An Analysis of the Institutional Framework of the Philippine Short-Term Financial Markets by Ronald Yacat

An Analysis of the Institutional Framework of the Philippine Short-term Financial Markets

byVictoria S.Licuanan

PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDI ES

All Rights Reservedby THE PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES, 1986 The PhilippineInstitute for DevelopmentStudiesisa non-stock,non-profit governmentresearchinstitution engagedin long-term policy-orientedresearch.It was establishedon September26, 1977 by virtue of PresidentialDecreeNo. 1201. Throughthe I nstitute's activities,it is hopedthat policy-orientedresearchon Philippinesocialand economicdevelopmentcan be expandedto more directly and systematicallyassistthe governmentin planningand policy-making. PIDS publishesthe output of its researchprogram aspart of itseffort to promote the utilization of research findingsand recommendations.The viewsexpressedin publishedreports, however,do not necessarilyreflect those of the Institute. No part of this book may be reproducedin any form or by any meanswithout permissionin writing from the Publisher.Brief quotationsin reviews,however,may be madeif properly acknowledged. Printed in the Philippines ISBN 971-128-012-4

TABLE OF CONTENTS

List of Tables List of Charts Foreword Summary

vii . xi xiii xv

CHAPTER 1

INTRODUCTION

.................

CHAPTER2

SURVEY OF THE PHILIPPINE MONEY MARKET ........................

The Development of the Money Market .............

The Volume and Composition of Transactions in the Money Market, 1977-82 ....................

CHAPTER3

INSTITUTIONS IN THE MONEY MARKET ........................

Commercial Banks .............................

18 :

A. Sourcesof Commercial Bank Funds .......... 1. Private domestic commercial banks ....... 2. Government commercial banks .......... 3. Foreign commercial banks ..............

19 19 33 34

B. Applications of Commercial Bank Funds ...... C. Commercial Banks and the Money Market .....

35 35

Investment Houses ............................. A. Sourcesof Investment House Funds .......... B. Applications of Investment House Funds ...... C. Investment Housesand the Money Market ..... Finance Companies ............................ A. Sourcesof Finance Company Funds ......... iii

40 43 44 52 61 64

B. Applications of Finance Company Funds ...... C. Finance Companies and the Money Market ....

CHAPTER4

MAJOR INSTRUMENTS IN THE MONEY MARKET .................

Interbank Call Loans ...........................

A. Volume of Interbank Call Loans ............ B. Major Borrowersand Lenders in the Interbank Market ................................ Deposit Substitutes ............................

Commercial Paper .............................

CHAPTERS

THE STRUCTURE OF INTEREST RATES IN THE MONEY MARKET

93 96 98 99 101

The Regulatory Framework ................ The Growth of the Commercial Paper Market .. Commercial Paper issuers .................. Commercial Paper in the Money Market ....... Investors in Commercial Paper .............. Mechanisms for Protecting the Investors ...... The Commercial Paper Market .............. -

A. Volume and Types of DepositSubstitutes ..... B. Major Borrowers in the Deposit Substitutes Market ................................ C. Major Investors in Deposit Substitutes ........ D. Deposit Substitutesand the Money Market ....

A. B. C. D. E. F. G.

72 79

....

102 ,106 115 121 126 128 132

141

Comparative Interest Rates on Money Market Instruments ..................................

144

Comparative Interest Rates for Money Market Intermediaries ................................

149

Comparative Interest Rates: Philippines and the USA...

1152

Interest Rates in the Money Market: A Summary .....

156

CHAPTER6

CONCLUSIONS AND POLICY RECOMM EN DATIONS .............

Summary .................................... Conclusionsand Recommendations ............... A. The Money Market asa Source of Funds for Financial Intermediation .................. B. Open Market Transactions in the Philippine Money Market .......................... POSTSCRIPT .................................... BIBLIOGRAPHY .................... APPENDIX

. ............

Selected updated tables ................

158 158 163 163 174 181 185 189

LIST OF TABLES

TABLE 1

PAGE NO.

Financial Institutions with Quasi.Banking Licensesas of February 1983 ................

13-15

Commercial Banksby Size of Assets ..........

20-21

FastestGrowing LargeCommercial Banks, 1977-82 ................................

SelectedCommercial Banks, Percentage Distribution of Total Resourcesby Source of Funds, 1977-82 ..........................

25-31

Commercial Banks, PercentageDistribution of Assetsand Liabilities, 1975-82 .............

Bills Payable of Commercial Banks, 1975-82 ....

Deposits and Deposit Substitutesof Commercial Banks, 1975-82 ..........................

8 9 10 11 12 13

Investment Houses,Total Assetsand Growth Rates, 1977-82 ...........................

41-42

Investment Houses, PercentageDistribution of Total Resourcesby Source of Funds, 1977-82.

45-50

Investment Houses, PercentageDistribution of Total Resourcesby Type of Asset, 1977-82 .....

53-57

Investment Houses,PercentageDistribution of Assetsand Liabilities, 1975-82 ...............

Finance Companieswith Quasi-Banking Licenses,Total Assets, 1977-82 ..............

62-63

Finance Companieswith Quasi-BankingLicenses, PercentageDistribution of Total Resources by Source of Funds, 1977-82 ................

67-71

Finance Companies with Quasi-BankingLicenses, PercentageDistribution of Assets,1977-82 .....

73-77

vii

LIST OF CHARTS CHART

PAGE NO.

Volume of Money Market Transactions ........

Money Market Transactionsby Maturity of Paper ..................................

Money Market Transactionsby Sizeof Placement...............................

Money Market Transactions by Instrument .....

Money Market Transactionsby Type of Intermediary ............................

Money Market Transactions by Type of Investor ................................

7 8

Money Market Transactions of "Other Investors" Commercial Bank Sourcesof Funds ...........

16 37

I nterbank Call Loans, Monthly Volume, 1977-82

Interbank Call Loans, PercentageChanges, 1977-82 ..

Commercial Paper Outstanding, by Issuer,1979-82 ..

106

Commercial Paper Outstanding, Exempt and Corporate Issuers,1979-82 ..................

107

Commercial Paper Issuedand Outstanding, 1979-82 .

110

Commercial Paper, Approvals, Outstanding Balances and Issuances,1979-82 .....................

113

Commercial Paper Outstanding, by Industry ....

115

Commercial Paper Flow Chart ...............

122

Interest Rates: Dealer PN and 91-Day Treasury Bills ...................................

144

Monthly Weighted Interest Ratesfor Interbank Call Loansand Dealer Promissory Notes, 1977-82 ................................

145

Monthly Weighted Interest Rates for CP Financial and CP Nonfinancial, and Dealer PN, 1977-82 ...

146

Yield Spread for CP and PN, 1977-82

Interest Rates,Various Instrument, Philippines ..

1S3

Interest Rates, US Money Market .............

1S3

xii

.........

147

FOREWORD This volume by Victoria S. Licuanan is a study on the institutions, instruments and financial practices which characterize the Philippine short-term financial market. Recent developments in the sector, particularly the financial crisisof 1981, are summarized and the effects of these developments on the system are discussed.The study covers not only government, private and foreign banks but also investment houses and finance companies with quasi-banking licenses. By describing the real-world operations of the market, the author makes understandable the relationship between money market flows, the various debt instruments and major borrowers and lenders. Significant implications of this relationship are also drawn, one of which, for instance, concerns the stability of the short-term financial system. Invariably, becauseof the quasi-banking nature of the short-term market, and the dependence of finance and investment companies on money market funds with short-term maturities to fill an almost permanent need for capital, questions are raised on the stability of these institutions and the instruments that they issue. It is hoped that this study can assistin the pursuit of structural reforms in the Philippine financial system and lead to further research on the aforementioned aspects of the financial system in the near future.

FILOLOGO PANTE, President

JR.

SUMMARY This paper focuseson the institutions, instruments and financial practices making up the Philippine short-term financial market. A large part of the paper is a description of the way in which the market operates: its major borrowers and lenders, the instruments it usesand the volumesand nature of money market flows. The period covered is 1977-82, during which money market transactions increased by 12 percent annually to reach 4_463 billion by 1982. The market is concentrated on the very short-term portion of the maturity spectrum, the weighted average maturity of transactions being only slightly over one month. It isalso largely a wholesale market; 70 percent of all transactions are 4_2 million or over. The major instruments used in the money market are deposit substitutes, especially dealer promissory notes. In 1977-82, these instrumentsaveraged roughly 75 percent of all transactions.Deposit substitutes are particularly important for investment houses and finance companies with quasi-banking licenses, for whom these instruments made up a very high portion of their money market transactions. Interbank call loans, however, have been increasing rapidly, and by 1982 comprised 29 percent of the market. Other instruments, including outright sale of commercial paper, averaged lessthan 6 percentof the money market. The importance of commercial paper in the money market goes beyond its relatively small share in total money market transactions. If deposit substitute instrumentsusingcommercial paper (namely repurchase agreements and certificates of assignment and participation) were included, the share of commercial paper in total money market transactionswould be roughly 15 percent. This instrument was also an important source of funds for nonfinancial corporations especially for manufacturing firms and financial institutions without quasi-banking licenses.However, difficulties in maintaining the quality of commercial paper issuesled to major problems in the commercial paper market in early 1981 which resuited in a virfual disappearance of commercial paper from the money market in 1982 and 1983. Because of its relatively riskier nature, commercial paper cornXV

mand higher interest rates than dealer promissory notes, with notes issuedby financial institutions without quasi-banking licensesh'aving higher rates than those issuedby nonfinancial concerns. Beyond this however, there seemsto be no interest differentials to indicate the broad rangeof risk categoriesamong commercial paper issuers. Dealer promissory notes generally command a lower interest rate, although there also seems to be some quality distinction here. Promissory notes of commercial banks generally command lower interest rates than those of investment housesand finance companies with quasi-bankinglicenses. The most active intermediariesin the money market are commercial banks. They accounted for an averageof 66 percentof all transactions in 1977-82, largely in the form of interbank call loans and deposit substitutes.The former is usedlargely for reserveadjustment, while the latter forms part of commercial banks' general fund sources. Reliance on deposit substitutes as source of bank funds, however, has been declining. The share in total bank funds declined from 14 percent in 1977 to only 7 percent by 1982. Investment housesand finance companieswithout quasi:banking licensesaccount for the balance of money market transactions with shares of 20 percent and 12 percent, respectively, in 1977-82. In comparison to commercial banks, however, thesetwo institutions are very highly dependent on the money market asa sourceof funds for their operations. For investment houses, deposit substitutessupply an averageof 80 percent of total funds, while for finance companies with quasi-bankinglicenses,an averageof 70 percent of total funds come from deposit substitutes. Thus, the primary activity of these institutions was quasi-banking, with loans comprising an increasing share of total assetsfor both institutions. As a result of their dependence on the money market as a source of funds for lending or quasi-banking,these institutions suffered major liquidity problemsin the aftermath of the liquidity crisis in early 1981, and again in late 1983 and 1984. From the survey of institutions, instrumentsand financial practices in the short-term markets, two major implications as to the stability and efficiency of the system may be noted. The nature of the short-term markets is largely one of quasi-banking,with deposit substitute instruments making up the bulk of transactions.The high dependence of two types of institutions, namely investment houses xvi

and finance companies with quasi-banking licenses, on "bought funds" on the liability side and lending on the asset side of their balance sheetsexpose them to problems _f mismatching. Aside from short maturities, the money market is a fickle source of funds, yet, on the lending side many companies continue to rely on renewed money market borrowings to fill a semi-permanent need for capital. Thus, reliance on quasi-banking as a major activity posesquestions on the stability of these institutions. A more general question is whether there is an economic rationale for institutions whosemajor activity is quasi-banking (despite their being establishedfor other reasons,e.g. underwriting). Corollary to the dominance of quasi-banking in the short-term markets, dealership and open market operations have not developed to a great extent, nor has a ladder of interest rates which would be indicative of the range of credit risks in the market. Open market operations would do much to improve the efficiency of the market in the senseof narrowing spreads,as well as widening the scope for open market operations as a tool of monetary policy, and hence would be a desirabledevelopment in the short-term markets. The Philippine money markets are continuously evolving in response to the requirements of the economy and the regulatory framework. Given the current nature and operations of the markets and their implications asto the stability and efficiency of the system, a major restudy of quasi-banking and financial practices in the money market is recommended for a possibleredirection of policies towards lessquasi-banking and the development of a dealership system and a true open market in short-term debt instruments.

xvii

CHAPTER1

INTRODUCTION

The short-term financial market hasbeen one ofthe most visible and certainly the most controversialsectorof the Philippine financial system over the past decade. In part this is becausethe money market is a fairly recent development on the financial scene,thus, the considerableconfusion on its actual role in the financial system,how exactly this role should be carriedout and bywhom. The market is continuously evolving. For example, much of the current discussionover the money market is affected by the financial crisisin 1981 and the continuing financial difficulties of certain market participants. While failures are a natural, if unfortunate economic phenomena, failures that involve financial institutions result in social and real costsgreater than the financial lossto its stockholders becauseof the public nature of its liabilities. In the wake of the 1981 financial crisisand the flaws it exposedin the system,the commercial paper market came to a virtual standstill. Recovery of the commercial paper market will be slow until a workable system is devised which will ensurea relative degreeof safety on one hand, while still providing an operational and financially viable source of funds for both nonfinancial and financial corporations on the other hand. The large size of the industry and, hence, the presenceof vested interest, the magnitude of financial resourcesand profits involved, and the repercussionson the competitiveness of different institutions, all contribute to the difficulty of a rational discussionof investor protection and the appropriate leveland form of industry supervision. The objective of this paper is to look at the institutions, instruments and financial practicesmaking up the Philippine private short-term financial market and from this draw some implications as to the stability and efficiency of the system. A large part of the discussionis a description of the way in which the market operates: its major borrowers and lenders, the instruments it uses,and the 1

SHORT-TERM

FINANCIAL

MARKETS

volumes and nature of money market flows. This is necessary because of the paucity of consolidated written materials on the subject and the need to understand the nature of the flows and relationships in the money market before they could be analyzed in meaningful terms. As is the case in most developing countries, the institutions and instruments in the Philippine financial markets are mostly drawn from developed country models; however, actual practices and their economic implications may differ considerably from the models due to differences in the nature, behavior, conventions and practices of institutions which are unique to each country. After examining the nature and financial flows in the short-term markets, some conclusions on the economic implications of the operations of the market are drawn. SCOPE OF THE STUDY This is a study of the private short-term financial market on the institutional level. Thus, the effect of interest ratesand balancesheet positions on nonfinancial behavior are not dealt with here, but rather, their implications for the financial institutions themselvesare discussed. The financial markets can be seen in the context of the familiar circular flow of income as a conduit in the transformation of savings into investment. In the circular flow of income, (seeFigure 1) households and firms are linked by a circular, self-perpetuating flow of productive services from householdsto firms (labeled "a"), and of goodsand servicesfrom firms to households(b). Savingsconstitute a leakage out of the system, but for so long as the flows are restored by investments, the flow is re-established. Since savers in general are different from investors, there must be some mechanism for transferring funds from the former to the latter. The funding of investments by deficit units through a transfer of savingsfrom surplus units is accomplishedeither by a direct transfer of savingsin exchange for primary securities issued by the deficit units (c), or through the financial markets. The transfer of funds(d) from surplus units or savers to deficit units or investors, and the return flow of securities(e) is accomplishedin two ways through the financial markets: either indirectly through the services of intermediaries who substitute their securities for those of the ultimate

INTRODUCTION

borrowers, or directly with the assistanceof dealers_hd brokers who facilitate the exchangeof securitiesfor funds. Figure1 CIRCULARFLOWOF INCOME1

(a)

(b)

I HOUSEHOLDS ( (c)

Savers< 4, /

(d)

, FINANCIAL MARKETS

) Investors 4" (

(e)

On certain levels of abstraction, the financial markets tend to be viewed as a "black box" into which funds enter and are drawn out again. This paper, however, is concerned directly with what goeson in that "black box", (i.e. with the institutions themselves). Since the study is on the micro level, there is no attempt to deal, for example, with the beneficial effects of the financial markets in raising the levels of savingsand investments; rather this paper deals with the functioning of the institutions themselves.Unless the institutions in the financial markets are themselvesstable and economically viable over the long run, they cannot perform well as conduits of savings and investments.The financial markets are not homogenous.Rather the markets are composed of different firms, each spurred by the profit motive to perform different functions which will maximize returns to its stockholders.These institutions are not indifferent to the forms and quantitiesof funds which flow through them. It is not just the level or maturity of funds which is important, but the structure: who owes whom and by how much, and what are the expectations and/or promiseson which the exchangewas premised.It is with questionslike these that this paper is concerned. While the money market started in the mid-1960s, this study deals only with the period from 1977 to 1982. However, some develop1Adaptedfrom Cramp,A.EL,MomelmryManagement.PrincilalesandProct/o_ London: Gee. Allen & Unwin Ltd., 1971.

SHORT-TERM

FINANCIAL

MARKETS

ments in 1983 and later are also noted. In general, the study focuses only on the private short-term markets (i.e. excluding government securities). The analysis is divided into five main parts. It startswith a brief history and survey of the short-term financial markets, The next sections deal with the institutions in the market, the major money market instruments and the structure of interest rates. The study ends with some conclusionsand policy recommendationson the private short-term financial markets.*

*A postscript 1983 and 1984.

to this study summarizes developments in the money market during

CHAPTER 2

SURVEY OF THE PHILIPPINE MONEY MARKET

THE DEVELOPMENT OF THE MONEY MARKET The development of the money market in the Philippines can be divided into three distinct periods. The first period was one of largely unregulated growth which spannedthe years from the beginningof trading in short-term debt instruments in the mid-1960s up to 1973. In 1973, legislation on quasi-banking ushered in a new phase in the development of the money market which was characterized by increasingcontrols on all market aspects. Finally, a third period started in mid-1980 with the introduction of the expanded commercial banking concept, followed shortly thereafter by the freeing of interest rates. The early years of the money market were marked by very rapid and, to a large extent, unregulated growth. The money market arose in responseto the evolving needs of the financial system. Up to the early 1960s, the only investment possibilitiesopen to economic units with a temporary surplusof funds were to keep them in cashor place them in savingsdeposits at commercial and savingsbanks. On the other hand, for those with short-term need for funds, commercial bank loans were the only institutional source of borrowing. What eventually evolved into the interbank call market did exist, but only on a very limited scale, with transactions being individually negotiated on the bank-to-bank and day-to-day basis.At thesametime, by the 1960s, the economy had grown largeenough suchthat profitable trading operations could be supported by the pooling of excessshortterm funds on the one hand, and of borrowing requirements on the other hand. The money market started in the mid-1960s when a few investment housesbegan trading operations (i.e. buying and selling short-

SHORT-TERM FINANCIAL MARKETS

dated debt instruments of banks and prime corporate names).Shortly thereafter, somecommercial banks alsostarted money desks. It is difficult to obtain statistics on theseearly years; however, a consolidation of the balance sheetsof investment housesduring this period indicates that total short-term borrowings and instruments sold under repurchase agreements by investment houseswere approximately P'32 million at the end of 1966, risingto roughly f'1,750 million by 1973.2 Bills payable3 by commercial banks,on the other hand, grew from f_954 million in 1966 to f_6,202 million by 1973.4 To thesefigures should be added interbank borrowings, plusfinance company paper. These are stock figures which would then have to be multiplied by some turnover figure to arrive at money market volumes which are comparable to data available for later years. Nevertheless,the numbersindicate a very rapid growth of the money market - an eight-fold increaseor an annualgrowth rate of about 34 percent basedon theserough figuresduring the early period. A new era in the money market was ushered in by legislation towards the end of 1973. Amendments to the Central Bank Act explicitly placed all bank and non-bank financial intermediariesunder the supervisionof the Central Bank. Rules and regulationsregarding the establishment and operation of investment houseswere passed. Central Bank circulars defined a new class of activity as quasibanking, delineated the institutions who would be allowed to engage in this activity, and es_tablishedrules on their operations. Quasibanking was defined as borrowing from twenty or more lenders, by issuingor acceptingdeposit substitutes(i.e., promissory notes,certificates of assignment or participation with recourse,and repurchase agreements), for the purpose of relendingor purchasingreceivables or other obligations. In the succeeding years, various other regulations were issued with regard to the standardization and physical delivery of shortterm debt instruments, minimum sizes and maturities, interest rate ceilings,and reserverequirements. Also important in the development of the money market were legislationamendingthe SecuritiesAct to 2Roxas, Sixto IC ManagingAsian Financial DevelopmenÂ˘ Manila: SinagTala Publilhers, Inc., 1976, p. A-231. 3While bills payable of commercialbanks Include mdlscountlngand emergencyadvancesfrom the CentralBankduringthe 1960sandearly 1970s,a substantialportionelfthis isbelievedto havebeencomposedof moneymarketborrowings. 4Unlessotherwls_Indicated, all figuresare from Central Bank data or the SGV $1udy of CommencialBanks in the Philippineg

SURVEY OF THE PHILIPPINE MONEY MARKET

place commercial paper under the responsibilityof the Securitiesand Exchange Commission in 1975, and imposinga 3S percent transaction tax on all primary borrowing in 1977. As in the early years of the money market, this period was also one of rapid growth. The Central Bank began publishing its time series on the money market in 1976; during that year the total volume of money market transactions was reported to have been _190.4 billion. From then on until 1980, the volume of money market transactionsgrew at the rate of over 12 percent per annum, and by 1980 amounted to _z303.7 billion. Mid-1980 marked a new period in the history of the financial markets when the Central Bank, in a major shift of direction, adopted the policy of non-specializationin financing activities. While this policy was not directed at the money market in particular, it marked a major new direction in the conduct of monetary policy which in the long run havefar-reaching effects on all segmentsof the financial markets. Of more immediate impact on the short-term markets was the second major policy shift of liberalizing interest rate ceilings that followed shortly thereafter. And yet another factor which warrants treating this period asseparatefrom the past was the industry-wide financial crisis in 1981, culminating in the closure of several institutions active in the money market and spurring wide rangingchangesin the regulatory framework. Over the yearsto come, the effects of these changesin the economic and legal environment will continue to shapethe nature of the short-term financial markets. In this latest period of money market activity, the total volume of transactions grew from fL303.7 billion in 1980 to f=329.6 billion in the following year and _462.8 billion in 1982. Each of these three periods in the development of the money market was characterized by specific developments.Until the establishment of the money market, the only financial instruments available to investors were savingsand time deposits, and for the particularly aggressive,securitiesat the stock exchanges.During the period from the mid-1960s to 1973, an educational processof introducing investors to major new financial instruments was accomplished. Because the money market was unregulated, it was able to attract a large number of participants in a relatively short period of time by offering an alternative investment instrument with an interest rate above the prevailingregulatedrate. In the subsequentperiod, 1974 to mid-1981, the money market becamehighly regulated. It was during this period that the character

SHORT-TERM FINANCIAL MARKETS

of the money market and its instruments were largely shaped, especially that of being principally an intermediary market rather than a dealership market, with dealer promissory notes being the primary money market instrument. New concepts were also introduced such as deposit substitutes and quasi-banking. It was also during this second period that commercial paper rose asa significant source of funds for nonfinancial firms and for financial institutions without quasi-banking licenses. Finally, a third phase of money market development can be traced to the introduction of major changes in the regulatory policy framework with the start of unibanking laws in mid-1980 and the subsequent freeing of interest rates. However, as far asthe character of the money market is concerned, it seems to have been shaped more by the liquidity crisisin 1981 than bythe changesin bankingand interest rate laws. As a result of this crisis and the changes in legislation that followed, there was a decline in the commercial paper market and in the importance of investment houses and finance companies as money market institutions. THE VOLUME AND COMPOSITION OF TRANSACTIONS IN THE MONEY MARKET, 1977-82 This section deals with a statistical description of the short-term markets in the period 1977-82. It includesa discussionof the volume of trading, its maturity composition, size of transactions, primary instruments, and major participating institutions and investorgroups. VOLUME OF TRANSACTIONS. In 1982, the reported total volume of money market transactions was@462.8 billion, havinggrown at an exceptionally high rate of about 40.7 percent during the year. In previousyears, growth was somewhat lower; the averageannual rate of expansion in 1977-81 was a fairly modest 11.8 percent, with year to year growth ranging from a low of only 2.8 percent in 1980 and a highof 25.3 percent in 1979 (SeeChart 1). Comparedwith this record, savingsand time depositsin commercial banks grew at a much higher 33 percent annually in 1977-81, while total deposits grew at an averagerate of 23 percent per annum over the same period. MATURITIES IN THE MONEY Ilia RKET. The money market refers to debt securities with maturities of lessthan one year. Excluding outright sales,roughly 45 percent of all money market transactions

SURVEY

OF THE PHILIPPINE

MONEY MARKET

Chart 1 VOLUMEOF MONEYMARKETTRANSACTIONS 500,

BI 250'_L_L_L L 0 77 78 P

_ 82

sE so 10

::::::::::::::::::::::

::=:::;::::::: n.:::::::::::m.:::::::::::!_,:::, .,.._::

VOLUMEOF MONEYMARKETTRANSACTIONS TOP:ANNUAL VOLUME BOTTOM:MONTHLYVOLUME Sourceof basicdata: CentralBank are on demand. Another 10 percent have maturities of betweenovernight to 15 days, so that over half of all money market transactions are made up of paper on demand or maturing in 15 days or less (SeeChart 2). Thosewith termsof between 16 to 45 days account for roughly 40 percent. Slightly over five percent of all transactions Chart2 MONEYMARKETBY MATURITY OF PAPER 70,

L I

Ep S 0 S B

48, 38,

TOTAL

28 68' t0_ 77

TOTRL TRRHSRCTIOH8 BY HRTURITY: t5 DAYS OR LESS, t6-45 DAYS, _ND 0UER 45 DI_YS Sourceof basicdata:CentralBank

SHORT-TERM FINANCIAL MARKETS

carry maturities of over 45 days. Thus, the weighted average maturity of all money market transactionsis slightly over one month. Over the years under study, the sharesof different maturities in the money market have been fairly constant so that the average maturity of all money market transactions has also been fairly constant at slightly over one month. SIZE OF TRANSACTIONS. The money market is a wholesale market; and while the minimum placement is only 1_50,000, an overwhelming portion of transactionsare considerably larger. Transactions in lots of about fl'2 million or less have been a roughly constant t_80 billion to t_90 billion each year from 1977 to 1982 (SeeChart 3). As a result,transactions of this size havefallen as a percentageof the total from about 41 percent in 1977 to only 20 percent by 1982. Within the category of placements below _2 million each, the share of even smaller placements(i.e. _1 million or less)hassteadily declined over time both in absoluteas well as in relative terms. Total transactions of t_1 million or lessduring 1977 amounted to 1='56.4 billion, or 17 percent of the market. By 1982, transactions of this size had fallen to only-P48.8 billion, accounting for 11 percent of all money market transactionsin that year. In contrast to the trends in small transactions, money market placements in lots of over @2 million have grown steadily over the Chart 3

MONEYMARKET PLACEMENTSBY SIZE 70,

5_,

4B_ BELOW P2 MIL

0 77

.,.A_ _" '

PLACENENTS BY SIZE: OVER P2 MILLION, AND LESS THAN P2 MILLION Sourceof basicdata:CentralBank

SURVEY OF THE PHILIPPINE MONEY MARKET

years. From a total of@126.9 million in 1977, and a shareof about 60 percent of all transactions,placementsof 1='2million or more have risen to @372.2 million in 1982, accounting for 80 percent of the total. Since the volume of transactionsof_2 million or lesshasbeen very steady in absolute amounts over the years, that portion of the market consisting of transactions of over _2 million each have accounted for all the volatility and growth in the money market in the pastsix years,asclearly shown in Chart 3. INSTRUMENTS IN THE MONEY MARKET. Basedon the distribution of transactions by type of instrument traded, the money market is seen to be very much an intermediation market. The bulk of transactions consistsof intermediate securities,with direct purchases of primary securitiesaccounting for only a small portion of the total (SeeChart 4). Chart4 INSTRUMENTSIN THE MONEYMARKET ?9.

5B, L p

48.

E 0

30 68" 10.

I_1 _;_-._,,.......

;; ; ;; ;_4:-:-;;; .....................

79 "98

MONEY MARKET INSTRUMENTS= IBCL, P/H, OTHER DEPOSIT SUBSTITUTES, AND OTHER INSTRUMENTS Sourceof basicdata:CentralBank Interbank call loans (IBCL) are the most rapidly growing sector of the market and have thus accounted for a growing share of all transactions. In 1977 and 1978, IBCL accountedfor only 8 percent, but their share hassince grown to an averageof 15 percent in 1979 and 1980, 20 percent by 1981, and 29 percent by 1982. In terms of volume, IBCLs amounted to _17.8 billion in 1977, and _67 billion by 1981. In 1982, IBCLs roseto _133.6 billion.

'12

SHORT-TERM

FINANCIAL

MARKETS

Since this is the market where commercial banks adjust their day to day liquidity, the amount of IBCLs fluctuates considerably more than other instruments. In 1982, for example, the monthly volume of IBCLs averaged4=11.12 billion, fluctuating from a low of @5.88 billion in May and a high of _'20.7 billion in December 1982 (See Chart 4). Promissory notes (PNs), on the other hand, account for the largest share of trading on the money market. During the early years of this study (1977-78), PNs made up an averageof about 60 percent of the market. During 1979 and 1980, however, other deposit substitutes (i.e. repurchase agreements and with-recourse transactions) grew at the expense of PNs, and the share of PNs declined to about 49 percent while that of other deposit subsitutesrose from about 19 percent in 1977-78 to about 31 percent by 1979-80. This trend, however, ended with the financial crisisin early 1981 and the subsequent decline of investor confidence in other deposit substitutes. Since early 1981, the amount of PNs traded again grew rapidly, while other deposit substitutes declined both in relative and absolute terms. By 1982, the share of PNs in total money market transactions was about 50 percent. Taken together, all deposit substitutes, (i.e. PNs and others) account for roughly 75 percent of all transactions in the money market. Only about 6 percent of short term-debt instruments consistof instrumentssuchascommercial paper. INSTITUTIONS IN THE MONEY MARKET. The three major types of financial institutions most active as intermediaries in the money market are commerciar banks, investment housesand finance companies. As of the first quarter, 1983, there were 64 institutions licensedto engagein quasi-banking;37 commercial banks, 11 investment houses, 12 finance companies, 2 private development banks, and 2 savingsbanks (See Table 1). The volumes of money market transactions accounted for by commercial banks, investment housesand finance companies were fairly constant over the period studied. Commercial banksaccounted for about 66 percent. Investment houseshave a much smaller share of approximately 20 percent, while finance companiesaccountedfor about 12 percent. All the other institutions accountedfor an average of only 2 percent of money market activity (SeeChart 5).

SURVEYOF THE PHILIPPINEMONEYMARKET

Chart S INTERMEDIARIES IN THE MONEY MARKET 70.

IB L

50, " 48. 6e'

F COS

10' I HSE 77

COMMERCIAL BANKS, INVESTMENT HOUSES, FINANCE COMPANIES AND OTHERS Sourceof basic data: Central Bank Table 1 FinancingInstitutions With Quasi-BankingLicenses As of February, 1983 COMMERCIAL BANKS PrivateDomesticCommercial Banks Allied Banking Corporation AssociatedCitizensBank Bank of the Philippine Islands China BankingCorporation City Trust BankingCorporation The ConsolidatedBank & Trust Co.

Allied Associated BPI China Citytrust Solid Bank

Equitable Banking Corporation Family Bank & Trust Company Far East Bank & Trust Company Insular Bank of Asia & America

Equitable Family FEBTC IBAA

The International Corporate Bank The Manila B_nkingCorporation Metropolitan Bank & Trust Company PacificBankingCorporation PhilippineBankof Communications PhilippineBankingCorporation PhilippineCommercial& Industrial Bank

Interbank Manila Bank Metro Bank Pacific PBCom Philbanking PCIB

SHORT-TERMFINANCIALMARKETS PhilippineTrust Company PilipinasBank Producers'Bank of the Phil. PrudentialBank Republic PlantersBank Rizal CommercialBankingCorporation Security Bank & Trust Company The Traders Royal Bank United CoconutPlantersBank

Philtrust Pilipinas Producers Prudential Republic RCBC Security Traders UCPB

GovernmentBanks PhilippineNational Bank

PNB

ForeignBanks Bankof America NT & SA The Chartered Bank Citibank N.A.

BA Chartered Citi

The Hongkong& ShanghaiBank

HSBC

INVESTMENT HOUSES AEA DevelopmentCorporation AnscorCapital Corporation Ayala Investment& DevelopmentCorporation Citicorp InvestmentPhilippines First Metro InvestmentCorporation MerchantsInvestmentCorporation Multinational InvestmentBancorporation PhilippineAmerican InvestmentCorporation PrivateDevelopmentCorporationof the Philippines Philippine PacificCapital Corporation State InvestmentHouse, Inc.

AEA Anscor AIDC Citicorp First Metro Merchants Multi PAIC PDCP PPCC State

FINANCE COMPANIES AsianConsumer& IndustrialFinanceCorporation Bank of America/FinanceCorporation Cebu International FinanceCorporation CommercialCredit Corporation/GeneralCredit FilinvestCredit Corporation IndustrialFinanceCorporation First Malayan Leasing_nd FinanceCorporation

ACl FC BAFC Cebu CCC Filinvest IFC Malayan

Note: Examplesof commercialbankswithoutquasi-banking licenses are Commercial BankofManilaandPhil.Veterans Bank.

SURVEY OF THE PHILIPPINE MONEY MARKET

FNCBFinance/Investors FinanceCorporation ManphilInvestment Corporation MercantileFinancing Corporation Paramount FinanceCorporation StateFinancing Center,Inc.

FNCB Manphil Mercantile Paramount StateFinancing

PRIVATEDEVELOPMENTBANKS PhilippineInvestment SystemOrganization Peninsula Development Bank

PISO

SAVINGSBANKS BancoFilipinoSavings & Mortgage Bank HomeSavings Bank Note: FNCB was formerly knownas InvestorsFinanceCorp; CCC underwenta CB rehabilitation plan in 1983 and changedits name to GeneralCredit Corp; First Malayan Leasing and FinanceCorp. was the resultof a mergerbetweenBacolodIndustrial FinanceCorporation (a financecompany) In Dec. 1981, with the latter beingthe survivingcorporateentity and retainingthe quasi-bankinglicense.In 1982, the nameof the merged_ntlty waschanged to FirstMalayan Leasingand FinanceCorp. Source:Central Bankof the Philippines

INVESTORS IN THE MONEYNIARKET. As indicated by the shares of different instruments and institutions in the market, commercial banks are also the largest investors in money market instruments. From 1977 to 1981, the averagemonthly investmentsof commercial banks in the money market grew from f=6.7 billion to f=8.7 billion (See Chart 6). In 1982, however, average monthly investmentsof commercial banks rose to _14.5 billion. Despite the growth in the average amount of commercial bank investments in money market instruments, the share of commercial banksas investorshasdeclined slightly over the years to about 37 percent by 1982. Meanwhile, the shares of other investors have been growing. Rural banks and other banks accounted for about 14 percent in 1982, up from about 6 percent in 1977 (SeeChart 7). Private corporations were also a substantial contributor of funds, supplying a roughly constant 18 percent of the market. Investments by individuals in the money market, however, have been a roughly constant _'3 billion to _4 billion over the years. As a result, the relative importance of individuals as suppliersof money market funds has declined, from 20 percent in 1977 to only 11 percentby 1981 and 9 percent by 1982. Other large investorswere investment houses,pen-

SHORT-TERM FINANCIAL MARKETS

Chart6 INVESTORSIN THE MONEYMARKET 50,

i $

20._ 10

OTHER IHVESTORS 77

INUESTORS IN THE HONEY MARKET; COHHERCIAL BANKS AND OTHERS Sourceof basicdata:CentralBank

Chart7 OTHERINVESTORSIN THEMONEYMARKET 38. RURAL &.--_ L

20-

OTHERS 77

OTHER INVESTORS IN THE HONEY HARKET: RURAL _ OTHER BANKS, INOIVIOUALS, PRIUATE CORP AND OTHERS Sourceof basicdata:CentralBank sion and trust funds, and government agencies.Their investmentsin the money market, however, have tended to fluctuate widely bver the year dependingon their liquidity positions.

SURVEY OF THE PHILIPPINE MONEY MARKET

SUMMARY OF MAJOR MONEY MARKET CHARACTERISTICS, 1977-1982 During the period 1977-82, the volume of transactions in the money market expanded at a fairly moderate rate of about 12 percent annually, with the exception of 1982 when the volume expanded by about 42 percent. Compared to this growth rate, other monetary aggregatesgrew much faster; savingsand time deposits,for example, grew at around 33 percent per annum during the same period. By and large, the money market instrumentsare confined to the very short-term end of the maturity spectrum. The averagematurity for all money market instruments isonly about 30 days. Roughly 45 percent of all transactionsare on demand, and fully 95 percentof all transactionshave maturities of lessthan 45 days. The money market isalsoa whofesale market. Seventy percentof all transactions are in lot sizes of _'2 million or more. Only 16 percentare in lots of lessthan _1 million, and roughly 14 percent are between@1 million and _'2 million. With respect to instruments, deposit substitutes are by far the most popular form. Over the period reviewed, these instrumerftscomprised roughly 75 percent of all transactions,although their share has been declining over the years. Interbank call loans were the next largest segment, with about 20 percent of the market. Other ir,struments, mostly commercial paper sold or, a without-recourse basis, comprisea very small segmentof the market. Among the financial intermediaries in the money market, commercial banks are the most active. These institutions accounted for about 66 percent of all money market activity in 1977-82. Investment houseshave the next largest share, averagingroughly 20 percent, while finance companiesaccountedfor the balanceof about 12 percent. Commercial banks also comprised the largest singlegroup of investors in the short-term markets, with an averageshare of 35 percent. Other identifiable groups were other banks which supplied roughly 14 percent of all money market investments during the period 1977-82, and private corporations with a share of about 18 percent. Private individualsaccounted for lessthan 10 percent of all investorsin the short-term markets.

CHAPTER 3

INSTITUTIONS

IN THE MONEY MARKET

COMMERCIAL BANKS The foregoing survey indicates the important and pervasive role of commercial banks in the money market. About 66 percent of all money market transactions go through commercial banks. As investors they provide about one-third of all money market funds. Moreover, the interbank market is one of the largest and the most rapidly growing sectorsof the market. As creators of money and the major depository institutiorl for liquid funds, banks are the focal point of liquidity adjustments of all other sectors of the economy. As such they also face seriousliquidity problems of their own. As users of the money market, commercial banks turn to the interbank market for the short run problem of reserve position adjustments, while for the slightly longer run problem of meeting loan and investment requirements for funds, commercial banks make use of the money market as a major source of funds to supplement deposits and equity capital. Apart from this, banks also maintain a certain level of liquid assetsasreserve. Hence, as investors, commercial banks are active usersof the money market as an investment outlet for their funds. These factors, and the dominant size of commercial banks in the financial system, enSure that they play a central role in the short-term markets. In this section we examine the use of the money market as a source of funds for banks. The analysis is largely concerned _ith deposit substitutes, while a discussionof interbank call loans is),deferred until a later section. On the usesof funds side, the application of funds raisedin the money market is subsumedunder generalfqnds management,and hence this section concludeswith a generalreview of the assetside of commercial bank balancesheets. ;

MONEY MARKET INSTITUTIONS

A. Sources of Commercial Bank Funds The major question dealt with in this section is the role of the money market in general, and of deposit substitutes in particular, in contributing to the increase in total resourcesof commercial banks. The total resourcesof the commercial banking system during the period 1977-82 grew at an average annual rate of about 24 percent. Indeed, this was the system's average annual growth rate for the entire decadefrom 1970 to 1982. The seemingly steady long-term growth of the commercial banking sector asa whole however, hidessubstantial differences in growth rates from year to year and bank to bank. For the period under study, the expansion of bank resources, while positive, decelerated from a growth rate of 31 percent in 1978, to 25 percent in the following year, 22 percent in 1980 and 17 percent in 1981. In 1982, however, total assetsof all commercial banks expanded at 22 percent. For purposes of analysis, commercial banks are grouped into three categoriesby ownership: private domestic banks, government banks, and foreign banks. 1. Private Domestic Commercial Banks INCREASE IN RESOURCES. Private domestic commercial banks account for about 60 percent of aggregate commercial bank resources. In 1977-82, total resources of private domestic banks grew at 24 percent annually. (i.e. more or less at the same rate as all commercial banks in general). For this period, there was apparently a slowing down in the expansion of private domestic banks. From annual growth rates of 2.5 percent to 32 percent in 1977 through 1979, total assets of private domestic banks grew at rates of 22 percent in 1980, 21 percent in 1981 and 18 percent in 1982 (See Table 2). In contrast, government commercial bank resourcesaswell asthose of foreign banks expanded by 28 percent in 1982. Among private domestic banks there appearsto be a fair amount of differences in relative growth rates and hence in the ranking of banks by size of assets(See Table 2). Of the ten largest banks in 1977, only 5 were still in the top ten six yearslater. Among the ten smallest banks in 1982, four were also among the 10 smallest in 1977, while 2 were not yet existing. There were some banks who, by dint of exceptionally rapid

TABLE 2 I

COMMERCIAL BANKS BY SIZE. OF ASSETS

TOTAL ASSETS ('P MIL) 1977

1981

BPI METRO ALLIED REPUBLIC UCPB FEBTC PCIB

4,851 3,002 1,914 302 2,274 2,555 2,451

8,489 6,940 7,430 5,061 6,218 5,356 4,817

INTERBANK MANILA TRADERS

610 1,633 1,135

FAMILY RCBC

RANK 1977

1981

1982

1977-81

1977-82

9,120 8,453 8,013 6,576 6,496 6,260 6,033

1 2 t1 27 6 3 5

1 3 2 6 5 4 7

1 2 3 4 5 6 7

15 23 40* 102* 29* 20 19

13 23 33* 85* 23 20 20

4,553 3,650 4,145

5,309 5,287 4,935

24 15 18

8 11 10

8 9 10

65* 22 38*

54* 26* 34*

N.A. 2,514

3,831 4,320

4,601 4,4_8

N.A. 4

12 9

11 12

N.A. 15

CHINA SECURITY IBAA

2,260 973 1,796

3,473 3,t 29 2,974

4,131 3,913 3,637

7 21 12

13 15 19

13 14 15

11 34* 11

13 32* 15

PACIFIC SOU D PBCOM E_ PRUDENTIAL

2,070 2,061 1,016 2,T8_ 1,444

3,354 3,095 3,110 • 3,208 2,565

3,619 3,268 3,050 2,908 2,894

9 10 20 8 17

14 18 17 16 20

16 17 18 19 20

13 11 32* 10 15

12 10 25 6 15

1982

% ANNUAL GROWTH

N.A. 12

u_ 1-1 m

"11

> Z ¢_ _= ;_ t'.ll

PHILBK UNION

1,610 N.A.

2,325 N.A.

2,629 2,575

16 N.A.

21 N.A.

21 22

I0 N.A.

