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TOPICS UNDER THE SYLLABUS
VIII. Banking Laws
A. The New Central Banking Act (R.A. 7653)
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A. The New Central Banking Act (R.A. 7653)
1. State Policies and Creation of the
Bangko Sentral ng Pilipinas (BSP)
The Bangko Sentral ng Pilipinas
(BSP) is the States Central Monetary
Authority
mandated
in
the
1987
Philippine
Constitution,
which
shall
function and operate as an independent
and accountable body corporate in the
discharge of its mandated responsibilities
concerning money, banking and credit
2. Responsibility and Primary Objective
Primary Objectives:
a. To maintain price stability
conducive to a balanced and
sustainable
growth
of
the
economy;
b. To promote and maintain the
monetary
stability
and
convertibility of the peso;
c. To provide policy directions in
areas of money, banking and
credit, with supervision over
operations of banks and with
regulatory
powers
over
operations of finance companies,
and
non-bank
financial
institutions
performing
quasibanking functions.
Roles of BSP:
a. Banker of Government
The Act as a banker of the
Government, its political subdivisions
and instrumentalities, and their cash
balances should be deposited to the
BSP, with only minimum working
balances to be held by governmentowned banks, and such other banks
incorporated in the Philippines as the
Monetary Board may prescribe.
b. Representation
with
the
International Monetary Board
To represent Government in all
dealings,
negotiations
and
transactions with the IMF, and shall
carry such accounts as may result
from the Philippine membership in or
operations with the said Fund.
c. Representation
with
Other
Financial Institutions
May represent the Government in
dealings, negotiations or transactions
with the World Bank and with other
foreign or international financial
institutions or agencies.

d. Fiscal Operations
Shall open a general cash account
for the Treasurer of the Philippines, in
which the liquid funds of the
Government shall be deposited, and
with transfer of funds to be made
only upon the order of the Philippine
Treasurer (Villanueva, 2009).
Other Basic Functions of BSP:
1. It shall have the sole power and
authority to issue currency within the
territory of the Republic of the
Philippines;
2. The power to issue regulations to
prevent the circulation of foreign
currencies, or currency substitutes as
well as the reproduction of facsimiles
of BSP notes;
3. It has the power to investigate, make
arrests, conduct searches and seizure
for the purpose of maintaining the
integrity of the currency;
4. To
engage
in
foreign
engage
transactions in order to maintain
price stability;
5. To make rediscounts, discounts, loans
and advances to banking and other
financial institutions to influence the
volume of credit consistent with the
objectives of price stability;
6. To
engage
in
open
market
operations---purchase and sale of
securities ---exclusively in accordance
with its objectives of achieving price
stability;
7. To
engage
in
marketing
and
stabilization of securities for the
account of the government;
8. To act as the financial advisor of the
government; (Sundiang, 2006)
3. Monetary
Functions

Board---Powers

and

Corporate Powers
The BSP is a government owned and
controlled corporation that is invested by
law with corporate powers. The corporate
powers specified in Section 5 of the New
Central Bank Act are as follows:
a. The power to adopt, alter and use a
corporate seal which shall be
judicially noticed;
b. To enter into contracts;
c. To lease or own real and personal
property;
d. To sell or otherwise dispose of its real
and personal property;
e. To sue and be sued;
f.
To perform any and all things that
may be necessary or proper to carry
out the purposes of the New Central
Bank Act;

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g.

To compromise, condone or release,


in whole or in part, any claim of or
settled liability (Sundiang, 2006).

The BSP powers and functions


exercised by the Monetary Board.

are

Composition of the Monetary Board:


There are 7 members who are appointed
by the President of the Republic of the
Philippines. They are only appointed
once.
a. Governor, as Chairman;
b. A member of the Cabinet designated
by the President of the Philippines;
c. Five (5) members who shall come
from the sector, all of whom shall
serve full-time.
Term: 6 years
Qualifications of the Members of the Board:
a. Must be a natural-born citizens of the Philippines;
b. At least 35 years of age with the exception of the
Governor, who should at least be 40 years of age;
c. Of good moral character, of unquestionable
integrity, of known probity and patriotism.
d. With recognized competence in social and
economic disciplines.
Grounds for Removal of a Member of the Board:
The President may remove any member of the Board
for any of the following reasons:
a. Subsequent disqualification
b. Physical or mental incapacity that he cannot
properly discharge his duties and responsibilities
and such incapacity has lasted for more than 6
months.
c. Guilty of acts or operations which are of
fraudulent or illegal character or which are
manifestly opposed to the aims and interests of
the BSP;
d. No longer possessing qualifications specified in
the Act.
The major functions of the Monetary Board
include the power to:
1. Issue rules and regulations it considers
necessary for the effective discharge of the
responsibilities and exercise of the powers
vested in it;
2. Direct the management, operations, and
administration of Bangko Sentral, organize its
personnel and issue such rules and
regulations as it may deem necessary or
desirable for this purpose;
3. Establish a human resource management
system which governs the selection, hiring,
appointment,
transfer,
promotion,
or
dismissal of all personnel;
4. Adopt an annual budget for and authorize
such expenditures by Bangko Sentral as are
in the interest of the effective administration
and operations of Bangko Sentral in

5.

accordance
with
applicable
laws
and
regulations; and
Indemnify its members and other officials of
Bangko Sentral, including personnel of the
departments performing supervision and
examination functions, against all costs and
expenses reasonably incurred by such
persons in connection with any civil or
criminal action, suit or proceeding, to which
any of them may be made a party by reason
of the performance of his functions or duties,
unless such members or other officials is
found to be liable for negligence or
misconduct..

