What’s a Central Bank?

Central Bank is a banking institution granted the exclusive privilege to lend a

Government its currency. Like a normal commercial bank, a central bank charges
interest on the loans made to borrowers, primarily the government of whichever
country the bank exists for, and other commercial banks, typically as a ‘lender of
last resort’. However, a central bank is distinguished from a normal commercial
bank because it has a monopoly on creating the currency of that nation, which is
loaned to the government in the form of legal tender.

1. Banker’s bank or Central Monetary Authority.

2. A place where bank can seek relief in turbulent times.

3. Issuers and custodians of currency.

4. Central bank decisions impact interest rates, and interest rates have a direct
effect on the cost of doing business and therefore profits.

What are the primary objectives of Central Bank?

Federal Reserve

The Board of Governors of the Federal Reserve System

and the Federal Open Market Committee shall maintain long
run growth of the monetary and credit aggregates
commensurate with the economy’s long run potential to
increase production, so as to promote effectively the goals of
maximum employment, stable prices, and moderate long-term
interest rates.

Bangko Sentral ng Pilipinas

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.
Under the New Central Bank Act, what are the responsibilities of Bangko Sentral ng
Pilipinas (BSP)?

1) Provide policy directions in the areas of money, banking and credit.

2) Supervises operations of banks and exercises regulatory powers over non-

bank financial institutions.

What are the general functions of a Central Bank?

Regardless of which central bank you are talking about, they all have
essentially the same functions. They:

1. Set monetary policy.

2. Determine how the economy behaves.

3. Respond to economic and financial market conditions within their jurisdiction.

4. Control money supply.

5. Regulate the banking system.

6. Issue currency (The Federal Reserve is the exception. The U.S. Treasury
prints U.S. currency while the Fed puts it into circulation.)

Under the New Central Bank Act, what are the functions to be performed
by BSP?

1) Liquidity Management - The BSP formulates and implements

monetary policy aimed at influencing money supply consistent with its
primary objective to maintain price stability.

2) 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.

3) Lender of last resort - The BSP extends discounts, loans and

advances to banking institutions for liquidity purposes.

4) Financial Supervision - The BSP supervises banks and exercises

regulatory powers over non-bank institutions performing quasi-banking
functions.
5) 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.

6) Determination of exchange rate policy - the BSP determines the

exchange rate policy of the Philippines. Currently, the BSP adheres to a
market-oriented foreign exchange rate policy such that the role of Bangko
Sentral is principally to ensure orderly conditions in the market.

7) 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.

Structure of Central Banks

Organization Structure of Federal Reserve System

The key elements in the structure of the Federal Reserve System are:

1) The Board of Governors. The Board has seven members who are
appointed by the President of the United States and confirmed by the
Senate, each for a 14-year term. The terms are staggered so that one
seat on the board becomes vacant every two years. The President
appoints one of the board members as chairman for a term of four years,
which is renewable.

2) The regional Federal Reserve banks. There are 12 Federal Reserve banks,
one for each 12 Federal Reserve districts. Following are the list of
districts:

• Boston

• New York

• Philadelphia

• Cleveland

• Richmond

• Atlanta

• Chicago

• St. Louis
 • Minneapolis

• Kansas City

• Dallas

• San Francisco

These Reserve banks provide check-clearing services to commercial banks

and other depositary institutions, hold the reserve accounts of commercial
banks, lend reserves to banks, and issue the bank notes that circulate as
currency. The Federal Reserve Bank of New York implements the policy
decisions of the Federal Open Market Committee.

3) The Federal Open Market Committee. The main policymaking organ of

the Federal Reserve System. The FOMC consists of the following voting
members.

a. The Chairman and the other six members of the Board of

Governors.

b. The President of the Federal Reserve Bank of New York.

c. The Presidents of the other regional Federal Reserve banks (of

whom, on a yearly rotating basis, only four vote)

Organizational Structure of Bangko Sentral ng Pilipinas

The Monetary Board

The powers and functions of the Bangko Sentral shall be exercised by the
Bangko Sentral Monetary Board, composed of seven (7) members appointed by the
President of the Philippines for a term of six (6) years.

