General Banking Act

(RA 8791)
Banking Laws
 Definition of Banks

• Entities engaged in the lending of funds

obtained in the form of deposits. (Sec. 3.1)
• Entities duly authorized by the Monetary
Board to engage in the business of regularly
lending funds obtained regularly from the
public through the receipt of deposits of any
kind. (Sec. 2, RA 337, as amended)
 Elements
• Engaged in lending of funds
• Obtained in the form of deposits
• From the public, which shall mean 20 or more
persons. (Sec. 8.2, GBL)

• Republic v. Security Credit and Acceptance Corporation

• Central Bank v. Morfe
• Bañas v. Asia Pacific Finance Corporation
 Classification of Banks
 Universal Banks;
 Commercial Banks;
 Thrift Banks, composed of:
◦ Savings and Mortgage Banks,
◦ Stock savings and loan associations, and
◦ Private development banks, as defined in the “Thrift Banks Act”
(RA 7906).
 Rural Banks, as defined in the “Rural Banks Act” (RA 7353);
 Cooperative Banks, as defined in the “Cooperative Code”
(RA 6938);
 Islamic Banks, as defined in the “Charter of Al Amanah
Islamic Investment Bank of the Philippines”; and
 Other classifications as determined by the MB of the BSP
 Universal Banks
• Large commercial banks licensed by the BSP to
do both commercial and investment banking.
• Used to be called expanded commercial
banks.
• Have the highest capitalization requirement.
• They can exercise the powers of a commercial
bank, an investment house and invest in non-
allied enterprises. (Sec. 23, GBL)
 Universal Banks
• Non-allied enterprise-is an activity that has no
relation at all to banking, e.g. construction,
trading, manufacturing, mining,etc.
• Allied enterprises – are classified into:
– Financial Allied Enterprises – e.g. credit card,
leasing companies, investment houses, financing
insurance companies, etc..
– Non-financial allied Enterprises – e.g.
warehousing, safety deposit box, providing
computer services.
 Commercial Banks
• Ordinary or regular commercial banks, as
distinguished from a universal bank.
• They have lower capitalization requirement
than universal banks and cannot exercise the
powers of an investment house and invest in
non-allied enterprises.
• Powers (Sec. 29, GBL)
 Thrift Banks
• Savings and mortgage banks, stock savings
and loan associations, and private
development banks which are governed
primarily by the Thrift Banks Act. (RA 7906)
• Powers (Sec. 10, RA 7906)
 Rural Banks
• Mandated to make needed credit available
and readily accessible in the rural areas on
reasonable terms and which are governed
primarily by the Rural Banks Act (RA 7353)
• Powers (Sec. 12, RA 7353)
 Cooperative Banks
• Organized by, the majority shares of which is
owned and controlled by, cooperatives
primarily to provide financial and credit
services to cooperatives and governed
primarily by the Cooperative Code (RA 6938).
• Powers (Sec. 9, RA 6938)
 Islamic Banks
• Business dealings and activities are subject to
the basic principles and ruling of Islamic
Shari’a, such as the Al Amanah Islamic
Investment Bank of the Philippines created
under RA 6848.
• Powers (Sec. 6, RA6848)
 Other Banks
• Government-owned Banks
– Philippine Veteran’s Bank
• RA 3518
– Land Bank of the Philippines
• By virtue of RA 3844
– Development Bank of the Philippines
 Other Banks
• Non-Stock Savings and Loan Associations
– A non-stock, non-profit corporation
engaged in the business of accumulating
the savings of its members and using such
accumulations for loans to members to
service the needs of households.
 Other Banks
• Offshore Banks
– It is a branch, subsidiary or affiliate of a
foreign banking corporation which is duly
authorized by the BSP to transact offshore
banking business in the Philippines.
 Banks vs. Quasi-Banks &Trust Entities
BANKS QUASI-BANKS TRUST ENTITIES
Entities engaged in Entities engaged in A stock corporation or a
the lending of funds the borrowing of person duly authorized
by the Monetary Board
obtained in the funds through the to engage in trust
form of deposits. issuance, business as a trustee or
(Sec.3, GBL) endorsement or administer any trust or
assignment with hold property in trust or
recourse or on deposit for the use,
benefit of others. (Sec.
acceptance of 3, GBL)
deposit substitutes.