PRODUCERS ASSO CITYTR PHILTR PILIPINAS

481 1,055 653 444 634

1,77t 2,030 1,799 1,120 1,090

2,474 2,191 2) 119 1,283 1,145

25 19 22 26 23

24 22 23 25 26

23 24 25 26 27

COMBANK TOTAL

N.A. 41,919

430 100,286

587 117,955

N.A. -

27 -

28 -

N.A. 24

N.A. 23

PNB VETE PANS TOTAL

19,238 1,696 20,934

44,866 2,726 47,592

58,080 2,620 60,700

1 2 -

24 13 23

25 9 24

CITI BA HSBC CHARTERED TOTAL

4,828 1,411 672 682 7,593

13,455 4,548 1,743 1,O42 20,788

17,892 5,548 1,827 1,337 26,605

1 2 3 4 -

29* 34* 27 11 29

30* 32* 22 14 28

ALL BANKS

70,446

168,667

205,259

39* 18 29* 26 15

10 N.A. 39* 16 26 24 13

IO z

_> -I _ m __ --. -I z_

*Denotesbankswithexceptionally rapid8rowth. Rankedbysizeof uNtsin 1982. 1977datafor BPiIncludes COMTRUSTwith whichIt wasmergedIn 1981; FamilyBa_kwu formerlyaav]np bankandbecame a commercist bankon|yin 1981;COMBANK andUntanBankworemt upIn 1981andt982, rempectively. Sourceof dsta: SGVstudyof Commercial Banks Nots:$_ peslscdpt for updated table. lib

SHORT-TERM

FINANCIAL

MARKETS

growth, rose to a considerably higher ranking during the period under study. These were Allied Bank, Republic Bank, Interbank, Traders Royal Bank and Security Bank (See Table 3). For these banks, the average annual growth rates in 1977-82 were substantially above the industry average of 23 percent. Annual growth of assets ranged from 85 percent for Republic Bank to 32 percent for Security Bank. The Philippine Bank of Communications also grew rapidly until 1980 resulting in an average growth in total assets of 32 percent in 1971-81, but with a decline in total assets in 1982. Average growth over the period 1977-82 declined to close to the industry average growth. (One other bank, Producers, also grewat exceptionally high rates averaging 39 percent in 1977-82; however, because of the low asset base from which it started, it remains among the smaller banks in the system.) TABLE 3 FASTEST GROWING LARGE DOMESTIC COMMERCIAL BANKS, 197742

RANK 1981

1982

YEARL Y GROWTH RATE % 1977-81 1977-82

Banh

1977

Allied Republic Interbank Traders Security PBCom

11 27 24 18 21 20

2 6 8 10 15 17

3 4 8 10 14 18

40.37 102.33 65.29 38.24 33.91 32.27

33.16 85.18 54.15 34.17 32.09 24.59

24.94

22.9

All Private Commercial Banks

In examining the growth records of these banks, it is interesting to note that periods of rapid growth seem to come in spurts rather than in a steady (although faster than average) growth over time. This suggests some special circumstance or opportunity which co_JId be availed of only by a particular bank at a particular time (_us preventing others from following suit and attaining similar ffigh

MONEY MARKET INSTITUTIONS

231

growth rates). Interbank, for example, started operations in 1977, taking over the license of Continental Bank. Starting as 22nd in rank until 1980, it rose to number 8 at the time of its merger with Atrium and Apcor during the shake-out among financial institutions in 1981. Allied Bank who took over from Genbank also started operations in 1977. From number 11, it grew extremely rapidly in 1978 when .its assetsalmost doubled, propelling it to the 3rd rank by 1979. Republic Bank rose from number 24 in 1978 to number 10 the following year, and to number 4 in 1982 as a result of a change in management which brought sugar interests into the bank. Security Bank was number 21 in 1977 through 1980, but since then grew rapidly and became number 19 in 1981 and number 17 in 1982, again due to a changein management. Growth rates for the other banks were not as high but also tended to fluctuate considerably over the years. .SOURCES OF FUNDS. Commercial banks utilize a high degree of financial leveragewith depositsand borrowed funds supplyingabout 90 percentof total resources. Table 4 shows the composition of the sources of funds for selected commercial banks in 1977-82. Looking at private domestic commercial banks as a whole, there were no drastic changesin the major funds sources,although sometrends may be observed.For this period, there was a slight rise in the share of funds contributed by deposits, a decline in the share of deposit substitutesand a rise in the shareof other bills payable. The role of the money market in bank funding is indicated by the deposit substitutes account, which is normally classifiedunder the general headingof "bills payable." The remainingcomponent of the bills payable account is "other bills payable," mainly rediscount and advancesfrom the the Central Bank as well as foreign acceptancespayable. While bills payable in general supplied between 21 percent and 25 percent of all bank funds in 1977-82, there appearsto have been a relative shift in the useof depositsubstitutes as opposedto other bills payable. Deposit substitutes accounted for 14 percent of total bank funds in 1977 but declined to only 7 percent by 1982. On the other hand, other bills payable accounted for only 6 percent of all bank funds in 1977 but roseto 14 percent by 1982. The trend towards relatively increaseddependenceon other bills payable to finance bank growth is confirmed by looking at the

SHORT-TERM

FINANCIAL

MARKETS

sourcesof funds of those banks which achieved higher than average growth ratessince 1977 (SeeTable 4). The highest growth rates in the period studied were achieved by Republic Bank and Interbank, which grew at averageannual rates of 85 percent and 54 percent, respectively. For both banks, deposits supplied a portion of funds which was substantially below the industry average. Whereasfor all private domestic banks, depositssupplied an average of 58 percent of resources,the comparable percentages were 33 percent for Republic Bank and 23 percent for interbank; Reliance on deposit substitutes was also minimal; virtually nil in the case of Republic Bank, while for Interbank, deposit substi_tes averaged26 percentof total resourcesin 1977.-78 before declining to 8 percent by 1982. On the other hand, other bills payable supplied much larger portions of these banks' funds. Compared to the industry averageof 8 percent in 1977-78 and 13 percent in 1979-82, other bills payable comprised 46 percent of Republic Bank's funds and 40 percent of Interbank's in 1977-82. In the caseof Republic Bank, a new management team with strong ties to the sugar i;ldustry took over in 1978, changing its name to Republic Planters Bank. Before the change in management, the bank's other bills payable were nil but after 1978, rediscounts and overdrafts (presumably connected with the financing of the sugar industry) causedthe level of other bills payable to rise. In 1978, other bills payable supplied 29 percent of Republic Bank's resources, later rising to an averageof 50 percent. Interbank was founded by the Orosa group in 1977, taking over the license of Continental Bank. Central Bank support funds were part of the rehabilitation package and were reflected in the 46 percent of total resources supplied by the other bills payable account in 1977 and 39 percent in 1978. In 1980, the Herdis group took over the bank. In 1981, it merged with Atrium and Apcor, an investment house and finance company, respectively, also under the Hordis group. Along with taking over the assets of those two compa_lies, Interbank took on the CB emergency advances previously given to Atrium and Apcor (largely to the former). As a result, Interbank's other bills payable account ballooned to an averageof 51 percent of total resources in 1981 and 1982. As part of the consolidation of,the three financial institutions, DBP took roughly 75 percent of I_erbank's capital, while NDC took about 20 percent. In October 1983, Interbank became almost wholly owned by NDC.

Table 4 SelectedCommercialBanks

Banks

o z

PercentageDistributionof Total Resourcesby Sourceof Funds1 1977 to 1982

"_ >_

BILLS PAYABLE

Yearly Growth

Deposits (2)

Deposit Other Bills Substitutes Payable

Total Bills Payable

Other Total Capital Liabilities (3) Liabilities

ALL PRIVATE DOMESTIC 25 32 25 22 21 18

c -4

COMMERCIAL BANKS (ave.growth 1977-82: 23%) 1977 1978 1979 1980 1981 1982

57 58 55 59 57 61

14 12 13 8 11 7

_* 6 9 12 13 13 14

21 21 25 22 23 21

12 11 11 11 11 9

90 91 91 92 91 9_

10 9 8 8 9 9

38 36 28 18 22 21

10 9 8 12 9 9

88 93 93 94 93 93

12 7 7 6 7 7

LARGE BANKS WITH EXCEPTIONALLY HIGH GROWTH RATES Allied Bank(ave.growth 1977-82: 33%) 1977 1978 1979 1980 1981 I982

n.a. 94. 61 21 2 8

40 46 57 64 62 63

10 12 14 11 20 15

28 24 14 7 2 5

Table 4 (Continued) BILLS PAYABLE Banks

Yearly Growth

Deposits (2)

Deposit Other Bills Substitutes Payable

Total Bills Payable

Other Liabilities(3)

Total Capital Liabilities

RepubJicPlanters (ave.growth 1977-82: 85%) 1977 1978 1979 1980 1981 1982

(3) 147 18 71 4 30

69 42 28 31 33 38

2 2 23 0 0 0

0 29 31 52 50 45

2 31 54 52 50 45

11 10 8 11 11 11

84 89 89 95 94 94

16 11 11 5 6 6

Interbank (ave.growth 1977-82: 54%) 1977 1978 1979 1980

n.a. 60 18 42

18 24 28 35

13 15 23 21

46 39 31 23

60 54 54 43

11 10 8 13

89 89 89 90

11 11 11 10

u_ "0 _= -I .h m

1981 1982

t77 17

12 21

8 8

53 48

60 56

14 12

87 89

13 11

Traders Royal (ave. growth 1977-82: 34%)

> z

1977 1978 1979 1980

47 59 35 54

59 72 68 71

t6 2 5 6

1 2 8 8

17 4 13 13

13 t7 12 11

89 92 93 95

11 8 7 â&#x20AC;˘ 5

1981 1982

10 19

68 71

4 1

10 13

14 14

12 9

94 94

6 6

Q r >

Table 4 (Continued)

0 Z fll

BILLS PAYABLE Banks

Yearly Growth

Deposits (2)

Security (ave. growth 1977-82: 32%) 4977 37 55 1978 41 52 1979 6 47 1980 79 66 1981 21 64 1982 25 77

Deposit Other Bi|ls Substitutes Payable

-< Total Bills Payable

Other Liabilities(3)

Total Capital Liabilities

-4

",'1

15 22 23 10 2 1

4 5 7 11 20 14

19 27 30 21 22 12

11 10 14 5 7 5

85 88 88 93 94 94

15 12 12 7 6 6

27 32 32 25 26 31

5 2 4 4 4 1

32 34 35 29 30 32

14 12 12 12 11 10

84 87 88 90 91 90

16 43 11 t0 9 10

4 5

t0 13

13 11

90 91

10 9

c_ m z째 Uq

PBCom(ave.growth 1977-82: 25%) 1977 1978 1979 1980 1981 1982

11 39 46 33 13 (2)

39 41 41 49 50 48

OTHER BANKS IN THE TEN LARGEST CATEGORY Bank of P.I. (ave.growth 1977-82: 43%) 1977 1978

22 32

68 66

5 8

t_ -4

Table 4 (Continued) BILLS PAYABLE Banks

Yearly Growth

Deposits (2)

Deposit Other Bills Substitutes Payable

Total Bills Payable

Other Liabilities(3)

Total Liabilities

Capital

1979 1980

16 19

64 65

7 9

10 11

17 19

10 7

91 92

9 8

1981 1982

(4) 7

62 68

12 6

10 11

23 17

8 8

93 93

7 7

Metro Bank (ave.growth 1977-82: 23%) 1977 1978 1979 1980

42 36 29 5

61 64 65 65

8 7 9 6

3 7 9 8

11 13 18 14

21 16 12 14

94 94 94 94

6 6 6 6

u_ O

1981 1982

26 22

61 64

11 9

8 8

19 17

12 12

92 93

8 7

UCPB(ave.growth 1977-82: 23%)

1977 1978 1979

94 51 75

83 80 69

t 3 4

2 5 8

2 7 12

5 4 10

90 90 90

10 10 10

1980 1981 t982

18 34 4

69 61 61

4 8 2

8 8 12

12 16 T4

9 12 13

89 90 88

11 10 i2

> Z __ >¢ X

Table 4 (Continued) BILLS PAYABLE Banks

Yearly Growth

Deposits (2)

Deposit OtheÂ˘ Bills Substitutes Payable

Total Bills Payable

Other Liabilities(3)

Total Liabilities

Capital

FEBTC (ave. growth 1977-82: 20%) 1977 1978 1979 1980 1981 1982

14 25 9 24 23 (7)

57 59 57 65 47 69

18 20 16 13 31 11

7 5 10 7 5 5

25 25 26 20 36 16

9 9 9 7 10 5

91 92 92 92 94 90

9 8 8 8 6 10

11 6 5 5 6 1

1 8 4 14 10 15

12 14 10 19 16 16

14 13 15 16 11 8

91 93 92 93 88 90

9 7 8 7 12 10

PCIB (ave. growth 1977-82: 20%) 1977 1978 1979 1980 1981 1982

18 32 14 30 1 25

66 66 68 58 61 66

Manila (ave.growth 1977-82: 26%) 1977 1978 1979 1980

n.a, 35 28 13

58 57 56 68

9 10 13 7

10 9 14 9

19 19 27 16

12 15 9 8

89 91 92 92

11 9 8 8

1981 1982

14 45

75 77

5 1

4 11

9 12

7 5

91 94

9 6

B z

Table 4 (Continued) BILLS PAYABLE Banks

Yearly Growth

Deposits (2)

Deposit Other Bills, Substitutes Payable

Total Bills Payable

Other Liabilities(3)

Total Liabilities

Capital

LARGEST GOVERNMENT BANK PHILIPPINE NATIONAL BANK (ave.growth 1977-82: 25%) 1977 1978 1979 1980 1981 1982

4 21 32 25 16 29

42 39 46 4-3 33 35

18 8 5 4 6 7

19 33 29 32 38 46

37 41 34 36 44 53

12 12 13 15 17 6

91 92 93 94 94 94

9 8 7 6 6 6

LARGEST FOREIGN BANKS

u,1 "I"

o -I

BA (ave.growth 1977-82: 32째_)

(4)

1977 1978 1979 1980

16 61 65 (4)

41 28 24 19

21 17 12 3

5 7 7 21

26 25 19 24

10 11 29 11

n.a. n.a. n.a. n.a.

23 36 28 46

_c >. z _'

1981 1982

26 22

22 23

6 3

15 10

22 13

9 7

n.a. n.a.

47 57

"11

I"11 ..q

Table 4 (Continued) Banks

Yearly Growth

BILLS PAYABLE Deposits (2)

Deposit Other Bills Substitutes Payable

"< _r

Total Bills Payable

Other Liabilities (3)

Total Liabilities

Citi (ave. growth 1977-82: 30%) 1977 1978 1979 1980 1981 1982

31 47 42 2S 6 33

18 16 33 28 27 17

Capital (4)

15 7 7 7 16 15

6 3 5 8 4 6

21 10 12 15 20 21

12 13 11 10 13 13

n.a. n._c n.a. n.a. n.a. n.a.

49 61 44 47 40 49

Notesto Table 4: (1) Table showsitem as a % of total resources;details may not add up to totals to roundingerrors.Banksarearranged by rank in t982. BPI incl Comtrust for years prior to 1981 ; percentagedistributionof resourcesfor FEBTC and Manila in 1981 includestheir consolidatedsubsidiaries. (2) Depositsincludedemand,savings & time deposits,gov't deposits,and depositsof banks and trust departments. (3) Other liabilitiesinc|udeoutstanding acceptances,marginaland specialtime deposits,due to accounts,accruedtaxes, unearnedand other deferredcreditsand other liabilities. (4) Minimal capital isshownor_the balancesheetsof bankswhich arebranchesof internationalbanks,amount shownin this table as "capital" areamounts whichare "due to headoffice, branches,and agencies. Source of Basic Data: SGV,A

_ > m -4

Study of Cornmercial Banks In the Philippines,

1977-82.

Â˘ -_

SHORT-TERM FINANCIAL MARKETS

Three other banks which alsogrew at exceptionally rapid rates in 1977-82 were Allied Bank, Traders Royal Bank and Security Bank. These banks each expanded at average annual rates of about 33 percent. For these three banks, depositsappear to have been the largest factor in resourcegrowth (SeeTable 4). This was particularly truefor Traders Royal Bank for which tleposits consistentlysupplieda higher portion of funds than was true for the industry as a whole. To a lesser extent, this was also the case for Allied Bank and Security Bank, especially in the last three years. For thesethree banks, deposit substitutes were important only in the caseof Allied Bank, where they supplied between 10 to 15 percent of resources,except in 1981 when deposit substitutes were 20 percent. For Traders Royal Bank, deposit substitutes comprised only an averageof 4 percent of total resourcesin 1978-82. while for Security Bank, the share of ftmds supplied by deposit substitutesdeclined from a highof 23 percent in 1979 to only 1 percent by 1982. Especially in the last three years, other bills payable were a rising share of funds for Traders Royal Bank and Security Bank at rates similar to the industry average.For Allied Bank, other bills payable declined from 28 percent of funds in 1977 to only 5 percent by 1982. The Philippine Bank of Communications (PBCom) was another bank which enjoyed a high and fairly steady rate of growth from 1977 to 1980 when it grew at an averagerate of 39 percent annually. in 1981, however, its growth slowed to 13 percent while in 1982, total resourcesdeclined by 2 percent. Among the large and rapidly growing banks, PBCom isthe only bank for which deposit substitutes supplied a consistently large portion, averaging 29 percent of total funds (Table 4). Deposits,on the other hand, comprised an avelage of only 45 percent of resources,compared to the industry average of 58 percent. Reliance on other bills payable, likewise, was much lower than for other banks,declining from 5 percent in 1977 to qnly 1 percent 1982. For the other banks in the top 10 (by size) category, growth rates in 1977-82 varied from 26 percent for Manila Bank, to 23 percent for the Metropolitan Bank and Trust Company (METROBANK) and United Coconut Planters Bank (UCPB), 20 percentlfor Far East Bank and Trust Company (FEBTC) and Philippine C0mmercial and Industrial Bank (PCIB), and about 13 percent for Blank of the Philippine Islands (BPI) (See Table 2). Of these banks, Only FEBTC relied significantly on deposit substitutes which suppli_l a

MONEY MARKET INSTITUTIONS

varying share of 11 percent of 31 percent of its funds (See Table 4). All other banks relied primarily on depositsto finance their expansion, and in most cases,depositswere a significantly higherpercentageof bank resourcescompared to the industry average.Only PCIB, and to a lesser extent, BPI utilized other bills payable for a significant portion of funds, although even for these two banks, reliance on other bills payable was still below the industry average. For a bank to grow very rapidly, all sources of funds must obviously grow at a rapid rate. However, these are relative rates of growth. (i.e., the category of funds sources which expandedthe fasttest and hence cameto supplya largershareof bank funds). Relative shareswere compared both with previouslevelsfor the bank itself as well asagainstthe industry average. From the above, it would seem that for banks that grew at exceptionally fast rates in the past 5 years the major sourceof growth was other bills payable. (i.e. advances,rediscountsand overdrafts at the Central Bank). For other large banks which also grew at rates above the industry norm, as well as other banks in the top ten category, depositsgenerally supplied the largest source of growth. Hence, for privatedomestic commercial banks asa whole, there was a slight rise in the share of resourcescontributed by deposits. In terms of the use of the money market, deposit substitutescontributed a declining share of banks' funds, from 13 percent in 1977-79 to an average of 9 percent in 1980-82. Reliance on other bills payable, however, rose from 7.5 percent in 1977-79 to 13 percent in 198082. 2. Government Commercial Banks Of the two government commercialbanks, the Philipine National Bank (PNB) aloneaccountsfor roughly one-fourth of the combinedresources of the commercial banking system. Veterans Bank, on the other hand, would rank number 23 in 1982 if all commercial banks were to be ranked accordingto the size of their assets.SinceVeterans Bank does not have a quasi-banking license and hence cannot issue deposit substitutes, it has not been included in this analysis. In the period 1977-82, PNB grew at an averageannual rate of 25 percent. Deposits supplied a comparatively lower share of PNB's resources than the average for private domestic commercial banks (See Tabli_ 4). in 1977-82, deposits made up only about 40 percent of total fund sources, dropping as low as 33 percent in 1981.

SHORT-TERM FINANCIAL MARKETS

As in the case of the most rapidly growing private banks, borrowed funds suppliedan increasinglylargepart of PNB's resources,largely in the form of "other bills payable." The shareof the former in PNB's total resourcesgrew from 19 percent in 1977 to 46 percent by 1982. Deposit substitutes, on the other hand, fell from 18 percent of resourcesin 1977 to only 7 percent by 1982. In 1980, deposit substitutes were only 4 percent of total resources.The share of equity in PNB's fund sources has also decreased steadily from 9 percent in 1977 to only 6 percent by 1980 through 1982. 3. Foreign Commercial Banks The four foreign commercial banks account for about 13 percent of the total combined resources of commercial banks. The average increase in resourcesof these banks in 1977-82 was slightly higher than that for private commercial banks at 28 percent (SeeTable=2). Growth rates, however, varied considerablyfrom 32 percentannually for Bank of America (BA) to 14 percent for Chartered Bank. They also vary considerably in terms of size. Citibank isthe secondlargest commercial bank in the country after PNB, and it is almost double the size of the largest private domestic bank, BPI. BA's resourCes, on the other hand, would rank it number 8 among all commercial banks. Hongkong and Shanghai Bank and Chartered Bank, however, are among the 5 smallest banks in the Philippines.This beingthe case, this analysis isconfined only to the two largestforeign banks. Largely because they are subsidiaries of major international banks, their pattern of fund sources differs from that of domestic banks (See Table 4). Deposits supply only a small portion of total funds averaging 23 percent for both BA and Citibank (excluding 1977 w.hen deposits were 41 percent of BA's resources). On _the other hand, the account "due'to head office, other banks and other agencies" contributed a major part of total resources.Over the years 1977-82 this accounted for 40 percent of BA's total funds and48 percent of Citibank's. Apart from this, the pattern of fund sourcesfor BA conforms to that of private domestic commercial banks. BA financed an aveDage of 22 percent of its resourcesfrom bills payable, with deposit substitutes supplying 12 percent and other bills payable the remainin_ 11 percent. Citibank, on the other hand, relied on bills payable for only 17 percent of its resources, 10 percent beingdeposit substitutesand only 5 percent being other bills payable.

MONEY MARKET INS-FITUTIONS

B. Applications of Commercial Bank Funds On the applications of funds side, the use of funds raised in the money market as well as other sourcesare subsumedin gene{alasset management. Commercial bank assetscan be divided into four basiccategories: cash, investments in liquid assets, loans and other assets(including fixed assets). The major earning assetsare loans and investments, while the important function of providing liquidity to the bank is provided by cashand investments. Table 5 coversthe commercial banking system as a whole and providesa somewhat longer term view of the system by showingdata from 1975 to 1982. Loans comprise the major earningassetsof commercial banks. In 1975-79, the portion of commercial bank assetsdevoted to loans were steady at 63 percent to 64 percent. Starting in 1980, however, there was a slight decreasein the share of loans to 62 percent in 1980, 61 percent in 1981 and 59 percent in 1982. A decline in the share of investments in total assetswas also evident over the years. From a peak of 15 percent in 1977, the portion of bank assetsheld in investment declined to only 10 percent in 1980-82. At least part of the decreasein loans and investmentswent into increasedliquidity for banks. In 1977, the share of cash and due to banks was 12 percent of total assets.By 1982, however this percentage rose steadily to 18 percent. Likewise, there was also an increasein the share of other assetsin commercial bank balancesheets. C. Commercial Banksand the Money Market Commercial banks account for the largestvolume of transactions in the money market. The foregoing section hasfocused chiefly on the sourcesof bank funds in 1977-82. Deposits remain the major source of bank funds, but "bought" funds in the form of deposit substitutes, and other bills payable (especially rediscounts and advancesfrom the Central Bank) also provide a substantial portion of total resources. The trend in the use of deposit substituesas a source of bank funds in perhapsbetter seen in the light of a longerterm perspective. Chart 8 showsthe long-term movements in liabilities and capital for

Table 5

uJ O_

PercentageDistribution of Assetsand Liabilities 1975 - 1982 ITEM

1975

1976

1977

1978

1979

1980

1981

1982

17 63 13 7 100

17 64 13 8 100

12 63 15 10 1IX}

12 64 14 10 100

15 64 11 10 100

16 62 10 13 100

17 61 10 12 100

18 59 10 13 100

42 29 18 11 21 91 9 100

46 28 19 9 17 91 9 100

49 24 17 7 17 91 9 100

48 25 10 16 18 92 8 100

48 25 9 16 19 93 7 100

50 24 6 18 18 93 7 100

47 28 8 21 17 92 8

48 29 6 23 16 93 7 100

ASSETS Cashand Due to Banks Loans(net) Investments Other Assets Total Assets LIABILITIES AND EQUITY Deposits Borrowings DepositSubstitutes Others Other Liabilities Total Liabilities Total Equity TotaL Liabilities& Equity

Detaibmaynotaddtototalsdueto rounding error. --r _ Sm"W*__

ee,m_ S.,_, r-dm_mw. _

I/I

_O m -4 -_ m m 3: "N _" > z F

> Fi,,_,_mt_men, _(2r_

_-m.)_

xm -I

MONEY MARKET INSTITUTIONS

all banks (i.e. private, government, and foreign) since 1965. Prior to 1970, the total resourcesof all commercial banks expanded at an average annualrate of about 16 percent. Growth acceleratedin the 1970's to about 25 percent per annum. While deposits grew apace and continued to supply a fairly steady portion of the expansion in bank resources,bills payable contributed a growing share. In 1965, bills payable accounted for 12 percent of total resourcesof banks. Relianceon this sourceof funds appears to have expanded at a fairly modest pace up to 1972. For this period (1965-72), the averageshareof bills payable in total funds was about 15 percent, rangingfrom a low of 12 percentto a high of 17 percent. Starting in 1973, however, the use of bills payable expanded very rapidly, with bills payable supplying 20 percent of resources.In 1975, bills payable accounted for asmuch asone-third of all bank resources. Chart8 COMMERCIALBANKSOURCESOF FUNDS 2ee T 1BBt 16et

EOt

t4et L 2et P 1 0 S

OTHER LIAB-

60 BILLS 402065

DEPOSITS 69 71

SOURCESOF CONNERCIAL BANK FUNDS= DEPOSITS, BILLS PAYABLE, OTHER LIABILITIES &EQUITY Sourceof basicdata:CentralBank Since then the contribution of bills payable to further bank expansion has declined and has stabilized at a level of approximately 25 percent of all bank funds. Central Bank data prior to 1975 does not distinguish between deposit substitutes and other bills payable. Available statisticsafter 1975, however, suggest that reliance on deposit substitutes as a

SHORT'TERM

FINANCIAL

MARKETS

source of funds peaked in the mid-1970s, and since then deposit substitutes have supplied a declining percentage of total bank funds. The absolute level of deposit substitutes in aggregate resources of commercial banks fluctuated over a fairly narrow range since 1975 while the peso amount of other bills payable grew substantially. In 1975, deposit substitutes amounted to _9.33 billion as opposed to _5.55 billion for other bills payable (See Table 6). Since then, deposit substitutes fluctuated within the narrow range of =P9.7 billion in 1978 to _12.8 billion, although they rose to _15.6 billion in 1982. During the same period, however, other bills payable expanded substantially from _5.6 billion in 1975 to f=34.7 billion in 1981 and f=44.1 billion in 1982. Growth of other bills payable was especially rapid in the period of 1978-82 when it rose almost seven times. As a result, the share of deposit substitutes in total bills payable of commercial banks fell from 63 percent in 1975 to only 26 percent by 1982, while that of other bills payable rose from 37 percent in 1975 to 74 percent by 1 982. Table 6 Bills Payableof CommercialBanks 1975-82, fbmillion, PercentShare Deposit Substitutes

1975 1976 1977 1978 1979 1980 1981 1982

Other BillsPayable

Total

9 333 11 277 I0 669 9 692 11 810 10 204 12 762 1,5586

63 67 61 42 39 28 27 26

5,552 5,675 6,708 13,476 18,348 25,660 34,666 44,140

Total Bills Payable %

37 33 39 58 61 72 73 74

Total 14,885 16,952 17,377. 23,168 30,158 3.5,864 47,428 59,727

Sou roe of Data: SGV, A Study of Commercial Banks in the PhilippineÂ˘ Note: See postscript for updated ruble,

A similar comparison might be made between deposits and deposit substitutes of commercial banks (See Table 7). While deposits at commercial banks grew at an average annual rate of about 25 percent over the years from 1975 to 1982, deposit substitutes grew _t an

MONEY MARKET INSTITUTIONS

averageannual rate of only about 7.6 percent over the sameperiod. Thus, the percentageshare of deposit substitutes in the total of deposits and deposit .substitutesdeclined from 31 percent in 1975 to only 14 percent by 1982; on the other hand, the share of deposits rosefrom 69 .percentto 86 percent in the samespanof years. In making a similar comparison, the IMF/IBRD Mission attributes the relative declinein the useof deposit substitutesby commercial banks to the financial reforms of 1976-77 which included interest rate ceilingson deposit substitutes,raising interest on regular bank deposits, increasedreserve requirementson deposit substitutes, minimum size lot requirements on money market transactions,and the imposition of a 35 percent transactions tax. As a result of these measures,the earlier rapid growth was arrested, and deposit substitutes, which grew at an annual rate of 50 percent in 1974-75, grew by only _5percent a year later.5 Table7 Deposits andDepositSubstitutes of Commercial Banks 1975-82,1"million, PercentShare Deposits Total % 1975 1976 1977 1978 1979 1980 1981 1982

20,747 26,062 33,778 43,653 55,998 80,026 80,026 98,074

69 70 76 82 82 88 86 86

Depositsubstitutes Total Total % 9,333 11,277 10,669 9,692 11,819 10,204 12,762 15,586

31 30 24 18 18 12 14 14

30,078 37,339 44,447 53,345 67,808 82,834 92,788 113,660

Sources:Depositsof commercialbanks,1975, 81: Central Bank Slatistical Bulletin; deposit substitutes1975-82 anddeposits,1982: SGV Study of Commercial Banksln the Philil_ine_ Note: Seepostscriptfor updatedtable..

In the past six years, the banks which exhibited the highestrates of growth appear to have relied to a great extent on other bills payable (especiallyrediscountsand advancesfrom the Central Bank), SlMF/IBRD Mission,The Philipplees: Asp_

of the F#mncial _'e_

October1979.

SHORT-TERM FINANCIAL MARI_ETS

with other fund sources growing at somewhat lower rates. Other largebanks, however, relied on deposit growth to fuel expansion._ Hence, while deposit substitutes remain a major source of bank funds, reliance on them has declined sincethe mid-1970s and by!,the latter half of the decade the share of deposit substitutes in bank funds stabilized at around 12 percentof the total. INVESTMENT HOUSES Investment housesaccount for the secondlargestshareof mOney market transactionsafter commercial banks. They participate in,the short-term markets on two levels:as intermediaries who borrow on the money market to finance a portfolio of loansand investments, and as dealersand brokers who facilitate the movementof securities from primary borrowers to the ultimate savers. Among all the financial institutions in the short-term markets, however, investment houseshave had the most troubled history. Investment housesas a group grew at an average annual rate of 23 percent in 1977-80 (SeeTable 8), declined by 36 percent in 1981 and then rose by 5 percent in 1982. As a result,the averagegrowth of the industry over the period asa whole wasonly 4.5 percent, well below the averagegrowth ratesof commercial banksand finance companies over the same period. The decline in industry-wide resourcesin 1981 was a direct consequence of the liquidity crisis in that year. In 1981, of the 11 investment housesincluded in this study6 and operating in the previous year, two (Bancom and Atrium) were mergedinto commercial banks and ceasedoperating as investment houses.One (Philippine Investment Systems Organization-PISO) converted its license into a private development bank and subsequently, to a commercial bank and four others, (AIDC, State, First Metro and PPCC) suffered declines in total resources.On the other hand, 2 new investment houses(Multinational and Anscor) startedoperations in 1981. For many investment houses,the ill effects of the previousyear carried on through 1982. Of the institutions included in this study, four (AIDC, Multinational, PPCC, and AEA) suffered decline_ in total resources.The six others had the following amounted rates:ione 6There were 12 investmenthousesregisteredin 1981; however,the Private De_lopment Corporationof the Philippines(PDCP)was not includedin thisstudy becauseitspperationsdiffer considerably from thoseof theother investmenthouses.To a largoextent, _DCP isengagedin developmentfinance,

MONEYMARKETINSTITUTIONS

percent for PAIC, 6 percent for State, 13 percent for First Metro, 34 percent for Citicorp, 39 percent for Merchants and 98 percent for Anscor. Table 8 InvestmentHouses,Total Assetsand Growth Rates 1977 - 82 1977

1978

1979

1980

1981

1982

Total Assets,I p Million: LARGE: ATRIUM AIDC STATE BANCOM

394 615 511 522

422 698 657 657

549 953 741 905

1644 1223 1062 923

1203 855 -

1087 898 -

MEDIUM: PAIC 351 AEA 216 MERCHANTS 408

294 239 336

550 316 294

519 375 327

536 415 407

543 359 567

191 248 216 191

226 309 251 178

268 300 303 123

258 244 185 273 176

212 276 247 235 348

4150

5273

7070

4551

4772

SMALL: PISO PPCC FIRST MET CITICORP MULTI ANSCOR

126 265 202 225 .... ....

ALL INVESTMENT HOUSES 3837

YEAR TO YEAR PERCENTAGE CHANGE (%): AVERAGE ANNUAL GROWTH 1977-81 1977-82 LARGE: ATRIUM AIDC STATE BANCOM MEDIUM: PAIC

7 13 29 26

-16

30 37 13 38

199 28 43 2

-6

-2 -19

-10 5

61 18 14 21

N.A. 12 12 N.A.

SHORT-TERMFINANCIALMARtKETS

Table 8 (Continued)

AEA MERCHANTS SMALL: PISO PPCC FIRST MET CITICORP MULTI ANSCOR ALL INVESTMENT HOUSES

1977

1978

11 -18

32 -13

19 11

_i2 -6

18 25

19 -3

-14

7 -15

16 -7

21 -31

-19 50

1979 1980

11 24

-36

1981 -13 39

1982

i_'

18 0

11 7

-18

N.A. 0

N.A. -4

13 34 -14 98

5 -5 N.A. N.A.

,6 2 N,A. N.A.

4.36

4.46

Notesto Table 8: 1.

2. 3. 4. 5. 6. 7.

Number of investmenthousesincluded in this sample: 11 in 1977-80, and 10 in 1981-82. PDCP is excludedfrom this list due to substantialdifferences in its operations from other investment houses. InvestmentHousesare arrangedaccordingto sizeof assetsin 1980. Multinational Bancorporationwas a securitiesdealer before it became an investmenthouse in 1981. PISO became a private development bank in 1981; growth rate shown coversthe period 1977 to 1980 only. Anscor beganoperations in 1981. IUCP becameAtrium in 1980. Atrium and Bancornceasedoperationsin 1981 ; growth ratesshownarc for 1977-80 only.

Detailsmay not add to totals due to roundingerrors. Source System.

of Basic Data: Central 1977-81 ; and published

Bank of the Philippines, Fact Book: statements in various newspapers.

Philippine

Financlal

For analytical purposes, it is useful to classify institutions acCording to size. However, due to the problems and changing fortunes of the industry, a neat classification is difficult. In view of this,nthe assets of investment houses in 1980 were used as the basis of the classification because this year seemed to be more reflectiv_ "normal" conditions, rather than the two years that followed.

MONEY MARKET INSTITUTIONS

In 1980, the two largest investment houses,AIDC and State had total resourcesof over P1 billion each. As such they were more than twice the size of the next largestinvestment house. These we classify as "large" institutions. The two investment houses which ceased operations in 1981 (Atrium and Bancom) are also included in the large category, although Bancom's resourceswere slightly below P1 billion. The next category are the "medium.sized" investment houses, (i.e. PAIC, AEA, and Merchants), with assetsrangingfrom about_'300 million to over PS00 million in 1980. In the category of "small" investment houses are the six remaining institutions (Multi, PISO, PPCC, First Metro, Citicorp and Anscor) with resources of fL300 million or less. In 1980, the four largest investment houses (AIDC, State, Atrium, and Bancom) accounted for almost 70 percent of the total resources of the investment house industry. In 1982, the two remaining large investment houses(AIDC and State) still comprised42 percent of the total assetsof the decimated industry. Taking the six years, 1977-82 as a whole, the growth rates of investment housesvaried from 2 percent to 12 percent (excluding Multinational and Anscor which had been in existence for only 2 years). There appears to be a relationship between size and ability to grow. The highest growth, averagingabout 12 percent annually for 1977-82, were achieved by the largest investment houses,AIDC and State. (Sheer growth and size, however, are obviously not enough to ensure success- the two housesthat ceasedoperations in 1981 were also among the largest). The medium-sized firms grew at lower rates of between 7 percent to 9 percent, while the small investment housesgrew at still lower rates. A. Sourcesof Investment House Funds The sourcesof funds of investment houses is quite clear-cut. Short-term funds obtained in the money market supply the major portion of resources.In 1977-82, depositsubstitutesaccounted for an average of 80 percent of investment house funds in 1977-80, and declined slightly to 76 percent in 1981 and 1982. Equity capital, on the other hand, supplied about 12 percent of resources in 1977-80 and 16 percent in 1981 and 1982 (See Table 9). The balancewas due to other bills payable and other liabilities.

SHORT-TERM

FINANCIAL

MARKETS

An examination of individual investment houses,showsa rough correspondence between the size of the institution and the Ilpattern of financing. Large investment housesare able to make more use of borrowed funds than smaller ones. Equity supplied an average ranging from 9 percent to 14 percent of the total resourcesof. the large investment houses.(It is interesting to note that the two failed houses, Bancom and Atrium, had the lowest averagecapital among all investment houses,evidently lower than necessaryto provide the equity baseto withstand financial reverses.) Corollary to this, borrowed funds which is almost exclusively in the form of deposit substitutes,supplied comparatively more of the resourcesof large investment houses.Deposit substitutessupplieEIan averageof over 80 percent of total funds of AIDC and Bancom, and 73 percent of State Bank's. The only exception was Atrium which relied lesson deposit substitutes which averaged 66 percent of resources. With its continuing liquidity problems, this investment house incurred substantial advancesfrom the Central Bank which were reflected in the other bills payable account. In 1977-80; the latter accountedfor about 15 percent of Atrium's resources. For the medium-sized investment houses,equity supplied a relatively larger share of resources, anywhere from 10 percent to 32 percent. AEA and PAIC relied almost entirely on deposit substitutes for the balance of their funding. Merchants Bank, however, also incurred large amounts of other bills payable, both in its earlier identity as Filcapital and later as Merchant Bank. For the smaller companies,equity ranged from 11 percent to as much as 40 percent for some years.Correspondingly, there was relatively less,though still substantial reliance on borrowed funds.'.!(Of the small investment houses,only PISO had large amounts of other bills payable. Like PDCP, PISO alsohad substantialbusinessin development finance and its other bills payable account included lengterm loansfrom the World Bank, IGLF, and U.S. Eximbank.) B. Applications of Investment House Funds Table 10 shows the distribution of assetsof investment hoLises. Between 1977 and 1982, investment houses as a group reduced investments in securitiesfrom 56 percent of total assetsin 1977 to 40 percent in 1981 and 32 percent in 1982. In contrast, there iwas increasing concentration of investment house assets in loanswelch

o z m .< Â˘ > _m

Table 9 InvestmentHouses PercentageDistributionof TolaI Resourcesby Sourceof Funds 1977 to 1982

investmentHouses

Deposit Substitutes

Other Bills Payable

Total Bills Payable

Other Liabilities

Total Liabilities

-4 Capital z

ALL INVESTMENT HOUSES 1977 1978 1979 1980 1981 1982

77 78 75 76 75 76

3 3 4 3 1 -

80 81 79 79 76 76

9 7 8 9 7 6

89 88 87 88 83 84

11 12 13 12 17 16

64 67 65 69

13 17 17 12

77 84 82 81

15 6 7 11

92 90 89 92

8 10 11 8

Atrium (formerly IUCP) 1977 1978 1979 1980 1981 (mergedwith Interbank)

Table 9 (Continued)

InvestmentHouses

;_ Other Bills

Total Bills

Payable

83 81 81 82 82 82

0 0 0 0 0 0

83 81 81 82 82 82

3 8 8 8 7 5

86 89 89 90 89 87

14 11 11 10 11 13

75 76 68 74 74 74

0 0 0 0 0 0

75 76 68 74 74 74

12 11 I7 13 10 9

87 87 85 87 84 84

13 13 15 13 16 16

,Deposit Substitutes

Other Total Liabilities Liabilities

Capital

Ayala Investmentand DevelopmentCorporation 1977 1978 1979 1980 t981 1982 State InvestmentHouse 1977 1978 1979 1980 1981 1982

= O _= -H mr1

_= -. m z> Z

_n > 1-

Bancom DevelopmentCorporation 1977 ,

1978

1979

m -4 _n

Table 9 (Continued)

z 0 z

Deposit

Other Bills

Total Bills

Othe_

Total

Substitutes

Payable

Liabilities

Investment Houses

m -c Capital

> tit -4

1980 1981 (mergedwith Union Bank)

7 -4 C

Phil. American InvestmentCorporation 1977 1978 1979 1980 1981 1982

90 87 91 86 85 83

0 0 0 0 0 0

90 87 91 86 85 83

1 1 1 4 4 6

91 88 92 90 89 89

9 12 8 10 11 11

77 79 81 79 79 79

1 0 0 0 0 0

78 79 81 79 79 79

2 1 5 5 7 3

80 80 86 84 86 82

20 20 14 16 14 18

103

AEA DevelopmentCorporation 1977 1978 1979 1980 198T 1982

â&#x20AC;˘

MerchantsInvestmentCorporation(formerly Filcapital) 1977

-3

__, z

9 (Continued)

Investment Houses

1978 1979 t 980 1981 1982

Deposit

Other Bills

Total Bills

Other

Total

Substitutes

Payable

Liabilities

Capital

72 35 36 47 62

8 14 14 13 9

80 49 50 60 71

19 15 18 12 9

99 64 68 72 80

1 36 32 28 20

75 79 88 86 84 86

12 6 0 0 0 0

87 85 88 86 84 86

3 4 2 2 2 2

90 89 90 88 86 88

10 11 10 12 14 12

PacificCapital Corporation 1977 1978 1979 1980 1981 1982

_* o ;;g ,-4 -4 m _r "11

First Metro Investment Corporation 1977 1978 1979 1980 1981 1982

__ >

81 82 80 77 60 64

0 0 1 1 1 0

81 82 81 78 - 61 64

2 3 4 5 3 4

83 85 85 83 64 68

17 15 15 17 36 32

z('3 r'-

Table 9 (Continued)

o rn -< Â˘ > ;o Z

Investment Houses

Deposit Substitutes

Other Bills Payable

Total Bills Payable

Other Liabilities

Total Liabilities

Capital

m ,-I

Phil. InvestmentsSystemOrganization 1977 1978 1979 1980

_c -q

65 73 38 75

4 2 36 0

69 75 74 75

9 4 7 7

78 79 81 82

22 21 19 18

82 82 72 53 70 74

0 0 0 0 0 0

82 82 72 53 70 74

3 1 6 7 3 3

85 83 78 60 73 77

15 17 22 40 27 23

87 83

0 0

87 83

1 2

88 85

12 15

1981 (convertedinto a private developmentbank) Citicorp InvestmentPhils. 1977 1978 1979 1980 1981 1982 Multinational InvestmentBancorporation 1981 1982

-_ o Z

Table 9 (Continued)

InvestmentHouses

Deposit Substitutes

Other Bills Payable

Total Bills Payable

Other Liabilities

58 77

0 0

58 77

3 3

Total Liabilities

Capital

AnscorCapitalCorporation 1981 t982

61 80

39 20

Notes to Table 9: 1. Arranged according to size of assets in 1980. 2. Table showsitemsas a percentageof total resources.Details may not add up to total due to roundingerrors. 3. Table excludesPDCP.Numberof investmenthousesincluded:11 in 1977-80, and 10 in 1981-82.

