Banking Laws Lecture Notes

2017-18 1st Sem.

1
• What is a bank; basic functions;
• Are lending and deposit taking the
only functions of banks;
• Is an institution engaged in lending
funds obtained from the public
deemed engaged in banking business;
• Case – investment company; if
accepting deposits and lending out the
money received;
2
• Investment house, an enterprise engaged
regularly or in an isolated basis in underwriting of
securities of another person or enterprise,
including government securities; subject to the
regulations of the SEC;
• Underwriting, act of guaranteeing distribution
and sale within the PH of securities, on a public or
private placement basis;
• Banks may perform investment house functions
directly thru a separate and distinct department
or other similar units of the bank, or indirectly
thru a subsidiary; cannot do both;
3
• Case – obtaining deposits in
small amounts from immigrants
to be sent to country of
depositors;
• Case – department store
receiving deposits, issues
passbook, pays interest, allows
withdrawal in money or goods; 4
• Case – investment house engaged in investing,
reinvesting or trading in securities; not a bank,
not lending money obtained from deposits;
• What are quasi-bank; do not accept deposits;
engaged in borrowing funds through the issuance,
endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes of
relending or purchasing of receivables and other
obligations;
• What are deposit substitutes; alternative forms
of obtaining funds from the public other than
deposits;
5
• What are deposit substitutes; alternative forms
of obtaining funds from the public other than
deposits; through the issuance, endorsement, or
acceptance of debt instruments for the
borrower’s own account, for the purpose of
relending or purchasing of receivable and other
obligations;
• Are quasi-banks the same as banks;
• Can banks do the activities of quasi-bank;
universal & commercial banks without prior
authority of MB; other banks with prior authority
of MB;
6
• Essential elements of quasi-banking; p. 3
• Case – commercial/industrial/other non-financial
companies borrowed funds for their own needs;
are they engaged in quasi-banking; note that
purpose is not for relending or purchase of
accounts receivables;
• Case – institution engaged in buying and selling of
instruments “without recourse”; is it engaged in
quasi-banking;

7
• What is the policy of the state on the business of
banking; p. 4; state recognizes
– the vital role of banks in providing an environment
conducive to the sustained national economy;
– the fiduciary nature of banking that requires high
standards of integrity and performance;
– 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;

8
• Public confidence is the anchor of any banking
system;
• Consequences of the policy of the state on the
banking business
– Banking business is subjected to reasonable regulation under the
police power; for the protections of the depositors and stockholders;
proper management for public welfare; business is affected with
public interest;
– Required to exercise utmost diligence in the handling of deposits;
treat the depositors’ accounts with utmost fidelity; must record
transactions accurately and promptly;
– Special rules on strikes and lockouts; reported by the BSP if
unsettled in 7 calendar days to the Sec. of Labor who may assume
jurisdiction and decide the dispute or certify case to the NLRC for
compulsory arbitration; Pres. may at any time intervene and assume
jurisdiction to settle or terminate the case; 9
• What duty is imposed on the Pres. or CEO of
banks in case of strikes or lockout; immediately
inform the Dep. Gov. of the Supervision and
Examination Section; state cause; position of the
bank on its legality; bank operations affected;
• What laws govern the establishment and
operations of banks in the Phil.;

10
• What is meant by the statement – the duty of a bank to exercise
the highest degree of diligence applies only to the handling of
deposits; not required in commercial transactions that do not
involve their fiduciary relationship with their depositors;
• Case (Reyes v. CA, Aug. 15, 2001) – purchase of foreign exchange
demand draft; draft purchased to pay for registration and
accommodation as delegates in a conference in Australia; draft
was dishonored by foreign correspondent bank; due to an
erroneous reading of PH bank’s cable message; allegedly no
deposit account to cover the amount; the PH repeatedly notified
and confirmed the draft with the foreign bank; acdg. to the court,
PH bank had done everything it could and cannot be held liable
for the foreign bank’s error; PH bank not required to exercise the
highest degree of care or diligence in the transaction, a
relationship of buyer and seller, not involving performance of
deposit function; a relationship of buyer and
seller; 11
• What form of organization is required for banking
institutions; Where do they apply for
incorporation; What requirement is imposed by
law before an entity applying for incorporation
may be incorporated by the SEC;
• What can be done in case an entity has been
incorporated without the required authority from
the BSP and is doing banking functions;
incorporation may be revoked; officers concerned
may be subject to criminal prosecution;