(Sec. 4, last par.,
GBL)
 Organization/Capital Structure
• Conditions/Requisites before monetary board
may authorize the organization of a bank or
quasi-bank:
– Entity is a stock corporation
– Its funds are obtained from the public,
which shall mean twenty or more persons;
– Minimum capital requirement prescribed
for each category of bank must be satisfied.
 Minimum Capital Requirement
Sec. 8.3, GBL; BSP Circular No. 257 (Series of 2000)
MINUMUM CAPITAL
BANK CATEGORY (IN MILLIONS)
Universal Banks P 4,950
Commercial Banks 2,400
Thrift Banks w/head office in Metro Manila 325
Thrift Banks w/head office outside Metro Manila 52
Rural Banks w/in Metro Manila 26
Cities of Cebu and Davao 13
1st/2nd/3rd class cities and 1st class municipalities 6.5
4th/5th/6th class cities and 2nd/3rd/4th class municipalities 3.9
5th and 6th class municipalities 2.6
 Foreign Stockholdings

• Foreign individuals and non-bank

corporations – up to 40% of the voting stock
of a domestic bank. (Sec.11)
• Foreign Banks Within seven (7) years- 100%
of the voting stock of only one (1) bank
organized under the laws of the Republic of
the Philippines.
• Same period - (60%-100%)
 Filipino Stockholdings
• DISCLOSURE REQUIRED
• Sec.12. Stockholdings of Family Groups of
Related Interests. – within the fourth degree
of consanguinity or affinity, legitimate or
common-law.
• Sec. 13. Corporate Stockholdings. - Two or
more corporations owned or controlled by
the same family group or same group of
persons
 Public Offering of Bank Shares
• A domestic bank applying for a UB authority
shall make a public offering of at least ten
percent (10%) of the required minimum
capital.
• The term public offering shall mean the offer
to sell equity shares to the public
stockholders. Sec. 2.2, BSP Circular No. 271
(Series of 2001)
 Directors and Officers
• Board of Directors – at least 5 and a maximum of
15, 2 of whom shall be independent directors;
merger or consolidation- not to exceed 21.
• Qualifications
– Own at least one share – Sec. 23,Corporation
Code
– Fit and proper rule – Sec. 16, GBL; Busuego v.
Court of Appeals, 304 SCRA 473 (1999)
– Other minimum qualifications – Guidelines for
the Establishment of Banks
 Disqualifications
• Criminal Conviction - convicted by final
judgment of an offense punishable by
imprisonment for a period exceeding six (6)
years, or a violation of this Code committed
within five (5) years prior to the date of his
election or appointment. Sec. 27, Corporation
Code
• Public officials – Sec. 19, GBL
• MB member/BSP personnel – Secs. 9 and 27,
NCBA
 Compensation and Other Benefits
• Under MB regulation in exceptional cases and
when circumstances warrant such as:
– When a bank is under comptrollership or
conservatorship; or
– When a bank is found by the Monetary
Board to be conducting business in an
unsafe or unsound manner; or
– When a bank is found by the Monetary
Board to be in an unsatisfactory financial
condition.
• The meetings of the board of directors
may be conducted through modern
technologies such as, but not limited to,
teleconferencing and video-
conferencing. Sec. 15, par. 3, GBL
 Powers of Directors - BSP Circular No.
283 (Series of 2001)
 Doctrine of Apparent Authority–
Philippine Commercial and International
Bank v. Court of Appeals, 350 SCRA 446
(2001)
• Prohibited Acts:
• (a) Making of false entries
• (b)Disclose to any unauthorized person
any information
• (c) Accept gifts, fees or commissions or
any other form of remuneration
• (d) Overvalue or aid in overvaluing any
security; or
• (e) Outsource inherent banking
functions.
 Incorporation
• The Securities and Exchange Commission shall not
register the articles of incorporation of any bank, or
any amendment thereto, unless the following are
present:
• Certificate of authority issued by the Monetary
Board, under its seal.
• Compliance with all requirements.
• Public interest and economic conditions justify the
authorization.
• There is reasonable assurance of the safety of
deposits and the public interest.
