Banking Law Issues GENERAL BANKING LAW.

Banking Law Issues GENERAL BANKING LAW

Topics 1. Banks 6. Ownership of Real Property 7. Loan to Banks
a. Nature of business b. Authority to incorporate and operate c. Classification of Banks 2. Functions of Banks a. Deposit Function b. Loan Function c. Other functions d. Prohibited Acts 3. Ownership of Banks a. Foreign Ownership b. Filipino Stockholdings c. Stockholdings of Family Groups and related interests 4. Directors and Officers a. Composition of Board b. Meetings c. Qualifications 5. Liquidity and Security 6. Ownership of Real Property 7. Loan to Banks a. Loans without collateral b. Emergency Loans 8. Conservatorship a. Grounds b. Powers of Conservatorship 9. Receivership and Liquidation b. Duties of Receiver c. Close Now-Hear Later Scheme d. Effect of Receivership and Liquidation 10. Trust Operations of Banks a. Prior Authority b. Trust Business c. Powers d. Separation of Trust Business of Banks

Objectives General Objective:
To be familiarized with the provisions of the General Banking Law of 2000, and Basel I, II, and III, as well as jurisprudence involving the said laws. The report is not a detailed discussion of all the provisions of the GBL as well as the Basel Accords. At best it will just give a comprehensive discussion of the said laws by giving the general framework and conduct of the banking business.

Objectives At the end of the report, the participants must be able to:
Discuss the policy behind the GBL; Define, classify and differentiate banks; Identify and discuss the core and other banking functions; Discuss and apply the rules on ownership of banks; Describe and evaluate the management of banks; and Discuss and apply the rules on conservatorship, receivership, liquidation, and trust operation of banks

GENERAL BANKING LAW R.A. 8791 AN ACT PROVIDING FOR THE REGULATION OF THE ORGANIZATION AND OPERATIONS OF BANKS, QUASI-BANKS, TRUST ENTITIES AND FOR OTHER PURPOSES Short Title: General Banking Law of 2000 1. In line with the government policy of providing a stable and efficient banking and financial system, the Genearl Banking Law of 200 was passed to replace the old General Banking Act of The General Banking Law of 2000 is the law that generally governs the regulation, organization and operation of banks, quasi-banks, and other quasi-entities. 2. It primarily governs Universal Banks (Secs , GBL) and Commercial Banks (Secs , GBL), and has suppletory application to Thrift Banks (which is primarily governed by RA 7906, the Thrift Banks Act), Rural Banks (primarily governed by RA 7353, the Rural Banks Act), and Cooperative Banks (primarily governed by RA 6938, the Cooperative Code). Ibid., Sec. 71 3. R.A. No is called a "law" rather and an "act" (purpose: to differentiate the current law from its predecessor)

1. Banks A. Definition B. Nature of business
C. Authority to incorporate and operate D. Classification of Banks To start with, let me emphasize that the banks are not ordinary business corporations, organized under the general business corporation laws. Some of the corporation laws may however apply as I will mention in a few minutes. Special rules will apply to strikes and lockouts, ownership of banks, Liquidity and Security, Loans, Conservatorship, Receivership and Liquidation, and Trust Operations. While corporation laws will come into play, but generally everything is not done according to the general corporation laws.

A. Definition Banks are entities engaged in:
the lending of funds obtained in the form of deposits from the public. (Sec. 3.1, GBL) Requirements: (Sec. 8, GBL) Stock corporation Funds obtained from public This (definition) is usually referred to as “core-banking functions” of mobilizing savings (through deposit-taking) and allocating resources (through lending). In addition to these core functions, CB can accept drafts, issue letters of credit, discount and negotiate drafts and other evidence of indebtedness, buy and sell foreign exchange and bullion; UB can also underwrite securities and invest in equities of the so-called non-allied enterprises. 2. It cannot issue no-par value shares funds are obtained from the public, i.e. deposits of twenty (20) or more persons.

Problem SA Corp. is an investment company;
It established 74 branches throughout the Philippines; It managed to induce the public to open 59,463 savings deposit accounts with an aggregate deposit of P1,689,136.74; It loans out the money of its customers, collects the interest and charges a commission to both lender and borrower; Is SA Corp. a bank?