Source of basic data: Central

Bank, Pact Book:

Phl_ FinanclalSystzm_,

and published

statements

of Investment

houses,

_. O _0 -4 2-1 rn _o

-n

_e m -4

MONEY MARKET INSTITUTIONS

grew from an averageof 22 percent in 1977-80 to 32 percent in 1981 and 40 percent in 1982. Investments in allied undertakingsalso grew over the period 1977-82 from 2 percent to 5 percent. Cash and cash items were fairly steady at 11 percent of assetsuntil 1982 when the percentage declined to 7 percent. Another significant useof funds was real property which comprised roughly 4 percent of investment houseassets,risingto 6 percent in 1982. The trend towards increased lending activity and reduced securities holdings does not appear as clear when all investment houses are taken together as it doeson an individual company basis.Among large investment houses, the trend is clearest for State Bank for which in 1982, 43 percent of total assets were in loans and 17 percent in investments. Five years earlier, the pattern reversed,with 67 percent in investmentsand 18 percent in loans. For AIDC, there is no clear pattern of drawing down the proportion of assetsin investments, except in 1982. In 1977-81, loansasa percentage of total assets fluctuated between 10 percent and 28 percent, while those for investments varied from 44 percent to 64 percent of assets. In 1982, however, loans made up 34 percent of assets, the highest percentage yet devoted to this asset by AIDC, while investmentswere 49 percent. There was no clear pattern for Bancom either although this investment house in general had a lower than averageportion of its assetsdevoted to securities,and a higher than averagepercentagein loans. Atrium showedthe opposite trend, with risinginvestmentsand falling loans. For medium-sized investment houses,(i.e. PAIC, AEA and Merchants) all three exhibited a gradual decine in investments and a correspondingincreasein loansover the past years. This was reversed for PAIC only in 1982 when its loansfell to 19 percentof assets,the changeapparently going into an increasein cash and cashitems. All three had about S percentof assetsin real property. Among the smaller investment houses,the trend of diminishing investments is also apparent in the data on First Metro Bank, but is not asclear for PPCC and Citicorp. The trend toward loansisvery pronounced in the caseof PISO. This, however, isto be expected because like PDCP, PISO operates more like a development bank offering medium and long-term financing to small and medium-scale industries financed by relending lines from multilateral agenciesaRd IGLF.

SHORT TERM FINANCIAL MARIKETS

For Multinational Investment Bancorporation and Anscor there is not enough data to note any trends; however, both have roughly the sameamounts in investmentsand loans. The same trend towards increasedconcentration in loans rather than investments is even more pronounced in tables preparedby the Central Bank (See Table 11). This table shows the share of loans in investment house balance sheets rising from 28 percent in 1975 to 36 percent in 1976, then going on as high rangeas71 percentto 79 percent in 1977 through 1982. Investments, on the other hand, were 61 percentof assetsin 1975 and 50 percent in 1976 but declined substantially to an averageof only six percent in 1977-82. It should also be noted that Table 11 includes all investment houses, i.e. including PDCP and PISO which, as mentioned earlier, engage in lending as a major part of their business.However, the trends are too prominent to be accounted for only by those two institutions. There is also a difference in classification which accounts for some of the differences between our tables (which were obtained by a simple aggregationof the balance sheetsof selected investment houses) and the tables prepared by the Central Bank. Both, however, show the same pattern, with those of the Central Bank being more pronounced than the tables used in the study. C. Investment Housesand the Money Market !.

The analysis of the sourcesof funds of investment housesshows how vital the money market isto this type of financial institution. In contrast to commercial banks, investment houseshave few alternative source of funds. Hence they rely very heavily on "bought" funds. In 1977-82, the money market supplied an averageof 76 .percent of investment house resources. On the asset sideof their balance sheets,the major applications of funds are investmentsand loans. Basedon a consolidationof their balance sheets, investment housesas a group are seen to have been shifting the concentrationof their assetsover the past few years. The share of investmentshave gone down from 36 percent in 1977 tO 32 percent by 1982, while that in loanshavegone up from slightly qver 20 percent in 1977-80 to 40 percent by 1982 (See Table 10). _, A number of factors help explain the differences in assetstructure of investment housescompared to commercial banks. Before going into them, however, it would be useful to review the m_jor business lines of investment houses. Unlike commercial banks and

Table 10 InvestmentHouses

¢ o zm

PercentageDistribution of Total Resourcesby Type of Asset 1977 - 1982

"< ¢>

InvestInvestmentHouse

Cash

ments

Invest Loans

in Allied

Real Property

Other Assets "4

All InvestmentHouses 1977 1978 1979 t980 1981 1.982

9 10 14 1t 11 7

56 52 54 51 40 32

22 24 22 21 32 40

2 2 1 3 5 5

4 4 1 3 3 6

7 8 7 10 9 10

c -4

Atrium (formerly IUCP) 1977 1978 1979 1980

8 10 12 12

51 61 68 61

35 21 11 10

4 2

1 2 2

1 8 7 12

Ayala Investment& DevCorporation 1977 5 1978 12

64 44

16 28

5 5

3 1

6 10

1981 (mergedwith Interbank}

1979

Table 10 (Continued)

InvestmentHouse 1980 1981 1982 State InvestmentHouse 1977 1978 1979 1980 1981 i 982

Cash

Investments

Loans

Invest in Allied

Real Property

Other Assets

15 15 4

62 51 49

10 22 34

4 3 3

10 9 8

8 4 10 6 10 5

67 71 48 54 23 17

18 16 36 22 46 43

4 3 3 6 6

4 2 3 9 9 24

3 3 5 6 5 0

Bancom Development Corporation 1977 1978 1979 1980 1981 (mergedwith Union Bank)

6 17 17

36 30 43

43 37 30

3 2 -

2 2 3

10 11 7

zt3 [,,-

Phil.

American Investment Corporation

1977 1978 1979

16 11 12

65 59 50

7 17 29

1 1 -

1 1 1

10 12 9

m =

Table 10 (Continued) InvestmentHouse

°¢ z

Cash

Investments

Loans

Invest in Allied

Real Property

Other Assets

1980

1981 1982

12 17

29 28

37 19

3 9

4 t

16 26

¢ >

AEA DevelopmentCorporation 1977 1978 1979 1980 1981 1982

12 12 11 11 t1 5

64 67 72 63 53 50

14 12 16 20 28 38

2 2 2 1 2 1

6 5 2 2 2

1 2 3 6 4

MerchantsInvestmentCorporation (formerly Filcapital) 1977 1 34 1978 31 1979 28 47 1980 4 29 1981 7 20 1982 10 19

28 28 38 47 48

2 3 2

23 25 7 5 5

13 15 25 21 19 16

PhilippinePacificCapital Corporation 1977 18 1978 13

5 10

2 2

1 1

12 9

63 65

-_ z_

Table 10 (Continued)

Investment House 1979 1980 1981 1982

First Metro Investment Corporation 1977 1978 1979 1980 1981 1982

o_u_

Cash

Investments

13 12 15 9

67 60 40 17

9 14 32 60

1 -

2 1 2

10 12 12 12

12 12 11 8 7

54 58 58 45 33

22 21 19 23 23

4 3 3 18 24

3 3 4 2 6

4 3 3 4 6

78 78 39 29

11 9 49 60

1 1

1 -1

1 1 2 2

Philippine Inv_tments SystemOrganization 1977 10 1978 16 1979 9 1980 7 198t (converted into a private development bank)

Loans

Invest in Allied

Real Property

Other Assets

o m

>z >

_ _> m

Table 10 (Continued) InvestmentHouse Citicorp InvestmentPhilippines 1977 1978 1979

Â˘ O Cash

Investments

Loans

Invest in Allied

Real Property

Other Assets

13 9 18

67 40 51

19 47 25

1 3 6

9 5 3

40 54 30

42 35 62

9 6 5

Multinational investmentsBancorporation 1981 5 1982 4

54 47

36 42

5 5

1 2

AnscorCapital Corporation 1981 1982

70 41

7 45

6 3

1 1

5 3

1980 1981 1982

10 7

NotestoTable10: 1. Arranged by sizeof assets in 1980. 2. Tableshows itemsasa percenta@ oftotaJassets. Detailsmaynotaddup to totalsdueto rounding errors. 3. Tableexcludes PDCP;numberof investment houses included inthistable:11 in 1977-80,andt0 in t981-82. Sourceofdata:CentralBank,FactBook:Phil F/nanclalSvstem,andpublished statements of investment houses.

Z m

-c Z= ). ._ _"_

Table 11 Investment Houses PercentageDistributionof Assetsand Liabilities 1975 - 1982 ITEM

1975

1976

1977

1978

1979

1980

1981

1982

ASSETS CashItems Loans(net) Investments Other Assets Total Assets

28 61 9 100

36 50 9 100

79 5 8 100

76 7 8 100

75 5 9 100

71 6 13 100

73 5 12 100

72 9 13 100

LIABILITIES AND EQUITY Borrowings Short-Term

85 70

79 65

81 68

82 66

80 n.a.

78 58

79 61

Long-Term Other Liabilities Total Liabilities

15 5 90

14 10 89

15 8 87

13 5 86

16 5 87

n.a. 8 88

20 6 84

18 5 84

-'4 m

Total Equity Total Liabilities&

-n 3:

100

1O0

100

1O0

100

Equity Total Resources _miliion % Change

zm r

4,774 n_

4,825 1

4,339 (10)

4,763 10

6,553 38

8,607 31

5,865 (32)

6,764 1.5

>_ m

This table Includes atl investment houses, including PDCP. Details may not add up to totals due to rounding errors, Source of basic data: CentraJ Bank, FactBook: PhllippineFinancisISyetem, 1981 (2nd sere.) and 1982.

MONEY MARKET INSTITUTIONS

finance companies whose main servicesare easily understood and well known (in the Philippines), those of investment housesare not. The following list culled from annual reports of various investment housesindicates the broad rangeof servicesoffered by them. The servicesoffered includethe following: •

FINANCIAL MARKET SERVICES Dealershipand Brokerage government securities commercial paper long-term securities Debt Financingof Short-Term Corporate Needs

•

CORPORATE FINANCE Underwriting Financial Packaging Private Placement Syndication of Loans Project Finance Mergers& Acquisitions Financial Consultancy

•

PORTFOLIO MANAGEMENT Investment Management Investment Advisory Services

As can be seenfrom the list, there isa preponderanceof fee-based activities, namely corporate finance and portfolio management as well as securitiesdealershipand brokerage.In comparison, the activities of commercial banks are mainly asset-based,(i.e. lending and investments in securities) as are those of finance companies,albeit in forms and credits different from those of commercial banks. The major implication of dealership and underwriting for the asset structure of investment houses is the need to maintain an inventory of securities. This may be in the form of the unsold portion of primary securities underwritten, or inventories of securities acquired in the course of dealership. On the other hand, neither brokerage nor portfolio managementhave balancesheet implications (except asa contingent liability, in the caseof funds held in trust).

SHORT-TERM

FINANCIAL

MARI_ETS

The only asset-basedactivity of investment housesis the pt_ovision of short-term financing for corporate clients. This, however, is not supposedto be their main activity. The distinguishingmark of an investment house is defined to be their ability to underwrite securities, and prior to the advent of universalbanking, was an activity reservedfor investment houses. On the basis of their services offered and their functional specialization in underwriting, we would expect that investments in securities would take up a larger portion of the assetsof investment houses more than loans. However, the trend seemsto be toward reducing investment house exposure in investments and increasing loans. There are many factors which accountfor this development. One major factor is simply that, given the.economic environment of the past few years, the underwriting businessof investment houseshas not been very good. For a substantialunderwriting and loan syndication businessto progress,for example, a rapidly expanding economy is required. This is not to say that there have been few syndications in the pastfew years, but simply that given the fairly limited number of such opportunities and the competition resulting from the large number of other financial institutions, notably banks offering the same services,investment houseshave been at a competitive disadvantage. The stock market hasalso been depressedfor a number of years so investment houseshave had to look for other opportunities to increaseearningsboth for themselvesand for their clients. Hence, the trend towards increased involvement in real estate, equipment and property leasing. The changing composition of investment houseassets,however, is also interesting in the light of their sourcesof funds. Basedon the characteristicsof money market instrumentswhich were reviewed in an earlier section, this type of instrument is shown to be of very short maturity, typically lessthan 30 days. On the other hand, investment housesseem to be gradually lengthening the maturilly of their asset portfolios by increasingthe portion held in the form of loans rather than investments in securities. Hence the mismatch in tenor between investment houseassetsand their sourcesof fund_ has grown more pronounced over the years, and this may have contributed to some of the liquidity problemsexperienced by many institutions since 1980. I

MONEY MARKET INSTITUTIONS

FINANCE COMPANIES The third largestgroup of institutions in the money market which accounted for roughly 12 percent of all transactions in 1977-82 are the finance companies with quasi-bankinglicenses.As of 1982, there were 346 finance companies,of which 12 had quasi-bankinglicenses (See Table 12). The finance company industry as a whole (i.e. including both those with and without quasi-banking licenses) is rapidly growing. On the average,about 32 new finance companieswere set up every year from 1977-81. In 1982, however, mergersand closurescaused a net reduction in the number of finance companies,although the total resources of the industry continued to rise. On the whole, finance company resourcesrose by about 17 percent each year from 1977 to 1982. The finance company industry is highly concentrated with the 12 companies having quasi-bankingpermits, accounting for roughly 50 percent of total industry-wide resources(See Table 12). Concentration, howeveG appears to be diminishing somewhat. In 1977, these same 12 companiesaccounted for 59 percent of industry resources, but their share hassteadily decreasedover the years to the current 50 percent. Corollary to the high concentration in the industry, the sizesof finance companiesvary considerably. In 1977, average resourcesof finance companieswas _24 million, but this hassince risen to f'37 million. Excluding the 12 companies with quasi-banking licenses, however, average resourcesof finance companiesin 1982 was_19.3 million. On the other hand, of the 12 finance companieswith quasibanking licenses, the largest company, Filinvest, had resourcesof over_2 billion in 1982, while the next two largestfinance companies had resources of over t'1 billion each. Together, these three largest companiesaccounted for 70 percentof the total resourcesof finance companies with quasi-banking licenses,and 35 percent of the total resourcesof all finance companies. Five other companieswith quasibanking licenses had resources of between @200 million to @400 million, while the four smallest each had total resourcesof f'170 million or less. The average growth (See Table 12) of finance companies with quasi-banking licenses was 13 percent in 1977-82 (considerably

Table 12

Finance Companies With Quasi-Banldng Licenses Total Assets,1977-82 In Million Pesos

Finance Companies With QB Licenses

1977

1978

1979

1980

1981

1982

1,163 942 1,361

1,334 1,054 1,035

1,481 925 1,270

2,066 1,119 1,351

AverageAnnual Growth (%) 1977-81 1977-82

LARGE: Filinvest BA Finance FNCB Finance

658 629 959

903 772 941

22 10 7

26 12 7 Z

MEDIUM:

ParamountFinance CommercialCredit

315

395

396

454

376

365

-_ .k m

Corporation Industrial Finance

187

256

331

405

228

100

(12)

Corporation State Finance

381 77

401 110

432 141

362 285

298 213

257 220

(6) 29

(8) 23

SMALL: ..

Mer_c._an_t.i.le .FioanGe 29 Manphil InvestCorporation 57

zf3 f-

3= 38 55

63 80

114 105

119 205

t 15 286

42 38

32 38

Table 12 (Continued) Finance Companies With QI3 Licenses

ox z

Average Annual Growth (%) 1977

1978

1979

1980

1981

1982

1977-81

1977-82

> m

Asian Consumers& I ndustria[Finance BacolodIndustria!

100

167

_c -4

Finance Corporation Cebu International

71 38

81 45

73 54

90 54

91 71

264 160

6 17

30 33

ALL FINANCE COMPANIES WITH QB LICENSES 3,446

4,052

5,057

5,389

5,380

6,470

All FinanceCompanies(with and without quasi4)ankin8licenses) Number Total Assets

244

300

342

372

346

5,852

7,366

9,743

11,902

12,123

12,919

Notes to Table 12: 1.

Arranged by size of assetsin 1980.

For complete names of finance companies and their abbreviations, please refer to Table 1 and the accompanying notes, pages 13-15. Source of basic data: Fact Book: Phiilppln_Flnenclel System, various Issues,and published statements of finance companies,

SHORT-TERM

FINANCIAL

MARKETS

lower than the 17 percent annual growth enjoyed by all finance companies in this period). Expansion was highest in 1977-79 with a steady growth rate of 21 percent. Becausethey are directly involved in the money market, finance companies with quasi-banking licenseswere severely affected by the 1981 liquidity crisis. Even in 1980, finance companies with quasi-banking licenses as a whole grew by only 7 percent. In 1981, there was no net expansion. In 1982, however, the total resourcesof finance companieswith quasibanking licensesrecoveredand grew by 20 per_cent. Considering the large portion of total finance industry resources accounted for by finance companieswith quasi-bankinglicenses,it is not surprisingthat this same pattern of growth was reflected in the finance industry as a whole. In 1977-79, the industry grew at an average annual rate of 27 percent. In the succeedingyear, growth slowed down somewhat to 22 percent, while for 1981, the industry grew at only 2 percent. In 1982, the finance company industry asa whole expanded by 7 percent. Individual companiesalso experienced widely divergent rates of expansion over the years, the highestbeingan averageannual growth rate of 38 percentfor Mercantile (See Table 12).7 In 1981, six out of the 12 finance companieswith quasi-bankinglicenseshad zero or negative rates of growth, and becauseof continuing liquidity problemsin 1981 and 1982, the assetsof 2 finance companieswith quasi-banking licenseswere lower in 1982 than they were in 1977.

A. Sourcesof Finance Company Funds8 Becauseof the wide range of sizes of finance companies with quasi-banking licenses,it is useful to classifythem by size for purposesof analyzing their liability structure. As in the caseof investment houses,this classification is based on the relative assetsof the companies in 1980 (i.e. prior to the 1981 liquidity crisis). Basedon 1980 figures, the cut-off point for "large" finance companiesWere those with assetsof over P1 billion in 1982. This would include

7For a listing of the complete names of finance companies with quasi-banking lic_hses and abbreviations used in the text, pls. refer to Table 1, pp. 13-15. ' 8Except when explicitly stated, all references to finance companies in this section are to finance companies WITH quasi-banking license_

MONEY MARKET INSTITUTIONS

three companies: Filinvest, FNCB9 and BA Finance. The "mediumsized" category included Paramount, I FC, CCC9 and State Finance, with assets ranging from _250 million to _500 million in 1980. Finally, the group of 5 "small" companieswould be those which had assetsranging from 4_50 million to fL150 million in 1980. This category would include Manphil, Mercantile, ACIFC, Bacolod9 and Cebu. There were no drastic changesin the ranking of the three largest companies in 1981 and 1982. However, among the medium-sized firms, CCC suffered such large decreasesin assetsin 1981 and 1982. By 1982, CCC became the smallest finance company with a quasibanking license.On other hand, as a result of a merger with a large non.quasi bank finance company, Bacolod which had theretofore been one of the smallest companies, qualified as a medium-sized finance company in 1982. Despite these changes, however, this classification has been retained for purposesof examining the liability structure of thesefinancial institutions. A company's capital structure isgenerally the result of major policy decisionswhich are changedgradually. Furthermore, the years prior to the 1981 liquidity crisis reflect more "normal" conditions for finance company operations. Like other financial intermediaries,finance companiestraditionally operate on a relatively narrow capital base. In 1977-82, equity capital supplied only roughly 10 percent of all resourcesof finance companies with quasi-banking licenses (See Table 13). Compared to this, equity supplied a higher percentage (about 16 percent) of the total resources of all finance companies as a whole (i.e. including those without quasi-banking licenses-refer to Table 15). This is hardly surprising since finance companies without quasibanking licenseshave limited opportunities for raisingfunds because they cannot tap the money market directly. The relationship of size to share of equity capital is even more clearly seen when finance companies are examined by size. Two of the three largest companies with assets of tP1 billion or more have equity capital averagingonly 6 percent of total resources.The exception is Filinvest for which equity supplied 11 percent of total 9pNCB was formerly knownas InvestorsFinanceCorporationjCCC underwenta CB rehabilitationin 1983 and changedits name to GeneralCredit Corporation;BacolodIndustrial FinanceCorp. mergedwith IFC AcceptanceandLeasingCorporationin Dec. 1981 and the nameof the mergedcompanywaschangedto FirstMalayanLeasingand FinanceCorporationin 1982.

SHORT-TERM FINANCIAL MARI(ETS

funds. For medium-sized companies, equity is anywhere from 6 percent to 19 percent of total resources,while for the 5 smatlest finance companies, it ranged from 12 percent to 37 percent. The relationship of size to the shareof equity reflects the larger margin of safety required of the capital base in smaller, compared with larger, finance companiesas well as the more limited accessof smaller companiesto the funds market. As in the case of investment houses, finance companies with quasi-bankinglicensesrely primarily on the money market in the form of deposit substitutes to finance their operations. For large and medium-sized companies,this source of funds has consistently provided about 65 to 80 percent of funds. The only exception among the largest companies was Filinvest, which relied on deposit substitutes for only about 50 percent of its fund sources in 1977-81. In 1982 however, its level of deposit substitutes rose to 60 percent of all resources.Yet, this is more of a policy choice rather than one dictated by circumstancesas Filinvest is also the only company which has consistently utilized long-term deposit substitutesas well as bondsas part of its funding. Among the medium-sized finance companies,deposit substitutes were also the major sourcesof funds. In 1981, however, ParamOunt and State Financing turned to other bills payable as a major source of funds when these 2 institutions suffered large declinesin deposit substitutes. In the caseof Paramount, deposit substitutesfell to 40 percent of total resources in 1981 compared to an average of 81 percent in previous years, while for State Financing, deposit substitutes constituted only 16 percent of total fundsin 1981, compared to an averageof 68 percent in the previousfive years. In order to supplement their funds and make up for the loss of deposit substitutes, these two companiesturned to other bills payable which supplied36 percent and 55 percent respectivelyof their total funds in 1981. In 1982, Paramount's other bills payable rosefurther to 71 percent of its resources,while deposit substitutesfell to only 5 percent. ' The five smallestfinance companiesin general relied on deposit substitutesfor a lower portion of their funds and they alsoresorted more frequently to other borrowings to finance their expansion, and/or to maintain their resourcelevel when deposit substitutesWere difficult to obtain. For three of the five smallestfinance companies,(i.e. ACI FC, Mercantile and Bacolod) deposit substitutes comprised an average of about 60 to 70 percent of total resources in 1977-82. For Man_hil

Table 13

z째

Finance Companieswith Quasi-BankingLicenses PercentageDistribution of Total Resourcesby Sourceof Funds 1977-82

Other

Total

Bills Payable

< X m -4

Unearned

Other

Income

Liabilities

ALL FINANCE COMPANIES WITH QUASI-BANKING LICENSES 1977 70 1 71 1978 70 1 71 1979 70 70 1980 66 1 67 1981 55 8 63 1982 62 4 66

13 12 10 11 14 14

6 8 11 12 12 11

91 90 91 90 90 91

9 10 9 10 10 9

FilinvestCredit Corp, 1977 1978 1979 1980 1981 1982

20 15 12 16 17 17

12 18 21 22 19 14

86 88 89 89 89 91

14 12 11 11 11 9

Finance Companies

Deposit Substitutes

Total

Equity

Liabi.lities

' 49 54 56 S0 53 60

5 t -

54 55 56 50 53 60

-4 c _-4

Table 13 (Continued) Finance Companies FinanceCorp 1977 1978 1979 1980 1981 1982

Deposit Substitutes

Other Bills Payable

Total Bills Payable

Unearned Income

Other Liabilities

77 77 73 71 63 63

14 13 t0 11 13 15

4 4 12 12 15 15

95 95 94 94 92 93

4 5 6 6 8 7

76 75 78 68 64 64

15 13 12 17 21 22

5 5 5 8 8 8

96 93 95 93 93 94

4 7 5 7 7 6

Investors Finance Corporation/FNCB Finance 1977 76 1978 75 1979 78 t980 68 -1981 64 -1982 64 -

Total Liabilities

Equity

-I,

o ,_ -4 "_ tlt "11

ParamountFinanceCompany 1977 82 1978 82 1979 1980 1981 1982

78 81 40 5

82 82

4 3

2 3

89 88

11 12

z >

-36 71

78 81 76 76

3 3 2 2

6 3 5 4

87 86 83 82

13 13 17 18

> _Â˘ m

-t

Table 13 (Continued)

FinanceCos.

Â˘ o

Deposit Substitutes

Other Bills Payable

Total Bills Payable

Unearned Income

Other Liabilities

Total Liabilities

Z m -<

Equity

> m

Commercial Credit Corporation 1977 82

-4 -

1978 1979 1980 1981

81 84 85 76

9 8 6 11

2 1 2 7

93 94 94 95

7 6 6 5

1982

113

128

(28)

industrial FinanceCorporation 1977 79 ] 978 73 1979 72 1980 70 1981 64 1982 61

79 73 72 70 64 61

9 12 9 8 9 S

5 7 12 13 16 17

93 92 92 91 89 83

7 8 8 9 11 17

State FinancingCenter, Inc. 1977 66 1978 64 1979 64 1980 77 1981 18 1982 77

5.5 -

66 64 64 77 73 77

6 12 6 3 3 1

6 5 9 6 5 3

79 81 79 86 81 81

21 19 21 14 19 19

Table 13 (Continued) Finance Companies

Deposit Substitutes

Other Bills Payable

Total Bills Payable

Uneared Income

.Other Liabilities

Total Liabilities

Equity â&#x20AC;˘â&#x20AC;˘

MercantileFinancingCorporation 1977 50 1978 62 1979 72 1980 83 1981 78 1982 74

50 62 72 83 78 74

4 4 4 2 3 6

2 2 3 2 4 2

57 69 78 87 85 82

43 31 22 13 15 i8

Manphit InvestmentCorporation 1977 17

1978 1979

24 47

33 47

3 3

13 9

49 59

51 41

1980 1981 1982

31 14 85

30 68 -

61 82 85

1 1 t

6 2 2

68 85 88

32 15 12

61 64 68 55 71 80

11 12 10 5 9 6

5 3 2 28 3 3

77 80 81 88 83 89

23 20 19 12 7 11

Asian Consumer and IndustrialFinanceCorporation 1977 61 1978 64 1979 66 2 1980 53 2 1981 71 1982 80 -

o m "11

z 1-

> _m _*

Table 13 (Continued) Finance Companies

Â˘ o z

Deposit Substitutes

Other BElls Payable

Total Bills Payable

Uneared Income

Other Liabilities

Total Liabilities

Equity _o > I"11

Bacolod IndustrialFinanceCorporation/FirstMalayanLeasing& FinanceCorporation 1977 68 68 11 6 1978 69 69 10 6 1979 1980 1981 1982

70 73 48 67

84 86

16 14

z _._

29 -

70 73 77 67

10 10 10 16

5 7 7 9

86 90 94 92

14 10 6 8

Cebu InternationalFinanceCorporation 1977 23 22 1978 20 31 1979 33 1980 12 24 1981 27 24 1982 64 -

45 51 33 36 51 64

13 12 17 17 14 12

12 11 26 22 14 10

71 74 77 76 79 86

29 26 23 24 21 14

Notes to Table 13: (1) Arranpd according to size of total assetsIn 1980. (2) Table shows |terns as a percentap of total resources; dete;Is may not add up to tota|sdue to rounding. Dash "-" may Indicate nil or nelJlgible quantity. (3) Number of finance companies with quasl.bankir_ licenses: 12 FNC8 Finance was formerly known as Investors Finance CoTp.; Commerelal Credit Corp (CCC) underwent a CB rehabilitation program In 1983 and changed Its name to General Credit Corp.; Bacolod Industrial Corp. merged with IFC Acceptance and Leasifig Corp. 1981 and the merged company was named First Malayan Leasing and Finance Corp. in 1982. Source of basic data: Published flnanÂŠiai statements of finance companies.

"_"

"/2

SHORT-TERM

FINANCIAL

MARI_"TS

and Cebu, however, deposit substitutessupplied only an averageof 27 percent and 23 percent respectively of total resources in 1977-81 while equity financed an average of 35 percent and 25 percent, respectively. In 1982, the level of deposit substitutes in thesetwo companies rose to more or less the same levels as other finance companies. B. Applications of Finance Company Funds Large finance companiesin the Philippinesgenerally offer a wide range of financial services, ranging from consumer credit for applicance purchase, home improvement loans, housing loans, car financing and personalloansto commercial credit (e.g. inventory and installment financing and industrial credit leasing, receivablesdiscounting and factoring, machinery/equipment and floor stock financing, etc). The larger the finance company, the more able they are to diversify their portfolio of receivables and offer financing across a broader range of activities than smaller finance companies. Unfortunately, a breakdown of financing by type of credit is unavailable. In the period 1977-82, an average of about 69 percent of the assets of finance companies with quasi-banking licenseswent into loans (See Table 14). In the absence of data, it is assumedthat the maturity composition of the loans is fairly short corresponding to the short-term nature of their fund sources. Basedon industry sources,the usual maturity period of financing would be a minimum of 30 days, with an averageof 90 to 120 days. While investmentsaveraged 17 percent of total finance company assetsin 1977-80, they dropped to 6 percent and 2 percent in 1981 and 1982, respectively. Investments in allied undertaking account for about one percent of assets.Real estate accountsfor a sma|l but rising portion of finance company assets.From a share of 4 percent in 1977-79, it roseto a shareof 6 percent in 1980, 9 percent in 1981 and 7 percent in 1982. A portion of this representsequipment and other property for leaseas well as investmentsin land and building. However, a significant portion is alsoaccounted for by real property owned as investments or as developers or acquired through foreclosure. Indeed a notable feature of nonbank financial institutions in recent years has been their entry into real estate development especiallycondominiumsand buildings. Table 15 shows the distribution of assetsfor the finance corn-

Table 14 FinanceCompaniesWith Quasi-BankingLicenses PercentageDistributionof Assets 1977- 1982

x o zm -< i= PO

InvestFinanceCompanies

Ca_

ments

Loans

Invest

Real

Other

in Allied

Property

Assets

74 68 62 61 73 77

1 1 1 1 1

4 4 4 6 9 7

2 3 3 4 4 9

FilinvestCredit Corporation 1977 1978 1979 1980 1981 1982

1978

-4

All FinanceCompaniesWith Quasi-BankingLicenses 1977 7 12 1978 7 17 1979 8 22 1980 11 17 1981 9 6 1982 4 2

BA FinanceCorporation 1977

II1

c -4

4 S 6 13 14 4

5 21 33 10 5 -

82 65 54 64 70 71

1 1 1 2 2 2

3 3 3 4 4 4

4 4 3 7 S 19

Table 14 (Continued) FinanceCompanies 1979 1980 1981 1982

_,"l Cash 9 17 5 3

InvestorsFinanceCorporation/FNCB Finance 1977 8 1978 9 1979 9 1980 6 1981 . 5 1982 4

Investmerits

Loans

Invest in Allied

Real Property

OtheÂ˘ Assets

25 7 2 3

60 69 82 83

3 5 8 9

2 2 2 2

4 2 12 10 1 -

81 82 73 74 82 88

5 5 4 6 6 7

1 2 2 4 5 1

= z o -4

Paramount Finance Corporation 1977 1978 1979 1980 1981 1982

8 12 7

30 44 33

57 36 48

2 3

4 4 5

1 1 4

9 12 4

37 17 3

44 56 72

2 4 9

5 9 8

3 2 4

J_ 111 _0 -_ m z z > ;> _o

CommercialCredit Corporation 1977

+- - + " 50

Table 14 (Continued)

Â˘_ Z m

FinanceCompanies

Cash

Investments 53 19 30 4 4

Loans

Invest in Allied

Real Property

Other Assets

< >_

29 77 49 78 85

6 2

1 1 5 14 7

2 3 2 3 2

m -4

1978 1979 198 0 1981 1982

9 14 -

-_ "_ C 0-I Z

Industrial FinanceCorporation 1977 1978 1979 1980 1981 1982

12 8 7 7 5

11 9 12 14 ' 2 -

68 80 68 61 72 55

State FinancingCenter, Inc. 1977 1978 1979 1980 1981 1982

8 6 17 4 5 5

64 60 49 65 37 6

17 26 28 20 42 55

Mercantile FinancingCorporation 1977

u_ 4 7 8 12 14 16

4 4 3 6 4 24

1 2 2

6 5 4 10 11 31

3 2 2 2 3 1

Table 14 (Continued) FinanceCompanies 1978 1979 1980 1981 1982 Manphil InvestmentCorporation 1977 1978 1979 1980 1981 1982

Cash

Investments

Loam

Invest in Allied

8 12 20 30 7

3 2 28 6 6

86 84 50 60 69

4 5 5 5 11 6

10 12 23 17 12 3

70 52 44 54 69 83

Real Property

Other Assets

2 1 1 2 13

1 1 1 2 5

12 20 13 11 6 4

1 6 1 4 2 1

3 14 9 2 3

77 67 42 74 72

1 1 1 t

6 7 4 5 3

3 2 29 2 2

AsianConsumerand Industrial FinanceCorporation

1977

1978 1979 1980 1981 1982

-,.L* o m

12 11 6 10 6

1 13 18 9 16

__ z > r--

BacotodIndustrial FinanceCorporation/First MaLayanLeasing& FinanceCorporation 1977 11 2 79 -

m -N 5

Table 14 (Continued) Cash

Investmenus

Loans

1978 1979 1980 1981

10 6 1"1 23

2 6 2 2

79 77 77 66

1982

FinanceCompanies

Invest in Allied

O z m "< >

Real Property

Other Assets

4 4 4 4

5 6 5 6

re ,-I 7c

"_ 5

_ c Z

Cebu International FinanceCorporation 1977 8 1978 9 1979 5 1980 8 1981 7 â&#x20AC;˘1982 $

1 1 3 1 1 13

77 75 74 72 76 72

11 12 12 16 14 8

2 3 6 2 2 2

NotestoTable14: (1) Arranged by dzeof a_etsin 1980 (2) TableshowsItemsasa percentapof totalassets; detailsnotaddup to totalsdueto roundln$ errors.Dash"--" mayIndicatehi!or neallgible amoun_ (3) Numberof financecompanies withQBlicense:12 FNC8 Financewasformerlyknownas tnvestorsFinanceCorp;Commercial Credit(CCC)underwenta CB rehabilitation pmsram in 1983,andchanged its nameto GeneralCreditCorp_Bace[odIndunrlalFinanceCOrl_merBed with IFC Acceptance andLeasin8 Corp.in Dec.1981,andthenameof themeq_dcompanywaschanged to FImtMalayanLmln8 andFinanchCorp.In 1982. Source of basicdata: publbhed statements offinancecompanies

_a -.a

Table 15 FinanceCompanies(with or without QB Licenses) PercentageDistribution of Assetsand Liabilities, 1975 - 1982 ITEM

1975

1976

1977

1978

1979

1980

1981

1982

3 70 16 12 I00

5 74 11 10 100

5 72 13 10 100

5 69 17 10 100

6 81 4 9 ] 00

8 77 4 11 100

6 76 5 13 100

4 75 5 16 100

63 57 6

64 55 9

64 56 8

66 56 10

67 56 11

65 n.a. n.a.

60 50 10

20 83 17 100

21 85 15 100

19 85 15 100

19 86 14 t 00

21 86 14 100

24 84 16 100

ASSETS Cash Items Loans(net) Investments Other Assets Total Assets LIABILITIES AND EQUITY Borrowings Short-Term Long-Term

Other Liabilities Total Liabilities Total Equity Total Liabilitiesand Equity Totai Resources(1)

3,467 n.a.

4,645 34

5,852 26

7,366 26

9,743 32

11,902 22

Details may not add up to totals due to roundingerror. Central

o m "11

zt_

â&#x20AC;˘Pmillion % Change

Source of basic data:

-1-

Bank,

FactBook:

Philil_tne_

FinancialS_.

12,123 2

12,919 1

> _m ,-4

1981

(2nd Sere).

and 1982.

MONEY MARKET INSTITUTIONS

pany industry as a whole. These statistics also show a slight upward trend in the portion of assetsdevoted to loans. From an averageof 71 percent of the total assetsin 1975-78, loansroseto 81 percent in 1979 and an average of 76 percent in 1980-82. The opposite pattern is evident for investment in securities which dropped somewhat precipitously in the last three years. From an averageof 14 percent in 1975-78, investmentsdropped to 5 percent in 1979-82. Thus, it would seem that the trend in assetallocation is similar for investment housesand finance companies, where there has been an increaseconcentration on loansand a decreasein investments in securities.

C. Finance Companiesand th_ Money Market As in the caseof investment houses,the money market is vital to the funding of finance companies with quasi-banking licenses.The major characteristic of the financing of finance companies with quasi-banking licenses is the high reliance on borrowed funds, almost exclusively in the form of deposit substitutes. Taking a closer look at finance company balance sheets,shortterm debt accounted for about 85 percent of total finance company bills payable, while long-term bills payable were about 15 percent. Even these number understate the reliance on short-term debt because only three finance companies(notably Filinvest, and to a lesser extent, BA Finance and FNCB) had substantialamounts of long-term borrowings. As noted elsewhere, deposit substitutes, and money market borrowings in general have a weighted average maturity of slightly over one month. In order for these short-term funds to be a fairly permament source of funds, finance companiesmust be highly dependant on their continuous ability to roll-over this debt. Extending the analysis of the relative shares of short-term and long-term bills payable (i.e. 85 percent vs. 15 percent) to total liabilities and assuming that all other liabilities (unearned income and others) are also short-term, the ratio of short- to long-term in the total liabilities of finance companies with quasi-banking licenses would be about 90 percent short-term and 10 percent long-term. On the same basis, the relative proportion of long- to short-term liabilities for all finance companies(i.e. with and Without quasi-banking licenses)would be roughly the same (i.e. about 90 percent short- and 10 percent long-term (SeeTable 15).

SHORT*TERM

FINANCIAL

MARK_I'S

The maturity composition of the sourcesof funds of finalhce companies with quasi-banking licensescan be compared to that in the United States where finance companiesare also traditionallybe. lieved to obtain a large portion of their funds through short-term borrowing. In the ease of finance companies in the United States, however, only about half of total finance company debt isshort-term (54 percent in mid-1980) while long-term debt comprised the other 46 percent.10 The shareof equity, however, in total finance company resources in the United States was similar to that in the Philippines.Moreover, the sameinverserelationship observedbetween finance company size and the portion of total funds supplied by equity is also observedin finance companies in the United States. And as is the case in the Philippines, the portion of equity capital risesin inverseproportion to the size of the company. Equity supplied about 14 percent of total funds for largefinance companies,19 percentfor medium-sized companies,and as much as46 percentfor small finance companies.1째

10Evelyn M. Hurley, Bulletin, May 1980.

"Survey

Finance Companies,

1980,"

Federal

Reserve

CHAPTER 4

MAJOR INSTRUMENTS IN THE MONEY MARKET

There are three major instruments in the money market: interbank call loans,deposit substitutesand commercial paper. In terms of their sharesin total money market transactions,deposit substitutes by far are the largest, accounting for roughly 75 percent of all transactions (please refer to Chart 5). Interbank call loans, however, have recently been the fastestgrowing category of transactions. During the period under study, they grew from 8 percent of total market activity to 29 percent by 1982. Other instru. ments, includingcommercial paper, made up only about 6 percentof the market in 1977-82. Statistics on the share of commercial paper, however, are not truly indicative of the importance of this instru. ment becausemoney market data on transactions by type of instrument list ascommercial paper only those sold without recourse. These instruments cater to different investment requirements and borrowing needs of various economic units. Table 16 shows the primary participating lendersand borrowersfor each instrument. The interbank call loan market is restricted to commercial banks and non-banks with quasi-banking licenses whether as borrowers or lenders. Borrowing in the form of deposit substitutes is likewise restricted to commercial banks and non-banks with quasi-banking licensesbut lenders include virtually all economic units with surplus funds. Issuersof commercial paper are nonfinancial corporationsand finance companiesand securitiesbrokers and dealerswithout quasibanking licenses.While there are no restrictions imposed on investors in commercial paper, the major investors in this market are individuals, private nonfinancial corporations and institutional investors. INTERBANK CALL LOANS The interbank market refers to the borrowing and lending of deposit balances of banks.and quasi-banksat the Central Bank as 81

SHORT-TERMFINANCIALMAI_KETS Table 16 Money Market Instruments And Major Borrowersand Lenders Money Market Instruments

INTERBANK CALL LOANS

Primary Participating Borrowers

Primary Participating Lenders

CommercialBanks Non-banksw/Quasi-Bk (QB) License

Commercialbanks Other Banks Non-bksw/QB License

PromissoryNotes

CommercialBanks Non-bksw/QB License

Bankand Non,bank Fin'l Inst. 4 Institutional

RepurchaseAgreements

CommercialBanks Non-bksw/QB License

Investors ' Individuals,Gdv't. Agencies& Corporationt Pvt. Nonfin'l : Corporations

DEPOSIT SUBSTITUTES

Cert. of Assign/Participation, CommercialBanks with Recourse Non-bksw/QB License Cert. of Assign/Part(Pvt), w/out Recourse

ExpandedComm'l Bnks Non-Bksw/QB License

Cert. of Assign/Part(Gov't.) w/out Recourse

CommercialBanks Non-bksw/QB License

COMMERCIAL PAPER

NonfinancialCorp. Individuals _: FinanceCos& Securities Pvt. Nonfin'l CorpoBrokers/dealerswithrations 'i out QB Licenses Institutional Investors

well as borrowings among-banks

and quasi-banks. The funds trans-

ferred are in a form which are immediately available for whatever purposes the borrower may have, such as satisfying reserve requirements without waiting for the usual funds clearing time. Interbank transactions are carried out by debit and credit orders authorizing the Central Bank to make the necessary transfers._n its books as well as by checks drawn on depository banks. These transactions are generally carried out late in the afternoon, after t_e results of the day's clearing have become known. So long as the trans. actions are reversed before 11 a.m. the next day, one day's interest is

MONEY-MARKET INSTRUMENTS

earned, regardless of the time actuallyelapsedbetweenborrowing and repaying.Whilemostinterbank loansare on call or on demand, they may also be for a specifiedperiodof time, typically lessthan one week. The interbank market servesa number of functions.Primarily, theseare usedto adjust the bank'sreservepsotions.On the lending side, excessreserves are a majorsourceof interbankfundssold,while on the demandside,bankswith deficit reservepositionsare buyers of funds. The existenceof the int_rbank market thus offers flexibility in the amount of excessreserveskept by a bank or other financial isntitut|on with accessto the interbank market.Because of their role in reserveadjustment,the interbank market reflectsthe short-termcreditneedsof banks. While this is the traditional use of the interbank market, the growing acceptanceof liability managementhas providedanother reasonfor banks to enter the interbank market. Insteadof using interbank loanssolely to managereserverequirements,some banks haveregardedthe market as a semi-permanentsourceof fundsfor regular operations.Thus, some banksborrow continuouslyin the interbank market. The fundsraisedhere performa function similar to that of depositsubstitutesin the bank'sgeneralliability management. The bank's effective use of the interbank market in this fashiondependsoq the existenceof profitable opportunitiesto investthe fundssogenerated. By reasonsof managementpolicy or the structureof their fund sources,other banksopt for maintainingliquidassetposition.These banks maintaina fairly constantnet longpositionin the interbank market, which they view primarily as a short-term repository of funds. A. Volumeof InterbankCall Loans Interbank call loans (IBCL) are a largeand growingpart of the money market. Indeed, IBCLs havebeenthe fastestgrowingsector of the money market in recentyears.In 1977, interbankcalllOans amountedto 4=17.8billion, and the following year they _roseby 3 percentto 4=18.4billion (Table 17). Sincethen, however,the yearly volumeof IBCLs hasgrown very rapidly, averaging64 percentper annum. In 1979, IBCLs morethan doubledto _42.3 billion andby 1981 havereached@66.9billion, and@133.6billion in 1982. Due to the fast growth of this type of transactionsin recent

SHORT-TERM FINANCIAL MAI_E-fS

Table17 InterbankCall Loans 1977-1982 r

Year

Amount (_'bil)

1977 1978 1979 1980 1981 1982

17.8 18.4 42.3 50.5 66.9 133.6

% Change 0 3 130 19 32 100

Sourceof Data: Central Bankof the Philippines

% of Total MoneyMarket 8.4 7.8 14.3 16.6 20.3 28.8 '

years, the shareof I BCLs in total money market volume grew from 6 percent in 1977, 20 percent in 1981 and 29 percent by 1982. Charts 9 and 10 show the monthly volumes and percentage changesof IBCLs in 1977-1982. In the first two yearsof that period, the monthly volumes of IBCLs were fairly steady at about _1.3 billion to @1.7 billion. In 1979 through most of 1980, the average rose to between f'3.2 billion to _4.1 billion. Since the mid-1980s, however, there has been a perceptible increasein market volatility. During that year there were month-to-month percentagechangesin market volume of, or closeto, 100 percent (Chart 10). After the _nid1980, the monthly volume of IBCLs also expanded, seemingly_Itan accelerating pace. In the first half of 1981, the average mo_hly volume was about @5 billion, rising to over fl'6 billion in the sei:ond half of the year. In 1982, IBCLs rose further to average8.2 billion each month during the first semesterand over@14 billion during the secondsemester. In seeking explanations for the volatility of the interbank market, one would expect credit conditions in general to determine changesin volumes of IBCLs. Indeed, the large increasein average volumesand volality of the market in 1981 appearsto be a reflection of unsettled credit conditions and tiering of the market that occ_red during the liquidity crisisin that year. In the following year, however, the credit markets easedconsiderably, but despite the easingoff,credit conditions, the IBCL market continued to grow both in VOlrUme and volatility, i

MONEY MARKET INSTRUMENTS

Chart9 INTERBANK_LOANS 25

IBCL MONTHLYUOLUHE 1977-82 Chart10 INTE_ANK CALL LOANS

2e8!