• A certificate of authority from the Bangko
Sentral. (Sec. 14)
•
 Operation
• Authority Required – BSP (Sec. 6, par. 1,
GBL)
• Monetary Board Determination –
Whether or not performing banking or
quasi banking functions (Sec. 6, par. 2,
GBL)
• Unauthorized Advertisement – Sec. 64,
GBL
 Operation
• Change in name – P.C. Javier & Sons, Inc. v.
Court of Appeals, 462 SCRA 36 (2005)
• Sanctions for operating without authority –
Sec. 6, par. 4, in rel. to Sec. 66, GBL
– Offender is:
• Director or Officer – suspension or
removal
• Corporation – dissolved by quo warranto
 Nature of Banking Business
• Sec. 2. Declaration Of Policy. - The State
recognizes the vital role of banks providing an
environment conducive to the sustained
development of the national economy and the
fiduciary nature of banking that requires high
standards of integrity and performance. In
furtherance thereof, the State shall promote and
maintain a stable and efficient banking and
financial system that is globally competitive,
dynamic and responsive to the demands of a
developing economy.
• Subject to reasonable regulation by the State:
Central Bank of the Philippines v. CA
• “…..the banking business is properly subject to
reasonable regulation under the police power of the
state because of its nature and relation to the fiscal
affairs of the people and the revenues of the state.
Banks are affected with public interest because they
receive funds from the general public in the form of
deposits. Due to the nature of their transactions and
functions, a fiduciary relationship is created between
the banking institutions and their depositors.
Therefore, banks are under the obligation to treat with
meticulous care and utmost fidelity the accounts of
those who have reposed their trust and confidence in
them.”
• Strikes and Lockouts: (Sec. 22, GBL, Art. 263 g,
Labor Code)
– Indispensable to the national interest.
– If nor settled after 7 calendar days, report
the same to the Secretary of Labor who will
assume jurisdiction.
– President of the Philippines may intervene
at any time.
 Degree of diligence required– Simex
International Inc. v. Court of Appeals
 “The point is that as a business affected with
public interest and because of the nature of
its functions, the bank is under obligation to
treat the accounts of its depositors with
meticulous care, always having in mind the
fiduciary nature of their relationship. In the
case at bar, it is obvious that the respondent
bank was remiss in that duty and violated that
relationship.”
 Bank of the Philippine Islands v. Intermediate
Appellate Court
 “There is no merit in petitioner's argument that it
should not be considered negligent, much less held
liable for damages on account of the inadvertence of
its bank employee for Article 1173 of the Civil Code
only requires it to exercise the diligence of a good
father of family.”
 “The point is that as a business affected with public
interest and because of the nature of its functions,
the bank is under obligation to treat the accounts of
its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship. . . .”
 When utmost diligence required
 In dealing with accounts of depositors –
Philippine Banking Corporation v. Court of
Appeals
 “The fiduciary relationship means that the bank’s
obligation to observe high standards if integrity
and performance is deemed written in every
deposit agreement between a bank and its
depositor.”
 “A bank is liable for the wrongful acts of its
officers done in the interest of the bank or in
their dealings as bank representatives but not for
acts outside of the scope of their authority.”
 In selection and supervision of employees –
Philippine Commercial and International
Bank v. Court of Appeals
 “A bank will be held liable for the negligence
of its officers or agents when acting within the
course and scope of their employment. It may
be liable for the tortuous acts of its officers
even as regards that species of tort of which
malice is an essential element.”
 To be mortgagees in good faith– Cruz v. Bancom
Finance Corporation
 “Banks, indeed, should exercise more care and
prudence in dealing even with registered lands, than
private individuals, for their business is one affected
with public interest, keeping in trust money
belonging to their depositors, which they should
guard against loss by not committing any act of
negligence which amounts to lack of good faith by
which they would be denied the protective mantle of
the land registration statute, Act [No.] 496, extended
only to purchasers for value and in good faith, as well
as to mortgagees of the same character and
description.”
