MODULE IN FM – MONETARY POLICY AND CENTRAL

BANKING

Topic covered:

MODULE NO. 04 FINANCIAL SYSTEM AND COMMERIAL BANKING

I. INTRODUCTION

Every economy (country) has a financial system which consists of

three main participants namely individuals, households or consumers, the
business establishment composed of MSMEs (micro, small and medium
enterprises) the large corporation engaged in service industries,
manufacturing establishment, and agriculture who deal with financial
institutions composed of banks and other financial institutions.

The financial institutions are regulated by government institutions

like the SEC (Securities and Exchange Commission), the Bureau of Internal
Revenue (BIR), the Bureau of Customs (BOC) who raise revenue for the
government. The banking sector and other financial institutions are
regulated by the Central Bank or Bangko Sentral ng Pilipinas (BSP) to
protect the interest of general public who are both depositors, invertors
and borrowers from the banks and other financial institutions like,
insurance companies, financing companies and even the small
pawnshops.

The objectives of the Philippine government are to attain (1) price is

stability, (2) relatively full employment and (3) a satisfactory rate of
economic growth as reflected by the GDP growth rate. These goals are
achieved through the government’s fiscal policy which uses the raising of
taxes and other revenue and the expenditure of this revenue to influence
the nation’s (1) spending, (2) employment and (3) price levels through the
annual budget.

The BSP is entrusted with the task of instituting the monetary policy
to promote a (1) low and stable inflation (2 to 4%) conducive to a (2)
balanced and sustainable economic growth (6 to 8% GDP growth), by (1)
regulating money supply, (2) credit and (3) interest rates in order to
control the level of spending in the Philippine economy.

The formulation and implementation of the country’s monetary

policies is the responsibility of the Monetary Board of BSP.
 This is a challenging time for the Monetary Board. The inflation rate
is up (6.9%) as of September 30, 2022. The exchange rate is increasing to
$69.00 to the dollar, increasing the cost of importing goods. While the
pandemic is subsiding, the Ukrainian Wary is heating up. The BSP had
already increased interest rates from a low of 2.0% in March, 2020 to it’s
highest rate of 4.75% of October 15, 2022. High interest rate discourages
borrowing. It puts a hold on consumer spending and expansion plan and
investment by the business sector because of the heightened consumer
spending during the Christmas season stimulating economic activity we
might still see a high GDP growth rate in Q4, 2022 but it will be a different
story in Q1, 2023 unless there is a truce in the Ukrainian war and the price
of crude oil in the world market hoes down.

II. INTENDED LEARNING OUTCOME:

At the end of this module, students are expected to know the
following:

1. The definition of financial systems and it’s six participants

2. Identify Commercial banking and risk of banks
3. Determine Methods of withdrawal
4. The Secrecy of Bank Deposits Law (R. A 1405) and exceptions
thereto
5. Loan discount facilities

KEYTERMS

Financial System - Financial system describes collectively the financial

markets, the participants, and the instrument and securities that are
traded in the said markets.

Monetary Policy – is the regulation of the monetary supply, credit and

interest rates in order to control the level of spending and investments in
the economy.

Monetary Board – refers to the governing body of a central bank or

monetary authority.

Government – By government is meant the national, provincial, city, and

barangays or towns comprising the Philippine as a whole.

Central Bank – that will help their respective countries maintain a

healthy and stable company.
Commercial banks- is a financial institution that provides service like
loans, certificates of deposits, savings banks, account bank overdrafts, etc
to it’s customers.

Foreign Participants – refer to the participants form the rest of the

world-household, governments, financial and non-financial firms, and
central banks.

III. CONTENT: THE FINANCIAL SYMTEM

All members of society-households, business (more importantly

financial institutions), non-profit organization, the church, and the
government are affected by the financial system of the country to which
the society belongs. The government, is primarily responsible for defining
and regulations the financial system. It is because the central bank and its
Monetary Board determines the rules, regulations, and monetary policies
that need to be implemented to ensure a stable and healthy financial
system for the country. Business firms, households and governments play
a wide variety of roles in our modern financial system. All of us, one way
or another, will be involved in the financial system either as a borrower or
a lender or both.

