long

1. THE
FINANCIAL
SYSTEM

2. OVERVIEW
FINANCE
• is the application of economic principles to decision-
making that involves the allocation of money under
conditions of uncertainty
• provides the framework for making decisions as to
how those funds should be obtained and then
invested.

3. OVERVIEW
FINANCE
• The theoretical foundations for finance draw from the
field of economics and, for this reason, finance is often
referred to as financial economics.
• The tools used in financial decision-making, however,
draw from many areas outside of economics: financial
accounting, mathematics, probability theory, statistical
theory, and psychology

4. OVERVIEW
SPECIALTY AREAS FINANCE
1. Capital markets and capital market theory
2. Financial management
3. Investment management

5. OVERVIEW
CAPITAL MARKETS AND CAPITAL MARKET THEORY
•focuses on the study of the financial system, the
structure of interest rates, and the pricing of risky
assets.
•The financial system of an economy consists of
three components: (1) financial markets; (2)
financial intermediaries; and (3) financial
regulators.

6. OVERVIEW
CAPITAL MARKETS AND CAPITAL MARKET THEORY
1. Financial Systems and Roles
2. Structure of Interest Rates
3. Derivative Instruments
4. Valuation of Assets

7. OVERVIEW
FINANCIAL MANAGEMENT
•sometimes called business finance or corporate
finance
•the specialty area of finance concerned with
financial decision-making within a business entity.
•primarily concerned with investment decisions and
financing decisions within business organizations

8. OVERVIEW
INVESTMENT MANAGEMENT
•Other terms commonly used to describe this area
of finance are asset management, portfolio
management, money management, and wealth
management
•specialty area within finance dealing with the
management of individual or institutional funds

9. FINANCIAL SYSTEM
•is an organized and regulated structure where an
exchange of funds takes place between the lender
and the borrower
•It supplies the necessary financial inputs for the
production of goods and services, in turn, promote
the well-being and standard of living of people in
the country.

10. FINANCIAL SYSTEM
•the financial system consisting of a variety of
institution, markets, and the instruments which are
related in a systematic manner and provide the
principal means by which savings are transformed
into instruments.

11. FINANCIAL SYSTEM
SIGNIFICANCE OF FINANCIAL SYSTEM
1. To attain economic development, financial systems are
important since they induce people to save by offering attractive
interest rate. These savings are then channelized by lending to
various business concerns which are involved in production and
distribution.
2. It helps in monitor corporate performance
3. It links savers and investors. This process is known as capital
formation
4. It helps in lowering the transaction cost and increase returns
which will motivate people to save more
5. It helps government in deciding monetary policy

12. FINANCIAL SYSTEM
3 COMPONENTS
1. Financial Markets
2. Financial Intermediaries
3. Financial regulators

13. FINANCIAL SYSTEM
ASSETS
• any resource that is expected to provide future benefi ts
and, hence, has economic value.
• 2 Types:
a. Tangible
b. Intangible

14. FINANCIAL SYSTEM
ASSETS
Tangible Assets
•depends on its physical properties
•Examples: Buildings, aircraft, land, and machinery

15. FINANCIAL SYSTEM
ASSETS
Intangible Assets
•represents a legal claim to some future economic
benefits
•The value of an intangible asset bears no relation
to the form, physical or otherwise, in which the
claims are recorded

16. FINANCIAL SYSTEM
FINANCIAL ASSETS / INSTRUMENTS
•intangible assets where typically the future benefits
come in the form of a claim to future cash.
•It can be referred to as securities including stocks
and bonds

17. FINANCIAL SYSTEM
FINANCIAL ASSETS / INSTRUMENTS
•Two parties involved:
a. Issuer - party that has agreed to make future cash
payments
b. Investor - party that owns the financial instrument
and therefore the right to receive the payments
made by the issuer

18. FINANCIAL SYSTEM
INVESTOR ISSUER

19. FINANCIAL SYSTEM
FINANCIAL ASSETS / INSTRUMENTS
• Two principal economic functions:
a. they allow the transference of funds from those
entities who have surplus funds to invest to those
who need funds to invest in tangible
b. they permit the transference of funds in such a way
as to redistribute the unavoidable risk associated
with the cash flow generated by tangible assets
among those seeking and those providing the funds.

