1944 during the Japanese occupation, but the arrival of the American
liberalization forces aborted its implementation.
Shortly after President Manuel Roxas assumed office in 1946, he instructed then
Finance Secretary Miguel Cuaderno, Sr. to draw up a charter for a central bank. The
establishment of a monetary authority became imperative a year later as a result of the
findings of the Joint Philippine-American Finance Commission chaired by Mr. Cuaderno.
The Commission, which studied Philippine financial, monetary and fiscal problems in
1947, recommended a shift from the dollar exchange standard to a managed currency
system. A central bank was necessary to implement the proposed shift to the new system.
Immediately, the Central Bank Council, which was created by President Manuel
Roxas to prepare the charter of a proposed monetary authority, produced a draft. It was
submitted to Congress in February1948. By June of the same year, the newly-proclaimed
President Elpidio Quirino, who succeeded President Roxas, affixed his signature on
Republic Act No. 265, the Central Bank Act of 1948. The establishment of the Central
Bank of the Philippines was a definite step toward national sovereignty. Over the years,
changes were introduced to make the charter more responsive to the needs of the
economy. On 29 November 1972, Presidential Decree No. 72 adopted the
recommendations of the Joint IMF-CB Banking Survey Commission which made a study
of the Philippine banking system. The Commission proposed a program designed to
ensure the system’s soundness and healthy growth. Its most important recommendations
were related to the objectives of the Central Bank, its policy-making structures, scope of
its authority and procedures for dealing with problem financial institutions.
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Subsequent changes sought to enhance the capability of the Central Bank, in the
light of a developing economy, to enforce banking laws and regulations and to respond to
emerging central banking issues. Thus, in the 1973 Constitution, the National Assembly
was mandated to establish an independent central monetary authority. Later, PD 1801
designated the Central Bank of the Philippines as the central monetary authority (CMA).
Years later, the 1987 Constitution adopted the provisions on the CMA from the 1973
Constitution that were aimed essentially at establishing an independent monetary
authority through increased capitalization and greater private sector representation in the
Monetary Board.
The administration that followed the transition government of President Corazon
C. Aquino saw the turning of another chapter in Philippine central banking. In
accordance with a provision in the 1987 Constitution, President Fidel V. Ramos signed
into law Republic Act No. 7653, the New Central Bank Act, on 14 June 1993. The law
provides for the establishment of an independent monetary authority to be known as the
Bangko Sentral ng Pilipinas, with the maintenance of price stability explicitly stated as its
primary objective. This objective was only implied in the old Central Bank charter. The
law also gives the Bangko Sentral fiscal and administrative autonomy which the old
Central Bank did not have. On 3 July 1993, the New Central Bank Act took effect.
(http://www.bsp.gov.ph/about/overview.asp)
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The BSP’s Legal Mandate
The BSP is the central bank of the Republic of the Philippines. It was established
on 3 July 1993 as the country’s independent central monetary authority, pursuant to the
Constitution and the New Central Bank Act. The BSP replaced the old Central Bank of
the Philippines, which was established on 3 January 1949, as the country’s central
monetary authority.
A government corporation with fiscal and administrative autonomy, the BSP is
responsible, among other things, for:
• Maintaining price stability conducive to a balanced and sustainable
growth of the economy;
• Formulating and implementing policy in the areas of money, banking
and credit; and
• Supervising and regulating banks and quasi-banks, including their
subsidiaries and affiliates engaged in allied activities.
Powers and Functions
The BSP’s Charter also provides that, as the country’s central monetary authority,
the BSP performs the following functions:
• Liquidity management. The BSP formulates and implements monetary policy aimed at
influencing money supply consistent with its primary objective of maintaining price
stability.
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• Currency issue. The BSP has the exclusive power to issue the national currency. All
notes and coins issued by the BSP are fully guaranteed by the Government and are
considered legal tender for all private and public debts.
• Lender of last resort. The BSP extends discounts, loans and advances to banking
institutions for liquidity purposes.
• Financial supervision. The BSP supervises banks and exercises regulatory powers over
non-bank institutions performing quasi-banking functions.