The Governors Powers and Duties as a Chief


Executive Officer:
The Governor is the chief executive officer of BSP and
is required to direct and supervise the operations and
internal administration of BSP. Specifically, the
Governor:
1. prepares the agenda for the meetings of the
Monetary
Board
and
submits
policy
recommendations for consideration of the
Board;
2. executes and administers policies and
measures approved by the Monetary Board;
3. appoints and fixes the remunerations and
other emoluments of personnel, as well as
imposes
disciplinary
measures
upon
personnel of the Bangko Sentral;
4. renders opinions, decisions, or rulings, which
shall be final and executory until reversed or
modified by the Monetary Board, on matters
regarding application or enforcement of laws
pertaining to institutions supervised by the
BSP and laws pertaining to quasi-banks, as
well as regulations, policies or instructions
issued by the Monetary Board, and the
implementation thereof; and
5. Exercises such other powers as may be
vested in him by the Monetary Board.
6. Serves as the principal representative of the
Monetary Board and of the BSP. As such, the
Governor is empowered to:
a. Represent the Monetary Board and the
BSP in all dealings with other offices,
agencies and instrumentalities of the
Government and all other persons or
entities, public or private, whether
domestic, foreign or international; and
b. Sign contracts entered into by the BSP,
notes and securities issued by the BSP, all
reports, balance sheets, profit and loss
statements, correspondence and other
documents of the BSP.
Disqualifications:
1. In addition to the disqualifications imposed by
Republic Act No. 6713, a member of the Monetary
Board is disqualified from being a director, officer,
employee,
consultant,
lawyer,
agent
or
stockholder of any bank, quasi-bank or any other
institution which is subject to supervision or
examination by the Bangko Sentral, in which case

2.
3.

such member shall resign from, and divest


himself of any and all interests in such institution
before assumption of office as member of the
Monetary Board.
The member of the Monetary Board coming from
the private sector shall not hold any other public
office or public employment during their tenure.
No person shall be a member of the Monetary
Board if he has been connected with any
multilateral banking or financial institution or has
a substantial interest in any private bank in the
Philippines, within one (1) year prior to his
appointment; likewise, no member of the
Monetary Board shall be employed in any such
institution within two (2) years after the
expiration of his term except when he serves as
an official representative of the Philippine
Government to such institution.

Responsibility and liability of the members of


the Monetary Board
a. Members of the Monetary Board, officials,
examiners, and employees of the Bangko Sentral
who willfully violate RA 7653 or who are guilty of
negligence, abuses or acts of malfeasance or
misfeasance or fail to exercise extraordinary
diligence in the performance of his duties shall be
held liable for any loss or injury suffered by the
Bangko Sentral or other banking institutions as a
result of such violation, negligence, abuse,
malfeasance, misfeasance or failure to exercise
extraordinary diligence.
b. Similar responsibility shall apply to members,
officers and employees of the Bangko Sentral for;
1. The disclosure of any information of a
confidential nature, or any information on the
discussions or resolutions of the Monetary
Board, or about the confidential operations of
the Bangko Sentral, unless the disclosure is in
connection with the performance of official
functions with the Bangko Sentral, or is with
prior authorizaytion of the Monetary Board or
the Governor; or
2. The use of such information for personal gain
or to the detriment of the Government, the
Bangko Sentral or third parties.
c.

However, any data or information required to be


submitted to the President and/or Congress, or to
be published under the provisions of RA 7653
shall not be considered confidential.

Outside interests of the Governor and the fulltime members of the Board
a. The Governor of the Bangko Sentral and the fulltime members of the Board shall limit their
professional activities to those pertaining directly
to their positions with the Bangko Sentral.
b. They may not accept any other employment,
whether public or private, remunerated or ad
honorem.
c. Exceptions:
1.
Positions in eleemosynary, civic,
cultural or religious organizations

2.