12
• In case an entity is alleged to be doing banking
business or activities, who shall determine
whether it is performing banking or quasi-banking
functions;
• How may the MB proceed to make a
determination on whether an entity is engaging in
banking functions;

13
• Read Sec. 64 of the GBL on unauthorized advertisement
or business representation as a bank; p. 9
• Case (RP v. Security Credit and Acceptance Corp.,
1.23.1967) – corp. was alleged to have engaged in
banking operations without authority; registered with
SEC in 1961; established 74 branches in principal cities
and town; campaigned inducing public to open 59,463
savings deposit accounts; total deposits of P1.6 million
plus; SG commenced quo warranto proceedings for
dissolution of the corp. and appt. of a receiver;
withdrawals of deposits dishonored; transactions
partook of the nature of banking; law violated (GBA);
corp. ordered dissolved; appt. of receiver made
permanent, to wind up affairs of corp.;
14
• Case (Central Bank of the Phil. V. Morfe, 6.30.1967) –
respondent First Mutual Savings and Loans Org., Inc., non-
stock corp., with main purpose to encourage … and
implement savings and thrift among its members and to
extend financial assistance in the form of loans to members
(founding, participating, honorary); CB conducted
investigation, sought seize and seizure order from the court
which was questioned in court; CB opinion that the org. is
a banking institution; CB published notice that the org. is
not authorized to accept deposit of funds from the public,
etc.; findings include that anybody can be a depositor and
thus be a participating member; open to public for deposit
accounts; search and seizure ordered by the court did not
constitute unreasonable search and seizure;
15
Philippine Banking Laws, Rules and Regulations

• The New Central Bank Act (RA No. 7653), passed on June 14, 1993;
• The General Banking Law of 2000 (RA No. 8791), eff. June 13, 2000);
superseded RA 337, General Banking Act (1949);
• Other banking laws:

- Deposit Secrecy Law (RA No. 1405)

- Foireign Currency Deposit Law (RA No. 6426)
- An Act Liberalizing the Entry and Scope of Operation of
Foreign Banks in the Philippines ands for Other Purposes (RA No. 7721); An Act
Allowing the Full Entry of Foreign Banks in the Philippines Amending for the
Purpose Republic Act No. 7721 (RA No. 10641)
- Philippine Deposit Insurance Corporation Law (RA 3591); RA No. 9576
amendment;
- Charters of Government-owned and –controlled banking
institutions (Land Bank of the Philippines; Development Bank
of the Philippines);
- Rural Banks Act of 1992 (RA No. 7353)
- Thrift Banks Act of 1995 (RA No. 7906)
- An Act Estasblishing A Credit Information System and for Other Purposes (RA No
9510)
- BSP regulations and issuances
Philippine Banking Laws, Rules and Regulations

• Other laws related to banking

• Anti-Money Laundering Act of 2001 (RA No
9160 as amended by RA 9194 eff. 7.22.2002;
• Human Security Act of 2007 (An Act to
Secure the State and Protect our People
from Terrorism, RA 9372 passed on
3.6.2007;
Banko Sentral ng Pilipinas (BSP)
• Independent central monetary authority (Art. XII, Sec. 20
of the Constitution)
• Responsibilities of the BSP:
- Maintain price stability;
- Supervise the banking system
• BSP monetary instruments

- Issue of currency
- Open market operation
- Operations in gold and foreign currency
- Requirements on bank reserves
- Credit facilities to banks
- Acceptance of deposits
- Custodian of reserves
- Emergency restriction on foreign exchange operations
 Cont. - Banko Sentral ng Pilipinas (BSP)