The seven members are:

1) Governor of the Bangko Sentral (who shall be the Chairman of the

Monetary Board)

2) A member of the Cabinet to be designated by the President of the

Philippines

3) Five (5) members who shall come from private sector (all of whom shall
serve full-time).

No member of the Monetary Board may be reappointed more than once.

The Governor

The Governor of the Bangko Sentral shall be the chief executive office of the
corporation. He shall also be the principal representative of the Monetary Board
and of the Bangko Sentral.
Some of the offices that help the Monetary Board and the Governor achieve the
primary objectives of the Bank.

1) 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. It also
prosecutes or defends cases involving the BSP, the MB, and Management in
judicial and administrative proceedings.

2) Internal Audit Office. Monitor the internal control system of the BSP. It also
reviews and appraises the effectiveness of operating control systems.

3) Treasury Department. Manages the BSP’s international reserves at a level

and a mix that allows the BSP to meet any demands for foreign currency. It
undertakes open market operations and transacts with accredited
government securities dealers and the rest of the members of the banking
system in pursuit of strategies for the development of an active secondary
market for government securities. And, participates in the Philippine Dealing
System to ensure the competitiveness of the Philippine Peso and its
convertibility into other acceptable foreign currencies.

4) BSP Staff in the Anti-Money Laundering Council Secretariat. Assists the Anti-
Money Laundering Council in implementing the provision of the Anti-Money
Laundering Law, otherwise known as Republic Act 9160.

5) Risk Management Office. Aggregates the various risk exposures of the Bank,
identifies appropriate risk control measures and ensures that appropriate risk
management practices are being implemented at all times.

6) Investor Relations Office. Assists in developing stronger relations with the

international financial community and promotes the Philippines as an
investment site.

7) Department of Economic Research. Acts as the principal policy research and

technical arm of the Bank and produces economic data for the guidance of
the Governor and the Monetary Board in the formulation and implementation
of monetary policies.

8) Department of Economic Statistics. Generates relevant, accurate and timely

statistics for the guidance of the Monetary Board in the formulation and
implementation of its policies.

9) Center for Monetary and Financial Policy. Conducts cutting-edge empirical

and theoretical researches in the monetary, financial and economic fields.
 10) International Relations Department. Monitors and analyzes regional
and global economic, financial, and trade development issues, assesses their
impact on the Philippine economy, and submits reports, updates, and
recommendations on positions and policy stance of the BSP thereon. It also
facilitates the Bank’s pro-active membership in bilateral, regional and
international associations and groupings by initiating and complying with
commitments and agreements.

11) International Operations Department. Supports the promotion and

maintenance of monetary stability and external sustainability through the
enhance management of external debt, foreign investments and other
foreign exchange transactions. It also reviews, recommend, and implements
sound policies and regulations on foreign exchange denominated
transactions.

12) Department of Loans and Credit. Implements the credit policies of the
BSP, extends loans and advances to banks and rediscounts, conducts credit
examination of banks, and undertakes special studies on credit policies.

13) Office of Supervisory Policy Development. Functions as central policy

research and development unit of the SES. It conducts continuing research
on financial institutions supervision requirements in line with evolving global
standards and needs of the banking and financial system as a whole toward a
more proactive regulatory environment.

Supervision and Examination Sector

This sector executes the supervision function and regulatory power of Bangko
Sentral. The Bank is mandated to supervise operations of banks and exercise such
regulatory powers, as provided under the New Central Bank Act, over the operations
of finance companies, non-bank financial institutions performing quasi-banking and
other institutions performing similar functions.

What is examination?

It is an investigation of an institution under the supervisory authority of the

Bangko Sentral ng Pilipinas (BSP) to determine if it complies with laws and
regulations, and if it conducts its business on a safe and sound basis.

It requires full and comprehensive look into the operations and books of
institutions.

BSP examiners do:

1) Determine the bank’s solvency and liquidity position.

2) Evaluate asset quality as well as sufficiency of valuation reserves
on loans and other risk assets.

3) Review all aspects of bank operations.

4) Assess risk management system, including the effectiveness of the

bank management’s oversight function, policies, procedures,
internal control and audit.

5) Appraise the overall management of the bank.