Whenever, by designation of the


President, the Governor or the fulltime member is tasked to represent
the interest of the Government or
other
government
agencies
in
matters connected with or affecting
the economy or the financial system
of the country

Prohibitions on personnel of the Bangko


Sentral
In addition to the prohibitions found in RA 3019 and
6713, personnel of the Bangko Sentral are hereby
prohibited from:
1.
Being an officer, director, lawyer or agent,
employee, consultant or stockholder, directly
or indirectly, of any institution subject to
supervision or examination by the Bangko
Sentral, except non-stock savings and loan
associations and provident funds organized
exclusively for employees of the Bangko
Sentral, and except as otherwise provided in
RA 7653;
2.
Directly or indirectly requesting or receiving
any gift, present or pecuniary or material
benefit for himself or another, from any
institution
subject
to
supervision
or
examination by the Bangko Sentral;
3.
Revealing in any manner, except upon orders
of the court, the Congress or any government
office or agency authorized by law, or under
such conditions as may be prescribed by the
Monetary Board, information relating to the
condition or business of any such institution.
This prohibition shall not apply to the giving
of information to the Monetary Boar or the
Governor of the Bangko Sentral, or to any
person authorized by either of them, in
writing, to receive such information; and
4.
Borrowing from any institution subject to
supervision or examination by the Bangko
Sentral unless said borrowings are adequately
secured, fully disclosed to the Monetary Boar,
and shall be subject to such further rules and
regulations as the Monetary Board may
prescribe.
HOW BSP HANDLE BANKS IN DISTRESS
A. CONSERVATORSHIP
-a bank or quasi-bank is
1. in a state of continuing inability or
2. unwillingness to maintain a condition of liquidity
deemed adequate to protect the interest of
depositors and creditors
Action of the Monetary Board
The Monetary Board may appoint a
conservator (who shall be competent and
knowledgeable in bank operations and
management) for a period not exceeding 1
year
i. take charge of the assets, liabilities and
management of the bank or quasi-bank in
question
ii. reorganize the management thereof

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iii. collect all monies and debts due and
iv. exercise all powers necessary to restore its
viability, including the power to overrule
or revoke the actions of the previous
management and board of directors
While admittedly, the Central Bank gives vast
and far-reaching powers to the conservator,
such powers must be related to preservation
of the assets of the bank, the reorganization
of the management thereof, and the
restoration of its viability. Such powers,
enormous and extensive as they are, cannot
extend to post-facto repudiation of perfected
transactions, otherwise they would infringe
against the non-impairment clause of the
Constitution.
It merely gives the conservator the power to
revoke contracts that are under existing law,
deemed to be defective i.e. void, voidable,
unenforceable or rescissible. Hence, the
conservator merely takes the place of a
Banks BOD. What the said Board cannot do
such as repudiating a contract validly entered
into under the doctrine of implied authority,
the conservator cannot do either. Ineluctably,
his power is not unilateral, and he cannot
simply repudiate valid obligations of the
Bank. His authority would be only to bring
court actions to assail such contract as he
has already done so in the instant case.
(First Phil. Intl Bank v. CA, 252 SCRA
259)
Termination of Conservatorship
(a) When MB is satisfied that the institution
can continue to operate on its own and
the
conservatorship
is
no
longer
necessary; or
(b) When
MB
determines
that
the
continuance in business of the institution
would involve probable loss to its
depositors or creditors, in which case
proceedings
for
receivership
and
liquidation shall be pursued.
B. CLOSURE
-prohibit a bank or quasi-bank from doing
business in the Philippines
Grounds for Closure
(a) Unable to pay its liabilities as they become
due in the ordinary course of business (cash
flow test)
BUT: shall not include inability to pay caused by
extraordinary demands induced by financial panic in
the banking community.
(b) Insufficient realizable assets to meet its
liabilities (balance sheet test)
(c) Cannot continue in business without involving
probable losses to its depositors and creditors
(d) Willfully violated a cease and desist order
under Sec. 37 (administrative sanctions) that
has become final and involves acts or
transactions which amount to fraud or
dissipation of assets
(e) Notifies the BSP or publicly announces a bank
holiday

(f) Suspends the payment of its deposit liabilities


continuously for more than 30 days
(g) Persists in conducting its business in an
unsafe or unsound manner

This may be done summarily and without


need of prior hearing.
Note that during conservatorship, no claims
can be paid.
Sec. 29 of the Central Bank Act does not
contemplate prior notice and hearing before
a bank is placed under receivership. It is
enough that such action is made the subject
of a subsequent judicial review. The Close
now and hear later scheme under the Act
is for the purpose of protecting the
depositors, creditors, stockholders and the
general public. (Central Bank vs. CA, 220
SCRA 536)

C. RECEIVERSHIP
Who are Receivers?
(a) For Banks PDIC
(b) For Quasi-Banks Any person of recognized
competence in banking or finance
Functions of Receiver
(a) Immediately gather and take charge of all the
assets and liabilities of the institution,
administer the same for the benefit of its
creditors e.g.

Collect pre-existing debts

Foreclose mortgages security


(b) Exercise the general powers of a receiver
(c) Determine as soon as possible, but not late
than 90 days from takeover, whether the
institution can be rehabilitated or otherwise
placed in such a condition so that it may be
permitted to resume business with safety to
its depositors and creditors, and the general
public.
BUT: any determination for resumption of business
shall be subject to the prior approval of the Monetary
Board.
If the receiver determines that the institution cannot
be rehabilitated or permitted to resume business,
then the MB shall notify in writing the board of
directors of the institution of its findings and direct
the receiver to proceed with the liquidation of the
institution.