20. FINANCIAL SYSTEM
FINANCIAL INSTRUMENTS
•They are legal contracts or indentures specifying
the amount of the transaction and the terms and
conditions for repayment.
•It can be classified by the type of claims that the
investor has on the issuer.
a. Debt Instruments
b. Equity Instruments

21. FINANCIAL SYSTEM
DEBT INSTRUMENTS
•the issuer agrees to pay the investor interest plus
repay the amount borrowed
• also referred to as an instrument of indebtedness, can
be in the form of a note, bond, or loan

22. FINANCIAL SYSTEM
EQUITY INSTRUMENTS
• specifies that the issuer pay the investor an
amount based on earnings, if any, after the
obligations that the issuer is required to make to
investors of the firm’s debt instruments have been
paid.
•Example: Common Stocks and Preferred Stocks

23. FINANCIAL SYSTEM
DIFFERENCES IN FINANCIAL INSTRUMENTS
1. Denominations – financial instruments vary in
denominations from one hundred peso to billions of pesos
2. Maturity - financial instruments also differ in the terms
of maturity, such as demand deposits which are short-term
and bonds that have maturity of more than one year

24. FINANCIAL SYSTEM
DIFFERENCES IN FINANCIAL INSTRUMENTS
3. Claim against Issuer – financial instruments may be categorized into two types:
Ownership Claims
Investors can convert their ownership claims into cash, his options are:
a) to “sell” his share to an interested buyer
b) to get his share of the proceeds of the company through dividends
Debt Claims
These are liabilities of the issuing companies which must be settled on given dates.
Interest is the amount paid for the use of borrowed funds. The settlement of debt
claims take priority over those of ownership claims.

25. FINANCIAL SYSTEM
DIFFERENCES IN FINANCIAL INSTRUMENTS
4. Collateral – all financial instruments are collateralized by
the revenue generated by the issuing borrower. Debt
claims may be collateralized by specific assets. Ownership
claims have residual but unlimited claim on the company’s
earnings after other claims have been satisfied.
5. Terms to Repricing – interest rates paid by the
companies on borrowed funds may change before
maturity.

26. FINANCIAL SYSTEM
DIFFERENCES IN FINANCIAL INSTRUMENTS
6. Marketability – financial instruments may differ in terms of whether
they are highly marketable or not. The cost of trading them on the
secondary market before maturity is an important factor of
marketability.
Factors that can lower cost of trading a financial instrument:
• When the issuer of the instrument is well-known, information cost
tends to be lower
• When the amount of the issue is large, there are lower search and
transaction costs
• When the instruments have few unique characteristics, the costs of
analyzing and monitoring are lower

27. FINANCIAL SYSTEM
DIFFERENCES IN FINANCIAL INSTRUMENTS
7. Forms of interest payment – (a) by coupons; (b) by a
periodic addition to the principal amount
8. Options – options consist of the following types:
• Call options – permit the issuer to redeem the instrument
before maturity
• Put options – permit the investor to sell back to the issuer
before maturity
• Convertibility options – permit the investor to convert from
one instrument to another.

28. FINANCIAL SYSTEM
DIFFERENCES IN FINANCIAL INSTRUMENTS
9. Currency – financial instruments may also differ in terms
of their currency denomination. Most are denominated in
pesos, while a few are in dollars and other currencies.

29. 3 COMPONENTS
1. Financial Markets
2. Financial Intermediaries
3. Financial regulators
FINANCIAL SYSTEM: COMPONENTS

30. FINANCIAL MARKETS
FINANCIAL MARKETS
•a market where financial instruments are
exchanged (traded)
•Three major economic functions:
a. Price Discovery
b. Liquidity
c. Reduced Transaction Costs

31. FINANCIAL MARKETS
Price Discovery
• the interactions of buyers and sellers in a financial
market determine the price of the traded asset
•determine the required return that participants in
a financial market demand in order to buy a
financial instrument

32. FINANCIAL MARKETS
Price Discovery
• signals how the funds available from those who
want to lend or invest funds will be allocated
among those needing funds and raise those funds
by issuing financial instruments

33. FINANCIAL MARKETS
Liquidity
• provide a forum for investors to sell a financial
instrument and is said to offer investors
•This is an appealing feature when circumstances
arise that either force or motivate an investor to
sell a financial instrument

34. FINANCIAL MARKETS
Reduced Transaction Cost
• Search Cost – Explicit costs include expenses that
may be needed to advertise one’s intention to sell
or purchase a financial instrument; implicit costs
include the value of time spent in locating a
counterparty to the transaction.

35. FINANCIAL SYSTEM: COMPONENTS
Reduced Transaction Cost
• Information Cost –costs associated with
assessing a financial instrument’s investment
attributes.