..........

P E 18B.....

!o -I_

:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::

IBCL PERCENTAGECHANGES (MONTH-TO-MONTH) 1977-82 Sou_

of _iÂŠ

_n_

B_k

_r _

charts (9 & 1

The steep rise in IBCL volume in 1982 appearsto reflect in,large measure the growing popularity of the so-called "conduit" transactions, rather than credit conditions per se. In these transactiOns, banks borrowed through the interbank market from conduit institutions where there were no reserve requirements, instead of raising

SHORT-TERM FINANCIAL MARKETS

funds directly from their clients in the form of deposit substitutes where there were reserverequirements.In turn, these conduit transactions sold the banks' notes on an outright basisto the banks' clients, thereby spreading the transaction. For the conduit institution, usually a non-bank quasi-bank, this providesa risklessand virtually effortless source of businesswhich was especiallywelcome giventhe decline in commercial pape_businessin 1982. It appears that it was largely a result of conduit transactions, rather than changes in credit conditions that IBCLs expanded so rapidly in 1982. Hence, changes in the volumes of IBCLs over the years can be viewed as a response,not only to credit conditions, but also to changesin the regulatory environment and relative economics of different transactions. In looking for the explanatory variablesof the developmentsin the IBCL market, one hasto look at the complex interplay of economic and credit conditions, the shifting resourcesamong banks and quasi-banksreflecting differences in fund sourcesand investment opportunities, differences in management preferenceswith regard to liquidity and asset/liability management, and the regulatory environment within which the market operates. B. Major Borrowersand Lendersin the Interbank Market Table 18 showsthe distribution of money market transactionsby institution and type of instrument. In 1981, IBCLs amounted to @67 million and rose to @133 million the following year. Virtually all of this represented borrowing by commercial banks. In terms of total commercial bank borrowing on the money market, however, deposit substitutes were larger than IBCLs. Hence, the share of IBCLs in total commercial bank money market borrowings was 29 percent in 1981 and 41 percent in 1982. On the investor side, however, institutions are somewhat more diverse, although commercial banks are alsothe primary suppliersof interbank funds. Table 19 showsthe distribution of money market transactions by type of instrument and investor in December 1981 and 1982 In 1981, commercial banks accounted for 75 percent of all investors in IBCLs, and 88 percent the following year (See Table 19-A). The balance of funds were lent by rural, thrift and other banks which in 1.981 supplied 24 percent of all funds going!into IBCLs. This declined to only 11 percent in 1982. _ IBCLs were an important outlet for the investible funds Of all

MONEY MARKET

INSTRUMENTS

Table

Volume of Money Market Transactions By Institution and Type of Instrument Billion CommercialBank BlIP

Pesos, 1981

InvestHouse BilIP

& 1982

Fimmeecos

BlIP

53.00 21.10 5.10 0.60 14.60 4.70 1.00

31.(;0 2.20 2.30 0.20 2.10 0.60 _

81.80 5.60 5.90 0,50 5.40 1.50 -

100.00

39.00

(Pdx_ BiI'P

Total %

BaP

4.80 0.70 0.70 4.90 0.30

42.10 6.10 6.10 43.00 2,60

67,00 189.50 20.60 27.20 0.50 20.40 3.30 0.90

20.34 57.53 6.25 8.28 0.15 6.19 1.00 0.27

100`00

11.40

100.00

329.40

100.00

1981 IBCL PIN RP PVT RP GOVT. CERT ASS CPN/FI CP FINL OTHERS

67.00 127.00 7.30 21,70 -6.20 0.40 0,10

29.20 55.20 3.20 9.40 2.70 0,20 -

TOTAL

229.70

100.00

1982 IBCL PIN gP Iw'r RPGOVT CERT ASS CP N/FI CP FINL OTHERS

133.60 156.40 4.90 24.10 1.80 0.60 3.80

41.10 48.10 1.50 7.40 0.60 0.20 1.20

...... 37,40 8.10 7.50 0.20 13.90 6,10 4.10

47.30 11.50 9.50 0.20 17.60 7.70 6.10

41.00 0.60 0.90 0.20 2.20 5.20 -

81.90 1.20 1.80 0.40 4.40 10.40 -

3.50 0.50 1.10 4.90 1.60

30.20 4.30 9.S0 42.20 13.80

133.60 28_30 14.10 33.60 0.40 22.80 / 11.90 9.50

28.78 51.34 3.04 7.24 0.09 4.91 2..56 2,00

TOTAL

325.20

100.00

77.30

100.00

50.10

100.00

11.60

100.00

464.20

10(I.00

No_;

...... 26.10 10.40 2.50 0.30 7.20 2.30 0.50 49.30

Dash (-) rosy mean nil or ne_lglble amounD. Details may not add to total due to rounding ecmr¢

So_rr_ of basic data: Central Bank of the Philippines Note: See pe_f_l;dpt for updated _Jble.

• /'

SHORT-TERM FINANCIAL MAI_KETS

Table 19 MoneyMarketTrammotlonsBy Instrumentand Investor In Million Pesos.i)e_mber 1981 and lg82 i,Ol_n. C_WL mU,U_LOT.EN i,v_r FI_ _ON PRIVATE TOTAL OUAU+ .ANXS S,U,XS "*NXS HOUSSSCm. _U.OS CO,P_ OTHE,m OEGEMBER 19(11 INTERBK CALL LOANS

5,829.00

4,238.00

286.00

1,081.00

2.00

22.00

0.00

DEFOSrr SUBSTITUTES PROMISSORY NOTES RP FVT INSTRUMENTS RP GOVT INSTRUMENT CERT ASSIGN/PART TOTAL DEP SUBS

15,009.00 1,200.1)0 1,642.00 09,00 18,600.00

1,437,01) 65.00 91.00 9.00 1,042.00

2,929.00 180.00 86.00 23.00 8+206.00

309.00 41.00 190.00

680.00 1,203.1)0 184.00 0.00 1,026.00 $,00

620.00

1,890.00 1,216.00

COMMERCIAL PAPER NON-FINANCIAL CP FINANCIAL TOTAL CP

2,209.00 $79,00 2,780.00

1,1)93.00 514.00 1,007.00

GS.00

8.00

58,00

0.OO

OTHERS TOTALTRANSACTION5

27,0?5.00

9,149.00

1,006.00 8.00 B.1)O 1,022.00

7.00

69.00

3,01)

0,00

17.00

10.00

27.00

0.00

7,590,00

919.00

2,990.00 1,218.00

13,230.00

198.00

2,111.00

O.1)0

7.(XI

698.00 68.1)0 170.00 4.00 990.00

4,190,01) 402.(Io 01,(10 13,00 4,657.Q0

3,159.00 273.00 65.00 2.00 3,49.00

216.0(} 9.00 225.00

768.B0 27.0 79S.0D

$3.00 29.00 02.00

1,00

2,00

1.1_

1,1)32,00

1,163.00

5,43S.00

0.1)0 9_81.00

DECEMBER 1082 INTERBKCALLLOAN3

20,895.01)

01.00

S.00

70.01)

0,00

4,203.00 208.0D 40.1J 2.00 4.489.00

1,909.00 02.00 ?$.00 9.00 1,478o00

087.00 217.0e 874.00

26,00 106.00 182,00

DEPOSIT SUBSTITUTES PROMISSORY NOTES RP PVT INSTRUMENTS RF GOVT INSTRUMENT CERT ASSIGN/PART TOTAL DEP. SUBS.

10,861.00 680,00 21224,00 20,00 21,788.00

9s7.00 27.00 10.00 9.00 997.00

4,331,00 186.1)0 791.00

329.00 1,563.00 1092.00

10.00 6.00 10.00

5,308.00

588.00 49.00 291.00 S.O0 934.01)

491.00 4,212.00 00.00 12_0 737.1)0 SS.OO 1,248.00 4,279.00

2,1s0o1)0 19.00

600.00 17.00 22S,00

2,1fi9.00

922.00

COMMERCIAL PAPER CP NON-FINANCIAL CP FINANCIAL TOTAL CF OTHERS TOTAL TRANSACTIONS

1,056.00 1,S_)0.0O 2,906.00 1_397.00 46,869.00

84.00 2,973.00

Oe'_Osmzy not addt_ t_4zb d_e to _',e,m'_ _ erpcn. source: Central Bank of the Phlllpplm No_! SeepesttcdDt for updatmd_dMe.

200.00

6.00 6.00" " 11.00

29,754.00 1,149.00

0.00 26.01) 3_8S.00

0.00

1.00 9.00 4.00

33.00 29,1)0 02.00

28.00

5.00

232.00

4,900,00

2,108.00

1,210.00

$SS.O0 S,792.00

410.00 2,023. nn

MONEY MARKET INSTRUMENTS

8,9

Tabk 19-A MoneyMarket Transa:tiomBy In4uumud and Immstor Shamof Each Imm_w InTotal Volume of _ Immmmt TOTAL

IRUDIVI_MJ_kL,9

COIdM'L BANICB

RURAl. BANKS

_ BARKS

IIMVEST _

FINANCE _

_ FUMOS

PRIVATE _

OTHERS

DECEM6ER 1951 INTERBK CALb LOANS

1.00

0.00

0.75

0.05

0.19

0"00

0.00

0-00

0.00

DEPOSIT SUBS'TITUTE5 PROMISSORY NOTES RP PVT INSTRUMENTS RP GOV'I" INSTRUMENT CERT ASglGNRART TOTAL DEF. SUBS.

1.00 1.00 1.00 1.00 1,00

0.09 0.05 0.02 0.13 _08

0.19 0.13 0-05 OA8 0.17

0.02 0.0'3 0.12 0"00 0,03

0.04 0.15 062 0,(10 0"10

_ UI 0,_) _ 0"07

0"00 0000 0,00 0.12 0.05

0.04 0.06 0,10 0.W 0.05

0.3? 0.34 0.84 0,19 0.2.5

0.20 0,23 0004 0.03 0.10

COMMERCIAL PAPER CP NON-FINANCIAL GIPFINANCIAL TOTAL CP

1.00 1.00 1.00

0,49 0.89 0.,S8

0.05 0.00 0.02

_ 0"00 0.(10

0.00 _ 0.00

0"00 0"00 0"00

0"00 0.00 _

0.10 0.02 _

0._5 0"_ 0..29

0.02 0.05 0"03

OTHERS ALL INSTRUMENTS

1.00 1.00

0.000 0.12

0,29 020

0.17 U3

0.4? 0,11

0,00 0,04

0.02 0.04

0.BS 0,04

0"02 0.20

0,09 0,13

DECEMBER 1982 INTERRK CALL LOANS

1.00

0"00

6.01

0,10

0"00

0.00

0-00

0.00

PROMISSORY NOTES RP PVT INSTRUMENTS RP GOVT INSTRUML_i'F CERT ASSIGN/PART TOTAL DEP. SUBS.

1.00 1,00 1.00 1.00 1,00

0.05 0.04 0.00 0.15 0.05

0.23 0.27 0-_ 0.00 0.24

0.93 0.07 0.13 0.30 0.04

0,92 0012 0033 AM 0"00

0.22 0.02 0"02 0"00 0.20

0.11 0.03 0.00 0.00 0.10

0,04 0.03 0,10 0Jm 0,04

0.22 0,31 0,02 0.10 4,20

0,0"/ 0.12 0.09 0,4$ 0.07

COMMERCIAL PAPER CP NON.FINANCIAL CP FINANCIAL TOTAL CP

1.00 1.00 1,00

0,31 0.81 O,Eg

0.01 0.00 0,01

0.00 0.00 0.00

_ 0"00 _

0000 0.00 0.00

0,00 0.00 0.00

0.03 0.02 0.02

0"62 0,11 0.;19

0,02 0.05 0.G4

OTHERS ALL INSI"RUMENTS

1.00 1.00

0.06 0.06

0.14 0.$1

0.01 (U_

0"nr'J, 0.07

0.1_ 0.09

0.00 0.0.S

0.17 0.0S

0.28 0,12

0.30 0.04

DEPOSIT SUBSTITUTES

Dotalb may not add to _ab due m munWl_ emirs. Sa_rc0: C._nlml Bwlk of thePhOlpplnm N(Re: SIIBp(st_cdpt for u_Pa_ *=Me,

SHORT-TERM FINANCIAL MARKETS

Tab_ 1943 MoneyMarket TrtmmgtiomBy InstrumentandInvestor Sham of EKh lestmment In EaehImmstor'sPortfolio

TOTAL

INDIVI. DUAL8

_ EI._tI_

RURAL BANK8

OTHER BANGS

INTERBK CALL LOANS DEPOSIT SUBSTITUTES

0`21

0`OD

0.56

0.31

0.36

PROMISSORY NOTES RP PVT INSTRUMENTS RP GOVT INSTRUMENT CERT ASSIGNIPART TOTAL DEP, SUDS.

0`$8 0.04 0`06 0,00 0`09

0_,8 0,02 0`01 0`00 0.49

0.39 0,02 0.01 0`00 0.43

0.42 0`04 0.21 0`00 0.67

CP NON-FINANCIAL CP FINANCIAL TOTAL CP

0.08 0,02 0,10

0`35 0.16 0`$1

0.01 0`00 0`01

OTHERS ALL INSTRUMENTS

0.00 1.00

0`00 1.00

INTERBK CALL LOANS DEPOSIT SUBSTITUTES

0.44

RP PVT INSTRUMENTS PROMISSORY NOTES RP GOVT IN5TRUMENT CERT ASSIGN/PART TOTAL DEP.SUE5.

INVEST _

FINANCE COB.

PEI_;ION FUN rm

PRIVATE _

0`00

0.00

0`QB

0,00

0.23 0.0E 0.34 0`00 0.53

0.99 0.01 0`00 0`00 1.00

0.97 0`QO 0.01 0,01 CLq9

0`50 0.06 0.1S 0`00 0,E1

0.7_ 0`Of] 0.0_ 0,00 O,U

O.BE 0,08 0,02 0`00 0.98

0.00 0`00 0`00

0.00 0`00 0.QO

O.O0 0`00 0.00

0.01 0.00 0.01

0`19 0.01 0.19

0.14 0,0Q 0.14

0,01 0.01 0.02

0`00 1.00

0.01 1.00

0.00 1.00

0`00 1.00

0`O1_ 1.00

0`00 1.00

0`00

0.77

0.17

0.62

0.02

0`00

O.O,

0.00

0,40 0.01 0.0S 0`00 0,46

0.01 0.32 0`00 0`00 0.:_4

O,01 0.18 0.03 0`00 0,22

0.04 0.51 0`2S 0.01 0`81

0.13 0,02 0.22 0.00 0.37

0`00 0._ 0.01 0.00 0.98

0.01 0.9S 0.00 0`00 0`99

0.$6 0.01 0.19 0`00 0.76

00_0171 0.0_ 0`00 0.77

0.04 0.65 0.1)4 0`00 0.73

CP NON-FINANCIAL CP FINANCIAL TOTAL CP

0.02 0.04 0`06

0.11 0`S:_ 0.64

0`00 0`00 0`00

0`00 0.01 0.01

0.00 0`00 0`00

0`00 0`00 0,00

0`00 0`00 0.00

0.03 0,1)2 O.OS

0.11 0`0_ 0.1S

0.01 (LOS 0`07

OTHERS ALL INSTRUMENTS

0.03 1,00

0.03 1.00

0,01 1.00

0.01 1.00

0,01 1,00

0.01 1.00

0`00 1,00

O.19 1,00

0,0/ 1,0R

0.21 1.00

OTHERS

DECEMBER 1911

COMMERCIAL PAPER

OECEIVIBER 192

COMMERCIAL PAPER

Details may not add m totals due to roundlnEenrorz. Sours: Cenwai Bank of the Philippines NOI_: Seepos_Hpt for updated t4ble,

MONEY MARKET ,INSTRUMENTS

these banks (See Table 19-B). For commercial banks, IBCLs comprised 56 percent of their total money market investments in 1981 and 77 percent in 1982. For rural banks; IBCLs made up 31 percent and 17 percent of their money market investments in 1981 and 1982, respectively, while for other banks, the relevant shares were 36 percent in 1981 and 62 percent in 1982. In this respect, the market pattern in the Philippine interbank market is similar to that observed in the U.S. federal funds market. In general, federal funds constitute a significant investment outlet for the short-term funds of smaller regional banks. On the other hand larger money center banks are, on the whole, net borrowers in this market, using federal funds to balance their reserve requirements and as a regular source of funds. In the same way, rural, thrift and other banks in the Philippines are apparently continuing to be net lenders in the interbank market, supplying about 10 to 25 percent of all IBCLs in 1981 and 1982, while their borrowings in this form were negligible. With respect to the commercial banking system itself, the market pattern is one where the very large banks and the smallestones are generally borrowers in the interbank market, while the large and medium-sized banks are the lenders. Table 20 shows I BCL receivablesoutstanding for individual com. mercial banks for 22 quarters in 1977-82. The banks have been classified by size of assetsin 1982. Group I banks are the very largebanks, PNB and Citibanks, with assets of f'58 billion and _17.9 billion respectively in 1982. The second group, composed of 7 banks, had assetsof between _6 billion and'PlO billion, while the third group Ill banks) had assets of over _3 billion but lessthan _6 billion in 1982. The fourth group of banks were the 10 smallest banks with assetsbelow _3 billion in 1982. Banks which were not in existence for the entire period were excludedfrom this sample. As the table shows,somebanks consistently maintain large IBCL receivable accounts, while others maintain low or zero balances. Comparing the average contribution of each group to their relative shares in total assets,the pattern that emergesis one in which the very large and the smallestbanks hold low or zero IBCL receivables, (i.e. they are either net borrowers on the interbank market or maintain very low levels of IBCL receivables).On the other hand, large and medium banks were usually net lenders, supplying the bulk of IBCL receivablesto the system. On the averagePNB and Citibank (Group I) suppliedlessthan 10

.... !t

MONEY MARKET INSTRUMENTS

913"

percent of total IBCL receivables, while they accounted for about one-third of total assetsof the system. Small banks (Group IV) asa whole maintained a more balanced position. They contributed an average of about il percent to total IBCL receivables, while their share in total assetswas about 14 percent. On the whole, small banks appear less likely to maintain a net lending position in IBCLs than larger banks. (In fact, only one bank in Group IV was fairly consistent in maintaining a positive balance in its IBCL receivable account.) Many large and medium-sized banks, on the other hand, routinely held large IBCL receivables.These banks (Groups II and III) supplied about 80 percentof the system'stotal IBCL receivables,compared to their share in total assetsof roughly 50 percent. DEPOSIT SUBSTITUTES Deposit substitutes are the second major classof instruments which make up the bulk of money market trading. This classof instruments was created by Central Bank Circular No. 438 (November 1974) in connection with the quasi-bankingactivity. The term quasibah'kingwas defined as the borrowing of funds from a large number of entities (20 or more) for the purposeof relending. Only certain instruments called "deposit substitutes" were allowed in quasi-banking. These were promissory notes, repurchaseagreements,and certificates of assignmentor participation with recourse. A. Volume and Types of Deposit Substitutes In 1977, the total volume of deposit substitutestraded amounted to e181.5 billion or 86 percent of all money market transactions (Table 21). The following year, deposit substitutes rose to @208.8 billion and then to _241.9 billion by 1979. The total volume of deposit substitute transactions stabilized at about this level for the period 1979 through 1980, before rising to e286.3 billion in 1982. Although the volume continued to rise, deposit substitutesdeclined somewhat in relative terms. Their sharein total money market volume by 1982 was 62 percent, compared to 86 percent in 1977. Promissory notes (PNs, also called dealer PNs) are the most popular form of deposit substitutesand account for the bulk of all transactions. These are short-term, unsecured IOUs of money market intermediaries which are sold to investors. In 1977, PNs accounted

SHORT-TERM FINANCIAL MARKETS

Table 21 Volume of Deposit Substitutes, by Type of Instrument 1977-82, in billion pesos INSTRUMENT

(1)

Promissory Notes Repurchase Agreement, Private Repurchase Agreement, Gov't Certificate

of As-

Certificate of Participation

Total Deposit Substitues Total Money Market Transactions

1977

1978

1979

1980

1981

lg82

140.6

160.9

151.2

144.5

189.5

231_.3

(66.7) 22.7

(68.2) 21.5

(51.2) 39.3

(47.6) 60.4

(57.5) 20.6

(51,'.3) 14_0

(10.8) 17.6

(9.1) 25.9

(13.3) 50.8

(19.9) 35.3

(6.2) 27.2

(3L9) 33_6

(8.3) .4

(11.0) .2

(17.2) .1

(11.6) 1.1

(8.2) .2

(7.2) .2

181.5

208.8

241.9

242.1

237.7

286_3

(86.1) 210.8

(88.5) 235.8

(81.9) 295.5

(79.7) 303.7

(72.1) 329.6

(61,7) 464.2

(100.0)

(100.0)(100.0))(100.0)

Notesto Table 21 : 1.

Numbersin parenthesisshowthe percentageshareof eachinstrumentin total money marketvolumefor the that year. 2. *denotesa percentagesharelessthan onepercent, 3. Detailsmay not add to totals dueto r_Jndlng errors. Sourceof basicdata: CentralBank Note: Seepostscriptfor updatedtable.

for P140.6 billion or 67 percentof all money market transactions; In 1982, the volume of PNs amounted to fL238.3 billion, having grown at the rate of about 11 percent since 1977. Their share in t_tal money market transactions, however, fell to slightly over 50 percent, compared to the earlier 67 percent (See Table 21). :. The next largest classof instruments used as deposit substitqtes are repurchase agreements(RPs). RPs (also called Repos) are contracts in money market instruments. Rather than issuinghis own promissory note or selling the investor the promissorynote of a third party on an outright basis,the money market dealer may sell a seCurity out of.his portfolio and simultaneously contract to buy bick

MONEY MARKET INSTRUMENTS

or repurchase the same security at a future date and agreed upon price. Hence the RP involves the agreement itself (i.e. the contract of saleand buy-back) and the underlying security which isthe subject of the repurchaseagreement.The underlying security in a repurchase agreement may be a security issuedby a private party or one issued by the government. In 1977, RPs on private securities comprised the secondlargest class of deposit substitutes, albeit a distant second to promissory notes. RPs on private securitiesamounted to @22.7 billion in 1977 or 11 percent of all money market transactions in that year. The third largest group of deposit substitutes were RPs on government securitieswhich were @17.6 billion or 8 percent of total transactions. Six years later, in 1982, RPson private and governmentsecurities totalled @47.6 billion, making up about 10 percent of all money market transactionsin the year (See Table 21). Certificates of assignmentor participation make up lessthan one percent of the market. Certificates of assignmentare debt instruments evidencingthe transfer of beneficial ownershipin a non-negotiable promissory note from the money market intermediary to the buyer of the instrument. Certificates of participation, on the other hand, are instrumentsevidencingthe participation of the holder asa lender, to the extent indicated in the certificate, in a larger "mother" certificate. Certificates of participation thus enable a money market dealer to retail debt instruments denominated in large amounts to a number of clients. Both certificates of assignmentand participation may cover private or governmentsecurities. The pattern of usageof each of thesedeposit substitutesmore or lessremainedthe sameover the period under study. For a brief period in 1979-80, RPson private securitiesrose to @60.4 billion accounting for almost 20 percent of all money market transactions, while the share of PNs fell to 48 percent. In 1981, however, the volumeof RPs on private securitiesdeclined to _P20.6 billion, or 6 percent of money market volume in that year. The brief rise in RPs during 1979-80 did not so much reflectan increase in demand or investorpreferencefor this type of instrument, as the rise in volumes of commercial paper issued. As will be discussedin the succeedingsection, this period saw large increasesin the amounts of commercial paper issuedand outstanding. Since commercial paper provide the underlying securities in the bulk of RPs, the increase in commercial paper resulted in the increasedusage of RPs during 1979-80. However, with the decline in commercial paperout-

SHORT-TERM FINANCIAL MARKETS

standing after the first quarter in 1981, the volumes of RPs on private securities also declined. By 1982, RPs on private securities amounted to P14 billion, or only 3 percentof the market, while ;RPs on government securities made up 7 percent. Certificates of assignment and participation continue to have very limited use in,the money market. B. Major Borrowersin the Deposit Substitutes Market Data on major borrowers in different instruments are available only for 1981 and 1982 (See Table 22). As the largestparticipants in the money market, commercial banks are also the largest borrowers in the form of deposit substitutes. In 1981 and 1982, they accounted for roughly 67 percent of the volume of PNs. However, with regard to RPs on private securities, investment housesare

Table 22 Money Market Transactions By PercentageShare of Each Institution In Each Instrument 1981 & 1982 RP's IBCL

PVT

i CP's

GOVT

CERT OF ASS N/FIN

FIN'L

OTHERS

0.11 0,5_ 0.00 0.39

1981 Commercial Banks 1,00 Investment Houses 0.00 FinanceCompanies 0.00 Others 0.00

0.67 0.14 0.17 0.03

0.35 0.50 0.11 0.03

0.80 0.09 0.08 0.03

0.00 0.60 0.40 0.00

0.30 0,35 0,10 0.24

0.12 0.70 0.18 0.00

All Institutions

1.00

1.01D r

Commercial Banks

1.00

0.66

0.35

0.72

0.00

0.08

0.05

0.40

InvestmentHouses FinanceCompanies Others

0.00 0,00 0,00

0.16 0.17 0,01

0.57 0.04 0.04

0.22 0.03 0.03

0,50 0,50 0,00

0.61 0.10 0.21

0.51 0.44 0.00

0:(_ 0,17 ii

All Institutions

1.00

1.0_

SourÂ˘eof BasicData:CentralBankof the Philippines Note.*Seepostscript for updatedtable,

MONEY MARKET INSTRUMENTS

relatively more active than otherinstitutions. In 1981 and 1982, investment houses accounted for about half of all transactions of this type, while commercial banks made up about one-third. On the other hand;' commercial banks accounted for the bulk of RPs on government securities (averaging75 percent in 1981 and 1982). The relativelysmall sharesof investment housesand finance companiesas issuersof different deposit substitutes do not, however, reflect the importance of these instrumentsto the institutions concerned assourcesof funds. For finance companies,depositsubstitutes made up 94 percent of the total money market transactions by this type of institution in 1981, and 85 percent in 1982 (SeeTable 18). Of this amount, PNs alone accounted for 82 percent in both'years. For investment houses,deposit substitutescomprised80 percent and 68 percentof all money market transactionsof these institutions in 1981 and 1982, respectively (See Table 18). Investment houses, however, were lessconcentrated than finance companies in terms of instruments used, although PNs were also the la.rgestinstrument employed. In both years, PNs averaged about 50 percent of all money market transactionsof investment houses,while RPs on private securitiesaccounted for another 21 percent in 1981 and 12 percent in 1982. The balancewas mostly made up.by RPson government securities(SeeTable 18). For commercial banks, deposit substitutes made up 68 percent of.all money transactionsin 1981 and 57 percent in 1982 (SeeTable 18). Thus, despite being the largestborrowers in the form of deposit substRutesin the short-term markets, these instruments are relatively less important to commercial banks, compared with investment housesand finance companies asa source of money market business. Reflecting the wider options open to them, IBCLs were almost as important a source of money market funds to commercial banks in 1982 as PNs. As noted in the previous section, there isalsoa degree of substitu.tability between IBCLs and deposit substitutesas instruments of money market borrowing by commercial banks. Commercial banks are also the most active institution in RPson government securities,accounting for roughly 75 percent of the total volume of this instrument in 1981 and 1982 (See Table 22). Nevertheless,RPs on government securitiesare still relatively unimportant in total commercial bank borrowing, comprising only about 8 percent of their total borrowing in the money market (SeeTable 18).

SHORT-TERM

FINANCIAL

MARKETS

C. Major Investors in Deposit Substitutes Different lendersappear to have fairly definite preferencesasto the type of deposit substitutesthat they hold. The statistics indicate that the major purchasersof promissory notes are commercialbanksand private corporations(SeeTable 19-A). At the end of 1981 and 1982, these two sectorseach purchasedover 20 percent of promissory notesoutstandingat that time. Investment housesand finance companiesare the next largest holders, both"_as part of their trading portfolio as well as their investment portfolio. Individualshold lessthan 10 percentof PNs. RPs on governmentsecurities,on the other hand, are held largely by rural, thrift and other banks. Pensionfunds, the only other large non-bank holder of RPs on government securities, hold lessthan :_10 percent of this instrument. Private corporations are the largest investors in RPs on private securities, holding roughly 30 percent of this instrument at the end of 1981 and 1982. Other large holders of RPs on private securities are commercial banks and other banks (See Table 19-A). Overall, the largest supplier of funds to the deposit substitute market are private corporations and commercial banks, each of them accounting for over 20 percent of total investmentsin these instruments. Rural and other bankssupply around 10 percent of the funds in deposit substitutes, while pensionfunds and individuals each account for roughly 5 percent. Investment houses,finance companies and others supply varying sharesas investorsin deposit substitutes. Table 19-B shows the importance of different instruments.in the portfolio of different investors. While commercial banks are among the largest purchaserstof deposit substitutes, these instruments comprise a smaller portion of their total money market investments than do interbank call learns. In 1981 and 1982, deposit substitutes were 43 percent and 22 percent, respectively, of commercial bank money market investments. During the sameperiods, interbank call loans were 56 percent and ]77 percent, respectively, ix Private corporations and pension funds, on the other hand, hold an averageof 80 percent of their investmentsin the money market,in the form of deposit substitutes. While the bulk of this is in the form of PNs, pensionfunds alsohold a sizableportion of their money market portfolio in RPs on government securities,while private corporations hold RPson private securities(See Table 19-B).

MONEY MARKET INSTRUMENTS

As investorsin the money market, investment housesand finance companiespurchasePNsalmost exclusivelyin their holdingsof money market instruments. Deposit substitutes account for about 40 percent of the total money market investmentsof individuals, mostly in the form of PNs (See Table 19-B). D. Deposit Substitutes and the Money Market Deposit substitutes merit close attention becauseapproximately 75 percent of all money market transactions in the past six years have been in these instruments. As the termioology indicates,deposit substitutes are a closealter* native to bank deposits. Furthermore, the intermediaries issuing them are engagedin banking, (i.e. using the word as a genetic term for financial intermediaries that issuesecurities on themselves for purchasing primary securities by others) rather than for purchasing nonfinancial goodsand services. A comparison of the Philippine short-term markets and United States' money market shows some parallel developments between deposit substitutes and instruments in that more highly developed market. Deposit substitutes issuedby commercial banks appearto have no exact counterpart in any money market instrument issued by commercial banks in the United States, although PNs seem to perform a similar function asa sourceof bank funds for Philippine banks as negotiable certificates of deposit (NCDs) do for banks in the United States. The major marketable short-term instrument issuedby banks in the United States are negotiable certificates of deposit (NCDs), which are large time deposits with a specific maturity and interest rate. They are evidenced by a certificate issued to the depositor and ,re negotiable instruments. Banks can redeem time depositsbefore maturity only with a penalty, and they cannot, deal with their own certificates of deposit; however, liquidity is provided for NCDs by a dealer network making a secondary market for prime NCDs: While PNs and CDs are certainly not the same,they nevertheless perform much the samefunction in terms of bank liability management. As seen in the previoussections,deposit substitutes_area major source of commercial bank funds although their use has stabilized

100

SHORT-TERM FINANCIAL MARKETS

since the mid-1970s. As was the casein the United States, there has been a shift in the attitudes of commercial banks towards funds management with the growth of the money market. Before thel,rise in the popularity of the money market, commercial banks were more passive with regard to securing funds. These fund gathering effOrts mainly took the form of deposit campaignsand opening new branches. Although investment houses are credited with starting the money market in the Philippines, commercial banks realized early its potential as a fund generator. Many commercial banks now aggressively go out and buy money. Indeed,as we have seenin the previous section, the useof deposit substitutesallowed some banks to grow at a more rapid rate than others. For finance companies, promissory notes correspond to what is known as directly placed commercial paper in the United States market. For the most part, direct placers of commercial paper in the United States money market are large finance companies or bank holding companies that are highly rated and in continuous need for short-terms funds. Their demand for funds must also be of spch volume as to justify the fixed costsof going directly to the market rather than passingthrough dealers. It has been estimated that there are currently about 60 such issuersin the United States,and that ehe minimum monthly arpount neededto justify direct issueof commercial paper isin excessof $1 billion. 1: As is the casein the Philippines, these directly placed CPs are generally rolled over upon maturity so that, though technically short-term debt, they actually constitute a permanent source of funds for the issuer. Deposit substitutes issuedby investment housesdo not, however, seem to correspondto any instrument issuedby investmentbankers or securities dealers in the United States. Dealers and investment bankers in the United States market do not usuallyoperate as intermediariesin the senseof issuingtheir own securitiesand in turn uSing the proceeds to make loansto others. Rather, they normally operate in the direct private capital markets as dealerswhere they assist_in the processof transferring securitiesfrom primary issuersto thei_investorsby buying and sellingsecurities. In the processof doing this, securitiesdealersin the US also n_ed financing becauseof the inventory of trading account securitiest_at they must maintain. This is part of their normal trading activity of i

11Evelyn M. Hudey, "The CommercialPaperMarketsincethe Mid-Seventies."Fed_raJ ReserveBulletin, June1982.

MONEY MARKET INSTRUMENTS

|01

making a market,:or financing as yet unsold newly issuedsecurities. These financing needs are commonly met by loans from commercial banks, especially the large money market banks. In addition, some aggressivedealers_also borrow from nonfinancial sources, chiefly through the useof repurchaseagreementswith government securities being the underlyingdocuments. It isonly to this latter.type of financing that deposit substitutesissuedby investment housesin the form of RPs on governmentsecuritieswould correspond. The practice of quasi.banking and the use of deposit substitutes constitute important distinctions between money market intermediaries in the United Statesand the Philippines. In the former, money market institutions operate mostly as dealers,and borrow funds only to finance their inventory of trading account securities. These borrowingsare almost exclusively in the form of large dealer loansfrom commercial banks where the relation between the bank and the money market dealer isa simple one of borrower and lender. Dealers then use the funds borrowed from banksto engagein dealershipor in brokerageoperations, but not to relend. In the Philippines, however, dealers are financed not only by bank borrowing, but mainly by borrowing directly from the public through their promissory notes. This is akin to the deposit taking function of commercial banks, hence the term "/deposit substitutes." These funds are then relent to clients, again an activity similar to bankingas indicated in the term "quasi4)anking."

COMMERCIAL PAPER The third major type of money market instrument is commercial paper.Over the pastfew yearsthe commercial paper market hasbeen the most visible part of the money market. In large part this was due to the highly publicized difficulties of a few major borrowers,which at times threatened to engulf the entire short-term markets. The 1981 liquidity crisiswas set off when a well-known busines_sman fled the country, leaving behind millions of pesos in unpaid debts. The subsequentinability of companies controlled by him to repay their obligations led to liquidity problems in related companies and financial institutions which had exposures to those companies. Within the year, two investment houseswere forced to merge with commercial banks, and a number of other investment houses,finance companies and smaller commercial banks faced financial difficulties

102

SHORT-TERM

FINANCIAL

MARKETS

as a result of the generaldecline in confidence in the financial system. Becauseof these difficulties and the changesin the regulatory framework that followed, the commercial paper market experienced a great deal of variability in issuancesand outstanding volumes cWer the pastyears. An examination of money market data on transactionsby instrument shows that the share of CPs in total money market activity was quite small, averagingonly 4.6 percent in 1977-82. This, however,_includes only transactions involving outright salesof CPsand understates the importance of this type of instrument. Asidefrom outright sales,CPs are also used in the money market as the underlying security in deposit substitutessuchas repurchaseagreement and certificatesof assignmentor participation with recourse. While the term "commercial paper" (CP) may be applied_'in generalto all short-term debt instruments,12 in practice it isgenerally used to refer to short-term, unsecured,negotiable evidencesof debt of nonfinancial corporations, finance companies and similar insti. tutions without quasi-banking licenses(NQB). 13 Following market convention, this section will deal only with the narrower definition of commercial paper, meaning, short-term IOUs of nonfinancial corporations and financial institutions without quasi-banking licenses. Short-term debt instruments issuedby banks, investmenthousesand finance companies with quasi-banking licensesin connection with their quasi-bankingactivities are dealt with in the previoussection on deposit substitutes,under the topic of dealer promissorynotes. A. The Regulatory Framework Under an amendment to the Securities Act by P.D. No. 678_.in April 1975, the Securitiesand Exchange Commissionwas giventhe task of ensuringfull and adequate disclosureof all material facts and information regarding issuersof commercial paper. With this mandate, the SEC issued its directives of December 1975 and October 1976 requiring all issuersof short-term and long-term commercial 12Under the rules of the Securities and Exchanp

Comrnlssion, commercial paphr is

defined as all evidence of indebtedness of any corporation to any person or entity w_h a maturity of 365 days or less, regardlessof whether the Issuer Is a bank, an instituttonl_performing quasi-banking functions or a nonfinancial corporation. 131n the US market this would correspond to the so-called "dealer-pla_ed comm_Â˘ial paper." On the other hand, deposit substitutes of finance companies with quasi-barldng licenses would correpond to "directiy placed commercial paper."

MONEY MARKET INSTRUMENTS

,103

paper to obtai_ the Commission'sapproval for the maximum amount of commercial paper that they could issue.Firms werealso required to submit regular reports on issuancesand outstanding balancesof CPs and information regarding their financial condition. These rules covered all CPs regardlessof whether they were issuedby financial institutions (with or without quasi-banking licenses)or by ilonfinancial corporations;,Exempted from registration (but not from reporting)were thosecorporationswhoseCP issueswere lessthan t_1 million or whose promissory notes were neither negotiable nor issuedto 20 or more lenders. In October 1979, the SEC and the Monetary Board adopted certain criteria to determine CPapprovals. Among thesewere maximum debt-equity ratios ranging from 10:1 for financial institutions without quasi.banking licensesto 70:30 for firms engagedin agriculture (SeeTable 23). In addition to meetingdebt-equity ratios, prospective CP issuerswere also required to maintain a minimum current ratio of 1:1 ; as_vell as to submit projected cashflow statements showingthe utilization of the proceedsof the CP issue. On the basisof these standards, the SEC issued regular permits as well as permits which were conditional on meetingcertain additional requirements, suchas requiring that the CPs be guaranteed by authorized financial institutions. Table23 MaximumDebt-EquityRazios andDebtFactors for Registered Issuers ofCommercial Paper Industry Trade RealEstate Mining Construction Services PublicUtilities Power Agriculture Others NQB Securities Brokers& Dealers: for marginfinancing for non-margin financing Investment companies

_ty Rezio 7S:25 75:25 85:1-5 80;20 80:20 85:15 91:9 70:30 70:30 10:1

: Debt Factor 3 3 5.7 4 4 5.7 10 2.3 2.3 10

10X capitalassigned for thispurpose 2X capitalassigned for thispurpose 3:1

104

SHORT-TERM FINANCIAL MARK_[I"S

In December 1981, the SEC issuedstricter rules on commercial paper registrationasa result of the financial crisisearlier in that year. The most important of these was that prospectiveCP issuersobtain a credit line from a bank or other authorized financial institutibn earmarked for the repayment, on a pro rata basis,of the aggregate outstanding commercial paper issued.The credit line, issuedon an irrevocablebasis,would make availablefunds to cover at least20 percent of the aggregatecommercial paper outstanding at any time.!!ln addition, the prospectiveCP issueshouldalso be covered by a sell_g agreement with an authorized financial institution stipulating, among others, that the selling agent be responsiblefor ensuring that the issuer observe the SEC's rules regarding the use of the proceeds'iof the committed credit line and, with the issuer,be jointly respomsihie for complying with the reportorial requirements of the SEC and the Central Bank. Except for special cases, CP issuesshould not exceed 300 percentof the issuer'snet worth. Also in December 1981, banks and those with QB licenseswere exempted from the requirement to register their short-term IOUs with the SEC, but were still required to submit reports on amou_nts issued.Also exempted from registration, but still required to submit reports, were those whose CPs amounted to lessthan @5 million_ issuedto a maximum of 10 lenders,and whose PNswere not bearer notes and were intended to be held to maturity by the institution to which they were issued. Central Bank Circulars Nos. 834 through 837, dated December 1981, defined the operating guidelines regardingcredit lines backing up CP issues.Among others, the circularsstipulateda minimum value for each commercial paper instrument of @300,000 and prohibited any clauseproviding the lenderthe right or option of preterminati0n. They also providedfor specialcredit accommodationsby the Cen_al Bank to financial institutions to support credit lines issuedin cennection with commercialpaper issuances. P_ While these new regulations were effective immediately, fi_rns which were already authorized to issueCPs under the old rules w_re given a transition period of about 15 months. Thus, the new rules_id not really become effective until March 1983. With the drastic decline in the number of firms issuingcomn_ercial paper after the issuanceof the new rules,the Investment Hour_s Association of the Philippines (IHAP) submitted various propo_ls to amend the rules and permit the registration of more CPs willie still ensuring their safety. Among these was a list of 42 comparlies

MONEY MARKET INSTRUMENTS

105

which it recommended for exclusion from the credit line requirement. This list consisted of companiesto which investment houses were prepared to lend on a clean basis for the next 12 months. Though not based on any rigorouscredit appraisal,this ]ist nevertheless represented the collective qualitative credit appraisal by investment housesof the companiesconcerned. The I HAP also suggested that firms not qualifiedfor registration underthe newrules be allowed to float paper so long as they were resold to the investingpublic on a "with recourse basis" or usedasthe underlying security in a repurchase agreement. Thus, they would in effect, be guaranteed by a financial institution. This latter suggestion was approved by the authorities in March 1983. In November 1982, the Monetary Board allowed exemptions from the 20 percent credit line requirement for firms meeting the following conditions:14 o

o o

liquidity ratio: a three year average ratio of Current assets to current liabilities of 1.2:1 or a three year average acid test ratio (ratio of liquid assets i.e. cash, receivables and marketable securities to current liabilities) of at least 0.5il. solvency criterion: on the average,total assets should not be lessthan total liabilities for the pastthree years. profitability criterion: average net profit on sales of at least three percent (computed as net income after tax divided by net salesor revenues)or averageannual return on equity of at least 8 percent. interest coverage:average interest service coverageratio for the past three yearsshouldbe at least 1.2:1. maximum debt-equity ratio: 2.5:1

A credit information bureau was also set up at the Central Bank to coordinate information on all issuersof commercial paper. As will be seen in the following sections, the regulatory framework and changestherein have been the most important factors in determining the volumes in the CP market over the past years. The succeedingsectionspresenta detailed discussionof commercial paper issuersand issuances,as well asdescription of the distribution mechanismand a discussionof current operational aspectsof the commercial paper market. The coverageof this section is limited 14CentraJBank.CB Review, januaw 1983, Vol. XXXV, #t, page7.

