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ACCELERATION CLAUSE shall mean any provision in the contract between the bank and the cardholder

that gives the bank the right to demand the obligation in full in case of default or non-payment of any
amount due or for whatever valid reason. (Circular 398)

AFFILIATE refers to an entity linked directly or indirectly to a bank or other financial institution through
any one or a combination of any of the following:
Ownership, control or power to vote, whether by permanent or temporary proxy or voting trust,
or other similar contracts, by a bank or other financial institution of at least 10% or more of the
outstanding voting stock of the entity, or vice-versa;
Interlocking directorship or officership, except in cases involving independent directors as
defined under existing regulations;
Common stockholders owning at least ten percent (10%) of the outstanding voting stock of each
financial institution and the entity; or
Management contract or any arrangement granting power to the bank or other financial
institution to direct or cause the direction of management and policies of the entity, or vice-
versa. (Circular 454)

BAD DEBTS shall include any debt on which interest is past due for a period of six (6) months, unless it
is well secured and in process of collection.

A loan payable in installments with an automatic acceleration clause shall be considered a bad debt
within the contemplation of this Subsection* where installments or amortizations have become past
due for a period of six (6) months, unless the loan is well secured and in process of collection. For a
loan payable in installment without an acceleration clause, only the installments or amortizations that
have become past due for a period of six (6) months and which are not well secured and in the process
of collection shall be considered bad debts within the contemplation of this Section.**

* Subsection X136.1 of the Manual of Regulations for Banks


** Section X136 of the Manual of Regulations for Banks

A BALANCE OF PAYMENTS (BOP) statement is a record of all economic transactions between the
residents of a country and those of foreign countries for a specific time period.

A debit entry (-) represents a home countrys payment to another country and a credit entry (+)
represents a payment received by the home country. Thus, a country earns foreign currency when
there is a credit entry, e.g. when a country exports goods or services or has a capital inflow.

BALANCE TRANSFER is a form of transaction where a cardholder moves his balance from a credit card
account to another credit card company that will restructure his loan.

BANK, ORIGINS OF THE TERM Historians believe that the word bank originated from the Italian word
banco, which means bench. Specifically, banco refers to the bench, desk, counter, shelf or table on
which moneychangers in Italy conducted business during the Middle Ages. Money changers were
needed at that time because of their skill in assessing the metal value of the several currencies churned
out by all major lords across Europe who all had the right to mint coins. These moneychangers soon
expanded into lending and soliciting of deposits with interest. To attract customers, it was said that the
merchants heaped coins on the banco, which was usually covered by a green cloth and set up in a
marketplace. A disgruntled customer, however, may overturn the banco; the term bankruptcy stemmed
from this practice. While bank developed from a merchants bench in medieval Italy, banco, in turn,
originated from the bancu of ancient Rome. Bancu was a long bench used by the empires money
changers who customarily placed the wooden fixture in the middle of an enclosed courtyard. The main
task of men at the bancu was to exchange foreign money with the currency produced by the imperial
mint, which produces the sole legal tender in Rome. Even in Filipino, bangk (note the stress on the
second syllable) pertains to a seat. Remove the accent and the word refers to a financial institution.

References: Essentials of Money, Credit and Banking (1977) by Gregorio Miranda, Encyclopedia
Americana, and other sources

BANK GUARANTEE is an irrevocable commitment of a bank binding itself to pay a sum of money in the
event of non-performance of a contract by a third party. The guarantee is a commitment separate and
distinct from the principal debt or contract. (Circular 425)

BANK EXAMINATION refers to an investigation of an institution under the supervisory authority of the
Bangko Sentral ng Pilipinas to determine if it complies with laws and regulations, and if it conducts its
business on a safe and sound basis. Examination requires full and comprehensive look into the
operations and books of institutions. The BSP examiners do:
Determine the banks solvency and liquidity position;
Evaluate asset quality as well as sufficiency of valuation reserves on loans and other risk assets;
Review all aspects of bank operations;
Assess the risk management system, including the effectiveness of the bank managements
oversight functions, policies, procedures, internal control and audit;
Appraise the overall management of the bank;
Review banks compliance with applicable laws, rules and regulations

Regular or periodic examination is done once a year, with an interval of 12 months from the last date
thereof.

Special examination may be conducted earlier, or at a shorter interval, when authorized by the MB, on
occasions like when there is a supervisory issue that requires immediate verification and/or validation.
To fully exercise the supervisory powers of the BSP, examination is complemented by overseeing the
institution. In this regard, the term overseeing refers to a limited investigation of an institution
regarding a particular aspect of its operation to check that laws and regulations are complied with,
inquire into the solvency and liquidity of the institution, enforce prompt corrective action, or such
other matters requiring immediate investigation. This is done as long as specific authorizations are
issued by the Deputy Governor of the Supervision and Examination Sector, and periodic summary
reports on overseeing are submitted to the MB.

BANGKO SENTRAL NG PILIPINAS OTHER DUTY Much has been said about the central banks functions
currency issuer, liquidity manager, bank supervisor. But the BSPs debt management role has not
commanded much attention. Under the Constitution, foreign loans may be incurred in accordance with
law and the regulation of the monetary authority which is the BSP. It must be noted that information
on foreign loans obtained or guaranteed by the government should be made available to the public. As
part of the BSPs debt management function, the Bank evaluates foreign borrowing proposals from
both the public and private sectors. The external debt management is guided by the principle of
allowing borrowed funds to be channeled to priority areas for development, giving due consideration
to the countrys capacity to meet maturing obligations in a timely and orderly manner. It is no wonder
then that the BSP has actively participated in loan negotiations of the government, provided advisory
services to both public and private sector borrowers on relevant regulations, and assisted them as well
in securing reasonable terms and conditions on their loans.

BASEL II is the short term for the International Convergence of Capital Measurement and Capital
Standards: A Revised Framework developed by the Basel Committee on Banking Supervision (BCBS).
BCBS is a committee of banking supervisory authorities that was established by the central bank
governors of the Group of Ten countries in 1975. It usually meets at the Bank for International
Settlements in Basel, Switzerland where its permanent secretariat is located.

Basel II, an offshoot of Basel I, is a risk-based capital framework for banking institutions. It seeks to
prevent bank failures by making sure that financial institutions have adequate capital relative to the
risks they take on. To align the Philippine banking system with Basel II, BSP issued Circular 538 which
will take effect on July 1, 2007.

BENCHMARKING A benchmark is a mark cut into a stone used by surveyors as a reference point.
Now, it is used as standard by which something is evaluated or measured. When people benchmark,
they search for and adopt ideas for improvement and best practices from other organizations. In so
doing, they do not have to reinvent the wheel. Benchmarking has three levels. It can be internal
when the best practices of a particular branch, plant, or facility of the same organization become
models for the others to follow. It is competitive when the best practices of another organization
engaged in the same business are identified, analyzed and copied. For example, the best practices of
other central banks around the world can be identified and adopted by the BSP. It may be functional
when the practices of another organization that have been identified as best in class are analyzed and
copied or adopted into ones own organizational processes. The target benchmark organization is not
necessarily from the same business.

Reference: Benchmarking for Improvement, Kaizen Management Systems,Inc. 2002; www.etymologie.

The CAMELS Rating System is a risk-based approach in the overall supervision of banks used by central
monetary authorities worldwide. CAMELS is the acronym for six key components of a banks condition,
namely, Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk.
The scheme provides a convenient summary of the financial health of a bank at the time of an on-site
examination.

The ratings adopted by the BSP are on a scale of 5 to 1. While banks that are rated 5 or 4 are
considered to have few if any supervisory concern, those rated 3, 2, or 1 indicate moderate to severe
degrees of concern. This system aids central banks monitor the stability of financial institutions and
identify which are in need of immediate attention.

CAPITAL ADEQUACY RATIO (CAR) is a measure of a banks capital. It is expressed as a percentage of the
qualifying capital to risk weighted risk assets of a bank computed in accordance with the risk-based
capital adequacy framework. The capital adequacy framework is patterned after the 1988 Basel Capital
Accord which took credit risks into account. It took effect on July 1, 2001 under Circular 280 issued on
March 29, 2001. On July 1, 2003, Circular 360 dated 3 December 2002 took effect, requiring that that
the computation of the CAR for universal and commercial banks integrate market risks. Two types of
capital are measured, as follows:

Tier One capital can absorb losses without a bank being required to cease trading.
Tier Two capital can absorb losses in the event of a winding-up, which means it provides a lesser
degree of protection to depositors.