 In the custody of documents; integrity of records – Heirs
of Eduardo Manlapat v. Court of Appeals
• “Simple rationalization would dictate that a
mortgagee-bank has no right to deliver to any
stranger any property entrusted to it other than to
those contractually and legally entitled to its
possession. “
• “The bank should not have allowed complete
strangers to take possession of the owner’s duplicate
certificate even if the purpose is merely for
photocopying for a danger of losing the same is more
than imminent. “
 Exception: does not cover transactions outside bank
deposits – Reyes v. Court of Appeals
 “…the degree of diligence required of banks, is more
than that of a good father of a family where the
fiduciary nature of their relationship with their
depositors is concerned. In other words banks are
duty bound to treat the deposit accounts of their
depositors with the highest degree of care. But the
said ruling applies only to cases where banks act under
their fiduciary capacity, that is, as depositary of the
deposits of their depositors. But the same higher
degree of diligence is not expected to be exerted by
banks in commercial transactions that do not involve
their fiduciary relationship with their depositors.”
 Applicability to government financial
institutions – Government Service Insurance
System v. Santiago, 414 SCRA 563 (2003)
 “The petitioner is not an ordinary mortgagee.
It is a government financial institution and,
like banks, is expected to exercise greater care
and prudence in its dealings, including those
involving registered lands.”
• Liability for negligence
• Rules on determination of negligence –Consolidated Bank
and Trust Corporation v. Court of Appeals, 410 SCRA 562
(2003)
• Solidbank is bound by the negligence of its employees under
the principle of respondeat superior or command
responsibility. The defense of exercising the required
diligence in the selection and supervision of employees is not
a complete defense in culpa contractual, unlike in culpa
aquiliana.
• The bank must not only exercise “high standards of integrity
and performance,” it must also insure that its employees do
likewise because this is the only way to insure that the bank
will comply with its fiduciary duty.
• Award of damages –Prudential Bank v. Court
of Appeals, 328 SCRA 264 (2000)
• “Even if malice and bad faith was not
sufficiently proved in the instant case, the fact
remains that petitioner committed a serious
mistake.
• “The bank’s negligence was the result of lack
of due care and caution required of managers
and employees of a firm engaged in so
sensitive and demanding business as
banking.”
• Right to recover against erring employee –
Pacific Banking Corporation v. Court of
Appeals, 173 SCRA 102 (1989)
• “….employers shall be liable for the damages
caused by their employers….acting within the
scope of their assigned task.”
• “whoever pays for the damages cause by his
dependents or employees may recover from
the latter what he has paid or delivered in
satisfaction of the claim.”
 Basic Function of Banks
• LOAN FUNCTION
– Mobilization of savings and allocating resources.
• Grant, Purpose, and Requirement of Loans,
Secs. 39 and 40, GBL
– Only in amounts and for the periods of time
essential for the effective completion of the
operations to be financed.
– Purpose: Stated. If not used for the said purpose,
terminate the loan and demand for immediate
repayment.
 Grant, Purpose, and Requirement of
Loans, Secs. 39 and 40, GBL
• Capacity of Debtor to fulfill his commitment.
• Statement of assets and liabilities and the like
• Financial Statements submitted to the BIR for
taxation purposes.
• If false or incorrect, bank may terminate the
loan and demand repayment or liquidation of
the obligation.
 Prohibited Transactions – Secs.
55.1(c), 55.1(d), and 55.2, GBL
• 55.1. No director, officer, employee, or agent of any
bank shall —
• (c) Accept gifts, fees or commissions or any other
form of remuneration in connection with the
approval of a loan or other credit accommodation
from said bank;
• (d) Overvalue or aid in overvaluing any security for
the purpose of influencing in any way the actions of
the bank or any bank; or
 Prohibited Transactions – Secs.
55.1(c), 55.1(d), and 55.2, GBL
• 55.2. No borrower of a bank shall —
• (a) Fraudulently overvalue property
• (b) Furnish false or make misrepresentation or
suppression of material facts
• (c) Attempt to defraud the said bank in the event
of a court action to recover a loan or other credit
accommodation; or
• (d) Offer any director, officer, employee or agent
of a bank any gift, fee, commission, or any other
form of compensation in order to influence
• SINGLE BORROWER’S LIMIT
• Total amount of loans, credit accommodations
and guarantees that may be extended to any
person, partnership, association, corporation or
other entity shall at no time exceed 25% of the
net worth of a bank. (Sec. 35, GBL)
• + 10%, adequately secured, unless MB prescribes
otherwise
• Exceptions:
– MB otherwise prescribe for reasons of national
interest.
– Deposits of rural banks with government-
owned of controlled financial institutions.
