Creating a Central Bank for the Philippines

A group of Filipinos had conceptualized a central bank for the Philippines as early as 1933. It came up with the rudiments of a bill for the
establishment of a central bank for the country after a careful study of the economic proisions of the !are"!awes #utting bill$ the
Philippine independence bill approed by the %& #ongress.
'uring the #ommonwealth period (193)"19*1+$ the discussion about a Philippine central bank that would promote price stability and
economic growth continued. ,he country-s monetary system then was administered by the 'epartment of Finance and the .ational
,reasury. ,he Philippines was on the e/change standard using the %& dollar0which was backed by 111 percent gold resere0as the
standard currency.
In 1939$ as re2uired by the ,ydings"3c'uffie Act$ the Philippine legislature passed a law establishing a central bank. As it was a
monetary law$ it re2uired the approal of the %nited &tates president. !oweer$ President Franklin '. 4ooseelt disapproed it due to
strong opposition from ested interests. A second law was passed in 19** during the 5apanese occupation$ but the arrial of the American
liberalization forces aborted its implementation.
&hortly after President 3anuel 4o/as assumed office in 19*6$ he instructed then Finance &ecretary 3iguel #uaderno$ &r. to draw up a
charter for a central bank. ,he establishment of a monetary authority became imperatie a year later as a result of the findings of the 5oint
Philippine"American Finance #ommission chaired by 3r. #uaderno. ,he #ommission$ which studied Philippine financial$ monetary and
fiscal problems in 19*7$ recommended a shift from the dollar e/change standard to a managed currency system. A central bank was
necessary to implement the proposed shift to the new system.
Immediately$ the #entral 8ank #ouncil$ which was created by President 3anuel 4o/as to prepare the charter of a proposed monetary
authority$ produced a draft. It was submitted to #ongress in February19*9. 8y 5une of the same year$ the newly"proclaimed President
:lpidio ;uirino$ who succeeded President 4o/as$ affi/ed his signature on 4epublic Act .o. <6)$ the #entral 8ank Act of 19*9. ,he
establishment of the #entral 8ank of the Philippines was a definite step toward national soereignty. =er the years$ changes were
introduced to make the charter more responsie to the needs of the economy. =n <9 .oember 197<$ Presidential 'ecree .o. 7< adopted
the recommendations of the 5oint I3F"#8 8anking &urey #ommission which made a study of the Philippine banking system. ,he
#ommission proposed a program designed to ensure the system-s soundness and healthy growth. Its most important recommendations
were related to the ob>ecties of the #entral 8ank$ its policy"making structures$ scope of its authority and procedures for dealing with
problem financial institutions.
&ubse2uent changes sought to enhance the capability of the #entral 8ank$ in the light of a deeloping economy$ to enforce banking laws
and regulations and to respond to emerging central banking issues. ,hus$ in the 1973 #onstitution$ the .ational Assembly was mandated
to establish an independent central monetary authority. ?ater$ P' 1911 designated the #entral 8ank of the Philippines as the central
monetary authority (#3A+. @ears later$ the 1997 #onstitution adopted the proisions on the #3A from the 1973 #onstitution that were
aimed essentially at establishing an independent monetary authority through increased capitalization and greater priate sector
representation in the 3onetary 8oard.
,he administration that followed the transition goernment of President #orazon #. A2uino saw the turning of another chapter in
Philippine central banking. In accordance with a proision in the 1997 #onstitution$ President Fidel A. 4amos signed into law 4epublic
Act .o. 76)3$ the .ew #entral 8ank Act$ on 1* 5une 1993. ,he law proides for the establishment of an independent monetary authority
to be known as the 8angko &entral ng Pilipinas$ with the maintenance of price stability e/plicitly stated as its primary ob>ectie. ,his
ob>ectie was only implied in the old #entral 8ank charter. ,he law also gies the 8angko &entral fiscal and administratie autonomy
which the old #entral 8ank did not hae. =n 3 5uly 1993$ the .ew #entral 8ank Act took effect.
Chronology of Events: Central Banking in the Philippines
1911" Act .o. )< was passed by the First Philippine #ommission placing all banks under the 8ureau of ,reasury. ,he Insular ,reasurer
was authorized to superise and e/amine banks and banking actiities.