CAPITAL REQUIREMENT is the volume of funds that banks and other depository institutions should
hold for a certain level of assets. Regulatory agencies such as a central bank or federal reserve impose
this requirement on these institutions to ensure that they are not involved in investments that increase
the risk of default and have enough capital to support operating losses and at the same time
accommodate withdrawals.

CASH PRICE (or DELIVERED PRICE), in case of trade transactions, is the amount of money which
would constitute full payment upon delivery of property (except money) or service purchased at
the banks place of business. In the case of financial transactions, cash price represents the
amount of money received by the debtor upon consummation of the credit transaction, net of
finance charges collected at the time the credit is extended.

(The Manual of Regulations for Banks)

CLAIMS refer to loans or debt obligations of the entity on whom the claim is held, and shall
include, but shall not be limited to, the following accounts, inclusive of accumulated market
gains/(losses) and accumulated bond discount/(premium amortization), and net of specific
allowance for probable losses:
Due from BSP;
Due from other banks;
Interbank loans receivable;
Loans and discounts;
Agrarian reform and other agricultural credit loans - P.D. 717;
Development incentive loans;
Bills purchased;
Customers liability on bills/drafts under LCs/TRs;
Customers liability for this banks acceptances outstanding;
Restructured loans;
Trading account securities loans;
Underwriting accounts debt securities (for UBs);
Underwriting accounts equity securities (for UBs);
Trading account securities investments;
Trading account securities equity (for UBs);
Available for sale securities;
Investments in bonds and other debt instruments (IBODI); and
Others, e.g., accounts receivable and accrued interest receivable.
(The Manual of Regulations for Banks)

CONTROL OF MAJORITY INTEREST is synonymous to controlling interest and exists when the
parent owns directly or indirectly through subsidiaries more than one half of the voting power
of an enterprise unless, in exceptional circumstance, it can be clearly demonstrated that such
ownership does not constitute control. Control of majority interest may also exist even when
the parent owns one half or less of the voting power of an enterprise when there is:
1. Power over more than one half of the voting rights by virtue of an agreement with
other investors; or
2. Power to govern the financial and operating policies of the enterprise under a statute
or an agreement; or;
3. Power to appoint or remove the majority members of the board of directors or
equivalent governing body; or
4. Power to cast the majority votes at meetings of the board of directors or equivalent
governing body; or
5. Any other arrangement similar to any of the above. (Circular 425)

COOPERATIVE BANKS To strengthen the cooperatives role as vehicles for social and economic
progress, the Monetary Board has approved the rules and regulations for cooperative banks
under RA 9520 or the Philippine Cooperative Code of 2008. The code gives cooperative banks
wider scope to serve areas beyond their territory and a more level playing field through the
liberalization of branching guidelines depending on their combined capital requirement, as
follows:
cooperative banks with at least P10 million can establish offices anywhere in the area
where their head office is located;
those with at least P50 million can establish offices anywhere in Luzon, Visayas and
Mindanao where their head office is located; and
those with over P100 million can establish anywhere in the country except in restricted
areas.

The code also sets a minimum paid in capital of P10 million for any cooperative bank that will be
established under the new law and provides guidelines for governance, membership and voting
rights proportionate to paid up shares.

CREDIT CARD means any card, plate, coupon book or other credit device existing for the
purpose of obtaining money, property, labor or services on credit. (Circular 398)

CREDIT CARD RECEIVABLES represents the total outstanding balance of credit cardholders
arising from purchases of goods and services, cash advances, annual membership/renewal fees
as well as interest, penalties, insurance fees, processing/service fees and other charges. (Circular
398)

A CREDIT INFORMATION BUREAU is a storehouse of credit information. As a central registry, it


receives and consolidates basic credit information from lending institutions. As repository of
credit information, it provides access to reliable information on the credit history and financial
condition of borrowers. In advanced countries, credit bureaus emerged out of the need to
address credit risks through better credit evaluation, which is made possible through
information sharing.

At present, there is no existing credit information bureau system in the country. The situation
now forces the good borrowers to essentially subsidize the bad borrowers. BSP has been
supporting the creation of a credit information bureau. When enacted into law, this measure is
expected to make credit accessible to borrowers especially to small and medium enterprises,
make loans cost-effective, and reduce excessive dependence of lending institutions on collateral
to secure the credit.

A CREDIT RATING is similar to a seal of confidence. It reflects the ability of a company or country
to pay its debts. Credit rating institutions assign categories of borrowers or bond issuers on the
basis of their credit worthiness. The higher the rating, the more creditworthy a borrower is
perceived to be.

The better-known credit rating agencies are Moodys, Standard and Poors (S&P), Fitch, and
Japan Credit Rating Agency (JCRA). The ratings of Moodys are Aaa, Aa, A, Baa, Ba and B. These
are equivalent to AAA, AA, A, BBB, BB and B credit ratings of S&P, Fitch and JCRA. Bond issuers
with a rating of Aaa to Baa (or their equivalents) are investment grade, which means they are
considered safe to invest in. Those in the lower rung may mean speculative or seen to involve
higher risks.

Sovereign rating is a countrys credit rating. By default, corporate borrowers cannot have a
rating above the sovereign rating. A credit rating is different from an outlook rating. While credit
ratings are indicators of the potential loss due to failure or delay in payment, an outlook is an
opinion as to the likely direction of the rating. The outlook may be developing, stable
(maintained rating), negative (threat of rating downgrade), or positive (possibility of rating
upgrade). In other words, an upgrade in outlook is not necessarily an upgrade in credit rating.

CRIME (ATTEMPTED) A crime is attempted when the perpetrator commences the commission
of the crime directly by overt acts but does not perform all of the acts of execution which
constitute the crime by reason of some cause or act other than his own voluntary desistance
under Article 6 of the Revised Penal Code, as amended. (Circular 587)

CRIME (CONSUMMATED) A crime is consummated when all the acts of execution which
constitute the crime was performed. As a result, the bank may have suffered a loss, the
recoverable portion of which should be deducted to arrive at the probable loss incurred by the
bank. (Circular 587)

CRIME (FRUSTRATED) A crime is classified as frustrated, when the perpetrator performs all the
acts of execution which should produce the crime as a consequence but which, nevertheless, do
not produce it by reason of causes independent of the will of the perpetrator under Article 6 of
the Revised Penal Code, as amended.
(Circular 587)

A CRISIS is the so-called turning point that calls for a decision to change course for business
continuity/survival.

CURRENT MARKET VALUE shall refer to the value of the property as established by a duly
licensed and independent appraiser.

DEFAULT or DELINQUENCY shall mean non-payment of, or payment of any amount less than,
the Minimum Amount Due or Minimum Payment Required within two (2) cycle dates, in
which case, the Total Amount Due for the particular billing period as reflected in the monthly
statement of account may be considered in default or delinquent. (Circular 398)

DEFAULT PROBABILITY is the degree of likelihood that a debtor or borrower of a loan will be
unable to meet the agreed upon scheduled payments. If a borrower is incapable of paying the
loan, then he is in debt default.

Default probability is an assessment performed by lenders such as banks and other financial
firms to evaluate the risk of a potential borrower before approving his loan. This is necessary in
determining the interest that shall be charged on the loan. The higher the default risk of the
potential borrower, the higher the interest that shall be charged on the loan.

DEMAND DEPOSITS For purposes of this Act*, the term "demand deposits" means all those
liabilities of the Bangko Sentral 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.

Issue of Demand Deposits - Only banks duly authorized to do so may accept funds or create
liabilities payable in pesos upon demand by the presentation of checks, and such operations
shall be subject to the control of the Monetary Board in accordance with the powers granted it
with respect thereto under this Act. *

Legal Character - 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: Provided, however, That 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.

* Republic Act 7653 - The New Central Bank Act


DEPOSIT SUBSTITUTES is defined as an alternative form of obtaining funds from the public,
other than deposits, through the issuance, endorsement, or acceptance of debt instruments for
the borrower's own account, for the purpose of relending or purchasing of receivables and
other obligations.

These instruments may include, but need not be limited to, bankers acceptances, promissory
notes, participations, certificates of assignment and similar instruments with recourse, and
repurchase agreements.

The Monetary Board shall determine what specific instruments shall be considered as deposit
substitutes for the purposes of Section 94 of this Act*: Provided, however, That deposit
substitutes of commercial, industrial and other non-financial companies for the limited purpose
of financing their own needs or the needs of their agents or dealers shall not be covered by the
provisions of Section 94 of this Act.*

* Republic Act 7653 - The New Central Bank Act

DERIVATIVES are financial instruments whose value is derived from the value of something else.
It can be based on different types of assets such as commodities, equities, bonds, interest rates,
exchange rate or indices.