A country’s financial system is not, however, solely determined by

the country itself because other worldwide organizations like the World
Bank, International Monetary Fund, Asian Development Bank, New York
Stock Exchange, Osaka Securities Exchange, Australian Stock Exchange,
BATS Global Markets, Chinese Stock Exchange, among others, and
transitional banks all effect the financial system of the country. Our
modern world has what may be called a complex and sophisticated
financial system.

This chapter will discuss what a financial system is all about and the
role it plays in the economy of a nation, as a follow up of the preceding
chapter on the financial environment. In addition, it will discuss the roles
of the different participants in financial system plays. The monetary
system, monetary policy, and it s effect in economic system of a country,
and the tools of monetary policy will be discussed and how they affect
many supply and interest rates.
 Lastly, the role of the central bank (BSP for the Philippines) will be
discuss. This is a prelude to financial intermediation that will be discussed
in the next chapter.

FINACIAL SYSTEM: DEFINITION

Financial system describes collectively the financial markets, the

participants, and the instrument and securities that are traded in the said
markets. The functions of the financial systems are to:

1. Channel the funds from the savings units (leaders) to the deficit
units (borrowers);
2. Provide a medium of exchange;
3. Provide a mechanism for risk sharing, and
4. Provide a channel through the central bank can influence the
economy, in general, and the financial system in particular.

FINANCIAL SYSTEM PARTICIPANTS

There are six participants or sectors in the financial system. They are:

1. Household or consumers,
2. Financial institutions/intermediaries:
3. Non-financial firms; (business, MSMEs & Corps.)
4. The government
5. The central bank; and
6. Foreign participants

HOUSEHOLD

Household or come, majority of which typically come from wages

and salaries. Such income is spent consumers are generally described as
that groups receiving on goods and services and a part is saved (if there is
enough to saved). Gross savings are equal to current income less current
expenditures. What is spent is termed consumption (from where the word
consumer came from). Goods that are consumed within a current period
are termed non-durable consumer goods or non-durables. Goods that will
last for more than a year are termed durable consumer goods or durables.

FINANCIAL INSTITUTIONS/INTERMEDIARIES

Financial institutions/intermediaries are the firms that bridge the

gap between the surplus units (SUs) or investors/lenders and the deficit
units (DUs) or borrowers. They Chanel the funds from the lenders to the
borrowers. They include the depository institutions and the non-depository
institutions that we will study in Chapter IX. Others and being channels,
they are, at times, also lenders and borrowers themselves. When they
underwrite securities or acts as brokers or dealers, they are
intermediaries. If they buy securities, they are investors or lenders and
when they are the ones issuing the securities, they are borrowers.

NON-FINANCIAL INSTITUTIONS

The non-financial institutions are the businesses other than the

financial institutions or intermediaries. They include the trading,
manufacturing, extractive industries, construction, genetic industries, and
all firms other than the financial ones. Just like the households and the
financial institutions, these non-financial institutions are also borrowers or
lenders or both at one time or the other. When these non-financial
institutions buy securities, they are lenders. When they issue the
securities, they are the borrowers.

THE GOVERNMENT

By government is meant the national, provincial, city, and

barangays or towns comprising the Philippines as a whole. Each division
has its heads and agencies that help in running the division it is made
responsible for. The President is responsible for the entire country: the
mayor is responsible for his own city: in the barangay captain is
responsible for his own barangay. Each of them has his own agency. The
Philippine Treasury is part of the government that we consider as
participants in the financial system. When the Philippine Treasury or any
other subdivision of the government issues their own securities, they act
as borrower/deficit units, and when the Philippine Treasury or any other
subdivision of government buys securities, they act as investors or
savers/surplus units.

