Banking

Front 1

Banking

Back 1

Is the service performed by the bank which is primarily concerned with the safekeeping of funds through the acceptance of deposits of money and the provision of credit through lending of money. Heart of financial institutions, Helps in the accumulation and maintenance of supply of funds through its depository and safekeeping functions & Banking system creates a circulating medium-credit instruments arising out of bank deposits.

Front 2

Ancient Times

Back 2

1. Babylon temples were considered as sacred places/safe depositories as early as 2000 BC.

2. Banking was performed in Greece during the 4th century BC through temples, public bodies & private firms.

Front 3

Medieval Times

Back 3

1. Records show that there were banking activities in Genoa & other Italian cities during the 12th century.

2. 4th century - numerous banking functions took place.

3. Italian cities became centers of warehouse trade & they developed local banking systems.

4. International trade fairs were set up famous of which where those in Champagne, France; had a system of finance through ambulatory bankers & functioned as centers for international clearings.

Front 4

Middle Ages & Renaissance

Back 4

1. Fugger families was the greatest money lender during the 16th century.

2. Bankers of Mediterranean cities - direct ancestors of the commercial banking.

3. 1587 - Banco della Piazza di Rialto was founded in Venice, Italy; 1st real public bank.

Front 5

Banking in England

Back 5

Bills of exchange were popularly used but they were not used as money.

Front 6

Sir Thomas Gresham

Back 6

One who plays an important role in financing foreign trade.

Front 7

Goldsmiths

Back 7

Direct ancestors of the banks where Charles I was in a great need of money seized the deposits of city merchants worth £ 200,000 of bullions deposited for safekeeping. Merchants searched for storage place beyond the reach of the king. Goldsmiths had strong facilities so merchants entrusted their money, gold bullions and other valuables for safekeeping. Goldsmiths used the money of the merchants to expand their money lending business. Exploited new banking methods. Resorted to economic abuses to amass more profits. The undesirable conditions in the banking system paved the way for the foundation of the Bank of England.

Front 8

Obras Pias

Back 8

Pious works which became the forerunner of banking institution in the Philippines & serves only the elite during the Spanish time like high military, civil & religious officials including their relatives & friends.

Front 9

Rise of banks

Back 9

1778 - Governor Jose Basco y Vargas paved the way for the economic development of the Philippines which stressed the development of agriculture, commerce & industry in order to open Manila for world trade.

Front 10

Earliest Banks

Back 10

1830 - the 1st Filipino bank established by Francisco Rodriguez is called Rodriguez Bank, then later, Garrido & Tuazon Banks were the next ones to established.

1851 - 21 years after the founding of the first 3 established banks, the 1st government bank was founded which was established by Governor Antonio de Urbiztondo called Banco Espanol-Filipina de Isabella II, now so-called the Bank of the Philippine Islands (BPI) which is now a part of Jaime Augusto Zobel de Ayala's acquisition.

Front 11

Coming of Foreign Banks

Back 11

1869 - opening of Suez Canal greatly increased Philippine trade.

1873 - Chartered bank of India, China & Australia established their branches in Manila.

1875 - Hong Kong & Shanghai Banking Corporation established branch in Manila.

Nicholas Loney - initiated business arrangements with the sugar planters and introduced modern machinery into the sugar industry.

Monte de Piedad y Caja de Ahorros de Manila - now Monte de Piedad and savings bank was the first savings bank established in 1882 by Fr. Felix Huertas. Obtained unused funds from obras pias.

Front 12

Need for Rural Credit

Back 12

1906 - founded the First Agricultural Bank of the Philippine Government (FABPG). Its objective was to provide easy credit for the farmers.

1916 - 10 years after FABPG's founding, its assets & liabilities were transferred to newly-organized PNB, the big bank for the small people.

Front 13

Philippine National Bank (PNB)

Back 13

The first universal bank was inaugurated on July 22, 1916 when Henry Parker Wellis was the founding president & chairman which their initial capital is 20 million pesos including 10.1 million pesos came from the Philippine Government. 2 years after its opening, it controlled about 2/3 of the country's banking resources. It is the sole depository of the PH government funds prior to the creation of central bank. Played a leadership role in improving the financial system. Business operations greatly depended on agricultural products for export. Funded various economic and social programs of the government since its creation in 1916.

Front 14

DEVELOPMENT OF CENTRAL BANKING

Back 14

Central bank – a large institution engaged in the ordinary business of banking. Lenders of last resort; bankers bank.