Derivatives are usually transacted through contracts between parties where payments are made
based on the value of an underlying asset at a particular point in time. Derivatives offer the
prospect of huge returns at high risk to investors in financial markets.

Banks can also use derivatives as a risk management tool for fixed long-term rate loans. By
obtaining funds for long-term loans from sources other than deposits, which are short-term,
banks may be able to lend money to borrowers at more stable interest rates. Financial
institutions may only engage in derivatives trading upon approval by BSP.

A DISASTER is a destructive or disruptive event where a solution or way out is beyond the
capabilities of the organization. A disaster may reach crisis level.

DOMESTIC LIQUIDITY or M3. is the broadest measure of money supply. It includes not only cash
in circulation and checking accounts but also savings and time deposits and deposit substitutes.
With more money going around, the propensity to acquire more goods and services is greater,
thus perking up demand. In turn, demand leads to increased prices once the supply of goods
and services is not able to adjust quickly to meet the higher demand.

DORMANT ACCOUNTS are bank accounts (in the form of either savings accounts or
current/checking accounts) that have shown no activity (deposit or withdrawal) for a certain
period of time. A checking or current account is considered dormant after one year of inactivity,
while a savings account is marked dormant after two years of inactivity.

As a policy, banks are required to communicate with their depositors to encourage them to use
their accounts if they have become dormant. They are also mandated to inform depositors
before imposing dormancy fees on their accounts, otherwise, the penalty charges are deemed
illegal.

DOSRI stands for directors, officers, stockholders and their related interests. In banking, DOSRI is
closely associated with insider lending. The banks loan exposure to DOSRI is closely watched
because, in the past, insider lending had caused many bank failures.
The Manual of Regulations for Banks provides that the dealings of a bank with its DOSRI should
be in the regular course of business, and their terms should not be less favorable to the bank
than those offered to other clients. Limits on DOSRI loans are imposed to prevent the
concentration of a banks resources to a single individual or corporation. Circular 423 redefined
DOSRI transactions and provided for stricter regulations on DOSRI loan transactions.

Individual Ceiling. The total loans, credit accommodations and guarantees to a DOSRI shall be
limited to his capital share plus his deposits in the bank that are not yet used as collateral for
other loans. This applies as long as unsecured loans and other DOSRI credit accommodations
and guarantees do not exceed 30 percent of its total exposure.

Aggregate Ceiling. Except with prior MB approval, the DOSRI exposure of a bank should not
exceed 15 percent of its total loan portfolio or 100 percent of its net worth, whichever is lower.

An EMERGENCY is a sudden or unforeseen condition calling for immediate action. If not


controlled, it results in a disaster.

An ENTERPRISE RISK MANAGEMENT of a central bank refers to a framework for identifying,


assessing, measuring, communicating, monitoring and controlling risks. These are risks arising
from or are related to the conduct of the central banks core functions, which are generally
monetary policy, payments system and policies to promote stability of the financial system. Such
framework is usually developed in line with best market practices.

The major classifications of central bank risks are: (a) financial risk arising from international
reserve management, financial markets and lending operations; and (b) non-financial risk in
relation to monetary policy, payments system and financial institutions policy. In more precise
terms, the risks that central banks face may be classified as credit risk, market risk, liquidity risk,
reputational risk and operational risk. The reputation of a central bankone of its most
precious assetsis most at risk if the bank suffers a material loss on account of bad risk
management.

Development of a culture of risk-awareness is essential to effective management of risk. The top


policymaking body determines the risk appetite, loss mitigating and risk control measures of the
institution, while management ensures adherence to such policies as well as the identification,
assessment, measurement, communication and monitoring of risks. At BSP , the office
principally concerned with providing tools and methodologies as well as the standard
framework for risk management and reporting is the Risk Management Office (created in June
2004).

ESTAFA A crime committed by a person who defrauds another causing the latter to suffer
damage by means of any of the following: (a) unfaithfulness or abuse of confidence, (b) false
pretense or (c) fraudulent acts/means, under Articles 315 to 317 of the Revised Penal Code, as
amended. (Circular 587)

EXAMINATION shall include, but need not be limited to, the verification, review, audit,
investigation and inspection of the books and records, business affairs, administration and
financial condition of any quasi-bank including the reproduction of its records, as well as the
taking possession of the books and records and keeping them under the BSP's custody after
giving proper receipt therefor. It shall also include the interview of the directors and personnel
of the quasi-bank including its Electronic Data Processing (EDP) servicer. Books and records shall
include, but not limited to, data and information stored in magnetic tapes, disks, printouts,
logbooks and manuals kept and maintained by the quasi-bank or the EDP servicer, necessary
and incidental to the use of EDP systems by the quasi-bank.
(The Manual of Regulations for Non-Bank Financial Institutions)

EXPECTATIONS SURVEY, whether it covers business or consumer outlook (hence, the terms
Business Expectations Survey or BES and Consumer Expectations Survey or CES), is a statistical
tool that uses opinion-testing techniques to collect information from entrepreneurs about
business conditions in their own companies or from households about consumer sentiments.
Both surveys also solicit information about views on the national economy. On a wider scale,
data from an expectations survey are intended to provide decision makers and other
stakeholders with supplemental indicators for short-term planning, forecasting, risk
management and surveillance activities.

In the case of BSP, results of the BES and CES provide monetary authorities with advanced
information on current and near-term economic and business conditions or consumer financial
conditions. They also provide other economic indicators that are useful for the formulation of
monetary policy. In 1986, BSP initiated the first semestral survey of business expectations
because of a growing need to feel the pulse of the business industry. The survey was later
enhanced and strengthened to harmonize with other tendency surveys in selected Asian
countries and facilitate inter-country comparison. On the other hand, the CES--intended as a
complement to the BES--was piloted during the third quarter of 2004. It was first officially
conducted in the 4th quarter of 2004.

Reference: Primer on Expectations Survey (www.bsp.gov.ph)

EXTRAORDINARY DILIGENCE The normal diligence required of a public officer is that of the
diligence of a good father of the family. This means the degree of care and diligence that a
person applies to a situation if he were in the shoes of a good father of the family. For example,
if the public officer is in receipt of public funds, he has to secure these funds from theft, and
have a proper accounting of the same. These are what a person must also do as head of the
family handling these funds. Extraordinary diligence refers to a higher degree of care which,
for BSP personnel, is required and imposed by the BSP charter (RA 7653) and which, in another
instance, the law applies only to common carriers or to those involved in the transport of
people or goods. The law requires these carriers to observe that care as far as human care and
foresight can provide, using the utmost diligence of very cautious persons, with due regard for
all the circumstances. It would not excuse from liability the commission of mistakes, errors or
even minor oversights. Using the same example above, it would not be sufficient for the
custodian of funds to have these funds under lock and key. He should guard against all
circumstances, which could pose threats to the loss or theft of the funds. Extraordinary
diligence therefore is a very exacting standard, which exposes BSP personnel to threats of legal
suits in the course of the performance of their functions. Those displeased by their official
actions may capitalize on any slight mistake or omission on their part. The proposed
amendments to the BSP charter include the substitution of extraordinary diligence by the
general rule on liability of public officers. Inputs from Dep. Gov. and Chief Legal Counsel Juan D.
de Zuiga Jr.

FALSIFICATION is a crime committed by a person who falsifies a document by:


Counterfeiting or imitating any handwriting, signature or rubric;
Causing it to appear that persons have participated in any act or proceeding when they
did not in fact participate;
Attributing to persons who have participated in an act or proceeding statements other
than those in fact made by them;
Making untruthful statements in a narration of facts;
Altering true dates;
Making any alteration or intercalation in a genuine document which changes its
meaning;
Issuing in an authenticated form a document purporting to be a copy of an original
document when no such original exists, or including in such a copy a statement contrary
to, or different from, that of the genuine original; or
Intercalating any instrument or note relative to the issuance thereof in a protocol,
registry, or official book and other acts falling under Article 169, 171 and 172 of the
Revised Penal Code, as amended.
(Circular 587)

FINANCE CHARGE represents the amount to be paid by the debtor incident to the extension of
credit such as interest or discounts, collection fees, credit investigation fees, attorneys fees and
other service charges. The total finance charge represents the difference between (a) the
aggregate consideration (downpayment plus installments) on the part of the debtor and (b) the
sum of the cash price and non-finance charges.