CENTRAL BANK

Bangko Sentral ng Pilipinas (Central Bank of the Philippines) and all

the other central banks of the different countries are mandated to assure
that their respective countries have a stable and healthy financial system.
They oversee the operation of the entire financial system of their
respective countries and mandate the rules, regulations and monetary
policies that will help their respective countries maintain a healthy and
stable company. Any central bank is the “banker” to banks providing
various services to banks, helping them collect and clear checks and
loaning them funds as needed. As a lender and a regulator, the central
bank oversees the health of the banking system. The cetitral banks are
the monetary policymakers of their respective countries.
FOREIGN PARTICIPANTS

Foreign participants refer to the participants from the rest of the

world-household, governments, financial and non-financial firms, and
central banks. Goods and services and financial instruments/securities are
exchanged across national boundaries, as well comments within these
boundaries. International trade and international finance are parts of
globalization. As globalization affects the entire world, the role of foreign
participants in the financial system has become more important.

CHAPTER 13-COMMERCIAL BANKING

Commercial banks, like Metropolitan Bank and Trust Company, BDO

Unibank, Bank of the Philippine Islands and others engage in universal
banking activities, but their main business consists of accepting deposits
and investing in loans and securities, Banks other business ventures are
operated for profit.

The basic source of bank earnings is the fact that a bank can earn a
higher rate of interest on its assets, its loans and investments than it must
pay to its depositors. The excess of interest received over interest paid
can be used to pay the cost of operating the bank. What remains is the
bank’s profit.

Banks pay interest on time and savings deposits but do not pay
interest on checking accounts. While demand deposits can be transferred
from one person to another by check, time deposits must present his
passbook at the bank to withdraw his funds. He can take away currency or
get a bank check which he can deposit in his checking account.

THE RISKS OF BANKS

Every business venture or investment involves sorne risk of loss.

Investments offering high returns are generally riskier and less easily
turned into cash than those offering low returns, Bank management must
balance the need for safety and liquidity against their desire for higher
carnings.

A bank which never takes any risk of loss on an investment cannot

earn enough to cover its cost. However, a bank which gambles on high
risk or on high-return investment may fail.

A bank naturally wants to invest in ventures that yield the highest

net return. However, in making its investments choices, it must be
constantly aware of its obligation to its depositors. It must be prepared at
all times to meet the legal reserve requirements as mandated by the
Central Bank. It must maintain enough cash to make the day-to-day
changes in the flow of currency into and out of the bank. And, it must
conduct its whole investment policy to minimize losses from bad debts
and unsuccessful investments.

RISK MANAGEMENT

Central Bank would not want banks to expose themselves to

excessive risk. This is because if the risk becomes a reality and a bank
failure ensues, there are heavy costs on the central bank to rescue it. It
may result in less confidence in the integrity of the financial system,
which it wants to avoid.

DOLLAR DEPOSITS

Since July 21, 1970 when Central Bank Circular No. 304 was
promulgated, commercial banks have been accepting deposits. However,
there was still an element of uncertainty owing to the act that as a Central
Bank circular, it can be easily revised, amended or even revoked. The
congress of the Philippines enacted Republic Act No. 6426 entitled
“Foreign Currency Deposit Act of the Philippines” which took effect in April
1972, giving legislative sanction to foreign currencies, such as the
following: Pound sterling, Swiss frane, Deutsche mark, Canadian dollar,
Dutch guilder, Italian lira, and Japanese yen. These foreign currencies
constitute what are known in the financial world as “hard currencies.”

The Central Bank, then, monitors the amount of risk assets of bank
in relation to its total assets, total net worth, and the like.

Not only are the ratios watched closely in relation to their likelihood
of causing bank failures, it also defines what type of assets are considered
risky. Thus, the “value at risk” (VAR) approach has gained prominence in
the recent years after the Asian crisis.

For example, shortly before the 1997 Asian crisis, BSP imposed a
limit of 20% of the bank’s total loan portfolio that could be lent to real
estate projects. This is because it feared an asset bubble in the property
sector.

