2009 Banking Law Expanded Outline - Als Commercial Law Review

ATENEO LAW SCHOOL
COMMERCIAL LAW REVIEW

BANKING LAW
I. GENERAL CONCEPTS
A. CONCEPT OF BANKING
1. Definition Sec. 3.1, GBL1:
2. Elements Republic v. Security Credit and Acceptance Corporation,
19 SCRA 58 (1967): receiving savings account deposits which are lent out
considered as banking, even without authority from BSP; Central Bank v.
Morfe, 20 SCRA 507 (1967): even if savings given as financial
assistance to members, but anybody can be a depositor, then
considered as banking; Baas v. Asia Pacific Finance Corporation, 343
SCRA 527 (2000): if purchase of receivables at a discount (not deposits),
then investing, reinvesting or trading in securities, not considered as
banking
a. Engaged in lending of funds
b. Obtained in the form of deposits
c. From the public, which shall mean 20 or more persons Sec. 8.2, GBL
B. BANKING DISTINGUISHED FROM QUASI-BANKING

1. Elements of Quasi-Banking Sec. 4, par. 3, GBL; xSec. X234, MRB2
a. Borrowing of funds for borrowers own account
b. From 20 or more lenders at any one time
c. Through issuance, endorsement or assignment with recourse or
acceptance of deposit substitutes Sec. 95, NCBA3
d. For purposes of relending or purchasing of receivables and other
obligations
2. Requirement of Separate License Sec. 6, pars. 1 and 2, GBL: BSP
authority required for banking and quasi-banking, except for UB and KB,
which if authorized as such, are authorized to engage in quasi-banking
C. BANKS DISTINGUISHED FROM OTHER FINANCIAL INSTITUTIONS

1
Republic Act No. 8791 (General Banking Law of 2000), which repealed Republic Act No. 337
(General Banking Act)
2
Manual for Regulation of Banks
3
Republic Act No. 7653 (New Central Bank Act), which repealed Republic Act No. 265 (Central
Bank Act)
2
1. Investment Houses xSecs. 2 and 3, Investment Houses Law4
2. Financing Companies xSec. 3(a), Financing Company Act5
3. Investment Companies xSec. 4, Investment Company Act6
4. Non-Stock Savings and Loans Associations xSec. 3, Revised NonStock Savings and Loans Association Act of 1997 7
5. Cooperatives xArt. 3, Cooperative Code8; But See xArt. 100,
Cooperative Code
6. Insurance Companies xSec. 2, Insurance Code9
D. NATURE OF BANKING BUSINESS Sec. 2, GBL

1. Vital Role in Economy10 Simex International (Manila) Inc. v. Court of
Appeals, 183 SCRA 360 (1990): indispensable institution in modern
world, vital role in economic life, whether as passive entities for
safekeeping and saving of money, or as active instruments of business
and commerce
a. Subject to reasonable regulation by the State Central Bank of the
Philippines v. Court of Appeals, 208 SCRA 652 (1992): police power
allows placing of bank under conservatorship, among other remedies
b. Strikes and Lockouts Sec. 22, GBL: banking industry indispensable
to national interest, therefore if strike/lockout unresolved within 7 days,
BSP may report it to Secretary of Labor, who shall assume jurisdiction,
also, President may at any time assume jurisdiction; xBSP11 Circular
No. 299 (Series of 2001); Article 263(g), Labor Code
2. Fiduciary Nature of Banking Business
a. Degree of diligence required 12 Simex International (Manila) Inc. v.
Court of Appeals, 183 SCRA 360 (1990): banking affected by public
interest, so deposits treated with utmost fidelity (bank liable for failure
to credit deposit, took 23 days to correct); Bank of the Philippine
Islands v. Intermediate Appellate Court, 206 SCRA 408 (1992): bank
not expected to be infallible, but must observe established procedure
to check errors (wrong account number on deposit slip)
b. When utmost diligence required
4
Presidential Decree No. 129, as amended

Republic Act No. 59080, as amended by Republic Act No. 8556
6
Republic Act No. 2629
7
8
9
10
Prudential Bank v. Lim, 474 SCRA 485 (2005)
11
Bangko Sentral ng Pilipinas
12
Solidbank Corporation/Metropolitan Bank and Trust Company v. Tan, 520 SCRA123 (2007)
5
3
(i)
In dealing with accounts of depositors 13 Philippine Banking

Corporation v. Court of Appeals, 419 SCRA 487 (2004):
fiduciary obligation deemed written into every deposit agreement,
even prior to GBL effectivity, bank liable for wrongful acts of
officers within scope of authority, but not beyond (offset time
deposit with fictitious PN); Bank of the Philippine Islands v.
Casa Montessori Internationale, 430 SCRA 261 (2004): banks
bound to know signatures of customers (bank failure to detect 8
instances of forgery in checks proximate cause of loss), no waiver
or estoppel from failure to report error in bank statement
(ii)
In selection and supervision of employees 14 Philippine

Commercial and International Bank v. Court of Appeals, 350
SCRA 446 (2001): bank liability primary, not vicarious, for fraud of
officers if they have apparent authority, even if bank did not
benefit from such fraud (bank failed to detect no clearing stamps
on switched checks); Philippine National Bank v. Pike, 470
SCRA 328 (2005): bank liability primary, not vicarious, for
negligence of employees (allowing withdrawal by non-account
holder without signing withdrawal slip, no passbook and authority)
(iii) To be mortgagees in good faith 15 Cruz v. Bancom Finance

Corporation, 379 SCRA 490 (2002): cannot rely merely on face
of title, must observe precautions to ascertain flaws in title (sale
absolutely simulated) and to examine condition of property,
because funds are being lent out
(iv) In the custody of documents; integrity of records 16 Heirs of
Eduardo Manlapat v. Court of Appeals, 459 SCRA 412 (2005):
bank liable for delivering titles to mortgaged properties to stranger
(for photocopying purposes)
(v)
13
Exception: does
Reyes v. Court
utmost diligence
not involve their
not cover transactions outside bank deposits

of Appeals, 363 SCRA 51 (2001): exercise of
not required in commercial transactions that do
fiduciary relationship with their depositors, i.e.,
Simex International (Manila) Incorporated v. Court of Appeals, 183 SCRA 360 (1990); Bank of
the Philippine Islands v. Court of Appeals, 326 SCRA 641 (2000); Philippine Commercial
International Bank v. Court of Appeals, 350 SCRA 446 (2001); Firestone Tire & Rubber Company
of the Philippines v. Court of Appeals, 353 SCRA 601 (2001); Westmont Bank v. Ong, 375 SCRA
212 (2002); Traders Royal Bank v. Radio Philippines Network, Inc., 390 SCRA 608 (2002);
Consolidated Bank and Trust Corporation v. Court of Appeals, 410 SCRA 562 (2003)
14
Metropolitan Bank and Trust Company v. Cabilzo, 510 SCRA 259 (2006); But See Go v.
Intermediate Appellate Court, 197 SCRA 22 (1991)
15
Development Bank of the Philippines v. Court of Appeals, 331 SCRA 267 (2000); Canlas v.
Court of Appeals, 326 SCRA 425 (2000); Premiere Development Bank v. Court of Appeals, 453
SCRA 630 (2005); Private Development Corporation of the Philippines v. Court of Appeals, 475
SCRA 591 (2005); Citibank, N.A. v. Cabamongan, 488 SCRA 517 (2006); Metropolitan Bank and
Trust Company, Inc. v. SLGT Holdings, Inc., 536 SCRA 517 (2007); Omengan v. Philippine
National Bank, 512 SCRA 305 (2007)
16
See Also United Coconut Planters Bank v. Basco, 437 SCRA 325 (2004)
4
sale and issuance of foreign exchange demand draft (swift code
error, but did everything in its power to correct)
c. Applicability to government financial institutions xGovernment
Service Insurance System v. Santiago, 414 SCRA 563 (2003)
d. Liability for negligence
(i)
Rules on determination of negligence Philippine Bank of

Commerce v. Court of Appeals, 269 SCRA 695 (1997): culpa
aquilana to tort rules, i.e., proximate cause, last clear chance,
contributory negligence 60-40 sharing of loss (failure to duly credit
deposits); Consolidated Bank and Trust Corporation v. Court
of Appeals, 410 SCRA 562 (2003): culpa contractual (breach of
contract raised presumption of negligence, defense of exercising
required diligence not a complete defense) vs. culpa aquiliana
(burden to prove bank was negligent, defense of exercising
required diligence complete defense)
(ii)
Award of actual, moral, compensatory or temperate damages

Araneta v. Bank of America, 40 SCRA 144 (1970): if no
pecuniary loss, temperate damages allowed for injury to
commercial credit or goodwill; Prudential Bank v. Court of
Appeals, 328 SCRA 264 (2000): moral damages allowed even if
no malice or bad faith, exemplary damages allowed also;
Citytrust Banking Corporation v. Villanueva, 361 SCRA 446
(2001): if embarrassment or inconvenience timely and adequately
corrected, no moral damages, if damnum absque injuria, no
compensation allowed
(iii) Cannot rely on judgment of other banks to escape liability

xMetropolitan Bank and Trust Company v. Cablizo, 510 SCRA
259 (2006)
(iv) Right to recover against erring employee xPacific Banking
Corporation v. Court of Appeals, 173 SCRA 102 (1989)
E. AUTHORITY TO OPERATE
1. Incorporation Secs. 17 and 46, Corporation Code; Sec. 14, GBL
2. Operation Sec. 6, GBL
a. Authority required Sec. 6, par. 1, GBL
b. MB17 determination Sec. 6, par. 2, GBL
c. Unauthorized advertisement/ business representation Sec. 64, GBL
d. Change in name xP.C. Javier & Sons, Inc. v. Court of Appeals, 462
SCRA 36 (2005): no need to notify all debtors of bank
17
Monetary Board
5
e. Sanctions for operating without authority: quo warranto instituted by
Solicitor General Sec. 6, par. 5, in rel. to Sec. 66, GBL; Republic v.
Security Credit and Acceptance Corporation, 19 SCRA 58 (1967):
unauthorized banking subject to quo warranto; Central Bank v. Morfe,
20 SCRA 507 (1967) : injury not pre-requisite for quo warranto
proceedings; xPerez v. Monetary Board, 20 SCRA 502 (1957)
II. CLASSIFICATION OF BANKS

A. UNIVERSAL BANKS (UB) Sec. 3.2(a), GBL
1. Governing Law xGBL
2. Powers Sec. 23, GBL; xSec. X101(b)(1), MRB
a. Commercial Bank (KB) powers xSec. 29, GBL; xSec. X101(b)(2),
MRB
b. Investment House powers xSec. 7, Investment Houses Law; xSEC
Omnibus Rules and Regulations for Investment Houses and Universal
Banks Registered as Underwriter of Securities
(i)
Definition/function of investment house any enterprise which

engages or purports to engage, whether regularly or on an
isolated basis, in the underwriting (i.e., guaranteeing distribution
and sale) of securities of any kind issued by another corporation
xSec. 3, Investment Houses Law; xSec. 2(a), IRR of Investment
Houses Law18
(iI)
Limitations on UBs exercise of investment house powers xSec.

101(b)(1), MRB:
(a)
(b)
(c)
subject to pertinent laws and SEC regulations

if investment house functions performed directly by UB, such
functions shall be undertaken by separate department/unit
UB cannot perform functions of investment house both
directly (i.e., through a separate department/unit) and
indirectly (i.e., through a subsidiary)
c. To invest in equity of non-allied enterprises xSec. 27, GBL; xSec.