(The Manual of Regulations for Banks)

FIT AND PROPER RULE PLUS Under corporate governance, bank directors and officers are
expected to be the best examples of competence and integrity as corporate decision makers. In
2006, BSP issued Circular 513 to expand the scope of disqualification criteria for bank directors
and officers. The new regulation places stronger emphasis on the integrity of bank directors.
Under this circular, the Monetary Board may permanently disqualify a bank director or officer if
he or she has been convicted by final judgment of offenses involving dishonesty or breach of
trust. These offenses include, but are not limited to, estafa, embezzlement, extortion, forgery,
malversation, swindling, theft, robbery, falsification and bribery. BSP also created a task force to
monitor the cases, charges and preventive suspensions filed by banks and the BSP against
temporarily disqualified individuals classified under File B for purposes of re-classifying these
individuals under File A (permanent disqualification) or permanent DIF file (internal
reference). Parallel to this, bank directors and trustees of quasi-banks and non-stock savings and
loan associations are required to undergo the Seminar on Corporate Governance to orient
themselves of their expanded duties and responsibilities.

The FOREIGN CURRENCY DEPOSIT UNIT (FCDU) is a unit of a local bank or of a local branch of a
foreign bank authorized by BSP to engage in foreign currency denominated transactions such as
accepting deposits and lending in foreign currency.

Established in the 1970s by virtue of the Foreign Currency Deposit Act, FCDUs provide foreign
currency credits to vital industries and sectors of the economy for their growth and
development. They are an important component of the local banking system.

FCDU accounts consist of dollar deposits and loans of the countrys banking system. FCDUs
usually draw more deposits during times of foreign exchange volatility (like the 1983 debt crisis,
the 1997 Asian crisis and the 1986 and 2001 EDSA revolutions). During these times, depositors
tend to convert their money into more stable currencies such as the US dollar.

Since they provide a source of foreign currency for the financial system, FCDUs are also
considered as the economys secondary pool of reserves to complement the BSPs own gross
international reserves (GIR). Together, the FCDU and GIR serve as the countrys main line of
defense against problems related to external payments and foreign exchange volatility.

GROSS RECEIPT TAX, BSP EXEMPTION FROM The Bureau of Internal Revenue (BIR) has
exempted the transactions of the BSP from the payments of the gross receipt tax (GRT). Under
Revenue Regulation 8-2008 (issued 20 August 2008), the BIR clarified that BSP, as the
constitutionally mandated independent central monetary authority, performs governmental
functions in order to perform its responsibilities and achieve its objectives, as prescribed under
the 1987 Constitution and RA 7653 (The New Central Bank Act). The BIR further ruled that the
activities engaged in and the transactions undertaken by BSP are geared toward the attainment
of its constitutional and statutory mandates, and not in pursuit of commercial or business
activities. Any revenues generated by BSP from its operation will not transform such activities
into a business undertaking. The GRT, being a tax imposed on the privilege to engage in
business, is not imposable on the revenues generated by BSP in the performance of its legally
mandated functions. Thus, the imposition of GRT on banks, nonbank financial intermediaries
performing quasi-banking functions, other non-bank financial intermediaries/financing
companies and on persons performing similar banking or financing activities, as prescribed
under the National Internal Revenue Code, does not apply to the revenues realized by BSP in
the conduct of its operations.

IDENTITY THEFT is a felony committed when someone steals the personal and financial
information of another person such as his or her name, address and bank account details, or
steals another person's ATM or credit card with the intention of assuming his or her identity in
making transactions, which result to financial loss for the victim.

If not robbing victims of their ATM and credit cards, these thieves acquire information by going
through personal files. More sophisticated techniques using electronic devices enable the
culprits to copy data stored in the magnetic strips of bank cards.

Awareness of how thieves work is the first step towards personal security. The public is warned
to take the necessary measures to keep their personal information safe and protected.

IN PROCESS OF COLLECTION A debt due to a quasi-bank shall be considered in process of


collection when it is the subject of continuing extrajudicial or judicial proceedings aimed
towards its full settlement or liquidation, or otherwise to place it in current status.

The extrajudicial proceedings, such as the writing of collection or demand letters, must have
been initiated by the quasi-bank and/or its lawyers before the interest or installments or
amortizations on the debt become past due and unpaid for a period of six (6) months.

The debt shall continue to be considered in process of collection for a period of six (6) months
counted from date of the first collection or demand letter and if, within this period, the debtor
fails to make a payment of at least twenty percent (20%) of the outstanding balance of the
principal on his account, plus all interests which may have accrued thereon, the same shall
automatically be classified as bad debt unless judicial proceedings are instituted.

The debt shall continue to be considered in process of collection during the pendency of the
judicial proceedings. When judgment against the debtor has been obtained, the quasi-bank
must be active in enforcing the judgment for the debt to continue to be considered in process of
collection.

INFLATION is the sustained increase in the general price level of goods and services typically
purchased by consumers. It measures how fast overall prices are rising. The higher the inflation,
the faster prices are rising. A low inflation rate does not mean prices are going down. It only
means prices are rising slowly from their levels a year ago. There is price stability when
inflation is low and stable.

Inflation is typically defined as the annual percentage change in the Consumer Price Index (CPI).
The CPI represents the average price of a standard basket of goods and services consumed by a
typical Filipino family for a given period. This standard basket contains hundreds of consumption
items (such as food products, clothing, water and electricity) whose price movements are
monitored to determine the change in the CPI, or the level of inflation.

The National Statistics Office (NSO) calculates and announces the monthly CPI and the rate of
inflation based on a nationwide monthly survey of prices for a given basket of commodities. The
NSO also determines the composition and the weights of the items in the CPI basket through
surveys that are conducted periodically

Reference: BSP Primer on Inflation Targeting

INSIDER A person who is one of the stockholders, directors, officers and employees of the bank.
(Circular 587)

INTERNATIONAL RESERVES, technically referred to as "GROSS INTERNATIONAL RESERVES"


(GIR), are foreign assets of the BSP held mostly as investments in foreign-issued securities,
monetary gold, and foreign exchange. As the bank of last resort, the BSP holds international
reserves for the forex requirements of the country in case supply from domestic commercial
banks falls short of the total demand. It also serves as stand-by fund to finance the deficit that
may arise from the current/capital and financial transactions. By convention, GIR is viewed
adequate if it can finance three-months worth of the countrys imports of goods and payments
of services and income.

INTEREST RATES can be defined in two ways: From the point of view of a borrower, it is the cost
of borrowing money (borrowing rate); and from a lenders point of view, it is the fee charged for
lending money (lending rate). Interest rates prior to liberalization in 1981 were fixed by the then
Central Bank of the Philippines. Today, the level of interest rates is determined by the market
(i.e., higher demand for loans tends to push up interest rates and lower demand pushes them
down). The Monetary Board only sets rates for the BSPs overnight borrowing and lending
facility as a monetary measure for stabilizing price level. In setting these rates (otherwise known
as policy rates), BSP influences the timing, cost and availability of money and credit. Essentially,
interest rate level is affected by movement in price level or inflation rate, fiscal policy stance and
intermediation cost.

The fiscal policy stance may be gleaned from the rate that the Bureau of Treasury accepts for
government securities that it bids out on a regular basis to banks and other accredited entities
to generate additional funds for government. Banks generally use the 90-day Treasury Bill rates
as benchmark. For the first quarter of 2006, bank lending rates averaged 9.84 percent, while
interest rates on savings and long-term time deposits averaged 3.65 percent and 5.28 percent,
respectively. This translates to a gap of around 4.6-6.2 percent between the lending and deposit
rates. This gap is not that alarming, considering that banks factor into their lending rates not
only the cost of funds (marginal cost) and intermediation and other overhead costs but also the
spread or profit margin. The spread represents the risk assigned to a particular loan exposure.
The higher the risk, the higher the spread.

Source: FAQ on Interest Rates (www.bsp.gov.ph)


INVESTMENT BANKS Goldman Sachs, JP Morgan Chase, Morgan Stanley. These are three of the
largest investment banks in the United States. Markets worldwide had watched with bated
breath as these icons of New York Citys Wall Street grappled with the US subprime mortgage
crisis. Investment banks like them are different from the traditional banks because they do not
accept deposits. Their main business is underwriting, which is selling securities (bonds or stocks)
that they purchase from companies. A company issues bonds (borrows) or sells stocks (shares of
the firm) to raise funds. As middlemen, investment banks sell the securities at a price higher
than what they paid for them. Investment banks also advise on mergers, acquisitions and
investments; manage the financial holdings of government bodies, private institutions and
wealthy individuals; and structure financial products such as derivatives. Other financial giants
like Citigroup, while performing investment banking activities, are considered as universal banks
because they take in deposits.