Bank of England - became the model of central banks and considered as the first real central bank. Known as “mother of central banks” which paved the way to modern central banking.

Riksbank of Sweden – oldest central bank.

Front 15

Bangko Sentral ng Pilipinas (BSP)

Back 15

• 1933 - Governor Miguel Cuaderno conceived the idea of central bank; 1st governor and considered as the father of the Central Bank of the Philippines”.

• 1946 – construction of central bank upon the instruction of Pres. Manuel Roxas.

• 1949 – establishment of central bank of the Philippines.

• Philippine CB was patterned after the CB of Guatemala because of its similar economic and social conditions.

• Under the 1973 Constitution, it also functions as a central monetary authority.

• Regulates activities of non-bank financial institutions.

Front 16

Precious metals

Back 16

Rare metallic element of high economic value of high economic value which includes gold, silver, platinum, palladium, osmium, indium, rhodium & ruthenium.

Front 17

Personal Finance

Back 17

Is the application of the principles of finance to the monetary decisions of an individual or family unit to improve the equity & sufficient liquidity.

Suggested Top 3 personal investment:

1. Life insurance

2. Readily available funds

3. Investment for personal needs.

Front 18

Components of personal finance

Back 18

1. Savings & checking account

2. Credit cards & consumer loans

3. Investments in financial securities

4. Retirement plans

5. Social security benefits

6. Insurance policies

7. Real estate

Front 19

Features of Good Investments

Back 19

1. Safety of the value of investment

2. Saleable investment

3. Stability of income

4. Taxes

Front 20

5 Steps of Personal Financial Planning

Back 20

1. Assessment (of your financial condition/position)

2. Set goals (e.g. Own a house at age 28)

3. Create a plan (how to achieve goals)

4. Execution

5. Monitoring & reassessment

Front 21

Investment Banking

Back 21

A specific division of banking related to the capital creation for other companies where investment banks underwrite new debt & equity security for all types of corporations.

Front 22

Underwriting

Back 22

Bank buys securities at stipulated price and sell to investors. If bank cannot sell securities at cost, bank bears the loss.

Front 23

Agency Marketing

Back 23

Bank does not buy & sell securities. It merely acts like a marketing agent of the corporation which offers the new securities.

Front 24

Financial Markets

Back 24

Market which people and entities can trade financial securities (which include stocks & bonds), commodities (which include precious metals & agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect supply & demand.

Front 25

Loan Transaction

Back 25

Requires face-to-face negotiations between the borrower & the lender.

Front 26

Investment Transaction

Back 26

Involves the sale of financial instruments on an impersonal basis to any buyer. This constitutes the financial market.

Front 27

Investment Houses

Back 27

Are the principal financial institutions of financial markets.

Front 28

Money Market

Back 28

Refers to buy & sell of short term funds, highly liquid & virtually risk less assets through a financial intermediary like a commercial bank & other financial institutions.

Participants: BSP, commercial banks, finance companies, dealers & brokers.

Principal: seller/borrower, buyer/lender & dealer/broker.

Financial Instruments: T-bills & commercial papers.

Minimum placement: 50,000 pesos.

Front 29

Top 10 largest banks in the Philippines based on the World list

Back 29

1. Banco De Oro (BDO) - rank 251

2. Metrobank - 333

3. Bank of the Philippine Islands (BPI) – 375

4. Rizal Commercial Banking Corporation (RCBC) - 642

5. Security Bank – 655

6. Chinabank – 663

7. Unionbank of the Philippines (UBP) – 702

8. Philippine National Bank (PNB) – 765

9. Philtrsut Bank – 986

10. East West Bank - 992

Front 30

IMF Special Facilities

Back 30

Designed to assist member countries with balance of payments problems.

1. Extended fund facility - intended to meet balance of payments needs. Financial assistance is longer & amount bigger than what is given under credit tranche policies.

2. Permanent facilities for specific purposes:

A. Facility for compensatory financing of exports - extended to members suffering from balance of payments problems caused by temporary shortfalls in their export earnings.

B. Buffer stock financing facility - helps members to finance their contributions to international buffer stock of primary products (sugar, rice, tobacco or corn) & also include products such as tin & rubber.

3. Enlarged access policy - enables the fund to provide supplementary financing to all members facing serious balance of payments deficits.

Front 31

World Bank & its roles

Back 31

Main goals: Fight poverty & improve the living standards of people in the developing world.

