3 Pillars of BSP
WARNING: No part of this E-module/LMS content can be reproduced or transported or
shared to others without permission from the University. Unauthorized use of the
materials, other than personal learning use, will be penalized.
For this week, the following shall be your guide for the different lessons and tasks that
you need to accomplish. Be patient, read them carefully before proceeding to the tasks
expected of you.
HAVE A FRUITFUL LEARNING EXPERIENCE
Lesson 3: Functions and operations of the BSP
3 Pillars of BSP
Topics:
Learning
Outcomes:
At the end of this module, you are expected to:
Evaluate the effectiveness of the three pillars of BSP
LEARNING CONTENT
Introduction:
Lesson Proper:
Three Pillars of BSP
The Bangko Sentral ng Pilipinas (BSP), the Philippines' central bank is
responsible for maintaining low and stable inflation and providing proactive leadership to
ensure a strong financial system for the balance and sustainable growth of the
Philippine economy. The economy is constantly evolving. It grows and responds to
changes and innovations. The BSP provides a solid anchor for the economy while
meeting the challenges of the times. The Bank prioritizes the stability and well-being of
the economy but it is also dynamic. The work of the BSP centers on the 3 main areas or
pillars. The first pillar is price stability through the conduct of monetary policy. The
second is financial stability through financial system supervision and regulation. The
third is an efficient payments and settlements system through the issuance of currency,
the operation of the real-time gross settlement system, and oversight over the payments
system.
First Pillar: Price Stability
Price stability also means monetary stability. It can be achieved through the
conduct of monetary policy. The BSP formulates and implements monetary policy aimed
at managing the expansion or contraction of money supply that is consistent with the
maintenance of price stability.
What is price stability?
According to Alan Greenspan, price stability is an environment in which inflation
is sufficiently low that is no loner a consideration in the economic decisions of
households and firms. In addition, Alan Blinder mentioned that prices are stable when
ordinary people stop talking about inflation.
Price stability therefore refers to the condition of low and stable inflation. By
keeping inflation low, the BSP helps ensure strong and sustainable economic growth
and better living standards. With price stability, prices of goods do not rise too quickly
and people have a degree of certainty when deciding how to spend, save or invest their
money. In short, prices neither increase nor decrease markedly.
What is inflation?
Inflation is the sustained increase in the average prices of goods and services
typically purchased by consumers. It is measured as the annual percentage change in
the Consumer Price Index (CPI).
How are prices measured?
Consumer price index represents the average price of a standard basket of
goods and services consumed by a Filipino family for a given period and monitored
monthly by NSO.
Take note: Positive rate of change in CPI= Inflation rate
BSP: Guardian of Price Stability
The BSP has the exclusive ability to influence the supply of money in the
economy and is therefore uniquely qualified to promote price stability. By controlling the
money supply, the BSP is able to exert some influence on the prices of goods and
services. Price stability can be maintained through the monetary policy.
Monetary policy refers to the measures or actions taken by the BSP to help keep
inflation low and stable. The BSP conducts monetary policy using an approach called
inflation targeting. In this approach, the BSP promises to keep average inflation close to
pre-announce target. If for example, prices are rising more rapidly than the desired
inflation rate. Because of the very strong demand for goods and services relative to
supply, then the BSP will take action to bring down inflation to the target level by
tightening monetary policy.
On the other hand, if forecasted inflation below the target, and then there's a weak
demand for goods and services, then the BSP will ease monetary policy. The BSP has
several means or instruments to carry out its monetary policy. To tighten monetary
policy, the BSP can raise its policy interest rates pumping market interest rates to follow
suit. It can also sell government securities as part of its open market operations to
reduce the amount of money in the financial system. Or it can raise reserve
requirements imposed on banks.
What is the BSP’s Monetary Policy Framework?
In the past, the BSP followed the monetary aggregate targeting approach to
monetary policy.This approach is based on the assumption that there is a stable abd
predictable relationship between money and output and inflation.
To strengthen further the structure for conducting monetary policy towards
achieving price stability, the Monetary Board approved the adoption of inflation targeting
as the new framework for monetary policy on January 24, 2000. The new framework
was implemented formally beginning January 2002. The BSP’s shift to inflation targeting
was aimed at improving further the consistency and transparency of monetary policy
and providing a clearer framework for assessing the impact of domestic and external
influences on inflation outlook.
Essential elements of inflation targeting
1. Set a target inflation rate- explicit inflation targets for some period ahead
2. Forecast the future path of inflation using a model that uses relevant variables
and information indicators
3. Compare forecast with the target
4. Difference determines the extent that monetary policy has to be adjusted
Second Pillar: Financial Stability through proactive regulation and effective
supervision
Financial stability is a property of a financial system that dissipates financial imbalances that
arise endogenously in the financial markets or as a result of significant adverse and
unforeseeable events. When stable, the system absorbs economic shocks primarily via
self-corrective mechanisms, preventing the adverse events from disrupting the real economy or
spreading over to other financial systems. Financial stability is paramount for economic growth,
as most transactions in the real economy are made through the financial system.