Appointment of a receiver operates to


suspend the authority of a bank and its
directors and officers over its properties and
effects, such authority being reposed in the
receiver, and in this respect, the receivership
is equivalent to an injunction to restrain
the bank officers from intermeddling with the
property of the bank in any way.
The receiver only has the authority to
administer the properties of the bank for the
benefit of the creditors. Consequently, the
receiver has no authority to approve the acts

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of ownership, such as the grant of exclusive
option to purchase a particular property of
the bank. (Abacus Real Estate Dev.
Center vs. Manila Banking Corp., 452
SCRA 97)

(1)

(2)

(3)

(4)

D. LIQUIDATION
-from the determination of receiver if
institution
cannot
be
rehabilitated
or
permitted to resume business
Duties of the Receiver/Liquidator
File ex parted with the RTC a petition for
assistance in the liquidation of the institution
pursuant to a liquidation plan adopted by the
PDIC for banks, and by MB for quasi-banks
Upon motion by receiver, upon RTCs
acquisition of jurisdiction, RTC shall assist
enforcement of the individual liabilities of the
stockholders, directors, and officers and
decide on other issues as may be material to
the liquidation plan adopted
Receiver shall convert the assets to money
and proceeds shall be applied in paying the
debts of the institution in accordance with
rules on concurrence and preference of credit
Receiver shall institute such actions as may
be necessary

The assets under receivership or liquidation


deemed in custodia legis, in the hands of the
receiver and shall be exempt from any order
of
garnishment,
levy,
attachment
or
execution
Phases of Liquidation Proceeding (Pacific
Banking vs. CA, GR 109373, March 20, 1995)
First: Approval and disapproval of claims
(a) all money claims against the bank are
required to be filed with the liquidation court

those entitled to
receive them. It
is the process of
reducing assets
to
cash,
discharging
liabilities
and
dividing surplus
or loss.

Effects of Liquidation of a Bank or a


Quasi-Bank
(a) After payment of the cost of the proceedings,
including reasonable expenses and fees of
the receiver to be allowed by the court, the
receiver shall pay the debts of such
institution, under order of the court, in
accordance with the rules on concurrence and
preference of credit as provided in the Civil
Code. (Sec. 31)
(b) All revenues and earnings realized by the
receiver in winding up the affairs and
administering the assets of any bank or
quasi-bank within the purview of this Act shall
be used to pay the costs, fees and expenses
mentioned in the preceding section, salaries
of such personnel whose employment is
rendered necessary in the discharge of the
liquidation together with the other additional
expenses caused thereby. (Sec.32)
The balance of revenues and earnings, after
the payment of all said expenses, shall form
part of the assets available for payment of
creditors.
A liquidation proceeding is a single
proceeding
Although the claims are litigated in the same
proceeding, the treatment is individual. And
the Order issued relative to a particular claim
applies only to said claim, leaving the other
claims unaffected, as each claim is
considered separate and distinct from the
others.
The exclusive jurisdiction of the liquidation
courts pertains only to the adjudication of
claims against the bank, and does not cover
the reverse situation where it is the bank
which files a claim against another person.
(Manalo vs. CA, 366 SCRA 752)
The actions of the MB under Sec. 29
(appointing a conservator) and Sec. 30
(closing a bank) are final and executory and
may not be restrained or set aside by a court
EXCEPT:on petition for certiorari on the ground of
excess of jurisdiction or with grave abuse of
discretion filed by stockholders of record representing
the majority of the capital stock within 10 days from
receipt by the BOD of the institution of the order
directing conservatorship, receivership or liquidation

(b) phase may end with the declaration by the


court whether claim is with basis or not; if
with basis, classified whether ordinary or
preferred
(c) order by court is final and may be appealed
by the party aggrieved
Second: Approval by the court of the
distribution plan prepared by the duly
appointed liquidator
(a) order disposes of the issue of how much
property is available for disposal
(b) payment of all allowed claims
DISTINGUISH
BETWEEN
LIQUIDATION
AND REHABILITATION
LIQUIDATION
REHABILITATIO
N
Is a winding up of
Connotes
a
settling
with
reopening
or
creditors
and
reorganization. It
debtors. It is the
contemplates
a
winding up of a
continuance
of
corporation
so
corporate life and
that assets are
activities in an
distributed
to
effort to restore

and reinstate the


corporation to its
former position of
successful
operation
and
solvency.

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Note that the twin requirement of majority of
stockholders and filing within 10 days should
be observed or else action will be dismissed.
A bank ordered closed by the MB retains its
juridical personality which can sue or be sued
through its liquidator
HOW THE BSP HANDLES EXCHANGE
CRISIS
A.LEGAL TENDER POWER when the
currency is offered in payment of a debt,
public or private, the same must be accepted.
All notes and coins issued by the Bangko
Sentral shall be fully guaranteed by the
Government of the Republic of the Philippines
and shall be legal tender in the Philippines for
all debts, both public and private.
However: unless otherwise fixed by the
Monetary Board, coins shall be legal tender in
amounts

not
exceeding
Fifty
pesos
P50
for
denominations of 25 centavos and above,
and

in
amounts
not
exceeding
P20
for
denominations of 10 centavos or less. (Sec.
52)
Philippine currency notes have no limit to
their legal tender power. Pursuant to BSP
Circular No. 537, Series of 2006, coins in
denomination of