February 19<9" ,he 8ureau of 8anking under the 'epartment of Finance took oer the task of banking superision.
1939" A bill establishing a central bank was drafted by &ecretary of Finance 3anuel 4o/as and approed by the Philippine ?egislature.
!oweer$ the bill was returned by the %& goernment$ without action$ to the #ommonwealth Boernment.
19*6" A >oint Philippine"American Finance #ommission was created to study the Philippine currency and banking system. ,he
#ommission recommended the reform of the monetary system$ the formation of a central bank and the regulation of money and credit.
,he charter of the #entral 8ank of Buatemala was chosen as the model of the proposed central bank charter.
August 19*7" A #entral 8ank #ouncil was formed to reiew the #ommission-s report and prepare the necessary legislation for
implementation.
February 19*9" President 3anuel 4o/as submitted to #ongress a bill C:stablishing the #entral 8ank of the Philippines$ defining its
powers in the administration of the monetary and banking system$ amending pertinent proisions of the Administratie #ode with respect
to the currency and the 8ureau of 8anking$ and for other purposes.
1) 5une 19*9" ,he bill was signed into law as 4epublic Act .o. <6) (,he #entral 8ank Act+ by President :lpidio ;uirino.
3 5anuary 19*9" ,he #entral 8ank of the Philippines (#8P+ was inaugurated and formally opened with !on. 3iguel #uaderno$ &r. as the
first goernor.
,he broad policy ob>ecties contained in 4A .o. <6) guided the #8P in the implementation of its duties and responsibilities$ particularly
in relation to the promotion of economic deelopment in addition to the maintenance of internal and e/ternal monetary stability.
.oember 197<" 4A .o. <6) was amended by Presidential 'ecree .o. 7< to make the #8P more responsie to changing economic
conditions.
P' .o. 7< emphasized the maintenance of domestic and international monetary stability as the primary ob>ectie of the #8P. 3oreoer$
the #8P-s authority was e/panded to include not only the superision of the banking system but also the regulation of the entire financial
system.
5anuary 1991" Further amendments were made with the issuance of P' .o. 1771 to improe and strengthen the financial system$ among
which was the increase in the capitalization of the #8P from P11 million to P11 billion.
1996" :/ecutie =rder .o. 16 amended the 3onetary 8oard membership to promote greater harmony and coordination of goernment
monetary and fiscal policies.
3 5uly 1993" ,he 8angko &entral ng Pilipinas (8&P+ was established to replace the #8P as the country-s central monetary authority.
Overview of Functions and Operations
Objectives
,he 8&P-s primary ob>ectie is to maintain price stability conducie to a balanced and sustainable economic growth. ,he 8&P also aims
to promote and presere monetary stability and the conertibility of the national currency.
Responsibilities
,he 8&P proides policy directions in the areas of money$ banking and credit. It superises operations of banks and e/ercises regulatory
powers oer non"bank financial institutions with 2uasi"banking functions.
%nder the .ew #entral 8ank Act$ the 8&P performs the following functions$ all of which relate to its status as the 4epublic-s central
monetary authority.
i!uidity "anage#ent$ ,he 8&P formulates and implements monetary policy aimed at influencing money supply consistent with its
primary ob>ectie to maintain price stability.
Currency issue$ ,he 8&P has the e/clusie power to issue the national currency. All notes and coins issued by the 8&P are fully
guaranteed by the Boernment and are considered legal tender for all priate and public debts.
ender of last resort. ,he 8&P e/tends discounts$ loans and adances to banking institutions for li2uidity purposes.
Financial %upervision$ ,he 8&P superises banks and e/ercises regulatory powers oer non"bank institutions performing 2uasi"banking
functions.
"anage#ent of foreign currency reserves. ,he 8&P seeks to maintain sufficient international reseres to meet any foreseeable net
demands for foreign currencies in order to presere the international stability and conertibility of the Philippine peso.
&eter#ination of e'change rate policy$ ,he 8&P determines the e/change rate policy of the Philippines. #urrently$ the 8&P adheres to a
market"oriented foreign e/change rate policy such that the role of 8angko &entral is principally to ensure orderly conditions in the market.
