FMGT 55A – BANKING AND FINANCIAL productive investments, and to pursue a return on their

financial assets.
INSTITUTIONS
➢ The financial system also includes sets of rules and practices
INTRODUCTION TO BANKING AND that borrowers and lenders use to decide which projects get
FINANCIAL INSTITUTIONS financed, who finances projects, and terms of financial
deals.
TOPIC OUTLINE
1. An Overview of the Financial System 5 PARTS OF FINANCIAL SYSTEM
2. Function of Financial Intermediaries 1. MONEY
3. Financial Innovation ➢ To pay for our purchases and to store our wealth.
4. Importance of Banking and Financial Institutions ➢ Store of value, which means people can save it and use it
later – smoothing their purchases over time;
LEARNING OBJECTIVES ➢ unit of account, that is, provide a common base for prices;
After the completion of the chapter, students should be able to: or
➢ discuss the importance of banking and financial ➢ medium of exchange, something that people can use to buy
institutions and sell from one another.
➢ identify the financial markets funds transferees
➢ distinguish the flow of funds through the financial 2. FINANCIAL INSTRUMENTS
system ➢ to transfer resources from savers to investors and to transfer
➢ classify the primary assets and liabilities of financial risk to those who are best equipped to bear it. (ex.
intermediaries securities).
➢ examine the trends in the banking industry ➢ It is a real or virtual document representing a legal
agreement involving any kind of monetary value.
BANKING ➢ may be divided into two types: cash instruments and
➢ Banking includes a wide variety of financial institutions that derivative instruments
store the money of individuals, businesses, and other ➢ Examples: Equity Instruments, Bonds, Loans, Derivatives,
entities. Banks provide financial services that help people Receivables and Payable
save, manage, and invest their money.
➢ Banking is the business of protecting money for others. 3. FINANCIAL MARKETS
Banks lend this money, generating interest that creates ➢ allows us to buy and sell financial instruments quickly and
profits for the bank and its customers. cheaply.
o Ex. New York Stock Exchange, PSEi
FINANCIAL INSTITUTIONS
➢ A financial institution (FI) is a company engaged in the 4. FINANCIAL INSTITUTIONS
business of dealing with financial and monetary transactions ➢ provide a myriad of services, including access to the
such as deposits, loans, investments, and currency financial markets and collection of information about
exchange. prospective borrowers to ensure they are credit worthy.
➢ Financial institutions encompass a broad range of business o Ex. Banks, insurance companies
operations within the financial services sector including
banks, trust companies, insurance companies, brokerage 5. BANKS
firms, and investment dealers. ➢ monitor and stabilize the economy
o ex. Bangko Sentral ng Pilipinas
IMPORTANCE OF BANKING AND FINANCIAL
INSTITUTIONS MAIN FUNCTIONS OF FINANCIAL SYSTEM
➢ Financial institutions are important because they provide a ➢ Financial system works as an effective conduit for optimum
marketplace for money and assets, so that capital can be allocation of financial resources in an economy.
efficiently allocated to where it is most useful. ➢ It helps in establishing a link between the Main savers and
the investors.
“For example, a bank takes in deposits from customers and lends the ➢ Financial system allows 'asset-liability transformation'.
money to borrowers. Without the bank as an intermediary, any one Banks create claims (liabilities) against themselves when
individual is unlikely to find a qualified borrower or know how to they accept deposits from customers but also create assets
service the loan. Via the bank, the depositor is able to earn interest when they provide loans to clients.
as a result. Likewise, investment banks find investors to market a ➢ Economic resources (i.e., funds) are transferred from one
company's shares or bonds to.” party to another through financial system.
➢ The financial system ensures the efficient functioning of the
IMPORTANCE OF BANKING ANG FINANCIAL payment mechanism in an economy. All transactions
INSTITUTIONS IN TIME OF UNCERTAINTY between the buyers and sellers of goods and services are
• Maximizing Effectiveness in New Working Conditions effected smoothly because of financial system.
• Building Trust Through Strong Communication ➢ Financial system helps in risk transformation by
diversification, as in case of mutual funds.
• Re-evaluating Digital Capabilities in Light of Social
➢ Financial system enhances liquidity of financial claims.
Distancing
➢ Financial system helps price discovery of financial assets
• Protecting Against Heightened Risk and Fraud
resulting from the interaction of buyers and sellers. For
• Being There for the Community
example, the prices of securities are determined by demand
and supply forces in the capital market.
FINANCIAL SYSTEM
➢ Financial system helps reducing the cost of transactions.
➢ A financial system is a set of institutions, such as banks,
insurance companies, and stock exchanges, that permit the
FINANCIAL SYSTEM IN THE PHILIPPINES
exchange of fund.
The Philippine financial system is consisting of:
➢ Financial systems exist on firm, regional, and global
➢ Banks / Depository Institutions
levels.
➢ Non-banks / Non- depository Institutions
➢ Borrowers, lenders, and investors exchange current funds
to system finance projects, either for consumption or
FINANCIAL SYSTEM IN THE PHILIPPINES
1. DEPOSITORY INSTITUTIONS
➢ They are what most people think of as banks, whether they
are commercial banks, savings and loans, or credit unions.
➢ Take deposits and make loans
➢ Commercial banks, savings banks, and credit unions

2. NON-DEPOSITORY INSTITUTIONS
➢ Include insurance companies, securities firms, mutual fund
companies, finance companies and pension funds.

3. INSURANCE COMPANIES
➢ Accept premiums, which they invest in securities and real
estate (their asset), in return for promising compensation to
policy holders should certain events occur (their liabilities).
➢ Life insurers protect them against untimely death. Property
and casualty insurers protect against personal injury loss and
losses from theft, accidents, and fire

4. PENSION FUNDS
➢ Invest individual and company contributions in stocks,
bonds, and real estate (their assets) in order to provide
payments to retired workers (their liabilities)

5. SECURITY FIRMS
➢ Include brokers, investment banks, and mutual fund
companies.
➢ Brokers and investment banks issues stocks and bonds to
corporate customers, trade them and advise customers

6. FINANCE COMPANIES
➢ Raise funds directly in the financial markets in order to
make loans to individuals and firms.
➢ Finance companies tend to specialize in particular types of
loans such as mortgage, automobile, or certain types of
business equipment