106

SHORT-TERM FINANCIAL MAI_KETS

by the availability of data for the period 1977 to 1982. Althbugh some data prior to this period exist, the statistical seriesare _fragmented and reasonably complete figures date only from 1!979; however, referencesto earlier periodsare included wheneverpo_ible. B. The Growth of the Commercial Paper Market. As mentioned earlier, this sectionwill deal only with commercial paper issuedby nonfinancial firms and by financial institutions with. out quasi-bankinglicenses(NQBs). By way of comparison,how_ever, Chart 11 showsthe volume of all categoriesof short-term paperissued which are reported to the SEC (i.e. including short.term IOUs of financial institutions issued in connection with quasi-bankingactivities.) As the chart shows,short-term debt instrumentsissuedby banks and by non-banks with QB licensesmake up the bulk of outstanding short-term IOUs, while those by nonfinancial concernsand non-quasi banks (shown as "registered issuers"and which are referred to in the market as commercial paper) comprise less than one-third of the total. If the graphwere to be extended to 1983, the shareof the latter group would be seen to decline to almost zero. Considering, however, the importance of commercial paper as a source of credit to nonfinancial corporations and NQBs, the current lack of issuersis C_ 11 OUTSTANDINGSHORTTERM PAPER 38.

,P BI

- REGISTEREb _ ::::::::::::::::::::::::::::: 79

OUTSTANDING SHORT TERM PAPER OF aLL ISSUERS: QUASI-BANKS, EXEMPT ISSUERS AND REGISTERED ISSUERS Sourceof basicdata:SEC

MONEY MARKET INSTRUMENTS

107

probably only a temporary situation until such time asthe problems in the development of the market are overcome, Focusing on CPs (_f nonfinancial firms and NQBs_Chart 12 and Table 24 show the total volume of CPs outstanding to have been tb4.9 billion at the start of 1979. While CPs of nonfinancial corporations and NQBs were being sold on the open market in limited amounts at least since the mid-1960s, the period of rapid growth of the CP market is commonly thought to have begun only in the mid-1970s, after the SEC began registering CPs and increased numbers of firms began entering the CP market. Abstracting from short-term peaks (such as that in Sept. 1980) 15 the level of CPs oustanding rose steadily till the first quarter of 1981 when it reached about t_7.9 billion. Of this, t_6.8 billion was accounted for by registered issuersand4;1.1 billion by exempt borrowers. Exempt CP issuers refer to those issuingsmall amounts of CPs, (@1 million under the old rules and t_5 million under the new rutes) and/or whose notesare non-negotiable. Commercial paper by exempt issuersaveraged no more than about 20% of those of registered is. suers.At their peak volume at_ined in the test quarter of 1980, the outstandingamount was about tS1.2 billion. Chart12 COMMERCIALPAPEROUTSTANDING 9 8 L

TOTAL COPIItERCIAL PAPER OUTSTANDING: EXEHPT AND CORPORATEISSUERS Sourceof basicdata:SEC |

l"SThe brief run up In CPsoutstandingin SÂŠptember1980 was brought about by a combinationof highissuances andsllshtly longermaÂ˘uritlesby a few largeCP issuers,

108

SHORT-TERMFINANCIALMARglET$ Table 24 CommercialPaper R_istered and Exempt Issuers OutstandingBalances 1979-1982, IPMil Registered

Issuers NOB

Others

Exempt Issuers

Total

Mfg.

TOTal

4,060 4,112 4,051 4,326 4,256 4,261 4,565 5,125 5,049 4,937 5,827 4,722

1,813 1,771 1,770 1,815 1,935 1,934 2,007 2,346 2,254 2,251 2.389 2,266

737 658 738 659 578 562 505 649 688 836 794 756

1,510 1,683 1,543 2,511 1,743 1,765 2,053 2,130 2,107 1,850 2,644 1,700

868 888 1,250 1,140 1,047 942 640 1,055 1,016 882 1,338 1,155

4_928 _000 ,$,301 _466 :_303 5,203 5_205 6,1,80 6,065 :_819 7,165 5,877

5,947 5,310 5,545 5,925 5,945 5,979 5,821 6,186 7,698 6,041 6,080 6,236

3,170 2,471 2,483 2,723 2,751 2,859 2,774 2,756 4,099 2,537 2,490 2,320

838 837 958 1,031 903 874 783 1,114 1,137 1,137 1,196 1,576

1,939 2,002 2,104 2,171 2,291 2,246 2,264 2,316 2,462 2,367 2,394 2,340

1,152 1,285 1,178 1,051 1,061 1,352 1,267 1,211 1,246 1,159 1,238 1,142

7,099 6,595 6,723 ,6,976 7,006 7,331 7,088 7,397 8,944 7,200 7,318 7,378

6,345 6,766 6,488 6,647

2,480 2,750 2,391 2,275

1,350 1,388 1,266 1,522

2,515 2,682 2,831 2,850

1,069 1,124 1,164 1,080

7,414 7,890 7,652 7,727

!,!

1979 january February March April May â&#x20AC;˘ June July, August September October. November December 1980 January February March April May June July August September October November December 1981 January February March Apdl

MONEY MARKET INSTRUMENTS

109

Table24 (_ont) gct_ed ................. Total Mfg May June July August September Ocu)ber November December

Issuers NOB

Others

Exempt Issuers Total

6,307 5,766 6,323 6,081 5,657 5,400 5,240 5,087

2,547 1,958 2,143 2,003 1,729 1,594 1,486 1,412

1,365 1,417 1,661 1,631 1,481 1,742 1,810 1,788

2_395 2,391 2,519 2,447 2,427 2;064 ! ,944 1,887

!,248 !,091 908 851 867 846 807 999

7,555 6,857 7,231 6,932 6,504 6,246 6.04?

4,404 4,949 4,442 4;053 3,713 3,348 3,020 2,976 2,655 2,258 ! ,709 1,283

1,174 1,196 1,153 1,!08 1;040 910 786 883 774 651 469 431

1;020 1,042 1,054 1;004 995 943 803 723 630 580 470 386

2,210 ;2,711 2,235 1,94! 1,678 1_495 1,431 !,370 1,251 1,027 770 466

1,470 1,173 904 826 633 262 60 34 36 33 236 96

5,874 6,122 5_346 4_879 4,346 3,610 3,080 3,010 2,691 2,291 1,945 1,379

1982 january February March April May Juno July August September October November December

Source: SecuritiesandExchangeCommiseion Not_: See0oslscrlptfor updatedtable.

While Chart 12 shows the amount of CPs issued by exempt borrowers to dwindle to zero starting in early 1982, this apparent decline can be explainedby the new rules issuedin late 1981 which no longer exempt PC issuersto report their activities to the SEC. In practice, however, exempt firms continue to issueCPs. Since exempt CPs comprisea small section of the market and are not sold to the gerpa-alpublic but are warehousedor held in inventory by the dealer; they will not be included in subsequentanalysiswhich will refer only to registeredCP issuers. Registered issuersare those issuinglarge amounts of commercial paper which are intended to be offered _ the public at brge. From

110

SHORT-TERM FINANCIAL MARN_ETS

the start of 1979 until the first quarter of 1981, CPsoutstandin_of registered corporate borrowers grew at an average annual rate of about 24 percent to peak at about 4=6.8billion in Feb. 1981. After the first quarter of 1981, the commercial paper market went into a period of prolonged decline. The contraction in the market was initiated by a generalfall in the level of confidence in commercial paper in the wake of the Dewey Dee Affair. In the tiering of the credit markets that followed, many investors turned away from commercial paper to the safer havensof depositsand deposit substitutesof commercial banks and the larger investment homes. As a result, the level of CPs outstanding declined precipitously, and by the end of 1981, was down by _=1.28 billion to the level,of 4_5.09 billion. After the end of 1981, new and stricter money market rules were promulgated, causinga further fall in CPs outstanding. By the close of 1982, the level of CPs was down to 4al.28 billion. By the first quarter of 1983, with the full implementation of the 20 percent credit line requirement, CPs outstanding were down to almost zero. By May 1983, only one company hasthus far been regist_ed under the new rules. Chart 13 and Table 25 show the monthly issuancesof CPs c_mpared to the levelsoutstanding during the samemonth. The amount of CPs issued in each month are approximately 60 percent of the Chart 13 COMM'L PAPER ISSUED AND OUTSTANDING

, CP OUTSTANDING

2" 1

I_ :::::::::::::::::::::::::::::::::::::::::

..............................

CO|_|4'L RAPER ISSUED RI4D OIOTSTQt,IDING OF REGISTERED ISSUERS (NON-FINANCIAL CORPS AN'D NgB) Sourceof basicdata:SEC

MONEYMARKETINSTRUMENTS

111

Table 2S CommercialPaper Registeredand Exempt Issuers Total Issuances 1979-1982, tPMil Registered Total

Mfg.

2,874 2,369 2,591 2,652 2,844 " 2,840 3,033 3,483 3,259 3,252 3,189 3,002

Issuers Exempt Issuers Total

NOB

Others

1,131 888 993 975 1,164 1,179 1,100 1,344 1,237 1,316 1,313 1,317

364 344 380 361 358 352 562 509 454 539 492 486

1,379 1,137 1,218 1,316 1,322 1,309 1,371 1,630 1,568 1,397 1,384 1,199

775 966 1,068 1,187 1,281 1,170 1,010 823 528 501 780 708

3,649 3,335 3,659 3,839 4,125 4,010 4,043 4,306 3,787 3,753 3,969 3,710

3,036 3,475 3,374 3,711 4,227 3,430 3,311 3,579 4,493 3,355 3,661 3,673

1,141 1,492 1,372 1,518 1,600 1,627 1,442 1,533 1,459 1,478 1,407 1,352

541 552 635 622 613 566 555 763 793 862 959 1,028

1,354 1,431 1,367 1,571 2,014 1,237 1,314 1,283 2,241 1,015 1,295 1,293

812 767 866 565 627 703 618 748 695 802 732 702

3,848 4,242 4,240 4,276 4,854 4,133 3,929 4,327 5,188 4,157 4,393 4,375

3,945 3,609 4,295 3,699

1,333 1,138 1,204 1,231

1,110 979 1,295 804.

1,502 1,492 1,796 1,664

670 654 838 •737

4,615 4,263 5,133 4,436

1979 January February March Apdl May June • j uly August September October November December 1980 january February March April May June July August September October November December 1981 January February March April

112

SHORT-TERM FINANCIAL MARI_ETS

Table25 (cont) Registered

May June July August September October November December

Issuers Others

Exempt Issuers Total

Total

Mfg.

NQB

3,160 3,226 3,467 2,709 2,821 2,791 2,360 2,148

1,087 922 1,127 761 891 805 648 503

890 956 1,272 853 932 1,032 796 761

1,183 1,348 1,068 1,095 998 954 916 884

616 663 535 462 427 426 345 579

3,776 3,889 4,002 3,171 3;248 3i217 2;:705 2,727

.2,663 2,259 2,404 2,023 2,182 1,979 1,781 1,420 1,477 961 940 663

777 758 724 589 626 565 598 n.a. 516 356 323 211

623 584 654 529 498 562 457 n.a. 388 298 234 232

1,263 917 1,026 905 1,058 852 726 n.a. 573 307 383 220

611 1,567 999 611 1,412 1,714 27 n.a. 23 26 25 n.a.

3,274 3,826 3,403 2,_634 3,_94 3,693 1,808 n.a. 1,500 987 965 _n.a.

1982 january February March April May June July August September October November December

Source: Securities andExchange Commission Note:Seepostscript forupdated table.

level outstanding, indicating an average maturity of lessthan two months for commercial paper. As the chart illustrates, the decline in the levelsof CPsoutstanding was the result of declines in issuances. At its peak around the first quarter of 1981, the monthly issuance$of CPs were about 4=4.3 billion. By the end of 1981, CPs issuedwere down to a level of _2.15 billion per month, declining further to _660 million by the end of 1982. L Under the current regulations, corporations intending to islue commercial paper are required to obtain the SEC's approval for the maximum amount they can issue.Chart 14 and Table 26 compare

MONEY MARKET INSTRUMENTS

113

the amounts outstanding and Issued to the level of approvals.The data available on approvals (from 1980 only) indicates a steady rise in aggregateapprovals until the first quarter in 1981. At its peak in April 1981j total approvalsamounted tof=18.7 billion. Following the same trends as all other CP statistics,the level of approvalsdeclined very steeply thereafter. By the end of that year, approvals were down by 20 percent to _14.4 billion, and by December 1982, were only 4=1.96 billion. As previously mentioned, as of 1983, with the new rules fully in effect, there was only one corporation authorized to issuecommercial paper with another pendingapproval. It is evident from the chart that most companiesobtained approvalsto issuecommercial paper in anticipation of the actual issue, but were unable or did not find it expedient to actually issuecommercial paper. Thus, there was a large difference between approvals and CPs outstanding. At the peak of the market in the first quarter of 198t, approvalsexceeded outstanding CPs by about _12 billion. At that point, approved CPs were almost three times the actual amounts outstanding.

Ch_ 14 COMMERCIALPAPER 18 I_

APPROVALS

12 O/STANDIHG_

COMM'L PAPER APPROVALS, ISSUANCES, AND OUTSTANDING BALANCES Sour_ of b_ic da_: SEC

114

SHORT-TERMFINANCIALMARKETS Table 26 CommercialPaperApprovals 1980.1982, tb million Total

Manufacturing

NQB

Others

1980 January February March April May June July August September October

10,125 10,850 10,566 11,368 12,401 11,986 15,371 15,734 15,754 16,383

5,036 5,751 5,288 5,944 6,073 5,996 6,704 6,195 6,566 6,403

447 447 447 456 477 348 2,666 3,013 3,233 3,212

4,642 4,652 4,831 ,4,968 5,851 _5,642 16,001 6,526 5,955 6,768

November December

16,249 15,883.

6,321 5,889

3,198 3,240

f6,730 6,754

16,112 18,061 18,603 18,703 17,006 15,714 14,978 14,401 12,991 12,296 11,204 9,162

6,051 6,058 5,860 5,902 5,424 4,713 4,769 4,449 3,889 3,726 3,484 2,676

3,019 4,961 5,372 5,372 4,474 4,804 4,368 4,413 4,014 4,028 3,770 3,172

7,042 7,042 7,371 7,429 7,108 6,197 5,841 5,539 5,088 4,542 3,950 3,314

7,757 7,247 6,073 5,780 5,480 5,302 4,757 4,420

2,944 2,606 1,775 1,693 1,611 1,522 1,377 1,266

1,582 1,506 1,313 1,259 1,234 1,197 1,086 988

3,231 3,135 2,985 2,828 2,635 2,583 2,294 2_!66

1981 January February March April May June July August September October November December 1982 January February March April May June July August

MONEYMARKETINSTRUMENTS

115

Table 26 (cont) Total September October November December

Manufacturing

3,129 2,965 2,311 1,959

NQB

967 847 662 637

753 643 547 486

Others 1,409 1,475 1,102 836

Source: Securities andExchange Commission Note:Seepostscript for updatedtable. C. Commercial Paper Issuers 1, Commercial Paper Issuers by Industry The largest users of the commercial paper market were corporations engaged in manufacturing and financial institutions without quasi-banking licenses (NQBs). Manufacturing concerns accounted for about 40 to 50 percent of all CPs outstanding in 1979 through 1980 (See Chart 15 and Table 27). The average monthly level of CPs issued by the manufacturing sector was about 4=1.8 million in 1978, and grew at the rate of about 18 percent annually to reach a peak level of_2.54 billion during the first quarter of 1981. Since then it fell to fb1.5 billion in December 1981 and to only _=431 million by the end of 1982. Chart 15 CP OUTSTANDING BY INDUSTRY 8,

L P

RADE

i : 01 79

CP OUT3TANDING BY SECTOR: MF6, TRADE, OTHERS, HQB Sourceof basicdata: SEC

Table 27 CommercialPaperOutstandingby Industry Nonfinanclal Corporationsand NQBs ( Registeredand Exempt Borrowers) Dec. 1978-1982

Industry

1978 fk mil %

1979 ff mil

1980 P miJ

1981 P'mil %

1982 ff mi!

13 117 2,320 315 652 540

2 37 S 10 9

37 1,412 161 704 483

1 28 3 14 9

2 11 431 12t 235

1 34 -9 18

383

374

318 1,576 6,235

S 25 100

48 1,788 5,087

1 35 100

26 37 34 386 1,283

2 3 3 30 100

REG;STERED BORROWERS Agriculture Mining Manufacturing Construction Trade Real Estate Public Utility Power Services NQB* TOTAL

41 300 1,553 79 384 -

1 tI 55 3 14 -

104 126 218 n_. 2,808

4 4 8 n_. t00

50 103 2,266 333 617 384 14 ....... 198 756 -4,722

1 2 48 7 13 8 4 ]6 100

EXEMPT BORROWERS NQB •Other Corporations TOTAL

n.a. n.a_ 425

100

597 558 1,1,55

*NQB refersto financialinstit_qutlofls withoutquaJi4_m_dn8 I[o_um¢ ]3_.-fer N_I_IS |s|ncomplete for 1978. Sourceof basicdata:Securities andExchange Commission

52 48 100

566 576 1,142

50 50 100

712 286 999

71 29 100

96 96

100 100

_o -4 -_ rll

-n Z 3> z _P" _> 4m_ m -4

MONEY MARKET

INSTRUMENTS

117

In 1981, the relative importance of the manufacturing sector in the CP market declined. Since the financial crisisin 1981 was precipitated by the default of a manufacturing concern, this sectorsuffered the most in terms of a drying up of available credit. From about 40 percent of the total in the previous three years, the share of total CPs accounted for by manufacturing fell gradually to about 30 per. cent by year-end 1981. In 1982, manufacturing made up only 2.5 percent of all CPsoutstanding. In contrast, NQBs appeared to have weathered the crisisof confidence reasonably well and the total outstanding CPs due to this sector rose steadily through 1981. From a level of about @600 million to @700 million throughout 1979, CPs outstandingof NQBs rose to about @900 million in the first half of 1980 and to _1 billion by the latter half. Throughout 1981, the level of CPs from NQBs continued to rise and hit a peak of 4_1.8 billion by the end of 1981. As a result of these trends, CPs of NQBs becamerelatively more important in the market in 1981 and their share rosefrom 15 percent of all CPsoutstanding in 1979 to 25 percentof the market in 1981. In 1982, CPs of NQBs followed the general trend of a steep decline in volumes,and by December 1982 were down to@380 million. Trade and real estate companieswere also substantial borrowers of the commercial paper market. CPs of corporations engaged in trade represented a roughly constant 13 percent of total CPs outstanding, while those of real estate companiesaccounted for about 8 percentof the market. Other sectorswhich were active in the commercial paper market include public utilities and mining. Their relative importance in the market, however, varied widely in different years depending on the fund requirements of individual companies at particular times. Mining, for example, made up about 11 percent of all CPs in 1978, but has since declined to account for lessthan 2 percent in subsequent years. Public utilities, on the other hand, made up lessthan one percent of all CPs outstanding in 1979, but accountedfor about 7 percentof the market in 1980 and 1981. Reflecting its relative importance in the market, the manufacturing sector had the largest number of companies with approvals to issueCPs (See Table 28). At the end of 1980, for example, there were 187 manufacturing companiesout of a total of 490 registered companies.At the same time, there were 90 NQBs, 39 _ompanies in trade and 73 in real estate.

118

SHORT-TERM

FINANCIAL

MARKETS

2. Sizes of CPs Approved/Issued Despite the rapid rise in the level of approved CPs throullhout 1980, the number of companies registered to issue CPs hardly changed over this period (See Table 28). The number of comp=nies with registered approvals fluctuated within a narrow range of 483 to 515 throughout 1 980, indicating a fairly large increase in the amounts of CPs being approved (at least for some companies) rather than a rise in the number of companies seeking approvals to issue CPs. During the first quarter of the succeeding year, the number of registered companies rose to about 555, but declined rapidly thereafter. By the end of 1981, the number of registered companies was reduced to almost half (259), and by the close of the following year was down to only 133. By May 1983, there was only one company approval to issue commercial paper.

with an

Table 28 CommercialPaper Number of Registeredand Exempt Issuers NonfinancialCorporationsand NQBs,by Industry June and December,1980-1982

Industry

June

1980 Dec

June

198_ Dec

1982 June Dec 1

REGISTERED ISSUERS

493

490

438

259

170

133

Agriculture Mining Manufacturing Construction Trade Real Estate PublicUtility Power Services NQB

12 13 191 26 72 42 15 1 29 92

11 14 187 28 38 73 18 2 29 90

8 17 150 25 61 38 15 1 27 96

3 5 98 16 30 23 8 1 13 62

1 3 62 8 24 19 4 1 6 42

1 3 52 5 20 12 3 1 4 32

EXEMPT BORROWERS

324

338

284

241

98 226

338 235

112 172

102 139

48 16

8 10

NQB Others

Source of basic data: Securities and Exchange Commission

MONEY MARKET INSTRUMENTS

119

The amounts of individual approvals varied over a very wide range reflecting the different resourcesand credit needsof individual companies. Permits to issueCPs, however, are quite concentrated, with only a few companiesaccounting for the bulk of approvals. At the peak of the commercial paper market around the end of 1980 and early 1981,50 percent of all approvals were in amounts of t_10 million or less,and another 35 percent were for amounts of over _10 million to _50 million. Only 14 percent of all companies,or70 out of 490 companies in December 1980, had CP debt limits of over _50 million each,and of these, 30 companieshad approved CP limits of over 4=100 million. Because of the large sizes of their approved CPs, each of these 30 companieswith approvals to issueover I_100 million CPs, accounted for slightly over 40 percent of total approvals.

3. Profile of CP Issuers For more details on commercial paper borrowers, a sample of 128 manufacturing firms with existing approvals as of December 1980 were examined. These 128 firms accounted for @3.95 billion out of total approvalsof _5.89 billion for the manufacturing sector. Likewise, the CPs outstanding of these 128 firms amounted to _=1.36 billion out of the total CPsoutstanding of _2.32 billion in the same period. Thus, the sample covered roughly 60 percent of the manufacturing sector in the CP market. This sample was chosen becausethe manufacturingsector isthe largestsector in the commercial paper market, and there were reasonablycomplete statisticsavailable on these 128 firms. In terms of industry dispersion,the largest sectors represented were chemicals, machinery & equipment, food & beverages,and textiles (SeeTable 29). On the basisof this sample, the sizesof firms havingapprovalsto issuecommercial paper varied considerably. In our sample,the smallest firm had assetsof @3 million, while the largestwas PICOP with assets(in 1980) of @2.19 billion. Almost 10 percent of the firms in our sample had assets of only4alO million or less,and a total of onefourth (32 firms) had assetsof _30 million or less.Another quarter of the firms had resourcesof between_=30million and _100 million. Still another quartile had assetsbetween @100 million and @200 million, while the last quartile had assetsof over4=200 million. After PICOP's @2.19 billion, the next largestfirm had assetsof_794 rail-

120

SHORT-TERM

FINANCIAL

MARKETS

lion. Of the 32 firms with assetsexceeding{=200 million, only 8 had assetsover {=300 million. In summary, half of the firms with approvals to issueC_ had total assetsof t_100 million or less,and with a few exception6, the others had resourcesof below{=500 million. Table29 Sampleof Manufacturing Industries in TheCommerical PaperMarketby Industrial Classification INDUSTRY Foodandbeverage Tobacco Timber Paper Textile Chemicals Machinery& Equipment Cement Miscellaneous TOTAL

NUMBEROF FIRMS 19 2 3 3 18 37 21 10 15 128 L

From the sample examined, it would appear that roughly 40 percent of all companieswith approvals to issuecommercial paper did not have outstanding CP borrowings as of December 1980. Of the 60 percent of firms who did issuecommercial paper, large issuers accountedfor the lion's shareof the total CPsactually issued. Of the 128 manufacturing firms studied, only 83 had CPs outstanding as of the end of 1980. Of these, about 30 percent of the individual amounts outstanding were {=5 million or less.Almost 50 percent of the firms (40 out of 83) had CPs outstanding of lover {=5 million and up to {=20 million. Eight of the firms (rough_ 10 percent) had CPs outstanding of between {=21 million to {=50 million, and another eight had CPs of over @50 million. The _ight largest individual CP issuers, with outstanding CPs of over P'{=50 million each, accounted for almost 50 percent of the total I:CPs outstanding for the manufacturing sector at the end of 198(J. Of these eight issuers,one very large borrower, with commercial paper outstanding of over _200 million, accounted for 30 percent Of all the CPs outstanding of the manufacturing sector at the en_l of 1980. :

MONEY MARKET INSTRUMENTS

121

With respect to the role of funds raised via the commercial paper market in a firm's capital structure, indications are that while the average maturity of CPs is about 45 days, these funds actually constitute part of the issuingfirm's long-term capital. In a study of the roll-overs in the money market by Edita Tan 16 it was estimated that as much as 70 percent of the money market representslong-term use of funds. Indeed, given the well known paucity of long-term funds and the relativeeasewith which (at least up to 1981 ) firms have been able to tap the CP market, it would seem reasonableto expect that companies would indeed usethe CP market asa sourceof medium- if not long-termfunds.

D. Commercial Paper in the Money Market Crucial to the understandingof the role of commercial paper in the money market is understandingthe market mechanismby which CPsare organized,distributed and financed.

1. Intermediation in the Commercial PaperMarket Money market institutions provide the distribution and intermediary servicesfor commercial paper.CPacome to market with the aid of money market institutions which originate the paperand then effect its secondarydistribution. There are three major types of intermediary activities in connection with the financing of commercial paper; namely, quasi-banking,dealershipand brokerage. The institutions most active as intermediaries in the commercial paper market are commercial banks and quasi-banks,although some finance companies and securities dealerswithout quasi-banking licensesalso act as dealers. It should also be noted that an institution is not confined to only one type of activity, but may perform all three ascalled for in particular situations. Chart 16 shows the commercial paper flow-chart which will be discussedin the following sections. QUASI-BANKING. After origination, a large portion of CPs are resoldwith recourse,usedas the underlying instrument in repurchase 16Ta_, Edlta, The Structure and Growth of the PhilippineFinancialMarket andthe Behaviorof Its MajorComponents.PIDS WorldngPaper81.06, June1981, p. 125.

122

SHORT-TERM

FINANCIAL

MARIIETS

Chart 16 COMMERCIAL PAPER FLOW-CHART

L+

, (M_IF.II|

IIIITIW_IMY)

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MONEY MARKET INSTRUMENTS

123

agreements or simply kept in the financial intermediary's portfolio of receivables. As such, the credit extended to the ultimate borrowers who issuedthe commercial paper partake of the nature of intermediated credit, since the financial intermediary substitutes his credit for that of the borrower as far as the lender is concerned. These transactionsthen enter the money market statisticsasdeposit substitutes. Table 21 shows that commercial paper (in the form of RPs on private securities, and certificates of assignmentor participation on private securities) made up an averageof 10 percentof all deposit substitutes in 1977-82. Its share, however, varied considerably over the years. In 1980, as much as 20 percent of all deposit substitutes involved commercial paper. In 1981 and 1982, with the sharp decline in the amounts of CPs issued,deposit substitutesinvolvingCPs declined to 6.2 percent and 3 percent, respectively." DEALERSHIP. An alternative to financing CPs asdepositsubstitutes is to sell them outright and without recourseto the orginating dealer. The dealer then has no credit or interest rate exposure, although he may perform paying agency functions. This would constitute true dealership, as opposed to the quasi-bankingnature of using CPs as deposit substitutes. In the field of dealership operations, investment housesare the most active. BROKERAGE. The third way in which commercial paperare distributed is through brokeragewhere the financial institution matches the ultimate borrower with the ultimate lender without taking any balance sheet exposure. Sometimes, however, the broker provides the additional service of guaranteeingor issuinga comfort letter to the investor in support of the paper. Brokeragearrangementsbecame especially popular after the imposition of a 35 percent transactions tax on money market borrowings. Since without-recourse transactionsand brokeragedo not constitute quasi-banking,financial institutions other than those with quasibanking licensesmay engagein them; nevertheless, most "withoutrecourse" transactionsare done by quasi-banks,especiallyby investment houses.

2. Commercial Paperin the Money Market As mentioned earlier, data on money market transactions by in-

124

SHORT*TERM

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MARI_ETS

strument do not .ndicate the real importance of commercial paper becausethey include only CPs which were soldon an outright basis. On that basis, data on money market transactions by instrument show transactionsin CPs to have fluctuated between 2 to 4 pero_nt of all money market transactions in 1977 to 1980, but rising Â˘o 7 percent in 1981 and 1982. However, counting both those transactionswhere CPs were sold outright and those in which they were used in deposit substitutes, CPs were involved in roughly 15 percent of all money market transactions up to 1982 (See Table 30). The highestsharewas reachedin 1980 when CP-related transactionsaccounted for asmuch as24 percent of the total, before declining to 14 percent and 11 percent in 1981 and 1982, respectively.

Chart16 COMMERCIALPAPERFLOWCHART Commercial Paper MillionPesos, 1977-84 INSTRUMENT

1977

1978

RP'sPV'I"Securities Certificateof Assignment With PVTSecurities

22,709 374

21,480 175

1981

1982

20,605 225

13,840 328

7,557 259

2,818 ' 409

374

175

225

241

23,280

21,967

21,020

14,409

7,833

3,250

8,196 756

3,045 744

8.571 1,885

20,460 3,454

22,762 8,946 11,894 15,046

11,134 9,987

3_789 9,752 10,456 25,756 49,629 72,776

23,914 44,934

34,656 49,065

13,992 21,825

21,121 24,371

TotalMoneyMarket 210,760 235,795 29Â˘;,483303,739 329,621 462,823 600,560 Transactions %Shareof Total MoneyMarketTransactions;

435,030

Certificateof Participation With PVTSecurities Total Dep,Substitutes With PVTSecurities CP'sNon.Financlal CP'sFinancial TotalCP'sSold Outright TotalTransactions WithPV'I"Securities

DEPSubstitutes With CP CPSoldOutright Total Transactions With PV'I"Securities

8,952 32,232

11.05 4.25 15.29

Source of Basic Data: Central Bank, Note: See postscript for updated table.

9.32 1.61 10.92

1979

1980

39,270 60,369 52 1,059 52

1,0=_9

39,877 62,320 7,923 1,829

13.50 3.30 16.80

20.52 3.44 23.96

6.38 7.25 13.63

3.11 7.49 10.60

1983

1.30 2.33 3.63

1984 (lO;mos.)

0.75 4.8.S 5.60

MONEY MARKET

INSTRUMENTS

125

Table 30 also shows that over the years, the proportion of CPs sold outright has grown compared to those used in deposit substitute transactions. At the height of the CP market in 1980,4z62.3 billion were used in deposit substitute transactions, compared with _10.4 billion sold outright. Since then CPs used in deposit substitutes declined to 4z14.4 billion in 1982, while those sold outright roseto 4s34.6 billion in the sameyear. In terms of the relative importance of the different types of financial institutions in dealing with commercial paper, Table 31 shows the break-down of transactions involving CPs by institution and instrument in 1981 (latest data available). During that year CPs used in deposit substitutes (i.e. RPs and certificates of assignment and participation) were 4z21.1 million, while those sold outright were 4z23.8 million. Hence, total money market transactions involving CPs were 4s44.9 billion out of a total money market volurne of 4z329.6 million. Table31 MoneyMarketTransactions InvolvinB Commercial Papers By InstitutionandTypeof Instrument 1981,in BillionPesos RP's Cert.Ass/ CP CP Total Total Mo. Private Part NonfinancialFinancialCPs MktVol Banks 7.3 InvestmentHouses10.4 FinanceCompanies 2.2 Others 0.7 TOTAL 20.6

0.3 0.2 0.5

6.2 7.2 2.1 4.9 20.4

0.4 2.3 0.7 3.4

13.9 20.2 5.2 5.6 44.9

229.7 49.3 38.8 11.8 329.6

Source of basic data: Central Bank of thÂŠ Philippines

The institutions most active in dealing with commercial paper were investment houseswhich accounted for 4a20.2 billion or 45 percent of all CP-related transactions during that year. The next largest share was that of commercial banks which had a total of 4_13.9 million or 31 percentof all CPstransacted.The shareof finance companieswas @5.2 billion or 12 percent, as was the shareof other quasi.banks. The pattern of CP activity was the same for commercial banks, investment housesand finance companies, where businesswas almost equally divided between CPs financed with deposit substitutesand

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MARIIETS

those sold outright. In contrast the activities of other quasi-bankSin CPswas almost entirely in CPssold outright. Commercial paper represents a very important segmentof businessfor investment houses.In 1981, CPs in all forms accounted;for @20.2 billion out of their total money market volume of@49.3 billion (about 40 percent). Hence, these institutions were the most affeoted by the decline of the CP market after early 1981. On the other hand, while commercial banks accounted for about 30 percent of all CPrelated transactions, CPs were a relatively unimportant segmentof their total money market business.Compared to a total money market businessof@229.7 buillion in 1981, banks' CP-related activity of _13.9 billion was only 6 percent. CPswere alsoa relatively small portion of finance company activity, accounting for only 13 percentof total money market volume. For other quasi-banks, however, CPs comprised fully 47 percent of total money market businessin 1981 (this largely reflects the activities of one securitiesbroker/dealer). I Table 32 shows the volume of without-recourse transactions by all non-bank financial institutions in 1982, broken down into those sold without recourse and those which were brokered. The volume of CPs brokered were roughly equal to those sold on an outright basis. During that year, quasi-banksaccounted for the bulk of transactions: 89 percentof the total or_70 billion out off79 billion transactions. Compared to this, institutions without quasi-banking licensesaccounted for only _9 billion of without-recourse transactions or 11 percent. Hence, it would appear that non quasi-banks are a relatively unimportant force in this segmentof the short-term markets. There is no secondary market for commercial paper. When the paper is used in connection with a deposit substitute, pretermination is possible but only at penalty rates. In the case of outright sales, some financial institutions may try to accommodate largeclients by buying back the instrument before maturity but will most likely arrange for a back-to-back loan instead. The lack of a secondary r_arket and pretermination, however, is mitigated by the short maturit:ies of CP_ '

E. Investorsin Commercial Paper There is little documented information on investors in commercial paper, especially on those CPs sold through NQBs. There _are

MONEY MARKET

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INSTRUMENTS

TaMe32 Non-BankFinancialinstitutions Volumeof WithoutRecourse Transactiohs linbillionpesos, Quarterly1982

SOLDWITHOUTRECOURSE Quasi-banks Non-Quasi-banks BROKERED Quasi-banks Non-Quasi-banks TOTAL TRANSACTIONS QB NQB NUMBEROF REPORTING INSTITUTIONS Quasi-banks Non/)uasi-ban ks Note:

1982 Total

March

June

Sept

De(;

11.3

11.6

7.8

9.6

40.3

10.6 .7

10.7 .9

6.9 .9

7.9 1.7

36.1 4.2

6.8

10.3

14.3

7.0

38.2

6.5 .3

9.8 .5

12.4 1.9

5.1 1.9

33.8 4.6

18.1

21.9

22.1

16.6

78.7

17.1 1.0

20.5 1.4

19.3 2.8

13.0 3.6

69.9 8.8

156 23 133

372 23 349

499 23 476

487 23 464

Data will not tally with other money market tables due to different cut-off dates used by different sections of the CB.

Source: Central Bank of the Philippines, Dept. of N_bank

Financial Institutions.

indications, however, that they are held mainly by individuals and private corporations, who are attracted by the higher rates offered for this type of paper. Table 19 shows the distribution of money market instruments negotiated through commercial and quasi-banksaccording to the type of investors holding them. As of December 1981, virtually all CPs were held by either individuals or private corporations. With respect to CPsissuedby nonfinancial corporations, half were held by individuals, another 35 percent by private corporations, | 0 percent by pension and trust funds, and the balance of 5 percent held by others. For CPs issuedby financial corporations, (i.e. NQBs) fully 89 percent were in the portfolios of individualsand S percent in those of private corporations.

128

SHORT-TERM FINANCIAL MARKETS

In 1982, the pattern was the same. Individuals held 31 percent of all CPs issued by nonfinancial corporations, with other private corporations holding 67 percent. The balance of 5 percent was held by other investors,notably pensionsand trusts. With respectto CPs of NQBs, individualsheld 81 percent while other private _orporat|ons held 11 percent. Again, pensionsand trusts held a substantial portion of the remaining 7 percent. Looked atanother way, (i.e. from the point of view of theimportance of CPs in the total portfolios of investors) Table T9-B showsthat CPs comprisedabout 50 percent of total investmentsby individuals in the money market at the end of 1981 and 63 percent in 19821 In the portfolios of private corporations, the share of C:Ps was 14 percent in 1981 and 15 percent in 1982. Trustsand pensions held approximately 18 percent of their portfolios in the form of _Ps in 1981 and 5 percent in the following year. In contrast, CPs comprised a negligible portion of the portfolio of all other type_ of investorsin the money market. The indications that individualshold sizeable amounts of cpsrhas various implications on the safety of the market. On one hand, CPs are among the riskiest classof money market instrumentsas amply demonstrated by the numerous and well publicized defaults in this type of paper. On the other hand, individualsare felt to be the most uninformed and financially unsophisticatedgroup of investorsinthe markeL Indeed, the US Securities and ExchangeCommissionspecifically emphasizes that CPs should be sold only to sophisticated investors.17 The fact that individuals are the largest holders of commercial paper has implications on the stability of the systemsincea situation where the least informed and the least able to bear risk holds the riskiestpaper isa potentially dangerousone.

F. Mechanismsfor Protecting the Investors According to PD 678, "the investing public must be given aidequate and effective protection in availing the credit of the borrower in the commercial paper market by havinga public evaluation of!the worthiness of the paper and the capability of the issuer." (sic) Accordingly, the SEC wasgiven the mandate to ensurefull and adeqUate 17Evelyn M. Hurley, "The CommercialPaperMarket Sincethe Mid-Seventies,"Fe_leral ReserveBulletln. June1982, p. 334.

MONEY MARKET INSTRUMENTS

129

disclosure of material facts and information regardingissuersof commercial paper. Up until the issuance of the new rules for CPs in December 1981 (particularly the requirement for a credit line to support CP issues), the registration procedure and the monitoring of compliance with the ceiling on CPs issuedwere the primary mechanismsusedby the SEC for protecting the public. Apart from the registration and monitoring process,the SEC also provides information to prospective investors in commercial paper. These are contained in bound copies of the registration statement and index cardssummarizing pertinent information on the company. These are made available to the public for the express purpose of enabling the investor, should he wish, to make his own assessment of the riskinessof his investment. Among the information available are the authorized amount of a company's CPs, monthly issuances and outstanding balances of CPs, as well as financial ratios of the company. The latter includes leverageratios (such asthe debt-equity ratio and debt service coverage),liquidity ratios (principally the current ratio and the ratio of current liabilities to total liabilities) and profitability ratios (suchasthe return on investment). In order to be useful for a potential investor, the data should allow the user to discriminate between potentially good and bad risks, before the actualization of the risk. A technique that has become quite popular in recent years in the area of failure prediction for financial and nonfinancial concernsis that of discriminant analysis. There are, for example, a number of studieson the development of an early warning system using discriminant analysis to aid in the identification of potentially troubled banks, brokers, and nonfinancial corporations. These have typically employed ratio analysis and accounting data to develop a discriminant function which will identify those whose characteristicsreflect problemsthat could result in failure. Results of some studies indicate that certain factors like asset composition, loan characteristics, efficiency and profitability indicators are good discriminators among groups. A major premiseis that the time path to failure is a continuous process, so that it is possibleto identify a potential failure from an analysisof ex-post accountingdata. The useof multiple discriminantanalysisin the problem of failure prediction seemed ideally suited to this case since the data is easily segregated into two clearly identifiable groups, namely those companies which have defaulted on their CPs and those who have not. Furthermore, the theory of financial analysistells us that there should

130

SHORT-TERM FINANCIAL MARKIJTS

be a difference in the profiles of thesetwo groupsand that this difference can be measured by reported financial information reflecting solvency potential. Upon closerexamination of the data, however, it was not possible to make a discriminant function for failure prediction. The statistics for which reasonably complete data existed were only for the debtequity and current ratios. An essential ingredient of discriminant analysisis that variablesshould show significant differences between the two groups. For this purpose, F-tests were performed on the means of the current ratios and the debt-equity ratios for the two groups as a prior step to estimating the discriminant function. Interestingly enough, while the debt-equity ratios showed significant differences for the current and non-current groups of CP issuers,the current ratio did not (See Tables 33 and 34). I

Table33 Debt-EquityRatios,CurrentandNon.Current Companies* Analysis of Variance

Sourceof Variation

Sumof Squares

D.F.

Mean Square

F-Ratio

;

Preb. w .,=

Debt-EquityRatio,1980,1stQuarter Amongmeans 138.93 1 Withincases 312.93 33 Total 451.86 34

138.93 9.48

14.65

.0005

129.01 11.21

11.51

.0019

162.14 13.63

11.90

.0015

Debt-EquityRatio,1980,2ndQuarter Amongmeans Withincases Total

129.01 358.57 487.58

1 32 33

Debt-EquityRatio,1980,3rdQuarter Amongmeans Withincases Total

162.14 463.41 625.55

1 34 35

*Companies classified as non-current were those which were in default or which_ad substantial overdue =counts for at least 4 months during the first semes_r, 1981.