1-, 5- and 10-piso shall be legal tender in


amounts not exceeding P1,000 while

1-, 5- and 10- and 25-sentimo shall be legal


tender in amounts not exceeding P100
B. RATE OF EXCHANGE The MB shall
determine the exchange rate policy of the
country to ensure orderly conditions in the
market
BSP maintains a floating exchange rate
system. Exchange rates are determined on
the basis of supply and demand in the foreign
exchange market.
C.
EMERGENCY
RESTRICTIONS
ON
EXCHANGE OPERATIONS: To give MB and
the Government time in which to forestall,
combat or overcome
such crisis
or
emergency, MB with concurrence of at least 5
of its members and with the approval of the
President may:
(a) temporarily suspend or restrict sales of
exchange by BSP
(b) subject all transactions in gold and foreign
exchange to license by the BSP; and
(c) may require that any foreign exchange
obtained by any person residing or entity
operating in the Philippines be delivered to
the BSP or to any bank or agent designated
by the BSP
HOWEVER: foreign currency deposit made
under FCDU Law shall be exempt from these
requirements
D. SECTION 105. The Monetary Board may
at any time prescribe minimum cash margins
for the opening of letters of credit, and may
relate the size of required margin to the

nature of the transaction to be financed.

E. SECTION 106. In order to promote the


liquidity and solvency of the banking system,
the Monetary Board may issue such
regulations as it may deem necessary with
respect
to
the
maximum
permissible
maturities of the loans and investments
which the banks may make, and the kind and
amount of security to be required against
various types of credit operations of the
banks.
DEMAND DEPOSITS this term refers to all
those liabilities of the BSP and of other banks,
which
are
denominated
in
Philippine
currency, and are subject to payment in legal
tender upon demand by the presentation of
checks (Sec. 58). Only banks duly authorized
may accept funds, or create liabilities payable
in pesos upon demand by presentation of
checks, and such operations shall be subject
to the control of the Monetary Board.
LEGAL CHARACTER OF CHECKS the
checks representing demand deposits do not
have legal tender power, and their
acceptance in the payment of debts; both
public and private, is at the option of the
creditor. However, a check which has been
cleared and credited to the account of the
creditor, shall be equivalent to a delivery to
the creditor of cash in an amount equal to the
amount credited to his account. (Sec.60)

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C. GENERAL BANKING LAW OF 2000 (R.A. NO.
8791)

recourse or acceptance of deposit substitutes


as defined in Section 95 of R.A. 7653 for
purposes of relending or purchasing of
receivables and other obligations (Sec. 4 par. 3
GBL).

1. DEFINITION AND CLASSIFICATION OF BANKS


a. UNIVERSAL BANKS these used to be called
expanded commercial banks and their operations are
primarily governed by the General Banking laws.
They can exercise the powers of an investment house
and invest in non-allied enterprises. They have the
highest capitalization requirement.

b. TRUST ENTITIES
i.

b. COMMERCIAL BANKS these are ordinary or


regular commercial banks, as distinguished from a
universal bank. They have a lower capitalization
requirement than a universal bank and cannot
exercise the powers of an investment house and
invest in non-allied enterprises.

A trust business is any activity resulting from


trusteeship involving the appointment of a
trustee by a trustor for the administration,
holding,
management
of
funds
and/or
properties of the trustor by the trustee for the
use, benefit or advantage of the trustor or of
beneficiaries.

c. THRIFT BANKS shall include savings and


mortgage banks, private development banks, and
stock savings and loans association organized under
existing laws.
d. RURAL BANKS - banks which are designed to
make needed credit available and readily accessible
in the rural areas on reasonable terms.
e. COOPERATIVE BANKS one organized, the
majority share of which is owned and controlled by
cooperatives, primarily to provide financial and credit
services to cooperatives.
f. ISLAMIC BANKS these are banks the business
dealings and activities of which are subject to the
basic principles and rulings of Islamic Sharia. The Al
Amanah Islamic Investment Bank of the Philippines,
which was created by RA 6848, is the only Islamic
bank in the country at this time.
Created by Congress to promote and accelerate
socio-economic development of the Autonomous
Region by performing banking, financing and
investment operations and to establish and
participate in agricultural, commercial and industrial
ventures based on the Islamic concept of banking.
(Sec. 3 RA. 6848).
g. Other Classification of banks as determined
by the Monetary Board.

3. BANK POWERS AND LIABILITIES


a. CORPORATE POWERS these are the powers
enumerated under the Corporation Code. Section 36
of the Corporation Code provides that every
corporation incorporated under this Code has the
power and capacity:
i.
ii.

iii.
iv.
v.

vi.

vii.

2. DISTINCTION OF BANKS FROM QUASI-BANKS


AND TRUST ENTITIES
a. QUASI-BANKS
i. Quasi-Banks shall refer to entities engaged
in the borrowing of funds through the
issuance, endorsement or assignment with

Any bank, investment house or a stock


corporation duly authorized by the Monetary
Board to engage in trust, investment
management
and
fiduciary
business
methodology.

viii.