1381, MRB
18
Rules and Regulations to Implement the Provisions of Presidential Decree No. 129
B. COMMERCIAL BANKS (KB) Sec. 3.2(b), GBL

1. Governing Law xGBL
2. Powers xSec. X101(b)(2), MRB
a. KB powers Sec. 29, GBL
(i) Accepting drafts
(ii) Issuing letters of credit (L/Cs)
(iii) Discounting and negotiating promissory notes (PNs), drafts, bills
of exchange, and other evidences of debt
(iv) Accepting or creating demand deposits
(i) Receiving other types of deposits and deposit substitutes
(ii) Buying and selling foreign exchange and gold or silver bullion
(iii) Acquiring marketable bonds and other debt securities
(iv) Extending credit
b. Engage in quasi-banking functions xSec. 6, par. 1, GBL
c. To invest in equity of allied enterprises xSecs. 31 and 32, GBL
d. To purchase, hold and convey real estate xSecs. 51 and 52, GBL
e. Other services xSec. 53, GBL
(i)
(ii)
Receive in custody funds, documents and valuable objects

Act as financial agent and buy and sell, by order of and for the
account of 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 banking business
(iv) Upon prior MB approval, act as managing agent, adviser,
consultant or administrator of investment management/advisory/
consultancy accounts
(v) Rent out safety deposit boxes
f. To issue guarantees See xSec. 74, General Banking Act
C. THRIFT BANKS (TB) Secs. 3.2(c), GBL

1
2
1. Governing Law Sec. 71, pars. 1 and 3, GBL

a. Organization, ownership, capital requirements, powers, supervision,
and general conduct of business xThrift Banks Act19
b. Net worth to risk assets ratio xSec. 71, par. 3, in rel. to Sec. 33, GBL
c. Other matters: GBL of suppletory application
19
7
3
2. Declaration of Policy Sec. 2, Thrift Banks Act: establishment of thrift

banks to meet needs for capital, personal and investment credit or
medium- and long-term loans for Filipino entrepreneurs
3. Definition/Purpose Sec. 3.2(c), GBL; Sec. 3(a), Thrift Banks Act

a. Composed of:
(i) Savings and mortgage banks
(ii) Stock savings and loans associations; and
(iii) Private development banks
b. For purposes of:
(i)
Accumulating savings of depositors and investing them in

marketable bonds and other debt securities, commercial papers
and accounts receivable, drafts, bills of exchange, acceptances,
or notes arising out of commercial transactions
(ii) Providing short-term working capital, medium- and long-term
financing, to businesses engaged in agriculture, services, industry
and housing
(iii) Providing diversified financial and allied services for its chosen
market and constituencies specially for small and medium
enterprises and individuals
4. Powers Sec. 10, Thrift Banks Act; xSec. X101(b)(3), MRB
D. RURAL BANKS (RB) Sec. 3.2(d), GBL

5
6
1. Governing Law Sec. 71, pars. 1 and 3, GBL;

and general conduct of business xRural Banks Act20
b. Other matters: GBL of suppletory application
2. Declaration of Policy Sec. 2, Rural Banks Act: Establishment of rural

banking system to make needed credit available and readily accessible in
rural areas on reasonable terms
3. Powers Sec. 12, Rural Banks Act; xSec. X101(b)(4), MRB
E. COOPERATIVE BANKS (Coop Banks) Sec. 3.2(e), GBL

8
9
1. Governing Law Sec. 71, pars. 1 and 3, GBL; Art. 99, Cooperative
Code
and general conduct of business xArts. 99 to 109, Cooperative Code
b. Other matters: GBL of suppletory application
20
8
10 2. Declaration of Policy Art. 2, Cooperative Code
11 3. Definition/Functions Art. 100, Cooperative Code
a. Definition: Organized by, the majority shares of which is owned and
controlled by, cooperatives primarily to provide financial and credit
services to cooperatives
b. Functions xArt. 100 Cooperative Code
4. Powers: Same as RB xSec. X101(b)(5), MRB
F. ISLAMIC BANKS (IB) Sec. 3.2(f), GBL

12
13 1. Governing Law Sec. 71, par. 2, GBL
and general conduct of business xIslamic Bank Charter21
2. Purpose Sec. 3, Islamic Bank Charter
3. Powers Sec. 6, Islamic Bank Charter; xSec. X101(b)(6), MRB
G. OTHER CLASSIFICATIONS OF BANKS Sec. 3.2(g), GBL

1. Land Bank of the Philippines (Land Bank) xSecs. 74 to 100-A, Code
of Agrarian Reform of the Philippines22
2. Development Bank of the Philippines (DBP) xRevised Charter of
Development Bank of the Philippines23
3. Philippine Veterans Bank (PVB) xPhilippine Veterans Bank Act24; xAn
Act to Rehabilitate the PVB25
4. Philippine National Bank (PNB) but now privatized xRevised Charter
of Philippine National Bank26; xPhilippine National Bank v. Velasco, 564
SCRA 512 (2008)
5. Pawnshops? xPawnshop Regulation Act27; xBSP Circular No. 37428;
First Planters Pawnshop, Inc. v. Commissioner of Internal Revenue,
560 SCRA 606 (2008): non-bank financial intermediaries (since primary
function is lending), i.e., principal functions include lending, investing or
placement of funds or evidences of indebtedness or equity deposited with
them, acquired by them, or otherwise coursed through them, either for
their own account or for the account of others
21
Republic Act No. 6848 (Charter of Al Amanah Islamic Development Bank of the Philippines)
23
Executive Order No. 81, Series of 1986
24
25
26
Executive Order No. 80 Series of 1986
27
Presidential Decree No. 114
28
Rules and Regulations for Pawnshops
22
H. FOREIGN BANKS
1. Entry of Foreign Banks
a. Modes of entry Sec. 2, Foreign Banks Liberalization Act 29
(i)
By acquiring, purchasing or owning up to 60% of the voting stock

of an existing domestic bank
(ii)
By investing in up to 60% of a new banking subsidiary

incorporated under the laws of the Philippines
(iii) By establishing branches with full banking authority

b. Subject to MB approval, guidelines Secs. 2 and 3, Foreign Banks
Liberalization Act
c. Foreign bank may avail of only 1 mode of entry Sec. 2, Foreign
Banks Liberalization Act; But may change from one mode of entry to
another xSubsec. 121.10, MRB
d. Control of 70% of resources or assets of entire banking system must
be held by banks which are at least majority-owned by Filipinos Sec.
73, par. 3, GBL; Sec. 3, par. 3, Foreign Banks Liberalization Act
e. Equal treatment of local banks Sec. 73, par. 4, GBL; Sec. 8,
Foreign Banks Liberalization Act
2. Rules on Acquisition of Voting Stock in Existing Domestic Bank
a. May own up to 60% voting stock of only 1 domestic bank Sec. 2,
Foreign Banks Liberalization Act
b. Within 7 years from GBL effectivity, MB may authorize foreign bank:
(i) To acquire up to 100% of voting stock of only 1 domestic bank
Sec. 73, par. 1, GBL
(ii) Which acquired up to 60% of voting stock under the Foreign Banks
Liberalization Act and Thrift Banks Act, to further acquire up to
100% voting stock thereof Sec. 73, par. 2, GBL
c. MB shall secure the listing in the PSE 30 of shares of stocks of banks
established under this mode of entry Sec. 3, par. 3, Foreign Banks
Liberalization Act
d. License to do business not required: Equity investment is not deemed
doing business Sec. 3(d), Foreign Investments Act of 199131
29

Philippine Stock Exchange
31
30
10
3. Rules on Acquisition of Voting Stock in New Domestic Bank
a. May own up to 60% of the voting stock of only 1 new banking
subsidiary Sec. 2, Foreign Banks Liberalization Act
b. Must be among top 150 foreign banks in the world or top 5 in their
country of origin as of application date Sec. 3, par. 2, Foreign
Banks Liberalization Act
c. MB shall secure the listing in the PSE of shares of stocks of banks
established under this mode of entry Sec. 3, par. 3, Foreign Banks
Liberalization Act
d. Must be widely-owned and publicly-listed in its country of origin, unless
applicant is owned by government thereof Sec. 3, par. 4, Foreign
Banks Liberalization Act
e. Capitalization Sec. 4(i), Foreign Banks Liberalization Act
f. License to do business not required: Equity investment is not deemed
doing business Sec. 3(d), Foreign Investments Act of 1991
4. Rules on Establishing Branches
a. Governing Laws
(i)
Creation, formation, organization or dissolution of corporations;

fixing of relations, liabilities, responsibilities, or duties of
stockholders, members, directors or officers of corporations to
each other and the corporation: Law of place where foreign bank
established Sec. 77, GBL
(ii)
Entry into the Philippines through establishment of branches:

xForeign Banks Liberalization Act Sec. 72, par. 1, GBL
(iii) Conduct of offshore banking business: xOffshore Banking System

Decree32; xChapter 1, Part Three, BSP Circular No. 1389 Sec.
72, par. 2, GBL
(iv) All other matters: GBL Sec. 77, GBL
b. Must be among top 150 foreign banks in the world or top 5 in country
of origin Sec. 3, par. 2, Foreign Banks Liberalization Act
c. Must be widely-owned and publicly-listed in country of origin, unless
government-owned Sec. 3, par. 4, Foreign Banks Liberalization
Act
d. Time limitation on entry Sec. 6, Foreign Banks Liberalization Act
e. Capitalization Sec. 4(ii), Foreign Banks Liberalization Act
f. Treatment of multiple branches Sec. 74, GBL; Citibank, N.A. v.
Sabeniano, 514 SCRA 441 (2007): Sec. 20 of GBL treats domestic
bank and all branches as one unit, but Sec. 74 of GBL treats all
32
11
branches of a foreign bank as one unit, but as to relation of local
branches, Sec. 75 of GBL and Sec. 5 of Foreign Banks Liberalization
Act provide for Head Office Guarantee for clients to invoke in order to
establish accountability of head office for liabilities of its foreign
branches. But does not apply in the reverse, i.e., clients liability to RP
branch does not extend to liability to head office and branch in other
countries, so off-setting cannot be effected.
g. Head office guarantee Sec. 75, GBL; Sec. 5, Foreign Banks
Liberalization Act
h. Must be licensed to transact business Sec. 133, Corporation Code;
Hang Lung Bank, Ltd. v. Saulog, 201 SCRA 137 (1991): foreign bank
not doing business in RP need not obtain license in order to sue
i. Summons and legal processes Sec. 76, GBL; Sec. 12, Rule 14,
1997 Rules of Civil Procedure
j. Revocation of license Sec. 78, GBL
5. Offshore Banking Units (OBU) Secs. 1(a) and 1(b), Offshore
Banking System Decree
a. Qualification Sec. 2, Offshore Banking System Decree
b. Certificate of authority to operate Sec. 3, Offshore Banking System
Decree
c. Head office guarantee Sec. 4, Offshore Banking System Decree
d. Effects of certain laws Sec. 8, Offshore Banking System Decree
III. DEPOSIT FUNCTION