Without financial stability, banks are more reluctant to finance profitable projects, asset prices
may deviate significantly from their intrinsic values, and the payment settlement schedule
diverges from the norm. Hence, financial stability is essential for maintaining confidence in the
economy. Possible consequences of excessive instability include financial crisis, bank runs,
hyperinflation, and stock market crashes.
Why is Financial Stability Important?
Financial stability is an essential requirement not only for price stability, the policy goal
of the central bank, but also for healthy development of the economy. This is because
financial instability entails heavy costs for an economy, since the volatility of price
variables in the financial markets increases and financial institutions or corporations
may go bankrupt. In addition, economic development can be limited at such a time,
since economic agents find it difficult to make rational decisions and the efficiency of
resource allocation is reduced.
Since the 1980s, many countries around the world have achieved the positive effects of
rapid financial industry growth owing to the progress of financial liberalization. At the
same time, however, they have also experienced periods of dramatic slowdown in
economic growth, due to heavy economic expenses arising from financial instability or
financial crises.
Against this backdrop, many countries have started to place great emphasis on financial
stability when implementing their policies. Attention paid to financial stability is growing,
as new factors with the potential to generate financial instability, including the
strengthening of financial sector links among countries and the rampant development of
complex financial instruments, have recently emerged.
Maintaining Financial Stability is an Intrinsic Part of the Central Bank's Role
When the financial system becomes unstable, such as with financial market turbulence
and deterioration in the soundness of financial institutions, a massive supply of funds is
generally needed to solve the problem. Historically, the central bank has therefore
naturally performed the role of promoting financial stability, since it has the ability to
promptly inject a huge amount of liquidity by virtue of its exclusive right to create fiat
money.
Financial Stability Enhances the Efficiency of the Central Bank's Monetary Policy
The financial system provides much of the information needed by the central bank to
implement its monetary policy. It is also a major channel through which the effects of
monetary policy are transmitted to the real economy. Financial system instability causes
a decrease in the usefulness of the information variables used for monetary policy,
including price variables and transaction movements in the financial markets, and the
lending behaviors of financial institutions, and thus reduces policy efficiency.
Consequently, the central bank places high value on financial stability, so that the
efficiency of its monetary policy can be enhanced.
BSP’s approach to supervision and regulation
The BSP conducts on and off site supervision and regulation
1. consolidated supervision ensures that activities of the branches are like the main
office. A risk-based approach is used giving emphasis on:
1. Underscoring the responsibility of the BOD and Senior Management of the
institution to ensure soundness and stability
2. Evaluating the quality of oversight, adequacy of policies and procedures,
and effectiveness of internal audit function
2. Issuance of prudential rules and regulation
1. Gate keeper function
2. Capital adequacy requirements
3. Regulatory limits on various activities
3. Financial reporting requirements
1. Financial reporting package
2. Consistent with PAS and PFRS
3. Data warehouse
4. Prompt corrective action
1. Memorandum of undertaking
Third Pillar: Efficient payments and settlements system
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 systems (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 the necessary infrastructure through the operations of the Philippine Real
Time Gross Settlement System or the “PhilPaSS”.
Roles of the BSP in Payment and Settlement Systems
The BSP performs the following role in the payments and settlements system:
1) Operator of the real time gross settlement system known as PhilPaSS
The BSP, through its Payments and Settlements Office (PSO), serves as the payment system
operator responsible for the operation and maintenance of PhilPaSS and its critical
components. It ensures that the operation of PhilPaSS is continuous, safe and efficient so that
time-critical payments are completed as expected to facilitate and enhance economic
processes, manage risks, and absorb shocks in order to promote financial stability.
2. Provider of credit facilities to banks as a lender of last resort
As payment systems affect the daily demand for liquidity of banks/financial institutions and may
therefore affect the level of money market interest rates, the BSP, as a lender of last resort,
provides the following liquidity tools to PhilPaSS participants:
1. Intraday Liquidity Facility (ILF) – a fully collateralized facility established to
maintain the smooth and efficient operation of the payments system in order to
avoid interbank payments gridlock in the settlement process within PhilPaSS
business hours.
2. Overdraft Credit Line (OCL) – another collateralized facility which aims to assist
bank experiencing unexpected or higher than usual volume of inward check
transactions. The governing policies and procedures are provided under BSP
Circular 681 in order to provide additional liquidity for banks encountering liquidity
problems due to check clearing losses as well as protect the BSP against
settlement exposures.
3. Overseer of the payments and settlements system
The BSP, through its Core Information Technology Sub-Group of the Supervision and
Examination Sector conducts information technology (IT) supervision and examination of banks
and non-bank financial institutions (FIs) and the payments systems. Its assessments of systems
focus on determining the adequacy of IT management and operational controls over data
integrity and confidentiality, and attendant risk exposures.