To sue and be sued in its corporate name;


Of succession by its corporate name for the
period of time stated in the articles of
incorporation
and
the
certificate
of
incorporation;
To adopt and use a corporate seal;
To amend its articles of incorporation in
accordance with the provisions of this Code;
To adopt by-laws, not contrary to law, morals,
or public policy, and to amend or repeal the
same in accordance with this Code;
In case of stock corporations, to issue or sell
stocks to subscribers and to sell treasury
stocks in accordance with the provisions of
this Code; and to admit members to the
corporation if it be a non-stock corporation;
To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
property, including securities and bonds of
other corporations, as the transaction of the
lawful business of the corporation may
reasonably and necessarily require, subject to
the limitations prescribed by law and the
Constitution;
To enter into merger or consolidation as
provided in this Code;

8
ix.

To make reasonable donations, including


those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar
purposes: Provided, that no corporation,
domestic or foreign, shall give donations in
aid of any political party or candidate or for
purposes of partisan political activity;
To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees; and
To exercise such other powers as may be
essential or necessary to carry out its
purpose or purposes as stated in the articles
of incorporation.

x.

xi.

b. BANKING AND INCIDENTAL POWERS


All such powers as may be necessary to carry on the
business of commercial banking (Sec. 29).
i.
ii.
iii.

Accepting drafts
Issuing letters of credit
Discounting and negotiating promissory
notes, drafts, bills of exchange and other
evidence of debt
Accepting or creating demand deposits
Receiving other types of deposits and deposit
substitutes
Buying and selling foreign exchange and gold
or silver bullion
Acquiring marketable bonds and other debt
securities
Extending credit

iv.
v.
vi.
vii.
viii.

4. DILIGENCE REQUIRED OF BANKS RELEVANT


JURISPRUDENCE
(Sec. 2) The State recognizes the vital role of
banks in providing an environment conducive to
the sustained development of the national
economy and the fiduciary nature of banking that
requires high standards of integrity and
performance. In furtherance thereof, the State
shall promote and maintain a stable and efficient
banking and financial system that is globally
competitive, dynamic and responsive to the
demands of a developing economy.
Banks are required to exercise the highest degree
of diligence.
Fiduciary Nature of Banks

Failure on the part of the bank to satisfy the


degree of diligence required of banks may
warrant the award of damages.

Under Sec. 2, the degree of diligence is


high
standards
of
integrity
and
performance.

Fiduciary Obligation of Banks


BPI v. Lifetime Marketing Corp. 555
SCRA 373, 2008
The degree of diligence required of banks is
more than that of a reasonable man or a
good father of a family.
In view of the
fiduciary nature of their relationship with their
depositors, banks are duty-bound to treat the
accounts of their clients with the highest
degree of care.
Fiduciary Obligation of Bank Employees
PNB v. Pike 470 SCRA 328
It bears emphasizing that the negligence of
banking
institutions
should
never
be
countenance. Although its employees may
be the ones negligent, a banks liability as
obligor is not merely vicarious, but primary,
as banks are expected
to exercise the
highest degree of diligence in the selection
and supervision of their employees.
Duty on Bank Accounts of Clients
BPI Family Bank v. Franco 538 SCRA 184,
2007
In every case, the depositor expects the bank
to treat his account with utmost fidelity,
whether such account consists only of a few
hundreds of pesos or of millions. The bank
must
record
every
single
transaction
accurately, down to the last centavo, and as
promptly as possible. This has to be done if
the account is to reflect at any given time the
amount of money the depositor can dispose
of as he sees fit, confident that the bank will
deliver it as and to whomever directed. A
blunder on the part of the bank, such as the
dishonor of the check without good reason,
can cause the depositor not a little
embarrassment if not also financial loss and
perhaps even civil and criminal litigation. The
point is that as business affected with public
interest and because of the nature of its
functions, the bank is under obligation to
treat the accounts of its depositors with

9
meticulous care, always having in mind the
fiduciary nature of their relationship.
Dealings with Registered Land
Ursal v. CA 473 SCRA 52, 2005
Banks cannot merely rely on certificates of
title in ascertaining the status of mortgaged
properties. As their business is impressed
with public interest, they are expected to
exercise more care and prudence in their
dealings than private individuals. Indeed, the
rule that persons dealing with registered land
can rely solely on the certificate of tile does
not apply to banks.

interest. Of paramount importance is the


trust and confidence of the public in general
in the banking industry. Consequently, the
diligence required of banks is more than that
of the Roman pater familias or a good father
of a family. The highest degree of diligence is
expected.
Bank of America NT&SA v. Philippine
Racing Club, 2009
The banking business is so impressed with
public interest where the trust and confidence
of the public in general is of paramount
importance such that the appropriate
standard of diligence must be high degree of
diligence, if not the utmost diligence.