Measures: Provision of long-term loans, grants & technical assistance.

Areas to focus nowadays on support for small scale local enterprises, rather than on measures for aggregate economic growth: Health & Education, Environmental Projects, Improvement of Infrastructure (dams, roads, etc.) & Economic Development.

New attitude: Clean water, education & sustainable development are essential to economic growth which sustainable development needs heavy investment in such projects.

Front 32

Exchange Rate Policy

Back 32

The exchange rate of an economy affects aggregate demand through its effect on export and import prices, and policy makers may exploit this connection. Deliberately altering exchange rates to influence the macro-economic environment may be regarded as a type of monetary policy. Changes in exchanges rates initially work there way into an economy via their effect on prices.

Front 33

Forex (Foreign Exchange)

Back 33

If the demand for a particular currency is greater than its supply, exchange rate increases as peso decreases in value. Choice of exchange rate policy is vital which directly affects the monetary stability.

IMF recommendations: Balance of Payments Position & Economic Development.

Front 34

2 Kinds of Currency

Back 34

1. Domestic Currency (Philippine Peso)

2. Foreign Currency (US Dollars, UK Pounds, Australian Dollars, Chinese Yuan Renminbi, Japanese Yen, South Korean Won, etc.)

Front 35

Top 7 Highest Developed Countries Today

Back 35

1. China

2. USA

3. India

4. Indonesia

5. Japan

6. South Korea

7. Saudi Arabia

Front 36

Exchange Rate

Back 36

Price of the foreign money relative to the local money. Also known as foreign exchange (forex) or currency quotation.

Front 37

Currency Devaluation

Back 37

Depreciation in the money value.

Front 38

Devaluation

Back 38

Refers to the increase in gold price relative to a currency.

Example: US$1 = Real market value of 40 pesos.

If it's issued by the BSP: US$1 = Real market value of 43.69 pesos.

As peso price in dollar increases, the more that the peso has devaluated.

Front 39

Balance of Payments

Back 39

The difference in total value between payments into & out of a country over a period.

Front 40

Surplus/Deficit

Back 40

More inflows influenced by the balance of payment.

Front 41

Surplus/Deficit Determinants

Back 41

Relative income, price & interest changes.

1. Income changes - increase in purchasing power.

2. Price changes - dollar supply in the country increases.

3. Current-account deficit - a current account is a balance of trade between a country & its trading powers while a deficit in a current account shows that the country is spending more on foreign trade than it is earning.

4. Public debt - large debt encourages inflation.

5. Terms of trade - ratio comparing export prices to import prices.

6. Political stability - an attempt to define this must begin by clarifying the concepts of politics & the political structure.

Front 42

3 Kinds of Exchange Rate Policies (ERP)

Back 42

1. Pegged Exchange Rate - facilities trade & investment between the 2 countries with the pegged currencies.

2. Flexible Exchange Rate - an exchange rate which fluctuates depending on the supply & demand of a currency in relation to other currencies.

3. Managed Exchange Rate - rate is allowed to be determined in the exchange market without an announced par value.

Front 43

Foreign Exchange Market

Back 43

The place where money denominated in one currency is bought & sold with money denominated in another currency.

Major Participants: Large transnational commercial banks, investment banking houses, financial intermediaries & the central bank.

Other Participants: Hotels, forex dealers, rural banks, tourist shops, travel agencies, individual investors & multinational companies.

Front 44

Black Market

Back 44

Refers to illegal or parallel market in a foreign exchange in various countries around the world.

Front 45

Effects of Black Market

Back 45

1. Evade taxes

2. Trade in smuggled goods

3. Less revenue to the government

4. Losses to legitimate industries

5. Underestimation of the national income

6. Underestimation of employment data

7. Deliberate creation of shortages

Front 46

Social Responsibility of the Financial Management

Back 46

A corporate responsibility to society which is responsible to the general public. Social responsibility is individuals are accountable for fulfilling their civic duty. Actions on an individual must benefit the whole of society. Financial management includes asset acquisitions, financing & management. The goal of the firm is Wealth Maximization. The primary responsibility of the management is to generate profit for the stockholders.

Front 47

Stakeholder

Back 47

Interested parties.

