Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Financial Markets & Non Bank Financial Institutions

An Overview of the Financial System

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Flow of Funds Through The Financial SystemINDIRECT FINANCE

DIRECT FINANCE

Lenders – Savers

1. Households2. Business Firms3. Government4. Foreigners

Borrowers - Spenders

1. Business Firms2. Government3. Households4. Foreigners

Financial Intermediaries

Financial Markets

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Direct Finance

Financial Markets

Lenders – Savers

1. Households2. Business Firms3. Government4. Foreigners

Borrowers - Spenders

1. Business Firms2. Government3. Households4. Foreigners

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Function of Financial Markets

FINANCIAL MARKETS channel funds from savers to spenders

FINANCIAL MARKETS are important because

They improve the economy They improve the welfare of

consumers

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Structure of Financial Markets

DEBT & EQUITY MARKETS

Debt Market (Borrowings) e.g. Bond

Mortgage

Equity Market (Shareholdings)e.g. Common Stock

Preferred Stock

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Primary and Secondary Markets

Primary MarketInitial Public Offering (IPO)Rights OfferingPrivate Placement

Secondary MarketExchangesOver-the-Counter (OTC) Market

Structure of Financial Markets

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

OTC in the Philippines

Stocks sold over the counter are outside the jurisdiction of the PSE

Some securities such as bonds sold are subject to the requirements of the Bangko Sentral ng Pilipinas (BSP) Circular 392 and its related regulations, including the rules governing the Over-the-Counter (OTC) Fixed Income Market issued by the Securities Exchange and Commissions (SEC) Memorandum Circular 14.

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Structure of Financial Markets

ISSUER

SELLING GROUP

INVESTORS

Underwriting Syndicate

Originating Inv. Banker

Other Inv. Bankers

Other Inv. Bankers

Primary Market: Sample IPO

Process

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Money & Capital Markets

Money MarketSecurity Traded: DebtMaturity: < One Year

Capital MarketSecurity Traded: Debt and EquityMaturity: At least One Year (for debt)

No Maturity for Equity

Structure of Financial Markets

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Internationalization of Financial Markets

International bond market (foreign bonds)

Eurobonds

Eurocurrencies

World stock markets

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Indirect Finance

Lenders – Savers

1. Households2. Business Firms3. Government4. Foreigners

Borrowers - Spenders

1. Business Firms2. Government3. Households4. Foreigners

Financial Intermediaries

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Function of Financial Intermediaries

FINANCIAL INTERMEDIARIES are institutions that borrow funds from savers and then lends these funds to others

FINANCIAL INTERMEDIATION is the process of indirect finance whereby financial intermediaries link savers and borrowers

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Function of Financial Intermediaries

Financial intermediaries are important because:

They can reduce transaction costs They can provide customers with

liquidity services

Other Concepts Risk sharing (asset transformation) Asymmetric information – financial panic

Adverse Selection Moral Hazard

Financial Markets & Non Bank Financial Institutions Atty. Rene B. Betita

Type of Institution Components Regulator/s

Banking Universal, Commercial, Thrift, Rural, Specialized Government, Microfinance

BSP, SEC

Non-Bank Financial

Investment HousesFinancial CompaniesSecurities DealersInvestment CompaniesInsurance CompaniesPawnshopsPre-need CompaniesVenture Capital Corporations

BSP, SECSECSECSECSEC, ICSEC, BSPSECSEC

Non-Bank Thrift Mutual Building and Loan AssociationsNon-stock Savings and Loans

SEC

SEC

Financial Intermediaries in the Philippines