Answer Yes. Sec. 2, GBL. Republic v. Security Credit and Acceptance Corporation. Funds were derived from the public; Lent out the deposit to persons; Violation - engaging in banking without securing the administrative authority required in Republic Act No. 337.

A. Definition “Quasi-banks” (QB) refer to entities engaged in the borrowing of 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. (Sec. 4, GBL) Quasi-banking function is an inherent power of Universal Banks and Commercial Banks. 1. deposit substitutes (as defined in Sec. 95 RA 7653, the New Central Bank Act) 2. Since this is an inherent power of UBs and CBs, they do not require separate licensing or authorization for this purpose. 3. Atty. Rafael Morales, in his book, The Philippine General Banking Law (Annotated), maintains that it is inappropriate to apply the term "quasi-banking" to the alternative borrowing operations (i.e. borrowing from the public through means other than deposits) of banks themselves. He suggests that such activity be simply termed "deposit-substitute operation" since, to quote him, "there is nothing ‘quasi’ about it, when it is performed by banks themselves."

B. Nature of Business Policy (Sec. 2, GBL)
“The State recognizes the vital role of banks in 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.” This consequently means that a bank shall be subject to heavy and close supervision and/or regulation by the Bangko Sentral ng Pilipinas, and that it must exercise utmost diligence in the handling of deposits. Central Bank of the Phil. v. C.A., 208 SCRA 652 Simex Internainoal (Manila) Inc. v. C.A., 183 SCRA 361

B. Nature of Business Rule on Strikes and Lockouts (Sec. 22, GBL)
If unsettled after seven (7) calendar days, Bangko Sentral reports to the Secretary of Labor who has two options: (1) assumption jurisdiction (2) certify to NLRC for compulsory arbitration. The President of the Philippines may, at any time, intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same. REASON: INDISPENSABLE TO NATIONAL INTEREST We are still under the nature of business. To promote and maintain a stable and efficient banking and financial system, there are special rules that govern banks. Because it is indispensable to the national interest, … (rule)

C. Authority to Incorporate and Operate
TO INCORPORATE: Articles of Incorporation must be accompanied by a certificate of authority issued by the MB, under its seal. TO OPERATE: Certificate of authority from the BSP 1. BSP, which is the central monetary authority, is the banking supervisor in charge with safe and sound banking system. No person or entity can engage in banking within the Philippines, without prior authorization from the BSP. - BSP has the correlative power to suspend or revoke banking licenses. - the Solicitor General can institute proceedings for dissolution of an entity conducting banking operations without the requisite liscense. - there are also criminal sanctions for violations of any provision of the GBL, which includes fines for erring entities and imprisonment for erring officials. NB: even private persons can denounce them before the prosecuting officer. - Rules of Conduct and Standards of operations for banks, quasi-banks, and other non-bank financial institutions are compiled in “The Manual of Regulations for Banks” and “Manual of Regulations for Non-bank financial institutions.” 2. the Securities and Exchange Commission shall not register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its seal.”

Prudential Measures Reserve Requirements Single Borrower’s Limit
Lending Restrictions to Bank Insiders (DORSI) Loan-Loss Provisions Deposit Insurance Equity Investment Limits Capital Adequacy BSP – Lender of last resort Measures to minimize systemic risk

Lending Restrictions to Bank Insiders (DORSI) Loan-Loss Provisions Deposit Insurance Equity Investment Limits Capital Adequacy BSP – Lender of last resort BSP requires all banks to maintain RESERVES against deposit and deposit substitute liabilities. - Non-static - Fractional reserve banking system – only a fraction of the deposit is set aside as reserve - The reserve shall be a ready source of funds for heavy withdrawals of deposits or deposit substitutes Consistent with the Basel Accord Requirement for safe and sound banking.