• Management of foreign currency reserves. The BSP seeks to maintain sufficient
international reserves to meet any foreseeable net demands for foreign currencies in order
to preserve the international stability and convertibility of the Philippine peso.
• Determination of exchange rate policy. The BSP determines the exchange rate policy of
the Philippines. Currently, it adheres to a market-oriented foreign exchange rate policy
such that its role is principally to ensure orderly conditions in the market.
• Other activities. The BSP functions as the banker, financial advisor and official
depository of the Government, its political subdivisions and instrumentalities, and
Government owned and controlled corporations.
The New Central Bank Act imposes limitations and other conditions on the
exercise of such powers by the BSP. Among others, the Charter limits the circumstances
under which the BSP may extend credit to the Government and prohibits it from
engaging in development banking or financing.
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The Central Bank
Republic Act 7653 is known as the New Central Act. Section I of RA 7653 states
that the state shall maintain a central Monetary Authority (CMA) That shall function and
operate as an independent body in the discharge of its mandated responsibilities
concerning money, banking and credit. This established independent Central Monetary
Authority shall a corporate body known as the Bangko Sentral ng Pilipnas hereafter
referred to as the Bangko Sentral.
The Goals of Monetary Policy
Monetary Policy is not an end itself; rather, it is a means to various ends. These
ends are called goals of monetary policy.
High Employment
Economic Growth
Stable Prices
Interest Rate Stability
Stability of Financial Markets
Stability of Foreign Exchange Markets
High Employment
Monetary Policy is used to attain high employment; the resources of the monetary
authorities can be channeled toward the creation of more jobs. The financial system
can give liberal financing terms to labor – intensive companies.
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The concern for high employment is understandable because when people are not
employed, the economy is affected. They become a burden to society.
A person who is unemployed loses a source of income and experiences hardship
for himself and his family. He becomes an easy target for exploitation by bad
elements of the society. His children are more likely to stop going to school.
High employment prevents the ill effects of unemployment. When the economy
has many idle workers, idle resources like closed factories and unused machinery are
prevalent, resulting in a reduction of output. This unwanted effect is eliminated by
high employment.
Economic Growth
Economic growth refers to “the steady process of increasing productive capacity
of the economy, and hence of increasing national income”
Economic growth is usually measured as the annual rate of increase in the
nation’s real national product. Real GNP derived when inflation is incorporated in
computing for the value, at current market prices of all final goods and services.
As economic growth is perceived to bring benefits to various sectors of society, it
becomes a priority concern of monetary authorities.
Stable Prices
When prices of commodities rise, they bring uncertainty in the economy and
economic growth is placed at standstill. Business people become reluctant to expand
or even maintain their current level of operations. Consumers who want to buy life
insurance policies are worried about the wisdom of making such an investment.
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Interest Rate Stability
The stability of interest rates is a desirable feature of a growing economy. When
interest rate fluctuates, they create uncertainty among decision-makers and these
people find it hard to decide on which move to make.
The prices of commodities which include payments on interest on money
borrowed. When interest rate fluctuates, adjustment on prices become necessary.
These bring difficulties, however, for the seller who cannot provide advanced
information on the price of his products. I, turn, customers become hesitant to place
orders.
Stability of Financial Market
When financial markets are firmly placed, savers are assured of a channel for
investing their savings. Borrowers are, likewise, assured of a ready source of funds
whenever such funds are needed for productive economic activities. When this
relationship in affected. This leads to a sharp contraction in economic activity.
One of the important goals of monetary policy is the promotion of a more stable
financial system in which financial crises are avoided. The implication of a sound
monetary policy is conducive to the creation of a more stable and stronger and
banking system.
Stability in Foreign Exchange Market
What happens to foreign exchange markets affect the value of the Philippine
Peso. When the value of the peso goes down in relation to the other currencies, the
prices of commodities tend to increase. Conversely, when the value of peso rises
against foreign currencies, the prices of commodities tends to go down.