A. NATURE OF DEPOSIT
1. Deposits as Simple Loans 33 Arts. 1953 and 1980, Civil Code;
Serrano v. Central Bank, 96 SCRA 96 (1980): bank deposits (fixed,
savings, current) are irregular deposits which are really loans; hence,
failure to honor time deposit is failure to pay obligation as debtor, and not
breach of trust from failure to return subject matter of deposit.
2. Bank as Debtor
a. Deposit is voluntary agreement; Know Your Customer standards
xMemorandum dated 1 October 2002; xSec. X262.1, MRB
33
San Carlos Milling Co., Ltd. v. Bank of the Philippine Islands, 59 Phil. 59 (1933); Hilado v. De la
Costa, 83 Phil. 471 (1949); People v. Ong, 204 SCRA 942 (1991); Moran v. Court of Appeals, 230
SCRA 799 (1994); Consolidated Bank and Trust Corporation v. Court of Appeals, 410 SCRA 562
(2003)
12
b. Bank acquires ownership of money deposited; obligation to pay
amount, but no obligation to return the same money 34 Guingona, Jr.
v. City Fiscal of Manila, 128 SCRA 577 (1984): hence, bank not liable
for estafa for failure to pay deposit; BPI Family Bank v. Franco, 538
SCRA 184 (2007): deposit of money is generic and fungible, so Art.
559 of Civil Code (which allows owner unlawfully deprived of movable
property to recover the same from current possessor) does not apply.
c. Payment to proper party-depositor Fulton Iron Works Co. v. China
Banking Corp., 55 Phil. 208 (1930): depositor presumed owner of
funds, bank without notice justified in paying out to depositor; Bank of
the Philippine Islands v. Court of Appeals, 232 SCRA 302 (1994):
since ownership of deposit disputed, determination by probate court
provisional, authority of heirs to withdraw not equivalent to court order
to release deposit to heirs, hence, bank no right to pay persons
indisputably entitled thereto
d. Deposits are not preferred credits Central Bank v. Morfe, 63 SCRA
114 (1975): if bank insolvent, deposits non-preferred credits subject to
rules on preference of credits
e. Bank has right to compensation Gullas v. Philippine National
Bank, 62 Phil. 519 (1935): general rule, bank has a right to set off of
the deposit in its hands for payment of any indebtedness to it on part of
depositor; Republic v. Court of Appeals, 65 SCRA 186 (1975):
depositor has every right to apply his credit with bank to loans he
obtained, compensation takes place ipso jure?; Bank of the
Philippine Islands v. Court of Appeals, 512 SCRA 620 (2007): while
bank has right to set-off, it should act judiciously, i.e., notify depositor
f. No breach of trust; Mandamus not a remedy xLucman v. Malawi, 511
SCRA 268 (2006)
3. Banks Duty of Utmost Care 35 Sec. 2, GBL; Consolidated Bank and
Trust Corporation v. Court of Appeals, 410 SCRA 562 (2003): fiduciary
nature does not convert contract between bank and its depositors from
simple loan to trust agreement, whether express or implied; because
banks do not accept deposits to enrich depositors but to enrich
themselves, thus banks allowed to offer lowest possible interest rate on
deposits and charge highest possible interest rate on loans, and failure to
pay deposit is failure to pay simple loan, not breach of trust
34
Serrano v. Central Bank, 96 SCRA 96 (1980); People v. Puig, 563 SCRA 564 (2008).
Simex International (Manila), Inc. v. Court of Appeals, 183 SCRA 360 (1990); Go v.
Intermediate Appellate Court, 197 SCRA 22 (1991); Bank of the Philippine Islands v. Intermediate
Appellate Court, 206 SCRA 408 (1992); Philippine Bank of Commerce v. Court of Appeals, 269
SCRA 695 (1997); Bank of the Philippine Islands v. Court of Appeals, 326 SCRA 641 (2000);
Firestone Tire & Rubber Company of the Philippines v. Court of Appeals, 353 SCRA 601 (2001)
35
13
B. KINDS OF DEPOSIT
1. Demand Deposits Secs. 58-60, NCBA: MRB; BPI Family Savings
Bank v. First Metro Investment Corporation, 429 SCRA 30 (2004):
liabilities of banks denominated in RP currency and subject to payment in
legal tender upon demand by presentation of depositors checks, no
prohibition against demand deposits earning interest; xSecs. X201 to
X204, MRB
a. For UB and KB Sec. 33, GBL
b. For TB Sec. 10(b), Thrift Banks Act
c. For RB/Coop Bank Sec. 12(b), Rural Banks Act; xSubsec. X201.1,
MRB
d. For Islamic Banks Sec. 6, par. (7)(a), Islamic Bank Charter
2. Savings Deposits xSec. X213 and X214, MRB; International
Exchange Bank v. Commissioner of Internal Revenue, 520 SCRA 688
(2007): fixed savings deposit treated as time deposit (provides higher
interest rate if not withdrawn within required fixed period) as opposed to
regular savings deposit (also with passbook but withdrawable any time)
3. Negotiable Order of Withdrawal (NOW) Accounts xSecs. X223 to
X226, MRB; People v. Reyes, 454 SCRA 635 (2005): interest-bearing
accounts that combine payable on demand feature of checks and
investment feature of savings account, hence, still deemed as check for
purposes of estafa, although gravamen is deceit, not negotiability
4. Time Deposits xSecs. X231, MRB; BPI Family Savings Bank v. First
Metro Investment Corporation, 429 SCRA 30 (2004): deposit the
payment of which cannot be legally required within such specified number
of days; International Exchange Bank v. Commissioner of Internal
Revenue, 520 SCRA 688 (2007): if withdrawn within period, will be
subject to interest as if regular savings deposit
5. Foreign Currency Deposits Secs. 2 and 3, FCDA36
6. Money Market Placements? Allied Banking Corporation v. Lim Sio
Wan, 549 SCRA 504 (2008): Money market is a market dealing in
standardized short-term credit instruments (involving large amounts)
where lenders and borrowers do not directly deal with each other but
through middle man or dealer in open market. Money market transaction,
like a deposit, is a simple loan or mutuum, with the investor as a lender
who loans his money to a borrower through a middleman or dealer. Bank
and client relationship is also creditor-debtor.
36
Republic Act No. 6426, as amended (Foreign Currency Deposit Act)
14
C. CAPACITY OF DEPOSITORS
1. Minors Sec. 1, Presidential Decree No. 734; Sec. 22, Thrift Banks
Act
2. Married Women Sec. 5, Republic Act No. 7192
3. Corporations: Through signatories designated by Board of Directors
Sec. 23, Corporation Code
4. Bank Officers and Employees: Prohibited from maintaining demand
deposits or current accounts in banking office where they are assigned
xSec. X204, MRB
D. OPENING OF DEPOSIT ACCOUNTS

1. Know Your Customer Standards: At least 3 specimen signatures
updated every 5 years, ID optional xSubsec. X262.1, MRB
2. Prohibitions:
a. Anonymous Accounts/Fictitious Names Sec. 9(a), AMLA37
b. Pseudonyms xArt. 178, Revised Penal Code; xCommonwealth Act
No. 142, as amended; xArts. 379-380, Civil Code
c. Exception: Numbered accounts Sec. 9(a), AMLA; Sec. 3(1), FCDA
3. Joint Accounts Arts. 485, 1207 and 1208, Civil Code
E. ADMINISTRATION OF DEPOSIT ACCOUNTS

1. Deposit of Funds
a. Delivery required Art. 1934, Civil Code
b. Acceptability of withdrawal slips as deposits Firestone Tire &
Rubber Co. of the Phil. v. Court of Appeals, 353 SCRA 601 (2001):
deposit slips not legal tender, not negotiable, therefore, not acceptable
2. Withdrawal of Funds
a. From current accounts: Allowing withdrawal of value of check drawn:
(i)
37
In case of insufficiency of funds Moran v. Court of Appeals,

230 SCRA 799 (1994): if deposit is sufficient, bank failure to pay
entitled depositor to damages, conversely, bank not liable for
refusal to pay check for insufficiency of funds, even if funds
deposited later in the day; Villanueva v. Nite, 496 SCRA 459
(2006): if bank refuses to pay check, payee-holder cannot sue
bank, but instead sue drawer, who in turn may sue bank
Republic Act No. 9160, as amended by Republic Act No. 9194 (Anti-Money Laundering Act of
2001)
15
(ii)
Prior to clearing Associated Bank v. Tan, 446 SCRA 282

(2004): bank allowing withdrawal of face value of deposited check
prior to clearing assumes risk of dishonor
(iii) In favor of other persons when check crossed Traders Royal

Bank v. Radio Philippines Network, Inc., 390 SCRA 608
(2002): if crossed check, bank duty bound to ascertain indorsers
title to check or nature of his possession because crossed check:
(a) may not be encashed but only deposited; (b) may be
negotiated only once to one with account in bank; (c) serves as
warning that check issued for particular purpose and bank must
inquire if holder received check pursuant to said purpose,
otherwise, he is not a holder in due course
(iv) In contrast with managers check Equitable PCI Bank v. Ong,
502 SCRA 119 (2006): managers check is order of bank to pay,
drawn upon itself, hence, regarded substantially as good as cash
b. From savings accounts Bank of the Philippine Islands v. Court of
Appeals, 326 SCRA 641 (2000): present passbook and withdrawal slip
and, if third party, present authorization (SPA)
c. From time deposits Far East Bank and Trust Company v.
Querimit, 373 SCRA 665 (2002): surrender of certificate of deposit
d. From foreign currency deposits Sec. 5, FCDA: based on contract
e. If deceased depositor:
(i)
Tax clearance required Sec. 97, NIRC; But See: xSec. 28(A)(1)
(a) and (6), NIRC
(ii)
Survivorship Agreements Vitug v. Court of Appeals, 183

SCRA 755 (1990): survivor-take-all feature allowed, obligation
with a term (death), not for unlawful purpose (inofficious donation)
3. Booking of Deposits xSec. X261, MRB

4. Interest on Deposits Citibank, N.A. v. Cabamongan, 488 SCRA 517
(2006): loan or forbearance of money, so interest due is that stipulated in
writing, and in absence thereof, 12% per annum counted from time of
demand
a. Not subject to interest ceilings xSec. X242, MRB
b. Time of payment of interest on time deposits xSubsec. X242.1, MRB
c. Matured time deposits xSubsec. X242.2, MRB
d. Disclosure requirements xSec. X243, MRB
5. Closing of Account Far East Bank and Trust Company v. Pacilan,
Jr., 465 SCRA 372 (2005): bank not liable for closing of account in
exercise of banks rights under express rules and regulations (due to
frequent drawing of checks against insufficient funds)
16
F. SECRECY OF BANK DEPOSITS

1. General Rules
a. Rationale: right to privacy Art. III, Secs. 2, 3, and 7 and Art. II, Sec.
28, 1987 Constitution; Republic v. Eugenio, 545 SCRA 384 (2008):
right to privacy is statutory, not constitutional, thus, while bank
accounts not covered by right to information or requirement of full
public disclosure, neither is it subject to requirements for issuance of
search or arrest warrants
b. Applicable law Intengan v. Court of Appeals, 377 SCRA 63 (2002):
if accounts are U.S. Dollar deposits, applicable law is FCDA, and not
R.A. 1405, which applies to Philippine Peso deposits.
c. Applicability of exclusionary rule Art. III, Secs. 2 and 3, 1987
Constitution; Ejercito v. Sandiganbayan (Special Division), 509
SCRA190 (2006): fruit of the poisonous tree principle not applicable
in absence of statutory provision calling for application
2. Rules for Peso Deposits
a. Coverage Sec. 2, Law on Secrecy of Bank Deposits 38: all deposits
of whatever nature with banks or banking institutions in RP, including
investments in bonds issued by GOP; Ejercito v. Sandiganbayan
(Special Division), 509 SCRA190 (2006): of whatever nature
proscribes restrictive interpretation of deposits, hence, broad enough
to cover trust accounts
b. Prohibitions Secs. 2 and 3, Law on Secrecy of Bank Deposits;
Secs. 55.1(b) and 55.4, GBL
c. Exceptions
(i)
Under the Law on Secrecy of Bank Deposits Sec. 2, Law on

Secrecy of Bank Deposits
(a)
Upon written permission of the depositor or investor:

(1)
(2)
38
39
DOSRI39 loans Sec. 26, NCBA; xSec. X337, MRB

For loans secured by hold-out or assignment of CTDs
xSec. X315(f), MRB
(b)
In cases of impeachment
(c)
Upon the order of a competent court in cases of bribery or

dereliction of duty of public officials
(d)
In cases where the money deposited or invested is the

subject of litigation
Republic Act No. 1405, as amended

Directors, Officers, Stockholders, Related Interests
17
(ii)
Under the Anti-Graft and Corrupt Practices Act 40: In cases

involving unexplained wealth Sec. 8, Anti-Graft and Corrupt
Practices Act; Philippine National Bank v. Gancayco, 15
SCRA 91 (1965): clear exception to bank secrecy law,
notwithstanding any provision of law to the contrary; Banco
Filipino Savings and Mortgage Bank v. Purisima, 161 SCRA
576 (1988): inquiry extends to cases where property is concealed
or held or recorded in name of other persons, else circumvention
(iii) Under the Ombudsman Act41 Sec. 15(8), Ombudsman Act;

