COLLEGE OF BUSINESS deposits, investment products, and

ACCOUNTANCY AND HOSPITALITY insurance.

MANAGEMENT
BANKING AND FINANCIAL 4. Risk Management:
INSTITUTIONS
 Learn about different types of financial
FM1 FM2-1
risks, including credit risk, market risk,
MODULE operational risk, and liquidity risk.

Learning objectives in the field of banking  Understand risk assessment and

and financial institutions are specific goals mitigation strategies used by financial
that individuals aim to achieve through their institutions.
education and training. These objectives 5. Regulatory Compliance and
guide the development of knowledge, skills, Governance:
and competencies needed to succeed in
various roles within the banking and financial  Familiarize yourself with banking
industry. Here are some common learning regulations, laws, and compliance
objectives in this field: requirements to ensure ethical and
legal conduct.
1. Understanding Financial Systems:
 Understand corporate governance
 Learn the structure and components principles and practices that promote
of financial systems, including banks, transparency and accountability.
non-bank financial institutions, and
capital markets. 6. Credit Analysis and Lending:

 Understand the roles and functions of  Learn how to assess the

different types of financial institutions creditworthiness of borrowers and
within the broader financial system. make informed lending decisions.

2. Banking Operations:  Understand the process of loan

origination, underwriting, and
 Gain knowledge of day-to-day monitoring.
banking operations, including account
management, payments, lending, and 7. Investment and Portfolio Management:
customer service.
 Develop knowledge of investment
 Learn about the regulatory principles, asset allocation, and
environment that governs banking portfolio management strategies.
activities and consumer protection.
 Understand how to analyze financial
3. Financial Products and Services: markets and make investment
decisions.
 Develop an understanding of various
financial products and services 8. Financial Technology (Fintech):
offered by banks, such as loans,
 Gain insights into the impact of
technology on financial services,
 including online banking, mobile and career development to meet the
payments, and digital currencies. demands of the banking and financial
industry. These objectives contribute to
 Understand the potential of fintech building a strong foundation of knowledge
innovations and their implications for and skills that are essential for success in
the industry. various roles within the field.
9. Customer Relationship Management: What Is a Bank?
 Develop skills in building and A bank is a financial institution that provides a
maintaining strong customer wide range of financial services to individuals,
relationships, providing personalized businesses, and governments. Banks play a
financial advice, and meeting client central role in the economy by facilitating the
needs. flow of money and credit, managing financial
10. Ethics and Professionalism: - transactions, and offering various financial
Understand ethical considerations in the products and services. Here are some key
financial industry, including conflicts of functions and characteristics of banks:
interest, confidentiality, and fair treatment of 1. Deposits and Savings: Banks offer
clients. - Develop professionalism in dealing individuals and businesses a safe
with clients, colleagues, and stakeholders. place to store their money. Customers
11. Financial Analysis and Reporting: - can open various types of accounts,
Learn how to analyze financial statements, such as savings accounts, checking
assess financial performance, and interpret accounts, and certificates of deposit
financial ratios. - Understand the importance (CDs), where they can deposit their
of transparent and accurate financial funds.
reporting. 2. Loans and Credit: Banks provide
12. Macroeconomic and Microeconomic loans and credit to individuals and
Concepts: - Gain a solid understanding of businesses. They lend money for
economic principles and how they influence purposes such as buying homes, cars,
financial markets, interest rates, and business and other assets, as well as for
decisions. financing business operations and
expansion.
13. International Banking and Finance: -
Develop insights into international financial 3. Payments and Transactions: Banks
markets, cross-border transactions, exchange facilitate electronic funds transfers,
rates, and global regulatory frameworks. wire transfers, and other payment
methods that enable individuals and
14. Regulatory Changes and Industry businesses to conduct financial
Trends: - Stay updated on regulatory transactions efficiently.
changes, industry trends, and emerging
challenges in the banking and financial sector. 4. Investment Services: Many banks
offer investment services, such as
Setting clear learning objectives helps wealth management, investment
individuals tailor their educational pursuits advisory, and brokerage services.
 They may provide access to stocks, and compliance with financial regulations.
bonds, mutual funds, and other The level of regulation and the specific
investment options. services offered by banks can vary
depending on the country and the type of
5. Foreign Exchange: Banks often bank.
facilitate currency exchange for
international trade and travel. They Understanding Banks
offer foreign exchange services to
convert one currency into another. Banks are complex financial institutions that
play a crucial role in the economy. Here's a
6. Risk Management: Banks provide more comprehensive overview of how banks
insurance and risk management operate and their significance:
products to help individuals and
businesses mitigate various financial 1. Financial Intermediation: One of the
risks, such as property damage, fundamental functions of banks is to act as
health emergencies, and liability. intermediaries between those who have
excess funds (depositors and savers) and
7. Financial Advice: Some banks offer those who need funds (borrowers). Banks
financial advisory services to help facilitate this by accepting deposits from
clients make informed decisions about individuals and institutions and using those
their finances, investments, retirement funds to provide loans and credit to
planning, and more. individuals, businesses, and governments.

8. Monetary Policy Implementation: 2. Balance Sheet: A bank's balance sheet is

Central banks, which are responsible a snapshot of its financial condition at a
for a country's monetary policy, use specific point in time. It consists of two main
tools like interest rates and reserve sides:
requirements to influence the money
supply and regulate the economy.  Assets: These are what the bank
owns, including loans, investments,
9. Liquidity Management: Banks and reserves held at the central bank.
manage liquidity by balancing the
inflow and outflow of funds. They  Liabilities and Equity: These are the
ensure they have enough reserves on sources of the bank's funds, including
hand to meet customer demands for deposits, loans from other banks, and
withdrawals and payments. capital provided by shareholders.