Wall Street investment banks are under the jurisdiction of the US Securities and Exchange
Commission. They are considered independent, and are less regulated compared to traditional
US banks. Goldman Sachs, the last major US investment banks, however, gave up independence
when it sought Federal Reserve assistance, following the collapse of Lehman Brothers and the
sale of Bear Stearns to JP Morgan Chase and of Merrill Lynch to Bank of America. Morgan
Stanley and Goldman Sachs may now accept deposits and tap the Feds emergency loan
program but they are now subject to stricter rules that traditional US banks must follow.

In the Philippines, investment banking may be carried out by private, government and foreign
universal banks or their affiliates (e.g., Union Bank, UCPB, First Metro Investment Corp., BPI
Capital Corp., Landbank, HSBC Ltd.) and investment houses (Abacus, ATR-Kim Eng., etc.). BSP
regulates all entities performing investment banking in the Philippines.

LIQUIDITY Remember the phrase too much money chasing too few goods in our basic
economics? Economists call this demand-pull inflation. A major demand-pull inflation theory
says that inflation may be caused by an increase in the money supply (otherwise known as
domestic liquidity or M3). Domestic liquidity or M3 is the broadest measure of money supply. It
includes not only cash in circulation and checking accounts but also savings and time deposits
and deposit substitutes. With more money going around, the propensity to acquire more goods
and services is greater, thus perking up demand. In turn, demand leads to increased prices once
the supply of goods and services is not able to adjust quickly to meet the higher demand. In
January 2007, M3 increased 22.8 percent, much faster than the rates recorded in previous
months, due to the continuing surge in foreign exchange from overseas Filipino workers, exports
and foreign investments. Despite the rise in liquidity, the increase in prices of goods was just 2.6
in February. This means the strong growth in liquidity has not led to higher inflation. Why?
Because of financial deepening and innovation in the market, and greater absorptive capacity of
the economy, BSP says. This means the expansion in money supply was used for more
productive economic activities that translate to economic growth. People tried to maximize
their earnings through short-term investments or increased savings. For example, OFW
remittances that were previously spent on consumer goods were now used to purchase real
estate properties or bonds. This also means that the financial system has developed a greater
capacity to use available money to finance attractive and productive ventures.

MERGER is the absorption of one or more corporations by another existing corporation, which
retains its identity and takes over the rights, privileges, franchises, and properties, and assumes
all the liabilities and obligations of the absorbed corporation in the same manner as if it had
itself incurred such liabilities or obligations. The absorbing corporation continues its existence
while the life or lives of the other corporation is terminated.

In line with BSP's policy to promote mergers and consolidations among banks and other
financial intermediaries as a means to develop larger and stronger financial institutions,
constituent entities may, subject to BSP approval, avail themselves of incentives as enumerated
in the Manual of Regulation for Banks.

An example of merger is that of Banco de Oro (BDO), surviving corporation, and Equitable PCI
Bank, Inc. (EPCI), absorbed corporation, where the entire assets and liabilities of EPCI were
absorbed by BDO.

MICROFINANCE LOANS represent small loans granted to the basic sectors such as farmer-
peasant, artisanal fisherfolk, workers in the formal and informal sector, migrant workers,
indigenous peoples and cultural communities, women, differently-abled persons, senior citizens,
victims of calamities and disasters, youth and students, children, and urban poor, as defined in
the Social Reform and Poverty Alleviation Act of 1997 (R.A. No. 8425), and other loans granted
to poor and low-income households for their microenterprises and small businesses. The
maximum principal amount of microfinance loans shall not exceed P150,000 and may be
amortized on a daily, weekly, semi-monthly or monthly basis, depending on the cash flow
conditions of the borrowers. Said loans are usually unsecured, for relatively short periods of
time (180 days) and often featuring joint and several guarantees of one or more persons.
(Circular 622)

MINIMUM AMOUNT DUE or MINIMUM PAYMENT REQUIRED means the minimum amount
that the credit cardholder needs to pay on or before the payment due date for a particular
billing period/cycle as defined under the terms and conditions or reminders stated in the
statement of account/billing statement which may include: (a) total outstanding balance
multiplied by the required payment percentage or a fixed amount whichever is higher; (b) any
amount which is part of any fixed monthly installment that is charged to the card; (c) any
amount in excess of the credit line; and (d) all past due amounts, if any. (Circular 398)

MONETARY POLICY refers to measures taken by a central bank to manage the availability and
cost of money and credit in the economy. BSPs monetary policy is geared to maintain price
stability conducive to a balanced and sustainable growth of the economy. The inflation targeting
framework of monetary policy adopted in January 2002 is aimed at achieving this objective from
a more forward looking and transparent perspective. To achieve the appropriate level of money
supply, which is one of the goals of monetary policy, BSP uses the following monetary tools:

reserve requirement
rediscounting rate
reverse repurchase and repurchase facilities
open market operations

Managing money supply is a delicate balancing act to ensure that not too much money is in the
system to trigger price increases or too little of it to choke economic activity. Monetary policy is
usually described as expansionary or contractionary. It is expansionary when it increases the
level of liquidity or money supply in the economy. Lowering of policy interest rates and
reduction in reserve requirements are expansionary measures. So is the tiering scheme adopted
in November 2006 on banks total placements with BSP. These tools are likely to encourage
economic activity as more funds are made available for lending by banks. Contractionary
monetary policy, on the other hand, decreases the level of money supply in the economy.
Increases in policy interest rates and reserve requirements have contractionary effect. They tend
to slow down economic activity as less funds are available for credit. In May 2009, to address
the rising money supply level, the Monetary Board introduced three schemes to absorb liquidity
(or tighten money supply). BSP encouraged GSIS, SSS and other GOCCs to deposit funds with
BSP; allowed BSP-supervised trust entities to deposit with BSP; and allowed special deposit
account placements of banks as alternative compliance to BSP requirements on liquidity floor
for government deposits. On July 12, 2009, the MB decided to maintain a neutral monetary
policy stance by implementing two complementary moves--scrapping the tiering system and
cutting BSPs key policy rates. A neutral monetary policy stance implies that demand pressures
remain moderate, supply conditions continue to be generally favorable, and inflation
expectations are manageable. Removing the tiering scheme has tightened the monetary policy
settings that will have a contractionary effect, while adjusting the policy rates downwards is
expansionary. Thus, the twin measures net effect is neutral.

NEGLIGENCE The failure to exercise the care which an ordinarily prudent person would use
under the circumstances in the discharge of the duty then resting upon him (People v. Aguilar,
2899-R, 18 October 1949). (Circular 587)

NET BOOK VALUE shall refer to the acquisition cost of property or accounts plus additions and
improvements thereon less valuation reserves, if any.

(The Manual of Regulations for Banks)


NET WORTH shall mean the total of the 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 the Bangko Sentral. (Circular 425)

NON-FINANCE CHARGES correspond to the amounts advanced by the bank for items normally
associated with the ownership of the property or of the availment of the service purchased
which are not incident to the extension of credit. For example, in the case of the purchase of an
automobile on credit, the creditor may advance the insurance premium as well as the
registration fee for the account of the debtor.

NON-PERFORMING LOANS (NPLs) refer to the following:


Loan accounts whose principal and/or interest is unpaid for 30 days or more after due
date (for loans payable in lump sum, in quarterly, semi-annual or annual installments);
Outstanding balance of loans when three or more installments are in arrears (for those
payable in monthly installments);
Outstanding balance of loans when the total amount of arrearages reaches 10 percent of
the total loan receivable balance (for those payable in daily, weekly or semi-monthly
installments);
In banking, NPL is better seen in the context of NPL ratio, which is the proportion of the
bad loans to the total loans. This ratio is an important indicator of the asset quality of
the banking system. Going by the NPL ratio, the performance of the banking system is
improving, from 14.6 in 2002 to 6.1 in 2006.
The loan exposure of banks also remains adequately covered as determined by the NPL
coverage ratio, or the proportion for allowance for probable losses on NPL to total NPL.

Reference: BSP Report on the Philippine Financial System, second semester 2006

OFFICERS shall include the president, executive vice president, senior vice president, vice
president, general manager, secretary, treasurer, trust officer and others mentioned as officers
of the bank, or those whose duties as such are defined in the by-laws, or are generally known to
be the officers of the bank (or any of its branches and offices other than the head office) either
through announcement, representation, publication or any kind of communication made by the
bank.