4. User of its own RTGS system
The BSP, through its different departments, also make use of the payments and settlements
system for the settlement of its own transactions with its stakeholders, such as:
1. The automated collection and settlement of Supervision and Examination Sector
annual supervisory fees;
2. Online processing of eRediscounting loan proceeds and collection of banks’
maturing loans with Department of Loans and Credit;
3. Processing/posting of banks’ cash deposit and withdrawal transactions with Cash
Department;
4. Investment/maturities of funds placed by the Provident Fund Office; and
5. Trading transactions as well as payments of maturing RRP/SDA placements with
Treasury Department
5) Initiate changes/reforms for the payments system
The BSP, through its Payments and Settlements Steering Committee (PSSCOM), initiate the
conduct of studies/research relating to payments system to ensure that it grows and matures in
accordance with the global standards.
Functions and operations of the BSP
WARNING: No part of this E-module/LMS content can be reproduced or transported or
shared to others without permission from the University. Unauthorized use of the
materials, other than personal learning use, will be penalized.
For this week, the following shall be your guide for the different lessons and tasks that you need
to accomplish. Be patient, read them carefully before proceeding to the tasks expected of you.
HAVE A FRUITFUL LEARNING EXPERIENCE
Lesson 4: Functions and operations of the BSP
Characteristics of Central Bank
Functions of Central Bank
Topic:
Monetary Tools
Learning Outcomes:
At the end of this module, you are expected to:
1. Exxplain the functions played by BSP to the economy
2. Describe the various monetary tools
3. Discuss the activities and credit operations of central bank
LEARNING CONTENT
Introduction:
The Bangko Sentral ng Pilipinas is not only engaged in central banking
operations, but also, it is a central monetary authority. Its main function is to maintain
monetary stability. It has monetary tools to do this job. In the fulfilment of its duties and
responsibilities, the Bangko Sentral is primarily involved in the management of money
supply. Hence, all financial institutions that can influence the volume and flow of money
and credit are subject to the supervision and/or regulation of the Bangko Sentral.
Professor Raymond Kent said; “A central bank is so called because it occupies a
or pivotal position in the monetary and banking structure of the country.
Lesson Proper:
Characteristics of Central Bank
A central bank has an extra-ordinary position and role in a developing economy.it
is not only concerned with the proper monetary and credit structure, but it has also a
more important responsibility of promoting the common good. In a poor country like
ours, common good refers to the general welfare of the poor masses.
1. It is a bank of issue. The Bangko Sentral has a complete monopoly of note issue.
The main reasons for granting the central banks the sole power to issue notes
are: (1) to ensure uniformity in money, (2) to effect government supervision over
money supply, (3) to give prestige to central banks, and (4) to provide a source of
income or reduce printing expenses on the part of the government.
2. It is the government’s banker, agent and adviser. As a government’s banker, the
Bangko Sentral conducts the banking accounts of government agencies. It
provides FOREX to the government for the importation of goods and for payment
of debts. As agent of government, the BSP performs a variety of financial
services for the government. The BSP lends to the government, buys and sells
securities, administers and manages national debts among others. And as
adviser, the BSP informs the top officials about the monetary and financial
conditions of the economy.
3. It is the custodian of cash reserves of banks. A legal reserve requirement is
imposed on the deposit liabilities of banks to control the volume of money
generated by the credit operations of the banking system.
4. It is the custodian of the nation’s reserves for international currency. International
reserves refer to gold and foreign exchange. A central bank is required to
maintain reserves of international currency as a support fund for balance of
payments difficulties and for the maintenance of external monetary stability.
5. It is a bank of rediscount and lender of last resort. The central bank’s function as
a lender of last resort has been derived from its rediscounting function. (Recall
previous lesson on lender of last resort) A central bank lends money to
distressed banks on the basis of their promissory notes. It charges interests on
its loans to such banks. This central bank lending is called rediscounting
6. It is a bank of central clearance and settlement. Settlements among banks is
easier, faster and more convenient if these are done by a central bank. (Recall
discussion on this item in your BFI subject)
7. It controls credit. This is a major function of any central bank. The BSP uses its
monetary tools in regulating credit to maintain price stability or monetary stability
which is very vital in the growth of the whole economy.
Monetary Tools
The BSP uses various monetary instruments in the pursuit of its general
objectives of maintaining monetary stability, both internal and external, and fostering
sustainable economic growth. These monetary tools are utilized to regulate both the
supply of and demand for money in the economy as well as the sectoral flow of credit in
the financial system.
4. moral suasion
This particular means of controlling credit or money supply is popularly known as moral
influence. The BSP influences the direction and conduct of business enterprise,
investors and consumers. Informal contacts, consultations and meetings are conducted
to explain the position of central bank on various issues.
5. Interest rate policy
The BSP is given the power to fix or regulate interest rates based on prevailing
credit conditions and the thrusts of the monetary policy. Through this monetary tool,
the BSP can encourage or discourage the expansion of certain business activities.
The deregulation of interest rates is designed to increase savings and improve the
allocation of capital funds.
6. Swap facility
This refers to a swap transaction between BSP and firms engaged in exportoriented or other preferred activities. The BSP swaps pesos for foreign exchange
with an authorized agent bank at the exchange rate prevailing on availment date.