Lending Restrictions to Bank Insiders (DORSI) Loan-Loss Provisions Deposit Insurance Equity Investment Limits Capital Adequacy BSP – Lender of last resort - Purpose of SBL: To prevent banks from making excessive loans and other credit accommodations to a single borrower, to safeguard the banks from putting too large a risk exposure to a single client. - Consistent with Core Principle 9 of the Basel Guidelines on effective banking supervision, which requires “prudential limits to restrict bank exposure to single borrowers or group of related borrowers. - 20% of the net worth of the bank; can be increased by an additional 10% of such net worth, as long as additional liabilities of the borrower are adequately secured by “documents of title to goods” and the goods covered are readily marketable, non-perishable and fully insured. - Allocate bank resources to different sectors of the economy

Lending Restrictions to Bank Insiders (DORSI) Loan-Loss Provisions Deposit Insurance Equity Investment Limits Capital Adequacy BSP – Lender of last resort To level the playing field between insiders and outsiders To prevent the insiders from making the bank as “their captive source of finance” GBL, loans and other credit accommodations to an insider must be made in the regular course of business and upon terms not less favorable to the bank than those offered to outsiders. Core Principle 10 of Basel guidelines for effective and banking supervision, this type of credit accomodation is called “connected and related party lending.”

Lending Restrictions to Bank Insiders (DORSI) Loan-Loss Provisions Deposit Insurance Equity Investment Limits Capital Adequacy BSP – Lender of last resort This is consistent with Basel Core Principle 8. To cushion an eventual write-off of non-performing loans, a bank is required to set aside reserve for bad debts and other doubtful accounts - BSP Rule on loan write-off

Lending Restrictions to Bank Insiders (DORSI) Loan-Loss Provisions Deposit Insurance Equity Investment Limits Capital Adequacy BSP – Lender of last resort Banks are required to ensure their deposit liabilities with the PDIC (Philippine Deposit Insurance Corporation) - Each depositor is insured for a maximum amount of P500,000 - This is only partial insurance because full insurance might encourage risky banking activities - It only addresses moral hazards

Lending Restrictions to Bank Insiders (DORSI) Loan-Loss Provisions Deposit Insurance Equity Investment Limits Capital Adequacy BSP – Lender of last resort Equity investment of banks in other enterprises needs prior approval of the BSP, consistent with Basel Core Principle 5, which enjoins banking supervisors to review major acquisitions by banks. - Equity investment of a CB in a single allied enterprise (such as a leasing company, financing company, investment house, credit card company, or storage company) must not exceed 25% of the networth of the bank. - The aggregate investments in allied enterprises must not exceed 35% of such networth. - CB cannot invest in non-allied enterprises such as companies engaged in agriculture, mining, or construction. -UB can invest in allied and non-allied enterprises so long as its total investments must not exceed 50% of its net worth, and any single investment should not exceed 25% of its networth.

Lending Restrictions to Bank Insiders (DORSI) Loan-Loss Provisions Deposit Insurance Equity Investment Limits Capital Adequacy BSP – Lender of last resort Minimum capital requirement – UB (Tier 1 – common equity) 4.95B - CB 2.4B Capital adequacy – Consistent with Basel II Capital Accord – Tier 1(Core Capital) + Tier 2 (Supplemental Capital) – required deductions -The MB shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts (i.e. net worth : total risk assets). The risk-based capital ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted assets, shall not be less than 10% for both solo basis (head office plus branches) and consolidated basis (parent bank plus subsidiary financial allied undertakings, but excluding insurance companies). The ratio shall be maintained daily. Sec. 33 -The mandate under the GBL is for the BSP to the extent possible to conform to international standards, including those of the Bank of Int’l Settlements, relating to risk-based capital requirements BSP CIRCULAR 280 (2001) -ADD FIT AND PROPER RULE about directors

D. Classification of Banks
i. Universal Banks (UB) – banks that have the authority to exercise, in addition to the powers authorized for a commercial bank, the powers of an investment house and the power to invest in non-allied enterprises. (Sec. 23) E.g. BDO Unibank, Inc., BPI, RCBC, SBC, Union Bank, UCPB, Al-Amanah, DBP, LBP, ANZ Banking, HSBC 1. Section 3.2 of the GBL classifies banks into Universal Banks, Commercial Banks, Rural Banks, Thrift Banks, Cooperative Banks, Islamic Banks, other classification of banks as determined by the Monetary Board (MB) of the BSP. 2. Banco De Oro Universal Bank, Bank of the Philippine Islands, Rizal Commercial Banking Corporation, Security Bank Corporation, Union Bank of the Philippines, United Coconut Planters Bank, Al-Amanah Islamic Investment Bank of the Philippine, Development Bank of the Phil, Land Bank of the Phil, ANZ Banking Group Ltd., Hong Kong Shanghai Banking Corporation