A person holding the position of chairman, vice-chairman or any other position of the board
who also performs functions of management such as those ordinarily performed by regular
officers shall also be considered an officer.
(The Manual of Regulations for Banks)

OUTSIDER A person involved other than an insider. (Circular 587)

PAWNSHOPS play a key role in the economy by lending to poor folks who would otherwise fail
to qualify for loans from banks. These entities appeal to those who are less finance-savvy
because they exude the informality of a barber shop or beauty salon. Pawnshops are non-bank
financial security of personal property. This is a very old credit practice. Pawnbroking existed in
ancient Greece, Rome, Babylon and China and was even described in the Bible. Queen Isabela of
Castile was said to have pawned her crown jewels to fund Columbus voyage to America. Today,
a typical pawnbroking transaction involves a borrower pledging an item to a pawnshop which
assesses its value. The loan is released as soon as the parties agree on the amount. Pawnshops
are able to grant quick loans because there is no credit investigation. The collateral helps
overcome a borrowers lack of creditworthiness while shielding a pawnshop from credit risk
because it can sell the item in case of default. In the Philippines, common pledges are jewelry;
household appliances like TV, electric fans and microwave ovens; and mobile phones.

Under the Pawnshop Regulation, a loan shall be at least 30 percent of the collaterals value
unless specified by the borrower in writing. The law also tasked the central bank to regulate
these entities. Pawnshops outnumber all other all other financial institutions in the country. At
end-2005, BSP listed 12,030 pawnshops, much higher than the 7,670 banks of all types during
the period. Aside from lending to households, studies noted that pawnshops finance the
operation of small farmers, petty traders and small entrepreneurs. The so-called banks for the
little man are indeed doing their share in nation-building.

PERPETRATOR A person, whether an insider or outsider, who is responsible for the commission
of crime either by direct participation, inducement or cooperation, including accomplices and
accessories as defined under Articles 18 and 19 of the Revised Penal Code, as amended.
(Circular 587)

PHILIPPINE CONSUMER FINANCE SURVEY (PCFS) A nationwide poll on the Filipino households
financial behavior and preferences that can be used to guide monetary policy. It was conducted
in 2009 by the BSP with the assistance of the Asia Pacific Centre for Research. A tedious and
data intensive survey, it required 10,000 respondents to answer questions on assets and
liabilities, consumption, savings and investment. It marked BSPs efforts to integrate mainstream
micro-level financial data into a macro assessment of the economy as part of a forward-looking
and intensive approach to monetary policy formulation.

PHILPaSS is the online and real-time gross settlement system owned and operated by the
Bangko Sentral ng Pilipinas.

Launched in 2002, its main objective is to mitigate, if not totally eliminate, the related risks
especially in high-value payments systems since the settlement is made through the central
bank.

BSP continues to spearhead the promotion of safe and efficient payment systems in the country
through continuous collaboration with its stakeholders. The current stakeholders of PhilPaSS
include 38 commercial banks, 37 thrift banks, 10 nonbanks performing quasi-banking functions,
one rural bank and five third-party system providers (MegaLink, Philippine Clearing House Corp.,
Philippine Securities Clearing Corp.-PDS Settlement Highway and the Bureau of the Treasury-
RoSS).

Recently, the Monetary Board approved the abolition of certain fees relative to the participation
of bank and non-bank financial institutions in the operations of PhilPaSS. These fees are: the
annual license fee of P20,000 for the use of the Phil. Payment System-Front End System Client
System by non-SWIFT user banks, and the monthly connectivity/access fees of P30,000 for third
party system providers. This move seeks to encourage more financial entities under BSPs
supervision to participate in the settlement operations of PhilPaSS.
Currently, the transactions that can be settled in PhilPaSS through demand deposit accounts
maintained with the BSP include:
high-value interbank lending and borrowing
sale and purchase of government securities
peso-leg settlement of forex sale/purchase
results of PCHC check clearing operations
MegaLink network funds transfers/payments
Repo/SDA/RDA placements/availments with BSP-Treasury Dept.
BIR/BOC revenue remittances
electronic cash withdrawals with BSP-CashD
interbank customer payments
e-rediscounting
deposits for reserve compliance PhilPaSS is managed by the BSP Payments and
Settlements Office.

PHISHING is the spoofing or sending of fake e-mail to convince a bank client or customer to
confirm online his account information and password. The public should always be vigilant
because phishing syndicates have been victimizing clients of banks and financial institutions.

PROMPT CORRECTIVE ACTION When a bank is found in its early stages of non-compliance with
standard conditions/ratings, the Bangko Sentral ng Pilipinas, as the supervisor of banks, enforces
the so-called prompt corrective action (PCA) on it. PCA involves the BSP directing the board of
directors of a bank, prior to an open outbreak of crisis, to institute strong measures to restore
the entity to normal operating condition within a reasonable period, ideally within one year.
These measures include the implementation of a plan on any or all of the following
components: capital restoration, business improvement and corporate governance. Factors that
are potentially reflective of the condition of a bank or financial institution will be considered in
determining the trigger events for the enforcement of the PCA such as substandard capital
adequacy ratios and poor CAMELS rating. CAMELS stand for capital adequacy, asset quality,
management, earnings, liquidity and sensitivity to market risk. Whenever PCA is initiated, banks
will be required to put forward an action plan to immediately correct the situation. The action
plan will be in a memorandum of understanding to be executed between the banks board of
directors and the BSP. The enforcement of PCA is authorized under Section 4.6 of the General
Banking Law. It seeks to avoid the imposition of harsher measures usually instituted when the
entity is in its advanced stages of deterioration.

Source: Circular 523 (2006)

PYRAMID & PONZI SCHEMES come in many forms but they all share one overriding feature.
They promise consumers or investors large profits based primarily on the recruitment of others
to join their program. The profits are not derived from any real investment or real sale of goods
to the public. Inventory loading and lack of retail sales are tell-tale signs that a product is simply
being used to disguise a pyramid scheme. Inventory loading occurs when a companys incentive
program forces recruits to buy more products than they could ever sell, often at inflated prices.
If this occurs throughout the companys distribution system, the people at the top of the
pyramid reap substantial profits, although little or no product moves to the market. The people
at the bottom make excessive payments for inventory that simply accumulates in their
basements. The lack of retail sales is also a red flag that a pyramid exists. Many pyramid
schemes will claim that their product is selling like hot cakes. On closer examination, however,
the sales occur only between people inside the pyramid structure or to new recruits joining the
structure, not to consumers in the general public.
A Ponzi scheme is closely related to a pyramid because it revolves around continuous recruiting.
In this scheme, however, the promoter generally has no product to sell and pays no commission
to investors who recruit new members. Instead, the promoter collects payments from a
stream of people, promising them all the same high rate of return on a short-term investment.
In the typical Ponzi scheme, there is no real investment opportunity; the promoter just uses the
money from new recruits to pay obligations owed to longer-standing members of the program.
In English, there is an expression that nicely summarizes this scheme. Its stealing from Peter to
pay Paul. In fact, some law enforcement officers call Ponzi schemes Peter-Paul scams. Both
Ponzi schemes and pyramids are quite seductive because they deliver a high rate of return to a
few early investors for a short period of time. Yet, both schemes are illegal because they
inevitably fall apart. No program can recruit new members forever. When the scheme collapses,
most investors find themselves at the bottom, unable to recoup their losses. Inventory loading
and lack of retail sales are tell-tale signs that a product is simply being used to disguise a
pyramid scheme. Inventory loading occurs when a companys incentive program forces recruits
to buy more products than they could ever sell, often at inflated prices. If this occurs throughout
the companys distribution system, the people at the top of the pyramid reap substantial profits,
although little or no product moves to the market.

Source: US Federal Trade Commission website

READILY MARKETABLE INSTRUMENTS, based on International Accounting Standard 39, are


financial products that are valued in an actively-traded market and their quoted prices are
openly available from regulatory agencies, financial firms, exchange, licensed dealers and
brokers. Also, such prices reflect actual and ongoing market transactions on a short-term, but
regular basis. Investment commodities such as derivatives, hedge funds, debt, equity and asset-
backed securities fall under this category. These financial instruments are publicly available to
prospective investors and their prices are based on the prevailing market rate.

REDISCOUNTING is the standing credit facility of the BSP that helps banks meet temporary cash
needs by refinancing the loans they extend to their clients.

The rediscounting cycle starts with a bank extending loans to borrowers who must execute
promissory notes (PNs) in favor of the bank. The bank turns around and endorses the PNs to
BSP (through the Dept. of Loans and Credit or the Regional Loans and Credit Unit) for
rediscounting.

The BSP, in turn, lends the bank an amount equivalent to a certain percentage of the face
amount or outstanding balance of the borrowers PN. The bank then plows back the proceeds of
the BSP loan into new loans to other borrowers. In effect, rediscounting helps sustain the banks
funds for short-term lending. Rediscounting is one of the tools of BSP for regulating the volume
of money in circulation. During periods of high inflation, BSP refrains from extending too much
credit to banks, but eases its grip when there is a need to expand money supply in the monetary
system.

