AEFMAR

Module 4
THE BANGKO SENTRAL and THE
MEANS OF PAYMENT

This module is a combination of

synchronous & asynchronous learning
and will last for two weeks.

March 27 2023
Date Initiated
April 5, 2023
Date of Completion

PMCF7 – MONETARY POLICY AND CENTRAL BANKING

Ester C. Castillo, Instructor

 MODULE 4

This module is designed to be discussed for a period of two weeks. Lesson delivery will be done in synchronous and
asynchronous learning. The platform to be used will be facebook messenger, google classroom and google meet
created for the class.

LEARNING OBJECTIVES:

At the end of the module, you are expected to:

• Identify the unit of monetary value
• Know the issue of means of payment
• Discuss the guiding principles of monetary administration by the Bangko Sentral
• Understand international monetary stabilization

INPUT INFORMATION

I. THE UNIT OF MONETARY VALUE

THE PESO – the unit of monetary value in the Philippines is the “peso,” which is represented
by the sign “P.”
The peso is divided into one hundred (100) equal parts called “centavos,” which are
represented by the sign “c.”.

ISSUE OF MEANS OF PAYMENT

A. CURRENCY
Definition of Currency.
The word "currency" is hereby defined, for purposes of this Act, as meaning all Philippine
notes and coins issued or circulating in accordance with the provisions of this Act.

Exclusive Issue Power.

The Bangko Sentral 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 Bangko Sentral notes without
prior authority from the Bangko Sentra
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 Bangko Sentral notes.
The Bangko Sentral 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 of any regulation issued by the Bangko Sentral 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.

Liability for Notes and Coins.

Notes and coins issued by the Bangko Sentral shall be liabilities of the Bangko Sentral
and may be issued only against, and in amounts not exceeding, the assets of the Bangko
Sentral. Said notes and coins shall be a first and paramount lien on all assets of the Bangko
Sentral.
The Bangko Sentral's holdings of its own notes and coins shall not be considered as part
of it's currency issue and, accordingly, shall not form part of the assets or liabilities of the Bangko
Sentral.

PMCF7 – MONETARY POLICY AND CENTRAL BANKING

Ester C. Castillo, Instructor

 Legal Tender Power.
All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the
Government of the Republic of the Philippines and shall be legal tender in the Philippines for all
debts, both public and private: Provided, however, That, unless otherwise fixed by the Monetary
Board, coins shall be legal tender in amounts not exceeding Fifty pesos (P50) for denominations
of twenty-five centavos and above, and in amounts not exceeding Twenty pesos (P20) for
denominations of ten centavos or less.

Characteristics of the Currency.

The Monetary Board, with the approval of the President of the Philippines, shall prescribe
the denominations, dimensions, designs, inscriptions and other characteristics of notes issued
by the Bangko Sentral: Provided, however, that said notes shall state that they are liabilities of
the Bangko Sentral and are fully guaranteed by the Government of the Republic of the
Philippines. Said notes shall bear the signatures, in facsimile, of the President of the Philippines
and of the Governor of the Bangko Sentral.
Similarly, the Monetary Board, with the approval of the President of the Philippines, shall
prescribe the weight, fineness, designs, denominations and other characteristics of the coins
issued by the Bangko Sentral. In the minting of coins, the Monetary Board shall give full
consideration to the availability of suitable metals and to their relative prices and cost of minting.

Printing of Notes and Minting of Coins.

The Monetary Board shall prescribe the amounts of notes and coins to be printed and
minted, respectively, and the conditions to which the printing of notes and the minting of coins
shall be subject. The Monetary Board shall have the authority to contract institutions, mints or
firms for such operations. All expenses incurred in the printing of notes and the minting of coins
shall be for the account of the Bangko Sentral.

Interconvertibility of Currency.
The Bangko Sentral shall exchange, on demand and without charge, Philippine currency
of any denomination for Philippine notes and coins of any other denomination requested. If for
any reason the Bangko Sentral is temporarily unable to provide notes or coins of the
denominations requested, it shall meet its obligations by delivering notes and coins of the
denominations which most nearly approximate those requested.

Replacement of Currency Unfit for Circulation.

The Bangko Sentral shall withdraw from circulation and shall demonetize all notes and
coins which for any reason whatsoever are unfit for circulation and shall replace them by
adequate notes and coins: Provided, however, That the Bangko Sentral shall not replace notes
and coins the identification of which is impossible, coins which show signs of filing, clipping or
perforation, and notes which have lost more than two-fifths (2/5) of their surface or all of the
signatures inscribed thereon. Notes and coins in such mutilated condition shall be withdrawn
from circulation and demonetized without compensation to the bearer.

Retirement of Old Notes and Coins.