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Violent fluctuations in the value of the peso make it harder for exporters and
importers to plan ahead. A desirable goal of monetary policy is to keep the value of
the peso as stable as possible in foreign exchange market.
Instruments of Central Bank Actions
In order to maintain monetary stability within and out of the country, the BSP
endeavors to control the expansion or contraction of the money supply, the level of
creditor, or any rise or fall in prices. Monetary authorities are empowered to institute a
number of devices for purpose of proper regulations of volume of money supply.
The devices may be as follows:
Control of Legal Reserve Requirement. (RA 7653, Sec. 96 to Sec. 102)
Control of discount and rediscount rates. (RA 7653, Sec. 85)
Open Market Operation. (RA 7653, Sec. 91)
Control of Collateral’s Required (RA 7653 Sec. 106)
Imposition of Portfolio Ceiling. (RA 7653 Sec. 107)
Minimum Capital Ratio.
Margin requirements for Letters of Credit (RA 7653 Sec. 105)
Moral suasion.
Control of Legal Reserve Requirement (RA 7653, Sec. 96 to Sec. 102)
Legal bank reserve refers to that portion of the bank’s deposit liability that cannot
be available for lending. Instead, it will have to be set aside a reserve in the Bangko
Sentral, vaults of the bank or temporarily invested in government securities to meet
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the withdrawal needs of the depositors. The control of the percentage of the bank
reserve is powerful and effective instrument that the Bangko Sentral may use in order
to effect an expansion or contraction of money supply.
During inflation, the objective of Bangko Sentral is to decrease the volume of
money supply. I order to do this, it will increase the percentage of the legal reserve
required on banks. This action will give an effect of reducing the loanable funds of
the banks because they will have to set aside a bigger portion of their deposit
liabilities as reserve to meet depositors’ withdrawals. Furthermore, this action
decreases credit expansion.
During deflation, when money supply is insufficient, the percentage of legal bank
reserve is decreased to induce greater credit expansion. When the percentage of the
legal bank reserve is decreased, the effects is an increase in investible funds, which
may induce greater lending operations and consequently higher credit expansion.
Control of Discount and Rediscount Rates (RA 7653, Sec. 85)
The Bangko Sentral extends credit to banking institutions for the following
purposes:
a, Using it as device for credit control;
b. Increase the liquidity of the banks through credit whenever necessary.
When the Bangko Sentral Extends credits to banks, it imposes interest or discount
rates, primarily to use it as credit control, and secondarily to earn income for the
Central bank.
During inflation, the Bangko Sentral increases the percentages of its rediscount
rates on credit extended to banks. Its purpose is to discourage the banks from
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borrowing from the Central Bank. The effect is that the banks will have less loanable
funds, which will limit their lending operations and credit expansion.
During deflation, the Bangko Sentral Decreases the percentage of rediscount or
interest on credit extended to the banking institutions, which encourage the banks to
borrow from the Bangko Sentral. Increase in the banks’ loanble funds will enable
them to expand their operations to promote greater expansion.
Open Market Operation (RA 7653, Sec. 91)
This refers to the buying and selling of government securities by the
BangkoSentral for the purposes of credit control. Government securities refer to the
evidences of indebtedness of the government.
There are two purposes of government securities:
1. To raise revenue
2. To control credit
The Central Bank plays a significant role in the issue and placement of
government securities. It also maintains the security stabilization fund, which is a
reserve intended to be used in buying and selling of government securities to stabilize
the value and liquidity of such government securities.
During inflation, the Central Bank will undertake the following remedies:
a. Sell to the public government securities to absorb excess cash holdings and to
b. Sell to the banking institutions governments securities, as to divert investment
in loans to investment in securities. The effects are: a decrease in available
funds for loans, a decrease in lending operations for banks, and a decrease in
credit expansion.
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During deflation the sale of government securities to the banks decreases money
supply by the amount it would have increased if the funds have been used by the
banks in their lending operation where they undergo a multiplier effect.