Republic Act No. 6426 does not only guarantee secrecy of deposits
in foreign currencies but, moreover, against confiscation. Savings deposits
of foreign currencies can be withdrawn at any time at the option of their
depositors, provided no liens are attached to such deposits. On time
deposits, however, withdrawals before maturity date shall be subject to
arrangement with the commercial bank concerned.

METHOD OF WITHDRAWAL

Government institutions or private sources could have a choice on

the type of deposits as to the method of withdrawal. This would largely
depend upon their need and on other considerations. Such choice may be
between demand and time deposits.

Demand Deposits. These deposits are withdrawn upon demand by

the depositor through the use of checks. Such deposits today do not carn
interest although in the past, they did. The reason for curtailing interest
paid on demand deposits was because the banks were using this as an
unfair competitive practice. Banks would vie for deposits by offering high
rates of interest and only the stronger banks survive the competition.
Furthermore, demand deposits are withdrawable at the depositors’ option
so that the bank, for sound banking practice, would rather rely more on
time deposits for their income. Thus, to a bank, a demand deposit is of
lesser advantage than time deposit

Time deposits. On the other hand, time deposits are those which
can be withdrawn only after a certain period of time. These deposits earn
interest at varying rate as governed by bank policy and Central Bank
circulars. Because of the element of time, the bank could program its
loans in conformity with the maturity of time deposits and thus would be
able to cats larger income. Besides, on all time deposits, the depositor is
required to present a notice of withdrawal if and when the bank cannot
meet his demand in an emergency. There are also a variety of deposits to
choose from. They are, among others, the special time deposits and the
savings deposit.

Special Time Deposit. The proceeds (principal plus interest), from

these deposits may be used for varied purposes These are governed by
special provisions entered into between the bank and the depositor. A
savings bank may have a variety of these provisions entered into in the
form of birthday deposits, Christmas shopping fund, insurance premium
fund, educational fund and the like. They are administered in such a way
as to provide the depositor the incentive to save and to be able to attain
his goal of saving up for the future. The deposits could only be withdrawn
in accordance with the purpose.

Time certificate of deposit. In making a deposit of this type, the

depositor is given time certificate to evidence his deposit. It usually lasts
for a year. The depositor is expected to get the deposit only upon
maturity. However, if an emergency should occur, he may withdraw the
funds, provided he gives a written notice of withdrawal to the bank at
least 30 days before the withdrawal.

If the deposit is withdrawn before it’s maturity, the depositor loses a

portion and sometimes, all of the interest, depending upon the banks’
policy. If, however, it reaches maturity, the depositor may either renew
the deposit or withdraw the entire amount consisting of principal plus
interest, upon presentation and surrender of time certificate.

Savings Accounts. The most common type of time deposit is the

savings account. It has the advantage of earning interest and also of
being withdrawn as if it were demand deposits. There remains the fact,
however, that upon its discretion, the bank may require a noticed of
withdrawal. Since it is presumed that saving is the primordial objective of
the depositor, he is sometimes charged a service fee if he withdraws
frequently. He is expected to add rather than to dissipate his savings
account. A number of banks also vary the use of savings accounts. This
would enable depositors of the middle- and lower-income levels to be able
to use their services.

PROTECTION OF DEPOSITORS

For the purpose of protecting the interests of deposits with respect

to their deposits in banks, Republic Act No.3591. as amended, was
enacted providing for the establishment of the Philippine Deposit
Insurance Corporation. For this purpose, a permanent insurance fund in
the amount of P5 million was appropriated.

Whenever an insured bank shall have been closed on account of

insolvency. Payment of the insured deposits in that bank shall be made by
the Corporation as soon as possible either (1) by cash (2) by making
available to each depositor a transferred deposit in another insured bank
in an amount equal to the insured deposit of such depositor. The
Corporation in the exercise of its discretion, may require proof claims to
be fielded before paying the deposits, and that in to any case where the
Corporation is not satisfied as to the validity of claim for an insured
deposit, it may require the final determination of a court of competent
jurisdiction before paying such claims.

