest rates from falling below the corridor. Interest accounted for:
rate for the O/N deposit facility is the RRP rate minus 50 bps (0.50 percentage Debit to the fixed assets account.
point). The interest rate for the O/N deposit facility serves as a floor for the O/N Credit to cash.
interbank rate. Once the building is completed, the original reserve entry is reversed, with $5
 Overnight Lending Facility million debited to the Building Reserve fund and $5 million credited to the retained
The standing overnight lending facility provides collateralized overnight earnings account.
funding to BSP counterparties to clear end-of-day imbalances. Interest rate for the
O/N lending facility is the RRP rate plus 50 bps (0.50 percentage point). The
interest rate for the O/N lending facility serves as a ceiling for the O/N interbank
rate.

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BANK RESERVE
It is a currency deposit that is not lent out to the bank's clients. A small Example:
fraction of the total deposits is held internally by the bank in cash vaults or deposited
with the central bank. Minimum reserve requirements are established by central banks If a bank has $1 million in deposits and the required reserve ratio is 10%, the
in order to ensure that the financial institutions will be able to provide clients with cash excess reserves for the bank are $900,000.
upon request. The process of deposit expansion does not end with that first bank loaning out
its excess reserves because the borrower is likely to deposit the money in another bank
HOW BANK RESERVES WORK for use in transactions. The second bank can use this deposit to expand the money
It is typically held by financial institutions to avoid bank runs and have supply again.
sufficient cash on hand, should an unexpected and large withdrawal request come up.
Bank reserves are divided into required reserves and excess reserves. Because of the
banking industry's importance to the economy, national authorities regulate banks by 6.2. BSP’S CONTROL OF DEPOSIT EXPANSION
obligating them to hold a certain amount of required reserves with central banks.
BSP ISSUES REGULATION ENABLING BANKS TO EXPAND SERVICE DELIVERY CHANNELS
DEPOSIT EXPANSION
- Process in which banks create additional money by using money 01.18.2017
already deposited. The money expands because when banks loan it out, it re-enters the
economy. In fact, most of the money supply in the United States is created in this
fashion. In line with the thrust of the BangkoSentralngPilipinas to create an enabling
Before being loaned out, deposits in a bank do not increase the overall money regulatory environment for innovations and allow banks to exponentially expand reach
supply. The funds deposited merely change in composition from currency to deposit. and serve clients more efficiently, the Monetary Board recently approved the
Money is created only when funds that have been deposited are loaned out. Because guidelines for new bank service channels and relaxed existing regulations on deposit
banks are required to hold a fraction of deposits in reserve, only the remaining fraction, taking activities outside bank premises.
when lent out, increases the money supply. The fraction lent out is a multiple of the Under the new regulations, banks are now allowed, with prior BSP
fraction that must be held in reserve. The mathematical function that describes the authorization, to serve clients through cash agents contracted by banks to accept and
maximum possible expansion of deposits is known as the money multiplier. disburse cash in its behalf, facilitating online self-service deposits, withdrawals and
Money Multiplier- the amount of money generated by the banking system with each fund transfers, as well as bills payment.
dollar of reserves. It shows the total amount of money created by the system
- It is calculated with this equation: Cash agents
 can also perform Know-Your-Customer procedures as well as collect and
Money Multiplier = 1/Required Reserve Ratio forward application documents for loan and account opening.
 They may also sell and service insurance as may be authorized by the
The required reserve ratio (RR) is the percentage of deposits a bank is Insurance Commission.
required to hold in reserve and not lend out or invest.  Typically cash rich third party entities with many outlets that conduct regular
business in fixed locations anywhere in the country, such as convenience
Example: stores, pharmacies and other highly accessible retail outlets.
 Enable banks to leverage on innovative digital solutions to serve a wider client
If a bank is required to reserve $1 for every $4 deposited, the required reserve base, particularly in the low-income and rural areas where there is limited
ratio is 25%, or 0.25. The equation for arriving at the money multiplier would be commercial incentive to establish a full branch or even a micro-banking office
1/0.25=41/0.25=4. Therefore, when the required reserve ratio is 0.25, the money (MBO).
multiplier is equal to 4. Through this new cost-efficient service channel, serving the currently unbanked and