• RESTRICTIONS ON BANK EXPOSURE TO DOSRI
• No director or officer of any bank shall directly
or indirectly, for himself or as the
representative or agent of others, borrow
from such bank nor shall he become a
guarantor, indorser or surety for loans form
such bank or others or in any manner be an
obligor or incur any contractual liability to the
bank except with the written approval of the
majority of all directors of the bank,
excluding the director concerned. (Sec. 36,
GBL)
• ARMS LENGTH RULE
• Account should be upon terms not less
favorable to the bank than those offered to
others.
• EXTENT OF LOAN TO DOSRI
• In excess of five percent (5%) of the capital
and surplus of the bank, or in the maximum
amount permitted by law, whichever is lower.
• Waiver of the secrecy of his deposits. (Sec. 26,
NCBA)
 Interest – Art. 1956, Civil Code
• No ceiling – Sec. 1-a, 4-a, 45 of Usury Law;
Bacolor v. Bango Filipino Savings and
Mortgage Bank, Dagupan City Branch, 515
SCRA 79 (2007)
– “For sometime now, usury has been legally
non-inexistent and that interest can now be
charged as lender and borrower may agree
upon.”
• In the absence of stipulation
• Escalation clause; when allowable – Art. 1308,
Civil Code; Philippine National Bank v. Court
of Appeals, 196 SCRA 536 (1991)
1. There can be an increase in interest if
increased by law or by the Monetary Board;
and
2. In order for such a stipulation to be valid, it
must include a provision for reduction of the
stipulated interest in the event that the
applicable maximum rate of interest is
reduced by law or by the Monetary Board.
• Floating rates of interest –Consolidated
Bank and Trust Corporation (Solid Bank) v.
Court of Appeals, 356 SCRA 671 (2001)
• “A STIPULATION FOR A FLOATING RATE OF INTEREST
IN A LETTER OF CREDIT IN WHICH THERE IS NO
REFERENCE RATE SET EITHER BY IT OR BY THE
CENTRAL BANK, LEAVING THE DETERMINATION
THEREOF TO THE SOLE WILL AND CONTROL OF THE
LENDER BANK IS INVALID.”
 Basic Function of Banks
• DEPOSIT FUNCTION
• entities that only extend loans but do not accept
deposits from the public is not considered performing
banking business.
• NATURE OF DEPOSIT
• Deposits as Simple Loans
• A person who receives a loan of money or
any other fungible thing acquires the
ownership thereof, and is bound to pay to
the creditor an equal amount of the same
kind and quality.
• RELATIONSHIP OF BANK AND DEPOSITOR
• Debtor and Creditor : Contract of Loan Art.
1980, NCC
“fixed, savings and current deposits of money
in banks and similar institutions shall be
governed by the provisions concerning simple
loans.”
However, unlike ordinary contracts of simple
loan, bank deposits are subject to special
rules provided for by special laws as well as
BSP regulations.
• Serrano v. Central Bank
• “ Bank deposits are in the nature of
irregular deposits. They are really loans
because they earn interest…”
• “…Failure of the respondent bank to honor
the time deposit is failure to pay its
obligations as a debtor and not a breach of
trust arising from a depositary’s failure to
return the subject matter of the deposit.”
 Bank as Debtor
• Deposit is voluntary agreement; “Know Your
Customer” standards
• Bank acquires ownership of money deposited;
obligation to pay amount, but no obligation to
return the same money–BPI Family Bank v.
Franco, 538 SCRA 184 (2007)
• Specific or determinate thing v. generic and
fungible.
• Obligation is to pay in equal amount upon
demand, but not the exact same thing
deposited.
 Bank as Debtor
• Deposit is voluntary agreement; “Know Your
Customer” standards
• Circular No. 251 (07/07/00), as amended by
Circular No, 333 (05/30/02)
• “Know your client policy”
• Report to AMLC any suspicious transactions,
not to allow anonymous accounts or accounts
under fictitious names.
 “KYC” Policy
• Circular No. 258 (09/06/00)
– Establish and record the true identity of clients
under a numbered account system as
authorized under existing banking rules and
regulations.
• Circular No. 279 (04/02/01)
– Phase out within 1 year all anonymous or
fictitious accounts and submit annually a
certification that there is monitoring of
compliance with existing AMLA regulations.