36. FINANCIAL INTERMEDIARIES
•Financial entity in order to limit the conditions
that make it difficult for lenders or investors of
funds to deal directly with borrowers of funds
in financial markets.
•Examples: depository institutions, insurance
companies, regulated investment companies,
investment banks,

37. FINANCIAL INTERMEDIARIES
•The role of financial intermediaries is to create
more favorable transaction terms than could be
realized by lenders/investors and borrowers
dealing directly with each other in the financial
market
•How?
1. obtaining funds from lenders or investors
2. lending or investing the funds that they
borrow to those who need funds.

38. INVESTOR
ISSUER
FINANCIAL INTERMEDIARIES
FINANCIAL
INTERMEDIARY

39. FINANCIAL INTERMEDIARIES
Other services:
•Facilitating the trading of financial assets for the
financial intermediary’s customers through
brokering arrangements.
•Facilitating the trading of financial assets by
using its own capital to take a position in a
financial asset the financial intermediary’s
customer want to transact in.

40. FINANCIAL INTERMEDIARIES
Other services:
•Assisting in the creation of financial assets for its
customers and then either distributing those
financial assets to other market participants.
•Providing investment advice to customers.
•Manage the financial assets of customers.
•Providing a payment mechanism.

41. FINANCIAL INTERMEDIARIES
SERVICES PERFORMED BY FINANCIAL INTERMEDIARIES
A. Services Benefiting Suppliers of Funds:
Monitoring costs —Aggregation of funds in an FI provides greater incentive to
collect a firm’s information and monitor actions. The relatively large size of the FI
allows this collection of information to be accomplished at a lower average cost
(economies of scale).
Liquidity and price risk —FIs provide financial claims to household savers with
superior liquidity attributes and with lower price risk.
Transaction cost services —Similar to economies of scale in information
production costs, an FI’s size can result in economies of scale in transaction costs.
Maturity intermediation —FIs can better bear the risk of mismatching the
maturities of their assets and liabilities.
Denomination intermediation —FIs such as mutual funds allow small investors to
overcome constraints to buying assets imposed by large minimum denomination
size.

42. FINANCIAL INTERMEDIARIES
SERVICES PERFORMED BY FINANCIAL INTERMEDIARIES
B. Services Benefiting the Overall Economy :
Money supply transmission —Depository institutions are the conduit through
which monetary policy actions impact the rest of the financial system and the
economy in general.
Credit allocation —FIs are often viewed as the major, and sometimes only,
source of financing for a particular sector of the economy, such as farming and
residential real estate.
Intergenerational wealth transfers —FIs, especially life insurance companies
and pension funds, provide savers with the ability to transfer wealth from one
generation to the next.
Payment services —The efficiency with which depository institutions provide
payment services directly benefits the economy.

43. FINANCIAL INTERMEDIARIES
TYPES:
Commercial banks —depository institutions whose major assets
are loans and whose major liabilities are deposits. Commercial
banks’ loans are broader in range, including consumer, commercial,
and real estate loans, than are those of other depository institutions.
Commercial banks’ liabilities include more non-deposit sources of
funds, such as subordinate notes and debentures, than do those of
other depository institutions.
Thrifts —depository institutions in the form of savings associations,
savings banks, and credit unions. Thrifts generally perform services
similar to commercial banks, but they tend to concentrate their
loans in one segment, such as real estate loans or consumer loans.

44. FINANCIAL INTERMEDIARIES
TYPES:
Insurance Companies— financial institutions that protect
individuals and corporation (policyholders) from adverse events.
Life insurance companies provide protection in the event of
untimely death, illness, and retirement. Property casualty
insurance protects against personal injury and liability due to
accidents, theft, fire, and so on.
Securities firms and investment banks ——financial
institutions that help firms issue securities and engage in
related activities such as securities brokerage and securities
trading.

45. FINANCIAL INTERMEDIARIES
TYPES:
Finance Companies— financial intermediaries that make
loans to both individuals and businesses. Unlike
depository institutions, finance companies do not accept
deposits but instead rely on short- and long-term debt for
funding.
Mutual Funds—financial institutions that pool financial
resources of individuals and companies and invest those
resources in diversified portfolios of assets.

46. FINANCIAL INTERMEDIARIES
TYPES:
Hedge Funds— financial institutions that pool funds from a limited
number (e.g., less than 100) of wealthy (e.g., annual incomes of more
than $200,000 or net worth exceeding $1 million) individuals and
other investors (e.g., commercial banks) and invest these funds on
their behalf, usually keeping a large proportion (commonly 20
percent) of any upside return and charging a fee (2%) on the
amount invested.
Pension Funds—financial institutions that offer savings plans
through which fund participants accumulate savings during their
working years before withdrawing them during their retirement
years. Funds originally invested in and accumulated in a pension
fund are exempt from current taxation.