Marquez v. Disierto, 359 SCRA 772 (2001): requisites for in
camera inspection: (a) pending case before court of competent
jurisdiction; (b) account must be clearly identified, and inspection
limited to subject matter of pending case; (c) bank personnel and
account holder must be notified to be present during inspection;
(d) inspection may cover only the account identified in pending
case Ejercito v. Sandiganbayan (Special Division), 509
SCRA190 (2006): Marquez v. Disierto ruling (accountholder must
be notified) has no retroactive application
(iv) Under the Plunder Law42 Secs. 1(d) and 4, Plunder Law;
Ejercito v. Sandiganbayan (Special Division), 509 SCRA190
(2006): cases of unexplained wealth, such as plunder, which is
similar to bribery, therefore, constitutes exception to confidentiality
of deposits
(v)
Under the AMLA Sec. 11, AMLA; Republic v. Eugenio, 545

SCRA 384 (2008): even if bank inquiry order may be availed of
without need of pre-existing case under AMLA, it does not follow
that such order may be availed of ex parte, since nothing in Sec.
11 authorizes it, unlike freeze orders which are authorized to be
issued upon application ex parte under Sec. 10 of AMLA; in case
of doubt, resolved in favor of confidentiality
(a)
Upon order of a competent court in cases of violation of the

AMLA where there is probable cause of money laundering,
except that no court order is required in cases of:
(1)
(2)
(3)
(b)
40
kidnapping for ransom

drug trafficking
hijacking, destructive arson and murder, including those
perpetrated by terrorists against non-combatants and
similar targets
BSP inquiry into or examination of deposits or investments

with any bank, when the inquiry or examination is made in
the course of the BSPs periodic or special examination

42
41
18
(vi) Independent auditor hired by the bank to conduct its regular audit,
provided that the examination is for audit purposes only and the
results thereof shall be for the exclusive use of the bank xDOJ
Opinion No. 243 (Series of 1957); xMarquez v. Disierto, 359
SCRA 772 (2001)
(vii) Under the PDIC43 Charter44 Sec. 8, par. Eighth, PDIC Charter:
PDIC and BSP may inquire into and examine deposit accounts in
case there is a finding of unsafe or unsound banking practice
(vii) Under the Human Security Act45 Secs. 27-43, Human Security
Act: Note that: (a) exception is only with respect to R.A. No. 1405,
and not FCDA; (b) exclusionary rule is made to apply
(viii) Under the NIRC Sec. 6(F), NIRC
(a)
Upon inquiry by the Commissioner of Internal Revenue for

the purpose of determining the net estate of a deceased
depositor
(b)
In case a taxpayer files and application to compromise his

tax liabilities on the ground of financial incapacity (waiver
required)
(ix) Under the Unclaimed Balances Law46 Disclosure to the

Treasurer of the Philippines for dormant deposits for at least ten
(10) years Sec. 2, Unclaimed Balances Law; xDOJ Opinion
No. 104 (Series of 1975)
(x)
Under the Rules of Court

(a)
Garnishment Sec. 9(c), Rule 39, 1997 Revised Rules of

Civil Procedure; China Banking Corporation v. Ortega,
49 SCRA 356 (1973): disclosure purely incidental to
execution process, and no legislative intent to place
accounts beyond reach of execution to satisfy final
judgment; xPhilippine Commercial and Industrial Bank v.
Court of Appeals, 193 SCRA 452 (1991)
(b)
Preliminary attachment Sec. 10, Rule 57, 1997 Revised

Rules of Civil Procedure;
d. Penalty for Violation Sec. 5, Law on Secrecy of Bank Deposits
43
Philippine Deposit Insurance Corporation

Republic Act No. 3591, as amended by Republic Act No. 7400 and Republic Act No. 9576
45
46
Act No. 3936, as amended by Presidential Decree No. 679
44
19
3. Rules for Foreign Currency Deposits
a. Coverage Sec. 8, FCDA: all foreign currency doposits authorized
under FCDA; Salvacion v. Central Bank of the Philippines, 278
SCRA 27 (1997): FCDA intent to cover only foreign lenders and
investors, not transients, but this is exceptional case; Estrada v.
Disierto, 445 SCRA 655 (2004): Seems to adopt view that foreign
currency deposits of Filipinos (as opposed to foreign lenders and
investors, citing Salvacion v. Central Bank of the Philippines), are not
covered by FCDA and thus not exempt from BIR-issued processes
b. Prohibition Sec. 8, FCDA
c. Exceptions
(i)
Upon written consent of the depositor 47 Sec. 8, FCDA; China

Banking Corporation v. Court of Appeals, 511 SCRA 110
(2006): co-payee of a foreign currency depositor in checks
deposited in account of latter deemed depositor and may give
consent to allow inquiry
(ii)
Upon order of a competent court in cases of violation of the AMLA

where there is probable cause of money laundering, except that
no court order is required in specified cases Sec. 11, AMLA
(iii) BSP inquiry into or examination of deposits or investments with

any bank, when the inquiry or examination is made in the course
of the BSPs periodic of special examination of said bank Sec.
11, AMLA
(iv) Under the PDIC48 Charter49 Sec. 8, par. Eighth, PDIC Charter:
PDIC and BSP may inquire into and examine deposit accounts in
case there is a finding of unsafe or unsound banking practice
d. Penalty for Violation Sec. 10, FCDA
4. Rules for Deposits in Specific Banks and Financial Institutions
a. Under the GBL Sec. 55.1(b), GBL
a. Islamic Banks Secs. 33 and 45, Islamic Bank Charter
b. Rural Banks Sec. 26(a)(2), Rural Banks Act
c. Thrift Banks Sec. 21(a)(2), Thrift Banks Act
d. Non-Stock Savings and Loans Association xSec. 6, Revised NonStock Savings and Loans Association Act of 1997
47
Intengan v. Court of Appeals, 377 SCRA 63 (2002); Estrada v. Desierto, 445 SCRA 655 (2004)
49
48
20
G. GARNISHMENT
1. Procedure Sec. 9(c), Rule 39, 1997 Rules of Civil Procedure
2. Exempt Deposits
a. Foreign currency deposits Sec. 8, FCDA; But See xSalvacion v.
Central Bank of the Philippines, 278 SCRA 27 (1997)
b. Under the Rules of Court Sec. 13, Rule 39, 1997 Rules of Civil
Procedure
3. No violation of Law on Secrecy of Bank Deposits xChina Bank v.
Ortega, 49 SCRA 356 (1973); xPhilippine Commercial and Industrial Bank
v. Court of Appeals, 193 SCRA 452 (1991)
4. Liability for Release Rizal Commercial Banking Corporation v. De
Castro, 168 SCRA 49 (1988): bank not liable for rlease of funds pursuant
to a court order; xPhilippine Commercial and Industrial Bank v. Court of
Appeals, 193 SCRA 452 (1991)
H. DEPOSIT INSURANCE
1. Coverage Sec. 4, PDIC50 Charter51; Sec. 9, FCDA
2. Amount Insured: Maximum of P500,000.00 Sec. 4(g), PDIC Charter52
3. Rules on Payment Secs. 10(b) to (d), PDIC Charter
4. Liability of PDIC Philippine Deposit Insurance Corp. v. Court of
Appeals, 283 SCRA 462 (1997): only for deposits actually received by a
bank (and therefore insured with PDIC), but not for money not received,
even if time deposit certificates indicates that it is insured with PDIC
I. UNCLAIMED BALANCES
1. Definition Sec. 1, Unclaimed Balances Law
2. Report to Treasurer; Notice, Posting, Publication Sec. 2, Unclaimed
Balances Law; Republic v. Court of Appeals, 345 SCRA 63 (2000):
publication mandatory to notify persons who may have interest in funds for
purposes of escheat proceedings
3. Escheat Proceedings Sec. 3, Unclaimed Balances Law
4. Effects of Compliance/Non-Compliance Secs. 4 and 5, Unclaimed
Balances Law
50

52
As further amended by Secs. 3 and 4, Republic Act No. 9576
51
21
J. ANTI-MONEY LAUNDERING ACT

1. Declared Policy Sec. 2, AMLA
2. Covered Transactions: Transaction, in cash or other equivalent monetary
instrument in excess of P500,000 within 1 banking day Sec. 3(b), AMLA
3. Suspicious Transactions: Transaction with Covered Institution,
regardless of amount involved, where any of the enumerated suspicious
circumstances exist Sec. 3(b-1), AMLA
4. Covered Institutions Sec. 3(a), AMLA
a. Banks and other entities,
supervised/regulated by BSP
their
subsidiaries
and
affiliates,
b. Insurance companies and other entities supervised/regulated by

Insurance Commission
c. SEC supervised/regulated entities53
5. Obligations of Covered Institutions Sec. 9, AMLA
a. Customer Identification: Establish and record, and maintain a system
of verifying true identities of clients, including legal existence and
organizational structure of corporate clients, and their representatives,
based on official documents
b. Record Keeping: Keep records for 5 years
c. Reporting of Covered and Suspicious Transactions: Report Covered
Transactions and Suspicious Transactions to AMLC 54, within 5 working
days from occurrence, which shall not violate the Law on Secrecy of
Bank Deposits, FCDA, and GBL
6. Money-Laundering Crime: Committed when the proceeds of an Unlawful
Activity are transacted to make them appear to have originated from
legitimate sources, by the following acts: Sec. 4, AMLA
a. Transacting or attempting to transact, with monetary instrument or
property, knowing it represents, involves, or relates to proceeds of any
Unlawful Activity
b. Facilitating money-laundering referred to in Item (a) above, by failing to
perform an act
53
(a) Securities dealers, brokers, salesmen, investment houses, and other entities managing
securities or rendering services as investment agents, advisor, or consultants; (b) Mutual funds,
closed-end investment companies, common trust funds, pre-need companies, and other similar
entities; (c) Foreign exchange corporations, money changers, money payment, remittance, and
transfer companies, and other similar entities; (d) Other entities administering or dealing in
currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes
and other similar monetary instruments or property
54
Anti-Money Laundering Council
22
c. Failing to disclose and file report with AMLC of any monetary
instrument or property as required under AMLA
7. Unlawful Activities: Act or omission or series or combination thereof,
involving or having relation to the crimes enumerated Sec. 3(i), AMLA
8. Jurisdiction: Regional Trial Court/Sandiganbayan Sec. 5, AMLA
9. Prosecution Sec. 6, AMLA
10. Prohibition against Political Harassment Sec. 16, AMLA
11. Penalties and Other Consequences
a. Penalties Sec. 14, AMLA
(i)
(ii)
(iii)
(iv)
Money laundering
Failure to keep records
Malicious reporting
Breach of confidentiality
b. Civil Forfeiture Sec. 12, AMLA; xRules on Civil Forfeiture55;

Republic v. Glasgow Credit and Collection Services, Inc., 542
SCRA 95 (2008): 2 conditions: (1) there is a suspicious transaction
report or a covered transaction report deemed suspicious after
investigation by AMLC; and (2) court has, in a petition filed for the
purpose, ordered seizure of any monetary instrument or property
related to such report. Criminal action for an unlawful activity is not a
prerequisite for institution of civil forfeiture proceeding, which is in rem.
12. Freezing of Accounts: Issued by Court of Appeals upon ex-parte
application of AMLC after determination of probable cause that monetary
instrument or property is in any way related to Unlawful Activity, for 20
days unless extended Sec. 10, AMLA; Republic v. Eugenio, 545 SCRA
384 (2008): ex-parte application allowed, unlike inquiry into deposit
13. Examination of Accounts Sec. 11, AMLA; xRepublic v. Eugenio, 545
SCRA 384 (2008)
a. Upon order of a competent court in cases of violation of the AMLA
where there is probable cause of money laundering, except that no
court order is required in cases of kidnapping for ransom, drug
trafficking, hijacking, destructive arson and murder, including those
perpetrated by terrorists against non-combatants and similar targets.
b. BSP inquiry into or examination of deposits or investments with any
bank, when the inquiry or examination is made in the course of the
BSPs periodic of special examination of said bank to ensure
compliance with AMLA
14. AMLC; Composition and Powers Sec. 7, AMLA
15. Mutual Assistance among States Sec. 13, AMLA
55
SC Circular A.M. No. 05-11-04-SC
23
IV. LOAN FUNCTION