ii. Commercial Banks (CB) – banks that have, in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking. (Sec. 29) E.g. Bank of Commerce, Citibank, Maybank Phil., PBC, Veterans, BDO Private Bank 1. Commercial Banks (CB) – banks that have, in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking, such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. Sec. 29 2. Bank of Commerce, Citibank, Maybank Phil., Philippine Bank of Communications, Philippine Veterans Bank, BDO Private Bank

iii. Rural Banks – banks that are created to make needed credit available and readily accessible in the rural areas for purposes of promoting comprehensive rural development. R.A. No. 7353 E.g. Providence Rural Bank, Rural Bank of Gattaran, Claveria Rural Bank, Rural Bank of Sanchez Mira, Rural Bank of Cauayan, Golden Rural Bank of the Philippines, Banco Agricula ii. Commercial Banks (CB) – banks that have, in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking, such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. Sec. 29

iv. Thrift Banks – banks that include: savings and mortgage banks, private development banks, and stock savings and loan associations. E.g. Allied Savings Bank, Bank of Makati, BPI Direct Savings Bank, Century Savings Bank, Express Savings Bank, Malayan Bank, Win Bank Some of the Banks here are subsidiaries of parent banks,

v. Cooperative Banks – banks that primarily provide financial, banking and credit services to cooperative organizations and their members. (Sec. 100, R.A as amended by R.A. 9520) E.g. Cooperative Bank of Cagayan, Coop of Bulacan, Coop of La Union, Coop of Bohol

vi. Islamic Banks – Charter of Al Amanah Islamic Investment Bank of the Philippines. (R.A. 6848) E.g. Al-Amanah Islamic Investment Bank of the Philippines The Al-Amanah Islamic Investment Bank of the Philippines (abbreviated AAIIBP) or Al-Amanah Islamic Bank is the first and only Islamic bank in the Philippines. Al-Amanah Islamic Bank traces its roots to the Philippine Amanah Bank, established by President Ferdinand Marcos in 1973 by virtue of Presidential Decree No. 264.[1] With an initial capital of 100 million pesos, it was one of the world's first Islamic banks.[2] Its charter originally mandated it to provide financial services to the provinces of Basilan, Cotabato,Lanao del Norte, Lanao del Sur, Palawan, Sulu, Tawi-Tawi, Zamboanga del Norte and Zamboanga del Sur, where there are large, if not predominant, Muslim populations.[3] In 1974, the bank's charter was amended by Presidential Decree No. 542, allowing it to open branches in Maguindanaoand Sultan Kudarat. The amended charter also mandated that the bank provide banking services according to Islamic principles, which was not explicitly provided for under the original charter.[3] In 1989, the bank was re-chartered and re-capitalized pursuant to Republic Act No. 6848, and was subsequently renamed the Al-Amanah Islamic Investment Bank of the Philippines, with a capital of one billion pesos. Between 1990 and 2007, the bank was under the supervision of the Bureau of the Treasury.[4] The bank was sold to another government-owned bank, the Development Bank of the Philippines, in 2008.[1] However, in 2012, DBP announced that it intended to divest itself of the bank, since it does not have the expertise to handle an Islamic financial institution.[4]

UNIVERSAL BANKS COMMERCIAL BANKS As to Powers 1. The powers authorized for a Commercial Bank; 2. The powers of an investment house as provided in existing laws; and 3. The power to invest in non-allied enterprises as provided in the GBL. (Sec. 23) 1. THE GENERAL POWERS INCIDENT TO CORPORATIONS, 2. ALL SUCH POWERS AS MAY BE NECESSARY TO CARRY ON THE BUSINESS OF COMMERCIAL BANKING, SUCH AS ACCEPTING DRAFTS AND ISSUING LETTERS OF CREDIT; DISCOUNTING AND NEGOTIATING PROMISSORY NOTES, DRAFTS, BILLS OF EXCHANGE, AND OTHER EVIDENCES OF DEBT; 3. SUBJECT TO SUCH RULES AS THE MB MAY PROMULGATE. THESE RULES MAY INCLUDE THE DETERMINATION OF BONDS AND OTHER DEBT SECURITIES ELIGIBLE FOR INVESTMENT, THE MATURITIES AND AGGREGATE AMOUNT OF SUCH INVESTMENT. (SEC. 29) BSP Circular 271 (2002) (1) invest in the equities of allied enterprises; (2) purchase, hold and convey real estate; (3) receive in custody funds, documents and valuable objects; (4) act as financial agent; (5) make collections and payments for the account of others; (6) act as managing agent, adviser, consultant or administrator of investment management/advisory/-consultancy accounts; (7) rent out safety deposit boxes; and (8) engage in quasi-banking functions.