PRESIDENTIAL DECREE ON BORROWING

Another important step taken for the benefit of bank depositors is

the presidential decree which amended the General Banking Act.

“No director or officer of any banking institution shall either directly

or indirectly, for himself or the representative or agent of others, borrow
any of the deposits of funds of such bank, nor shall he become a
guarantor, endorser, or surety for loans from such bank to others, or in
any manner be an obligor for money borrowed from the bank or loaned by
it except with the written approval of the majority of the directors of the
bank, including the director himself.”
 Violator of this provision shall be separated immediately from his
position and moreover shall be punished by imprisonment of not less than
one year nor more than 10 years.

This amendment to the General Banking Act is of special import to

depositors and to the banking system for the reason that in the years
past, preferential distribution of credit accommodation in favor of owners
and management of the bank worked to the prejudice of others not-so-
favored but legitimate borrowers who are likewise in need of funds.

In this connection, it should be pointed that this does not mean that
officers, directors and stockholders can no longer avail of the credit
facilities of their own banks. They can borrow, but under the new
amendment by the president in his presidential decree, subject to certain
limitation, to wit.

“The Monetary Board may regulate the amount of credit

accommodation that may be extended directly or indirectly, by banking
institutions to their officers, directors or stockholders. However, the
outstanding credit accommodations which the bank may extend to cash of
its stockholder owning (2%) or more of the subscribed capital stock, its
directors or its officers shall be limited to an amount equivalent to the
respective outstanding deposit and book value of the paid-in capital
contribution to the bank.”

LOANS AND DISCOUNT FUNCTION

Bank loans and discounts are important not only to the banks but
also to our economic society as a whole.

To the banks, they represent a good source of income.

To our economics society, they represent a valuable contribution to

the increase the productive capacity of commerce and industry by
providing them with the financial assistance which they need not only
during the stage of production, but likewise during the marketing process
as well.

Economies in the use of wealth are the only advantage growing out
of the landing process. The bank distributes in its advances in a
discriminating manner among its customers by directing funds into the
hands of producers best able to use them. In this way, credit definitely
fosters the effective use of productive equipment and the maximum
expansion in the supply of consumer goods.

LOANS TO BUSINESSES
 Loans granted to commercial and industrial enterprises represent a
very significant segment of the credit extended by the commercial banks.
Traditionally, such loans were to finance current short-term needs with
maturities ranging for 30 days to 90 days which normally corresponds to
credit terms on which day sell their customers. Trade notes and
acceptances offered to the bank for discount and the merchant’s own
single-name promissory note came to be known as self-liquidating paper
since it is based upon the expectation that money borrowed can be
resold, and the loan later on repaid out of the process obtained at the
time of maturity.

SIGNIFICANCE OF BANK LOANS

Bank lending is very important to our economic society for it makes

possible the financing of the agricultural, commercial and industrial
activities of the nation. It makes possible what economists have called
indirect or roundabout production, where consumable goods are secured
by the direct application of labor to the land or natural wealth. In indirect
or roundabout production, the primary production agents are used first to
produce capital goods which are used later in the production of
consumable goods. Since production involves time, loans from commercial
banks make funds available to producers for the purchase of raw
materials and the employment of labor. During the productive process,
the out-of-pocket expenses are met, and when the goods are sold the
bank loan can be retired.

Moreover, bank loans make possible production for inventory. The

food industry provides the classical example since all of the foods that are
harvested like grains and vegetables which are later on processed cannot
be consurned immediately. Loans to food processors, for instance, enable
them to purchase, process, and store goods which can later takes time to
be sold to wholesalers, retailers and ultimately to consumers. During this
interim period from farmer to processors to manufacturer to wholesalers,
to retailers and finally to consumers bank loans have made possible
economical handling of the food corporation.