A. BASIC CONCEPTS
1. Grant, Purpose, and Requirement of Loans Secs. 39 and 40, GBL;
a. Grant of loans Sec. 39, GBL: Only in amounts and for periods of
time essential for effective completion of operations to be financed;
must be consistent with safe and sound banking practices
b. Purpose of loans Sec. 39, GBL: Must be stated in application and in
contract between bank and borrower; if bank finds that proceeds
employed, without its approval for other purposes, bank has right to
terminate loan and demand immediate repayment
c. Requirement for loans Sec. 40, GBL; xSecs. X301, X302 and 304,
MRB; bank must ascertain that debtor capable of fulfilling his
commitments, hence, bank may require submission of financial
statements; if financial statements prove false or incorrect in any
material detail, bank has right to terminate loan and demand
immediate repayment; United Coconut Planters Bank v. Ramos, 415
SCRA 596 (2003); bank should verify identity and other information
regarding its debtors; Banco de Oro-EPCI, Inc. v. JAPRL
Development Corporation, 551 SCRA342 (2008): bank should verify
capacity to repay, if financial statements falsified, bank may terminate
2. Prohibited Transactions Secs. 55.1(c), 55.1(d), and 55.2, GBL:
prohibition against bank officers and borrowers in overvaluing security,
furnishing false statements, offering and accepting gifts, fees,
commissions for loan approval
3. MB Regulation
a. Unsecured loans Sec. 41, GBL
b. Other security requirements Sec. 42, GBL; Sec. 106, NCBA
c. Terms and conditions Sec. 43, GBL
d. Renewal or extension Sec. 48 GBL; xSec. X332, MRB
e. Provisions for losses and write-offs Sec. 49 GBL; xSecs X302 and
X306 MRB, xRepublic Act No. 9182 (Special Purpose Vehicle Act of
2002)
4. Development Assistance Incentives Sec. 46, GBL: for banks that
extend loan for social purposes without government guarantee
5. Disclosure Requirements Secs. 2, 4 and 6, Truth in Lending Act 56;
xSec. X307, MRB; New Sampaguita Builders Construction, Inc.
56
24
(NSBCI) v. Philippine National Bank, 435 SCRA 565 (2004): If borrower
not clearly informed of Disclosure Statements prior to consummation of
loan, bank has no right to collect upon such charges, increases, even if
stipulated in the loan documents (PN), for violation of Truth in Lending Act
B. TERMS AND CONDITIONS

1. Amortization Sec. 44, GBL: adapted to nature of operations to be
financed; if maturity more than 5 years, provisions for periodic
amortization; if purpose will not initially produce revenues, may defer
amortization, but initial date not later than 5 years
2. Pre-Payment Sec. 45, GBL: borrower may, at any time, prepay loan or
portion thereof, subject to such reasonable terms agreed upon
3. Interest Art. 1956, Civil Code: expressly stipulated in writing
a. No ceiling xSec. 1-a, 4-a, 45 of Usury Law 57; xSec. X305, MRB;
Bulos, Jr. v. Yasuma, 527 SCRA 727 (2007): although usury law
suspended by C.B. Circular No. 905, s. 1982, still stipulated interest
rates are illegal if unconscionable (here 4% per month, other cases 3%
per month unconscionable), in which case, legal interest rate of 12%
per annum shall apply; Bacolor v. Bangko Filipino Savings and
Mortgage Bank, Dagupan City Branch, 515 SCRA 79 (2007): 24%
per annum reasonable, also, banks closure does not diminish
liquidators power to carry on administration of bank including
imposition of interest and institution of foreclosure proceedings
b. In the absence of stipulation xSec. X305, MRB
c. Escalation clause; when allowable Art. 1308, Civil Code; xSec.
X305, MRB; Philippine National Bank v. Court of Appeals, 196
SCRA 536 (1991): provision allowing increase within limits allowed by
law at any time depending on whatever policy it may adopt in the
future invalid because it violates mutuality of contracts, especially in
contracts of adhesion; New Sampaguita Builders Construction, Inc.
(NSBCI) v. Philippine National Bank, 435 SCRA 565 (2004): if
escalation clause annulled, subject to original or stipulated interest
rate; But See xLlorin, Jr. v. Court of Appeals, 218 SCRA 426 (1993)
d. Floating rates of interest xSec. X305, MRB; Consolidated Bank
and Trust Corporation (Solid Bank) v. Court of Appeals, 356 SCRA
671 (2001): if no reference rate upon which to peg variable interest
rate, then invalid
4. Extraordinary Inflation/Deflation Art. 1250, Civil Code; Equitable PCI
Bank v. Ng Sheung Ngor, 541 SCRA 223 (2007): (a) valid escalation
clause provides: (i) interest rate will only be increased if applicable
maximum interest rate increased by law or MB; and (ii) stipulated interest
57
Act No. 2655 as amended
25
rate will be reduced if maximum interest rate is reduced by law or MB; (b)
for extraordinary inflation (or deflation to apply: (i) there is an official
declaration of extraordinary inflation or deflation from BSP: (ii) obligation is
contractual in nature; and (iii) parties expressly agreed to consider effects
of extraordinary inflation or deflation.
5. Restructuring xSec. X322, MRB
C. SINGLE BORROWERS LIMIT Sec. 35, GBL

1. Ceilings Sec. 35.1 and 35.2, in rel. to Sec. 24, GBL; xSec. X303, MRB
a. Total credit commitment of bank to borrower shall at no time exceed
20% of net worth (total unimpaired paid-in capital including paid-in
surplus, retained earnings and undivided profit, net of valuation
reserves and other adjustments as may be required by BSP) of bank
b. May be increased by an additional 10% of net worth of bank if
adequately secured by trust receipts, shipping documents, warehouse
receipts or other similar documents transferring or securing title
covering readily marketable, non-perishable goods fully insured
2. What is Included in Ceiling Secs. 35.3 to 35.7, GBL58; xSubsec
X303.1 to 303.4, MRB:
a. Direct liability of maker or acceptor of paper discounted with or sold to
bank such bank and liability of general indorser, drawer or guarantor
who obtains a loan or discounts or sells papers with such bank
b. If individual, include all liabilities of corporation, partnership, or
association where he owns or controls majority interest
c. If corporation, include all liabilities of subsidiaries in which corporation
owns or controls majority interest
d. If partnership, association, other entity, include liabilities of all members
e. But Exclude: loans and obligations secured by obligations of BSP or
GOP, fully guaranteed by GOP, covered by assignment of deposits,
margin deposits, and other non-risk items
58
Government of the Philippine Islands v. Judge of First Instance of Iloilo, 34 Phil. 157 (1916);
Tolentino v. Carlos, 66 Phil. 140 (1938); Gutierrez v. Camus, 96 Phil. 144 (1954); Araneta v. Hon.
Gatmaitan., 101 Phil. 323 (1957)
26
3. Exceptions
a. As MB may otherwise prescribe for reasons of national interest Sec.
35.1, GBL: Note, SBL currently set at 25% of net worth of bank
b. Deposits of RB with government financial institutions Sec. 17, Rural
Banks Act
4. Sanctions xSubsec. 303.5, MRB
D. DOSRI ACCOUNTS Sec. 36, GBL; Sec. 26, NCBA

1. Coverage: Persons and Transactions Covered xSecs. X326 to X329,
MRB
a. Covered Persons: Directors, Officers, Stockholders, Related Interests
b. Excluded Persons: Shareholders Coop Bank with respect to loans,
credit accommodations and guarantees extended by Coop Bank
b. Covered Transactions: DOSRI becoming a borrower (directly or
indirectly, for himself or as representative of others), guarantor,
indorser, surety (MB may also regulate amount of investments of bank
in enterprises owned or controlled by DOSRI)
c. Excluded Transactions: Loans, credit accommodations, or advances to
officers in the form of fringe benefits
2. Ceilings: Individual and Aggregate Ceilings and Exclusions xSecs.
X330 to X332, MRB
a. Limit of loans to DOSRI amount equivalent to unencumbered
deposits and book value of paid-in capital contribution in bank
b. Exclusions from limit loans secured by non-risk assets
3. Requirements: Procedural and Reportorial xSecs. X334 and X335,
MRB
a. If Director or Officer loan must be approved in writing by majority of
all directors of bank, excluding director concerned, and approval shall
be entered upon records of bank and copy transmitted to BSPs SED;
Note that if there is a violation of Sec. 36 of GBL, upon due notice to
Board of Directors, the office of director or officer who violates may be
declared vacant and the director or officer may be subject to penal
provisions of NCBA
b. If DOSRI dealings shall be upon terms not less favorable to bank
than those offered to others
4. Sanctions xSec. X336, MRB
27
E. COLLATERAL/SECURITY
1. Unsecured Loans xSec. X319, MRB
2. Joint and Solidary Signature (JSS) Art. 2047, Civil Code; xArts. 1207
to 1225, Civil Code; Philippine National Bank v. Court of Appeals, 198
SCRA 767 (1991): liability of surety based on contract; Security Bank
and Trust Company, Inc. v. Cuenca, 341 SCRA 781 (2000): suretyship
strictly construed against creditor, hence, surety not liable beyond amount
or period stipulated, even if continuing surety agreement, absent clear
showing that surety waived right to be notified or to give consent; xOng v.
Philippine Commercial Industrial Bank, 448 SCRA 705 (2005)
3. Loans Secured by Chattels or Intangible Property
a. Limits Sec. 38, GBL: not exceed 75% appraised value of security;
xSec. X313, MRB
b. Types of security
(i)
Chattel Mortgage xChattel Mortgage Law59
(ii)
Pledge xArts. 2085-2123, Civil Code
(iii) Hold-out and/or Assignment xArts. 1624-1635, Civil Code

4. Loans Secured by Real Estate Mortgages (REMs)
a. Limits Sec. 37, GBL: not exceed 75% appraised value of real estate,
plus 60% appraised value of insured improvements; xSec. X311, MRB
b. Mortgagee in good faith vs. mortgagee in bad faith Philippine
National Cooperative Bank v. Carandang-Villalon, 139 SCRA 570
(1985): old rule, bank not required to investigate title of property;
Development Bank of the Philippines v. Court of Appeals, 331
SCRA 267 (2000): due diligence required of banks: (i) send
representatives to premises; and (ii) investigate who are real owners of
property; Canlas v. Court of Appeals, 326 SCRA 425 (2000): degree
of diligence more than good father of a family, because public interest;
xMetropolitan Bank and Trust Co. v. Pascual, 547 SCRA 246 (2009)
c. Acquisition of property by way of satisfaction of claims Sec. 52, GBL:
Property (i) mortgaged to bank in good faith by way of security for
debts, (ii) conveyed to bank in satisfaction of previously contracted
debt, or (iii) purchased under judgments, decrees, mortgages, trust
deeds, bank may acquire but must dispose within 5 years
d. Dragnet Clause or Blanket Mortgage Clause Union Bank of the
Philippines v. Court of Appeals, 471 SCRA 751 (2005): mortgage
liability usually limited to amount in contract, but if manifest intent of
parties that mortgaged property shall also answer for future loans, valid
59
Act No. 1508
28
5. Foreclosure of REMs Sec. 47, GBL
a. Types of foreclosure
(i)
Judicial Rule 68, Rules of Court
(ii)
Extra-judicial Act No. 3135, as amended
(iii) Specific rules for TB/RB/Coop Banks Sec. 6, Rural Banks Act;
xSubsecs.2311.4 and 3311.4, MRB
b. Right and period of redemption Sec. 47, par. 1, GBL: General rule,
one (1) year from registration of certificate of sale; xSC Circular AM
No. 99-10-05 (as further amended on 7 August 2001)
(i)
Exception: Extrajudicial foreclosure of property mortgaged by

juridical person Sec. 47, par. 2, GBL: registration of certificate
of sale, but not exceeding three (3) months
(ii)
Exercise of right of redemption Metropolitan Bank and Trust

Company v. Tan, 569 SCRA 814 (2009): statement of intent to
redeem must be with actual and simultaneous tender of payment
(iii) Extension of redemption period Lazo v. Republic Surety and