10. Credit Creation: One of the key 3. Reserve Requirements: Banks are
functions of banks is the creation of required to hold a certain amount of reserves,
credit. When a bank lends money, it typically as deposits with the central bank.
effectively creates new money in the These reserves serve as a cushion to meet
economy by extending credit to depositor withdrawals and payment
borrowers. obligations.

Banks are regulated by government 4. Fractional Reserve Banking: Banks

authorities to ensure their stability, fairness, operate on a fractional reserve system,
meaning they hold only a fraction of their
deposits in reserves. The rest of the funds 11. Technological Advancements: In recent
are used for lending and other investments. years, technological advancements have led
to online banking, mobile banking apps, and
5. Money Creation: When a bank lends digital payment systems, transforming the
money, it effectively creates new money in way people interact with banks.
the economy. For example, if you take out a
loan from a bank, the money you receive is Understanding banks involves grasping these
newly created and added to the money key aspects of their operations, functions,
supply. and broader impacts on the economy. Keep
in mind that banking practices and
6. Risk Management: Banks are involved in regulations can vary between countries and
various financial activities that carry risks. regions.
They manage these risks through
diversification of their loan portfolios, credit The 9 Major Financial Institutions
assessments, and risk management
strategies. 1. Commercial Banks: These are
traditional banks that offer a wide
7. Central Banks: Central banks are the range of financial services to
highest authority in a country's monetary individuals, businesses, and
system. They regulate and supervise banks, governments. They handle deposits,
set monetary policy (including interest rates), loans, and other financial transactions.
and maintain the stability of the financial
system. 2. Investment Banks: Investment banks
specialize in providing various
8. Financial Services: Beyond basic banking financial services to corporations,
functions, many banks offer a wide range of governments, and other large
financial services, such as investment advice, institutions. They help with
insurance products, retirement planning, underwriting, mergers and
foreign exchange services, and more. acquisitions, trading, and other
investment-related activities.
9. Regulatory Compliance: Banks are
subject to strict regulatory oversight to ensure 3. Insurance Companies: These
stability, transparency, and consumer companies provide various types of
protection. Regulatory bodies enforce rules insurance coverage, such as life,
related to capital adequacy, risk management, health, property, and casualty
anti-money laundering, and more. insurance.

10. Economic Impact: Banks have a 4. Asset Management Firms: Asset

significant impact on economic growth. By management firms manage
providing credit and financing, they contribute investment portfolios for individuals,
to business expansion and job creation. They businesses, and institutional investors.
also support consumer spending by offering They offer services such as mutual
loans for purchasing homes, cars, and other funds, exchange-traded funds (ETFs),
goods. and pension fund management.
 5. Hedge Funds: Hedge funds are functions, and services they provide. The
investment funds that use various Bangko Sentral ng Pilipinas (BSP), the
strategies to generate high returns for country's central bank, regulates and
their investors. They often have more supervises banks in the Philippines. As of my
flexibility in their investment last update in September 2021, here are the
approaches compared to traditional common classifications and powers of banks
mutual funds. in the Philippines:

6. Credit Unions: Credit unions are 1. Universal Banks: Universal banks offer a
cooperative financial institutions full range of banking services, including
owned by their members. They commercial banking, investment banking, and
provide similar services to banks, thrift banking. They have the widest range of
including savings accounts, loans, powers and are authorized to engage in
and other financial products. various financial activities, including
accepting deposits, granting loans,
7. Pension Funds: Pension funds underwriting securities, and providing
manage retirement funds on behalf of investment services.
employees. They invest these funds
to generate returns that can support 2. Commercial Banks: Commercial banks
pension payments in the future. provide basic banking services such as
accepting deposits, granting loans, and
8. Private Equity Firms: Private equity facilitating payments and fund transfers. They
firms invest in private companies or cater to both individuals and businesses.
take public companies private with the Commercial banks can also offer ancillary
aim of improving their performance services like foreign exchange and
and profitability. investment products.
9. Central Banks: Central banks are 3. Thrift Banks: Thrift banks are divided into
governmental or quasi-governmental two categories: savings banks and rural
institutions that oversee a country's banks.
monetary policy, control the money
supply, and often regulate the banking  Savings Banks: Savings banks focus
industry. on attracting savings and time
deposits from individuals and small
It's important to note that the financial businesses. They offer retail banking
landscape can change, and the significance services and can provide loans, but
of various institutions can shift over time. For they generally have a more limited
the most up-to-date and accurate information, scope than universal or commercial
I recommend checking with reliable financial banks.
sources or databases.
 Rural Banks: Rural banks primarily
Classification and Powers of Banks in the serve rural and agricultural areas.
Philippines They provide financial services to
In the Philippines, banks are classified based small farmers, fishers, and
on various criteria such as ownership, microenterprises in underserved
communities. Rural banks play a
 significant role in promoting financial It's important to note that regulations and
inclusion. classifications might have evolved since my
last update in September 2021. For the most
4. Cooperative Banks: Cooperative banks current and accurate information on the
are owned and operated by cooperatives. classification and powers of banks in the
They provide financial services to their Philippines, I recommend referring to official
members, who are also owners of the bank. sources such as the Bangko Sentral ng
Cooperative banks are designed to promote Pilipinas (BSP) or other reputable financial
the interests of their members and help them institutions in the country.
access financial services.
The Philippine Financial System
5. Islamic Banks: Islamic banks operate in
accordance with Islamic principles, which The Philippine financial system encompasses
prohibit the payment or acceptance of interest a network of institutions, markets, and
(usury) and promote risk-sharing and ethical regulations that facilitate the flow of funds and
business practices. These banks offer Sharia- financial services within the country. The
compliant financial products and services. system plays a vital role in supporting
economic growth, promoting financial stability,
6. Foreign Banks: Foreign banks are and providing individuals and businesses with
established by foreign entities and have the access to various financial products and
authority to operate in the Philippines under services. As of my last update in September
the supervision of the BSP. They can provide 2021, here are the key components of the
a range of banking services similar to other Philippine financial system:
classifications.
1. Bangko Sentral ng Pilipinas (BSP): The
7. Microfinance Banks: Microfinance- BSP is the central bank of the Philippines. It
oriented banks focus on providing financial is responsible for issuing the Philippine peso
services to low-income and underserved currency, formulating and implementing
individuals and communities. They offer monetary policy, supervising financial
microloans, savings facilities, and other institutions, and maintaining price stability
financial products tailored to the needs of the and financial system stability.
financially marginalized.
2. Banks: Banks in the Philippines, including
8. Investment Banks: Investment banks are universal banks, commercial banks, thrift
involved in underwriting securities, facilitating banks, rural banks, and cooperative banks,
mergers and acquisitions, and providing provide a range of financial services such as
advisory services related to capital markets deposit-taking, lending, foreign exchange,
and investment activities. They assist and investment products.
corporations in raising capital through various
financial instruments. 3. Capital Markets: The Philippine Stock
Exchange (PSE) is the primary stock
9. Government Banks: These banks are exchange in the country. It facilitates the
owned and controlled by the Philippine trading of stocks and other securities issued
government. They serve specific purposes, by corporations. The Philippine Dealing and
such as development financing, housing, and Exchange Corporation (PDEx) is the fixed-
agricultural credit. income exchange for trading bonds.
4. Non-Bank Financial Institutions: These encouraging the use of digital financial
include non-stock savings and loan services.
associations, investment houses, financing
companies, and pawnshops, which contribute 11. Digital and Fintech: The digital
to the diversification of financial services transformation of the financial industry is on-
available to the public. going, with the adoption of digital banking
services, mobile payments, and other fintech
5. Microfinance Institutions: These innovations.
institutions provide microloans and financial
services to low-income individuals and The Philippine financial system aims to
microenterprises to promote financial provide a stable and inclusive environment
inclusion and poverty reduction. for individuals and businesses to manage
their finances, invest, and grow. Keep in mind
6. Insurance Industry: The insurance sector that developments in the financial system can
offers life insurance, non-life insurance, and change over time, so it's recommended to
health insurance products to individuals and refer to official sources such as the Bangko
businesses, providing protection against Sentral ng Pilipinas (BSP) or other reputable
various risks. financial institutions for the most up-to-date
information.
7. Pension Funds: Pension funds manage
retirement funds for employees, helping them PRELIMS
save and invest for their future needs.
Banking Regulation
8. Payment and Settlement Systems: The
Philippine Payment and Settlement System Banking regulation refers to the rules, laws,
(PhilPaSS) is the real-time gross settlement and supervisory measures that govern the
system operated by the BSP for large-value activities of banks and other financial
interbank transactions. Retail payment institutions. The primary goal of banking
systems and electronic fund transfers also regulation is to ensure the stability and
play a significant role in the country's integrity of the financial system, protect
payment ecosystem. consumers, and maintain confidence in the
banking sector. Regulations are typically
9. Regulatory Framework: The BSP is implemented by government agencies,
responsible for supervising and regulating central banks, and financial regulatory
financial institutions to ensure their authorities. Here are key aspects of banking
soundness and compliance with regulations. regulation:
Regulatory agencies such as the Securities
and Exchange Commission (SEC) oversee 1. Prudential Regulation: Prudential
capital markets, while the Insurance regulations focus on the financial soundness
Commission oversees the insurance industry. of banks. They require banks to maintain
adequate capital levels to cover potential
10. Financial Inclusion Initiatives: The losses, manage risks effectively, and have
Philippine government and financial sufficient liquidity to meet their obligations.
regulators have taken steps to promote
financial inclusion, such as expanding access 2. Capital Adequacy: Regulatory agencies
to banking services in underserved areas and set capital requirements that banks must
meet to ensure their financial stability. Banks strategies for addressing financial distress
are required to maintain a certain amount of while minimizing disruption to the financial
capital as a buffer against losses. system.

3. Risk Management: Regulations require 10. Cross-Border Regulation: International

banks to have robust risk management banking operations are subject to cross-
practices in place to identify, assess, and border regulations to ensure consistency in
manage various risks such as credit risk, global financial standards and to prevent
market risk, operational risk, and liquidity risk. regulatory arbitrage.

4. Reserve Requirements: Central banks 11. Stress Testing: Regulatory authorities

often establish reserve requirements that often require banks to undergo stress tests to
banks must hold as deposits with the central assess their resilience to adverse economic
bank. These reserves serve as a safeguard scenarios and ensure they can withstand
against excessive withdrawals and contribute shocks.
to monetary stability.
12. Reporting and Disclosure: Banks are
5. Consumer Protection: Banking required to provide regular financial reports
regulations aim to protect consumers by and disclosures to regulatory bodies and the
ensuring transparency in banking practices, public to enhance transparency.
preventing unfair practices, and providing
mechanisms for addressing customer 13. Digital Banking and Fintech Regulation:
complaints and disputes. As technology advances, regulations are
being developed to address the unique
6. Anti-Money Laundering (AML) and challenges and opportunities presented by
Know Your Customer (KYC) Regulations: digital banking and fintech innovations.
These regulations require banks to implement
measures to prevent money laundering, 14. Supervision and Enforcement:
terrorist financing, and other illicit activities. Regulatory agencies oversee and enforce
Banks must also verify the identity of their compliance with banking regulations through
customers through KYC procedures. on-site examinations, off-site monitoring, and
sanctions for non-compliance.
7. Liquidity Requirements: Banks are
mandated to maintain a certain level of liquid Banking regulations vary from country to
assets to meet their short-term obligations country and may change over time based on
and handle unexpected funding needs. economic conditions, technological
advancements, and evolving risks in the
8. Market Conduct and Integrity: financial sector. Effective banking regulation
Regulations address issues related to market is essential for maintaining a stable financial
manipulation, insider trading, and other system that serves the interests of the
unethical behaviors that could undermine the economy and society as a whole.
integrity of financial markets.