Front 48

2 Kinds of stakeholders

Back 48

1. Internal stakeholder - management, employees within a company.

2. External stakeholder - government, general public.

Front 49

Socialism in Finance

Back 49

1. Economic Growth & Development versus Equal distribution of wealth & income & Social Responsibility.

2. Robert Owen - father of cooperation & socialism.

3. Karl Marx - father of modern socialism which labor is the real factor of production.

4. Full development of socialism:

More Goods --> Over Supply --> Price Decrease

Front 50

ACCOMPLISHMENTS OF CBP

Back 50

1. Has taken a lead role during the last decade in mobilizing domestic savings for capital formation. (to reduce dependence on foreign source).

2. Participated extensively in government programs for development.

3. Continues to pursue its policy of dispersal of financial institutions to the rural areas.

4. Maintained linkages with the international financial markets through offshore banking units and foreign currency deposit units.

5. Adoption of universal banking program to improve efficiency in the financial system.

Front 51

UNIVERSAL BANKING

Back 51

• Referred to as expanded commercial banking.

• A system of banking where banks are allowed to provide an expanded variety of services to their customers to become super banks.

• Described as “department store banking”.

• In universal banking, banks are not limited to just loans, checking and savings accounts, and other similar activities, but are allowed to offer investment services as well.

• Makes financial system more responsive to the needs of the economy.

Front 52

OBJECTIVES OF UNIVERSAL BANKING

Back 52

• To increase the mobilization of savings intermediated through the financial system.

• To channel more of the financial resources towards medium and long-term purpose rather than for short-term lending.

Front 53

SERVICES OFFERED BY UNIBANK

Back 53

• Short-term credit, including capital loans, credit lines and any such service available at a commercial bank.

• Money marketing

• Letters of credit, including ordinary L/C, standby L/Cor deferred L/C.

• Direct guarantee letters

• Intermediate or long-term financing

• Discounting or purchase of receivables

• Pension fund management and other trust services

• Stocks and other securities underwriting and stock dealership

• Capital leasing

• Checking accounts, drafts and others

Front 54

ADVANTAGES OF UNIBANK

Back 54

1. Mobilizes savings and direct funds to long-term credits.

2. Firms need to deal with only one bank for their entire range of financial requirements.

3. Strengthens international capital markets.

4. Facilitates sourcing of financing.

5. Stimulates competition within the banking system.

Front 55

Central Banking

Back 55

A body corporate entrusted with the responsibility of administering the monetary, banking and credit system of the country with due regard to the availability, use and cost of money and credit for the attainment of a balanced and sustainable growth of the economy and the maintenance of internal and external monetary stability in the country.

Front 56

Central Banking (Continued)

Back 56

A. Promotes economic growth for the welfare of the people.

B. Regulates the monetary and credit conditions of the country.

C. Increases investments, production, employment & income.

D. Stabilizes the economic situations of the nation.

Front 57

Objectives of the Central Bank

Back 57

1. To maintain internal and external monetary stability in the Philippines, and to preserve the international value of peso and its convertibility into other freely convertible currencies.

2. To foster monetary, credit & exchange conditions conducive to a balanced and sustainable growth of the economy.

Front 58

Criteria for Sound & Responsible Banking

Back 58

1. Prudence

2. Service to the community

3. Commitment to the development efforts like mobilizing and investing savings

Front 59

Functions of the Central Bank

Back 59

1. As fiscal agent of the government; banker and financial advisor of the government.

2. As caretaker of commercial bank reserves.

3. As a manager of international reserve of the country (gold & foreign exchange).

4. As issuer of notes (legal tender money).

5. As regulator or controller of credit.

Front 60

Features of a Central Bank

Back 60

1. Indirect dealing with any particular individual or individuals or the public at large.

2. Created not for a purpose of making profits or profit-seeking venture.

3. Acts as an agency of the government in implementing public policy.

4. Exercises supervision & regulation over monetary, credit & banking system of the country.

5. Serves as the linkage or the connecting link between the banking system of one country & that of another or the rest of the world.

Front 61

Role of the Central Bank

Back 61

1. Bank capital build up.

2. Regional dispersal of credit & financial institution.

3. Rationalization of interest-rate structure.

4. Credit allocation to agro-industrial development.

5. Careful international debt management.

6. Other components of monetary innovation.

Front 62

Monetary Board

Back 62

It is the policy-making body of the BSP which is the powers & functions of bangko sentral are exercised by its governor together with 6 members appointed by the PH president.

Front 63

Powers of the Monetary Board

Back 63

1. Prepare & issue rules & regulations for the effective discharge of the responsibilities & exercise the powers vested in the central bank.