Other activities$ ,he 8&P functions as the banker$ financial adisor and official depository of the Boernment$ its political subdiisions
and instrumentalities and goernment"owned and "controlled corporations.
(nflation )argeting: )he B%P*s +pproach to "onetary Policy
,he primary ob>ectie of the 8&PDs monetary policy is Cto promote price stability conducie to a balanced and sustainable growth of the
economyE (4epublic Act 76)3+. ,he adoption of inflation targeting framework of monetary policy in 5anuary <11< is aimed at achieing
this ob>ectie.
Inflation targeting is focused mainly on achieing a low and stable inflation$ supportie of the economy-s growth ob>ectie. ,his approach
entails the announcement of an e/plicit inflation target that the 8&P promises to achiee oer a gien time period.
)he (nflation )arget
,he goernment-s inflation target is defined in terms of the aerage year"on"year change in the consumer price inde/ (#PI+ oer the
calendar year. ,he inflation targets hae been set at *.1 percent F 1 percentage point for <11* and at 3.1 percent F 1 percentage point for
<11)"<116.
#onsistent with the inflation targeting framework$ the 3onetary 8oard announced in 5uly <111 the 8&P-s shift to a fi/ed inflation target
for the medium term of *.1 percent F 1 percentage point for <11<"<11*. ,he shift to a fi/ed medium"term inflation target from a ariable
annual inflation target was approed by the 'eelopment 8udget #oordination #ommittee ('8##+ on 9 5uly <111 under '8##
4esolution .o. <111"3.
,o achiee the inflation target$ the 8&P uses a suite of monetary policy instruments in implementing the desired monetary policy stance.
,he reerse repurchase (44P+ or borrowing rate is the primary monetary policy instrument of the 8&P. =ther monetary policy instruments
include (a+ increasingGdecreasing the resere re2uirementH (b+ encouragingGdiscouraging deposits in the special deposit account (&'A+
facility by banks and trust entities of 8&P"superised fnancial institutionsH (c+ ad>usting the residscount rate on loans e/tended to banking
institutions on a short"term basis against eligible collateral of banksD borrowersH and (d+ outright salesGpurchases of the 8&PDs holding of
goernment securities.
,$ Open "arket Operations
4epurchase and reerse repurchase transactions are carried out through the reerse repurchase (44P+ facility and the repurchase (4P+
facility of the 8&P. In a repurchase or repo transaction$ the 8&P buys goernment securities (B&+ from a bank with a commitment to sell it
back at a specified future date at a predetermined rate. ,he 8&P-s payment to the bank for the B& increases the latter-s resere balances
and has an e/pansionary effect on li2uidity. #onersely$ in a reerse repo$ the 8&P acts as the seller of B& and the bank-s payment to the
8&P has a contractionary effect on li2uidity. 4P and 44P transactions hae maturities ranging from oernight up to two weeks to one
month. ,he interest rates for the oernight 44P and 4P facilities signal the monetary policy stance and sere as the 8&P-s primary
monetary policy instruments.
=utright transactions refer to the direct purchaseGsale by the 8&P of its holdings of goernment securities fromGto banking institutions. In
an outright transaction$ the parties do not commit to reerse the transaction in the future$ creating a more permanent effect on money
supply. ,he transactions are conducted using the 8&P-s holdings of goernment securities. Ihen the 8&P buys securities$ it pays for them
by directly crediting its counterparty-s demand deposit account (''A+ with the 8&P. ,he transaction thus increases the buyer-s holdings
of central bank reseres and e/pands the money supply. #onersely$ when the 8&P sells securities$ the buyer-s payment (made by direct
debit against his ''A with the 8&P+ causes the money supply to contract.
Foreign e/change swaps refer to transactions inoling the actual e/change of two currencies (principal amount only+ on a specific date at
a rate agreed on the deal date (the first leg+$ and a reerse e/change of the same two currencies at a date further in the future (the second
leg+ at a rate (different from the rate applied to the first leg+ agreed on deal date.