Classification of Banks
UNIVERSAL BANKS COMMERCIAL BANKS As to Equity Investments A UB MAY INVEST IN THE EQUITIES OF ALLIED (EITHER FINANCIAL OR NON-FINANCIAL) AND NON-ALLIED ENTERPRISES. (SEC. 24) EXCEPT AS THE MB MAY OTHERWISE PRESCRIBE: THE TOTAL INVESTMENT IN EQUITIES OF ALLIED AND NON-ALLIED ENTERPRISES SHALL NOT EXCEED 50% OF THE NET WORTH; AND THE EQUITY INVESTMENT IN ANY ONE ENTERPRISE, WHETHER ALLIED OR NON-ALLIED, SHALL NOT EXCEED 25% OF THE NET WORTH OF THE BANK (SEC. 24) A CB MAY INVEST ONLY IN THE EQUITIES OF ALLIED ENTERPRISES (EITHER FINANCIAL OR NON-FINANCIAL). (SEC. 30) EXCEPT AS THE MB MAY OTHERWISE PRESCRIBE: THE TOTAL INVESTMENT IN EQUITIES OF ALLIED ENTERPRISES SHALL NOT EXCEED 35% OF THE NET WORTH OF THE BANK; AND THE EQUITY INVESTMENT IN ANY ONE ENTERPRISE SHALL NOT EXCEED 25% OF THE NET WORTH OF THE BANK.

UNIVERSAL BANKS COMMERCIAL BANKS Equity Investments in Financial Allied Enterprises A UB CAN OWN UP TO 100% OF THE EQUITY IN… A THRIFT BANK, A RURAL BANK OR A FINANCIAL ALLIED ENTERPRISE. (SEC. 25) A KB MAY OWN UP TO 100% OF THE EQUITY OF A THRIFT BANK OR A RURAL BANK. (SEC. 31) WHERE THE EQUITY INVESTMENT OF A CB IS IN OTHER FINANCIAL ALLIED ENTERPRISES, INCLUDING ANOTHER COMMERCIAL BANK, SUCH INVESTMENT SHALL REMAIN A MINORITY HOLDING IN THAT ENTERPRISE. (SEC. 31)

UNIVERSAL BANKS COMMERCIAL BANKS Equity Investments in Non-Financial Allied Enterprises A UB OR KB MAY OWN UP TO ONE HUNDRED PERCENT (100%) OF THE EQUITY IN A NON-FINANCIAL ALLIED ENTERPRISE. (SEC. 26 AND 32)

UNIVERSAL BANKS COMMERCIAL BANKS Equity Investments in QBs TO PROMOTE COMPETITIVE CONDITIONS IN FINANCIAL MARKETS, THE MB MAY FURTHER LIMIT TO 40% EQUITY INVESTMENTS OF UBS AND CBS IN QBS. (SEC. 28) A UB OR CB MAY OWN UP TO ONE HUNDRED PERCENT (100%) OF THE EQUITY IN A NON-FINANCIAL ALLIED ENTERPRISE. (SEC. 26 AND 32)

UNIVERSAL BANKS COMMERCIAL BANKS Equity Investments in Non-Allied Enterprises THE EQUITY INVESTMENT OF A UB, OR OF ITS WHOLLY OR MAJORITY-OWNED SUBSIDIARIES, IN A SINGLE NON-ALLIED ENTERPRISE 1. shall not exceed 35% of the total equity in that enterprise nor 2. shall it exceed 35% of the voting stock in that enterprise. (Sec. 27)

2. Functions of Banks A. Deposit Function B. Loan Function
C. Other functions D. Prohibited Acts

A. Deposit Function Simple Loan
Fixed, savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan (Article 1980, Civil Code of the Philippines). Deposit is one of the core banking functions. While the function is referred to as deposit, it is strictly “simple loan” where the bank is the debtor and the depositor is the creditor.