MONEY MARKET INSTRUMENTS

131

Table34 CurrentRatios,CurrentandNon-Current Companies* Analysis of Variance Sourceof Variation

Sumof Squares

D.F.

Mean Square

F-Ratio

Prob.

CurrentRatio,1980,1stQuarter AmongMeans Withincases Total

.2267 5.8784 6.1051

1 34 35

.2267 .1729

1.3112

.2601

1 34 35

.3205 .1476

2.1717

.1498

1 37 38

.076 .186

.409

.5265

CurrentRatio,1980,2ndQuarter AmongMeans Withincases Total

.3205 5.0177 5.3382

CurrentRatio,1980,3rdQuarter Amongmeans Withincases Total

.076 6.877 6.953

*Companiesclassifiedas non-currentwere thosewhichwere in default or which had substantialoverdueaccountsfor at least4 monthsduringthe first semester,1981.

Theoretically, it is expected that a liquidity ratio would perform better than a leverageratio at distinguishingbetween companieswho would default on their short-term IOUs. The liquidity ratio is, after all, a short-term solvency indicator showing the extent to which claims of short-term creditors are coveredby assetsthat are expected to, or can easily be, converted into cash.One explanation of their low predictive power may be that the averageterm of commercial paper is usually no more than 2 monthswhile data on liquidity and leverage are available only at quarterly intervals. Hence, the time lag between predictive variables and the actualization of insolvency is tpo long. On the other hand, it is reasonably expected that companibswhich would eventually default would exhibit deteriorating financial ratiosfor sometime before the actual default. While the disappointing statistical results prevented discriminant analysis,the fact that the data availableto the public cannot be used to distinguish between potentially good and bad credit risks is also

132

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MARI_TS

significant. The data usedwere specifically compiled by the SEC and made publicly availableto enable investorsto assessthe credit worthinessof their actual or potential commercial paper holdings.They are, however,apparently inadequate for this purpose. No attempt was made to refine or supplement the data sincethe purpose was to test if the data asthey stand were useful to potential investors. The failure of SEC-provided data to be a good guide in distinguishingbetween potentially good and poor credit riskspoints out the pitfalls in trying to base financial analysis on highly ag_tregative, as well as in many cases,very limited information. The quality of data generally made public by companies is doubtful a_d needs to be substantially qualified before any interpretation of the company's credit worthiness can be made. However, the point is that if this is all the information that is available to the investor, it is not sufficient for them to make a judgement as to the credit worthiness of a potential money market investment, The failure of this data to discriminate between good and poor credit risks points out the need to provide safeguardsfor the investor before the issueeven comes to market, since a thorough assessment of the riskinessof commercial paper is probably an unreasonableexpectation for the individual investor, and even for some corporate ones. It is thi9 guarantee of safety that the new rules, requiring an irrevocable credit line prior to commercial paper registration, seek to provide.

G. The Commercial Paper Market The commercial paper market has been a major source of funds for financial and nonfinancial firms alike. At its peak towards the end of 1980 and early 1981, the CP market provided as much as t_6.8 billion for about 340 smallercompanies.It was a sourceof fudds primarily for nonfinancial concernsin manufacturing, trade and r_al estate, as well as for finance companies without quasi-bankihg licenses. The commercial paper market, however, tends to be conce_i.

trated, especially among the nonfinancial firms, with a few large_P issuersdominating the market. At one time, there was also a large overhangof CPswhich were approved but not yet issued. The flaws in the system, however, were highlighted by the severity of the liquidity crisisfollowing the Dewey Dee-related defaults_n

MONEY MARKET I_ISTR_HENTS

!33

ear!y 1981. The harp decline in the m_rlcet immediately following the defaults wasnot unexpected. What isSignificant, however, is that while the crisi_h_ pissed, the CP market h_sr_otrecovered.The prolonged d_cJine to a virtually non-_xisxent market appears to have been due to regulations imposing requirementson commercial paper issuersthat have made this type of jns_'ument uneconomical for issuers. Given the paucJWof long-term funds, the commercial paper market supplied a significant portion of the credit needsof corporations and finance complies, both for the short- as well as the medium. term. The CP m_ket is also important becauseof the existence of the singje b.orrow_rs limit which makes it necessaryfor large companies to turn to nonbank sourcesof funds to fill their credit requiremen_. The CP market _n also be a .ch_per source of funds than bank bans as is ofte_ the C_ILse in the United States' commercial paper market. Thus, the CP market filled a real need in the financing strategiesof largecompanies. Conceptually and in practice, the commercial paper market in the Philippines differs substantially from that of the United States mode! where its Pomenclature and institutions were nominally borrowed. A comparison between the Philippine commercial paper market _nd that in the United States could be made on the basisof issuersof CPs,investors,and market mechanism,t 8

1. JSsU_ of Commercial Papa o

industrial Dispersion - In thisaspe_ the two marketsare quite similar. As of mid-1982, two-thirds of all CPs in the United St_s market were issued by nonfinancial concerns -- principally industrial companies, public utilities, and foreign nonfinancial entities. One-third consisted of nonbank and bank related financial institutions, especially finance companies, medbJm-sizedbank holdin8 companies and foreign banks. The industrial dispersionof CP issuersin the Philippines is similar, with the manufacturing sector and finance com'-

18ThiscomparisonpertaJmonly to CPsissuedby nonflnanclalcoq_ _td NQSs In b_ Philippinesand dealer-placedcommercialpaper in the U.S. Refterence_ to market prar,dcesIn the US for this sectionwerelarFJYdrawnfrom E.M. Hudeyp"The Commercial PaperM_ket _ th_ MJd-ÂŁxeventies," Fe41_alRJeServe Bulle_Tm, june 1_62, _ 327-334.

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MARKI|TS

panies 4_ithout quasi-banking licenses (NQBs) being the largestissuersof commercial paper. Quality of Borrowers - Companies which borrow in the United States' CP market are very highly rated. In mid-1982, almost three-fourths of all borrowers were rated by at least two rating servicesas A-l, another 25 percentwere rated A_2, a little over one percentwere rated A-2, and only a little over one percent were rated A-3 quality. Over the years, in fact, the quality of dealer-placedCPsin the Un.ited Stateshasbeen rising. In the Philippines, the absenceof rating servicesdoes not make it possibleto compare directly the quality of borrowers. Nevertheless, especially after the defaults among some iCP issuersin 1981, the common feeling seemsto be that many CP issuersare lessthan prime, necessitatingvery strict rules as to who may issuecommercial paper.

2. Investors o

In the United States market, it is estimated that over onethird of all dealer-placed CPs are held by money market mutual funds. Other large investors are bank trust departments, life insurance companies, pensions funds and nonprofit organizations. Most of these institutional investorswill not consider holding commercial paper rated lower than A-1. Individuals do not hold significant amounts of commercial paper, although recently there may have been some growth in individual holdings with the decline in the minimum denomination of CPs to aslow as$25,000 in the caseof some smaller finance companies and regional bank holding companies.The participation of individuals in the CP market isnot encouraged by the United StatesSecuritiesand ExchangeCommission. In contrast, individuals seem to be the most active investors in the Philippine CP market, who are attracted away from bank deposits by the higher returns available on this kind of paper.

3. Market Mechanisms o

Registration of CPs - The SEC of theUnited Statesdoesnot

MONEY MARKET INSTRUMENTS

135

require registration of CPs for so long as they are issuedfor terms of 9 months or les_ The acceptability of the paper, first by the dealersand then by the investors,is basedsolely on the quality of the paper as indicated by its rating. Most require that the paper be rated by two rating agencies. In the Philippines, CPs may come to market only with the approval of the SEC which issuessuch permits for one year.

Rating Agencies - There are at least 5 rating agetlciesin the United States which rate prospectiveand current CP issuers. Ratings may changewhile the paper is outstanding if a deterioration in the condition of the issueris apparent. In the Philippines, the Credit Information Bureau was formed in 1982. Its purposeis to provide information on the activitiesand track recordsof borrowers.

Mechanisms to Ensure Payment at Maturity - Most of the CPs placed by dealers in the United States market are unsecured. However, there has been growing use of letters of credit (LCs) and other similar mechanismsto assurepayment at maturity. The use of letters of credit for this purpose started in the early 1970s but declinedafter federal regulatory agenciesplaced restrictionson their usein 1974. In late 1980, as interest rates in the United States rose and credit conditions tightened, dealers began to encourage new issuers to use letters of credit to enable them to tap the commercial paper market. The use of letters of credit enablesnew issuersand those whose credit standing is not widely known to avoid paying the high premiums which they might otherwise have to pay in order to tap the CP market. The rating assignedto the paper is that of the issuerof the letter of credit. The decision of whether or not to obtain an LC to support a CP issueisa purely voluntary one. The use of LCs by new issuers and/or publicly unknown issuers,however, is encouragedby market forces which ensure that an issuerwith a lower credit rating or an unknown credit rating will pay a higherinterest rate. In the Philippines,prospectiveCP issuersare now required to secure a bank LC line equal to 20 percent of the paper to be issued. Exemptions are given on the basisof somecriteria

136

SHORT-TERM

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MARKkT$

such as a 3-year averagecurrent ratio of 1.2.1 and an average net profit marginof at least 3 percent, etc. o

Yield Spreads- In the United States market, there is a very definite yield spreadbetween a paperrated A-1 and thosewith lower ratings. On the whole, both dealersand investors are more discriminating here such that those issuerswith a rating lessthan prime would have to pay a hefty premium to enter the market, and many investors would not buy paper that was lessthan prime. Since there are no public credit rating agencies in the Philippines, there are also no statistics on interest rates by type of credit standingof the CP issuers.From interviewswith market participants, however, it appearsthat there were no interest differentials between securitiesof different risk categories. As a result, there are no market forces ensuring that companiesof lower credit rating pay premiums to issuetheir CPs, which will effectively discouragethesecompanies.

Quasi-banking Activities and Commercial Paper - There are no deposit substitute arrangementsin the CP market; CPsare bought by dealersfor later resaleon an outright basis.Dealers in the United StatesCP market are not intermediariesin the sense of performing credit risk and term transformation, although they do provide denomination transformation. As a result, dealers are able to "play the inside spreads", simultaneously offering higher rates to investorsand lower rates to borrowers. Dealers can operate on a lower spread than do banks for a number of reasons.They have no reserverequirements since they have neither fiduciary nor money creating functions. They have no credit exposure and have lower overhead costs, both in terms of office and staff since credit rating isdone by an outside agency. In the Philippines, roughly half of CPs are financed, by deposit substitutes, and even in those issueswhich are brokered, dealers sometimes provide guarantees. In such car_s, the financial intermediary functions of credit risk and term transformation are provided. The cost structure of money market operations then differs substantially from a strictly dealership operation. The money market intermediary bears credit risks, needs the overhead to evaluate and administer

MONEY MARKET INSTRUMENTS

137

credit, and is generally made to keep reserverequirementÂ˘ "Lender of last resort" facilities are also requiredof the Central Bank. The original concept of dealership borrowed from the New York commercial paper market appears to have been lost to a largeextent.

4. Overview of the Commercial Paper Market The Philippine commercial paper market as it developed in the 1970s was characterized by three features: (1)On the side of the borrowers, the rapid expansion of the money market in the late 1970s, without any independent credit rating agency and with the "ministerial" approval of the SEC, appears to have resulted to some extent in the entrance of lessthan prime borrowers. With the lack of a long-term capital market, and the ease with which companiescould avail of the money market, many companies started using the short-term market as a source of long-term funds. The combination of lessthan prime borrowers and mismatched capital structures made the system vulnerable to liquidity shocksas the economy entered a period of prolonged strain. (2) On the side of the investors,the commercial paper market induced investors to shift out of depositswith regulated rates into instruments that paid market rates. It is significant that individuals and private companies are the largest holdersof commercial paper, whereasfinancial institutions (who are no lessconsciousof the high rates available on CPs) do not hold such paper to any appreciable extent. Investors in the Philippines are seemingly not sufficiently aware of the credit risk implications of higher interest rates. (3) Finally, on the side of the intermediary institutions, the decade of the 1970s was characterized by the entrance of a large number of institutions which were attracted by the rapid growth and profit potential of runninga money desk, whether asa quasi-bankor a non-quasi-bank. With the rise in the competition for accounts, all money market operations were forced to lower credit standardsto generate sufficient businessto support overhead costs.The competition for clients did not, however, lead to a lowering of interest rates chargedto borrowers. Since many of the latter were fairly poor credit risks and could not borrow from banks anyway, and with inflation-

138

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FINANCIAL

MARI_KETS

induced increases in the amounts of credit required even by prime borrowers,financial institutions were able to keep charginghigh rates. Nor did the competition for investorsresult in a lowering of intermediary spreadswhich would have resulted in maximizing rates paid to investors in commercial paper. Alternative rates were kept down by regulation, and investors were willing to buy commercial paper for so long as rates were higher than for other instruments. Investors,it appears, were not knowledgeable'enoughto demand higher rates for poorer risks (beyond certain very broad classifications,as will be discussedin the succeedingsection on interest rates.) Furthermore, the costs of providing financial intermediation serVices, including reserverequirements and taxes kept the real cost of funds highfor the financial institutions. The combination of these three factors: less than prime borrowers, investors willing to buy CPs (perhaps without being fully cognizant of the risks involved), and the proliferation of financial institutions willing to accommodate both, set the stagefor the liquidity crisisthat came in early 1981. As recognizedby the regulatory agencies,there is a needfor major reforms in the commercial paper market and for more selective use of the market, both on the part of borrowers and of lenders. In the past, the major mechanismfor regulatingthe entry of borrowers into the CP market was that of SEC registration which even the SEC terms "ministerial." In order for investorsto protect themselves,SEC made available to the public, information on financial ratios. As discussedin a previous section, however, this data appears to have been inadequate for the purpose of credit evaluation. Debtequity and current ratios alone are insufficent to determine creditworthiness. A much more detailed financial analysis is needed to determine ability to pay. The analysisalso hasto be dynamic. Since conditions changerapidly, credit worthinesscan deteriorate over the year during which the company is licensedto issuecommercial paper. Despite the mandate and the responsibilitygivento the SEG, the performance of such detailed analysis is difficult to expect o| the agency, given its many other functions and duties. Hence, i.SEC approval became "ministerial" and as a result many companies_were registered that were lessthan creditworthy. In fact, there mayt=have been an element of "moral hazard" in this case. Registrationby the SEC, in effect, placed a stamp of credit worthinesson all registered companies, leading investorsto assumethat they were, in fact}, safe investments.

MONEY MARKET INSTRUMENTS

139

The 1981 crisisshowed the inherent weaknessin the regulatory system. Now the weight of regulation hasswungto the opposite end, and the regulatory agencies now require all commercial paper to carry bank guarantees, except under some strict conditions. As a result, the market hasvirtually ceasedto exist. The Credit Information Bureau is a large step forward in the development of a safeand smoothly functioning market. However, it will take time to develop its systems,and perhapsmore importantly, it will also take time before the CIB can establishits track record and reputation asan independent,competentand reliable rating agency. The-SEC rules on registration,the Central Bank rules on CPs and on financial market activities in general, and the quasi-government Credit Information Bureau follow the tradition of a strong guiding and regulatory role for Philippine governmentauthorities, As a result, the framework of legislativeand regulatory controls of the financial sector is the most important determinant of the environment in which financial institutions operate. It is, however, unlikely that any regulatory agencycan make the CP market completely safe, asappearsto be the intent of the current regulations. Indeed, one could question whether the market should be completely safe. A "completely safe" repository of funds already exists in the bank deposit market although at lower rates. In the money market of the United States,for example, the reasonwhy CPs are traditionally at the upper end of the rate structure is precisely to reflect the higher risk inherent in the market. Since the Philippine financial market follows the free market system, the role of the regulatory authorities may not be to make all investments completely safe for all investors,but merely to ensure that there are reasonable safeguards,and equally important, ensure adequate disseminationof information as to the true nature of risks in the commercial paper market. In a free market system, it is necessarythat the correct signals be sent to all economic units. While authorities should do all that can reasonably be done to protect the investor, there is a limit on how much the market can be made risk-free without destroyingthe price mechanismthat is necessaryfor the efficient functioning of the market. For the price system to operate in this case, it is necessarythat pricestruly reflect risksand that the true nature of the risk is made known to all. What is necessary is to encourage the CP market if not the entire money market to develop a rate structure which reflects the

140

SHORT-TE RM FI NANCIAL MARKETS

true differences between the risks of prime paper and those of lower quality. The investorsshould be made to understand that the higher ratesare'meant to compensate them for the added risks and that they are not entitled to full protection againstdefaults. Again, the correct market signals are necessary to support the latter point. Failure is a normal, if unfortunate, fact of economic life. And when the economy is growing only slowly, profits and balancesheetsare under strain and the possibility of failure increases. If the system of price incentives is to have meaning, added interest rates must compensate for added risks, while on the other hand, investors should not get the impressionthat they are entitled- to protection at all costs. Risks of default do exist and it is preciselyfor bearing this risk that rewards are given in the form of higher returns. If investorsare not prepared to make this trade-off, then they should be in the "safe" markets of bank deposits where safety is assured, but where returns are lower.

CHAPTER5

THE STRUCTURE OF INTEREST RATES IN THE MONEY MARKET The most striking characteristicof interest rates,especiallyshortterm ones, is their variability. Philippine money market rates are no exception. Moreover, even the variation which is observablein the data is probably understateddue to the fact that, until recently, rate ceilingswere in effect. Interest rates in the money market were unregulated until July 1976 when a 17 percent ceiling was imposed on deposit substitutes maturing in lessthan two years. In June 1977, a 35 percent transactions tax to be paid by the borrower on any primary money market borrowing was put into effect. In january 1978, the interest rate ceiling was lowered to 16 percentand againto 15 percentsix months after; the rate ceilingswere inclusiveof the 35 percent transactions tax. The interest rate ceiling was raised to 18 percent in December 1979. In July 1980, a 20 percent final withholding tax on money market yields was imposed in lieu of the 35 percent transactions tax. Finally, in July 1981, the monetary authorities started to phase out all interest rate ceilings. While time series on money market interest rates are available, they are also widely believed to be unreliable. Due to a discrepancy between rate ceilingsand the real opportunity costof money, aswell as taxes on interest rates, there is believed to have been substantial underreporting in interest rates. A further difficulty is that of obtaining effective rather than nominal interest rates. Translating nominal rates to effective rates introduces many practical aswell asconceptual problems. For example, the true cost of commercial paper should include the costsof issuingand, if necessary,guaranteeing the paper. The cost of bank loans should include the cost of special conditions, some of which are difficult to quantify, such as the cost of keeping a minimum level of deposit in the bank or coursingother banking businesssuch 141

142

SHORT-TERM

FINANCIAL

MARKETS

as letters of credit through the bank in question. Another factor to considerin comparing ratesisthe nature of the securitiesthemselves which.may differ considerably such as, for example, interbank call loansand commercial paper. Finally, where taxes are high and â&#x20AC;˘interest rate ceilingslie below the economy's true cost of money, there is the additional problem of underreporting of rates and the proliferation of side agreementswhich raise the effective interest cost while still complying with the legal rate. These problems undermine efforts to apply standard economic analysis to reported interest rates. Tan, for example, related the average level of interest rates in the money market to those for oompeting classesof assets, namely deposits and equities, for different types of investors and intermediaries for different time periods. During the first period, 1971-1976, when interest rates were unregulated, she found that "neither excessreservesnor CB loansto banks, nor changes in money supply significantly affected money market rates except interbank rates." On the other hand, rates on promissory notes and repurchase agreements were affected by the sllock price index. For the second period, 1976-1979, during which interest rate ceilings and the 35 percent transactions tax were in effect, she "obtained a perverse, if not an insignificant effect of credit tightness, as reflected in CB loans or excess reserves,and generally insignificant effect of the stock price index.''_9 In any case, the overall leveland movement of interest rates over time which is the result of the complex blending of expectations, net worth, and utility functions of all economic units in the economy is beyond the scope of this paper. Instead, focus is on relative interest rates,"and the explanatory variables on the difference of interest ratesamong different instrumentsand institutions. The explanation as to differences in rates are generally divided into two major factors: the influence of length to maturity of the instrument, usually with reference to the term structure of Interest rates, the default risk premium and the influence of the tax structure. Since money market maturities are highly concentrated on the very short-term end of the term structure with only 5 percent of transactions exceeding 45 days maturity, the influence of length to

19Edlta Tan, "The Structure and Growth of the Philippine Financial Market and the Behavior of the Major Components," Working Paper 81-06 Philippine Institute of Development Studle_ Manila, June 1981. pp. 139 (mimeographed).

INTEREST RATE STRUCTURE

143

maturity should not play a large role in determining rate differentials among money market instruments. The mostobviousfactor contributing to differences in the interest rate would then be the default risk aswell asthe tax structure. The possibility of default is present in all securities, with the possible exception of those issued by the government. Since investors are not totally risk averse, however, some will be induced to hold risky securities if promised a higher rate of return. The risk premium is the additional interest rate required to compensate investorsfor buying riskier securities. Risk premiums reflective of the businessor credit risk vary over time. This is the risk referred to when a company isunable to maintain its growth or the stability of its earnings, and asa result,.be unable to meet its debt service obligations. Changes in the earning power of the company may be the result of factors internal to the firm such as poor management or changesin the businessenvironment. The latter reflects the fact that even good and well-managed firms can be soadverselyaffected by generalbusinessconditions that their ability to service debt is impaired. Companies which are perceived to constitute bigger credit risks are able to sell their securities only by paying a premium over that offered by lower risk companies. Generally, one would expectsrisk premiums to rise whenever there is a perceivedrise in businessrisk, whether justified or not. The risk premium is computed as the difference between yields of different risk classesof securities. It is a measureof the market's assessmentof default risk. The more risky the instrument, the higher the additional interest required to attract holders. Ideally, one should measurethe default risk premium as the difference between yields on different risk classesof securities and a risk-free security of equal tenor, usuallygovernment securities. In the caseof the Philippines, however, interest rates on government securities are not felt to be fully reflective of market forces especially after 1978 when interest rates on treasury bills hardly fluctuated (_SeeChart 17). Nor are governmentsecuritieswidely held. Roughly 50 percent of all outstanding governmentsecuritiesare held in the portfolios of government and semi-governmentbodies, while the balance is largely held by commercial banks to fulfill certain requirements of the monetary authorities. In the absenceof comparative interest rate seriesbetween private and government securities, we looked at the risk premiums among

144

SHORT-TERMâ&#x20AC;˘FINANCIALMARKETS Chart 17 INTEREST RATES

P E

N T

35, _0,

2,5.

F'.,:N

15' _ N N U M

10. 5

_0_"_

9.1 DAY T-BILLS C_ F_;'_'A_',!:::_'_'!: ', !',',',::!;::;:! :!::_:; 77 78 ?9 88 81 82 83 84 !HTEREST R_TES: DEALER P/N f_ND FIND 91 O_'f TREASURY BILLS

Sourceofbasic data:Central Bank competing securities. This was computed as the differencebetween interestrates of competing money market instruments,namely IBCLs, dealer promissory notes,and commercial paper.The yield spread among these instruments should theoreticallyreflectdifferencesinthe market'sriskassessmentof thesesecurities. â&#x20AC;˘ Comparative Interest Rates on MoneyMarket

Instruments

The major published statistics on interest rates by the Cehtral Bank are monthly time series showing rates by maturity of paper (co.mputed as a weighted average of interest rates for given maturity intervals, regardless of the type of paper or the issuing institution) and another showing weighted average interest rates by type cWfinstrument (regardless of the tenor or the issuing institution). The time series on interest rates by maturity of paper shows rates at intervals of up to 730 days. However, since 45 percent (if all transactions are on demand, and.another 40 percent have maturities of between 16 to 45 days, the relevant portion of the yield curlVe is very small. Hence, this paper concentrates on the latter series on interest rates by instrument, regardless of tenor. I In any case, because of the very high concentration of traSsactions on two maturities, little information is lost by focusing on into-

145

INTEREST RATE STRUCTURE

rest rates by instrument. For example, interest rates on I BCL by and large also reflects interest rates on transactionson demand. On the other hand, rates on deposit substitutes also reflect the rates on transactionsof 16 to 45 days which is the dominant maturity for this type of transaction. Hence, the data on interest rates is not unduly distorted by lumping together all maturities and simply focusing on interest rates by instrument. Furthermore, looking at interest rates by instrument enablesus to capture the effect on interest rates of differencesin the risk complexion arising from .differences in the nature of money market instruments. In so far as certain instruments (i.e. CPs) are exclusively issued by non-financial and financial institutions without quasibanking licenses,as opposed to deposit substitute instruments issued exclusively by quasi-banks,this time seriesshould also givean indication on the market's assessmentof the relative riskinessof lending to different institutions. Chart 18 compares interest rates on IBCLs and dealer PNs for the period 1977-82. IBCL rates are seen to be more volatile compared with interest rates on PNs, reflecting the reserveadjustment function of IBCLs and their consequent sensitivity to day-to-day variability in rates. Maturities of IBCLs are also very short, generally over-night. In contrast, dealer PNs generally have longer maturities

Chart 18 MONEY MARKET INTEREST P

RATES

20. IB" 14"

_ P

12. 10-

A N H U

6" 4, 2.

0 77

:::::::::::::::::::::::: ........... ' .......... l.......... i........... 7g 79 80 @1 _2

MONTHLYWEIGHTED AUE INTEREST RATES FOR INTERBANK CALL LOANS, AND DEALER PROMISSORY NOTES

146

SHORT-TERM

FINANCIAL

MARI_TS

than IBCLs and are used in connection with overallfunding reqUirements. Hence, rates in this market are comparatively more stable. Nevertheless, both instruments are essentially concentrated in Ithe very short-term end of the market. In terms of issuers,the bulk of PNs are accounted for by commercial banks, as is exclusively,the casefor IBCLs. Hence, thesetwo seriesmovevery closelytogether. Chart 19 traces interest rates for three classesof securities:dealer PNs and CPs issuedby non-financial firms, and those issuedby financial institutions without QB licenses.Chart 20 showsthe correspOnding yield spreads.Since these instrumentsare mutually exclusivewith regardto issuers,comparative rates would reflect the risk assessment of lendersasto those groupsof borrowers. In addition, the seriesalso reflect changingcredit conditionsover the year 1977-82. Chart19 MONEYMARKETINTERESTRATES P

C E

18-

1_.

P E R

14-

H A N U M

CP FIN' I

12. 10.

|__

8 l,_,,

,,,,,h,,,,u,.

,_h.u,,,,..,

W K-DEALER PH h, ......... t...........

i ...........

MONTHLYWEIGHTED AVE INTEREST RATES FOR CP FINANCIAL, CP NONFINANCAL, AND DEALER PN On the basisof the graphs,it would seemthat dealer PNs are considered the most secure and command correspondingly lower interest ratesthan dothe other two instruments. It can be noted that PNs are direct obligations of financial institutions with quasi-banEing licenses.In general, these are the largest financial institutions in the system. On the other hand, CPs issued by finance companies and other financial institutions which have no q_Jasi-banklicensesappear to have beenconsideredthe most risky, and accordingly commanded the highest interest rates. Non-financial firms were evidently viewed

INTEREST RATE STRUCTURE

,147

as being better credit risks than financial institutions without QB licenses.Accordingly, CPs issued by non-financial firms generally enjoyed lower interest rates than did those issuedby financial firms. Both classesof commercial paper, however, are evidently seenas being riskier than direct obligations of quasi-banks,and hence command higher interest rates than PNs.Thus,for the entire period underreview, the yield spread between CPs and PNs was positive, with spreads being wider for paper issuedby financial institutions without quasi-banking licenses than for those issued by non-financial concerns (SeeChart 20). Chart20 YIELD SPREADSFORCPAND PN P E

_R T

_!?J..................................................... iii_i _.i'._.ii_il._ i i-_i_i!iii iiiiiiii

4 ..........................................

iiiiiii

.................

YIELD SPREADS: CP FINANCIAL AND PN CP NONFIN'L AND PN The risk premium between CPsin generaland PNs was particularly large in the period 1979 through 1980, averagingabout 4 to 5 percentage points. Ir. 1981 through 1982, however, the yield spreadfell to an average of roughly 2 percentage points for CPs of financial firms and less than one percentage point for CPs of non-financial firms. Ceteris paribu_ it is expected that yield spreadswill widen at times when the credit markets are tight and interest rates are high and/or rising, reflecting the effect of credit rationing. Yield spreads would also widen when economic conditions deteriorate such that there is increasedpressureon the viability and profitability of issuer_ Under these circumstancesof a perceivedhigher probability of default,

148

SHORT-TERM

FINANCIAL

MARIEETS

(especially for companies which are already perceived to be hi|her credit risks even under "normal" conditions) a tiering of the market occurs as lenders revisetheir desired risk premiums upward, and _iskier classesof borrowers suffer in comparison to those deemed more stable. At suchtimes the "quality spread" may be expected to widen. Another major factor which is commonly observed to cause a widening of the yield spread is a rise in issuevolumes relative tothe market. As the market attempts to digest the larger volume of issue, there is a rise in relative yields on the instruments whosevolumes have risen. Charts 19 and 20 show that the rise in yield spreadsin 1979 and 1980 coincided with the period of very rapid rise in CP volumes during those years. In the earlier period, 1977-78, interest rates on CPs in general followed the trend for rates on PNs albeit with an appropriate spread. This was true whether interest rates were fairly volatile as in 1977, or were fairly stable as in 1978. From the end of 1978 through 1979 and most of 1980, however, the yield spread between CPs and PNs widened dramatically. This was the result of a steep rise in CP rates while interest rates on PNs remained stable at 10 to 13 percent. Rates on CPs, however, rose steeply duringthe latter part of 1978 and stabilized at around the legally set limits of approximately 17 percent. As a resultof these relative movementsin interest rates, the yield spreadduring 1979 through 1980 was quite large, averaging 4 to S percentage points for CPs of non-financial firms and S to 6 percent for CPsof financial firms. This suggestthat the large yield spread during this period was a combination of the quality spread between CPs and dealer PNs, as well as the result of competition for funds engendered by higher issuevolumes in 1979 and 1980. In 1981, credit conditions tightened considerably in the aftermath of the liquidity crisis following the Dewey Dee episode, i_ccordingly, rates on PNs also roseto about the legal limit, though Still below those on CPs. In addition, the volumes of CPs declined very drastically after 1981. During this period, yield spreadsnarrowed. This suggeststhat the decline in yield spreadsin 1981 and 1982 rtelative to the earlier period does not so much reflect a decline in ithe risk premiums demanded by lenders on CPs per se, as a general rise in interest rates, such that all instruments rose to the limits set_by law, or following the liberalization of interest rates in 1982, at!Â˘he limits set by the cartelized lending practices followed by finanCial institutions.

INTEREST RATE STRUCTURE

149

Beyond the yield spreadsamong broad classificationsof money market instruments (i.e. between CPs versuspromissory notes, and between CPs of nonfinancial firms versusCPsof financial firms without quasi-banking licenses),there is no data which would indicate the existence of yield differentials within the broad category of commercial paper issuers.Interviews with market participants also indicate that there are few, if any, such rate differentials. The existence of uniform interest rates on all CPsof nonfinancial firms and of finance companies without quasi-banking licenses, plus the SEC approval to issueCPs, conveysto the investor the erroneous information that all CPsbear equal risk. There is,however, a very broad rangeof risk among commercial paper issuerswhich is not indicated in the interest differential between CPs and promissory notes alone. It is this lack of interest differentials within the broad classesof commercial paper that was referred to in the previoussection as a seriousflaw in the system, becauseit doesnot alert the investor to the riskinessof hisCP holdings.

Comparative Interest Ratesfor Money Market Intermediaries It is also of interest to see if there are any differencesin interest rates paid by different classesof money market intermediaries. Unfortunately, data on interest rates by institution and classof instrument isavailablefrom the Central Bank only from 1981. In Table 35, a T-test is used on paired observations of interest rates for the same type of instrument with the same tax status to see whether there was any statistically significantdifference between the rates reported by different quasi-banking institutions. The six casesstudied were dealer PNs (tax-paid and taxable), RPs on private instruments (taxpaid and taxable), and CPsissuedby non-financialand financial firms. The CPs were sold on an outright basiswhile the dealer PNsand RPs are deposit substitutes. For each instrument, a comparison wasmade between rates reported by commercial banks, investmenthousesand finance companieswith quasi-bankinglicenses. In the case of the RPs on private instruments, there was hardly any difference between rates paid by any of the above three institutions, regardlessof whether the RPs were on a tax-paid or a taxable basis. In the casesof dealer PNs and CPs, however, there were usually no significant differences between interest rates paid by investment

Table 35 InterestRatesOn MoneyMarket BorrowingsBy CommercialBanks, InvestmentHousesAnd FinanceCompanies 1981-1982

Test For DifferenceOf Means (PairedObservations) Diff. of Means

Std. Dev.

Std. Error

No. of Observ.

.6708 -.3667 -1.0375

.9281 .9342 .8219

.1894 .1907 .1678

24 24 24

-.9208 -.9250 -.0042

1.360 1.3524 .8493

.2776 .2761 .1734

24 24 24

T Value

D.F.

Prob.

3.5412 -1.9228 -6.1842

23 23 23

.0009 .0335 .0001

-3.3171 -3.3508 -.024

23 23 23

.0015 .0014 .4905

DEALER P/N (Tax-Paid) 1. Comm'fBksvs investHses 2. Comm'! Bksvs FinanceCos 3. Invest HsevsFinanceCos DEALER P/N (Taxable) 1. Comm'l Bksvs InvestHses 2. Comm'l Bksvs FinanceCos 3. InvestHsesvs FinanceCOs

:z o -_ t_ ._ "11 B

COMMERCIAL PAPER (Non-Financial) 1. Comm'l Bksvs Invest Hses -.4273 2. Comm'l Bksvs FinanceCos -.6091 3. Invest Hsesvs FinanceCos -.3417

1.0352 1.3183 1.024

.2207 .2811 .209

22 22 24

-1.936 -2.167 -1.6346

21 21 23

.0032 .0209 .0579

1. Comm'l Bks vs Invest Hses

1.2089

.2773

-5.5792

.0001

_" r-

-H

-1.5474

Table 35 (Con_.) Diff. of Means 2. Comm'! Bks vs FinanceCos 3. investHsesvsFinanceCos

-2.0737 -.3792

Std. Dev. 1.4255 1.4298

Std. Error .3270 .2919

No. of Observ. 19 24

T Value

D.F.

Prob.

[_ -1 > -I rn

-6.3409 -1.2992

18 23

.0001 .1034

c C

RPsPRIVATE (Tax Paid) |. Comm'l Bksvs investHses 2. Comm'l Bksvs FinanceCos 3. Invest Hsesvs FinanceCos RPsPRIVATE (Taxable) 1. Comm'l Bksvs InvestHses 2. Comm'l Bksw FinanceCos 3. Invest Hsesvs FinanceCos

-.7125 -1.2583 -.5458

.0174 -.0522 -.2292

Sourceof basicdata: Central Bank.

2.1395 2.1285 1.9494

.4367 .4345 .3979

24 24 24

1.2025 1.6752 1.7211

.2507 3493 .3513

23 23 24

-1.6314 -2.8962 -1.3717

.0694 --1494 -6523

23 23 23

0.0582 .(X)41 .0917

22 22 23

.4727 .4413 .2603

152

SHORT-TERM FINANCIAL MARI_F_TS

houses and finance companies (3 out of 4 cases). On the other hand, there were generally significant differences between rates paid by commercial banks and those paid by investment houses and finance companies. Generally, the mean differences were in the order of less than 100 basis points, with the rates paid by investment houses and finance companies being higher than those paid by commercial banks. Since there are no institutional barriers forcing lenders to choose one type of quasi-bank over the other, and since costs imposed by reserve requirements and gearing ratios are the same, one would expect rates to equalize unless there were other factors causing interestrates to differ. A plausible explanation for the higher rates paid by investment houses and finance companies is that theyare perceived as being risk depository (or more accurately quasi-depository) institutions than are commercial banks and thus are forced to pay more for their funds. Differences in risk perception among institutions may be due to factors such as size of institution, or length of investorexperience in dealingwith a particular type of financial institution. Commercial banks have had the longest history of operation among all financial institutions, the oldest bank dating back to the mid-1800s. Thus, they are the most firmly establishedinstitutions in the financial system, accounting for 66 percent of system-wide resources. Individually, commercial banks are also much larger institutions. In 1982, the 3 largest finance companieswith quasi-banking licenses had assetsranging from 91.35 billion to @2.07 billion. In comparison,the smallestcommercialbank had assetsof@1.14 billion. Thus, the largest finance company was equal in assetsonly to the commercial bank which was ranked #25 in size out of 28 private domestic commercial banks. Becauseof their fiduciary responsibilities,Commercialbanks are also the most regulated, and until recently were the only institutions for which the Central Bank maintained lender-of-last-resortfacilities. Hence, it is not surprisingthat their IOUs are consideredsafer than those of investment houses and finance companies. Correspondingly, commercial banks are able to borrow from the money mar_kot at rates lower than those for the other two institutions. Comparative

Interest Rates: Philippines and the United States

Extending our analysis beyond the money market, Charts 21 and 22 show the structure of interest rates for commercial bank loans as well as for money market borrowing for the Philippines and the

INTEREST RATESTRUCTU RE

153

United States. In chart 21, the rates shown for Philippine commercial bank loansare the weighted average rates on all loansoutstanding. The inclusionof long-term loanswould tend to givethe rateseries an upward bias; nevertheless,it may be noted that duringthe period analyzed, short-term loans (including those on demand) comprised roughly three-fourths of all loansoutstandingat commercial banks. Chart21 INTERESTRATES,VARIOUSINSTRUMENTS P 2B, C E

18.

A N U N

CP FIN'

12.

OANS

10, 8

79 8g 81 INTEREST RATES: CP FIN'L, CP NONFIN'L, DEALER PN AND COMMERCIAL BANK LOANS Sourceof BasicData:CentralBank 78

Chart22 INTERESTRATES,USA R C_ 1"4 N T P E R A N N U M

<-PRIME

12. 10 8 6;

. 78

. 79

. 80

' ..... I 81 82

I 83

PRIME RATE, CERT OF DEPOSIT (ge DAYS), COMM'L PAPER (ge DAYS) AND FINANCE CO PAPER (90 DAYS) Source:FederalReserve Bulletin

YEAR

T-BILLS

Table 36

InterestRates,US Money Market 1978-83

FIN CO. PAPER'

COMM'L PAPER

BANKERS ACCEPT

CERT OF DEPOSIT

PRIME RATE

1978

7.19

7.80

7.90

8.11

8.22

9.74

1979

10.07

10.47

10.97

11.04

11.22

75.50

1980

11.43

11.49

12.66

12.72

13.07

15.75

1981

t4.03

14.08

15.32

15.91

15.87

1982

10.61

11.23

11.89

1_.89

12.27

14.03

1983

8.88

8.93

9.10

9.17

9.34

10.83

_. -.r O

Notes:

-I

Treasury btl_s, secondary market, 90 days Finance company paper, directly placed, 90 days

Commercial paper, prime companies, 90 days Banker's acceptances, 90 days Certificates of deposit, secondary market, 90 days

-n z _> z

Prime rates on short-term bank loans, average of high and low for the year Source of datat Federa_ Reserve Board, Federal Remn_e Bulletn,

various issues,

> r_r >

INTEREST RATE STRUCTURE

15S

Comparedto the interestratesin the Philippines,Chart 22 and Table 36 showa very well definedladderof interestratesin the US market. Focusingon instrumentswith a 90-daytenor, TreasuryBills commandthe lowestrates,followedby directly placedfinancecompany paper. Dealer placedcommercialpaperwould commandthe next highestrate, followed by bankersacceptances,certificatesof deposit,andfinally commercialbankloansas indicatedby the prime rate. In contrastto the caseofthe United States,interestrateson commercialpaperin the Philippineshavebeenabovethoseon commercial bank loanssince 1979. This is true for both commercialpaper issuedby nonfinancial corporationsand those issuedby finance companiesand similar firms without quasi-bankinglicenses.The reverseistrue for the United Stateswherecompanieswho are ableto borrow on the commercialpapermarket are ableto obtaincreditat a cheaperratethan they wouldpayon bankloans. The differencein the rate structurebetweenthe Philippinesand the United States is a reflection of the different nature of the marketsand instrumentsin eachcountry. Financecompaniesthat issuecommercialpaper in the money market of the United States are generallyvery large,well known, and stablecompaniesof the highestcredit rating. Hence, finance companypaper bear interest rates only slightlyabove thoseof the risklessalternative,treasury bills. The sameis true of nonfinancialcompaniesissuingcommercial paperin the money market of the UnitedStates.As previouslymentioned,75 percentof all CP issuersin the UnitedStateswere rated A-1 while 25 percentwereratedA-2. Furthermore,becausecommercial paperin the United Statesare generallysoldoutright, andwithout recourseto the dealer with no depositsubstitutetransactions, they are cheaperto service.Thereare no intermediationcosts,including the need to bear credit risksto maintainreservesand to issue intermediatesecurities,aswell asno overheadfor creditadministration and evaluation.CPsare alsoa cheapersourceof fundsfor the borrowingcompanybecausethere isno needto maintaincompensation balancesaswouldberequiredfor bankloans.Asa result,interest rateson CPsare lowerthan the primerate. In contrast,there appearsto havebeen little quality differentiation in the companiesauthorized to issuecommercialpaperin the Philippines,the resultbeingthat thismarketis perceivedto be riskier than others. In the absenceof quality ratings,all CPsare lumped

156

SHORT-TERM FINANCIAL MAI_KETS

together into two broad categoriesby issuer(i.e. nonfinancial Rrms or financial institutions without quasi-bankinglicenses).Thus, prime issuersare penalized by having to pay the higher rate accorded1tOall CPs, while the lessthan prime obtain funds at rates lower than ciilled for by the risks they entail. Furthermore, intermediation costs for CPs are greater thab in the United States, including the need to perform credit evaluatiOns, and in the case of CPs used in d_posit substitutes, the costs of administering credit, issuingguarantees, maintaining reservesand bearing the credit risk. Hence, commercial paper is a more experlsive sourceof funds in the Philippines than bank loans. Another difference between the Philippines and the United Stbtes market is that rates on certificates of deposit in the United States money markets are always below the prime rate, since CDs ate a major source of funds for bank loans. In the Philippines, rate_ on dealer PNs which are also usedto finance loans,are sometimesalcove the interest rates on bank loans. However, since.data on dealer PNs includes those issuedby investment housesand finance companies with quasi-bankinglicenses,this may be due to the higher rates paid by thesecompaniescomparedto those paid by commercial banks'for their promissory notes. Interest Rates in the Money Market: A Summary Interest rates are among the more problematic statistics on the money market. Data available from the Central Bank are highly aggregative,and largely becauserateswere controlled until mid-1981, they are alsowidely felt to have been under-reported. The time series used in this section are interest rates on b_bad classesof instruments in the money market which were computed as the weighted average rateson different instruments,regardlessof_the maturity of the transaction. Since about 95 percent of transactions were for lessthan 45 days, the influence of term to maturity or_'the data was probably minimal. Furthermore, different money maFket instrumentstend to be concentratedon certain maturities, (e.g. IBCLs are almost entirely on demand) while deposit substitutes usually Flave maturities of 16 to 45 days. The data show that; among money market instruments, dealer promissory notes commanded the lowest interestrates. Interest r_tes on commercial paper were generally higher, with CPsof nonfinan!cial firms commanding lower interest rates than CPs of financial inslitu-

INTERESTRATESTRUCTURE

157

tionswithout quasi-bankinglicenses.Apart from riskandthe effects of changingcredit conditions,the yield spread betweenCPsand dealerPNsalsoappearsto be a functionof i_suevolumes. With respectto interestrates paid by different institutionson money market transactions,commercialbanksappearto pay lower rateswhetherfor dealerpromissorynotesor commercialpaper,compared with rates paid by investmenthousesand financecompanies with quasi-banking licenses. Both casesare suggestive of the market'sassessment of relative risks. In the first case,quasi-banking institutionsin generalare felt to be safercreditrisksthan eithernonfinancialbusinesses or financial institutionswithout quasi-bankinglicenses.Of the latter two categories, however,nonfinancialfirms are evidently viewed as being better credit risksthan financial institutionswithout quasi-banking licenses.The secondcasesuggeststhat commercialbanksareviewed by the investingpublicasbeingsaferdepositories of fundsthaneither investmenthousesor financecompanies with quasi-banking licenses. It wasalsonoted that whilethere isa risk premiumbetweenCPs and PNs,thereappearsto be no further interestdifferentialto reflect the wide range of risks within the broad categoryof commercial paper,whetherof nonfinancialfirmsor financialinstitutionswithout quasi-bankinglicenses.The lack of a rate differentialconnotesequal riskin all CPs,whichisunlikely, giventhe widerangeof CPissuers. Comparinginterestratesin the Philippinesandthe United States, a very welldefinedladderof ratesisseento existin the latter market comparedwith the former. Furthermore, in contrastto the United States market,commercialpapersin the Philippinesare seento be a more expensivesourceof fundsthan bank loans.This isattributed to the costsof intermediation(comparedwith dealershipin the United States market), as well as the lack of credit ratingswhich woulddistinguishbetweenprimeand lessthan primepaper.