• Other responsibilities of BSP

- Provider of facilities for clearing

- Lender of last resort

- Banker and financial advisor of the government

- Emergency restriction on foreign exchange operations

- Administrator of the payments and settlements system

 Cont. - Banko Sentral ng Pilipinas (BSP)

• BSP supervision
- banks are subject to supervision by BSP;
- restriction on DOSRI loans;
- single borrower’s limit
 Cont. - Banko Sentral ng Pilipinas (BSP)

• BSP supervision includes

- Issuance of regulations
- Examination/audit
- Enforcement of banking laws, rules and regulations
- Administrative sanctions
- Initiation of criminal sanctions
- Receivership
- Rehabilitation
- Liquidation
 Cont. - Banko Sentral ng Pilipinas (BSP)

• BSP initiatives
- On-site Issuance of regulations
- Request for confirmation from bank clients
- Validation for government agencies
- Receipt of complaints from the public
- Request for assistance from other government offices
- Disqualification proceedings Receivership
- Rehabilitation
- Liquidation
 Cont. - Banko Sentral ng Pilipinas (BSP)

• BSP measures

- Capital Adequacy Ratio (CAR)

- CAMELS (Capital, Asset quality, Management, Earnings,

Liquidity, Sensitivity to risk) Rating -
 Cont. - Banko Sentral ng Pilipinas (BSP)

• Appointment of a conservator

- based on report submitted by the appropriate

supervising or examining BSP department to the
Monetary Board;

- bank or quasi-bank is in a state of continuing inability or

unwillingness to maintain a condition of liquidity deemed
adequate to protect the interest of depositors and
creditors;

- power to take charge of assets, liabilities and

management; reorganize the management; collect; all
powers necessary to restore to the bank to viability;
 Cont. - Banko Sentral ng Pilipinas (BSP)

• Appointment of a conservator, cont.

- conservator reports and is responsible to the Monetary

Board;

- power to overrule or revoke the actions of the previous

management and board of directors of the bank or quasi-
bank;

- conservator should be competent and knowledgeable in

bank operations and management;

- conservatorship shall not exceed one year;

 Cont. - Banko Sentral ng Pilipinas (BSP)

• Appointment of a conservator, cont.

- Monetary Board shall terminate conservatorship when

satisfied that bank or QB can continue to operate on its own, or
the continuance in business would involve probable loss to
depositors or creditors (receivership and/or liquidation may then
be appropriate);
 Cont. - Banko Sentral ng Pilipinas (BSP)

• Receivershiip and Liquidation

- based on report by the head of the supervising or examining

BSP department;

- PDIC shall be the designated receiver for banks; for QB, any
person of recognized competence in banking or finance;
 Cont. - Banko Sentral ng Pilipinas (BSP)

• Receivershiip and Liquidation, cont.

- grounds for designation of receiver

a) inability to pay liabilities as they become due in the

ordinary course of business; not include inability to
pay caused by extraordinary demands induced by
financial panic in the banking community;

b) insufficient realizable assets, as determined by BSP,

to meet its liabilities;

c) cannot continue in business without involving

probable losses to depositors or creditors;
 Cont. - Banko Sentral ng Pilipinas (BSP)

• Receivershiip and Liquidation, cont.

- grounds for designation of receiver

d) willful violation of a cease and desist order that has

become final, involving acts or transactions which amount to fraud
or a dissipation of assets;

- MB may summarily and without need for prior hearing forbid

the bank or QB from doing business in the Philippines;

- receiver shall gather and take charge of all assets and

liabilities; administer same for benefit of its creditors; exercise
the general powers of a receiver;
 Cont. - Banko Sentral ng Pilipinas (BSP)

• Receivershiip and Liquidation, cont.

- receiver shall not (except for administrative expenses) pay or

commit any act that will involve the transffer or disposition of any
asset;

- receiver may place the funds in non-speculative investments;

- receiver shall determine (as soon as possible but not later 90

days from take over) whether bank or QB may be rehabilitated or
placed in a condition to resume business with safety, subject to
prior approval of MB;

- otherwise, MB shall notify the board of directors in writing of

its findings and direct the receiver to liquidate the bank or QB;
 Cont. - Banko Sentral ng Pilipinas (BSP)

• Receivershiip and Liquidation, cont.