The Bangko Sentral may call in for replacement notes of any series or denomination
which are more than five (5) years old and coins which are more than ten (10) years old.
Notes and coins called in for replacement in accordance with this provision shall remain
legal tender for a period of one (1) year from the date of call. After this period, they shall cease
to be legal tender but during the following year, or for such longer period as the Monetary Board
may determine, they may be exchanged at par and without charge in the Bangko Sentral and by
agents duly authorized by the Bangko Sentral for this purpose. After the expiration of this latter
period, the notes and coins which have not been exchanged shall cease to be a liability of the
Bangko Sentral and shall be demonetized. The Bangko Sentral shall also demonetize all notes
and coins which have been called in and replaced.

Demonetization is the process by which a central bank removes the monetary value of a legal
tender currency it issues. Demonetized currencies are no longer accepted as payment for
goods and services.
The process of demonetization is widely practiced throughout the world, though reasons for
demonetizing can be varied. Among the common reasons are the following:

PMCF7 – MONETARY POLICY AND CENTRAL BANKING

Ester C. Castillo, Instructor

 • The prevention of counterfeiting
• Benchmarking with other countries
• A change in the type or form of government
• A change in the type of currency as part of political or social reform
• Redefining the value of money in response to hyperinflation
• Shift to a single design series of currency in countries where more than one series are
in circulation

PRESIDENTIAL DECREE No. 247 July 18, 1973

PROHIBITING AND PENALIZING DEFACEMENT, MUTILATION, TEARING, BURNING OR

DESTRUCTION OF CENTRAL BANK NOTES AND COINS.

WHEREAS, the Central Bank has the sole right and authority to issue currency within the territory
of the Philippines under its issue power, and pursuant to Section 54 of Republic Act No. 265,
otherwise known as the "Central Bank Act," as amended, by Presidential Decree No. 72 dated
November 29, 1972, the notes and coins issued by the Central Bank shall be fully guaranteed
by the Government of the Republic of the Philippines and shall be legal tender in the Philippines
for all debts, both public and private;

WHEREAS, Central Bank notes and coins are issued for circulation as medium of exchange and
to utilize them for other purposes does not speak well of the due respect and dignity befitting our
currency; and

WHEREAS, defacing, mutilating, tearing, or partially burning or destroying our currency by any
means renders it unfit for circulation, thereby unduly shortening its lifetime, and such acts
unfavorably reflect on the discipline of our people and create a bad image for our country;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the

powers vested in me by the Constitution as Commander-in-Chief of all the Armed Forces of the
Philippines and pursuant to Proclamation No. 1081 dated September 21, 1972, Proclamation
No. 1104 dated January 17, 1973, and General Order No. 1 dated September 22, 1972, and in
order to effect the desired changes and reforms in the social, economic and political structure of
our society, do hereby order and decree:

1. That it shall be unlawful for any person to willfully deface, mutilate, tear, burn or destroy,
in any manner whatsoever, currency notes and coins issued by the Central Bank of the
Philippines; and

2. That any person who shall violate this Decree shall, upon conviction, be punished by a
fine of not more than twenty thousand pesos and/or by imprisonment of not more than
five years.

All laws, orders and regulations, or parts thereof, inconsistent herewith are hereby modified or
repealed accordingly.

This Decree is hereby made part of the law of the land and shall take effect immediately after
the publication thereof in a newspaper of general circulation.

Done in the City of Manila, this 18th day of July, in the year of Our Lord, nineteen hundred and
seventy-three.

PMCF7 – MONETARY POLICY AND CENTRAL BANKING

Ester C. Castillo, Instructor

B. DEMAND DEPOSITS

Definition. For purposes of this Act, the term "demand deposits" means all those
liabilities of the Bangko Sentral and of other banks which are denominated in Philippine currency
and are subject to payment in legal tender upon demand by the presentation of checks.

Issue of Demand Deposits. Only banks duly authorized to do so may accept funds or
create liabilities payable in pesos upon demand by the presentation of checks, and such
operations shall be subject to the control of the Monetary Board in accordance with the powers
granted it with respect thereto under this Act.

Legal Character. Checks representing demand deposits do not have legal tender power
and their acceptance in the payment of debts, both public and private, is at the option of the
creditor: Provided, however, That a check which has been cleared and credited to the account
of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the
amount credited to his account.

GUIDING PRINCIPLES OF MONETARY ADMINISTRATION BY THE BANGKO SENTRAL

DOMESTIC MONETARY STABILIZATION

Guiding Principle.
The Monetary Board shall endeavor to control any expansion or contraction in monetary
aggregates which is prejudicial to the attainment or maintenance of price stability.

Power to Define Terms.

For purposes of this article and of this Act, the Monetary Board shall formulate definitions
of monetary aggregates, credit and prices and shall make public such definitions and any
changes thereof.

