MODULE 3 – FUNDAMENTALS OF FINANCIAL INSTITUTIONS

FINANCIAL INTERMEDIARY
What Is a Financial Intermediary?
A financial intermediary is an entity that acts as the middleman between two parties in a
financial transaction, such as a commercial bank, investment bank, mutual fund, or pension fund.
Financial intermediaries offer a number of benefits to the average consumer, including safety,
liquidity, and economies of scale involved in banking and asset management. Although in certain
areas, such as investing, advances in technology threaten to eliminate the financial intermediary,
disintermediation is much less of a threat in other areas of finance, including banking and
insurance.

KEY TAKEAWAYS
• Financial intermediaries serve as middlemen for financial transactions, generally between
banks or funds.
• These intermediaries help create efficient markets and lower the cost of doing business.
• Intermediaries can provide leasing or factoring services, but do not accept deposits from
the public.
• Financial intermediaries offer the benefit of pooling risk, reducing cost, and providing
economies of scale, among others.

How a Financial Intermediary Works

A non-bank financial intermediary does not accept deposits from the general public. The
intermediary may provide factoring, leasing, insurance plans or other financial services. Many
intermediaries take part in securities exchanges and utilize long-term plans for managing and
growing their funds. The overall economic stability of a country may be shown through the
activities of financial intermediaries and the growth of the financial services industry.

Financial intermediaries move funds from parties with excess capital to parties needing
funds. The process creates efficient markets and lowers the cost of conducting business. For
example, a financial advisor connects with clients through purchasing insurance, stocks, bonds,
real estate, and other assets. Banks connect borrowers and lenders by providing capital from
other financial institutions and from the Federal Reserve. Insurance companies collect premiums
for policies and provide policy benefits. A pension fund collects funds on behalf of members and
distributes payments to pensioners.

Benefits of Financial Intermediaries

Through a financial intermediary, savers can pool their funds, enabling them to make
large investments, which in turn benefits the entity in which they are investing. At the same time,
financial intermediaries pool risk by spreading funds across a diverse range of investments and
loans. Loans benefit households and countries by enabling them to spend more money than they
have at the current time.

Financial intermediaries also provide the benefit of reducing costs on several fronts. For
instance, they have access to economies of scale to expertly evaluate the credit profile of
potential borrowers and keep records and profiles cost-effectively. Last, they reduce the costs of
the many financial transactions an individual investor would otherwise have to make if the
financial intermediary did not exist.

Source: https://www.investopedia.com/terms/f/financialintermediary.asp

TYPES OF FINANCIAL INTERMEDIARIES

Financial intermediaries fall into three categories: depository institutions (banks),

contractual savings institutions, and investment intermediaries.

Depository Institutions
Depository institutions (for simplicity, we refer to these as banks) are financial
intermediaries that accept deposits from individuals and institutions and make loans. These
institutions include commercial banks and the so-called thrift institutions (thrifts): savings and
loan associations, mutual savings banks, and credit unions.

Commercial Banks These financial intermediaries raise funds primarily by issuing checkable
deposits (deposits on which checks can be written), savings deposits (deposits that are payable
on demand but do not allow their owner to write checks), and time deposits (deposits with fixed
terms to maturity). They then use these funds to make commercial, consumer, and mortgage
loans and to buy government securities and municipal bonds.
Credit Unions These financial institutions are typically very small cooperative lending
institutions organized around a particular group: union members, employees of a particular firm,
and so forth. They acquire funds from deposits called shares and primarily make consumer loans.

Contractual Savings Institutions

Contractual savings institutions, such as insurance companies and pension funds, are
financial intermediaries that acquire funds at periodic intervals on a contractual basis. Because
they can predict with reasonable accuracy how much they will have to pay out in benefits in the
coming years, they do not have to worry as much as depository institutions about losing funds
quickly. As a result, the liquidity of assets is not as important a consideration for them as it is for
depository institutions, and they tend to invest their funds primarily in long-term securities such
as corporate bonds, stocks, and mortgages.
Life Insurance Companies Life insurance companies insure people against financial hazards
following a death and sell annuities (annual income payments upon retirement). They acquire
funds from the premiums that people pay to keep their policies in force and use them mainly to
buy corporate bonds and mortgages. They also purchase stocks but are restricted in the amount
that they can hold.

Pension Funds and Government Retirement Funds Private pension funds and state and local
retirement funds provide retirement income in the form of annuities to employees who are
covered by a pension plan. Funds are acquired by contributions from employers and from
employees, who either have a contribution automatically deducted from their paychecks or
contribute voluntarily. The largest asset holdings of pension funds are corporate bonds and
stocks.