-$ +cceptance of fi'ed.ter# deposits
,he 8&P also accepts deposits from banks and trust entities. ,he &pecial 'eposit Accounts (&'A+ facility consists of fi/ed"term deposits
by banks and by trust entities of banks and non"bank financial institutions with the 8&P. It was introduced in .oember 1999 to enable
the 8&P to e/pand its toolkit in li2uidity management. In April <117$ the 8&P e/panded access to the &'A facility by allowing trust
entities to deposit in the &'A facility in order to better manage li2uidity in the face of strong foreign e/change inflows.
&ubse2uently$ the 8&P implemented arious ad>ustments in its &'A facility. In 5uly <11<$ funds from foreign sources were prohibited
from being placed in banksD &'A facility to help aoid the situation where 8&PDs instruments for =3= become the recipient of capital
inflows. 1 Also$ the spread on &'A rate oer 44P rate was reduced to 1G3<nd of a percent to fine"tune insrtrumentsD pricing consistent
with the decline in global interest rates. Further fine"tuning of the operation of 8&PDs monetary policy tools inoled the remoal of the
term premium in the &'A facility in 5anuary <113 and the cumulatie reduction in &'A rate (total of 1)1"bps+ from 5anuary to April
<113. Finally$ in 3ay <113$ the 8&P decided to limit the access to the &'A facility to legitimate trust arrangements.<
/$ Rediscounting
,he 8&P e/tends discounts$ loans and adances to banking institutions in order to influence the olume of credit in the financial system.
,he rediscounting facility allows a financial institution to borrow money from the 8&P using promissory notes and other loan papers of its
borrowers as collateral. In August <113$ the 8&P restructured the rediscounting window to align it further with the 8&PDs market"based
monetary operations framework and with the international central banking practice of scaling down directed credit operations. 3
%nder #ircular .o. 916 series of <113$ two separate rediscounting windows were established$ namelyJ (1+ the 4ediscounting Iindow I
(4I I+ for uniersal and commercial banks (%GK8s+H and (<+ the 4ediscounting Iindow (II+ for thrift banks (,8s+$ cooperatie banks
(coop banks+$ and rural banks (48s+. 8anks will be able to access 4Is I and II on an open"olume basis consistent with the ob>ectie of
reorienting the 8&P rediscounting window as a regular li2uidity standing facility. In the 4I I$ the rediscount rate was aligned with the
lending rate under the 8&P 4P facility plus the appropriate term premium to encourage banks to e/haust other possible sources of funding
before trying to access the central bak rediscounting window. 3eanwhile the interesrtrate in the 4I II is pegged to the oernight 44P
rate plus a term premium. ,8s will hae access to the 4I II until .oember <119$ while coop banks and 48s will hae access to the 4I
II until .oember <1<3. 8y .oember <1<3$ the 4I II will no longer be operational and all banks shall hae access only to 4I I.
0$ Reserve re!uire#ents
4esere re2uirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must set aside in deposits with
the 8&P which they cannot lend out$ or where aailable through resere"eligible goernment securities. #hanges in resere re2uirements
hae a significant effect on money supply in the banking system$ making them a powerful means of li2uidity management by the 8&P.
4esere re2uirements are imposed on the peso liabilities of uniersalGcommercial banks (%8sGK8s+$ thrift banks (,8s+$ rural banks (48s+
and cooperatie banks (#oop 8anks+$ and non"bank financial institutions with 2uasi"banking functions (.8;8s+. 4eserable liabilities
include demand$ saings$ time deposit and deposit substitutes (including long"term non"negotiable ta/"e/empt certificates of time deposit
or ?,.#,'s+
,he e/isting resere re2uirement ratios ary across bank types and liabilities. ,he current headline resere re2uirement ratio of <1 percent
is imposed on certain liabilities of %8sGK8s and .8;8s. Preiously$ the eligible forms of compliance to the resere re2uirements
included banksD deposits in their demand deposit account (''A+ with the 8&P$ resere"eligible goernment securities$ and ault cash.
:ffectie on the resere week beginning on 6 April <11<$ the 8&P e/cluded ault cash (for banks+ and demand deposits (.8;8s+ as
eligible forms of resere re2uirement compliance. * At the same time$ the 8&P unified the e/isting statutory resere re2uirement and
li2uidity resere re2uirement into a single set of resere re2uirement as well as discontinued the renumeration of the unified resere
re2uirements.