Problem A deposited in Bank X; Bank used the money;
A would like to withdraw but the Bank cannot pay; Is the Bank liable for estafa?

Answer No. Guingona v. City Fiscal of Manila, 128 SCRA 577
Since the bank is the borrower, it can make use as its own the money deposited, and the amount is not held in trust for the depositor nor is it kept for safekeeping. (Tang Tiong Tick v. American Aphothecaries, 65 Phil. 414) Bank officers cannot also be held liable for estafa if they authorized the use of the money deposited by the depositor.

Problem A deposited in Bank X;
B alleges that the money deposited by A belongs to him; A withdraws from the bank; Is Bank X liable?

Answer No. Third persons who may have the right to the money deposited cannot hold the bank responsible unless there is a court order or garnishment, since the duty of the bank is to the creditor-depositor and not to third persons. Fulton Iron Work v. Chinabank, 55 Phil. 208

Problem A deposits in Bank X; Bank X loans out money to A;
If A defaults in payment, can Bank X off of the deposits in its hands for the payment of A’s indebtedness?

Answer Yes. “A bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor.” Gullas v. PNB, 1935 Conversely, the depositor has every right to apply his deposit in a bank against his loan from such bank. RP v. CA, 1975; Villanueva cites Serrano v. CB, 1980; Ppl v. Ong, 1991

Kinds of Deposit 1. Demand deposits
The depositor can take out his funds any time. No interest is paid by the bank The depositor can withdraw the money he deposited on the very same day. 1. Demand deposits are those liabilities of banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by presentation of checks. In here, no interest is paid by the bank because the depositor can take out his funds any time. It is called demand deposit because the depositor can withdraw the money he deposited on the very same day.

Kinds of Deposit 2. Savings Account 3. Time Deposit
Evidenced by a passbook Has interest rate, but not as high as time deposits. 3. Time Deposit Has a fixed term Money deposited cannot be withdrawn within a certain period Has a higher rate of interest than saving account. 2. Savings Account, which is the most common type of deposit, is usually evidenced by a passbook. Under the fine print, if you deposit today, you cannot withdraw the amount until 60 days later. Bank pays an interest rate, but not as high as time deposits. 3. Time Deposit is an account with fixed term. The interest rate is stipulated depending on the number of days. During this period, the money deposited cannot be withdrawn. It has a higher rate of interest than saving account.

Kinds of Deposit 4. Negotiable Order of Withdrawal (NOW) Account is an interest-bearing deposit account that combines the payable on demand feature of checks and investment feature of savings accounts. 5. Other Account is one that may be opened by one individual or by two or more persons. Whenever two or more persons open an account, the same may be an “and/or account” or an “and” account. NB: A bank other than a UB or KB cannot accept or create demand deposits except upon prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board. Moreover, the bank is under the obligation to treat deposit accounts of it depositors with meticulous care. It must bear the blame for failing to discover the mistake of its employees despite the established procedure requiring bank papers to pass through bank personnel whose duty it is to check and countercheck them for possible errors. As a business affected with public interest and because of the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous case, always having in mind the fiduciary nature of their relationship. Sec. 33 Metropolitan Bank and Trust Co. v. CA, 1994 and Firestone Tire v. CA, 2001 PCI Bank v. CA, 1997

Kinds of Deposit Safety Deposit Boxes Special kind of deposit
Not an ordinary contract of lease Bailer and bailee Note on Safety Deposit Boxes: In the case of rent of safety deposit box, the contract is a special kind of deposit and cannot be characterized as an ordinary contract of lease because the full and absolute possession and control of the deposit box is not given to the renters. The prevailing rule is that the relation between the bank renting out and the renter is that of bailer and bailee the bailment being for hire and mutual benefit. CA Agro-industrial Dev. Corp. v. CA, 1983