2. Direct the management, operation & administration of the central bank & prepare the necessary rules & regulations for the purpose.

3. Appoint, fix the renumeration & other emoluments, & decide on the removal of the central bank personnel except the government.

4. Authorize some expenditures of the central bank in the interest of its effective administration & operations.

Front 64

Monetary Policy

Back 64

A process whereby the monetary authority attempts to achieve a desired set of economic goals by controlling money supply, cost & availability of credit or the allocation of credit to its various uses.

Front 65

BSP Services

Back 65

1. Supervises & regulates operations of banking institutions.

2. Regulates operations of non-bank financial intermediaries.

3. Regulates foreign exchange.

4. Regulates credit.

5. Issues money.

6. Mint coins & prints paper money.

7. Keeps reserves.

8. Clears checks.

9. Prints checks.

10. Prints government securities.

11. Grants loans & advances.

12. Buys & sells government securities.

13. Collects revenues for the government.

Front 66

BSP

Back 66

It has 3 regional offices performing cash operations, cash administration, loans & rediscounting, bank supervision & gold buying operations. These regional offices are located in San Fernando, La Union, Cebu City & Davao City. There are also 18 BSP branches.

Front 67

Investment

Back 67

Refers to an asset or property right acquired for profit motive.

Front 68

Speculators

Back 68

Are individuals to invest in risky business or ventures to earn big profits.

Front 69

Professional Gamblers

Back 69

Are those who place their money merely on impulse or reckless decision on activities hoping for larger returns.

Front 70

Investment Risk Types

Back 70

1. Business risk - the first & the greatest risk which is the possibility of a company will have lower than anticipated profits, or that will experience a loss rather than a profit which causes competition, demand & technology changes, mismanagement & inflation.

2. Market risk - the possibility of an investor to experience losses due to factors that affect the overall performance of the financial markets which causes changes in interest rates, foreign exchange rates & equity & commodity prices.

3. Inflation risk - also known as power risk which is the chance that the cash flows from an investment won't be worth as much in the future because of changes in the future because of changes in purchasing power due to inflation which causes supply shortage, excessive money supply, high cost of production & capitalist's desire for more profits.

4. Social risk - hazards brought about by government laws & policies which is also political in nature where politicians make laws favorable to consumers to get more votes.

Front 71

Classes of investments

Back 71

1. Savings Account - Deposits & withdrawals can be made anytime where minimum required balance ranges from 500 to 20,000 pesos in order to earn modest interest which ranges from 0.5% to 1% with less than 20% withholding tax.

2. Time Deposits - a loan to a bank for a fixed term where it is evidenced by certificates of time deposits. Also, the minimum requirement ranges from 5,000 to 10,000 pesos and the interest ranges from 2% to 4%, with less than 20% withholding tax.

3. Life-Insurance Policies - insurance contracts that award payment of a lump sum or an annuity if a life-related event occurs.

4. Bonds - a certificate of indebtedness issued by both government & private corporations which are in urgent need of funds with a fixed interest rate & the maturity date.

5. Money Market Placements - is short term placement (overnight to longer maturities) with banks & investment houses.

6. Houses, Apartments & Building - investments of these kinds appear very profitable due to high cost of rentals where houses appreciate in value.

7. Land Ownership - These are good investments since real estate prices keep on rising.

8. Precious Tangibles - refer to gold & silver coins, precious metals, jewelries, old paintings, rare books & antiques.

9. Business Ownership

10. Education & Training

11. Foreign Exchange Investments

Front 72

Primary Function of a Money Market

Back 72

Its primary function is to match those units (corporations, banks & other financial intermediaries) with temporary surplus of money with those with temporary shortage.

Front 73

Money Market Instruments (Government Securities)

Back 73

1. Treasury bills - issued by the BSP for the national government in an effort to mop up excess liquidity on money supply in the financial system where maturities range from 35 to 365 days.

2. Tax anticipation bills - issued by the government for its various activities without waiting for tax payment dates to come. These mature on income tax dates. Such bills are used for tax payments.

3. DBP progress bonds - long-term obligation of the DBP. Interest is payable semi-annually.

4. Treasury notes - held by banks as part of their primary reserves.

5. PW & ED bonds - issued specifically to fund public works projects. Interest payable semi-annually.

6. Central bank certificate of indebtedness - 3-year obligation of the BSP, interest payable semi-annually.

Front 74

Money Market Instruments (Commercial Papers)

Back 74

1. Prime corporate notes - unsecured negotiable obligations of prime companies to fund working capital requirements with specific maturities.

