This document defines banks and their classification under Philippine law. It discusses the key elements of banks, including that they engage in lending funds obtained through deposits from the public. It also classifies the different types of banks like universal banks, commercial banks, thrift banks, rural banks, and cooperative banks. The document provides details on the capital requirements, powers, organization, directors and officers of the different banks.
This document defines banks and their classification under Philippine law. It discusses the key elements of banks, including that they engage in lending funds obtained through deposits from the public. It also classifies the different types of banks like universal banks, commercial banks, thrift banks, rural banks, and cooperative banks. The document provides details on the capital requirements, powers, organization, directors and officers of the different banks.
This document defines banks and their classification under Philippine law. It discusses the key elements of banks, including that they engage in lending funds obtained through deposits from the public. It also classifies the different types of banks like universal banks, commercial banks, thrift banks, rural banks, and cooperative banks. The document provides details on the capital requirements, powers, organization, directors and officers of the different banks.
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.