Investment Intermediaries
This category of financial intermediaries includes finance companies, mutual funds,
money market mutual funds, and investment banks.

Finance Companies Finance companies raise funds by selling commercial paper (a short-term
debt instrument) and by issuing stocks and bonds. They lend these funds to consumers (who
make purchases of such items as furniture, automobiles, and home improvements) and to small
businesses. Some finance companies are organized by a parent corporation to help sell its
product. For example, Ford Motor Credit Company makes loans to consumers who purchase Ford
automobiles.

Mutual Funds These financial intermediaries acquire funds by selling shares to many
individuals and use the proceeds to purchase diversified portfolios of stocks and bonds. Mutual
funds allow shareholders to pool their resources so that they can take advantage of lower
transaction costs when buying large blocks of stocks or bonds. In addition, mutual funds allow
shareholders to hold more diversified portfolios than they otherwise would. Shareholders can
sell (redeem) shares at any time, but the value of these shares will be determined by the value
of the mutual fund’s holdings of securities. Because these fluctuate greatly, the value of mutual
fund shares does, too; therefore, investments in mutual funds can be risky.

Hedge Funds Hedge funds are a type of mutual fund with special characteristics. Hedge funds
are organized as limited partnerships with minimum investments ranging from $100,000 to, more
typically, $1 million or more. These limitations mean that hedge funds are subject to much
weaker regulation than other mutual funds. Hedge funds invest in many types of assets, with
some specializing in stocks, others in bonds, others in foreign currencies, and still others in far
more exotic assets.
Investment Banks An investment bank is a type of intermediary that helps a corporation
issue securities. First it advises the corporation on which type of securities to issue (stocks or
bonds); then it helps sell (underwrite) the securities by purchasing them from the corporation
at a predetermined price and reselling them in the market. Investment banks also act as deal
makers and earn enormous fees by helping corporations acquire other companies through
mergers or acquisitions.

FINANCIAL REGULATORY AGENCIES IN THE PHILIPPINES

1. SECURITIES AND EXCHANGE COMMISSION

MANDATE

The Securities and Exchange Commissio n (SEC) or the Commission is the national
government regulatory agency charged with supervision over the corporate sector,
the capital market participants, and the securities and investment instruments
market, and the protection of the investing public. Cr eated on October 26, 1936 by
Commonwealth Act (CA) 83 also known as The Securities Act, the Commission was
tasked to regulate the sale and registration of securities, exchanges, brokers,
dealers and salesmen. Subsequent laws were enacted to encourage inves tments and
more active public participation in the affairs of private corporations and
enterprises, and to broaden the Commission’s mandates. Recently enacted laws gave
greater focus on the Commission’s role to develop and regulate the corporate and
capital market toward good corporate governance, protection of investors, widest
participation of ownership and democratization of wealth.

SEC is the registrar and overseer of the Philippine corporate sector; it supervises
more than 600,000 active corporations a nd evaluates the financial statements (FS)
filed by all corporations registered with it. SEC also develops and regulates the
capital market, a crucial component of the Philippine financial system and economy.
As it carries out its mandate, SEC contributes significantly to government revenues.

FUNCTIONS:

Its major functions include registration of securities, analysis of every registered security, and the
evaluation of the financial condition and operations of applicants for security issue.[6]
The functions of the SEC are defined in Section 5 of the Securities Regulation Code, and include
the following major areas:

• Supervision over all registered business entities in the country, including suspensions
and revocations of their registrations
• Policymaking with regard to the market in securities
• Control over and approval of security registration statements
 • Power to investigate violations of securities laws and to impose sanctions for such
violations
• Power to issue subpoenas, punish for contempt, and issue cease and desist orders in
furtherance of its law enforcement mission

CHAIRMAN:

EMILIO B. AQUINO

2. INSURANCE COMMISSION

MANDATE

To regulate and supervise the insurance, pre-need, and HMO industries in accordance with the
provisions of the Insurance Code, as amended, Pre-Need Code of the Philippines, and Executive
Order No. 192 (s. 2015)