47. FINANCIAL INTERMEDIARIES
Flow of Funds in a World in FIs

48. FINANCIAL REGULATORS
Most governments throughout the world
regulate various aspects of financial
activities because they recognize the vital
role played by a country’s financial system.

49. FINANCIAL REGULATORS
The degree of regulation varies from country to
country. Regulation takes one of four forms:
1. Disclosure regulation
2. Financial activity regulation
3. Regulation of financial institutions
4. Regulation of foreign participants

50. FINANCIAL REGULATORS
Disclosure Regulation
• requires to provide on a timely basis financial
information and non-financial information that
would be expected to affect the value of its
security to actual and potential investors.
• Governments justify disclosure regulation by
pointing out that the issuer has access to better
information about the economic well being of the
entity than those who own or are contemplating
ownership of the securities

51. FINANCIAL REGULATORS
Financial Activity Regulation
•Rules about traders of securities and trading
on financial markets
•The SEC has is in charged with the
responsibility of monitoring the trades that
corporate officers, directors, as well as major
stockholders, execute in the securities of their
firms.

52. FINANCIAL REGULATORS
Regulation of Financial Institutions
•form of governmental monitoring that
restricts their activities.

53. FINANCIAL REGULATORS
Government Regulation of Foreign
Participation
•involves the imposition of restrictions on the
roles that foreign firms can play in a country’s
internal market and the ownership or control
of financial institutions

54. FINANCIAL REGULATORS
FINANCIAL REGULATORS IN THE PHILIPPINES
• Bangko Sentral ng Pilipinas (BSP)
• Bureau of Treasury (BTr)
• Securities and Exchange Commission (SEC)
• Insurance Commission (IC)
• Department of Finance (DOF)
• Philippine Deposit Insurance Corporation (PDIC)

55. FINANCIAL REGULATORS
Bangko Sentral ng Pilipinas (BSP)
• Monetary and Economics Sector is mainly responsible for the
operations/activities related to monetary policy formulation,
implementation, and assessment
• Financial Supervision Sector is mainly responsible for the regulation of
banks and other BSP-supervised financial institutions, as well as the
oversight and supervision of financial technology and payment systems​
• Currency Management Sector is mainly responsible for the forecasting,
production, distribution, and retirement of Philippine currency, as well as
security documents, commemorative medals, and medallions
• Corporate Services Sector is mainly responsible f​or the effective
management of corporate strategy, communications, and risks, as well as
the BSP's human, financial, technological, and physical resources to
support the BSP's core functions​

56. FINANCIAL REGULATORS
BURUEA OF TREASURY (BTr)
- As principal custodian of government funds, the
Bureau of the Treasury (BTr) is responsible for
ensuring the sufficiency of Government financial
resources including the active management and
investment of excess funds.

57. FINANCIAL REGULATORS
SECURITIES AND EXCHANGE COMMISSION
(SEC)
- is the agency of the Government of the Philippines
responsible for regulating the securities industry in
the Philippines. In addition to its regulatory functions,
the SEC also maintains the country's company
register.

58. FINANCIAL REGULATORS
INSURANCE COMMISSION (IC)
- The purpose of insurance commissioners is to
maintain fair pricing for insurance products,
protecting the solvency of insurance companies,
preventing unfair practices by insurance companies,
and ensuring availability of insurance coverage.

59. FINANCIAL REGULATORS
DEPARTMENT OF FINANCE (DOF)
• Formulate goals, action plans and strategies for the Governments resource mobilization
effort;
• Formulate, institutionalize and administer fiscal and tax policies;
• Supervise, direct and control the collection of government revenues;
• Act as custodian of, and manage all financial resources of Government
• Manage public debt;
• Review and coordinate policies, plans and programs of GOCCs;
• Monitor and support the implementation of policies and measures on local revenue
administration;
• Coordinate with other government agencies on matters concerning fiscal, monetary,
trade and other economic policies
• Investigate and arrest illegal activities such as smuggling, dumping, illegal logging, etc.
affecting national economic interest

60. FINANCIAL REGULATORS
PHILIPPINE DEPOSIT INSURANCE
CORPORATION (PDIC)
• is authorized to issue regulations to implement its
Charter, conduct bank examinations and
investigations to assess financial safety and
soundness of banks and their adherence to banking
and deposit insurance rules and regulations, and
extend financial assistance to eligible distressed
banks.