THE EXCHANGE FUNCTION

The banks exchange function entails the transfer of funds without

physical transfer of cash. This is carried out mostly through bookkeeping
entries in the bank’s book accounts. Under this function we may include
the clearing of checks, the collection procedure of foreign exchange, and
letter of credit financing.
The Clearinghouse

The term clearing is use has a variety of connotations from its origin
to the present. The first clearing process was done largely by messenger
where checks presented individually for settlement to each bank on which
they were drawn. Today a clearing house may convey the meaning of the
place where checks are cleared. It may also mean the association of the
banks that bank themselves together to achieve mutual goals. They
contribute to the expenses of the cleaning process and are bound by the
rules and regulations set forth by the association.

The operations of a clearinghouse will be taken up in higher courses

in finance. For the moment, it shall suffice to say that it has brought
numerous advantages such as economy, safety, convenience and faster
service to customers of the banks.

Clearing of Checks

The collection procedure is somewhat connected with the clearing

process. A customer assigns to his bank such item as checks, drafts,
acceptances, bonds, and coupons, among others for collection to be
made.

Depending upon the type of collection whether clean or

documented, the bank adopts its own procedure. Clean items represent
those which neither any documents nor limiting provisions upon which
payments is based. Documented items are those which require the
presentation of a bill of lading accompanying it.

For this service, the bank is compensated with a service fee. The fee
is based on the nature and amount of the item to be collected.

Collection is affected either through book entries or through outright

payment to the customer who has requested the bank to collect.

Letter of Credit Financing

The underlying principle in a letter of credit is the substitution of

credit by the bank for the customer, whether he is an importer, exporter
or traveler. Likewise, a bank which confirms and makes payment
substitutes its credit for that of the issuing bank. The reason for this is
that banks are comparatively known to be trustworthy and there is need
that the importer, and exporter who are not personally known to each
other seek an intermediary where both have confidence and this is none
other than the bank. A bank brings together the buyers and sellers in
international trade.

THE TRUST FUNCTION

The trust function in a commercial bank is lodged in the trust department.
The trust activities may be taken care by a trust officer who is specialized
in this phase of trust ansactions are separate and distinct from the
commercial banking functions. The General Banking Act also specifies the
phase of trust services that a bank or a trust company may engage in and
establish the rules of conduct regarding these institutions

The more commonly known trust services handled by banks or the

following:

1. To act as trustee for a corporation’s bond issue. In a corporate

mortgage, the trustee is one of the parties and is charged with the
responsibility of protecting the bondholder’s interests. In so doing,
the trustee reviews and examines the bond indentures:
authenticates the bond issue; takes care of the sinking fund. In
general, it sees to it that the claims of the bond holders are well
established and protected. Titles to the properties the mortgaged
are usually transferred to the trustee for the duration of the
mortgage.
2. To act as transfer agent or registrar of stocks and bonds.
The transfer of ownership of stocks and bonds necessitates an
accurate record to protect the interest of the owners. The function
of transfer agent is to see to it that proper transfers are duly
recorded in
The stock book and for the duration of to assure a clean title to the
new owner.
On the other hand, the registrar checks upon the work of the
transfer agent and certifies to the fact that the outstanding stock do
not exceed the issued and authorized stock. Thus, the transfer
agent is usually distinct and separate from the registrar of stocks
and bonds.
3. To act as guardian of minor’s interest. When a property of
minor through will or through court order is left in the hands of a
bank as a trustee, it sees to that such interests are safeguarded and
are properly invested. This would assure the minor of some security
in income until he reaches the age whereby, he could ably
administer his own property.
4. To act as executor of last wills and testaments. When a trustor
leaves a will, banks are usually assigned to execute the last will and
testament. Hence, the trustee should, among other things probate
the will, prepare a report of the properties, make publications
necessary and do everything that he will state.
5. To act as administrator of estates. Sometimes, the owner of a
property lets a trustee take over the management and
 administration of his estate. The trustee sees to it that the property
is well tended and that it brings in a reasonable income.
6. To act as depository for escrow deposits or valuables or
other securities. In some transactions one party may require the
other party to deposit in escrow property or cash to insure the
performance of an obligation. In such a case, the bank’s trust
company may take charge of such deposit.
The agency services division of the bank’s trust department
also receives deposits in the form of properties or valuables and
keeps the same for individuals or businesses as already mentioned.
The important papers are not only kept safe physically but also
legally and for purposes of investing and loaning.
7. To act as assignee, receiver or depository. In case of
corporation or individual businesses which are on the brink of
bankruptcy or are being mismanaged, it may be necessary for a
third party to take over management to insure the interest of the
outside creditors. In such a case, the trustee may act either as an
assignee, a receiver or a depository.