Loan Function Basic Rules and Restrictions Risk-Based Capital Ratio
Single Borrower’s Limit DORSI Restrictions 1. A bank shall grant loans and other credit accommodations only in amounts and for the periods of time essential for the effective completion of the operations to be financed, consistent with safe and sound banking practices. The bank must ascertain before granting the load or other credit accommodation the ability of the debtor to fulfill his commitment. 2. The MB shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts (i.e. net worth : total risk assets). The risk-based capital ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted assets, shall not be less than 10% for both solo basis (head office plus branches) and consolidated basis (parent bank plus subsidiary financial allied undertakings, but excluding insurance companies). The ratio shall be maintained daily. Sec. 33 BSP CIRCULAR 280 (2001)

Single Borrower’s Limit
Not exceed 25% of the net worth of bank Basis: total credit commitment of the bank to the borrower GBL provides that the total amount of loans, etc. may be increased by an additional 10% of the net worth of such bank provided: The additional liabilities of any borrower are adequately secured Sec. 35.2 The SBL limits lending of a bank to a single client to only 25 percent of their capital. As a general rule, banks should spread their risks. By capping lending to a single client, the potential loss of a bank from that particular's client failure will be limited. Except as the MB may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees as may be defined by the MB that may be extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed 25% of the net worth of such bank. The basis for determining compliance with SBL is the total credit commitment of the bank to the borrower. GBL provides that, Unless the MB prescribes otherwise, the total amount of loans, credit accommodations and guarantees prescribed in the preceding paragraph may be increased by an additional 10% of the net worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance. Sec as increased by BSP Circular 425 Ibid. Sec. 35.2

DORSI Account GENERAL RULE: cannot borrow from bank;
CANNOT BECOME AN OBLIGOR OF THE BANK. cannot borrow from bank; cannot become a guarantor, indorser or surety for loans from such bank to others; GENERAL RULE: a director or officer of any bank shall neither, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank; nor become a guarantor, indorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank.

DORSI Account EXCEPTION:
written approval of the majority of all the directors entered upon the records of the bank copy of such entry transmitted to BSP. Such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the BSP. The EXCEPTION is when there is a written approval of the majority of all the directors of the bank, excluding the director concerned. The required approval shall be entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the BSP. Sec. 36. Such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the BSP.

DORSI Account Individual lending ceiling = Aggregate Ceiling =
insider’s unencumbered deposit + book value of his paid-in capital contribution Aggregate Ceiling = Whichever is lower between 15% of the total loan portfolio and 100% of combined capital accounts Unsecured portion of the loan = It should not exceed 30% of the loan of the insider - DORSI rules have three ceilings: individual lending ceiling, aggregate ceiling, and ceiling on unsecured loans - 70% of the loan of the insider must be secured

Limits on Loans and other CA
real estate (collateral) not exceed 75% of its appraised value plus 60% of the appraised value of the insured improvements, Chattels and intangibles (collateral) not exceed 75% of the appraised value of the security Collaterals Unless otherwise prescribed by the MB, loans and other credit accommodations against “real estate” shall not exceed 75% of the appraised value of the respective real estate security, plus 60% of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees. Those against “security of chattels and intangible properties” shall not exceed 75% of the appraised value of the security, and such loans and other credit accommodations may be made to the title-holder of the chattels and intangible properties or his assignees. NB: The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders. Sec. 37. Sec. 38 Sec. 36 par. 6

Foreclosure of Mortgage
Debtor has the right to redeem real property within 1 year from sale of real estate. Right to take possession by the purchaser from date of confirmation of auction sale. 1. the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. 2. the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. 3. Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than 3 months after foreclosure, whichever is earlier.

Other Functions UB and CB may also exercise any of the following functions: i. Receive in custody funds, documents and valuable objects; ii. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities; iii. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with baking business; iv. Upon prior approval of the MB, act as managing agent, adviser, consultant of administrator of investment management/advisory/consultancy accounts; and v. Rent out safety deposit boxes.

