PRESENTATION OF CONTENT

Central Bank: Origins, Structures and Functions

 CENTRAL BANK
 Descriptions
 It is a financial institution given privileged control over the production and distribution of
money and credit for a nation or a group of nations.
 In modern economies, it is usually responsible for the formulation of monetary
policy and the regulation of member banks.
 It is inherently non-market-based or even anti-competitive institutions.

 Major Functions of Central Bank in an Economy

1. Bank of Issue
 Central bank has been given exclusive monopoly of note-issue in the interest of
uniformity, better control, elasticity, supervision, and simplicity. It will also avoid
the possibility of over-issue by individual banks.
 The central banks, thus, regulate the currency of country and the total money-
supply in the economy. The central bank has to keep gold, silver or other securities
against the notes issued.
 The main objects of the system of currency regulation in general are to see that:
a. People’s confidence in the currency is maintained
b. Its supply is adjusted to demand in the economy.

2. Banker, Agent and Adviser to the Government

 As banker to the government, it makes and receives payments on behalf of the
government. It advances short-term loans to the government to tide over difficulties.
It floats public loans and manages the public debts on behalf of the government. It
keeps the banking accounts and balances of the government after making
disbursements and remittances.
 The central bank also acts as an agent to the government where general exchange
control is in force.
 As an adviser to the government it advises the government on all monetary and
economic matters.

3. Custodian of Cash Reserves

 The centralization of cash reserves in the central bank is a source of great strength
to the banking system of any country. Centralized cash reserves can at least serve as
the basis of a large and more elastic credit structure than if the same amount were
scattered amongst the individual banks.
 It is obvious, when bank reserves are pooled in one institution which is, moreover,
charged with the responsibility of safeguarding the national economic interest, such
reserves can be employed to the fullest extent possible and in the most effective
manner during periods of seasonal strain and in financial crises or general
emergencies…the centralization of cash reserves is conducive to economy in their
use and to increased elasticity and liquidity of the banking system and of the credit
structure as a whole.”

4. Custodian of Foreign Balances

 After World War I, central banks have been keeping gold and foreign currencies as
reserve note-issue and also to meet adverse balance of payment, if any, with other
countries.
 It is the function of the central bank to maintain the exchange rate fixed by the
government and manage exchange control and other restrictions imposed by the
state. Thus, it becomes a custodian of nation’s reserves of international currency or
foreign balances.
 5. Lender of Last Resort
 Central bank is the lender of last resort, for it can give cash to the member banks to
strengthen their cash reserves position by rediscounting first class bills in case there
is a crisis or panic which develops into ‘run’ on banks or when there is a seasonal
strain. Member banks can also take advances on approved short-term securities from
the central bank to add to their cash resources at the shortest time.
 This facility of turning their assets into cash at short notice is of great use to them
and promotes in the banking and credit system economy, elasticity and liquidity.
 Thus, the central bank by acting as the lender of the last resort assumes the
responsibility of meeting all reasonable demands for accommodation by commercial
banks in times of difficulties and strains.

6. Clearing House
 Central bank also acts as a clearing house for the settlement of accounts of
commercial banks.
 A clearing house is an organization where mutual claims of banks on one another
are offset, and a settlement is made by the payment of the difference.
 Central bank being a bankers’ bank keeps the cash balances of commercial banks
and as such it becomes easier for the member banks to adjust or settle their claims
against one another through the central bank.
 Clearing house function of the central bank leads to a good deal of economy in the
use of cash and much of labour and inconvenience are avoided.

7. Controller of Credit
 The expansion or contraction of currency and credit may be said to be the most
important causes of business fluctuations. The need for credit control is obvious. It
mainly arises from the fact that money and credit play an important role in
determining the level of incomes, output and employment.
 According to Dr. De Kock, “the control and adjustment of credit is accepted by most
economists and bankers as the main function of a central bank. It is the function
which embraces the most important questions of central banking policy and the one
through which practically all other functions are united and made to serve a
common purpose.”
 Thus, the control which the central bank exercises over commercial banks as regards
their deposits, is called controller of credit.

8. Protection of Depositors Interests

 The central bank has to supervise the functioning of commercial banks so as to
protect the interest of the depositors and ensure development of banking on sound
lines.
 The business of banking has, therefore, been recognized as a public service
necessitating legislative safeguards to prevent bank failures.
 Legislation is enacted to enable the central bank to inspect commercial banks in
order to maintain a sound banking system, comprising strong individual units with
adequate financial resources operating under proper management in conformity with
the banking laws and regulations and public and national interests.
 BANGKO SENTRAL NG PILIPINAS (BSP)
 Descriptions
 It is the central bank of the Republic of the Philippines.
 It was established on 3 July 1993 pursuant to the provisions of the 1987 Philippine
Constitution and the New Central Bank Act of 1993.
 The BSP took over from Central Bank of Philippines, which was established on 3
January 1949, as the country’s central monetary authority.
 The BSP enjoys fiscal and administrative autonomy from the National Government in
the pursuit of its mandated responsibilities.