Control of Collateral’s Required (RA 7653 Sec. 106)
“ In order to promote liquidity and solvency of banking system, the Monetary
Board may issue such regulations as it deem necessary with respect to the maximum
permissible maturities of loans and investment which the banks may make, and the
kind and amount of security to be required against the various types of credit
operations of the banks.”
The Bangko Sentral has the power to impose condition or requirements on the
securities against the loans extended by the bank. This in effect increases the loan
value of the collateral.
During inflation, the Bangko Sentral may increase collaterals required on loans,
which in effect decreases loan value of the collaterals. This may discourage public
borrowings from the bank, decreases lending operations of the banks, and decrease
credit expansion. During deflation, the Bangko Sentral may decrease collaterals,
which may be an incentive to borrowers.
Imposition of Portfolio Ceiling (RA 7653 Sec. 107)
Imposition of portfolio ceiling to the upper limit that the Bangko Sentral may
place on the loans and investment of banks. It is instituted only during inflation. It is
the direct limitation on the volume of loans, and investment that the bank may extend.
Such restrictions may not be instituted during deflation. To do this, Bangko
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Sentral sets a date and whatever is the total amount of loans and investment the bank
on that date is its limit.
Minimum Capital Ratio
It is the maximum ratio that the combined capital account of surplus may bear on
the banks’ corporate assets. The Bangko Sentral requires 10% of the risk assets of the
bank as its minimum capital. Thus total assets minus non-risk assets equals risk
assets.
Section 101 of RA 7653 states, the Monetary Board may prescribe the minimum
ratios which the capital and surplus of the banks must bear to the volume of their
assets, or to specific categories thereof, and may alter said ratios whenever it deems
necessary.
Margin requirements for Letters of Credit (RA 7653 Sec. 105)
The Monetary Board may at anytime prescribe minimum cash margins for the
opening of letters of credit, and may relate the size of the required margin to the
nature of the transactions to be financed.
Moral Suasion
This more of psychological approach in which the Bangko Sentral may use its
persuasive power to make the banks follow or support credit policies without direct
imposition of restrictions. These are case when the Bangko Sentral shies away from
imposition of credit restrictions because of possible repercussions such that, the
Bangko Sentral just use their influence among banks for voluntary support of credit
policy. For instance, during the imposition of free floating exchange rate in 1970, the
Central Bank was able to avoid buying and selling of US $ at very high speculative
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rates. The banks agreed among themselves to limit their trading in foreign
transactions to an agreed foreign exchange rate.
Vision
The BSP aims to be a world-class monetary authority and a catalyst for a globally
competitive economy and financial system that delivers a high quality of life for all
Filipinos.
Mission
BSP is committed to promote and maintain price stability and provide proactive
leadership in bringing about a strong financial system conducive to a balanced and
sustainable growth of the economy. Towards this end, it shall conduct sound monetary
policy and effective supervision over financial institutions under its jurisdiction.
Core Values
IntegrityExcellencePatriotismSolidarityDynamism
Objectives
The BSP’s primary objective is to maintain price stability conducive to a balanced
and sustainable economic growth. The BSP also aims to promote and preserve monetary
stability and the convertibility of the national currency.
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Organizational Structure
Figure 1 shows the organizational Chart Bangko Sentral ng Pilipinas. The chart
embodied how the bank work and act to the need of managing and developing the
organization as well as observing the functions and line of receiving commands.
The topmost part is the executive management system, which is the central
decision making body. Followed by the four functional sector – Monetary Stability
Sector, Supervision and Examination Sector, Resource Management Sector and Office of
the Security Plant Chief Superintendent.
Executive Management Services
1. Office of the Secretary, Monetary Board
Provides administrative and secretarial services to the Monetary Board.
2. Office of the General Counsel and Legal Services
Prepares opinions and rulings for the MB, the Governor, and the Deputy
Governors on matters relating to policies, functions, operations and
regulations of the Bank; and
Prosecutes or defends cases involving the BSP, the MB, and Management in
judicial and administrative proceedings.
3. Office of Special Investigation
Evaluates bank irregularities and anomalies noted in the examination reports
submitted by examining departments.
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