9. Resolution and Recovery Planning:

Regulatory frameworks may require banks to Money Markets
develop resolution plans that outline
Money markets are a segment of the financial  Certificates of Deposit (CDs): Time
market where short-term borrowing and deposits offered by banks to retail and
lending of funds occur. These markets institutional investors. They have fixed
facilitate the trading of highly liquid and low- maturity dates and fixed interest rates.
risk financial instruments with maturities
typically ranging from overnight to one year.  Repurchase Agreements (Repo):
Money markets play a crucial role in providing Short-term collateralized loans where
funding to financial institutions, corporations, one party sells securities to another
and governments to meet their short-term with an agreement to repurchase
liquidity needs and manage their cash flows. them at a later date at a slightly higher
Here are some key features and instruments price.
commonly found in money markets:  Banker's Acceptances (BAs): Short-
1. Short-Term Nature: Money market term promissory notes issued by
instruments have relatively short maturities, corporations that are guaranteed by a
making them suitable for investors seeking to bank. BAs are often used in
park funds temporarily. international trade transactions.

2. High Liquidity: Instruments in the money  Federal Funds: Overnight loans

market are highly liquid, meaning they can be between banks to meet reserve
easily bought or sold with minimal price requirements. The interest rate on
fluctuations. federal funds is a key benchmark for
short-term interest rates.
3. Low Risk: Money market instruments are
considered low-risk investments due to their  Short-Term Municipal Notes: Short-
short durations and typically high credit term debt securities issued by
quality. municipalities to fund immediate cash
needs.
4. Primary Participants: Banks, financial
institutions, corporations, governments, and 6. Role in Monetary Policy: Central banks
central banks are the primary participants in often use money markets to implement
money markets. monetary policy by influencing short-term
interest rates. By buying or selling money
5. Instruments in Money Markets: market instruments, central banks can
increase or decrease the money supply.
 Treasury Bills (T-Bills): Short-term
debt securities issued by governments 7. Yield Curve: The relationship between the
to raise funds. They are usually interest rates and the maturity of money
issued at a discount to their face value market instruments is known as the yield
and mature at par. curve. It helps to gauge market expectations
of future interest rates.
 Commercial Paper (CP): Short-term
unsecured promissory notes issued 8. Money Market Funds: These are mutual
by corporations to raise funds for funds that invest in money market
working capital needs. CP is typically instruments. They provide a relatively safe
issued by creditworthy companies.
and liquid investment option for individuals 5. Instruments in Money Markets:
and institutions.
 Treasury Bills (T-Bills): Short-term
9. Global Nature: Money markets operate debt securities issued by governments
internationally, with participants trading in to raise funds. They are usually
various currencies. issued at a discount to their face value
and mature at par.
Overall, money markets serve as a vital
component of the broader financial system,  Commercial Paper (CP): Short-term
providing short-term funding options and unsecured promissory notes issued
contributing to the efficient allocation of by corporations to raise funds for
capital. working capital needs. CP is typically
issued by creditworthy companies.
The Mortgage Market
 Certificates of Deposit (CDs): Time
Money markets are a segment of the financial deposits offered by banks to retail and
market where short-term borrowing and institutional investors. They have fixed
lending of funds occur. These markets maturity dates and fixed interest rates.
facilitate the trading of highly liquid and low-
risk financial instruments with maturities  Repurchase Agreements (Repo):
typically ranging from overnight to one year. Short-term collateralized loans where
Money markets play a crucial role in providing one party sells securities to another
funding to financial institutions, corporations, with an agreement to repurchase
and governments to meet their short-term them at a later date at a slightly higher
liquidity needs and manage their cash flows. price.
Here are some key features and instruments
commonly found in money markets:  Banker's Acceptances (BAs): Short-
term promissory notes issued by
1. Short-Term Nature: Money market corporations that are guaranteed by a
instruments have relatively short maturities, bank. BAs are often used in
making them suitable for investors seeking to international trade transactions.
park funds temporarily.
 Federal Funds: Overnight loans
2. High Liquidity: Instruments in the money between banks to meet reserve
market are highly liquid, meaning they can be requirements. The interest rate on
easily bought or sold with minimal price federal funds is a key benchmark for
fluctuations. short-term interest rates.

3. Low Risk: Money market instruments are  Short-Term Municipal Notes: Short-
considered low-risk investments due to their term debt securities issued by
short durations and typically high credit municipalities to fund immediate cash
quality. needs.

4. Primary Participants: Banks, financial 6. Role in Monetary Policy: Central banks

institutions, corporations, governments, and often use money markets to implement
central banks are the primary participants in monetary policy by influencing short-term
money markets. interest rates. By buying or selling money
market instruments, central banks can homeownership and catering to the needs of
increase or decrease the money supply. individuals seeking housing-related financial
services. There are two main types of thrifts:
7. Yield Curve: The relationship between the
interest rates and the maturity of money 1. Savings and Loan Associations
market instruments is known as the yield (S&Ls): Also known as savings banks
curve. It helps to gauge market expectations or savings associations, S&Ls
of future interest rates. traditionally specialized in accepting
savings deposits and providing
8. Money Market Funds: These are mutual mortgage loans for purchasing homes.
funds that invest in money market They played a significant role in
instruments. They provide a relatively safe promoting homeownership in the
and liquid investment option for individuals United States and other countries.
and institutions.
2. Credit Unions: While not strictly
9. Global Nature: Money markets operate considered thrifts, credit unions are
internationally, with participants trading in also cooperative financial institutions
various currencies. that emphasize savings and lending
Overall, money markets serve as a vital among their members. They are
component of the broader financial system, owned by their members and operate
providing short-term funding options and under a not-for-profit structure, often
contributing to the efficient allocation of offering competitive interest rates on
capital. savings and loans.