 Vision, Mission and Core Values

 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.
 Mission
To promote and maintain price stability, a strong financial system, and a safe and
efficient payments and settlements system conducive to a sustainable and inclusive
growth of the economy
 Core Values

 Organization and Governance

 Organizational Structure
  Governance of the Bank
o 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.
o 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:
a. Monetary and Economics Sector is mainly responsible for the
operations/activities related to monetary policy formulation, implementation,
and assessment
b. 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
c. 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
d. 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

 History of the Bank (Chronology of Events: Central Banking in the Philippines)

Time Period Event

Act No. 52 was passed by the First Philippine Commission placing
1900 all banks under the Bureau of Treasury. The Insular Treasurer was
authorized to supervise and examine banks and banking activities.

February 1929 The Bureau of Banking under the Department of Finance took over
the task of banking supervision.
1939 A bill establishing a central bank was drafted by Secretary of
Finance Manuel Roxas and approved by the Philippine Legislature.
However, the bill was returned by the US government, without
action, to the Commonwealth Government.
1946 A joint Philippine-American Finance Commission was created to
study the Philippine currency and banking system. The Commission
recommended the reform of the monetary system, the formation of
a central bank and the regulation of money and credit.

The charter of the Central Bank of Guatemala was chosen as the

model of the proposed central bank charter.

August 1947 A Central Bank Council was formed to review the Commission’s
report and prepare the necessary legislation for implementation.
February 1948 President Manuel Roxas submitted to Congress a bill “Establishing
the Central Bank of the Philippines, defining its powers in the
administration of the monetary and banking system, amending
pertinent provisions of the Administrative Code with respect to the
currency and the Bureau of Banking, and for other purposes.
15 June 1948 The bill was signed into law as Republic Act No. 265 (The Central
Bank Act) by President Elpidio Quirino.
3 January 1949 The Central Bank of the Philippines (CBP) was inaugurated and
formally opened with Hon. Miguel Cuaderno, Sr. as the first
governor.
 The broad policy objectives contained in RA No. 265 guided the
CBP in the implementation of its duties and responsibilities,
particularly in relation to the promotion of economic development
in addition to the maintenance of internal and external monetary
stability.
November 1972 RA No. 265 was amended by Presidential Decree No. 72 to make
the CBP more responsive to changing economic conditions.

PD No. 72 emphasized the maintenance of domestic and

international 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 system but also the regulation
of the entire financial system.
January 1981 Further amendments were made with the issuance of PD No. 1771
to improve and strengthen the financial system, among which was
the increase in the capitalization of the CBP from P10 million to
P10 billion.
1986 Executive Order No. 16 amended the Monetary Board membership
to promote greater harmony and coordination of government
monetary and fiscal policies.
3 July 1993 Republic Act No. 7653 was passed establishing the Bangko Sentral
ng Pilipinas (BSP), replacing CBP as the country's central monetary
authority.
14 February 2019 Republic Act No. 11211 was passed amending RA No. 7653. The
charter amendments bolster the capability of the BSP to safeguard
price stability and financial system stability.

 Pillars of BSP
1. Price Stability
 The BSP's main responsibility is to formulate and implement policy in the areas of
money, banking and credit with the primary objective of preserving price stability.
 Price stability refers to a condition of low and stable inflation.
 By keeping price stable, the BSP helps ensure strong and sustainable economic
growth and better living standards.

2. Financial Stability
 Financial systems play a critical role for consumers – both corporates & individuals –
because they bridge the aspirations of today with the economic fortunes of tomorrow.
 Historically, financial systems develop through the banking industry because of the
nature of fiat money. In this context, making sure that banks operate in a safe and
sound manner is in the public interest.
 Banking authorities nurture this by defining the regulatory framework that
encourages innovation while monitoring that banks operate within prescribed
governance guidelines.
 The Global Financial Crisis (GFC), however, highlighted how the financial system is
more than just the sum of its parts. There is a unique sense of “systemic-ness” that
arises from the way each market player interacts with another party, creating a
network of interconnected and sequenced transactions. This leads to risk choices
being interlinked within the network and as a result, societal outcomes that can differ
from the intentions of private entities. This provides the basis for the global initiative
to manage the health of the financial system as an explicit and separate policy
objective. Its focus is on managing so-called “systemic risks” and this is done through
macroprudential policy.
 3. Payments and Settlements
 Payment systems are essential to the effective functioning of financial systems
worldwide. They provide the channels through which funds are transferred among
banks and other institutions to discharge payment obligations arising from economic
and financial transactions across the entire economy.
 An efficient, secure and reliable payment system reduces the cost of exchanging
goods and services, and it is an essential tool for the effective implementation of
monetary policy, and the smooth functioning of money and capital markets.
 It is this key role played by payment and settlement system (PSS) in the smooth
functioning of an economy in general and its financial and monetary system in
particular that gives the central bank (CB) a strong incentive for ensuring that an
effective, reliable and secure payment and settlement system is in place.
 In the Philippines, the BSP takes the lead in promoting an efficient payments and
settlements system by providing:
a. the necessary infrastructure through the operations of the Philippine Payment and
Settlement System or the “PhilPaSS”; and
b. a policy and regulatory framework, also known as the National Retail Payment
System or NRPS, to establish safe, efficient and reliable retail payment system in
the country.

References:
 https://www.investopedia.com/terms/c/centralbank.asp
 https://www.bsp.gov.ph/
 https://www.economicsdiscussion.net/banks/central-banking/8-major-functions-of-central-bank-
discussed/8375