The authority of BSP to extend rediscounts, discounts, loans and advances to banking
institutions to influence the volume of credit consistent with its price stability objective is
provided in the New Central Bank Act. Given the current thrust toward market orientation,
however, the reliance has shifted gradually to the use of open market operations for liquidity
management.

RELATED COMPANY means another company which is: (a) its parent or holding company; (b) its
subsidiary or affiliate; or (c) a corporation where a bank or its majority stockholder own such
number of shares that will allow/enable him to elect at least one (1) member of the board of
directors or a partnership where such majority stockholder is a partner.

(The Manual of Regulations for Banks)

REMITTANCES, in general, refer to transfers in cash or in kind from migrants to household


residents in the country of origin. Economic crises in the Philippines had seen the flow of
remittances going up. This suggests an altruistic motive for remittances, which formed an
important element in the countrys resilience during the recent economic crisis. In 2009, the
country was fourth among the top recipients of remittances with $20 billion. First was India
($49B); second, China ($48B); and third was Mexico ($22B). Surge in labor migration and
demand for skills account for the continued strength of remittances. In terms of percentage to
the gross domestic product (GDP), the Philippines posted an 11 percent remittance share of
GDP (same with Bangladesh and Guatamela). In top place was Tajikistan with 50 percent. In
2009, remittances grew while Philippine exports declined. Strong economic performance of host
countries leads to higher remittances.

Source: Philippine Remittances: Determinants and Outlook, a paper presented by Dir. Zeno
Abenoja in a Brown Bag session in July 2010

RESERVE DEPOSIT ACCOUNT (RDA) is a debt instrument introduced by the BSP in 2006. It is an
alternative mode for banks to facilitate their compliance with the reserve requirement, which
obliges them to set aside a portion of their deposits in cash or in government securities with
BSP.

The RDA also assists in mopping up excess liquidity in the financial system and help keep
inflation at manageable levels by influencing the supply of money in the economy (refer to
Domestic Liquidity). The implementing guidelines of the RDA are outlined in Circular 539.

RESERVE REQUIREMENT - The Monetary Board requires banks to maintain reserves against
their deposits to manage the volume of money in the banking system. This action is in
accordance with the provisions of RA 7653 or The New Central Bank Act.

Increasing the reserve requirement has a limiting effect on the money supply as banks would
need to have more money for keeping and less for lending or investing. It is a clear tightening
move by BSP. Conversely, decreasing the reserve requirement is expansionary because banks
will have more money at their disposal. Thus, banks can lend more to the public. Generally, the
reserve requirement is the monetary tool for the longer term as opposed to the more dynamic
open market operations. BSP last adjusted (upward) its reserve requirements on July 15, 2005.
The MB observed at the time that there was too much money circulating in the market and this
could impact on inflation.

At present, the reserve requirement rate is 10 percent for statutory reserves and 11 percent for
liquidity reserves, or a total reserve requirement of 21 percent. This means that for every peso
of depositors money held by banks, 21 centavos are required to be reserved and must not be
lent out.

Regular reserves are kept in the vaults of banks and a certain percentage in BSP. Liquidity
reserves come in the form of securities bought directly from BSP prior to the establishment of
the reserve deposit account, which now requires banks to deposit their funds directly to the BSP
at rates comparable to those on government securities. From the depositors perspective, it can
be said that the reserve requirement is a safety net as well as assurance to depositors that part
of their money is secure in the vaults of their banks. Historically, reserve requirements had
peaked to a high of 23 percent, down to a low of 16 percent from where it had risen
consistently after the Asian financial crisis.

REVOLVING INTEREST is the fee charged to credit card holders who do not pay their obligations
in full within the monthly billing cycle of 30 days, with a grace period of 21 more days.

ROBBERY - A crime committed by a person who, with intent to gain, shall take any personal
property belonging to another, by means of violence against or intimidation of any person, or
using force upon anything pursuant to Article 295 and other pertinent provisions of Chapter 1,
Title X of the Revised Penal Code, as amended. (Circular 587)

SKIMMING is the electronic means by which personal information is surreptitiously captured by


thieves through scanning the magnetic strip from either an ATM or credit card. The theft is
accomplished in only a few seconds as all data is stolen from the strip after one swipe.
Scammers can then use the information to manufacture a duplicate card and use the victims
own money for criminal purposes, including withdrawing cash from their bank account or
purchase items at their expense.

Skimming credit cards can take place in a merchant establishment where a card is taken away
when the bill is being settled. This provides the opportunity for a thief to scan the victims card
without his or her knowledge.

ATM cards, on the other hand, require additional technology and a more meticulous approach.
Electronic thieves install false card readers in front of existing ones on ATM machines, as well as
a disguised camera near the keyboard and monitor. Once a victim inserts an ATM card, the false
reader copies the information in the magnetic strip and the camera records the personal
information number typed by the victim.

SLOWDOWN, RECESSION, DEPRESSION Amid the worst global financial crisis since the Great
Depression, would the local economy experience a recession or merely a slowdown? A
recession is generally defined as the shrinking of a countrys gross domestic product (GDP) for
two consecutive quarters. GDP is the economy measured in the money value of all goods and
services produced in a country. To illustrate, a hypothetical economy with P100 billion worth of
GDP in the first quarter would be in recession if its total production of goods and services
drops to, say, P99 billion in the second quarter and to P98 billion in the third quarter. In this
case, the economy posted negative growth for six months straight. Depression, on the other
hand, is a severe recession. While mass unemployment and falling wages and prices marked the
Great Depression of the 1930s, there are no generally accepted parameters for this economic
condition. Economists, however, would explain in laymans terms that a recession is when your
neighbor loses his job. A depression is when you lose yours. Philippine economic managers
believe that the country is far from a recession (and much farther from a depression) and would
only experience a slowdown.

In a slowdown, the economy still expands but the rate of growth is less. In the example, the
hypothetical P100 billion economy would experience a slowdown if it grows (by 5 percent) to
P105 billion in the first quarter, and then to P108 billion (3 percent) in the second quarter. While
the US and some European economies are now officially in recession, local and foreign analysts
agree that the Philippines would post positive growth rates in 2009.

SOUND MACROECONOMIC FUNDAMENTALS include, among other things, stable prices driven
by low inflation rates, low interest rates, large forex reserves, healthy banking systems, vibrant
economic growth, and a sustainable external position. Central to having a sound
macroeconomic environment is the existence of mutually consistent and reinforcing monetary,
fiscal and exchange rate policies. This requires at the minimum (1) monetary measures that limit
the growth of money supply to a rate that complements growth of real output, (2) a fiscal path
that controls spending to a level close to revenues, and (3) an exchange rate regime that
promotes international competitiveness.

Within a decade of reforms following the Asian financial crisis, the Philippine economy has
reached a new level of maturity and stability founded on strong macroeconomic fundamentals.
Statistics point to a robust economic performance in recent years. The GIRs continued buildup
ensures a steady supply of hard currencies to meet current and near-term foreign obligations.
The Philippine banking sector remains stable. Philippine banks remain among the best
capitalized in the region, enhanced by ongoing consolidation in the industry and the recent
implementation of the Basel II accord. On the fiscal side, the government held down the deficit
by improving revenue generation, channeling resources to productive activities such as
investments in healthcare, education, housing and other infrastructure projects. These positive
developments are indicative only of one thing sound economics. Sound macroeconomic
fundamentals and well-developed financial system and capital markets not only help weather
domestic and external shocks as they emerge but also minimize their severity. They help sustain
positive investor sentiment in the country and, in the process, ensure that economic growth
advances and remains robust.

SPECIAL DEPOSIT ACCOUNT is one of the monetary tools of the BSP. It is used to siphon off
excess liquidity in the system and helps prevent potential inflationary pressure. The SDA is a
fixed-term deposit open only to banks, non-banks with quasi-banking functions and trust
entities under BSP supervision. Trust entities with access to the SDA facility can offer this to their
trustors or principals (clients of these entities) by participation. Participation means the trustors
may purchase or invest in smaller amounts together with other trustors to arrive at the
minimum placement required by BSP. The BSPs counterparty in this transaction is the trust
entity, not the persons participating in the SDA.

Trust entities offer SDA placements with tenors ranging from two weeks to a maximum of one
month. The interest rate is based on BSP-published SDA rate. Just like any other funds received,
managed and held in custody by trust entities under a trust and other fiduciary relationship,
funds invested in SDA are not covered by the Philippine Deposit Insurance Corp.