The fraction of a deposit that a bank can loan out or invest is called excess low-income segments can become more viable and sustainable for banks. Data from
reserves. It is through its excess reserves that a bank can grow its total reserves. the BSP shows that more than 36% of all the municipalities in the country have no
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banking presence although most of these are served by a variety of non-bank financial  Exogenous has further divided into country specific factors and bank specific
institutions like pawnshops, cooperatives, and lending investors. factors for clarification purpose.
In addition to these new service delivery models, the Monetary Board also  Endogenous factors can be controlled by the banking system; however the
relaxed existing regulations on offsite deposit servicing as well as deposit solicitation, exogenous factors cannot be controlled by the banking system.
by removing highly prescriptive operational requirements and conditions before banks  The bank specific factors are factors that are specific to the banking system.
may engage and offer these services. The amended regulations provide banks with  The country specific factors are factors that are beyond the banking system.
more flexibility in designing appropriate and cost-efficient ways to render deposit pick-
up and delivery services and as a result, enhance client experience. 6.4. PUBLIC PREFERENCES AND DEPOSIT EXPANSION
To ensure the safety and soundness of banks as well as to uphold consumer
protection, the guidelines emphasize banks’ responsibility for ensuring the adequacy of The process of deposit expansion tells us that when the reserve of the banking
risk management and internal control systems for these liberalized deposit servicing system increases, bank deposits will multiply many times over. This expansion multiple
activities. is known as deposit multiplier, which is equal to the reciprocal of the rate of the
The BSP will evaluate the quality and sufficiency of these risk management and statutory reserve. This principle on deposit expansion is known as deposit multiplier.
control systems before granting authorization to perform banking services outside Note that for this principle to work one has to assume that banks do not borrow
bank premises. funds with the bank. Additionally, it is not just the central bank that can make the
banks' reserve increase, causing multiple deposit expansions.
6.3. FACTORS AFFECTING DEPOSIT EXPANSION The public decides to put a portion of its hand-held cash into banks that will
surely make the banks hold additional cash leading to increased bank reserves.
Nowadays, commercial banks are managing their deposit to fulfill the need of According to the same principle, the banks'deposits will expand multiple times.
their customers. However, their managing systems for the deposits are being affected In fact, as long as banks have excess reserves, the process for the banks to create
by some exogenous and endogenous factors (Desinga, 1975). deposits will not halt. Only when banks do not hold any excess reserves that are when
An important indicator of the success and efficiency of any credit agency, the banks' reserves are exactly the same as their statutory reserves the creation of
which is also a banking institution is, the extent to which it is able to mobilize the deposits can be stopped. That is when the deposit and loan activities at bank will be in
savings of the community in the form of deposit. But deposit mobilization is very equilibrium. So, different levels of reserves support different and corresponding levels
difficult task. It depends up on various factors exogenous as well as endogenous, to the of demand deposits.
banking system (Desinga, 1975).
6.5. MONEY, VELOCITY AND ECONOMY

Exogenous factors are: MONEY

 the general economic environment of the region
 the volume of business transaction of the region Money may make the world go around, as the song says. And most people in
 the confidence of the people on the banking system the world probably have handled money, many of them on a daily basis. But despite its
 the banking habit of the people familiarity, probably few people could tell you exactly what money is, or how it works.
 the saving potential of the region
Even when exogenous factors are more conducive for deposit mobilization, banks may In short, money can be anything that can serve as a:
fail because of unfavorableendogenous factors such as: • store of value, which means people can save it and use it later—
 location smoothing their purchases over time;
 type of building
• unit of account, that is, provide a common base for prices; or
 Window dressing (furniture, cheque books, vouchers, pay slips etc), which
assure the customers about the physical fitness of a bank (Desinga, 1975). • Medium of exchange, something that people can use to buy and sell
Desinga (1975) classified the variables which are claimed to have effect on the from one another.
commercial banks deposits into two, namely exogenous and endogenous factors.