Degree of Diligence Required of Banks


as Lenders-Mortgagees
Consolidated
Rural
Bank
(Cagayan
Valley) v. CA 448 SCRA 347, 2005

5. NATURE OF BANK FUNDS AND BANK


DEPOSITS

Banks, their business being impressed with


public interest [in this case taking-up real
estate mortgages to secure the loans given],
are expected to exercise more care and
prudence than private individual in their
dealings, even those involving registered
lands.
Hence, for merely relying on the
certificates of title and for its failure to
ascertain the status of the mortgaged
properties as is the standard procedure in its
operations, the bank is a mortgagee in bad
faith.

The bank can make use as its own the money


deposited (Tan Tiong Tick v. American
Apothecaries 65 Phil 414, 1938). Said
amount is not being held in trust for the
depositor nor is it being kept for safekeeping.
Art. 1990 (Civil Code). Fixed, savings, and
current deposits of money in banks and
similar institutions shall be governed by the
provisions concerning simple loan.

Relevant Jurisprudence
Simex International v. CA, 1990
As a business affected with public interest
and because of the nature of its functions,
the bank is under obligation to treat the
accounts of its depositors with meticulous
care, always having in mind the fiduciary
nature of their relationship.
PCI Bank v. CA, 2001
Banks are expected to exercise the highest
degree of diligence in the selection and
supervision of their employees.
PS Bank v. Chowking Food Corp., 2008
It cannot be overemphasized that the
banking business is impressed with public

Confidentiality of Bank Deposits


The prevailing policy of the matter is to
preserve the absolute confidentiality enjoyed
by bank deposits.
Republic v. Eugenio, 2008
Indeed, by force of statute, all bank deposits
are absolutely confidential, and that nature is
unaltered even by the legislated exceptions
referred to above. There is disfavor towards
construing these exceptions in such a manner
that would authorize unlimited discretion on
the part of the government or of any party
seeking to enforce those exceptions and
inquire into bank deposits.
If there are
doubts
in
upholding
the
absolutely
confidential nature of bank deposits against
the affirming authority to inquire into such
accounts, then such doubts must be resolved
in favor of the former. Such a stance would
persist unless Congress passes a law
reversing the general state policy of
preserving the absolutely confidential nature
of Philippine bank deposits.
BSP Group, Inc. v. Go, 2010

10
It is conceded that while the fundamental law
has not bothered with the triviality of
specifically addressing privacy rights relative
to banking accounts, there, nevertheless,
exists in our jurisdiction a legitimate
expectation of privacy governing such
accounts.
The source of this right of
expectation is statutory, and is found in
R.A.No. 1405, otherwise known as the Bank
Secrecy Act of 1955.
Subsequent statutory enactments have
expanded the list of exceptions to this policy
yet the secrecy of bank deposits still lies as
the general rule, falling as it does within the
legally recognized zones of privacy. There is,
in fact, much disfavor to construing these
primary and supplemental exceptions in a
manner that would authorize unbridled
discretion,
whether
governmental
or
otherwise, in utilizing these exceptions as
authority to unwarranted inquiry into bank
accounts. It is then perceivable that the
present legal order is obliged to conserve the
absolutely confidential nature of bank
deposits.

Bank as a Debtor
Deposit is a voluntary agreement, Know Your
Customer standards
Bank acquires ownership of money deposited;
obligation to pay amount, but not obligation
to return the same money (Guingona, Jr. v.
City Fiscal of Manila 128 SCRA 577,
1984)
Payment to proper party-depositor (Fulton
Iron Works Co. V. China Banking Corp.
58 Phil. 206, 1930)
Deposits are not preferred credits (Central
Bank v. Morfe 63 SCRA 114, 1975
Bank has right to compensation (Gullas v.
PNB 62 Phil. 519, 1935)
No breach of trust - mandamus not a remedy
(Lucman v. Malawi 511 SCRA 268, 2006).
6. STIPULATION ON INTEREST
Interests on Deposits
The Monetary Board has declared that the
interest on deposits are not subject to ceilings
(Section 242, MORB).
Interest or yield on time deposit/deposit
substitute may be paid at maturity or upon
withdrawal or in advance. However, interest
or yield paid in advance shall not exceed the
interest for one year (Section 242.1, MORB)
Interest on Loans
While the Usury Law ceiling on interest rates
was lifted by Central Bank Circular 905,

nothing in the said circular grants lenders


carte blanche authority to raise interest rate
to levels which will either enslave their
borrowers or lead to a hemorrhaging of their
assets (Solangon v. Salazar 360 SCRA
379).
Effect of Excessive interest Rates:
Art. 1229. The judge shall equitably reduce
the penalty when the principal has been
partly or irregularly or partly complied with by
the debtor.
Even if there has been no
performance, the penalty may also be
reduced by the courts if it is iniquitous or
unconscionable.
Escalation Clause
Agreement by the Bank and the borrower that
the obligation shall become due and
demandable upon default of the latter.
While such a agreement is valid, the bank
cannot be given unbridled right to adjust the
interest rate independently and upwardly.
Such would negate the mutuality of contracts
Floirendo v. Metropolitan Bank, G.R. No.
148325 September 3, 2007).
Floating Rate of Interest
While it may be acceptable, for practical
reasons given the fluctuating economic
conditions, for banks to stipulate that interest
rate on a loan not be fixed and instead be
made dependent upon prevailing market
conditions, there should always be a
reference rate upon which to peg such
variable interest rates (Consolidated Bank
and Trust Corporation (Solid Bank) v. CA
356 SCRA 671).