OTHER SERVICES

Oftentimes, business firms are in need of cash with which to pay

their officials:

1. Payroll
2. Financial Counselor
3. Sale of bank drafts or managers check
4. Sale of Bank Money Orders
5. Provide safety deposit bank
6. Provide automated teller machine in convenient places
 IV. ASSESSMENT

Name: ______________________________________ Date: ________

Course & Year: ________________

[Link]

1. _____________________ describes collectively the financial markets, the

participants, and the instrument and securities that are traded in the said
markets.

2.The_____________________ are the businesses other than the financial

institutions or intermediaries.

3. ________________________are the firms that bridge the gap between the

surplus units (SUs) or investors/lenders and the deficit units (DUs) or
borrowers

4. Any central bank is the _______ to banks providing various services to

banks, helping them collect and clear checks and loaning them funds as
needed.

5. ________________are equal to current income less current expenditures.

6. _____________________ refer to the participants from the rest of the world-

household, governments, financial and non-financial firms, and central
banks.

7.___________________, like Metropolitan Bank and Trust Company, BDO

Unibank, Bank of the Philippine Islands and others engage in universal
banking activities, but their main business consists of accepting deposits
and investing in loans and securities, Banks other business ventures are
operated for profit.

[Link] _____________ is meant the national, provincial, city, and barangays or

towns comprising the Philippines as a whole.

9.________ granted to commercial and industrial enterprises represent a

very significant segment of the credit extended by the commercial banks.

10._______________ is very important to our economic society for it makes

possible the financing of the agricultural, commercial and industrial
activities of the nation

II. MULTIPLE CHOICE

Direction: Read the questions carefully and write the letter of your
answer before the number.

1. The regulation of the monetary supply, credit and interest rates in

order to control the level of spending and investments in the economy.
a) Monetary policy c) Money orders
b) Monetary board d) Money supply

2. Refers to the governing body of a central bank or monetary authority.

a) Monetary policy c) Monetary board
b) Monetary supply d) Monetary orders
3. These deposits are withdrawn upon demand by the depositor through
the use of checks.
a) Demand deposits c) Time deposits
b) Special time deposits d) Time certificate of deposits
4. These deposits earn interest at varying rate as governed by bank
policy and Central Bank circulars.
a) Demand deposits c) Time deposits
b) Special time deposits d) Time certificate of deposits
5. The proceeds (principal plus interest), from these deposits may be
used for varied purposes.
a) Demand deposits c) Time deposits
b) Special time deposits d) Time certificate of deposits
6. In making a deposit of this type, the depositor is given time certificate
to evidence his deposit.
a) Demand deposits c) Time deposits
b) Special time deposits d) Time certificate of deposits
7. It has the advantage of earning interest and also of being withdrawn as
if it were demand deposits.
a) Demand deposits c) Savings
b) Savings accounts d) Deposits
8. Describes collectively the financial markets, the participants, and the
instrument and securities that are traded in the said markets.
a) Non-financial institutions c) Intermediaries
b) Financial system d) Financial institutions
9. It entails the transfer of funds without physical transfer of cash.
a) Exchange functions c) Money functions
b) Bank exchange functions d) Bank functions
10. Majority of which typically come from wages and salaries.
a) Household or come c) House
b) Income d) Wage
III. MATCHING TYPE

Match column A and column b. Write your answer before the number.