Culled from the BSP leaflet SDA Questions: BSP Answers (2009)

STRONG PESO, IMPACT OF What is the impact of a strong peso on the economy? Philippine
exporters claim they will become less globally competitive as exports become more expensive in
dollar terms. This would dampen interest for Philippine exports. It would also mean less profit
for the exporters. Beneficiaries of overseas Filipino workers (OFWs) complain that that they will
get less pesos for every dollar sent by their overseas relatives. Domestic producers of import
substitutes also see themselves at a disadvantage as imported goods become cheaper. In the
tourism sector, domestic tourists may opt to visit foreign places over local sites as foreign travel
becomes cheaper; while foreign tourists could find it less attractive to visit the Philippines
because their dollars will buy less products and services. The hotel industry will also be receiving
less pesos for hotel accommodation paid in foreign exchange by foreign tourists. On the other
hand, blunting the plaint of exporters is the fact that a stronger peso would buy them more
imported raw materials, which constitute a sizable portion of their production cost. Likewise, a
strong peso would buy more imported basic products like diesel and gasoline, ample supply of
which triggers fare and price reductions. Lower domestic prices, in turn, would mean OFW
beneficiaries would be shelling out less pesos for basic commodities.

A stronger peso also decreases the countrys foreign liabilities or debts. To cite an example in
the most elementary way: For a $5 loan, the borrower will need P215 to pay it, with the current
exchange rate of P43 to a dollar, as opposed to P240 if the exchange is, say, P48 per dollar.
Savings incurred from a strong peso exchange rate can be used to finance economic programs
that will generate jobs and provide employment as well as livelihood opportunities for OFWs
and their families right here in the country. Closer to home, high foreign exchange inflows
enable BSP to further build up the countrys gross international reserves (GIR), which foreign
investors, creditors and international economic observers use as an initial gauge to ascertain a
countrys capability to service payments of goods and services.
Source: FAQs (www.bsp.gov.ph)

STRESS TEST In business, the stress test is part of the armory of modern risk management in the
framework prescribed by what is commonly known as the Basel II convention. These stress tests
are meant to gauge the tolerance of whatever is under measurement and alert any likelihood of
breaking points. Tolerance is tested to provide warning signals to avert undesirable outcomes. In
the United States, stress tests put into focus various playersinvestors, board of directors,
management and regulatorsand how they do what they are supposed to do. For example,
regulators want to determine from the tests if additional capital is required to keep the banks
afloat.

In BSP, early warning systems (EWS) for surveillance work have been developed and are
continuously being improved. These are:

Macro models
EWS on business cycles
EWS on currency crisis
Bank distress index
EWS on external debt sustainability

Micro models
Bank performance report system
Comprehensive bank folders
Top corporate borrower reports
Bank early warning system
Source on BSPs EWS. BSP Modernization: A Policy Perspective (A BSP Working Paper Series) by
Cristeta Bagsic and Eloisa Glindro, August 2006

SUBSIDIARY refers to a corporation or firm more than fifty percent (50%) of the outstanding
voting stock of which is directly or indirectly owned, controlled or held with the power to vote
by a bank or other financial institution.

THEFT - A crime committed by a person who, with intent to gain but without violence against or
intimidation of persons nor force upon things, shall take personal property of another without
the latters consent pursuant to Article 308 and other pertinent provisions of Chapter III, Title X
of the Revised Penal Code, as amended. (Circular 587)

TIERING is a variation in the overnight borrowing or reverse repurchase (RRP) rates that BSP
uses from time to time to manage the volume of funds that banks place with BSP.

As money manager, BSP always aims for a balance between money supply and economic
growth. Generally, too little money in circulation would inhibit economic activity. Too much of it
is also not good as it fuels inflation. With the tiering scheme, only the first P5 billion of short-
term money that banks place with BSP will get 7.5 percent. The next P5 billion will get only 5.5
percent while placements in excess of P10 billion will earn just 3.5 percent.
The lower rate BSP pays on overnight money (in excess of certain threshold levels) aims to
discourage banks to park their funds with BSP and to encourage them to lend these funds to the
public. Vigorous bank lending to the public stimulates the economy while generating higher
volume of loans and other transactions for the banks.

TRUST CORPORATION In a bank, a trust department administers trusts, guardianships, and


estates; serves as a trustee for certain corporate bonds and pension; and manages the assets of
customers who request it to do so. Starting this year, the trust services can also be provided by
other market participants within the appropriate framework and governance standard. Under
Circular 710 (issued 19 January 2011), a separate corporate vehicle for trust services can be
created. The stand-alone trust corporation will have a required minimum capitalization of P300
million which will increase as assets under management exceed P20 billion. To protect the
interests of the public, directors and senior officers of the trust corporation are held to a
minimum standard of actual industry experience. Market practitioners who already perform
related functions but may not have been engaged directly by trust departments may likewise
consider taking the tests given by accredited providers to demonstrate the expected
competencies. Banks currently with trust departments may spin off said department into a trust
corporation. However, banks must choose between maintaining the trust department or
providing the service through the trust corporations. Under the new guidelines, banks can only
choose to operate one mode but not both. Should a financial institution opt to operate a trust
corporation, said financial institution is limited to owning two trust corporations under the
guidelines. A key feature of the trust corporation is the treatment of the Single Borrowers Limit
(SBL). The new rules provide that for a trust corporation which is owned by a bank or quasi-
bank, the assets under management of the trust corporation do not form part of the SBL
calculations for the parent bank/quasi-bank. This is in recognition that the arrangement
between trustor-trustee is not a debtor-creditor relationship against which the SBL provisions
apply. To prevent possible regulatory circumvention, a bank or quasi-bank will not be allowed to
be a trust account holder in any trust corporation.

The TRUTH IN LENDING ACT, or R.A. 3765, was enacted on 22 June 1963 with the purpose of
protecting Filipinos from lack of awareness of the true cost of credit and assisting them in their
transactions with lenders by making full disclosure of credit information a requirement.

The act covers most types of credit transactions, including any loan, mortgage, deed of trust,
contract to sell and leasing of properties. The only forms of credit not under this law are
transactions which do not involve the payment of finance charges by the debtor, and credit
transactions in which the debtor is the one specifying a definite and fixed set of credit terms,
such as bank deposits, insurance contracts, sale of bonds, etc.

To further promote awareness of this law, the BSP mandates banks to post in conspicuous areas
of their principal place of business and branches, if any, the following:
a) An abstract of the provisions of R.A. 3765 reproduced in 60 cm. wide by 75 cm. long
poster, as prescribed by the Monetary Board.
b) Information regarding interest and other charges on loans.
c) Types of loans.
d) Simple annual rate of interest.
e) Manner of interest payment; i.e. whether collected in advance or otherwise.
d) Other fees and charges imposed by the bank in connection with the loan.

TUV or Technischer ueberwachungs-Verein, which literally means Technical Watch-Over


Association, is one of Germanys best-known brands and a certifying body involved with
product safety for the European community. This brand is the hallmark of the German TUV
organization and may only be used exclusively by them and to those companies for which it has
been registered or certified. The three-letter word has become synonymous with safety and
certainty, reliability and impartiality. TUV organizations ensure these principles are applied not
only in Germany but also around the world. The BSP departments and offices sporting the sign
have qualified as recipients of TUV SUD certification after having complied with applicable
requirements under the OHSAS and ISO standards. TUV SUD has defined the TUV brand even
more distinctively and added characteristics for its own organization as Choose certainty. Add
value. For TUV SUD clients, the brand and the blue octagon have come to represent Enhanced
Certainty and Economic Value Added.

UNIT INVESTMENT TRUST FUNDS (UITFs) are defined as open-ended pooled trust funds, in
pesos or in any acceptable currency, which are operated/administered by a trust entity. It was
developed at the initiative of the BSP to replace the common trust fund (CTF). Unlike the CTF,
the UITF allows the investor to know the actual value of his investment any banking day. Since a
UITF is not a deposit account but a trust product, it is not insured by the Philippine Deposit
Insurance Corporation. Neither does it carry any guaranteed rate of return. Find out more about
UITF in Circular 447.

VICTIM An insider or outsider other than the perpetrator, who is the aggrieved party to the
crime and may as result of the incident, suffered the loss. (Circular 587)

WELL SECURED A debt shall be considered well secured (or fully secured), if it is covered by
collateral in the form of a duly constituted mortgage, pledge, or lien on real or personal
properties, including securities, having a loan value sufficient to discharge the debt in full,
including accrued interest and other pertinent fees and expenses.

(The Manual of Regulations for Banks)

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