- actions of the MB for receivership and liquidation shall be final

and executory, and not be set aside by court except on petition for
certiorari for lack or excess of jurisdiction or grave abuse of
discretion as to amount to lack or excess of jurisdiction; petition
shall be filed by stockholders representing majority of the capital
stock within 10 days from receipt of notice
 Cont. - Banko Sentral ng Pilipinas (BSP)

• administrative sanctions

- without prejudice to criminal sanctions;

- imposition of
* fines;
* suspension of redicsounting privileges or access to
BSP clearing facilities;
* suspension of lending or forex operations or authority
to accept new deposits or make new investments;
* suspension of interbank clearing privileges;
* revocation of MB license;
 Cont. - Banko Sentral ng Pilipinas (BSP)

• administrative sanctions

- for any willful violation of bank’s charter or by-laws;

- willful delay in the submission of reports or publication
thereof;
- refusal to permit examination into the affairs of the bank
or QB;
- any willful making of a false or misleading statement to
the examiners;
- willful failure or refusal to comply with, or violation of, any
banking law or order, instruction or regulation issued by
the MB;
- commission of irregularities, and/or conducting business
in an unsafe or unsound manner
 The General Banking Laws of 2000
• Bank are entities engaged in the lending of funds obtained
in the form of deposits from the public;

• Classifications of banks

- universal banks
- commercial banks
- thrift banks (savings and mortgage banks; stock savings
and loan association; private development banks)
- rural banks
- cooperative banks
- Islalmic banks;
- other classification of banks as determined by the
Monetary Board of the BSP
 The General Banking Laws of 2000
• Bank Products

- Deposits
- Deposit substitutes (money market instruments)
- Investment management accounts (IMA)
- Trust instruments
- Government securities
- Special deposit accounts (SDAs)
- Tier 2 capital notes (unsecured and subordinated long
term notes/BSP Circular 503)
- Derivatives
 Cont. - The General Banking Laws of 2000
• Conducting business in an unsafe and unsound manner (Sec. 56
of RA No. 8791)

1. causes material loss of damage to the bank;

2. causes any undue injury, or has given unwarranted

benefits, advantage or preference to the bank or any
party;

3. involves transaction manifestly and grossly

disadvantageous to the bank;
 Cont. - The General Banking Laws of 2000
• Conducting business in an unsafe and unsound manner
includes the following (BSP Circular 341, Aug. 6, 2002, amended by
Circular 640, Jan. 16, 2009)

1. operation that produces deficit without adequate

measures to ensure a surplus;

2. high cost deposits (50% over comparative market

median rates);

3. high incidence of spurious and fraudulent loans;

4. most borrowers have impaired or limited credit history;

5. loan rates excessively high (50% over comparative

market median);
 Cont. - The General Banking Laws of 2000
• Categories of acts/ conducting business in an unsafe and
unsound manner

1. scheme to generate high income for bank; (e.g.

investments in sub-prime papers without
authorization; marketing of unregistered foreign
securities; multiple/fraudulent sale of securities;
speculative investments in forex;)

2. activities arising from poor governance; (e.g. Allowing

overdrafts and acceptance of second-endorsed checks
without credit approval; purchase of securities against
mere promise to deliver; allowing offsite deposit
transactions; acceptance; acceptance of over-
appraised or fictitious collaterals;
 Cont. - The General Banking Laws of 2000
• Categories of acts/ conducting business in an unsafe and
unsound manner

3. scheme to project healthy financial condition; (e.g.

window dressing; concealment of transactions;
unauthorized conversion of deposit into equity);