7. GRANT OF
REQUIREMENTS

LOAN

AND

SECURITY

a.
RATIO OF NETWORTH TO TOTAL
RISK ASSETS
The Monetary Board shall prescribe the
minimum ratio which the net worth of a bank
must bear to its total risk assets wh.ich may
include contingent accounts, and may:
Require that such ratio be determined on
the basis of the Net Worth and Risk
Assets of a bank and is subsidiaries,
financial or otherwise;
Prescribe composition and manner of
determining Net Worth and Total Risk
Assets
of
the
banks
and
their
subsidiaries.

11
Provided:
(i)
The Monetary Board may require or
suspend compliance with such ratio
whenever necessary for a maximum
period of one year;
(ii)
The ratio applied uniformly to banks
of same category.
a. SINGLE BORROWERS LIMIT (SBL)
Except as the Monetary Board ay otherwise
prescribe for reason of national interest, total
amount of loans, credit, accommodations and
guarantees that may be extended by a bank
to any person, partnership, association or
other entity shall at no time exceed 20% of
the net worth of such bank. However, in
2010, the SBL was increased to 25% for a
period of 3 Years.
Further, in 2013, the
Bankong Sentral ng Pilipinas issued Circular
No. 779 which extended the 25% SBL for
another 3 years.
Also, unless the Monetary Board prescribes
otherwise, the SBL may be increased by an
additional 10% of Net Worth, provided that
the additional is supported adequately by
trust
receipts,
shipping
documents,
warehouse
receipts
or
other
similar
documents transferring or securing title
covering readily marketable, non-perishable
goods which must be fully recovered by
insurance, which shall include:
a. Direct liability of the maker or acceptor of
paper discounted with or sold to such
bank, and liability of general indorser,
drawer or guarantor who obtains a loan
or other credit accommodation from, or
discounts paper with, or sells papers to
such bank;
b. In the case of an individual who owns or
controls a majority interest in a
corporation, partnership, association or
any other entity, the liabilities to such
bank;
c. In case of the corporation, all liabilities to
such bank of all subsidies in which such
corporation owns or controls a majority
interest; and
d. In case of a partnership, association or
other entity, the liabilities of the
members thereof to such bank.
Coverage For purposes of the SBL
coverage,
loans
and
other
credit,
accommodations
and
guarantees
shall
exclude those which are:

Secured by obligations of the BSP or


Philippine Government;

Fully guaranteed by the Government as


to the payment of principal and interest;

Covered by assignment of deposits


maintained in the lending bank and held
in the Philippines;

Under letters of credit, to the extent


covered by margin deposits;
Those which the Monetary Board may,
from time to time, specify as non-risk
items
Loans and other credit accommodations,
deposits maintained with, and usual
guarantees by a bank to any other banks
or non-bank entity, whether locally or
abroad.

Inclusion of Parent Corporation


Even if a parent corporation, partnership,
association, entity or an individual who owns
or controls a majority interest in such entities
has no liability to the bank, the Monetary
Board may prescribe the combination of the
liabilities of subsidiary corporations or
members of the partnership, association,
entity or such individual under certain
circumstances, including but not limited to
any of the following situations:

Parent
corporation,
partnership,
association,
entity
or
individual
guarantees the repayment of the
liabilities;

Liabilities
were
incurred
for
the
accommodation of the parent corporation
or another subsidiary or the partnership
or association or entity or such individual;
or

Subsidiaries through separate entities


operate merely as departments or
divisions of a single entity. (Villanueva,
2009)
b. RESTRICTIONS ON BANK EXPOSURE
TO
DOSRI
(Directors,
Officers,
Stockholders
and
their
Related
Interest)
No director or officer of any bank shall,
directly or indirectly, for himself or as the
representative or agent of others:
(1) Borrow from such bank; nor
(2) Shall he become a guarantor, endorser,
or surety for loans from such bank to
others; nor
(3) In any manner be an obligor, or incur any
contractual liability to the bank.
EXCEPT with the written approval of the
majority of all the directors of the bank,
excluding the director concerned.
However, such written approval shall not be
required
for
loans,
other
credit
accommodations and advances granted to
officers under a fringe benefit plan approved
by the Banko Sentral.
After due notice to the board of directors of
the bank, the office of any bank director or

12
officer who violates the provisions of the
DOSRI restriction may be declared vacant and
the director or officer shall be subject to the
penal provisions of the New Central Bank Act.
DOSRI accounts shall be limited to an amount
equivalent to their respective encumbered
deposits and book value of their paid-in
capital contribution in the bank. Provided:
(i)
Loans, credit accommodations and
guarantees
secured
by
assets
considered as non-risk by the
Monetary Board shall be excluded
from such limits;

(ii)

Loans, credit accommodations and


advances to officers in the form of
fringe benefits granted shall not
apply
to
loans,
credit
accommodations, and guarantees
extended by a cooperative bank to its
cooperative shareholders.