Action When Abnormal Movements Occur in the Monetary Aggregates, Credit, or Price
Level.
Whenever abnormal movements in the monetary aggregates, in credit, or in prices
endanger the stability of the Philippine economy or important sectors thereof, the Monetary
Board shall:
(a) take such remedial measures as are appropriate and within the powers granted to the
Monetary Board and the Bangko Sentral under the provisions of this Act; and
(b) submit to the President of the Philippines and the Congress, and make public, a detailed
report which shall include, as a minimum, a description and analysis of:
(1) the causes of the rise or fall of the monetary aggregates, of credit or of prices;
(2) the extent to which the changes in the monetary aggregates, in credit, or in prices have been
reflected in changes in the level of domestic output, employment, wages and economic activity
in general, and the nature and significance of any such changes; and
(3) the measures which the Monetary Board has taken and the other monetary, fiscal or
administrative measures which it recommends to be adopted.
Whenever the monetary aggregates, or the level of credit, increases or decreases by
more than fifteen percent (15%), or the cost of living index increases by more than ten percent
(10%), in relation to the level existing at the end of the corresponding month of the preceding
year, or even though any of these quantitative guidelines have not been reached when in its
judgement the circumstances so warrant, the Monetary Board shall submit the reports mentioned
in this section, and shall state therein whether, in the opinion of the Board, said changes in the
monetary aggregates, credit or cost of living represent a threat to the stability of the Philippine
economy or of important sectors thereof.
The Monetary Board shall continue to submit periodic reports to the President of the
Philippines and to Congress until it considers that the monetary, credit or price disturbances
have disappeared or have been adequately controlled.

PMCF7 – MONETARY POLICY AND CENTRAL BANKING

Ester C. Castillo, Instructor

II. INTERNATIONAL MONETARY STABILIZATION

International Monetary Stabilization. The Bangko Sentral shall exercise its powers under this
Act to preserve the international value of the peso and to maintain its convertibility into other
freely convertible currencies primarily for, although not necessarily limited to, current payments
for foreign trade and invisibles.

International Reserves. In order to maintain the international stability and convertibility of the
Philippine peso, the Bangko Sentral shall maintain international reserves adequate to meet any
foreseeable net demands on the Bangko Sentral for foreign currencies.

In judging the adequacy of the international reserves, the Monetary Board shall be guided by the
prospective receipts and payments of foreign exchange by the Philippines. The Board shall give
special attention to the volume and maturity of the Bangko Sentral's own liabilities in foreign
currencies, to the volume and maturity of the foreign exchange assets and liabilities of other
banks operating in the Philippines and, insofar as they are known or can be estimated, the
volume and maturity of the foreign exchange assets and liabilities of all other persons and
entities in the Philippines.

Composition of the International Reserves. The international reserves of the Bangko Sentral
may include but shall not be limited to the following assets:

(a) gold; and

(b) assets in foreign currencies in the form of: documents and instruments customarily employed
for the international transfer of funds; demand and time deposits in central banks, treasuries and
commercial banks abroad; foreign government securities; and foreign notes and coins.

The Monetary Board shall endeavor to hold the foreign exchange resources of the Bangko
Sentral in freely convertible currencies; moreover, the Board shall give particular consideration
to the prospects of continued strength and convertibility of the currencies in which the reserve is
maintained, as well as to the anticipated demands for such currencies. The Monetary Board
shall issue regulations determining the other qualifications which foreign exchange assets must
meet in order to be included in the international reserves of the Bangko Sentral.
The Bangko Sentral shall be free to convert any of the assets in its international reserves
into other assets as described in subsections (a) and (b) of this section.

Action When the International Stability of the Peso Is Threatened.

Whenever the international reserve of the Bangko Sentral falls to a level which the
Monetary Board considers inadequate to meet the prospective net demands on the Bangko
Sentral for foreign currencies, or whenever the international reserve appears to be in imminent
danger of falling to such a level, or whenever the international reserve is falling as a result of
payments or remittances abroad which, in the opinion of the Monetary Board, are contrary to the
national welfare, the Monetary Board shall:

(a) take such remedial measures as are appropriate and within the powers granted to the
Monetary Board and the Bangko Sentral under the provisions of this Act; and
(b) submit to the President of the Philippines and to Congress a detailed report which shall
include, as a minimum, a description and analysis of:
(1) the nature and causes of the existing or imminent decline;
(2) the remedial measures already taken or to be taken by the Monetary Board;
(3) the monetary, fiscal or administrative measures further proposed; and
(4) the character and extent of the cooperation required from other government agencies
for the successful execution of the policies of the Monetary Board

If the resultant actions fail to check the deterioration of the reserve position of the Bangko
Sentral, or if the deterioration cannot be checked except by chronic restrictions on exchange and
trade transactions or by sacrifice of the domestic objectives of a balanced and sustainable
growth of the economy, the Monetary Board shall propose to the President, with appropriate
notice to Congress, such additional action as it deems necessary to restore equilibrium in the
PMCF7 – MONETARY POLICY AND CENTRAL BANKING

Ester C. Castillo, Instructor

international balance of payments of the Philippines. The Monetary Board shall submit periodic
reports to the President and to Congress until the threat to the international monetary stability of
the Philippines has disappeared.