4. schemes to abstract bank funds; (e.g. Marketing of

high interest deposits; fictitious loans; use of dummy
borrowers; diversion of loan proceeds; unregistered
deposit transactions; grossly disadvantageous real
estate transactions);
 Enactment of Republic Act (RA) No. 10641 (Approved on July
15, 2014, effective on August 7, 2014) – An Act Allowing the Full
Entry of Foreign Banks in the Philippines Amending for the
Purpose Republic Act No. 77231 (New Law)
• Approval on May 18, 1994 of RA No. 7721 – An Act
Liberalizing the Entry and Scope of Operation of Foreign
Banks in the Philippines ands for Other Purposes
• RA No. 10641 aims to build a stronger banking industry by
further liberalizing the entry of foreign banks in the Philippines
• Modes of entry
1. acquiring up to 100% of voting stock of an existing
bank (instead of 60%);
2. investing in up to 100% of voting stock of a new banking
subsidiary incorporated under the Philippine laws (instead
of 60%);
3. establishing branches with full banking authority
Cont. – RA No. 10641…
• 5 additional branches allowed (instead of 3 additional
branches)
• Removal of restriction that foreign banks must establish their
branches within 5 years from the effectivity of the law
• Removal of restriction that during the 5 year period, only 6
new foreign banks can be allowed to establish branches (plus
additonal 4 foreign banks as the President may allow)
• Locally incorporated subsidiaries of foreign banks have same
branching privileges as domestic banks of the same category
• Removal of the rule that a foreign bank may avail itself of only
one mode of entry
• Removal of the restriction that a foreign bank or a Philippine
corporation may own up to 60% of voting of only one
domestic bank or new banking subsidiary
Cont. – RA No. 10641…
• Monetary Board shall ensure that control of at least 60% of the
resources of the entire banking system is held by domestic
banks which are majority-owned by Filipinos
• Only “established, reputable and financially sound foreign
banks” shall be allowed entry
• Maintains the requirement that the foreign bank must be
“widely-owned and publicly listed in its country of origin, unless
the foreign bank applicant is owned and controlled by the
government of its country of origin
• Restrictions under the Constitution and other laws shall apply
- ownership in local bank shall not exceed 40% of its capital;
- alien board members not exceed 40% of board membership;
- no foreigner may intervene in the management, operation,
administration or control of local bank, except technical
personel as authorized by the Secretary of Justice
Cont. – RA No. 10641…

• Foreign banks are allowed to bid and take part in the

foreclosure of real estate mortgaged to them, avail of
enforcement and other proceedings, and take
possession of the mortaged property for a period not
exceeding 5 years from actual possession;

title shall not be transferred to foreign bank; if the winning

bidder, it shall transfer its rights to a qualified Philippine
national; in case of failure, shall pay penalty of ½ of 1% per
annum of the price until actual transfer;

• Note – the citizenship of a corporation which is a stockholder

in a bank shall follow the citizenship of the controlling
stockholders of the corporation, regardless of the place of
incorporation

• Monetary Board shall issue the implementing rules

• How may a universal bank perform the
functions of an investment house?
• What is the requirement for a public
offering for universal banks? Extent?
• What does public stockholders refer to?
• Are commercial banks also allowed to
invest in equities of enterprises? How
does it differ from the power of universal
banks to invest in equities?

44
• Classification of Banks
• Universal banks (expanded commercial banks);
• Commercial banks;
• Thrift banks (savings and mortgage banks; stock
and savings and loan associations, private
development banks, RA 7906);
• Rural banks, RA 7353;
• Cooperative banks, RA 6938;
• Islamic banks, RA 6848;
• Other classifications of banks as determined by
MB;
45
• Classification of Banks
• Universal banks
– Can exercise the powers of a commercial bank, and in
addition,
– Powers of an investment house;
– Power to invest in non-allied enterprises;
– Power to own up to 100%of equity in a thrift bank, RB,
financial allied enterprise or non-financial allied
enterprise;
– In case of publicly listed universal banks, power to own
up to 100% of the voting stock of only one other
universal bank or commercial bank;

46
• Classification of Banks, cont.
• Investment house, an enterprise engaged regularly or
in an isolated basis in underwriting of securities of
another person or enterprise, including government
securities; subject to the regulations of the SEC;
• Underwriting, act of guaranteeing distribution and sale
within the PH of securities, on a public or private
placement basis;
• Banks may perform investment house functions directly
thru a separate and distinct department or other similar
units of the bank, or indirectly thru a subsidiary; cannot
do both;