CHAPTER 6

CONCLUSIONS AN D POLICY RECOMMEN DATIONS

SUMMARY A. History This paper began by tracing the development of the Philippine money market through 3 phases.The beginningof the market in the mid-1960s to 1973 wasa period when the short-term market grew in a rapid but largely unregulatedfashion.New instrumentsand transactionswere introduced and were accepted becausethey filled a need in the funds market (i.e. giving surplus units an alternative to bank deposits as an investment medium and giving borrowers an alternative sourceof funds to bank loans). I In the second phase of the market, 1974 to 1981, regulations were introduced which shapedthe characterof the money marketias an intermediation market, with depositsubstitutesasthe main instrument and quasi-bankingasthe major activity of intermediaries in the market. A third phase in the development of the short-term market came with the introduction of universalbanking and the freeing of interest rates. Another major influence at this time was also the liquidity crisisin 1981 and subsequentchangesin the regulatory environment and in investor attitudes, which had a major impact on the intermediaries in the money market, especially on investment housesand finance companieswith quasi-bankinglicenses. B. The Money Market, 1977-82 The major characteristicsof the market during the period 197782 are the following: VOLUME. During. 1977-82, the volume of transactions in the 158

CONCLUSIONS AND RECOMMENDATIONS

159

short-term markets grew at a fairly modest rate, averaging12 percent annually to reach @463 billion by 1982. Over the years, however, growth varied from a low of 2.8 percent in 1980 to ahigh of 40.7 percent in 1982. In comparison, other monetary aggregatesgrew at faster rates, (e.g. savingsand time depositsgrew by 33 percentannually) over the same period. MATURITIES. Forty-five percent of all money market transactions are on demand, another 10 percent have maturities of overnight to 15 days, and 40 percent more have maturities of 16 to 45 days. The weighted average maturity of all transactionsisslightly over one month. SIZE OF TRANSACTIONS. On the average, for 1977-82, transactionsoffb2 million or more madeup 70 percentof the money market. Smaller transactions of P2 million or lessdeclined from 41 percent of the market in 1977 to only 20 percent by 1982. INSTRUMENTS. Deposit substitutes, especially dealer promissory notes, made up an averageof roughly 75 percent of all transactions in 1977-82. Interbank call loans, however, are the most rapidly growing category of transactions, its share growing from 8 percent of the market in1977 to 29 percent by 1982, About 6 percent of the market consistsof other instruments such as commercial paper sold outright. INTERMEDIARIES. Commercial banks accounted for about 66 percent of all money market transactions,while investment houses and finance companies with quasi-banking licensesaccountedfor 20 percentand 12 percent, respectively. INVESTORS. Commercial banks were also the largest investors in the money market, supplying 37 percent of all funds in money market instruments in 1972. Other banks suppliedabout 14 percent, while other corporationscontributed roughly 18 percent. Individuals accounted for a declining share of funds in the short-term markets, from 20 percent in 1977 to 9 percent by 1982. C. Intermediaries in the Money Market The following are noted in'the major intermediary institutions in the money market, their sourcesand usesof funds. COMMERCIAL BANKS. Deposit substitutessupplieda declining portion of the funds of private domestic commercial banks, from 14

160

SHORT-TERM FINANCIAL MARK_ETS

percent in 1977 to only 7 percent in 1982. In contrast, the shar_ of other bills payable, largely rediscounts and overdrafts from the Central Bank, played a growing role as a source of bank funds in recent years. The same was true of the largest government ba_nk, PNB. Data for prior years indicates that deposit substitutes as a source of bank funds grew substantially in the early years of the 1970s, peaked in the mid-1970s and hassincebeen declining. INVESTMENT HOUSES WITH (QUASI-BANKING LICENSES. In contrast to commercial banks, investment housesare very dependent on the money market as a sourceof funds. In 1977-82, deposit substitutes accounted for an average of 80 percent of total investment housefunds. In terms of use of funds, there wasan increasing concentration on loans and a decline in investments in securities. Loans as a percentage of total investment house assetsgrew from 22 percent in 1977-80 to 32 percent in 1981 and 40 percent in 19B2, whereas investments in securitiesdeclined from 56 percent of total assetsin 1977 to 32 percent by 1982. FINANCE COMPANIES WITH QUASI-BANKING LICENSES. As in the caseof investment houses,finance companies with quasibanking licensesrely primarily on the money market as a source of funds. In 1977-82, deposit substitutes accounted for about 60 totS0 percent of all funds of these institutions. On the applications side, loans comprised about 69 percent ofall assetsof finance companies with quasi-banking licenses; investments in securities, on. the other hand, declined from 17 percent of finance company assetsi in 1977-80 to 6 percent in 1981 and 2 percent by 1982. L D. Major Instruments in the Money Market There are three major instruments in the money market with _he following characteristics: INTERBANK CALL LOANS. This has been the most rapidly growing segment of the money market in recent years, its share_in total transactions rising from 8 percent in 1977 to 29 percent by 1982. IBCLs are generally used for reserveadjustment, but may also be usedasa sourceof funds for regular operations. IBCLs asa source of funds is utilized exclusively by commercial banks. On the lend_hg side, however_other banks suchas rural and thrift banks are regular investors, providing roughly 20 percent of the funds in this market,

CONCLUSIONS

AND RECOMMENDATIONS

161

the balance being supplied by commercial banks. The pattern appears to be one where medium-sized commercial banks, as well as thrift and other banks are net lenders in the IBCL market, whereas large banksare net borrowers. DEPOSIT SUBSTITUTES. Deposit substitutes are the major instruments in the money market, accounting for roughly 75 percent of all transactions. Dealer promissory notes are the most popular form of deposit substitutes, making up over 50 percentof all money market transactions. The next largest class are repurchase agree* ments,followed by certificates of assignmentor participation. As borrowers, commercial banks issuethe biggestportion of all deposit substitute instruments. However, sincethey are alsoactive in the IBCL market, and becausecommercial banks have other sources of funds, borrowings in the form of depositsubstitutesare relatively less important to them than they are for investment housesand finance companieswith quasi-bankinglicenses.For the latter institutions, deposit substitutesmade up about 75 percent and 90 percent, respectively, of all money market transactions entered in by these two institutions in 1981-82. Overall, private corporations and commercial banks are the largest suppliers of funds in the deposit substitute market, each accounting for about 20 percent of all investmentsin these instruments. Rural and other banks supply another 10 percent, while pensionfunds and individualssupply about 5 percent each. Institutions which issue deposit substitutes engagein financial intermediation since the funds generated are used for relending to other entities. However, the fiduciary nature of the deposit is blurred since they are only consideredsubstitutesfor deposits, and the financial intermediation performed is only termed "quasi" banking. COMMERCIAL PAPER. Commercial paper sold outright make up only a very small share of total money market transactions, (around 6 percent) however, commercial paper also play a role in other money market transactions as the underlying instrument in repurchaseagreements and certificates of assignmentand participation. Overall, commercial papers are involved in roughly 15 percent of all money market transactions. The volumesof CPs rose very rapidly starting in 1979 and hit its peak in the first quarter of 1981. At that time, defaults by major borrowers resulted in a liquidity crisis, loss of confidence in the

162

SHORT*TERM FINANCIAL MARKETS

market, and changesin the regulatory framework, resulting in a_rsub sequentdecline in CPsvolumes. The largest borrowers in the commercial paper market are manufacturing concerns and financial institutions (mostly finance comPanies) without quasi-banking licenses.In terms of sizes,about 50 percent of all approvals to issueCPswere in amounts of_'lOmillion or less.There were, however, a few very large borrowers; in 1980 30 companies out of a total of 490 approved CP issuersaccoui_ted for 40 percent of the total pesovolume of approvals. Not all those with authorizations to issueCPs actually did so, but at its peak; the CP market provided as much ast_6.g billion in funds for as marly as 500 large corporations. Sizesof the firms authorized to issueCPsalso varied considerably. Based on a sample of manufacturing firms, almost 10 percent had assetsof lessthan _10 million, while a quarter of the firms had assetsof over _200 million. In terms of investors, almost all CPs appear to be held by individuals or by private corporations, with the former holding almost all CPs issuedby financial corporations without quasi-bankinglicenses. A major problem in the CP market is the lack of control on=the quality of CP issuers , as well as the absenceof interest rate differentials to indicate the broad range of risks among CP issuers.Tl_ese, plus the SEC approval given to CP issuers,conveys the erroneous impressionthat all CPsare of equal risk.

E. Interest Ratesin the Money Market i

Interest rate data are among the most difficult to analyze in the money market becausethe time seriesare highly aggregatedand _tes are widely felt to have been underreported. On the basis of _rate differentials among broad classesof money market instruments, however, the following observations may be made: INTEREST RATE SPREADS AMONG INSTRUMENTS. Dealer promissory notes generally command a lower interest rate than !commercial paper, while among the latter, CPsof nonfinancial corpora_ions generally bear a lower interest rate than CPs issued by financial!Institutions without quasi-banking licenses. Interest rate spreads inculcate the rise assessment of different instruments, although at timesissue_t volumes may account for a large part of the spreads. There are no interest differentials within the broad cla_ of commercial paper issuers except for the distinction between ICPs

CONCLUSIONS

AND RECOMMENDATIONS

163

issued by nonfinancial firms and those issuedby financial institutions without quasi-banking licenses. INTEREST RATE SPREADS AMONG INTERMEDIARIES. Among money market intermediaries, commercial hanks pay a lower rate for their money market borrowings than do investment houses and finance companies with quasi-banking licenses, INTEREST RATES IN THE PHILIPPINES AND THE UNITED STATES MONEY MARKETS. Comparing the interest rates in the Philippines and in the United States, there is a very well defined ladder of rates in the latter market. Furthermore, in contrast to that of the United States, commercial paper in the Philippinesare a more expensivesourceof funds than bank loans. CONCLUSIONS AND POLICY RECOMMENDATIONS There are two major aspectsof the short-term financial markets that bear comment. These have to do with the nature of the money market as it hasevolved over the past years and the implications of these developments for the institutions which are active in the market. A. The Money Market as a Source of Funds for Financial Intermediation The characteristicsmost often mentioned in connection with the money market is that it provides facilities for economic units to adjust their liquidity positions. As proof that it accomplishesthis purpose, the short maturities of money market instruments iscited. While the money market is supposed to involve temporary shortterm exchangesof money (and indeed the maturity periods stipulated on the instruments evidencing the exchange are normally less than 45 days), it is more accurate to say that most of the supply of money market instruments is characterized by the need for permanent long-termfunds. The money market is an agglomeration of markets where different borrowers issuedifferent short-dated instruments (summarized in Table 16.) The major borrowers in the money market are commercial banks and non-bank quasi-bankswho borrow in the form of deposit substitutes and interbank call loans. As indicated in the previous section, the former constitute the bulk of money market tramactions,

164

accounting 1977-82.

SHORT-TERM

for

FINANCIAL

MARKETS

roughly 7S percent of total market volurrle in

Thus, the chief importance of the money market isas a sourceof funds for the operations of certain financial intermediaries, which is confirmed by looking at their balance sheets.Investment housesand finance companies are the most dependent on money market funds, drawing roughly 80 percent and 70 percent, respectively, of their funds from this source. Commercial banks have more diversified sourcesof funds, so that they relied on deposit substitutes for an averageof only about 11 percent of their funds during 1977-82. Although a portion of deposit substitutes varies in responseto short-term fluctuations in the quantity of funds neededby com_nercial banks, investment houses, and finance companies with qUasibanking licenses, the larger part goesto provide funds neededon a permanent basis by these institutions to accommodate the credit needs of their clients. Even a portion of borrowing in the form of interbank call loansis for this purpose. Looking at the assetside of commercial bank balancesheets;the major useof bank funds is for loanswhich make up about 62 percent of all bank assets.For investment houses,loansalsocomprisedabout 32 percent of all assetsin 1981, having risen from 22 percent in 1977, while the portion of their total assetsin investmentsfell from 56 percent in 1977 to 40 percent by 1981. In the caseof finance companies, loansmade up about 68 percent of all assetsin 1977-81. The bulk of money market transactions is thus undertaken as part of the processof financial intermediatio_. There is little direct transfer of funds from ultimate lendersto ultimate borrowers, since outright salesof commercial paper constitutes only a limited portion of all money market transactions. Rather, the bulk of short-term borrowing is done by financial institutions, who in turn, lendlthe funds to the ultimate borrowers. And indeed, in recognition of their intermediation functions, most of the money market activitie_ of commercial banks, investment houses and finance companies!fall under what is termed as "quasi" banking, whoseactivity isfunded_by deposit substitutes. The use of short-term instruments for permanent finantin8 requirements for intermediation purposesis accomplished thrqtlgh refunding, (i.e. the issuingof new short-dated instrumentsto paM.off old debts as they come due, so that there is a continuous suppll_of funds available to the financial institution through the placement of

CONCLUSIONS AND RECOMMENDATIONS

16S

new paper). Thus, though nominally short-term, most of the funds raised in the money market goes to providing commercial banks and non-banks with quasi-banking licenseswith a long-term permanent source of financing. There are two aspects to this characteristic of the Philippine money market which bear comment: one is the impact on the financial institutions in the money market, and the other is the implications for the growth of the money market and its ability to meet the financial requirements of a developingeconomy. With rega,rd to the institutions in the money market, usingshortdated instruments to supply a large portion of permanent long-term needs for funds exposesfinancial institutions to a certain degree of risk. Term transformation is made possibleby the fact that though individual depositors may withdraw their funds upon maturity, at any given time, fund withdrawals are matched by fund inflows and there is always a pool of funds availableto support-the lending portfolio. The risk lies in the possibility that enoughfunds may be withdrawn unexpectedly and/or not renewed (either by reinvestmentby old depositorsor by fresh fund inflows from new ones.) Many factors are involved in the actualization of this risk. The issue of stability for financial institutions is a function of the riskinessof their operations, which isin turn a resultof the degreeof term transformation, portfolio diversification, efficiency of the financial markets and the approach of monetary authorities in dealingwith liquidity problems of financial institutions. Jf the financial institution does not have sufficient liquid reserves, is unable to obtain liquid assetsby borrowing from banks which have excessliquidity, and if the Central Bank isunable or unwilling to supply the financial institution with liquid assets,then a liquidity crisisensues. The same possibility of a liquidity crunch also arisesfrom credit risk, or the possibility that loans may not be repaid as expected. A still further source of risk is interest rate behavior. This is the possibility'that an adverse movement of the yield curve occurs and the cost of funds becomes higher than the interest being earned on the loans they support. If severe enough, the financial institution's liquidity or profitability could be impaired to the point of precipitating a crisis. The problems posed by a mismatching of maturities or interest sensitivities has commanded a good deal of attention in recent literature on financial management, much of which was spawned by the increased practice in recent years of "liability management", or

166

SHORT-TERM FINANCIAL MARKETS

the reliance on funds bought in the money market by banks to meet asset expansion. Discussionsin the literature includeboth the theoretical responsethat might be expected from rational profit-maXimizing banks as well asempirical evidence of hedging. In particular_the mix of high interest rates, tight credit, and downward-sloping _ield curve, expose the financial institution to the risk of illiquidity and/or insolvency. To protect themselvesagainst suchdangers,the prescription to financial institutions has been to practice "asset/liability management", (i.e. to try to maintain a fairly exact balancebetween asset and liability maturities and to invest interest-sensitiveliabilities in equally interest-sensitiveassets.Those banks with volatile shortterm interest-sensitive sourcesof funds should structure their a_sets around short-term interest-sensitiveassets,while banks which are less dependent on short-term funds are more able to make long-term fixed rate loans and investments. There is some empirical evidence that financial institutions do practice asset-liability management.One recent study, for example, finds strong evidence of systematicasset/ liability hedging by large banks in the United States to mahage interest ratesrisk. 20 As shown in the analysis of the sourcesof funds for the major intermediaries in the money market, liability managementor reliance on bought funds is also a major funding strategy of financial institutions in the Philippines. The question that may be posed is that of the impact of mismatching on the stability of the institutions active in the money market, namely commercial banks, investment ho0ses and finance companies. In considering this same question, the joint IMF/World I_ank Mission, in discussing issuesin the development of the Philippine financial system saw little causefor concern: "The risk for individual institutions depends upon the degreeof term transformation and accessto liquidity should the owners of short-term liabilities withdraw their funds. The first line of defense for an institution faced with a lossof liquidity woul_lbe the interbank market, which is already well developed in!the 1. Philippines... The second line of defensewould be accesst_the facilities of the Central Bank (in the form of) rediscou_ing

20SImonson, Donald G. et al. "A CanonicalCorrelationAnalysisof Commer_ia nk Asset/Liability Structures." Ioumal of Financial and QuantitativeAnalysis,Vol. 18, AIo'.1, 1983. p. 125-140.

CONCLUSIONS

AND RECOMMENDATIONS

167

facilities... For the financial system asa whole, the risksof more extensive term transformation depend upon the extent to which all institutions might come under pressureat the sametime. The impact would then fall upon the Central Bank sincethe interbank market would be of little help. Such a state of affairswould be that of a general crisisof confidence and panic, an extreme situation that is likely to be a rare event, calling for special measures. A prudent expansion of term transformation does not need to be limited by the remote possibility of a general panic.''21 The degree to which banks and other institutions can safely borrow in the short-term and lend long-term depends upon the stability of the short-term funds in question, i.e. how much of the funds, though nominally short-term, will stay in the financial intermediary at any given time and provide a pool of funds to finance longer term loans. There are indications that a significant portion of money market investments are actually long-term funds. In her study of the Philippine financial markets, for example, Tan used purchasesof money market issuest_y individuals, trust and pensionsfunds and insurance companiesas indicative of that portion of short-term funds which are actually long-term savings.She found that they accounted for about 25 percent of the total in 1976 through 1979. 22 The Joint IMF/World Bank Mission, using a different and more direct approach, estimated that a very high percentage, asmuch as95 percent of total deposit substitutes could be considered "a stable part of the permanent core of deposits" (i.e. those which would remain permanently availablefor investmentby financial institutions). This was the portion of deposit substitutesthat, on the basisof its time path (both rate and stability of growth), could be expected to be available to financial intermediaries in future periods, despite its short-term nature. As they then conclude, "This suggeststhat the common belief that the term structure of deposit liabilities should be the decisivefactor for the term structure of intermediaries' assets required revision. There would appear to be little ground for concern about the maturity structure of liabilities. Instead, the focus should

21 Joint IMF/World October 1, 1979. p. 70.

Bank MissiorL "The Philippines: Aspects of the Financial Sector."

22Tan, op. cir. p. 122.

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SHORT-TERM FINANCIAL MAllETS

be more on what is needed to encourage banks to move to Idnger maturities on the assetside.23 The analysis performed by the Joint IMF/World Bank Mil_sion examined four types of deposits: demand, savingsand time deposits, plus deposit substitutes. Quarterly rates of growth and t-statistics were calculated. The next step involved the forecast of volumeS for each instrument in the time period immediately following the sample data, the calculation of the lower end value (at a 95 percent confidence limit) for this predicted value, and the expression of the lower end value as a percentage of the estimated out-of-sample values. The results of this analysis (reproduced on Table 37) were quite impressive. Of all the types of financial instruments studied, :_time Table37 DepositGrowth,StabilityandStableCore, QuarterlyData:1970(I) - 1978(IV) Estimated Percentage Coreof Deposits a QuarterlyRate of Growth Rate DemandDeposits Savings Deposits TimeDeposits b DepositSubstitutes "Short-termDep''c

4.33 4.13 6.57 (14.20) 3.47 6.15

1stPeriod Outsidethe Sample

AVe.for Future Periods

87.2 89.4 50.2 (81.0) 84.2 75.9

95.8 96.6 80.6 (_4.3) 94.8 91.7 P

t-value 35.2 41.2 10.6 (22.2) 9.3 24.8

aResultsare basedon onetailed calculationof 95% confidenceinterval. bData in bracketscoverthe period 1975 (I) to 1978 (IV) to take accountof the facl_that the total period saw two distinct subperiodswith a different behaviorof time depbsits. This fact was not appropriatelytaken accountof by the linear regressionapplied t_ the total periodestimate. c'short-term Deposits" is the sumof demandandsavingsdepositsanddepositsubsiltutes. Source:CentralBank. Reproducedfrom: Joint IMF/Wodd Bank Mission. The Philippines: At,l_tS FinanclalSecmr WorldBank,October 1, 1979, p. 73.

23joint IMF/World BankMission,Op Cir., p. iv.

of the

CONCLUSIONS AND RECOMMENDATIONS

169

deposits grew fastest and deposit substitutesthe.slowest.The growth path was most stable for savingsdeposits(as indicated by the highest t-value) and lowest for deposit substitutes. The estimation of core deposits, as indicated by the lower limit of each instrument that would be available to the financial institution in the next period, rangedfrom 75.9 percent to 89.4 percent for the first period outside the sample, and from 91.7 percent to as high as96.6 percent for the average of future periods. (Numbers cited exclude time depositsfor 1970-78, the growth path of which was different from that in 197578). Duplicating the experiment for the period 1977-82 (Table 38) it can be seen that growth rates slowed down for all instrumentsexcept for time deposits.And while still significant, the T-valuesfor demand 'deposits and deposit substitutes were down substantially from the Table 38 CommercialBanks DepositGrowth,StabilityandStableCore, QuarterlyData:1977(I)- 1982(111)

EstimatedPercentage Coreof Deposits QuarterlyRate of Growth Rate t-value

DemandDeposits e Savings Deposits TimeDeposits DepositSubstitutes "Short-termDep''d

1.95 3.82 6.50 2.30 2.91

5.97 22.82 22.16 5.21 24.29

1stPeriod Outsidethe Sample a

Ave.for Future Periods b

70.17 91.20 91.14 69.20 92.35

70.33 91.25 91.27 69.30 92.38

.629 .961 .959 .564 .966

aThe lower limit of the expectedlevel of depositsat the end of the first periodoutsidethe sample_expressedas a percentaseof the predicted value of the dÂŠposit_basedon a one_)_/ed95% confidencelimit. e averagevalue of future depositsthat will remain with the financial institution over future periods, expressedasa percentageof the predictedvalue of the depositin the first cperiod outsidethe sample,basedon a 95% confidencelimit. Volumesoutstandingat the end of the quarter. d"Short-termdeposits"isthe sumof demandandsavingsdepositsand depositsubsWqes. S(mreeof basicdata: Central Bank

170

SHORT-TERM FINANCIAL MARI_ETS

earlier period. â&#x20AC;˘Also, note that the R2 for demand depositsland deposit substitutes (0.629 and 0.564 respectively) were much lower than those for savingsand time deposits(0.961 and 0.959 respectively), suggestingmuch lower reliability of the estimates for the former. Accordingly, the estimation of core deposits for demand deposits and deposit substitutes were lower than the previous estimates, though still substantial at about 70 percent. The estimated core deposits for savingsand time depositscontinued to be a _ery high 91 percent. Short-term deposits(the sum of demand and savings depositsplus deposit substitutes) showed the highest T-value aswell as the highest percentageof core deposits. Considering that demand depositsand deposit substitutes had the loweststability and smal_lest estimated core depositsamong all the instrumentsstudied, the high degree of stability of short-term depositsas a whole at commercial banks suggestssubstitutability among these three instruments and the possibilitiesof compensatory shifts in their volumes. These numbers sUggestthat the effects of a mismatch between maturities of assets and liabilities on the stability of commercial banks are indeed very small. This would, however, apply to the stability of the system as a whole, rather than to individual banks. What,should be considered is the variability of deposits and deposit substitutes of individual banks.* In any case,the dependence of commercial banks on "bought funds" in the form of money market borrowings has been declining over the years, and as of 1982, deposit substitutes were only about 7 percent of total commercial bank funds. What is of greater concern, however, is the stability of deposit substitutes in investment houses and finance companies with quasibanking licenses. These are the institutions which are hi_hly dependent on the money market for their funds and which have been shifting their assetsfrom investments in securities to loans. The analysis above for 1977-82 included only commercial bank deposits and quasi-deposits. (Wewere also unable to verify whether the analysis of deposit substitutes by theJoint IMF/World Bank Mission covered only commercial banks or included non-banks with qt!asibanking licenses as well.) It would be interesting to seethe results of the experiment if deposit substitutes could be broken down by t_pe of institution, (i.e. commercial banks, investment housesand finance companies) as well as type of instrument, and by individual insfltu*We aregrateful to Dr. Mario Lamberte for this comment.

CONCLUSIONS AND RECOMMENDATIONS

171

tions. Likewise, quarterly data on deposit substitutes outstanding (as opposed to volumes transacted during the month) for non-bank financial institutions were not available and annual data would be too aggregatedto give reliable estimates. Given the problems experienced by non-bank financial institu. tions in obtaining deposit substitutesduring the 1981 liquidity crisis, we suspect(though unverifiable statistically for lack of data) that the core of deposit substitutesfor these institutions is much smaller than is the casefor commercial banks. A major factor determining the susceptibility of a financial institution to unexpected lossof funds is the confidence of depositors. One would suspect that depositors would have a higher degree of confidence in the stability of commercial banks compared with investment houses and finance companies. Among the factors inspiring confidence would be that commercial banks as a whole are more established, whether in terms Qf length of service or size of operations, as well as the familiarity of the public at large with commercial banking business.They generally have a much larger equity base. Commercial banks also enjoy deposit insurance, which though not extended to deposit substitutes, contributes to confidence in their stability in general. Equally important, they have accessto lender of last resort facilities of the Central Bank, which until recently, was not the casefor non-bank quasi-banks. Considering the high degree of reliance of investment housesand finance companies on deposit substitutes,the impact of a lower level of core deposit substituteson these institutions would be substantial. The extent of portfolio diversification is a major factor in the stability of financial institutions, and in this respect, commercial banks have a great advantageover nonbank quasi-banksbecausethey are able to tap a variety of depositsasidefrom deposit substitutes. In contrast, investment housesand finance companies rely solely on the latter sourceof funds asidefrom equity capital. Portfolio diversification on the assetside isalso a major consideration with respectto stability of financial institLitions,and here again, commercial banks appear to have an advantage over investment houses and finance companies. Unfortunately, a breakdown, of earning assetsbeyond the very general one of loansand investments is not available to non-Central Bank personnel. Some indications of the quality composition of the portfolios of different institutions, however, may be surmised from the nature of the institutior_sconcerned and the market they service.

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FINANCIAL

MARKETS

Commercial banks are generally thought to draw their clierltele from among large well-establishedfirms. In a market where credit is limited, commercial banks, with their supply of relatively cheap funds, an array of servicesthat non-banks cannot match, plusl the respectability traditionally brought by association with a banl_ are well positioned to draw prime clients. On the other hand, the major business of finance companies is with commercial and industrial firms, especially in the form of car financing and installment purchasesof major appliances. While both commercial banks and finance companiesenga_ in financial intermediation, there isan element of market segmentationi Finance companiesare much more willing, and hopefully also, more able to assume the risks and rewards of lending to borrowe_ of marginal credit standing. In exchange for the higher risk they bear, finance companiesdemand higher collateral cover and higher interest rates. Nonetheless, it seems probable that the quality of finance company loan portfolios are less prime than those of commercial banks. With regard to investment houses,there is little published information on their lendingportfolios. Nor is it possibleto draw paraJIlels with investment banks in developed countries since there are substantial differences in their operations. It seemsprobable, however, that the lending portfolios of investment houseswould tend more to be like those of finance companiesthan those of commercial banks. In comparison, in developed financial markets like those in the United States, investment banks are generally felt to operate inr:the higherquality end of the market. However, their businessis not intermediation and investment banks do not maintain lending portfolios as do investment housesin the Philippines. Rather, investment banks in the United States specialize in underwriting, very largesyndicated loansand commercial paper issuesfor very prime names. Corollary to operating in the lower end of the credit markets, finance company portfolios, and probably those of investment houses,are more susceptibleto an economic downturn. ; Returning to the question of stability, the combination of a riskier portfolio with high dependence on a less stable source of funds has serious implications on the position of non-bank qUasi-. banks. Unfortunately, it has not been possibleto verify this duo to the lack of detailed data both on the sourcesand the usesof fui_ds. What has been verified is the very high dependence of investrr_ent housesand finance companieson the money market asa source.of

CONCLUSIONS AND RECOMMENDATIONS

173

funds. Moreover, it has not been possibleto perform statisticaltests on the stability of those funds, There is, however, evidence of a lower level of stability, compared with that for commercial banks in the difficulties experienced by these institutions during the 1981 liquidity crisis. For investment houses, for example, out of 11 companies excluding PDCP which were operating as investment houses in 1980, 7 experienced funding problemsof varying severity. Four had drastic declines (ranging from 2 to 19 percent) in the absolute level of their resources,while one grew only by 3 percent. Two others were forced to merge with commercial banks as a result of difficulties in obtaining enough resourcesto continue independent operations. Of 12 finance companies,on the other hand, 5 suffered declines in resourcesrangingfrom 12 to 44 percent, while 3 others grew by lessthan 4 percent. This same situation was repeated in the liquidity crisis precipitated by political events in August1983. Severe funding difficulties caused a number of finance companies and investment housesto declare moratoriums on their deposit substitutes in the last quarter of 1983 and the first months of 1984. With the widespreadcrisisof confidence in the ability of financial institutions to service deposit substitutes, liquidity problems were reported to havespread to some commercial banks as well. On the assetsside, it has likewise not been possibleto make a detailed anal'Isisof quasi-banks.Hence, there is nostatistical proof on the extent of the mismatch between asset/liability maturities or interest sensitivities. There are, however, qualitative arguments suggestinga less prime loan protfolio for finance companies and investment housescompared with commercial banks, which would tend to aggravatethe effects of a mismatch between their assetsand liabilities. Given the severe and recurring problemsexperienced by investment houses and finance companies largely becauseof their high dependence on the money market for their funds on one hand, coupled with their maintenance of a lending portfolio on the other, and the disruptive effect it has had on the functioning of the entire financial system, it would seem that a closer look at the stability of bought funds at non-bank quasi-banksas well as the asset side of their operations is called for. This leads to the broader question of the nature, intent and general desirability of deposit substitutesand quasi-bankingactivities in general, and the roles they play in the operations of investment

174

SHORT-TERM

FINANCIAL

MARI_TS

houses and finance companies with quasi-bankinglicenses.It would appear that these are the major activities of investment housesand finance companieswith quasi-banking licenses.This was not, hl)wever, the original intent of establishingthese kinds of financial institutions. In the case of investment houses, for example, their major activity was supposed to be underwritin_ However, the opportunities for such activities are limited in an economy that is expanding slowly and where the capital markets are largely underdeveloped.As a result, their major businessactivity has been quasi-banking.Hewever, what is the economic rationale for institutions whose ntain activity isgathering funds which substitute for depositsand mal_ng "quasi" banking loans? What distinguishesthese institutions f_m banks which would justify activities that are very similar to banking yet is not banking? Furthermore, not being "real" banks, quasi-banks do not have the other elementsthat contribute to the long-run viability of commercial banks, especiallythe wide rangeof fund sources and financing activities open to such banks. If institutions are to engage in banking, it would seem that they should engagein "real" banking with all the risks, rewards, responsibilitiesand regulations attendant to this activity. The question of the stability of bought funds and their implications for institutions with a h;gh reliance on such funds is only part of the much larger question of quasi-banking in general which requires a major restudy, for possible revision of the current regulationsgoverningits.practice. B. Open Market Transactionsin the Philippine Money Market Another characteristicof the Philippine money market that bears comment is that it is almost exclusively an intermediation market. That segment of the market consistingof open market transactiens where direct and outright sales of instruments takes place and investorsassumecredit exposuresto third parties isstill undeveloped. Corollary to this is the limited role of true dealership in the PhiJippine market and the absence of a clear ladder of interest rates reflectiveof different risk categories. In comparison, open market transactions make up a significiant portion of the money market of the United States. The most active participants are large money market banks and independent dealers who comprise the major intermediaries in the money market system

CONCLUSIONS AND RECOMMENDATIONS

175

of the United Statesfor governmentsecurities,commercial paperand bankers acceptancesas well as make secondary markets for negotiable certificates of deposit. There also exists in the United States a well defined rational interest rate structure. Finance companies, bank holding companies, industrial corporations and others who are able to raise funds by selling CPs on the open market are almost always able to borrow in this market at interest rates lower than the prime lending rate offered by commercial banks. As mentioned earlier, interest rates in the US money market for finance company paper (i.e. directly placed corn* mercial paper) are usually only slightly above those on treasury bills. Commercial paper (dealer placed) would command the next higher rates, followed by bankers acceptances, negotiable certificates of deposit, and finally, prime bank lending. Dealers in the money market of the United States perform dealership rather than inter.mediation functions. The distinction is that as dealers, these institutions buy and sell short instruments rather than borrow and lend funds. The major functions performed by dealers is that of originating issues(i.e. buying paper from issuers on a wholesale basis) for later resale on a retail basisto clients. A secondary function is that of "making a market", (i.e. ensuring market clearing and market liquidity) by buying securitiesinto inventory when the supply of instruments exceedsdemand, and sellingout of inventory when the demand for money market instruments is greater than the supply. Thesedealers finance themselvesby borrowing in the form of bank loansas well as repurchase agreements, but the important distinction isthat they borrow to finance an inventory of securities rather than to support a portfolio of loans. Hence, they are not financial intermediaries in the sense of substituting their credit with depositors in placeof the ultimate borrowers. In contrast, in the Philippine case, outright salesof commercial paper make up only a small part of total transactions, and both bank and non-bank intermediaries in the money market engagelargely in quasi-banking. The development of open market transactions as a major segment of the short-term markets offers a number of advantages, both for the institutions in the money market and for the financial systemasa whole. One implication is that, for a given level of resources,a dealer can safely support a mucE larger turnover than he could as a financial

176

SHORT-TERM FINANCIAL MARKJETS

intermediary because he has no credit exposure to the issuers_ of money market paper. As a result, the dealer needsa much lower level of financing. There is no needfor large reservesor a large equity b_se to support credit risksas is necessaryin the caseof banking or quasibanking. The amount of businessa dealer does is not a functioniof the size of his balance sheetsincethe businessis not asset-based,I_ut fee-based; rather it is a function of his placing power, largely based on contactsand knowledgeof sourcesand usersof funds. . For so long as the Philippine short-term markets consistlargely of intermediation, the amount of credit possibleis restrictedto wlpat the financial institutions can safely support. On the other hand, _e development of an open market would allow the system to spr_d credit risks beyond the financial institutions intermediating the transaction to the public at large. Partly becausethe dealer doesnot have to support a largebalar_ce sheet, he can operate on a narrower spread than can a bank orl a quasi-bank. As a result, it is possibleboth to give the buyer of the paper a return higher than that on time deposits or negotiabrle certificate of deposit while still providing a cheaper source of funds for the borrower. Furthermore, bank lending rates are higher than commerc!al paper ratesto compensatebanksfor catering to the specializedcredit needs of their individual customers. Bank loansare negotiated on a personal level, and banks are often willing to extend special credit terms and other concessionsto customers that are not available in the open market. Also, in the case of the bank loan, it may be possible to either pre-pay or delay repayment should such be necessary. On the other hand, because the open market is more impersonaland therefore a more unreliable sourceof funds, commercial paper are a cheapersourceof credit than bank loans. Hence, the open market is efficient in the economic senseof minimizing spreads, (i.e. it makes possible for companies with superior credit to raisefunds cheaper than bank rates) while simultaneously giving investorswho are prepared to take direct credit risks returns which are better than bank deposit rates. Becausean open market is more efficient in the senseof having lower spreads,the largerthe portion of the financial market accou_ed for by this type of transaction, the higher the averageefficiently of the financial system asa whole. _ Why has such a system not developed in the Philippines despite the existence, at least in name, of many dealers and open market

CONCLUSIONS AND RECOMMENDATIONS

177

instruments? Is it simply becauseit is still too early in the develop ment of the market? The rise and fall of the commercial paper market presentsan interestingcaseon the difficulties of evolvingan open market in negotiableinstruments. There are a number of preconditionsbefore a true open market can develop. First of all, there must be a clear understandingby market participants on the nature of the open market instruments, its risks, and the nature of the relationshipsbetween all parties to the transaction; namely, the issuer,the-investor or buyer of the securit_ and the intermediary. The buyer of the instrument must be prepared to assumethe direct credit risk of the issuer.The role of the dealer is simply that of acting as middlemen without any obligation to guarantee the paper. Finally, there should be a.reliable system of credit classification of the instruments issuedon the market, and a rate structure that truly reflects the risks and the rewards accorded to different credit categories. These conditions, however, can only develop over time as the financial markets progressfrom a purely negotiated market to one where there is financial intermediation, and finally to one where the intermediation marketsare supplemented by open market transactions accessibleto the more sophisticated investorsand the lowest risk borrowers. In the Philippines, a dealership market cannot be said to have developed despite the existence of many financial institutions supposedlyoffering dealership services.The reasonswhy the market continues to be underdevelopedcan be traced to a number of factors. A rational rate structure with premiums paid for'taking higher risks and discountsgiven up in exchangefor safety hasnot developed to any appreciable degree.The existenceof controls on interest rates until very recently is.one major factor which has inhibited the development of a rational rate structure. Equally important is the tradition of a strong regulatory and developmentalrole for monetary authorities in the Philippines. Over the years, the authorities have also taken on the function of assuring de facto absolute safety to investors on the one hand, and rescuing companies which are failing on the other. As a result, the meaning of risks was largely forgotten and the disciplinary function of the market was lost. Still another institutional factor which has inhibited the develop ment of a rational rate structure and an open market in negotiable instruments was the introduction of quasi-banking and deposit substitutes as alternative investment instruments. Prior to the advent of the money market, the only instrument available to savers were

178

SHORT-TERM

FINANCIAL

MA'_KETS

bank depositsat controlled rates. With the start of the money n_arket in the mid-1960s, two new types of instruments were introduced: dealers promissory notes and commercial paper, which were offered at rates above bank deposit rates. In 1973, quasi-bankingwas formally introduced as a new type Of intermediation activity, and dealers promissory notes (among others) were designated as deposit substitutes. This set the stage for the development of deposit substitutes as the primary money market instrument. This also meant t_t inVestors could avail of instruments which, being almost like deposits (deposit substitutes) and issuedby institutions performing functions close to banking (quasi-banking) are considered very safe, but also carry ratessubstantially above the rate on "genuine" deposits.H_nce, the blurred distinction between high and low risk securities, Where higher returns could be had only at the cost of greater risk. With the existence of deposit substitutes, it made no sen_ for the investors to buy paper without recourse, since they Could purchasepaper at rates substantially above deposit rates, with viRually the same risks as deposits. Negotiable instruments did not disappear from the short-term markets; on the contrary, the volume of commercial paper grew at a very fast pace, especially after the SEC took on the role of licensingtheir issuances.However, in order to be competitive, negotiable instruments had to be sold with recourse. Once negotiable instruments were sold with recourseto the dealer (at which point they ceasedto be dealersand became financial intermediaries) the cost of negotiable instruments becameashigh asthose of bank loans, removing one major support to the existence of this type of instrument. Other factors also resulted in a high cost for commercial paper, such that the efficiency with which the dealership market should work was never realized. One factor was the imposition of a 35% transactions tax on money market borrowing which made the market an expensive one. As a result, companies of highest _redit standing who had alternative sourcesof credit were driven out Qf the market. Companies which had no choice, namely, those with bwer credit ratings remained, iP The imposition of the samereserverequirements on dealersEson banks also had the effect of raising dealership coststo the same!ilevel as bank loans, thus serving to increasespreads. In any case,d_lers were essentially performing intermediation functions, requiring _hem to maintain largereservesand in general, largebalance sheets.

CONCLUSIONS AND RECOMMENDATIONS

179

In the absenceof a reliable credit rating mechanism,both banks and dealers alike, had to perform individual credit investigations. There was no uniformity of credit standards nor reliability of an independent credit appraisal. This also required the maintenanceof largefixed overhead costsfor staff work in credit appraisal. As a result of the above factors, a dealershipmarket and an active open market for negotiable instrumentsfailed to develop. An interesting question is how the market can begin to move towards the development of a real open market. The move towards freeing interest rates sho_rldhelp in this regard. Another movewould be to restore the discipline of the marketplace with regard to the weeding out of weak companiesand the clarification of the role of regulatory agenciesin protect.inginvestors.Only then will a rational interest rate structure reflective of credit risks beginto develop. SEC registration, which admits to being "ministerial," nonethelless, has the effect of giving credibility to those so regfstered and giving buyers of commercial paper a false senseof security. Furthermore, the government has pursued a policy of "bailing-out" large companies running into financial trouble, such that again investors have come to view absolute protection as their right. The assumed absence of depositor risk reduced market discipline and encourages risky behavior. With de focto unlimited protection, the investor is in fact, rewarded for risky behavior. In supporting high risk firms/ financial institutions by buying their paper, he is rewarded in the form of higher yields. The de facto absolute protection of investors largely negates the markets' normal safety mechanism, namely, the reduction in credit availability and the increasein costsfor companiesperceivedasbeing exceptionally risky. No amount of government regulation and supervisioncan replace the discipline of the market both with regardto borrowers as well as investors in the money market. Those investors who are not prepared to shoulder the risk of being exposed to the issuersof negotiable instruments and desire the protection of a financial intermediary should stay in the bank deposit market. They will, of course, haveto forego higher interest rates in favor of investor safety. Those investors who are prepared to take credit risks will be more discriminating in their choice of companiesto finance. Borrowerswill realize that different risk _tegories translate into different costsof funds, which they can factor into their profitability calculations. Once the issues of investor protection and the relation of higher interest rates to

180

SHORT-TERM FINANCIAL MARKETS

higher risks have been clarified, a ladder of interest rates whidh is reflective of the underlying riskswill begin to develop. Another factor which is alsoimportant for the growth of an open market and which has already been started is the development of a reliable and independentcredit rating agency. Finally, efforts haveto be madeto encouragethe development of true dealers in the money market. A logicalcandidate for this would be the investment houses,but the institutional and market structures to support real dealership must be developed before dealershiprcan be a viable businessoperation. As suggestedearlier, among the institutions in the money market, the role of investment houses needs to be clarified. So also shOuld the role of quasi-banking. The existence of quasi-banking makes it difficult to develop an open market with a ladder of interest rates reflective of different risk categories. Given the benefits to the financial system of a real open market in negotiable instrumentsand the problemsin quasi-banking,a mpjor restudy of the institutional framework of the short-term mariners for possible revision to develop a true dealership market withÂ˘ut quasi-bankingis recommended.