COLUMN A COLUMN B

__1. They Chanel the funds from A. Non – durable consumer

the lenders to the borrowers. They goods or non – durable
include the depository institutions
B. Central banks
and the non-depository institutions
that we will study in Chapter IX. C. Financial institutions/
intermediaries
__2. They oversee the operation of
the entire financial system of their D. Household
respective countries and mandate
E. Special time deposits
the rules, regulations and
monetary policies that will help F. Durable consumer goods or
their respective countries maintain durable
a healthy and stable company.
G. Republic act no. 6426
__3. These deposits earn interest
H. Time deposits
at varying rate as governed by
bank policy and Central Bank I. To act as a trustee for a
circulars. corporation’s bond issue

__4. It usually lasts for a year. The J. Time certificate for deposit
depositor is expected to get the
K. To act as transfer agent or
deposit only upon maturity
registrar of stocks and
__5. These are governed by special bonds.
provisions entered into between
the bank and the depositor.

__6. In a corporate mortgage, the

trustee is one of the parties and is
charged with the responsibility of
protecting the bondholder’s
interests.

__7. Such income is spent

consumers are generally described
as that groups receiving on goods
and services and a part is saved (if
there is enough to saved). Gross
savings are equal to current
income less current expenditures.

__8. Goods that are consumed

within a current period.

__9. Goods that will last for more

than a year.

__10. It is entitled “Foreign

Currency Deposit Act of the
Philippines” which took effect in
April 1972.

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Enumerate the following.

1. Cite the more commonly known trust services handled by banks.

2. Give the functions of the financial systems

3. Cite six participants or sectors in the financial system.

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Discuss the following.
1. What is the significance of bank lending?
2. What are the functions of loans and discount?
ANSWER KEY

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1. Financial system

2. Non-financial institution

3. Financial institutions/intermediaries

4. Banker

5. Gross savings

6. Foreign participants

7. Commercial banks

8. Government

9. Loans

10. Bank lending

[Link] CHOICE

1. A
2. C
3. A
4. C
5. B
6. D
7. B
8. B
9. B
10. A

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1. C
2. B
3. H
4. J
5. E
6. I
7. D
8. A
9. F
10. G

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1. The more commonly known trust services handled by banks or the

following:
● To act as trustee for a corporation’s bond issue
● To act as transfer agent or registrar of stocks and bonds
● To act as guardian of minor’s interest
● To act as executor of last wills and testaments
● To act as administrator of estates
● To act as depository for escrow deposits or valuables or other
securities
● To act as assignee, receiver or depository.
2. . The functions of the financial systems are to:
● Channel the funds from the savings units (leaders) to the
deficit units (borrowers);
● Provide a medium of exchange;
● Provide a mechanism for risk sharing, and
● Provide a channel through the central bank can influence the
economy, in general, and the financial system in particular.
3. The six participants or sectors in the financial system. They are:
1. Household or consumers,
2. Financial institutions/intermediaries:
3. Non-financial firms; (business, MSMEs & Corps.)
4. The government
5. The central bank; and
6. Foreign participants

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1. Answers may vary.

2. Bank loans and discounts are important not only to the banks but also
to our economic society as a whole.

To the banks, they represent a good source of income.

To our economics society, they represent a valuable contribution to the

increase the productive capacity of commerce and industry by providing
them with the financial assistance which they need not only during the
stage of production, but likewise during the marketing process as well.

Economies in the use of wealth are the only advantage growing out of the
landing process. The bank distributes in its advances in a discriminating
manner among its customers by directing funds into the hands of
producers best able to use them. In this way, credit definitely fosters the
effective use of productive equipment and the maximum expansion in the
supply of consumer goods.