Insurance Co., 31 SCRA 329 (1970): legal redemption converted
by agreement of parties to conventional redemption; Ibaan Rural
Bank, Inc. v. Court of Appeals, 321 SCRA 88 (1999): estoppel
(iv) Tolling of redemption period Sumerariz v. Development Bank
of the Philippines, 21 SCRA 1374 (1967): Not; Peoples
Financing Corporation v. Court of Appeals, 192 SCRA 34
(1990): Not even by TRO; But see Consolidated Bank and
Trust Corporation (Solidbank) v. Intermediate Appellate
Court, 150 SCRA 591 (1987): Yes; See also CMS Stock
Brokerage, Inc. v. Court of Appeals, 275 SCRA 790 (1997): in
prior case of Consolidated, there was fraud, hence, period tolled
(v)
Payment of CGT and DST xBIR Ruling 0046-2001; Letter dated

26 September 2001 addressed to Ayala Life.
c. Redemption Price Sec. 47, par. 1, GBL: amount due under

mortgage deed plus stipulated interest, costs, expenses less income;
Sec. 6, Act No. 3135, as amended; Sec. 28, Rule 39, 1997 Rules of
Civil Procedure; Union Bank of the Philippines v. Court of
Appeals, 359 SCRA 480 (2001): governed by GBL (GBA then) which
amends Act No. 3135, hence, Section 30, Rule 39 of Rules of Court
not applicable; Development Bank of the Philippines v. West
Negros College, Inc., 391 SCRA 330 (2002): DBP governed by
charter
d. Possession Sec. 47, par. 1, GBL; Samson v. Rivera, 428 SCRA
759 (2004): Issue of WOP ministerial, even within redemption period
e. Injunction and Bond Sec. 47, par. 1, GBL
29
V. INVESTMENTS AND OTHER FUNCTIONS OF BANKS

A. EQUITY INVESTMENTS
1. Limits on Equity Investments of UB
a. In general Sec. 24, par. 1, GBL: May invest in equity of allied
(financial or non-financial) and non-allied enterprises; xSec. X376,
MRB; xAgan, Jr. v. Philippine International Air Terminals Co., Inc., 402
SCRA 612 (2003)
(i)
Must be with prior approval of MB Sec. 24, par. 4, GBL
(ii)
Total investment in equities of allied and non-allied enterprises

Sec. 24.1, GBL: Max. 50% of net worth; xSec. X383(b), MRB
(iii) Investment in equity of any one enterprise Sec. 24.2, GBL:

Max. 25% of net worth; xSec. X383(a), MRB
(iv) Definition of net worth Sec. 24, par. 3, GBL: total unimpaired
paid-in capital including paid-in surplus, retained earnings and
undivided profits, net of valuation reserves and other adjustments
as may be required by BSP
(v)
Do the foregoing limits apply to debt-to-equity conversions? No.

xSubsec. X116.3(i)., MRB; xSec. 52, GBL (by analogy)
(vi) Sanctions if without prior MB approval xSec. 385, MRB

b. In specific areas
(i)
In financial allied enterprises Sec. 25, GBL: Up to 100% of TB,

RB, or financial allied enterprise; if UB publicly listed, up to 100%
of only one other UB or KB; xSec. 378, MRB
(ii)
In Venture Capital Corporations (VCCs) xSec. X379, MRB
(iii) In non-financial allied enterprises Sec. 26, GBL: Up to 100% of

equity; xSec. X380, MRB
(iv) In non-allied enterprises Sec. 27, GBL: Whether UB or its
wholly or majority-owned subsidiary, max. 35% of equity and
voting stock of non-allied enterprise; xSec. 1381, MRB
(v)
In quasi-banks Sec. 28, GBL: MB may limit to 40% of equity to

promote competitive conditions
(vi) In subsidiaries and affiliates abroad - xSec. X382, MRB

2. Limits on Equity Investments of KB
a. In general Sec. 30, par. 1, GBL
(i)
Must be with prior approval of MB Sec. 30, par. 3, GBL
30
(ii)
Total investment in equities of allied (financial or non-financial)

enterprises Sec. 30.1, GBL: Max. 35% of net worth
(iii) Investment in equity of any one enterprise Sec. 30.2, GBL:

Max. 25% of net worth
(iv) Definition of net worth Sec. 24, par. 3, GBL (see above)
(v)
Sanctions if without prior MB approval xSec. 385, MRB
b. In specific areas
(i)
In financial allied enterprises Sec. 31, GBL: Up to 100% of TB

or RB; if other financial allied enterprise, including another
commercial bank, minority holding only
(ii)
In VCCs xSec. X379, MRB
(iii) In non-financial allied enterprises Sec. 32, GBL: Up to 100% of

equity
(iv) In quasi-banks Sec. 28, GBL: MB may limit to 40% of equity to
promote competitive conditions
(v)
In subsidiaries and affiliates abroad - xSec. X382, MRB
3. Limits on Equity Investments of TB Sec. 12, Thrift Banks Act

4. Limits on Equity Investments of RB Sec. 13, Rural Banks Act;
5. Limits on Equity Investments of Islamic Bank Sec. 6(11), Islamic
Bank Charter
B. OTHER KB FUNCTIONS Sec. 29, GBL; xBSP Circular No. 271 (Series of
2001)
1. Non-Core/Quasi-Banking Functions Sec. 4, GBL; Sec. 95, NCBA
2. Issuing L/Cs60 Sec. 105, NCBA; Bank of America, NT & SA v. Court
of Appeals, 228 SCRA 357 (1993); Transfield Philippines, Inc. v. Luzon
Hydro Corporation, 443 SCRA 307 (2004); Vintola v. Insular Bank of
Asia and America, 150 SCRA 578 (1987)61 (previously discussed under
Letters of Credit and Trust Receipts)
3. Foreign Exchange Operations: Buying and selling foreign exchange and
gold or silver bullion Secs. 76-80, NCBA
C. OTHER SERVICES Sec. 53, pars. 1-3, GBL

60
Abad v. Court of Appeals, 181 SCRA 191 (1990); Reliance Commodities, Inc. v. Daewoo
Industrial Co., Ltd., 228 SCRA 545 (1993);Metropolitan Waterworks and Sewerage System v.
Daway, 432 SCRA 559 (2004);
61
Philippine National Bank v. Pineda, 197 SCRA 1 (1991); People v. Nitafan, 207 SCRA 726
(1991); Allied Banking Corporation v. Ordoez, 192 SCRA 246 (1990)
31
1. Custodian of Funds, Documents, Valuable Objects Sec. 53.1, GBL

2. Financial Agent Sec. 53.2, GBL; Panlilio v. Citibank, N.A., 539 SCRA
69 (2007): investment management activities may be exercised by bank,
and it creates principal-agent, not trustor-trustee (trusts) or creditor-debtor
(deposits), relationship, so governed by rules on agency
3. Collection/Payment Agent Sec. 53.3, GBL
4. Financial Adviser Sec. 53.4, GBL
5. Renting Out Safety Deposit Boxes Sec. 53.5, GBL; CA AgroIndustrial Development Corporation v. Court of Appeals, 219 SCRA
(1993): (a) not ordinary contract of lease (because full and absolute
control and possession of safety deposit box not with renter) but special
kind of deposit; (b) stipulation exempting from liability for loss due to fraud,
negligence or delay is void as contrary to law and public policy; (c) if no
stipulation, degree of diligence is good father of family; Sia v. Court of
Appeals, 222 SCRA 24 (1993): while fortuitous event may exempt bank
from liability, its failure to give notice of fact renders it liable (flooding which
damaged stamp collection)
D. OTHER FUNCTIONS/OPERATIONS
1. Issue Guarantees See Sec. 74, General Banking Act
2. Act as Correspondent Bank Feati Bank & Trust Company v. Court
of Appeals, 196 SCRA 576 (1991): if L/C transactions, correspondent
banks liability depends on whether it is merely an advising, or it is a
confirming, bank; Philippine National Bank v. Court of Appeals, 259
SCRA 174 (1996): local bank, while acting as correspondent bank, cannot
intercept funds coursed through it by foreign counterpart for transmittal
and deposit to account of individual with another local bank, and thereafter
apply funds to obligations owed to it by individual (no shortcut for set-off)
3. Credit Card Operations xSec. X320, MRB
E. TRUST OPERATIONS Secs. 79 to 93, GBL: Essentially provides for rules

on trust operations by a trust entity to govern trustor-trustee-beneficiary
relationship
F. PROHIBITED ACTS
1. Insurance business Sec. 54, GBL: bank shall not directly engage in
insurance business Sec. 2, Insurance Code (definition of insurance
business)
2. Outsourcing of inherent bank functions Sec. 55(1)(e), GBL
VI. BANK REGULATIONS
32
A. OWNERSHIP/CAPITALIZATION OF BANKS
1. Organization Sec. 8, GBL; xBasic Guidelines for Establishment of
Banks (BSP Circular-Letter dated 13 July 1998)
a. Stock corporation Sec. 8.1, GBL
(i)
Issuance of stocks Sec. 9, GBL: MB may prescribe rules and

regulations on types of stock issued by bank to ensure
compliance with governing capital and equity structure; provided,
only par value shares may be issued by bank
(ii)
Treasury stocks Sec. 10, GBL: bank cannot acquire own shares
or accept own shares as security for a loan, except with MB
approval; provided, if so acquired, sold within 6 months; Fua Cun
v. Summers, 44 Phil. 705 (1923): bank has no lien on shares of
stock for indebtedness of stockholder; Filipinas Mils, Inc. v.
Dayrit, 192 SCRA 177 (1990): based on Sec. 24 of GBA, both
specific and general exception; now, under Sec. 10 of GBL, only 1
exception, with MB approval
b. Funds obtained from the public (20 or more persons) Sec. 8.2, GBL
c. Minimum capital requirements (amount in million Pesos) Sec. 8.3,
GBL; xBSP Circular No. 257 (Series of 2000)
d. Capability and other requirements Sec. 8, par. 2, GBL: determine
capability in terms of financial resources and technical expertise,
assessment of ownership structure, directors, senior management,
operating plan, internal controls, financial projects and capital base
2. Stockholdings
a. Foreign stockholdings
(i)
Individuals and non-bank corporations Sec. 11, GBL: aggregate

up to 40% of voting stock of domestic bank; xBSP Circular No.
256 (Series of 2000)
(ii)
Foreign banks Secs. 11 and 73, GBL; Foreign Banks

Liberalization Act (see previous discussions)
b. Filipino stockholdings
(i)
Individuals and non-bank corporations Sec. 11, par. 1, GBL:

individually up to 40% of voting stock of domestic bank; xBSP
Circular No. 256 (Series of 2000); xBSP Circular No. 332 (Series
of 2002)
(ii)
Domestic banks Sec. 25, GBL (for UB); Sec. 31, GBL (for KB)
c. Stockholdings of family groups or related interests Secs. 12 and 13,