BANK RESERVES.

RESERVE REQUIREMENT
In order to control the volume of money created by the credit operations of the banking
system, all banks operating in the Philippines shall be required to maintain reserves against their
deposit liabilities: Provided, That the Monetary Board may, at its discretion, also require all banks
and/or quasi-banks to maintain reserves against funds held in trust and liabilities for deposit
substitutes as defined in this Act. The required reserves of each bank shall be proportional to
the volume of its deposit liabilities and shall ordinarily take the form of a deposit in the Bangko
Sentral.
Reserve requirements shall be applied to all banks of the same category uniformly and
without discrimination. Reserves against deposit substitutes, if imposed, shall be determined in
the same manner as provided for reserve requirements against regular bank deposits, with
respect to the imposition, increase, and computation of reserves.
The Monetary Board may exempt from reserve requirements deposits and deposit
substitutes with remaining maturities of two (2) years or more, as well as interbank borrowings.
Since the requirement to maintain bank reserves is imposed primarily to control the
volume of money, the Bangko Sentral shall not pay interest on the reserves maintained with it
unless the Monetary Board decides otherwise as warranted by circumstances.

Definition of Deposit Substitutes.

The term "deposit substitutes" is defined as an alternative form of obtaining funds from
the public, other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrower's own account, for the purpose of relending or purchasing of
receivables and other obligations. These instruments may include, but need not be limited to,
banker’s acceptances, promissory notes, participations, certificates of assignment and similar
instruments with recourse, and repurchase agreements. The Monetary Board shall determine
what specific instruments shall be considered as deposit substitutes for the purposes of Section
94 of this Act: Provided, however, That deposit substitutes of commercial, industrial and other
nonfinancial companies issued for the limited purpose of financing their own needs or the needs
of their agents or dealers shall not be covered by the provisions of Section 94 of this Act.

SEC. 94. Reserve Requirements. In order to control the volume of money created by the credit
operations of the banking system, all banks operating in the Philippines shall be required to maintain
reserves against their deposit liabilities: Provided, That the Monetary Board may, at its discretion, also
require all banks and/or quasi-banks to maintain reserves against funds held in trust and liabilities for
deposit substitutes as defined in this Act. The required reserves of each bank shall be proportional to the
volume of its deposit liabilities and shall ordinarily take the form of a deposit in the Bangko Sentral.
Reserve requirements shall be applied to all banks of the same category uniformly and without
discrimination.

Reserves against deposit substitutes, if imposed, shall be determined in the same manner as
provided for reserve requirements against regular bank deposits, with respect to the imposition, increase,
and computation of reserves. The Monetary Board may exempt from reserve requirements deposits and
deposit substitutes with remaining maturities of two (2) years or more, as well as interbank borrowings.
Since the requirement to maintain bank reserves is imposed primarily to control the volume of money,
the Bangko Sentral shall not pay interest on the reserves maintained with it unless the Monetary Board
decides otherwise as warranted by circumstances.

Required Reserves Against Peso Deposits.

The Monetary Board may fix and, when it deems necessary, alter the minimum reserve
ratios to peso deposits, as well as to deposit substitutes, which each bank and/or quasi-bank
may maintain, and such ratio shall be applied uniformly to all banks of the same category as well
as to quasi-banks.

Required Reserves Against Foreign Currency Deposits.

PMCF7 – MONETARY POLICY AND CENTRAL BANKING

Ester C. Castillo, Instructor

 The Monetary Board is similarly authorized to prescribe and modify the minimum reserve
ratios applicable to deposits denominated in foreign currencies.
Reserves Against Unused Balances of Overdraft Lines. In order to facilitate Bangko Sentral
control over the volume of bank credit, the Monetary Board may establish minimum reserve
requirements for unused balances of overdraft lines. The powers of the Monetary Board to
prescribe and modify reserve requirements against unused balances of overdraft lines shall be
the same as its powers with respect to reserve requirements against demand deposits.

LEARNING ACTIVITIES

Answer the following review questions:

1. What do you understand by domestic and international monetary stability?
2. Why is there a reserve requirement for the bank? Explain.
3. What can you say about the composition of bank reserve? It’s purpose?
Explain.

Learning Resources: The New Central Bank Act (BSP)

www. bsp.gov.ph

PMCF7 – MONETARY POLICY AND CENTRAL BANKING

Ester C. Castillo, Instructor