MIDTERM EXAMINATION Thrifts have historically been important in

providing accessible and affordable mortgage
____________________________________ financing for individuals and families,
____________________________________ particularly those looking to buy homes.
____ However, over time, the distinctions between
thrifts and other types of financial institutions
Thrifts and Finance Companies have become less defined due to changes in
regulations and financial industry evolution.
Thrifts and finance companies are two types
of financial institutions that play distinct roles Finance Companies:
within the financial system. They offer various
financial services and products, often catering Finance companies are non-bank financial
to specific segments of the population or institutions that provide various types of loans
serving specific financial needs. Here's an and credit services to individuals and
overview of thrifts and finance companies: businesses. Unlike traditional banks, finance
companies do not hold banking licenses and
Thrifts: typically focus on providing loans rather than
accepting deposits. Here are some key points
Thrift institutions are financial institutions that
about finance companies:
primarily focus on gathering savings from
individuals and providing residential mortgage  Consumer Finance Companies:
loans. They are often involved in promoting These companies offer personal loans,
 installment loans, and other credit financial protection, risk management, and
products to consumers. They often long-term savings solutions. Both insurance
serve individuals who may have and pensions help individuals and
limited access to credit from traditional organizations manage various uncertainties
banks. and plan for their future financial needs.
Here's an overview of insurance and
 Commercial Finance Companies: pensions:
Commercial finance companies
provide financing solutions to Insurance:
businesses, including equipment
leasing, factoring (purchasing Insurance is a contract between an individual
accounts receivable), and working or entity (the policyholder) and an insurance
capital loans. company. The policyholder pays a premium
in exchange for the promise that the
 Automobile Finance Companies: insurance company will provide financial
These companies specialize in compensation or coverage in the event of
providing loans for purchasing specified events or losses. These events can
vehicles. They often work closely with include accidents, illnesses, property damage,
car dealerships to offer financing liability claims, and more. Here are key points
options to customers. about insurance:

 Specialized Finance Companies:  Types of Insurance: There are

Some finance companies focus on various types of insurance, including
specific niches, such as providing life insurance, health insurance,
loans for education, healthcare, or property and casualty insurance, auto
consumer electronics. insurance, liability insurance, and
more.
Finance companies can be an alternative
source of credit for individuals and  Risk Transfer: Insurance allows
businesses that may not meet the criteria of individuals and businesses to transfer
traditional banks. However, the interest rates the financial risk of certain events to
on loans offered by finance companies can the insurance company. In exchange
be higher than those of banks due to the for paying premiums, policyholders
higher risks associated with certain borrowers. receive protection against potential
losses.
It's important to note that the roles and
characteristics of thrifts and finance  Premiums: Policyholders pay
companies may vary between countries and premiums, which are periodic
regions due to regulatory frameworks and payments, to the insurance company.
market conditions. Premiums are based on factors such
as the type of coverage, the insured's
Insurance and Pensions risk profile, and the coverage limits.
Insurance and pensions are critical  Claims Process: If an insured event
components of the financial system that occurs, the policyholder can file a
provide individuals and businesses with claim with the insurance company.
 The insurer then evaluates the claim contributions from workers and
and provides compensation according employers.
to the terms of the policy.
 Individual Retirement Accounts
 Risk Pooling: Insurance works on the (IRAs): IRAs are personal retirement
principle of risk pooling. Many savings accounts that individuals can
policyholders pay premiums into a contribute to independently. They
common pool, and the insurance offer tax advantages and allow
company uses this pool to cover the individuals to manage their own
claims of those who experience retirement savings.
losses.
 Long-Term Savings: Pensions
Pensions: encourage individuals to save for the
long term, ensuring financial security
Pensions are long-term financial during retirement when regular
arrangements designed to provide individuals income from work may no longer be
with income during retirement. Pensions help available.
people save and invest over their working
years so that they can have a stable source  Annuities: Annuities are financial
of income once they retire. Here are key products that provide a stream of
points about pensions: regular income in exchange for a
lump-sum payment. They are often
 Types of Pensions: Pensions can used to supplement retirement income.
take various forms, including
employer-sponsored defined benefit Both insurance and pensions provide
plans, defined contribution plans (like essential financial services that contribute to
401(k) plans in the US), government- economic stability and the well-being of
run social security systems, and individuals and societies as a whole. These
individual retirement accounts (IRAs). financial tools help individuals and
organizations manage risks, plan for the
 Employer-Sponsored Plans: Many future, and achieve financial security.
employers offer pension plans as part
of their employee benefits. In defined Investment Banks and Private Equity
benefit plans, employers promise a
specific retirement income based on Investment banks are financial institutions
factors like years of service and salary. that provide a range of services to
In defined contribution plans, corporations, governments, and institutional
employees contribute a portion of their clients. They play a crucial role in facilitating
salary, and employers may match capital raising, mergers and acquisitions
contributions up to a certain limit. (M&A), and other financial transactions. Here
are key aspects of investment banks:
 Government Social Security: Many
countries have government-run social 1. Capital Raising: Investment banks
security systems that provide help companies raise capital by
retirement benefits to eligible citizens. issuing stocks (equity) or bonds (debt)
These benefits are funded through in the capital markets. They assist in
 structuring the offering, underwriting offices in major financial centers
the securities, and finding investors. around the world.