GBL: What must be disclosed: transactions of (i) individual with bank if
33
stockholdings of individuals related within 4 th degree of consanguinity
or affinity, legitimate or common-law (considered family groups); (ii)
corporations with bank if 2 or more corporations owned by same family
group or group of persons (considered related interests); xBSP
Circular No. 332 (Series of 2002)
d. Required public offering: At least 10% of capital stock of UB xSec.
2.2, BSP Circular No. 271 (Series of 2001)
B. DIRECTORS AND OFFICERS
1. Composition of Board Secs. 15 and 17, GBL: (a) Corp. Code
notwithstanding, 5-15 Directors (but if merger or consolidation, up to 21),
with 2 Independent Directors (person other than officer or employee of
bank, subsidiaries, related interests); (b) Non-Filipinos may be directors to
represent extent of foreign participation; Sec. 7, Foreign Banks
Liberalization Act; Sec. 23, Corporation Code
2. Qualifications
a. Own at least one share Sec. 23, Corporation Code
b. Fit and proper rule Sec. 16, GBL: (i) To maintain quality of bank
management and afford better protection to depositors and public, MB
shall prescribe, pass upon, and review qualifications and
disqualifications of directors and officers and disqualify those unfit; (ii)
after due notice to Board of Directors of bank, MB may disqualify,
suspend, or remove any bank director or officer who commits or omits
act which renders him unfit for the position; (iii) in determining fitness,
consider integrity, experience, education, training, competence
Busuego v. Court of Appeals, 304 SCRA 473 (1999): although
involving Savings and Loans Associations, MB has wide latitude in
administrative proceedings and prior notice and hearing not strictly
required, so Sec. 16 of GBL controlling; xSubsec. X141.1, MRB
c. Other minimum qualifications xGuidelines for the Establishment of
Banks; xSubsec. X141.2, MRB
3. Disqualifications xGuidelines for the Establishment of Banks; xSubsec.
X141.2, MRB
a. Criminal conviction Sec. 27, Corporation Code; Sec. 17, PDIC
Charter
b. Public officials (whether appointive or elective) Sec. 19, GBL: cannot
serve as officer in private bank, except if incidental to financial
assistance of GOP/GOCC to bank, or otherwise provided by law; Sec.
5, Rural Banks Act; xSec. 10, Appendix 38, MRB (Guidelines For The
Organization Of Cooperative Banks)
34
c. MB member/BSP personnel Secs. 9 and 27, NCBA: DQ as officer,
director, lawyer or agent, employee, consultant or stockholder, directly
or indirectly, of any bank, quasi-bank, or BSP-regulated entity, except
non-stock savings and loans associations solely for BSP employees
4. Compensation and Other Benefits Sec. 18, GBL: MB may regulate
compensation and other benefits in exceptional cases where
circumstances warrant,
i.e., bank under comptrollership or
conservatorship, found by MB to be conducting business in unsafe and
unsound manner, or in an unsatisfactory financial condition; Sec. 30,
Corporation Code
5. Meetings Sec. 15, par. 3, GBL: teleconferencing and videoconferencing allowed; Sec. 25, Corporation Code; xSEC Memorandum
Circular No. 15 dated 20 November 2001
6. Powers of Directors
a. General Powers Sec. 23, Corporation Code; xBSP Circular No. 283
(Series of 2001); xSubsec. X141.3, MRB
b. Specific Duties/ Responsibilities xSubsec. X141.5 and 4141Q5, MRB
c. Certification of Directors xBSP Circular No. 283 (Series of 2001)
7. Doctrine of Apparent Authority62 Prudential Bank v. Court of
Appeals, 223 SCRA 350 (1993): bank liable to innocent third persons if
representation is made in course of its business by agent acting within
general scope of his authority even though agent secretly abusing the
same to perpetrate fraud; First Philippine International Bank v. Court
of Appeals, 252 SCRA 259 (1996): third person not chargeable with
knowledge of internal memoranda showing limited actual authority; BPI
Family Savings Bank, Inc. v. First Metro Investment Corporation, 429
SCRA 30 (2004): third person not chargeable with what transpires in
board room; Associated Bank v. Pronstroller, 558 SCRA 113 (2008):
apparent authority ascertained through: (a) general mannter in which bank
holds out officer or agent as having power to act, with which it clothes him;
or (b) acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, within or beyond scope of his ordinary
powers.
8. Prohibited Acts Sec. 55.1, GBL: make false entries in bank report or
participate in fraudulent transaction; disclose, without court order,
information regarding deposits; accept gifts/fees/commissions for loan
approval; overvalue security; outsource inherent banking functions
62
Limketkai Sons Milling, Inc. v. Court of Appeals, 1 December 1995; Rural Bank of Milaor
(Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000); Philippine Commercial and International Bank
v. Court of Appeals, 350 SCRA 446 (2001)
35
C. BANK OPERATIONS
1. Branches Secs. 20, 74 to 75, GBL: (a) With prior MB approval, UB or
KB may open branches within or outside RP (other banks, pertinent law);
(b) With prior MB approval, bank may use branches as outsets for
presentation/sale of financial products of allied undertaking/investment
house units; (c) Bank responsible for business in branches as if in head
office, and bank and its branches treated as one unit.
2. Banking Days and Hours Sec. 21, GBL: Unless BSP authorizes in
interest of public, all banks including branches and offices transact
business on all working days (Mondays to Fridays, except holidays) for at
least 6 hours, and on Saturdays, Sundays and holidays for at least 3
hours (submit report to BSP); xSec. X156, MRB; xCircular No. 500, Series
of 2005
3. Independent Auditor Sec. 58, GBL: MB may require bank to engage
services of independent auditor
4. Financial Statements Secs. 60 to 62, GBL: (a) regular submission; (b)
publication; (c) capital stock
5. Electronic Transactions Sec. 59, GBL: BSP may regulate
6. Unsound Banking Practice Sec. 56, GBL; xBSP Circular No. 341
(Series of 2002)
a. Factors to be considered by MB: If act or omission
i. Resulted or may result in material loss or damage, or abnormal risk
or danger to safety, stability, liquidity and solvency of bank
ii. Resulted or may result in material loss or damage, or abnormal risk
to banks depositors, creditors, investors, stockholders, BSP, public
in general
iii. Caused undue injury or has given unwaranted benefits, advantage
or preference to bank or any party in discharge by director or officer
of his duties and responsibilities through manifest partiality, evident
bad faith or gross inexcusable negligence
iv. Involves entering into contract or transaction manifestly and grossly
disadvantageous to bank, whether or not director or officer profited
b. Effect of persistence in conducting business in unsafe and unsound
manner: MB may
i. Without prejudice to administrative sanctions under Sec. 37 of
NCBA
ii. Take action under Sec. 30 of NCBA (receivership and liquidation)
iii. Immediately exclude erring bank from clearing, provisions of law to
the contrary notwithstanding
36
7. Settlement of Disputes Sec. 63, GBL; Home Bankers Savings and

Trust Co. v. Court of Appeals, 318 SCRA 558 (1999): Primary recourse
to PCHC arbitration for disputes between banks involving check cleared,
subject to right to petition court for measures to safeguard/conserve
matter subject of arbitration; Allied Banking Corporation v. Court of
Appeals, 294 SCRA 803 (1998): Decisions of Arbitration Committee final
and executory, except by way of appeal on questions of law to RTC (Sec.
13, PCHC Rules); Insular Savings Bank v. Far East Bank and Trust
Company, 492 SCRA 145 (2006): Remedies: (a) Petition RTC to issue
order vacating award on grounds provided under Sec. 24 of Arbitration
Law; (b) Petition for review under Rule 43 with CA on questions of fact, of
law, or both; or (c) Petition for certiorari under Rule 65 with CA on grounds
of grave abuse of discretion by Arbitration Committee.
D. OTHER REGULATIONS
1. Risk Based Capital Sec. 34, GBL:
a. MB Authority MB shall prescribe minimum net-worth-to-risk-assets
ratio: (i) in accordance with internationally accepted standards; (ii)
which may be suspended if necessary for max. period of 1 year; and
(iii) which shall be applied uniformly to all banks of same category.
b. Effect of Non-Compliance MB may: (i) limit or prohibit distribution of
net profits and require the same to be used to increase capital
accounts of bank until minimum requirements are met; (ii) restrict or
prohibit acquisition of major assets, making of new investments, except
purchase of readily marketable evidences of indebtedness of GOP or
BSP or obligations guaranteed by GOP, until minimum ratio restored.
2. Major Investments/Ownership of Real Property Secs. 50 to 52, GBL:
(a) major acquisitions or investments subject to MB criteria to avoid undue
risk; (b) real estate necessary for its own use allowed, but such real
estate, improvements and equipment (including equity investment in realty
company) should not exceed 50% of combined capital accounts, except
Sec. 52 (see previous discussions)
3. Declaration of Dividends Sec. 57, GBL: Prohibited if: (a) clearing
account with BSP overdrawn; (b) deficient in liquidity floor for GOP
deposits for 5 or more consecutive days; (c) non-compliance with BSP
liquidity standards; (d) committed major violation as determined by BSP
E. PENALTY FOR VIOLATIONS Sec. 66, GBL: quo warranto; Sec. 34-37,
NCBA: refusal to make reports, false statements, proceedings upon violation,
administrative sanctions on banks and officers; Perez v. Monetary Board, 20
SCRA 592 (1967): BSP may cause prosecution, but not compelled by
mandamus; private person may initiate.
37
VII. BANKS IN DISTRESS;

CESSATION OF BANKING BUSINESS
A. LOANS TO BANKS
1. Loans without collateral Sec. 83, NCBA: For purposes of providing
liquidity to banking system in times of need, BSP may extend loans and
advances to banks for period not exceeding 7 days without collateral
2. Emergency loans Sec. 84, NCBA: (a) in periods of national and/or
local emergency or of imminent financial panic which directly threaten
monetary and banking stability; (b) even during normal periods, for
purpose of assisting banks in precarious financial condition or under
serious financial pressures due to fortuitous events (provided bank is not
insolvent), MB (by vote of at least 5 members) may authorize BSP to grant
extraordinary loans or advances to banks secured by assets, in amount
not exceeding 50% of total deposits and deposit substitutes of bank,
released in 2 tranches of 25% max. each
B. CONSERVATORSHIP Sec. 67, GBL: applies to banks and quasi-banks;

Secs. 29 and 30, NCBA
1. Grounds Sec. 29, par. 1, NCBA: MB may appoint conservator when,
based on report submitted by appropriate SED, MB finds that bank/quasibank in state of continuing inability or unwillingness to maintain condition
of liquidity deemed adequate to protect interest of depositors and creditors
2. Appointment of Conservator Sec. 29, par. 1 and Sec. 30, last par.
NCBA: Designation of conservator vested exclusively with MB;
designation of conservator not precondition to designation of receiver
3. Powers of Conservator Sec. 29, par. 1, NCBA: such powers as MB
deems necessary to take charge of assets, liabilities, and management,
reorganize management, collect monies/debts due, and restore viability;
First Philippine International Bank v. Court of Appeals, 252 SCRA 259
(1996): conservator merely takes place of banks Board of Directors;
hence, powers of conservator, though enormous and extensive, cannot
extend to post-facto repudiation of perfected transactions, otherwise,
would infringe non-impairment clause of Constitution, at most, merely
gives conservator power to revoke contracts that under existing law are
deemed defective
4. Qualifications and Remuneration Sec. 29, pars. 2 and 3, NCBA:
5. Period Sec. 29, par. 2, NCBA: Shall not exceed one (1) year
38
6. Termination of Conservatorship Sec. 29, par. 2 and last par., NCBA:
a. When MB satisfied that bank can continue to operate on its won and
conservatorship no longer necessary;
b. If MB, on basis of report of conservator or its own findings, determines
that continuance in business of bank will involve probable loss to
depositors or creditors, in which case, Sec. 30 of NCBA (receivership
and liquidation) will apply
6. Effect: Bank cannot be compelled to pay same bonuses to employees
xProducers Bank of the Philippines v. NLRC, 355 SCRA 489 (2001)
7. Judicial Review Sec. 30, 2nd to last par., NCBA: MB action under
Secs. 29 and 30 final and executory, and may not be restrained, except on
petition for certiorari on ground of grave abuse of discretion amounting to
lack or excess of jurisdiction. Petition may only be filed by stockholders of
record representing majority of capital stock within 10 days from receipt by
Board of order directing receivership, liquidation or conservatorship
C. VOLUNTARY LIQUIDATION Sec. 68, GBL: If voluntary liquidation of RP

bank or RP branch or office of foreign bank, prior written notice sent to MB,
and MB may intervene and take necessary steps to protect creditors interest
D. RECEIVERSHIP
AND INVOLUNTARY
LIQUIDATION Sec. 69, GBL: applies
to banks and, to extent possible, quasi-banks; Secs. 30 to 33, NCBA