 Bank as Debtor
• Payment to proper party-depositor –Bank of
the Philippine Islands v. Court of Appeals, 232
SCRA 302 (1994)
• “ Payment made by the debtor to the wrong
party does not extinguish the obligation as to
the creditor who is without fault or
negligence, even if the debtor acted in utmost
good faith and by mistake as to the person of
the creditor, or through error induced by fraud
of a third person.”
 Bank as Debtor
• Deposits are not preferred credits – Central Bank
v. Morfe, 63 SCRA 114 (1975)
• “A contrary rule or practice would be productive
of injustice, mischief and confusion. To recognize
such judgments as entitled to priority would
mean that depositors in insolvent banks, after
learning that the bank is insolvent as shown by
the fact that it can no longer pay withdrawals or
that it has closed its doors or has been enjoined
by the Monetary Board from doing business,
would rush to the courts to secure judgments for
the payment of their deposits.”
 Bank as Debtor
• Bank has right to compensation –Bank of
the Philippine Islands v. Court of Appeals,
512 SCRA 620 (2007)
• The relationship between banks and
depositors has been held to be that of
creditor and debtor. Thus, legal
compensation may take place.
Bank’s Duty of Utmost Care– Sec. 2, GBL
• Declaration Of Policy. - The State recognizes
the vital role of banks providing an
environment conducive to the sustained
development of the national economy and
the fiduciary nature of banking that requires
high standards of integrity and performance.
In furtherance thereof, the State shall
promote and maintain a stable and efficient
banking and financial system that is globally
competitive, dynamic and responsive to the
demands of a developing economy.
 KINDS OF DEPOSIT
• Demand Deposits – Secs. 58-60, NCBA
• Savings Deposits
• Negotiable Order of Withdrawal (NOW)
Accounts
• Time Deposits
• Foreign Currency Deposits – Secs. 2 and 3,
Foreign Currency Denominated Accounts
 CAPACITY OF DEPOSITORS
• Minors – Sec. 1, Presidential Decree No. 734;
Sec. 22, Thrift Banks Act
• Married Women – Sec. 5, Republic Act No. 7192
• Corporations: Through signatories designated
by Board of Directors – Sec. 23, Corporation
Code
• Bank Officers and Employees: Prohibited from
maintaining demand deposits or current
accounts in banking office where they are
assigned –Sec. 204, MRB
 OPENING OF DEPOSIT ACCOUNTS
• Know Your Customer Standards: At least 3
specimen signatures updated every 5 years, ID
optional
• Prohibitions:
– Anonymous Accounts/Fictitious Names – Sec.
9(a), AMLA
– Pseudonyms – Art. 178, Revised Penal Code
– Exception: Numbered accounts – Sec. 9(a),
AMLA; Sec. 3(1), FCDA
– Joint Accounts – Arts. 485, 1207 and 1208, Civil
Code
 OTHER SERVICES/FUNCTIONS/OPERATIONS
– Sec. 53, pars. 1-3, GBL
• Custodian of Funds, Documents, Valuable Objects –
Sec. 53.1, GBL
• Financial Agent – Sec. 53.2, GBL
• Collection/Payment Agent – Sec. 53.3, GBL
• Financial Adviser – Sec. 53.4, GBL
• Renting Out Safety Deposit Boxes – Sec. 53.5, GBL;
CA Agro-Industrial Development Corporation v.
Court of Appeals, 219 SCRA (1993)
• Issue Guarantees – See Sec. 74, General Banking Act
• Credit Card Operations
 Prohibited Acts
• Insurance business – Sec. 54, GBL; Sec. 2,
Insurance Code
• Outsourcing of bank functions – Sec.
55(1)(e), GBL
Penalty for Violations – Sec. 66, GBL;
Sec. 34-37, NCBA;
– Perez v. Monetary Board, 20 SCRA 592
(1967)
• Fine, imprisonment
• Suspension or removal of director or
officer
• Dissolution of bank
 Ratio of net worth to total risk assets
• The Monetary Board will prescribe the
minimum ratio which the net worth of a bank
must bear to its total risk assets.
• If there is non-compliance, MB may:
– Limit or prohibit distribution of net profits and
require the same to be used to increase capital
accounts until the minimum ratio is achieved.
– Restrict or prohibit acquisition of major assets and
new investments until minimum required capital
ratio is achieved.