POSTSCRIPT July 198S In the two years since the period covered in this study, there were major developmentsin the economy which profoundly affected the short*term markets. Of special impact were the moratorium on Philippine external debt and devaluation of the peso in October 1983, subsequently followed by inflation and the rise in interest rates. In many ways, the short-term markets had not yet recovered from the unheavalsfollowing the Dewey Dee incident in early 1981 ; and the severestrains on the economy after the October devaluation caused further problems in the short-term markets and its institutions. The following section coversmajor developments in the money market in 1983 and 1984. It should be noted, however, that these developments do not changethe conclusionsand recommendations of this study; if anything, they confirm and reinforce them. SURVEY OF MONEY MARKET CHARATERISTICS VOLUME. From a growth rate of 40.7% in 1982, total transactions in the short.term markets in 1983 amounted to t=600.6 billion, reflecting an increaseof 29.8%. In 1984, however, the total volume of money market transactions fell by 15.8% to t=505.8 billion. During the first quarter of 1985, total transactionscontinued to decline, and fell by a further 25% compared to the volume in the first quarter of 1984. MATURITIES. From a fairly constant maturity structure in 1977.82, the average maturity of money market instrumentsshortened considerably in the next 2 years. From a shareaveraging45% in 1977-82, transactionson demand roseto about 70% of the market in 1983-84. As a result, the weighted averagematurity of money market instruments which was slightly over 30 days in 1977-82, fell to about 3 weeks in 1983 and 17 days in 1984. SIZE OF TRANSACTIONS. Transactions of t=2 million or more continued to dominate the market. On the other hand, smaller 181

182

SHORT-TERM FINANCIAL MARKETS

transactions of lessthan 4w2million each, which had amounted_to a fairly constant ?'80 million to @90 million in 1977-82, declined to 4_69 million in 1983 and to @60 million in 1984. As a result, the fall in the share of smaller transactions in total money market vol_ume accelerated, and made up only 12% of the market by 1984. INSTRUMENTS. The portion of the money market consisting of IBCIs continued to rise, so that by 1984, one-third of all l_ransactions were of this type of instrument, compared to 29% in 1982. The share of dealer promissory notes continued to fall, from 51% in 1982, to 41% and 38% in 1983 and 1984, respectively. Outright sales of commercial paper comprised 5% of all transactions in 1983-84; The most notable development in terms of shares of different instruments in the money market in 1983-84 was the rise in the sl_are of government securitiessold on an outright basis.While thesesecurities made up one percent or lessof total transactions in 1977_82, they comprised 3% of the market in 1983 and 8% in 1984. INTERMEDIARIES. Commercial banks continued to dominate the short-term markets in 1983-84. However, from fairly consent shares averaging 66% for commercial banks, 20% for investment houses and 12 percent for finance companies in 1977-82, there was a marked growth in the share of commercial banks and a declin_, in the activities of other institutions. In 1983-84, investment houses' share of total money market activity fell to 12%, while that for finance companies declined to 7% in 1983 and 4% in 1984, Commercial banks accounted for about 80% of all money market activity in 1983-84. INVESTORS. From supplying about one-third of all funds in i;the money market, the share of commercial banks as investors in ithÂ˘ market grew to over 50% in 1983-84. There was continued declin_ in the investments of individuals to only 8% by 1984. The share of other private corporations as investors in the money market also declined to average12% in 1983-84, compared to a shareof about T8% in the previous 6 years. INTERMEDIARIES

IN THE MONEY MARKET

COMMERCIAL BANKS. The decline in the contribution,:of deposit substitutesto commercial bank funds accelerated in 1983-84. Whereas in 1977, this source of funds accounted for 14% oflall commercial bank funds and 7% by 1982, their contribution was clownto only 3% by 1984.

POSTSCRIPT

183

INVESTMENT HOUSES AND FINANCE COMPANIES WITH QUASI-BANKING LICENSES. Available data suggestscontinued reliance on the money market as a source of funds by these institutions. As a result, there were substantial declines in the activities of these investment houses and finance companies with quasi-banking licenses.The operations of a number of investment houseswere consolidated with those of commercial banks to which they were affliated. Especially hard hit by the general crisisin the financial system were finance companies.Of the 12 institutions with QB licensesas of 1982, two were placed under receivership in 1984, and two more in 1985. MAJOR INSTRUMENTS IN THE MONEY MARKET INTERBANK CALL LOANS. This sector continued to be one of the most rapidly growing forms of money market transactions, accounting for about one-third of all money market activity in 1984. Patterns of usage remained roughly the same, although a notable development was the move by the Central Bank to stop the use of interbank call loans in the so-calledconduit transactions.Per CB Circular No. 929, (May 1983) promissory notescovering interbank loan transactions are non-negotiable, non-assignableand non-transferable. They are also not to be subjects of repurchase agreements, nor of certificates of participation or assignmentwith recourse. DEPOSIT SUBSTITUTES. Deposit substitutes continued to be the largest classof money market instruments, although the decline in the share of total transactionsaccountedfor by these instruments continued in 1983.84. From 86% of total trajnsactions in 1977, deposit substitutes in 1982 were only 62% of the market and 45% in 1984. The shareof P/Ns fell from 51% in 1982 to 38% by 1984, while that of repurchase agreementsinvolving private securities fell from 3% in 1982 to lessthan one percent in 1984. With the growing role of government securities, however, the share of repurchase agreements involving government securities grew from 7% of total money market volume in 1982 to 14% in 1984. Commercial banks continued to account for'the largestshare of deposit substitutes, although reflecting the decline in their reliance on this instrument as a source of funds, and their share in the total fell from 70% in 1981-83 to about 55% in 1984. In contrast, with a lack of alternative sourcesof funds, the share of investment houses in total deposit substitutes rose from 15% in

184

SHORT-TERM FINANCIAL MAI_KETS

1981-83 to 39% in 1984. The share of finance companiesin ddposit substitutesremained constantat about 15%. Thus, depositsubstitutes continued to be the most important type of money market activity for thesetwo types of institutions. COMMERCIAL PAPER. When the transition period for the effectivity of the requirement for a credit line covering at least 20% of commercial paper issuesended in March 1983, the volu_e of commercial paper outstanding of registered issuersfell to _1.3 billion at the end of 1982, and an averageof only _100 million in March through August 1983. Thereafter, the volume picked up and by the end of 1984, total commercial paper outstandingof registered issuers was up at tbl.5 million. Amounts approved and amqtunts issuedfollowed the same pattern. At the end of 1984, the monthly volume of commercial paper issued stood at about _500 mil_lion. Also at the end of 1984, the total amount of commercial paper approved to be issued stood at _2.9 billion, compared with over _7 billion approved at the market's peak in early 1981 and _836 million at the end of 1982. _ The recovery in the commercial paper market was almost entirely in paper by manufacturing companies. The other major sector of CPs, namely those issuedby finance companieswithout QB licenses, continued to be severely depressed. Throughout 1983 and 1984, there were no major changesin the regulatory framework for commercial paper. INTEREST RATES IN THE MONEY MARKET Despite the lifting of interest rate ceilingson short-term crbdit instruments on Jan. 1, 1983, interest rates remained fairly stable through the first 8 months of that year. One of the major manifestations of the economic upheavalsof 1983 and 1984, however, Was the run up in interest rates.The weighted averageinterest rates of all money market instruments rangedfrom 12.7% to 15.8% in JanUary to August 1983; but they roseto 16.5% in September and contini_ed risingto 26.3% in December 1983. In 1984, rates peaked at 37.2%in October, before easingto 24% at the end of the year.

BIBLIOGRAPHY

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186

SHORT-TERM FINANCIAL MARKETS

Crosse, Howard and George Hempel. Management Policies for COmmercial Banks. EnglewoodCliffs, N.J.: Prentice-Hall. Inc., 1980. Dolly Express. Various Issues,January 1977-June 1983. Horvitz, Paul. "Failure of Large Banks: Implications for Banking Supervision and Deposit Insurance." journal of Financial and Quantitative Analysis. (November 1975): 589. Hurley, Evelyn M. "Survey of Finance Companies, 1980." Federal Reserve Bulletin. (May 1981): 398. • "The Commercial Paper Market." Federal Reserve Bulletin. (June 1977): 525. _: "The Commercial Paper Market Since the MidSeventies." Federal Reserve Bulletin. (June 1982): 329. Johnston, J• Econometric Methods. NY: McGrQw-HIII Boobs, CO., Inc. 1963. Kaufman, George. The U.S. Financial System: Money, Morhets, end Institution_ EnglewoodCliffs, N.J.: Prentice-Hall, 1980. I Laya, Jaime C. "A Crisis of Confidence." Dialogue on the Fir_naiol S/tuotion. Manila: Central Bank of the Philippines, 1981. Levinson, Paul. "Fed Funds and Rel_os- An Overview." Banhers Monthly Magozine. June 15, 1980: 24. Licuanan, Victoria. "The Philippine Money Market," Asian Institute of Management, 1983 (mimeo). Limlingan, Victor S. "Reflections on the Money Market," Manila, 1982. (Mimeographed). Lindow, Wesley. Inside the Money Morhet. NY: Random House, 1972. Ludtke, James B. The American Financial System. Boston: Allyn and Bacon, Inc., 1967. Meek, Paul. Open Morhet Operations. NY: Public Information Department, Federal Reserve Bank of New York, July 1969. Morrison, Donald F. Multivoriote Stotlsticol Methods (second edition), NY: McGraw Hill Book Co., 1976. Peters,William and GeorgeSummers•Statistical Analysis for Business Decision. Englewood Cliffs, N.J.: Prentice-Hall, 1968. Pettway, Richard and Sinkey, Joseph. "An Early Warning System Using Accounting and Market Information." JournM of Finonc_ (March 1980). "Plus Ca Change in Philippine Commercial Paper." Asian BanhinI. (June 1982): 36. R.P. Letter of Instruction No. 1107. "Facilitating a Credit Information Exchange System in Support to Banksand Other Financial

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Institution." Central Bank of the Philippines Annual Report 1981. Manila: 1982. R.P. Presidential Decree No. 1797. "Amending Further P.D. No. 129, As Amended, otherwise known as the Investment Houses Law." Central Bank of the Philippines Annual Report 1981. Manila: 1982. . Presidential Decree No. 1688. "Authorizing Banks to Invest in the Equity of Venture Capital Corporation." Central Bank of the Philippines Annual Report 1987. Manila: 1982. Presidential Decree No. 129. "Governing the Establishment, Operation and Regulation of Investment Houses." Central Bank of the Philippines Annual Report 1973. Manila, 1974. , Presidential Decree No. 1798. "Promulgation of Rules on the Monetary and Credit Aspects of Commercial Paper Issues." Central Bank of the Philippines Annual Report 1981. Manila: 1982. • Presidential Decree No. 1739. "Providing Fiscal incentives by Amending the National Revenue Code." Central Bank of the Philippines Annual Report 1980. Manila: 1982. R.P. Ministry of Finance, Securities and Exchange Commission. New Rules on Registration of Short-Term Commercial Papers, December 1981. • SEC Weekly Bulletin., Jan. 1982 - June 1982. Reed, Edward et al. Commercial Banking. Englewood Cliffs, N.J.: Prentice Hall Inc., 1980. Robinson, Roland and Wrightsman,Dwayne• Financial Markets: The Accumulat/on and Allocation of Wealth. NY: McGraw-Hill Book Co., 1980. Roxas, Sixto, Managing Asian Development. Manila: Sinag-tala Publishers,1976. "Memorandum to the Honorable Jaime C. Laya, Governor, Central Bank of the Philippines." Feb. 9, 13, 16, 1983. (Typewritten). Sheldon, Russell. "Structuring a Money Market Model For Fiscal Policy Analysis." Southern Economic Journal. (April 1980) 46:1141. Sinkey, Joseph J. "A Multivariate Statistical Analysis of the Characteristicsof ProblemBanks."Journa/ofFinance. (March 1975): 21. Sycip, Gorres, Velayo and Co. A Study of Commercial Banks in the PhiliD/_ine_ Manila: SGV and Co., 1972-1981.

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Tan, Edita. "The Structure and Growth of the Philippine FinanCial Market and the Behavior of Its Major Components." Worl_ing Paper 81-06 of the Philippine Institute for Development Studies. Manila, June 1981. (Mimeo). TimesJourr_/. Various Issues,jan 1977 - june 1983. United States Congress.A .Study of the Dealer Market for Federal Government Securities (Materials Prepared for the Joint Economic Committee). US Government Printing Office. Washington: 1960. â&#x20AC;˘ Economic Policies and Practices: Paper No. 3, A Description and Analysis of Certain European Capital Mariners (Materials Preparedfor Joint Economic Committee). US Government Printing Office. Washington,1964. Van Home, James. Financial Market Rates and Flows. Englewood Cliffs, NJ: Prentice-Hall, Inc., 1978. Wilson, J.$.G. Monetary Policy and the Development of Money Marhats. London: GeorgeAllen and Unwin Ltd., 1966. World Bank. The Phih'ppines: Aspects of the Financial Sector. (Joint IM F/World Bank Mission), October 1979.

Appendix

Updated Tables

rn Z

Table 2 (Updated) Commercial

Banks By Size Of Assets (1977-84)

Total AsSets (P'm011on)

R " nk

% Annuel Growth

Bank 1977

t981

198_

_1983

1884

1977

1981

1983

BPI Metro Aiifed

4,851 3,002 1,914

8,489 6,940 7,430

9,120 8,453 8,013

10,642 11,505 6,857

14,333 15,182 8,566

1 2 11

1 3 2

1 2 3

3 1 6

Repubile UCPB FEBTC PCIB Intmbank Manila Traders

302 2,274 2,,$$5 2,451 610 1,633 1,135

5,061 6,218 5,356 4,817 4,553 3,650 4,14S

6,576 6,496 6,260 6,033 5,309 5,287 4,935

6,830 10,739 7,149 8,070 3,004 6,486 4,639

7,894 12,442 11,657 10,344 5,506 7,667 $,495

27 6 3 5 24 ,1$ 18

6 5 4 7 8 11 10

4 5 6 7 8 9 i0

Family RCBC China Secudry IBAA Pacific ScJId PBCom Equitable PmdentJal

N.A. 2,514 2,260 973 1,796 2,070 2,061 1,016 2,183 1,444

3,831 4,320 3,473 3,129 2,974 3,354 3,095 3,110 3,208 2,$65

• 4,601 4,448 4,131 3,913 3,637 3,619 3,268 3,050 2,908 2,894

5,655 5,445 4,$84 4,267 3,699 4,083 3,995 3,313 3,099 3,625

4,869 6,258 4,883 5,540 4,630 4,471 4,428 3,231 4,030 4,678

N.A. 4 7 21 12 9 10 20 8 17

12 9 13 15 19 14 18 17. 16 20

11 12 13 14 15 16 17 18 19 20

1984

,077-81

1977.82

1982-83

1983-84

2 1 6

1S 23 40*

13 23 33*

17 36 -14

3 3 3

7 2 5 4 21 8 11

7 3 4 $ 11 8 12

102* 29* 20 19 6.5* 22 38*

85 • 23 20 20 54* 26* 34*

4 65 14 34 .--43 23 -6

1 t 6 2 8 i

9 10 12 13 16 14 1$ 19 20 17

15 9 14 10 17 18 19 22 20 16

N.A. 1.S 11 34* 11 13 11 32* 10 1$

N.A. 12 13 32* 15. 12 10 25 6 1$

23 22 11 9 2 13 22 9 7 25

-! 1 3 2 1 1 3 2 i,,k

,mL

Total Am

(P million)

R â&#x20AC;˘ nk

% Annual Growth

Bank 1977

1981

1982

1983

1984

1977

1981

1982

1983

1984

1977-81

1977-82

lge2-83

1983.84

Ph[ll_znk Union Producers ASSO ClW_ru_ Phlltrust PIIIplnas Combank Total

1,610 N.A. 481 1,055 653 444 634 N.A. 41,919

2,325 N.A. 1,771 2,030 1,799 1,120 1,090 430 100,286

2,629 2,575 2,474 2,191 2,119 1,283 1,145 587 117,955

2,931 2,227 2,630 2,379 3,355 1,285 1,357 793 134,643

2,79 i 3;299 2,014 3,107 5,065 1,647 1,331 1,799 167,157

16 N.A. 25 19 22 26 23 N.A.

21 N.A. 24 22 23 25 26 27

21 22 23 24 25 26 27 28

22 25 23 24 18 27 26 28

24 21 25 23 13 27 28 26

10 N.A. 39* 18 29* 26 15 N.A. 24

10 N.A. 39* 16 26 24 13 N.A. 23

11 --14 6 9 58 0 19 35 14

-4 -2 3 5 2 -12 2

PNB Veterans Total

19,238 1,696 20,934

44,866 2,726 47,592

58,080 2,620 60,700

70,502 2,555 73,057

87,196 2,301 89,497

1 2

I 2

1 2

24 13 23

25 9 24

21 -2 20

2 -1 2

CITi BA HSBC Chartered

4,828 1,411 672 682

t3,455 4,548 1,743 1,042

17,892 5,548 1,827 1,337

26,590 9,004 2,574 2,290

27,588 12,639 3,410 3,189

1 2 3 4

29* 34* 27 11

30* 32* 22 14

49 62 41 71

4 3 3

TotaF

7,593

20,788

26,605

40,458

46,826

70,446

168,667

205,259

248,158

303,480

1 2 3 4

u_ -IO _1 m _0 "el

Ali Banks

*Denotes Banks with exceptionally rapid growth 1977-8] and 1977-82. Ranked by size of assetsIn 1982.

1977 data for BPI includesComtrust with which It was merged in 1981. Family Bank was formerly a Savinss Bank and became a CommerciaJ Bimk mz4yt981; Comtl_llk Union Bank were set up I_ 1981 and 1982, respectively: Source of Data: SGV, A Study of CommercialBanks and published reports of banks.

:> PO

APPENDICES

191 Table 6 (Upda_) BiLlsPayableof CommercialBanks 1975-84, _ million, Pecem Share Deposit Substitutes

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Other BillsPayable

Total Bill Payable

Total

9,333 11,277 10,669 9,692 11,810 10,204 12,762 15,586 15,402 9,900

63 67 61 42 39 28 27 26 24 14

5,552 5,675 6,708 13,476 18,348 25,660 34,666 44,140 49,772 61,463

37 33 39 58 61 72 73 74 76 86

14,885 16,952 17,377 23,168 30,158 35,864 47,428 59,727 65,174 71,363

Source of Data.SGV,A Study of CommemlalBanksin the PhiliDpineÂ˘ Table 7 (Updated) Depositsand DepositSubstitutesof CommercialBanks 1975-84, P million, PercentShare Deposits

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Deposit substitutes

Tot_

20,747 26,062 33,778 43,653 55,998 72,630 80,026 98,074 120,734 138,213

69 70 76 82 82 88 86 86 89 93

Total 9,333 11,277 10,669 9,692 11,819 10,204 12,762 15,586 15,402 9,900

Total

% 31 30 24 18 18 12 14 14 11 7

30,078 37,339 44,447 53,345 67_08 82,834 92,788 113,660 136,136 148,133

Sourees: CentralBankStatistical Bulletin,SGV b_.dy uf Om_mercialBanksin the Philip andBulletinToday(v_iousissues).

Table 18 (Updated) Volume Of Money Market TransactionsBy Institution & Type Of Instruuruent Billion Pesos,June& Dec. 1983 & 1984 CommercialBk BIL P

InvestHse

BIL P

FinanceCos BIL P

Others BIL P

Total %

BIL P

June t983 i BCL PtN RP PVT RP GOV'I" CERT ASS CP N/FI CP FINL

12.27 16.87 7.55 0.12 -

32.92 45.25 20.25 0.00 0.00 0.33 0.00

3.64 0.27 0.t 3 0.32 0.67

0.00 60.67 4.50 2.17 0.00 5.33 11.17

3.57 0.01 0.02 0.07

0.00 97.01 0.00 0.00 0.27 0.54 1.90

0.38 0.03 -

0.00 92.68 7.32 0.00 0.00 0.00 0.00

12.27 24.46 7.85 0.13 0.01 0.46 0.74

25.91 51.63 16.57 0.27 0.02 0.98 1.56

GOVT SEC TOTAL

0.47 37.28

1.25 100.00

0.97 6.00

16.17 100.00

0.01 3.68

0.27 100.00

0.41

0.00 100.00

1.45 47.37

3.05 100.00

u_ o po _l II'1 ,_ 3: "11

Dec 1983 IBCL PIN

16.57 16.07

40.77 39.54

3.14

0.00 68.04

2.58

0.00 92.58

1.21

0.00 66.70

16.57 23.00

33.23 46.13

RP PVT RP GOVT

0.49 5.40

1.21 13.29

0.14 0.08

3.03 1.71

0.14 -

5.02 0.00

0.01 0.60

0.44 32.86

0.78 6.08

1.56 12.19

0"_ 6.44

0"06 " 0.01

_. I_ ...... 0.25 -

0.00 0.00

0.06 0.87

O;12 1.75

_ CP N/FI

.........

0.57

1.40

0.30

-_ > z r--

> _g

CP FI NL GOVT SEC

1.54

0.00 3.79

0.69 0.27

14.91 5.87

0.00 0.00

40.64

100.00

4.62

100.00

2.79

100.00

0.00 0.00

0.69 1.81

1.38 2.00

100.00

49.86

98.37

"_ III

TOTAL

! .81

zO B

June 1984 IBCL P/N RP PVT RP GOVT CERT ASS CP N/FI CP FINL GOVT SEC

m 10.91 7.76 0.30 11.38 0.53 1.80

33.38 23.75 0.93 34.82 0.00 1.62 0.00 5.51

3.48 0.01 0.36 0.98 1.26

0.00 57.14 0.16 0.00 0.00 5.91 16.09 20.69

2.73 0.04 0.03 -

0.00 97.50 0.00 0.00 1.43 1.07 0.00 0.00

0.40 1.37 -

0.00 22.60 0.00 77.40 0.00 0.00 0.00 0.00

10.91 14.37 0.31 12.75 0.04 0.92 0.98 3.06

25.17 33.16 0.72 29.42 0.09 2.12 2.26 7.06

TOTAL

32.69

100.00

6.09

100.00

2.80

100.00

1.77

100.00

43.35

100.00

IBCL P/N RP PVT RPGOVT CERT ASS CP N/FI CP FINL GOVT SEC

10.35 5.16 3.21 0.01 0.90 2.64

46.48 23.17 14.41 0.04 0.00 4.04 0.00 11.85

2.73 0.01 0.10 0.15 2.65

0.00 48.39 0.18 0.00 0.00 1.77 2.69 46.97

1.37 -

0.00 100.00 0.00 0.00 0.00 0.00 0.00 0.00

0.10 0.14 -

0.00 41.18 0.00 58.82 0.00 0.00 , 0.00 0.00

10.35 9.36 3.22 0.15 0.00 1.00 0.15 5.29

35.06 31.70 10.91 0.51 0.00 3.39 O.51 17.92

TOTAL

22.27

100.00

5.64

100.00

1.37

100.00

0.24

100.00

29.52

Dec 1984

Nots: Dash (--) may mean nil or negllliJble amounts; details may not add to total due to rounding. Source of Basic Data: Central Bank of the Philippines

100.00

194

SHORT-TERM

FINANCIAL

MARKI_TS

Table 19 (Updated) Money Mad(et Transactions By Instrument And investor In Million Pesos,December 1983 and 1984

Toted

Indbld_la

Colllm'l bko

Rtmd Mw

Other bks

I W4mlt II_

Fm Cos

2,019.20

115.20

2.00

3,593.31 0,60

1,165.63

Pemdfm Fumb

Prlvm Coqm

OUtem

DECEMBER 1983 INTERBK CALL LOANS

16,568.68

81,00

13,716.38

624.90

PROMISSORY NOTES RP PVT INSTRUMENTS

23,007.46 786.98

2,194,34 10.84

6,835.00 401.20

975,65 82.50

132.57 246,54

RP GOVTINSTRUMENTS CERT ASSIGN/PART TOTAL DEP SUBS

6,078,12 61,12 29j933.68

9,09

3,463.86

196.82 10.00 1,264,67

2,065.81

10._0

0.0O

770.19 33.48

5,19$.(B 6,66

2,144.89 5.21

189.92 993.54

23._7 ;, 5,22.T,._2

129,55 0.00 2,279,65

137,38

471.67

109.08

14.07 151.45

39.S5 $11.22

10.66 119.74

DEPOSIT SUBSTITUTES

COMMERCIAL PAPER CP NON-FINANCIAL CP FINANCIAL TOTAL CP OTHERS

2,214.27

_70.40

144.87

688.09 1,558.49

623.81 768.68

10,700.06

2,444.92

50.12 3,644.03

1.00 1,166.63

0.00

7.40 0.00

7.40

0.00

1,809.67

77.44

201,51

5.73

1,142.03

0.00

4,99

12.75

142.16

223.06

49,870.52

3,141.38

24,617.95

1,902,70

5,606.15

3,759.23

1,113.62

1,157,74

5,889.30

2,622.45

10_3$2.00

15.00

10,041.50

185.80

PROMISSORY NOTES RP PVT INSTRUMENTS

9,357.90 89.97

2,108,06

2,946.31 76.50

188.02 0.44

43.52

F_PGOVT INSTRUMENT CERT ASSIGN/PART TOTAL DEP SUBS

3,280.79 0.19 12,728.85

2,615.10

22.00

488.08

0.19 2,108,25

5,637.91

210.46

$31.60

235,38

COMMERCIAL PAPER CP NON-FINANCIAL CP FINANCIAL TOTAL CP

993.87 152.38 1,146.22

442,65 142.56 585.21

0.00

18.50

0.00

5,292.31 29,519.38

787.03 3,495.49

443.45 16,122.86

148,07 562.53

606.42 1R38.02

TOTAL TRANSACTION$ DECEMBER 1984 INTERBKCALL

LOANS

i 100.00

10.00

0.00

305.92 0.90

2,842,$9 4.22

566.04 7.91

140.61

13.50

122.26

447.43

2,860.11

I.$0 0.00 $75.45

0.00

139.83 0.13 139.96

389,41 7,87 897.08

3.48 1.99 5.47

179.03 414.41

0.00 122.26

366.08 953,47

1,997.23 5,264,42

765.00 1,345.92

DEPOSIT SUBSTITUTES

OTHERS TOTALTRANSACTIONS

Details may not add to totals due to rounding errom. Source: Central Bank of the Phllil)olnes

235.38

122.26

18.80

APPENDICES

195

Table 19-A (Updated) MoneyMarket Tmmamlmw By Immmmlt And Invut_ PmmMtag@ ShareOf EadJ Im b Total Value Of EachImtrumem, _ lg85 & 1984 Ind_l.

Fining)

Pemkm

Col.

Fum_

0.01

0,00

0.00

0.01 0.31 0.34 0,00 0.(W

0.16 0.00 0"00 0.82 0.12

0.05 0.00 0,00 0.02 0.04

0.03 0.04 0.03 0.00 0.03

0,23 0.01 0.00 0.00 0.17

0.0g 0,01 0.02 0.QO 0.08

0.01 0.00 0"00

0,00 0.00 0`00

0"00 0.00 0.00

0.00 0.00 0.00

0.16 0,02 0.10

0.54 0.06 0.33

0.13 0.02 0,08

0.11 0.49

0,00 0.04

0.63 0.11

0.00 0.08

0`00 0.02

0.01 0.02

0.08 0.12

0.12 0.05

0.00

0.97

0,02

0.01

0.00

0"00

0.00

1.00 1,00

0.23 0.00

0.31 0.85

0,02 0,00

0.00 0.00

003 0.0(I

0.01 0`00

0"03 0"01

0.30 0.05

0.06 0`09

1.00 1.00

0,00 1.00

0,S0 0.00

0.01 0.00

0`15 0.00

0.00 0.00

0,00 0.00

0.04 0.00

0.00 0.00

1.00

0,17

0.44

0`02

0.04

0.02

0.01

0.04

0.22

0.05

CJPNON-FINANCIAL CP FINANCIAL TOTAL CP

1,00 1.00 1,00

0.45 0,94 0.51

0`00 0"00 0.00

0`02 0.00 0,n_

0`00 0.00 0`00

0"00 0.00 _00

0`00 0,00 0`00

0.14 0.00 0.12

0,39 0.05 0.35

0.00 0,01 0.00

OTHERS ALL INSTRUMENTS

1,00 1,00

0.15 0.12

0.08 0,55

0.09 0.02

0.11 0,04

0"03 0,01

0.00 0.00

0.07 0_03

0,38 0`18

0.14 0.04;

Total

Comw/'l

_ Mw

dmdm

bks

bib

1.00

0.00

0.83

0.04

0.12

1.00 1.00 1.00 1,00 1,00

0.10 0.01 0`00 0.00 0.07

0.30 0.51 0.57 0,00 0.36

0.04 0.10 0.03 0`16 0.04

CP NON-FINANCIAL CP FINANCIAL TOTAL CP

1.00 1.00 1.00

0.17 0,01 0,4_

0.00 0.00 0,00

OTHERS ALL INSTRUMENTS

1.00 1.00

0.04 0.05

1.00

PROMISSORY NOTES RP PVT INSTRUMENTS RP GOVT INSTRUMENT CERT ASSIGN_ART TOTAL DEP SUBS

Imm

Prlmm) _

0tk.

DECEMBE _ i_J_ INTERBK CALL LOANS DEPOSIT SUBSTITUTES PROMISSORY NOTES RP PVT INSTRUMENTS RP GOVT INSTRUMENTS CERT _,_SIGN_ART TOTAL OEP SUBS COMMERCIAL

DaCEMBER INTERBK

PAPER

1984

CALL LOANS

DEPOSIT SUBSTITUTES

COMMERCIAL

PAPER

Detail:; map/not _dd to to_ls due to roufldlns errori. Source: Central Bank of the Philippines

196

SHORT-TERM

FINANCIAL

MARIC_TS

Table 19-B (UPdated) Money Market Transactions By instrument And Investor Pet_ntap Slmre Of Each Imm'ument In Each Immetors' Portfolio, Dec_nber 1973 & 1984 ImJbl-

g_mm'l

T¢_d

ckmh

I_s

0.33

0.03

0,56

Rural him

Otltm'

Imm_

Fk,m_e

I_ndon

him

C<_

Fumll

0.36

0.03

0.00

Prlvcm _

Taml

DECEMBER 1983 INTERBK CALL LOANS

0-33

DEPOSIT SUBSTITUTES PROMISSORY

NOTI;S

0.00

I 0.46

0.70

0,2B

0.51

0.02

0.96

0,9'9

0.67

0.aB

0,82

RP GOVTINSTRUMENTS PVT INSTRUMENTS CERT ASSIGN/PART TOTAL DEP SUBS

0.12 0.02 0.00 0,60

0.00 0.00 0.70

0.14 0,02 0,00 0.43

0.10 0.04 0.01 0.66

0.37 0.04 0.00 0,44

0.00 0.01 0.97

0.00 0.00 0.99

0.16 0.03 0.00 0.86

001_ O._) 0.89

0,05 0.00 0.00 0,87

COMMERCIAL PAPER CP NON-FINANCIAL CP FINANCIAL TOTAL CP

0.02 0,01 0.03

0.05 0.20 0.24

0.00 0.00 0.00

0,00 0.00 0,00

0.00 0.O0 0,00

0.00 0.00 0.00

0.12 0.01 0,13

0.OS 0.01 0.09

U.04 0.00 0.05

OTHERS ALL INSTRUMENTS

0.04 1,00

0.02 1.00

0.01 1.00

0.00 1.00

0.20 1._30

0.00 1.00

0.G2 1.01_

0.09 1.00

0.35

0.00

0,62

0.33

0,08

0.00

0.01 - 1,00 'J_

OECEMBE R 198.4 INTERBK CALL LOANS

I 0.00

DEPOSIT SUBSTITUTES

0.OO

0.00

PROMISSORY NOTES RP PVT INSTRUMENTS RP GOVT INSTRUMENT

0.32 0.00 0.11

0.60 0,00 0.00

0.18 0.00 0.16

0.33 0.00 0.04

0.04 0.00 0.$9

0.57 0.00 0.00

1.00 0.00 0.00

0.32 0.00 0,1 $

0..5t(' 0,(_ O.0ll

0.42 0.01 0.00

CERT ASSIGN/PART TOTAL DEP SUBS

0,00 0.43

0.00 0.60

0.00 0.35

0,00 0.3?

o.00 0.43

0.00 0.57

0,oo 1.00

0.00 0.47

O.0g 0,511

0.00 0.43

CP NON-FINANCIAL CP FINANCIAL TOTAL CP

0.03 0.01 0.04

0.13 0.04 0.17

0.00 0.00 0.00

0.0S 0,00 0.03

0.00 0,00 0.00

0.00 0.00 0.00

0.I$ 0.00 0.1S

0.0_ 0.00 0.GS

0.00 0.00 0.00

OTHERS ALL INSTRUMENTS

o.18 1.0(I

0.23 1.00

0.03 1.00

0.26 1.00

0.49 1.00

0.43 1.00

0.00 1.00

0.38 1.00

0.311 1.0e

0.57 1.00

COMMERCIAL

PAPER

Details may not add to totals due to tocmdlng erron. Scm'_e: Central Bank of the Philippines

APPENDICES

197

TaMe21

(Updamd) Volume of Deposit _ by Type of Instrumem 1977.84, in billion pesos INSTRUMENT

PromissoryNotes RepurdmseA_-eement Pdvate

RepurchaseA_ecrnent, Government

1977

140.6 (66.7)

1978

1979

1980

1981

1982

1983

1984 (10 months)

160.9 (08.2)

151.2 (51.2)

144.5 (47.6)

189.5 (57.5)

238.3 (51.3)

224.0 (40.6)

163.3 (37.5)

22.7

21.5

39.3

60.4

20.6

(10.8)

(9.1)

(13.3)

(19.9)

(6.2)

14.0 (3.0)

8.0 (1.3)

2.8 (0.6)

17.6

25.9

50.8

35.3

27.2

33.6

111.7

62.6

(8.3)

(11.0)

(17.2)

(11.6)

(8.2)

(7.2)

(18.6)

(.14.3)

1.1

1.2

0.4

Certificate of Assisnment Certificate of Participation

Total Deposit Substitutes To_ Money Market Transactions

Numbers

181.5 (86.1)

208.8 (88.5)

241.9 (81.9)

242.1 (79.7)

237.7 (72.1)

286.3 (61.7)

363.9 (60.5)

229.1 (45.3)

210.8 (100.0)

235.8 (100.0)

295.5 (100.0)

303.7 (100.0)

329.6 (100.0)

464.2 (100.0)

600.6 (100.0)

435.0 (100.0)

In paJrenth_;Is show the pe_

sharv: of each Insllrullt_lt

â&#x20AC;˘ denotes a plerce.ntalie share of [e_ than one percent. Details may not add to totals due to rmmdlng errors, Source of basic data: Central

Bank

In total _

market volume for that year.

198

SHORT-TERM

FINANCIAL

MARKETS

Table 22 (Updated) Money Market Transactionsby Percentage Shareof EachInstitution in Total Volume of Each Instrument June& Dec. 1983-84 IBCL

P/N

RPPVT RPGOV'I"

CERTASS CPN/FI

CPFINL

GOVSEC TOTAL

1.00 0.00 0.00 0.00

0._9 0.15 0,15 0.02

0.96 0.03 0.00 0.00

0.00 1.00 0.0O 0.00

0.00 0.00 1.00 0.00

0.27 0.69 0.04 0.00

0.00 0.91 0.09 0.00

0.32 0.67 0,,01 0.00

0"_/9 0.13 0.08 0.01

TOTAL 1.00 DECEMBER1983 COMMLBKS 1.00 INVESTHS 0.00 FIN COS 0.00 OTHERS 0.00

1.00

1,00

0,70 0.14 0.11 0.OS

0,63 0.18 0.18 0.01

0.89 0.01 0.00 0.10

0.00 0.00 1.00 0.00

0.65 0.34 0.01 0.OO

0,00 1.00 0.00 0.00

0.85 0.15 0.00 0.00

0;82

TOTAL

1.00

1_00

_UNE1984 COMMLBKS INVESTHS FIN COS OTHERS

1.00 0.00 0.00 0.00

0.54 0.97 0.24 0.03 0.19 0.00 0.03 0.00

0.89 0.00 0.00 0.11

0.00 O.00 1.00 0.00

0.58 0.39 0.03 O.00

0.00 1.00 0.00 0.00

0.59 O.41 0.00 0.00

0,75 0.14 _06 0;04

TOTAL

1.00

COMMLBK5 INVESTHS FIN COS OTHERS

1.00 0,00 0.00 0.00

0.55 0"29 0,15 0.01

1.00 0.00 0.00 0.00

0.07 O.OO 0.00 0.93

0.O0 O.00 0.00 O.00

0.90 0.10 0.00 O.00

0.00 1.00 0.00 O.00

0.50 0.50 0.00 0.00

0.75 0,19 0_05 _.O1

TOTAL

1.00

1,00

1.00

0.00

1.00

l_,0t;

)UNE 1983 COMMLBKS INVSTHS FIN COS OTHERS

+,,

0"09 (X06 0.04

• DECEMBER1984

5ource of Basle Data:CentralBank ofthePhlllpplrms Please n=fer toTable 18(Updated) fordata.

APPENDICES

199

Table 24 (Ulxlat_l) CommercialPaperOutstandingBalances Million Pesos,-1963-84

TOTAL

MANUFACTURING

NQIB

OTHERS

1983 JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER

940 545 83 98 102 102 93 84 410 647 661 739

358 148 37

1984 JANUARY FEBRUARY MA RCH APRIL MAY j UNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER

735 771 798 796 791 943 1,215 1,024 419 1,382 1,543 1,483

577 577 604 622 780 855 1,112 934 311 1,244 1,390 1,343

223 499 499 588

No1=.DataonExemptIssuers N.A. Source:Securities & Exchanse Commission

268 206 12 98 102 102 93 84 138 100 114 106

314 191 34 0 0 0 0 0 49 48 48 45

108 148 150 148

50 46 44 26 11 12 8 2 0 0 14 1

76 95 88 108 138 139 139

200

SHORT-TERMFINANCIALMARKIt_rs Table 25 (Updated) CommercialPaper Registeredand Exempt Issuers Total issuances,1983-1984

Registered Total

Mfg.

Issuers NQB

Others

Exempl_, IssuersTotal {, ,-

1983 January February March April May June July August September October November December

501 466 16 97 19 12 58 8 368 301 54 186

234 42 4 -233 276 85

118 377 12 97 19 12 58 8 96 13 42 89

149 47 1 -39 12 12 12

NA NA NA NA NA NA NA NA NA NA NA NA

136 178 95 108 281 259 533 461 353 655 521 275

47 47 75 91 271 162 447 369 272 595 505 273

89 131 9 16 92 80 92 81 60 3 -

-11 1 10 5 6 -13 2

NA NA NA NA NA NA NA NA NA NA NA NA

1984 january February March April May 'June july â&#x20AC;˘ August September October November December

APPENDICES

201

Table 26 (Updated) CommercialPaperApprovals in Million Pesos 1983-84 TOTAL 1983 j AN UARY FEBRUARY MARCH APRIL MAY

1,606 1,183 250 250 250

JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER

250 250 250 1,350 1,350 1,350 1,365

1,487 1,465 1,654. 1,654 1,654 1,723 1,723 1,823 2,724 2_774 2,914 2,914

MANUFACTURING

496 281

NQB

OTHERS

288 288 250 250 250

822 614 0 0 0

1,000 1,000 1,000 1,015

250 250 250 250 250 250 250

0 0 0 .100 100 100 100

1,015 1,015 1,165 1,165 1,165 1,165 1,165 1,265 2,265 2,265 2,405 2,405

332 332 343 343 343 413 413 413 413 413 413 413

140 118 146 146 146 145 145 145 46 96 96 96

1984 JANUARY FEBRUARY MARCH APRIL MAY j UNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER

Note: Data on Exempt Issuers N.A_ Source: Securities & F.xchanSe Commission

Table 30 (Updated) Money Market Transactiora InvoJvingCommefciaJPaper Million Peso_t977_4

INSTRUMENT

1977

1978

1979

1980

1981

1982

1983

1984 110 MOS)

RP'S PVT SECURITIES

22,709

21,480

39,270

60,369

20,605

13,840

7,5S7

2,818

Wt PVT SECURITIES

374

175

1,059

225

328

259

409

CERT OF PARTICIPATION WI PVT SECURITIES

197

312

555

892

190

241

23.280

21,967

39,877

62,320

21,020

14,409

7,833

3,250

8,196

3,045

7,923

8,571

20,460

22,762

8,946

11,134

756

744

1,829

1,885

3,454

11,894

15,046

9,987

8,952

3,789

9,752

10,456

23,914

34,656

13,992

21,121

32,232

25,756.

49,629

72,776

44,934

49,065

2t,825

24,371

210,760

235,795

295,483

303,739

329,621

462,823

600,560

435,030

3.T 1 7.49

1.30 2,33

.75 4.85

3'._J

_'Jb"0'

CE RT OF ASSIGNMENT

TOTAL DEP SUBSTITUTES W'/PVT SECURITIES CP'S NON-FIN'L CP_SFIN'L TOTAL CP'SSOLD OUTRIGHT TOTAL TRANSACTIONS W/PVT SECURITIES TOTAL MONEY MKT TRANSACTIONS

% SHARE OF TOTAL MONEY MARKET TRANSACTIONS. DEP SUBS W/CP CP SOLD OUTRIGHT TOTAL TRANSACTIONS _I_ PVT SF_TI_

11.05 4.25 --

Sourceof BasicData.:CentralBank

_ - T15.29

9.32 1.61

13.50 3.30

20.52 3.44

6.38 7.25

tO.92

16.80

2"_._

13.63

tgL-_O....

-r" O -I -t m _o ¢: -n m z > z (-) r" >. _1_ m .-I r._

The Author VICTORIA S. LICUANAN is an Associate Professor at the Asian Institute of Management where she is the Citibank Professor of Business Management. She teaches finance subjects in the second year Master in BusinessManagement Program. She is also the Director of the ASEAN COIME-USAID Small and Medium Business Improvement Program, an ASEAN-wide project doing research,case writing and teaching for small and medium businessmanagement. Before joining AIM, she was an AssistantVice-President at Bancom Development Corporation, where she headedthe Economic Research Department. She has done consulting work with a number of institutions and companies, including the Population Center Foundation, Sixto Roxas and Associates,and the Pragma Corporation (Washington). Mrs. Licuanan obtained her BA degree (Magna Cure Laude) from Maryknoll College and is a Ph.D. candidate in Economics at Harvard University.

203