2. Mergers and Acquisitions (M&A): 9. Regulation: Investment banks are

Investment banks advise companies subject to financial regulations that
on mergers, acquisitions, and other vary by jurisdiction. In the U.S., for
corporate transactions. They help with instance, they are regulated by the
valuation, negotiation, due diligence, Securities and Exchange Commission
and deal structuring. (SEC) and other bodies.

3. Initial Public Offerings (IPOs): Private Equity:

Investment banks guide companies
through the process of going public by Private equity involves investing in private
offering their shares to the public for companies or taking public companies private
the first time. They help with with the goal of improving their performance
regulatory compliance and investor and profitability. Private equity firms pool
relations. funds from investors to acquire equity stakes
in companies. Here are key aspects of private
4. Trading and Brokerage: Investment equity:
banks trade securities on behalf of
clients and themselves. They provide 1. Investment Process: Private equity
trading services for equities, fixed firms identify investment opportunities,
income, derivatives, and other conduct due diligence on target
financial instruments. companies, negotiate terms, and
provide capital to acquire ownership
5. Research: Investment banks conduct stakes.
research and analysis on companies,
industries, and market trends. 2. Value Creation: Private equity firms
Research reports provide insights to often actively work to improve the
clients for making investment operational and financial performance
decisions. of the companies they invest in. They
may implement strategic changes,
6. Advisory Services: Investment optimize operations, and enhance
banks offer financial advisory services, growth prospects.
including strategic planning,
restructuring, and risk management 3. Exit Strategies: Private equity firms
advice. aim to exit their investments after a
certain period of time, usually 3-7
7. Syndicated Loans: Investment banks years. Common exit strategies include
arrange syndicated loans, where a selling the company, taking it public,
group of lenders collectively provides or merging it with another company.
financing to a borrower.
4. Types of Private Equity: Private
8. Global Presence: Investment banks equity can be divided into venture
operate internationally and often have capital (early-stage investments in
startups), growth equity (investments
 in established companies with growth representations (bank account balances,
potential), and buyout (acquiring a electronic payment systems). Money is a
controlling stake in a company) fundamental component of modern
segments. economies, enabling individuals to trade
goods and services efficiently.
5. Risk and Return: Private equity
investments can offer potentially high Money Supply:
returns but also carry higher risks due
to the illiquid nature of investments The money supply refers to the total amount
and the operational challenges of of money in circulation within an economy. It
turning around companies. includes all forms of money that people use
for transactions, savings, and other financial
6. Limited Partners and General activities. Economists often categorize the
Partners: Private equity funds have money supply into different levels, known as
limited partners (investors who monetary aggregates, based on liquidity and
provide capital) and general partners accessibility:
(the private equity firm responsible for
managing the fund). 1. M0 (MB) - Physical Currency: This
includes all physical currency in
7. Due Diligence: Thorough due circulation, including coins and
diligence is crucial in private equity banknotes issued by the central bank.
investing to assess the financial
health, growth prospects, industry 2. M1 - Narrow Money: M1 includes
trends, and potential risks of target physical currency (M0) and demand
companies. deposits (checking accounts) that are
easily accessible for transactions.
8. Private Equity Firms: Well-known
private equity firms include Blackstone, 3. M2 - Broad Money: M2 encompasses
KKR, Carlyle Group, and many others. M1 and adds savings deposits, time
deposits (certificates of deposit), and
Both investment banks and private equity money market funds. It includes a
play significant roles in the financial broader range of liquid assets that can
landscape, supporting capital formation, be quickly converted into cash.
corporate transactions, and investment
opportunities. However, they operate in 4. M3 - Broadest Money: M3 is the
distinct areas with different objectives and broadest measure of the money
strategies. supply. It includes M2 and adds large
time deposits, institutional money
Money, Money Supply, and Interest market funds, and other large liquid
assets.
Money:
The money supply is influenced by central
Money is a medium of exchange that banks and the banking system through
facilitates transactions, serves as a unit of actions such as open market operations,
account, and functions as a store of value. It reserve requirements, and changes in
comes in various forms, such as physical interest rates.
currency (coins and banknotes) and digital
Interest: they can earn higher returns on their
savings.
Interest is the cost of borrowing money or the
compensation paid for the use of money over  Asset Prices: Interest rates can
time. It is expressed as a percentage of the impact the prices of assets like real
principal amount borrowed or invested, and it estate and stocks, as investors
reflects the opportunity cost of using funds in evaluate their returns compared to
one way rather than another. There are two interest-bearing investments.
main types of interest:
The relationship between money, the money
1. Simple Interest: Simple interest is supply, and interest rates is intricate and
calculated on the initial principal forms the basis of monetary policy, economic
amount. It does not take into account theory, and financial decision-making. Central
the interest that accumulates over banks and financial institutions closely
time. monitor and manage these factors to promote
economic stability and growth.
2. Compound Interest: Compound
interest takes into account both the Monetary Policy Tools
initial principal and the accumulated
interest. As interest is added to the Monetary policy tools are the instruments and
principal at regular intervals, the actions that central banks use to influence
interest amount grows over time. and manage the money supply, interest rates,
and overall economic conditions in a country.
Role of Interest Rates: These tools are used to achieve specific
economic goals such as controlling inflation,
Interest rates play a crucial role in the promoting economic growth, and maintaining
economy by influencing various aspects: financial stability. Here are some common
 Cost of Borrowing: Higher interest monetary policy tools:
rates increase the cost of borrowing, 1. Open Market Operations (OMOs):
which can influence consumer
spending and business investment. Open market operations involve the buying or
selling of government securities (such as
 Investment Decisions: Lower bonds) by the central bank in the open
interest rates encourage borrowing for market. By doing so, the central bank can
investments, promoting economic influence the amount of money in circulation
growth. and affect short-term interest rates.
 Monetary Policy: Central banks use  Expansionary OMOs: If the central
interest rates as a tool for bank buys government securities, it
implementing monetary policy. injects money into the economy,
Raising rates can curb inflation, while increasing the money supply and
lowering rates can stimulate economic potentially lowering interest rates to
activity. stimulate borrowing and spending.
 Savings: Higher interest rates may  Contractionary OMOs: If the central
incentivize people to save more, as bank sells government securities, it
 removes money from circulation, 4. Forward Guidance:
reducing the money supply and
potentially raising interest rates to Central banks communicate their future policy
curb spending and control inflation. intentions to the public and financial markets.
By providing guidance on their expected
2. Reserve Requirements: future actions, central banks can influence
market expectations and shape behavior.
Reserve requirements are the portion of
deposits that banks are required to hold as  Dovish Forward Guidance:
reserves in their accounts with the central Indicating that the central bank will
bank. By adjusting these requirements, the keep interest rates low for an
central bank can influence the amount of extended period can encourage
funds banks have available for lending. borrowing and spending.