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 With money, you don’t need to find a particular person. You just need a There's a simple formula used to calculate the velocity of money: V = PQ/M
market in which to sell your goods or services. In that market, you don’t barter for
individual goods. Instead you exchange your goods or services for a common medium Wherein:
of exchange—that is, money. You can then use that money to buy what you need from V =velocity of money
others who also accept the same medium of exchange. As people become more
specialized, it is easier to produce more, which leads to more demand for transactions PQ =Nominal GDP, which measures the goods and services purchased
and, hence, more demand for money.
M =total, average amount of money in circulation in the economy
VELOCITY

What is the Velocity of Money? VELOCITY OF MONEY AND ECONOMY

• The rate at which money is exchanged in an economy.
The velocity of money can be a useful indicator of the health of an economy
• The number of times that money moves from one transaction to another.
or, more specifically, inflationary pressures.
• How much a unit of currency is used in a given period of time. The "monetarists" who subscribe to the quantity theory of money argue that
• important for measuring the rate at which money in circulation is used for money velocity should be stable absent changing expectations, but a change in money
purchasing goods and services, as this helps investors gauge how robust the supply can alter expectations and therefore money velocity and inflation.
economy is, and is a key input in the determination of an economy's inflation For example:
calculation An increase in the money supply should theoretically lead to a commensurate increase
in prices because there is more money chasing the same level of goods and services in
Simply put, it's the rate at which people spend money. The velocity of money is usually the economy. The opposite should happen with a decrease in money supply. Critics, on
measured as a ratio of gross national product (GNP) to a country's total supply of the other hand, argue that in the short term, the velocity of money is highly variable,
money. and prices are resistant to change, resulting in a weak and indirect link between money
supply and inflation.
Basics of Velocity of Money The relationship between money velocity and inflation is also variable.
 Economies that exhibit a higher velocity of money relative to others tend to be
further along in the business cycle and should have a higher rate of inflation — all
things held constant. Example:
 The velocity of money can be thought of as the turnover of the money supply. For From 1959 through the end of 2007, the velocity of M2 money stock averaged
this application, economists use broad measures of money supply: M1 or M2. 1.86x with a maximum of 2.21x in 1997 and a minimum of 1.66x in 1964. Since 2007,
 M1 is defined by the Federal Reserve as the sum of all currency held by the public however, the velocity of money has fallen dramatically as the Federal Reserve greatly
and transaction deposits at depository institutions. expanded its balance sheet in an effort to combat the global financial crisis and
 M2 adds in savings deposits, time deposits and real money market mutual funds. deflationary pressures. As of the first quarter of 2016, M2 velocity was just 1.46x — the
lowest reading since it bottomed out at 1.15x during the Great Depression. Over the
Example of Velocity of Money past 20 years, the correlation between M2 and core inflation in the United States is
Consider an economy consisting of two individuals, A and B, who have $100 about 0.3, and there were periods in the 1990s when the relationship was actually
each. A bought a car from B for $100. Then B purchases a home from A for $90. B has negative, which is the exact opposite outcome as theorized by the monetarists.
kids and enlists A's help in adding new construction to his home. For his efforts, B pays
A $100. A also sells the car he bought from B back to him for $90. Thus, both parties in KEY TAKEAWAYS
the economy have made transactions worth $400, even though they only possessed
$100 each. This multiplication in the value of goods and services exchanged is made  Velocity of money is the rate at which money is exchanged in an economy.
possible through the velocity of money in an economy.  The rate of velocity of money is variable, meaning it is difficult to derive
between its value and inflation.
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