MONETRAY POLICY MODULE 1:

Nature and Meaning of Central Banking

A central bank is a financial institution given privileged control over the production and
distribution of money and credit for a nation or a group of nations. In modern economies, the
central bank is usually responsible for the formulation of monetary policy and the regulation
of member banks.
In the Philippines, 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.
Evolution of Central Banking in 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 provisions of the Hare-Hawes Cutting bill, the Philippine
independence bill approved by the US Congress. During the Commonwealth period (1935-
1941), the discussion about a Philippine central bank that would promote price stability and
economic growth continued. The country’s monetary system then was administered by the
Department of Finance and the National Treasury. The Philippines was on the exchange
standard using the US dollar which was backed by 100 —percent gold reserve as the
standard currency. —In 1939, as required by the Tydings-McDuffie Act, the Philippine
legislature passed a law establishing a central bank. As it was a monetary law, it required the
approval of the United States president. However, President Franklin D. Roosevelt
disapproved it due to strong opposition from vested interests. A second law was passed in
1944 during the Japanese occupation, but the arrival of the American liberalization forces
aborted its implementation. Shortly after President Manuel Roxas assumed office in 1946, he
instructed then Finance Secretary Miguel Cuaderno, Sr. to draw up a charter for a central
bank. The establishment of a monetary authority became imperative a year later as a result
of the findings of the Joint Philippine-American Finance Commission chaired by Mr. Cuaderno.
The Commission, which studied Philippine financial, monetary and fiscal problems in 1947,
recommended a shift from the dollar exchange standard to a managed currency system. A
central bank was necessary to implement the proposed shift to the new system.
Immediately, the Central Bank Council, which was created by President Manuel Roxas to
prepare the charter of a proposed monetary authority, produced a draft. It was submitted to
Congress in February1948. By June of the same year, the newly-proclaimed President Elpidio
Quirino, who succeeded President Roxas, affixed his signature on Republic Act No. 265, the
Central Bank Act of 1948. The establishment of the Central Bank of the Philippines was a
definite step toward national sovereignty. Over the years, changes were introduced to make
the charter more responsive to the needs of the economy. On 29 November 1972,
Presidential Decree No. 72 adopted the recommendations of the Joint IMF-CB Banking Survey
Commission which made a study of the Philippine banking system. The Commission
proposed a program designed to ensure the system’s soundness and healthy growth. Its
most important recommendations were related to the objectives of the Central Bank, its
policy-making structures, scope of its authority and procedures for dealing with problem
financial institutions. Subsequent changes sought to enhance the capability of the Central
Bank, in the light of a developing economy, to enforce banking laws and regulations and to
respond to emerging central banking issues. Thus, in the 1973 Constitution, the National
Assembly was mandated to establish an independent central monetary authority. Later, PD
1801 designated the Central Bank of the Philippines as the central monetary authority
(CMA). Years later, the 1987 Constitution adopted the provisions on the CMA from the 1973
Constitution that were aimed essentially at establishing an independent monetary authority
through increased capitalization and greater private sector representation in the Monetary
Board. The administration that followed the transition government of President Corazon C.
Aquino saw the turning of another chapter in Philippine central banking. In accordance with a
provision in the 1987 Constitution, President Fidel V. Ramos signed into law Republic Act No.
7653, the New Central Bank Act, on 14 June 1993. The law provides for the establishment of
an independent monetary authority to be known as the Bangko Sentral ng Pilipinas, with the
maintenance of price stability explicitly stated as its primary objective. This objective was
only implied in the old Central Bank charter. The law also gives the Bangko Sentral fiscal and
administrative autonomy which the old Central Bank did not have. On 3 July 1993, the New
Central Bank Act took effect.
 Chronology of Events: Central Banking in the Philippines
1900 Act No. 52 was passed by the First Philippine Commission placing all banks
under the Bureau of Treasury. The Insular Treasurer was authorized to
supervise and examine banks and banking activities.

February 1929 The Bureau of Banking under the Department of Finance took over the
task of banking supervision.

1939 A bill establishing a central bank was drafted by Secretary of Finance

Manuel Roxas and approved by the Philippine Legislature. However, the
bill was returned by the US government, without action, to the
Commonwealth Government.

1946 A joint Philippine-American Finance Commission was created to study the

Philippine currency and banking system. The Commission recommended
the reform of the monetary system, the formation of a central bank and
the regulation of money and credit. The charter of the Central Bank of
Guatemala was chosen as the model of the proposed central bank charter.

August 1947 A Central Bank Council was formed to review the Commission’s report and
prepare the necessary legislation for implementation.

February 1948 President Manuel Roxas submitted to Congress a bill “Establishing the
Central Bank of the Philippines, defining its powers in the administration
of the monetary and banking system, amending pertinent provisions of
the Administrative Code with respect to the currency and the Bureau of
Banking, and for other purposes.

15 June 1948 The bill was signed into law as Republic Act No. 265 (The Central Bank
Act) by President Elpidio Quirino.

3 January1949 The Central Bank of the Philippines (CBP) was inaugurated and formally
opened with Hon. Miguel Cuaderno, Sr. as the first governor. The broad
policy objectives contained in RA No. 265 guided the CBP in the
implementation of its duties and responsibilities, particularly in relation to
the promotion of economic development in addition to the maintenance of
internal and external monetary stability.

November 1972 RA No. 265 was amended by Presidential Decree No. 72 to make the CBP
more responsive changing economic conditions to PD No. 72 emphasized
the maintenance of domestic and international monetary stability as the
primary objective of the CBP. Moreover, the CBP’s authority was expanded
to include not only the supervision of the banking system but also the
regulation of the entire financial system.

January 1981 Further amendments were made with the issuance of PD No. 1771 to
improve and strengthen the financial system, among which was the
increase in the capitalization of the CBP from P10 million to P10 billion.

1986 Executive Order No. 16 amended the Monetary Board membership to

promote greater harmony and coordination of government monetary and
fiscal policies.

3 July 1993 Republic Act No. 7653 was passed establishing the Bangko Sentral ng
Pilipinas (BSP), replacing CBP as the country's central monetary authority.
14February 2019 Republic Act No. 11211 was passed amending RA No. 7653. The
charter amendments bolster the capability of the BSP to safeguard price
stability and financial system stability.
 The Evolution of the Central Bank Mandate
3 January 1949, the Central Bank of the Philippines (CBP) was inaugurated and
formally opened with Hon. Miguel Cuaderno, Sr. as the first governor. The broad policy
objectives contained in RA No. 265 guided the CBP in the implementation of its duties and
responsibilities, particularly in relation to the promotion of economic development in addition
to the maintenance of internal and external monetary stability. November 1972, RA No. 265
was amended by Presidential Decree No. 72 to make the CBP more responsive to changing
economic conditions. PD No. 72 emphasized the maintenance of domestic and international
monetary stability as the primary objective of the CBP. Moreover, the CBP’s authority was
expanded to include not only the supervision of the banking system but also the regulation
of the entire financial system.
3 July 1993, Republic Act No. 7653 was passed establishing the Bangko Sentral ng
Pilipinas (BSP), replacing CBP as the country's central monetary authority. 14 February 2019,
Republic Act No. 11211 was passed amending RA No. 7653. The charter amendments bolster
the capability of the BSP to safeguard price stability and financial system stability.
Assessment :
Instruction: In a one whole sheet of yellow pad paper, answer the question based on your
own understanding of the topic above. (30pts)
Deadline of submission:
1. Discuss the evolution of central banking and the reason why it needs evolution?