1. Governing Law In Re: Petition for Assistance in the Liquidation of
the Rural Bank of Bokod (Benguet), Inc., PDIC v. Bureau of Internal
Revenue, 511 SCRA 123 (2006): NCBA governs, and since it has
substantially different provisions for involuntary dissolution and liquidation
under Corporation Code, requirements in one cannot be imposed in other
2. Grounds Secs. 30 and 36, 2nd par., NCBA; Sec. 53, last par., GBL;
MB may, summarily and without need of prior hearing, close bank and
designate PDIC as receiver:
a. Whenever, upon report of head of SED, MB finds that bank
i. Is unable to pay liabilities as they become due in ordinary course of
business (not include inability to pay caused by extraordinary
demands induced by financial panic in banking community)
ii. has insufficient realizable assets, as determined by BSP, to meet its
liabilities
iii. cannot continue in business without involving probable losses to its
depositors or creditors
iv. has willfully violated final CDO under Sec. 37 of NCBA, involving
acts or transactions amounting to fraud or dissipation of assets of
bank
39
b. Whenever bank persists in carrying on its business in unlawful or
unsafe manner
c. Whenever bank notifies BSP or publicly announces bank holiday, or in
any manner suspends payment of deposit liabilities continuously for
more than 30 days
Banco Filipino Savings and Mortgage Bank v. Monetary Board, 204
SCRA 767 (1991): Under Sec. 29 of Central Bank Act (R.A. No. 265), MB
may order closure and receivership of bank upon finding of insolvency or
when continuance in business will involve probable loss to depositors and
creditors, but the following are mandatory requirements: (a) examination
of condition of bank conducted by head of appropriate SED or his
examiners or agents; (b) examination discloses that grounds exist; (c)
department head concerned shall inform MB in writing of facts; (d) MB
shall find statements of department head to be true; here, no showing of
insolvency, hence, closure premature; Rural Bank of San Miguel, Inc. v.
Monetary Board, Bangko Sentral ng Pilipinas, 516 SCRA 154 (2007):
Under NCBA, which was repealed by NCBA, in 1993, only report of head
of SED is necessary, not examination conducted by head, purpose to
make closure of bank summary
3. Who May Be Receiver Sec. 30, 1 st and 2nd pars., NCBA: PDIC for
banks; any person of recognized competence in banking or finance for
quasi-banks
4. Duties of Receiver Sec. 30, par. 3, NCBA: (a) immediately gather and
take charge of all assets and liabilities of bank, administer the same for
benefit of creditors, exercise general powers of receiver under Rules of
Court, but shall not (except for administrative expenses) pay, or transfer or
dispose of assets, but may make nonspeculative investments; (b)
determine ASAP, not later than 90 days, if bank may be rehabilitated or
otherwise placed in condition that it may be permitted (by MB) to resume
business with safety to its depositors; (c) otherwise, liquidate bank;
Larrobis, Jr. v. Philippine Veterans Bank, 440 SCRA 34 (2004): bank
cannot do new business (grant new loans or accept new deposits) but
receiver obliged to collect pre-existing debts and foreclose, if necessary
5. Close Now-Hear Later Doctrine63 Central Bank of the Philippines
v. Court of Appeals, 220 SCRA 536 (1993): No prior notice and hearing
required, valid exercise of police power, and may only be annulled if
resolution determined by trial court to be arbitrary and issued in bad faith
6. Liquidation
a. As opposed to rehabilitation Philippine Veterans Bank Employees
Union-N.U.B.E. v. Hon. Benjamin Vega, 360 SCRA 33 (2001):
63
Rural Bank of Buhi v. Court of Appeals, 162 SCRA 288 (1988); Rural Bank of Lucena, Inc. v.
Arca, 15 SCRA 66 (1965); Banco Filipino Savings and Mortgage Bank v. Monetary Board, 204
SCRA 767 (1991); Central Bank of the Philippines v. Court of Appeals, 220 SCRA 536 (1993)
40
Liquidation connotes winding up or settling with creditors and debtors;
rehabilitation connotes reopening or reorganization; concepts are
diametrically opposed
b. Actions to take Sec. 30, NCBA: MB shall notify in writing banks
Board of Directors of findings and direct receiver to proceed with
liquidation: (i) file ex-parte petition for liquidation pursuant to liquidation
plan adopted by PDIC (for banks) or MB (for quasi-banks); (ii) convert
assets to money, and dispose in favor of creditors in accordance with
concurrence and preference of credits
c. How assets are distributed Secs. 31 and 32, NCBA: after payment
of costs of liquidation proceeding (including reasonable expenses and
fees of receiver), pay debts of bank in accordance with rule on
concurrence preference of credits, using the assets of bank as well as
revenues and earnings realized during winding up process
d. All claims filed in liquidation court Ong v. Court of Appeals, 253
SCRA 105 (1996): all claims (no need for prior pending action) against
insolvent bank should be filed in liquidation proceeding to avoid
multiplicity of suits; Manalo v. Court of Appeals, 366 SCRA 752
(2001): does not cover reverse situation where insolvent bank is
claimant.
e. Disposition of banking franchise Sec. 33, NCBA: BSP may award to
another institution
7. Effects of Receivership and Liquidation
a. Restriction on capacity to act Villanueva v. Court of Appeals, 244
SCRA 395 (1995): appointment of receiver suspends authority of bank
and its directors and officers over its property and effects, such that
receivership is equivalent to injunction (if bank became insolvent
before its acceptance of offer came to knowledge of offeror, then offer
became ineffective; Abacus Real Estate Development Center, Inc.
v. The Manila Banking Corporation, 455 SCRA 97 (2005): receiver
only has authority to administer bank assets for benefit of creditors
(granting exclusive option to purchase not administrative)
b. Penalties for transaction after Bank becomes insolvent Sec. 70,
GBL: subject to penal provisions of NCBA
c. Effect on garnishment, levy on attachment or execution Sec. 30,
NCBA: assets deemed in custodia legis and from moment bank placed
under receivership or liquidation, exempt from order of garnishment,
levy, attachment, or execution Lipana v. Development Bank of Rizal,
154 SCRA 257 (1987): stay of execution warranted, otherwise, will
prejudice other depositors and creditors
d. Stoppage of business Provident Savings Bank v. Court of
Appeals, 222 SCRA 125 (1993): stoppage only for new business
41
(grant new loans and accept new deposits), not to collect existing
loans and foreclose
e. Interest on deposits64 Fidelity Savings and Mortgage Bank v.
Cenzon, 184 SCRA 141 (1990): insolvent bank closed by BSP not
liable to pay interest on bank deposits, because prohibited from doing
business; But See Rural Bank of Sta. Catalina, Inc. v. Land Bank of
the Philippines, 435 SCRA 183 (2004): here, bank was declared in
default and therefore could not modify judgment ordering it to pay
interest and penalties
8. Judicial Review
a. Availability of remedy Sec. 30, NCBA: Petition for certiorari may only
be filed by stockholders of record representing majority of capital stock
within 10 days from receipt by Board of order directing receivership,
liquidation or conservatorship
b. Ground: grave abuse of discretion Central Bank v. Court of
Appeals, 106 SCRA 143 (1981): bank officers pressured into
relinquishing management and control of bank by INK which had no
intention to restore bank to original condition, BSP in promissory
estoppel for committing to support bank to restore it but failing to do
so; Banco Filipino Savings and Mortgage Bank v. Monetary Board,
204 SCRA 767 (1991): no basis for finding of insolvency (see above)
c. Jurisdiction Sec. 4, Rule 65, Rules of Court
d. Who may question Central Bank of the Philippines v. Court of
Appeals, 220 SCRA 537 (1993): only stockholders, not receiver;
xCentral Bank of the Philippines v. Court of Appeals, 208 SCRA 652
(1992)
e. Actions of the MB final and executory; Injunction Central Bank of
the Philippines v. Dela Cruz, 191 SCRA 346 (1990): only upon
convincing proof that action is plainly arbitrary and made in bad faith
(under Sec. 29, Central Bank Act), now GADALEJ (under Sec. 30,
NCBA); Sec. 22, PDIC Charter: only CA (not RTC) can enjoin PDIC
f. Effect of Filing Petition for Review Banco Filipino Savings and
Mortgage Bank v. Ybaez, SCRA (2004): does not diminish authority
of designated receiver or liquidator to administer bank
g. Liability of the MB and PDIC Miranda v. Philippine Deposit
Insurance Corporation, 501 SCRA 288 (2006): BSP and PDIC not
solidarily liable with bank for the latters obligations
E. PDIC FINANCIAL ASSISTANCE Sec. 12(c), PDIC Charter

64
Integrated Realty Corporation v. Philippine National Bank, 174 SCRA 295 (1989); The
Overseas Bank of Manila v. Court of Appeals, 105 SCRA 49 (1981) and 113 SCRA 778 (1982)

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ATENEO LAW SCHOOL

COMMERCIAL LAW REVIEW

B. BANKING DISTINGUISHED FROM QUASI-BANKING

C. BANKS DISTINGUISHED FROM OTHER FINANCIAL INSTITUTIONS

D. NATURE OF BANKING BUSINESS Sec. 2, GBL

Presidential Decree No. 129, as amended

In dealing with accounts of depositors 13 Philippine Banking

In selection and supervision of employees 14 Philippine

(iii) To be mortgagees in good faith 15 Cruz v. Bancom Finance

not cover transactions outside bank deposits

Rules on determination of negligence Philippine Bank of

Award of actual, moral, compensatory or temperate damages

(iii) Cannot rely on judgment of other banks to escape liability

II. CLASSIFICATION OF BANKS

Definition/function of investment house any enterprise which

Limitations on UBs exercise of investment house powers xSec.

subject to pertinent laws and SEC regulations

c. To invest in equity of non-allied enterprises xSec. 27, GBL; xSec.

B. COMMERCIAL BANKS (KB) Sec. 3.2(b), GBL

Receive in custody funds, documents and valuable objects

C. THRIFT BANKS (TB) Secs. 3.2(c), GBL

1. Governing Law Sec. 71, pars. 1 and 3, GBL

Republic Act No. 7906

2. Declaration of Policy Sec. 2, Thrift Banks Act: establishment of thrift

3. Definition/Purpose Sec. 3.2(c), GBL; Sec. 3(a), Thrift Banks Act

Accumulating savings of depositors and investing them in

D. RURAL BANKS (RB) Sec. 3.2(d), GBL

1. Governing Law Sec. 71, pars. 1 and 3, GBL;

2. Declaration of Policy Sec. 2, Rural Banks Act: Establishment of rural

E. COOPERATIVE BANKS (Coop Banks) Sec. 3.2(e), GBL

Republic Act No. 7353

F. ISLAMIC BANKS (IB) Sec. 3.2(f), GBL

G. OTHER CLASSIFICATIONS OF BANKS Sec. 3.2(g), GBL

By acquiring, purchasing or owning up to 60% of the voting stock

By investing in up to 60% of a new banking subsidiary

(iii) By establishing branches with full banking authority

Republic Act No. 7221

Creation, formation, organization or dissolution of corporations;

Entry into the Philippines through establishment of branches:

(iii) Conduct of offshore banking business: xOffshore Banking System

Presidential Decree No. 1034, as amended

III. DEPOSIT FUNCTION

Republic Act No. 6426, as amended (Foreign Currency Deposit Act)

D. OPENING OF DEPOSIT ACCOUNTS

E. ADMINISTRATION OF DEPOSIT ACCOUNTS

In case of insufficiency of funds Moran v. Court of Appeals,

Prior to clearing Associated Bank v. Tan, 446 SCRA 282

(iii) In favor of other persons when check crossed Traders Royal

Survivorship Agreements Vitug v. Court of Appeals, 183

3. Booking of Deposits xSec. X261, MRB

F. SECRECY OF BANK DEPOSITS

Under the Law on Secrecy of Bank Deposits Sec. 2, Law on

Upon written permission of the depositor or investor:

DOSRI39 loans Sec. 26, NCBA; xSec. X337, MRB

Upon the order of a competent court in cases of bribery or

In cases where the money deposited or invested is the

Republic Act No. 1405, as amended

Under the Anti-Graft and Corrupt Practices Act 40: In cases

(iii) Under the Ombudsman Act41 Sec. 15(8), Ombudsman Act;

Under the AMLA Sec. 11, AMLA; Republic v. Eugenio, 545

Upon order of a competent court in cases of violation of the

kidnapping for ransom

BSP inquiry into or examination of deposits or investments

Republic Act No. 3019, as amended