 Lowering Reserve Requirements:  Hawkish Forward Guidance:

When reserve requirements are Suggesting that interest rates will rise
lowered, banks have more funds in the future can lead to higher
available for lending, which can savings and more cautious spending.
stimulate economic activity.
5. Quantitative Easing (QE):
 Raising Reserve Requirements:
Increasing reserve requirements Quantitative easing is a policy in which the
restricts the funds available for central bank buys longer-term government
lending, helping to control inflation securities and sometimes other assets to
and excessive lending. increase the money supply and lower long-
term interest rates.
3. Discount Rate:
 Boosting Economic Activity: QE
The discount rate is the interest rate at which aims to stimulate economic activity
commercial banks can borrow funds directly when traditional policy tools, such as
from the central bank. By changing the interest rate cuts, are less effective.
discount rate, the central bank can influence
the cost of borrowing for banks and, These are some of the primary tools central
consequently, the interest rates in the banks use to implement monetary policy. The
broader economy. specific combination and emphasis on these
tools depend on the central bank's goals,
 Lowering the Discount Rate: A economic conditions, and the prevailing
lower discount rate encourages banks challenges in the economy.
to borrow more from the central bank,
which can lead to lower interest rates The Monetary Supply Process
and increased lending. The money supply process refers to the
 Raising the Discount Rate: Raising mechanisms through which the central bank,
the discount rate makes borrowing financial institutions, and the broader
more expensive for banks, which can economy interact to determine the total
lead to higher interest rates and amount of money in circulation. It involves
reduced borrowing. various stages and players that contribute to
the creation, distribution, and control of portion of their excess reserves while
money within an economy. Here's an maintaining the required reserve ratio.
overview of the monetary supply process:
 Reserve Management: Banks
1. Central Bank Role: manage their reserves to meet the
central bank's reserve requirements
The central bank plays a pivotal role in and to ensure they have enough
controlling the money supply. It uses its policy liquidity to meet customer demands
tools to influence the amount of money in for withdrawals and payments.
circulation and achieve specific economic
objectives, such as price stability and 5. Interaction with the Economy:
economic growth. The central bank's main
tools include open market operations, reserve The money supply process has a direct
requirements, and the discount rate. impact on the broader economy:

2. Open Market Operations (OMOs):  Interest Rates: The money supply

affects interest rates. An increase in
Through open market operations, the central the money supply can lead to lower
bank buys or sells government securities in interest rates, making borrowing more
the open market. When the central bank buys attractive and stimulating economic
securities, it injects money into the economy, activity. Conversely, a decrease in the
increasing the money supply. Conversely, money supply can lead to higher
when it sells securities, it removes money interest rates, which can curb
from circulation, reducing the money supply. spending.

3. Reserve Requirements:  Inflation: An excessive increase in

the money supply can contribute to
Central banks set reserve requirements, inflation, as more money chases the
which mandate that financial institutions hold same amount of goods and services.
a certain portion of their deposits as reserves. Central banks aim to balance money
By adjusting these requirements, the central supply growth with economic growth
bank can influence the amount of funds to maintain price stability.
available for lending and hence control the
money supply. 6. Economic Activity and Feedback Loops:

4. Interaction with Banks and Financial The money supply affects economic activity,
Institutions: which, in turn, can impact the demand for
money. As economic activity increases, the
Banks and financial institutions play a crucial demand for money for transactions and
role in the money supply process: investments grows. Central banks monitor
 Lending and Deposit Creation: these feedback loops to adjust their policy
When banks lend money, they create actions accordingly.
new deposits in borrowers' accounts. 7. Control and Regulation:
This process is known as credit
creation, and it effectively expands the The central bank closely monitors the money
money supply. Banks can lend a supply process to ensure that it aligns with its
monetary policy objectives. It has the stimulating or cooling down the economy. In
authority to intervene and adjust policy tools periods of low interest rates, central banks
as needed to maintain stability and achieve may have limited room to lower rates further,
its goals. leading to discussions about the potential
efficacy of alternative measures.
Overall, the monetary supply process is a
complex interplay of central bank actions, Considerations: The "zero lower bound"
financial institutions' operations, economic refers to the point where interest rates are so
dynamics, and regulatory controls. The low that further cuts might not significantly
central bank's ability to manage the money boost borrowing and spending. This has led
supply effectively is essential for promoting a to discussions about unconventional
stable and sustainable economy. monetary policies like quantitative easing.