Prohibited Acts Engaging in insurance
Directors, Officers, Employees, Agents Borrowers of Banks Directors, officers, employees, or agents of any bank are prohibited from: (1) Making false entries in any bank report or statement or participating in any fraudulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or any person; (2) Without order of a court of competent jurisdiction, disclosing to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail; (3) Accepting 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; (4) Overvaluing or aiding the overvaluing of any security for the purpose of influencing in any way the actions of the bank or any bank; or (5) Outsourcing inherent banking functions. iii. Outsourcing per BSP Circular 268 (2000) Section 2.1 Outsourcing of inherent banking functions shall refer to any contract between the bank and a service provider for the latter to supply the manpower to service the deposit transactions of the former. Section 2.2 Banks cannot outsource management functions except as may be authorized by the Monetary Board when circumstances justify. Section 3. Outsourcing of Information Technology Systems/Processes. Subject to prior approval of the MB, banks may outsource all information technology systems and processes except for functions excluded in Section 3.1. Section 3.1 Functions affecting the ability of the bank to ensure the fit of technology services deployed to meet its strategic and business objectives and to comply with all pertinent banking laws and regulations may not be outsourced. Subject to prior approval of the MB, consultants and/or service providers may be engaged to provide assistance/support. Section 4. Outsourcing of Other Banking Functions. Section 4.1 Subject to prior approval of the MB, banks may outsource data imaging, storage, retrieval and other related systems; clearing and processing of checks not included in the Philippine Clearing House System; printing of bank deposit statements. Section 4.2. Banks may outsource credit card services; printing of bank loan statements and other non-deposit records, bank forms and promotional materials; credit investigation and collection; processing of export, import and other trading transactions; transfer agent services for debt and equity securities; property appraisal; property management services; messenger, courier and postal services; security guard services; vehicle service contracts; janitorial services. Section 5. Service Providers. When allowed by law and under this circular, banks may enter into outsourcing contracts only with service providers with demonstrable technical and financial capability commensurate to the services to be rendered. Sec. 55.1 iv. Prohibited Transactions of Borrowers of Bank: borrowers of banks are prohibited from – 1. Fraudulently overvaluing property offered as security for a loan or other credit accommodation from the bank; 2. Furnishing false or misrepresenting or suppressing material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof; 3. Attempting to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or 4. Offering any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application. Sec. 55.2

3. Ownership of Banks A. Foreign Ownership B. Filipino Stockholdings
C. Stockholdings of Family Groups and Related Interests

Foreign Ownership Foreign stockholdings
Up to 40% of the voting stock of domestic banks Foreigners - total equity participation Corporate stockholder – citizenship is determined by citizenship of controlling stockholders The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation. The restriction applies on foreigners in terms of their total equity participation, while it applies to individual equity participation to Filipinos and non-bank corporations.

Filipino Ownership Filipino stockholdings
Section 11 of the GBL applies to Filipinos and domestic non-bank corporations. individual equity participation should not exceed 40% of the voting shares The restriction applies on foreigners in terms of their total equity participation, while it applies to individual equity participation to Filipinos and non-bank corporations.

Family Groups and Related Interests
No prohibition Full disclosure 1. What GBL imposes is that stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in all transactions by such an individual with the bank. Sec. 12 2. In addition, two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank.

4. Directors and Officers
A. Composition of Board B. Meetings C. Qualifications

Composition of BOD At least five (5), and a maximum of fifteen (15) members of the BOD of bank, two (2) of whom shall be independent directors. Non-Filipino (restriction, equity participation) Public Officials (prohibition) 1. An "independent director" shall mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests. 2. Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank. (Sec. 7, RA 7721) 3. Section 19 of GBL imposes a prohibition on public officials, such that no appointive or elective public official, whether full-time or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or a government-owned or controlled corporation to the bank or unless otherwise provided under existing laws.

Meetings conducted through modern technologies
E.g. teleconferencing and video-conferencing. Section 15 of the GBL also provides that the meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and video-conferencing.

Qualifications Fit and Proper Rule integrity, experience, education,
training, and competence Section 16 of the GBL provides the “Fit and Proper Rule” which states that “to maintain the quality of bank management and afford better protection to depositors and the public in general, the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit.” “After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position.” “In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his integrity, experience, education, training, and competence.” NB: Sec. 19 of the GBL prohibits appointive or elective public official, whether full-time or part-time, from serving as officer of any private bank, save in cases where: 1. Such service is incident to financial assistance provided by the government or a GOCC to the bank; 2. Unless otherwise provided in the Rural Banks Act; or 3. Unless otherwise provided under existing laws.

Banking Law Issues GENERAL BANKING LAW.

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Banking Law Issues GENERAL BANKING LAW.

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