2. Banker acceptances - time drafts drawn by a buyer or seller of goods who arranges with the bank to accept such goods as collateral.

3. Certificate of acceptance - notes issued by non-prime commercial firms whose credit standing is acceptable to the bank but not yet to the investors. The bank stamps its acceptance on the notes to make it acceptable to investors.

Front 75

Money Market Instruments (Call Money)

Back 75

1. Demand loans - mechanism used by banks to adjust their daily reserve positions which is dependent on the total bank deposits. Banks with deficient reserve requirements have to borrow from banks with surplus reserves.

2. Term loans - loans to banks for a definite period of time.

Front 76

Call Money

Back 76

Call money is money loaned by a bank that must be repaid on demand.

Front 77

Types of Transactions

Back 77

1. Straight sale - involves a direct sale to an investor of money market instruments up to maturity date.

2. Repurchase agreement - a form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, & buys them back the following day.

Front 78

Origin of the 3 main institutions that govern globalization

Back 78

1. Joining the 2 largest main global financial institutions: World Bank (1945) & IMF (1946).

2. Plan to establish International Trade Organization (ITO).

Front 79

IMF's Primary Purpose

Back 79

To ensure the stability of the international monetary system which is the system of exchange rates & international payments that enables countries (and their citizens) to transact with each other.

Front 80

IMF's Primary Functions

Back 80

1. Surveillance - it is an assessment of economic & financial developments, and the provision policy of advice, aimed especially at crisis-prevention. Provides a framework that facilitates the exchange of goods, services & capital among countries & sustains sound economic growth. It focuses on assessing whether countries' policies promote external stability. Its importances are globalized economy where economic & financial policies of one country may affect many others; It's important to have an external overseer to advert financial crises, which often spread from one originating country; and it involves the monitoring of economic & financial developments, & the provision of financial advise, aimed especially at crisis-prevention.

2. Lending - IMF lending enables countries to rebuild their international reserves; stabilizes their currencies; continue paying for imports; and restore conditions for strong economic growth.

3. Technical assistance - it supports the development of the productive member countries by helping them to effectively manage their economic policy & financial affairs.

Front 81

Organizational Structure

Back 81

Board of Governors - a governor & his/her alternate from each member country, which appoints them. They are usually the finance ministers or Governors of the central banks. The board which delegates many of its powers.

Executive Board - a president of any European nationality by tradition & the 24 executive directors which are appointed by their respective governments (including 5 of them represent individual countries like USA, UK, France, Germany & Japan & the other 19 represent group of countries such as G8 (specifically Canada, Italy & Russia), G20 (specifically the other 12 members which are not included in the G8), OECD (Organization of Economic Cooperative & Development, with the exception of G20 member countries) and many others.

Front 82

Government

Back 82

Usually meet once a year to decide on important issues such as admission of new members, adjustments of quotas, election of directors & other financial matters.

Front 83

Executive board

Back 83

Responsible for conducting the business of the IMF. Issues annual reports to the Governors; conducts discussions to complete the process of consultation with members.

Front 84

Great Depression

Back 84

Unprecedented rates of employment where 25% of US workforce was unemployed.

Front 85

Monetary restrictions of international trade

Back 85

1. Many countries didn't have enough foreign currency because of trade deficits and they are not available for international trade in some countries that caused by 2 reasons: They didn't exchange money into foreign currency & they hoarded gold & money that could be converted into gold.

2. Competitive devaluations - countries made their currencies cheaper in order to export more goods.

Front 86

IMF's original purpose

Back 86

1. By stimulating demand to insure economic growth & stability.

Governments must stimulate demand by increasing public expenditures, cutting taxes or both. IMF's role is to provide money/loans for deficit spending + pressure on member countries to act along these lines.

2. By improving restrictive monetary policies.

Objectives: freely conversion from one currency to another, stabilization of value for each currency & elimination of restrictions & practices like competitive devaluations.

Belief: Need for collective action at the global level of economic stability.

Front 87

Economic Policy Kinds

Back 87

1. Expansionary - state expenditure with lower taxes & interest rates. More demand, Economic growth/expansion.

2. Contractionary - cutting of deficits with higher taxes & interest rates. Less demand, Economic contraction.

Front 88

Quotas & Voting

Back 88

Membership in 1946: 39 & Today: 188.