OBJECTIVES
• To promote growth and financial stability of insurance, pre-need, and HMO companies
• To professionalize insurance, pre-need, and HMO services, and develop insurance, pre-
need, and HMO consciousness among the general populace
• To establish a sound national insurance market
• To safeguard the rights and interest of the insuring public, pre-need and HMO customers
FUNCTIONS
1. Promulgation and implementation of policies, rules and regulations governing the
operations of entities engaged in insurance, pre-need, and HMO activities as well as
benevolent features
2. Licensing of insurance, reinsurance companies, its intermediaries, mutual benefit
associations, trusts for charitable uses, pre-need companies, pre-need intermediaries,
and HMO companies
3. Conducting insurance agent’s examinations, as well as processing of reinsurance treaties
and request for investments of insurance companies
4. Examination/verification of the financial condition and methods of doing business of
entities engaged in insurance business, pre-need, mutual benefit associations, trusts for
charitable uses, and HMO companies
5. Evaluation and preparation of statistical reports, studies, researches, annual reports, and
position papers relative to insurance, pre-need matters, and HMO matters
6. Review of premium rates imposed by life and non-life companies, mutual benefit
associations; statistical reports of adjusters to determine compliance with established
standards.
 7. Adjudication of claims and complaints involving loss, damage or liability incurred by an
insurer under any kind of policy or contract of insurance or suretyship;
8. Review and approval of all life and non-life policies, pre-need, and HMO plans before sale
to prospective clients.

Chief-of-Staff

Atty. Czarina J. Pablo-Nepomuceno

IC Division Manager

3. BANGKO SENTRAL NG PILIPINAS

The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines. It was
established on 3 July 1993 pursuant to the provisions of the 1987 Philippine Constitution and the
New Central Bank Act of 1993. The BSP took over from Central Bank of Philippines, which was
established on 3 January 1949, as the country’s central monetary authority. The BSP enjoys fiscal
and administrative autonomy from the National Government in the pursuit of its mandated
responsibilities.

MANDATE, FUNCTIONS AND RESPONSIBILITES

• Monetary policy
• Monetary operations
• Systematic risk management
• Financial supervision
• Payments and settlements system oversight
• Currency management
• Inclusive finance
• Loans and credit operations
• International reserves management
• International operations
• International economic cooperation
• Economic education

BSP Governor:

Benjamin E. Diokno
4. PHILIPPINE DEPOSIT INSURANCE CORPORATION

PDIC is a government instrumentality created in 1963 by Republic Act 3591, as amended, to

insure the deposits of all banks. PDIC exists to protect depositors by providing deposit insurance
coverage for the depositing public and help promote financial stability.

PDIC is tasked to strengthen the mandatory deposit insurance coverage system to generate,
preserve, maintain faith and confidence in the country's banking system; and protect it from
illegal schemes and machinations.

Public Policy Objectives

PDIC was established to promote and safeguard the interests of the depositing public by way of
providing insurance coverage on all insured deposits. PDIC also aims to strengthen the mandatory
deposit insurance coverage system to generate, preserve, and maintain faith and confidence in
the country's banking system, and protect it from illegal schemes and machinations.

Mandates
Consistent with its public policy objectives, the PDIC has the following mandates:

I. Deposit Insurance. PDIC provides a maximum deposit insurance coverage of PhP500,000

per depositor per bank. To pay claims on insured deposits, PDIC builds up the Deposit
Insurance Fund (DIF) primarily through assessments of banks at an annual flat rate of 1/5
of 1% of their total deposit liabilities.
II. Receivership of Closed Banks. PDIC proceeds with the liquidation process upon order of
the Monetary Board of the Bangko Sentral ng Pilipinas (BSP). The assets of the closed bank
are managed and eventually disposed of to settle claims of creditors in accordance with
the preference and concurrence of credits as provided by the Civil Code of the
Philippines.

Carlos G. Dominguez III

CHAIRMAN
Secretary, Department of Finance

5. DEPARTMENT OF FINANCE

The Department of Finance (DOF) is the government’s steward of sound fiscal policy. It
formulates revenue policies that will ensure funding of critical government programs that
promote welfare among our people and accelerate economic growth and stability.
The Department of Finance (DOF) is responsible for the management of the government’s
financial resources. Its duties include policy formulation, revenue generation, resource
mobilization, debt management, and financial market development. The DOF is also tasked with
the rationalization, privatization, and public accountability of corporations and assets owned,
controlled, or acquired by the government.

Department Secretary:

Carlos “Sonny” Dominguez

6. PHILIPPINE STOCK EXCHANGE

The Philippine Stock Exchange (PSE) is the only stock exchange in the Philippines. It is one of the
oldest stock exchanges in Asia, having been in continuous operation since the establishment of
the Manila Stock Exchange in 1927. It currently maintains a trading floor at the PSE Tower in
Bonifacio Global City, Taguig City. The PSE is composed of a 15-man Board of Directors with Jose
T. Pardo as Chairman.

7. BUREAU OF TREASURY

The Bureau of the Treasury (BTr) acts as principal custodian of the financial assets of the national
government. It makes funds available for various government programs and projects. It assists in
the formulation of policies on borrowing, investment, and capital market development; in
managing cash resources; in collecting taxes; and in controlling and servicing public debt.

ROBERTO B. TAN

Treasurer of the Philippines