Semifinal Exam 3. Phillips Curve Trade-Off:

Monetary Policy and Debates Debate: The Phillips Curve suggests a trade-
off between unemployment and inflation.
Monetary policy is a critical tool used by Some economists question the strength of
central banks to influence the economy by this relationship in modern economies,
controlling the money supply and interest particularly when inflation remains low
rates. However, the implementation and despite low unemployment (as observed in
impact of monetary policy can give rise to recent years).
various debates and discussions among
economists, policymakers, and the public. Considerations: The flattening of the Phillips
Here are some common debates and Curve suggests that the relationship between
considerations related to monetary policy: unemployment and inflation might not be as
strong as previously thought. This has
1. Inflation Targeting: implications for policymakers trying to fine-
tune the economy.
Debate: One key debate centers around the
appropriate level of inflation to target. Some 4. Forward Guidance:
argue for a low and stable inflation target
(around 2%), while others question whether a Debate: The effectiveness of forward
slightly higher target might be more guidance (communicating the central bank's
conducive to economic growth. future policy intentions) is debated. Some
argue that clear guidance can anchor
Considerations: The trade-off between expectations and influence behavior, while
inflation and economic growth is a key others question whether such guidance can
consideration. Too low inflation (deflation) be accurately predicted.
can lead to decreased spending and
economic stagnation, while high inflation Considerations: Forward guidance can
erodes purchasing power. influence market expectations and impact
interest rates. However, economic
2. Effectiveness of Interest Rates: uncertainties can make accurate predictions
challenging.
Debate: There's ongoing debate about the
effectiveness of interest rate changes in 5. Financial Stability vs. Monetary Policy:
Debate: The relationship between monetary vary and continue to be a topic of on-going
policy and financial stability is debated. discussion and research.
Aggressive monetary policy, such as very low
interest rates, can encourage excessive risk- Foreign Exchange Markets
taking and asset bubbles. Foreign exchange (forex or FX) markets are
Considerations: Balancing the need for global decentralized markets where
economic stimulus with potential risks to participants can buy, sell, exchange, and
financial stability is a challenge for central speculate on different currencies. These
banks. This debate has led to discussions markets play a vital role in facilitating
about whether macroprudential measures international trade and investment by
should complement monetary policy. enabling the conversion of one currency into
another. Here's an overview of foreign
6. Distributional Effects: exchange markets:

Debate: Monetary policy's impact on different Key Participants:

segments of the population is debated. Critics
argue that low interest rates can hurt savers, 1. Banks: Banks are the main players in
particularly retirees relying on fixed income. the forex market. They facilitate
currency transactions for their clients,
Considerations: Policymakers need to engage in proprietary trading, and
consider both the overall macroeconomic provide liquidity to the market.
impact and the distributional effects of their
decisions on various groups within society. 2. Corporations: Companies engaged
in international trade need to
7. Political Independence: exchange currencies to conduct
business in different countries. They
Debate: The degree of central bank use forex markets to hedge against
independence from political influence is a currency risk.
subject of debate. Some argue for a strong
independent central bank to ensure sound 3. Investors: Investors participate in the
monetary policy, while others believe that forex market for various reasons,
central banks should be more accountable to including speculation, portfolio
elected officials. diversification, and as a hedge against
currency risk.
Considerations: Central bank independence
is often seen as crucial to maintaining price 4. Central Banks: Central banks
stability and avoiding short-term political intervene in forex markets to manage
pressures. However, democratic their currency's value, stabilize the
accountability is also important. economy, or address balance of
payment issues.
These debates highlight the complexities and
challenges associated with monetary policy. 5. Hedge Funds and Investment
While there is broad consensus on the Funds: These entities engage in forex
importance of price stability and economic trading as part of their investment
growth, the specific strategies and trade-offs strategies.
involved in implementing monetary policy can
 6. Retail Traders: Individuals and small currency risk. By entering into
investors can also participate through currency trades, they aim to offset
online platforms provided by brokers. potential losses from adverse
currency movements.
Key Features:
3. Carry Trade: This strategy involves
1. 24-Hour Market: Forex markets borrowing a currency with a low-
operate 24 hours a day, five days a interest rate to invest in a currency
week due to the global nature of with a higher interest rate, aiming to
trading and the involvement of profit from the interest rate differential.
different time zones.
4. Arbitrage: Traders exploit price
2. Major Currency Pairs: The most discrepancies of the same currency
traded currencies are known as major pair across different markets or
currency pairs. These include pairs brokers to make risk-free profits.
like EUR/USD (Euro/US Dollar),
USD/JPY (US Dollar/Japanese Yen), Market Influence:
GBP/USD (British Pound/US Dollar),
and more. Central banks and governments can
influence forex markets through interventions,
3. Exchange Rate Determination: interest rate decisions, and monetary policies.
Exchange rates are determined by the Major economic events, geopolitical
supply and demand for different developments, and changes in commodity
currencies. Economic indicators, prices can also impact currency values.
interest rates, geopolitical events, and
market sentiment can all influence Foreign exchange markets are dynamic and
exchange rates. subject to various factors that can lead to
rapid price movements. Participants use
4. Bid and Ask Prices: Each currency these markets for trading, hedging,
pair has a bid price (the price at which investment, and speculation, making them a
traders can sell the base currency) crucial component of the global financial
and an ask price (the price at which system.
traders can buy the base currency).
The difference between these prices FINAL EXAMINATION
is known as the spread. Prepared by:
Currency Trading Strategies: Mr. Allan D. Santillana, MBA, LPT
Subject Professor
1. Speculation: Traders speculate on
the future direction of currency prices
to make a profit. They may go long
(buy) a currency pair if they expect it
to appreciate or go short (sell) if they
expect it to depreciate.

2. Hedging: Corporations and investors

use forex markets to hedge against