Purposes: Pool of money ($269 billion in 2001) from which members can borrow when they are in financial difficulties, Basis for how much a member country can borrow & Determine the voting power of a country. USA (17.1%), Japan (6.1%), Germany (6%), France (5%), UK (5%), Italy (3%), Canada (3%) & Russia (2.8%) which is a total of 48% contributions from the G8 countries. 100 middle-developed countries contribute 42% contribution. And the 80 poorest countries contribute 10%. That is a total contribution to the IMF is 100%.

Front 89

IMF Policies Critical View

Back 89

Funds are only provided if other countries engage in contractory & neo-liberal policies.

1. Neo-liberal Policies

- less state intervention: free markets can regulate things better.

- privatization of the nationalized industries.

- austerity: reduction of debts by reducing public spending.

- market liberalization: free trade & free flow of capital.

Advantages of Attraction of foreign investment:

1. MNCs bring expertise & access to foreign markets.

2. MNCs have better access to sources of finance.

3. New employment possibilities.

Negative Results:

A. Industries in poor countries often can't compete with imported goods, which are sometimes even subsidised because local industries go bankrupt, foreign MNCs take over.

B. Higher interest rates & other contractionary measures lead to slow economic growth.

C. Free capital markets: local banks go bankrupt, small businesses & farmers can't get any more loans.

D. Not enough money for health, education & a social safety net.

The IMF's most important macroeconomic goal: low inflation (due to its focus on monetary problems).

Less important: unemployment, distribution of income & wealth, education & health.

Newest Tendency: More attention on help for the poor, health, education & "good governance".

Front 90

Suggestions for a better policy

Back 90

A functioning market system requires:

- clear property rights & the courts to enforce them.

- competition & information can't be established overnight.

Successful East Asian Countries:

- dropped protective barriers slowly & carefully.

- state investments for enterprises.

- joint-venture companies.

Development requires a transformation of society:

- Education: All countries which have invested in universal primary education.

- Help for the poor (safety net) --> important to avoid riots & upheaval.

- Land reform: In many developing countries a few rich people own most of the land.

- Fight against corruption.

Front 91

Normal Facilities of the IMF

Back 91

1. Ordinary drawing rights (2 elements include Gold & credit tranches)

Tranche - represents the total quota of a member country.

1st credit tranche - IMF requires the borrowing member country to make a reasonable effort to solve its problem.

Higher credit tranches - IMF requires a substantial justification for the loan application.

2. Stand-by arrangements - guarantee the borrowing member country an assured credit line, which is higher than the gold tranche drawing, for a certain period of time, usually one year.

3. Special drawing rights (SDRs) - designed to meet balance payments needs of member countries.

Front 92

Conditionality

Back 92

Requires to the requirements placed on the usage or distribution of money lent to another country.

Front 93

Conditions given by the IMF to the Philippines

Back 93

1. Devalue the peso.

2. Reduce excess liquidity.

3. Increase sales taxes on certain products.

4. Reduce government spending.

Front 94

Conditionality (Usual IMF appropriate policies)

Back 94

1. Devaluation

2. Free Trade

3. Foreign investment expansion

4. Tax increase

5. Political reforms

Front 95

New International Monetary System (NIMS)/Breton Woods Monetary System (BWMS)

Back 95

Less developed countries clamored for a monetary system that would reflect the development needs of peoples' living in different economic conditions, social systems & cultural environments.

Front 96

Objectives of New International Monetary System

Back 96

1. It must be capable of achieving monetary stability, restoring acceptable levels of employment & sustainable growth & checking the present strong inflationary tendencies in the world economy.

2. It must be supportive of a global development, especially for the 3rd world countries where most of the world's poorest people live.

Front 97

Characteristics of New International Monetary System

Back 97

1. Democratic management & control

2. Universality

3. Establishment of an international money

4. Organization of a new international monetary

Front 98

Difference Between IMF & World Bank

Back 98

World bank - assists developing countries through long-term financing of development projects & programs. Acquires most of its financial resources by borrowing on the international bond market. Staff of 7,000 drawn from 188 member countries.

IMF - oversees the international monetary system. Evaluation of member countries' economic performance. Promotes exchange stability & orderly exchange relations among its member countries. Assists all members - both industrialized & developing countries by providing short to medium term credits. Draws its financial resources principally from the quota subscriptions of its member countries. Staff of 2,300 drawn from 188 member countries.