)he (nflation )arget
,he 'eelopment 8udget and #oordination #ommittee ('8##+$ an inter"agency economic planning body together with the 8&P sets the
annual inflation targets. ,he goernmentDs inflation target is defined in terms of the aerage year"on"year change in the consumer price
inde/ (#PI+ oer the calendar year. ,he 8&P makes the announcement of the inflation target two years in adance. ,he inflation targets
hae been set at * F 1 Percentage Point for <113"<11* and at 3 F 1 Percentage Point for <11)"<116. =n 9 5uly <111$ the 8&P announced a
shift to a fi/ed inflation target for the medium term$ beginning with a target of *.1 percent F 1.1 percentage point for <11<"<11*.
Inflation targeting is an approach to monetary policy that inoles the use of a publicly announced inflation target set by the Boernment$
which the 8&P commits to achiee oer a two"year horizon. Promoting price stability is the 8&PDs main priority$ and the target seres as a
guide for the publicDs e/pectations about future inflation$ allowing them to plan ahead with greater certainty.
1overnance of the Bank
,he 3onetary 8oard e/ercises the powers and functions of the 8&P$ such as the conduct of monetary policy and superision of the
financial system. Its chairman is the 8&P Boernor$ with fie full"time members from the priate sector and one member from the
#abinet.
,he Boernor is the chief e/ecutie officer of the 8&P and is re2uired to direct and superise the operations and internal administration of
the 8&P. A deputy goernor heads each of the 8&PDs operating sector as followsJ
"onetary %tability %ector takes charge of the formulation and implementation of the 8&P-s monetary policy$ including sering the
banking needs of all banks through accepting deposits$ sericing withdrawals and e/tending credit through the rediscounting facility.
%upervision and E'a#ination %ector enforces and monitors compliance to banking laws to promote a sound and healthy banking
system.
Resource "anage#ent %ector seres the human$ financial and physical resource needs of the 8&P
)he "onetary Board
,he powers and function of 8angko &entral are e/ercised by its 3onetary 8oard$ which has seen members appointed by the President of
,he Philippines. %nder the .ew #entral 8ank Act$ one of the goernment sector members of the 3onetary 8oard must also be a member
of the #abinet designated by the President.
,he .ew #entral 8ank Act establishes certain 2ualifications for the members of the 3onetary 8oard and also prohibits members from
holding certain positions with other goernmental agencies and priate institutions that may gie rise to conflicts of interest. Iith the
e/ception of the members of the #abinet$ the Boernor and the other members of the 3onetary 8oard sere terms of si/ years and may
only be remoed for cause.
,he 3onetary 8oard meets at least once a week. ,he 8oard may be called to a meeting by the Boernor of the 8angko &entral or by two
(<+ other members of the 8oard. %sually$ the 8oard meets eery ,hursday but on some occasions$ it conenes to discuss urgent issues.
,he ma>or functions of the 3onetary 8oard include the power toJ
Issue rules and regulations it considers necessary for the effectie discharge of the responsibilities and e/ercise of the powers ested in itH
'irect the management$ operations$ and administration of 8angko &entral$ organize its personnel and issue such rules and regulations as it
may deem necessary or desirable for this purposeH
:stablish a human resource management system which goerns the selection$ hiring$ appointment$ transfer$ promotion$ or dismissal of all
personnelH
Adopt an annual budget for and authorize such e/penditures by 8angko &entral as are in the interest of the effectie administration and
operations of 8angko &entral in accordance with applicable laws and regulationsH and
Indemnify its members and other officials of 8angko &entral$ including personnel of the departments performing superision and
e/amination functions$ against all costs and e/penses reasonably incurred by such persons in connection with any ciil or criminal action$
suit or proceeding$ to which any of them may be made a party by reason of the performance of his functions or duties$ unless such
members or other officials is found to be liable for negligence or misconduct.
)he B%P "onetary Board
Chair#an
Amando 3. ,etangco$ 5r.
"e#bers
#esar A. Purisima
Alfredo #. Antonio
5uan '. 'e LuMiga$ 5r.
Aalentin A. Araneta
Felipe 3. 3edalla
Armando ?. &uratos