47
• Classification of Banks, cont.
• Non-allied enterprises, no prior MB approval is needed
for investments by universal banks (directly or thru a
subsidiary) in any of the following broad categories
– Enterprise engaged in physically productive activities in agriculture,
mining and quarrying, manufacturing, public utilities, constructions,
wholesale trade and community and social services following the
industrial grouping in the Philippine Standard Industrial Classification;
– Industrial park projects and/or industrial estate developments;
– Financial and commercial complex (including land development and
bldgs. Constructed thereon) arising from or in connection with
Government’s privatization program;
– Such other broad categories as the MB may declare as appropriate
(broad categories of non-allied undertakings in which a universal bank
may invest in require prior MB approval);

48
• May a rural bank accept current accounts?
• May a thrift bank accept current accounts?
• Distinctions, capitalization; purpose;
powers or functions; who can be directors
(note public officers can be directors in RBs
but not in other banks);

49
• What is the contractual relationship
between a bank and its depositors;
• How does the contract of loan between a
bank and its depositors differ from ordinary
contracts of loan; subject to BSP
regulations;
• Can a bank be compelled to accept
deposits; is there a limit to a bank’s refusal
to accept deposits from certain depositors;
• What is KYC among banks;
50
• What are graduated customer acceptance
policies; more extensive due diligence for
high risk customers; decision at senior
management level;
• Read rules on opening of deposit accounts,
p. 38;
• Is capacity to enter into contract required
for the opening of deposit accounts;
minors; child 7 years of age;
• Read rule on minors as depositors, p. 39;
51
• What is the rule on a married woman’s
capacity to open deposit accounts;
• Read RA 7192, sec. 5, p. 40;
• What is the rule in case of corporations;
what authority is needed for a corporation
to open deposit accounts; before
incorporation; after incorporation;
• May the authority to open deposit accounts
be delegated by the board; what is the
limitation;
52
• Explain the statement – “monies deposited with
banks are not kept by the bank for safekeeping;”
• Can a third party require the bank to hold any
withdrawal on monies that he claims to be his
own; what procedure is required;
• If a bank fails to allow a withdrawal of deposit
because the money has been used by the bank,
is the bank liable for estafa;
• Are bank deposits preferred credits; note case
of depositors able to obtain court judgment
against a bank that has been closed by the BSP;
53
• Will the rule on compensation apply to
deposits held by a bank and loans granted
by a bank to the depositors;
• Can compensation be invoked with respect
to the value of dishonored checks that were
previously credited;
• May a bank debit another account of a
depositor in the same bank if the account
where a check that has been paid and later
dishonored is already closed;
54
• Case – bank sought to offset an alleged
obligation of a depositor of the bank with his
deposits in the same bank where the bank is
unable to prove the existence of the PN
covering the loan;
• Explain, deposit is not “trust” under the civil
code; not a trustor-trustee relationship;
• May a bank unilaterally freeze a deposit based
on an allegation or belief that the depositor
obtained the money by fraud; why;

55
• A’s money has been stolen by X who deposited it with
bank ABC; can the bank freeze the deposit based on
the claim of A, invoking Art 559 of the civil code;
read the provision, p. 44-45; money is not a specific
or determinate thing but is generic and fungible;
• Certain funds were deposited by A with Bank ABC in
his/A’s account; the funds were amounts entrusted
to A (trustee) by X (trustor) for the benefit of Y
(beneficiary), thus the account was indicated to be “in
trust for Y;” the funds were withdrawn by A who
misappropriated them; can Y hold the bank liable for
such misappropriation; see case, p. 45-46;

56
• Explain “dishonest assistance;” p.46;
• What is the duty of a bank in case there has
been a garnishment of certain deposits;
• What is the effect of the insolvency of a
bank on the deposits; PDIC insurance;
ordinary unsecured credits;
• What are the different kinds of deposits
recognized in the MORB; p. 47 …;

57

 C
–B –P

 F
– P –P

 Core Values
- S - P

58