Banking 2017 Reviewer - (Portrait)

CHAPTER 2 – ORGANIZATION, MANAGEMENT AND ADMINISTRATION OF BANKS, QUASI-
BANKS AND TRUST ENTITIES
I. Organization of Banks
A. Conditions
A. Entity is a stock corporation.
B. Funds are obtained from public. Public means 20 or more persons
C. Meet the minimum capital requirements per category prescribed
by MB. (BSP Circular 854, series of 2014)
B. Capital Requirements
Bank Category Minimum Capitalization
Universal Bank
 Head Office only 3.00 billion

 Up to 10 branches 6.00 billon
 11 to 100 branches 15.00 billion
 More than 100 branches 20.00 billion
Commercial Banks
 Head Office only 2.00 billion

 Up to 10 branches 4.00 billion
Thrift Banks
Head Office in NCR
 Head Office only 500 million
 Up to 10 branches 750 million
Head Office in all other areas outside NCR

 Head Office only
 11 to 50 branches 300 million
 More than 50 branches 400 million
800 million
Rural and Cooperative Banks
Head Office in NCR
 Head Office only 50 million
(All cities up to 3rd class municpalities)
80 million
(4th class to 6th class municipalities)
80 million
C.
*25% of the total ACS shall be subscribed and at least 25% of subscription shall be paid-up.
C. Capabilities
A. Bank’s ownership structure
B. Directors and Senior Management
C. Its operating plan, and
D. Internal controls, as well as
E. Its projected financial condition and capital base
D. Incorporators
A. Must be a person of integrity and of good credit standing
B. Must not have been convicted of any crime involving moral
turpitude.
C. Must not be officers or employees of a gov’t agency or
instrumentality in charged with the supervision of, or granting of
loans to banks
D. 5-15 Incorporators
E. Bank Branches
A. Universal or Commercial Bank – may open branches within or
outside of PH upon prior approval of BSP
II. Stockholdings
A. Treasury Stocks
Prohibitions:
1. Purchase or acquire shares of its own capital stock
2. Accept its own share as security for a loan whether:
a. Lien upon the shares of stockholders for and as
indebtedness to the corporation
b. Granting loans/discounts upon the security of the stock
Exception: authorized by MB, within 6mos from purchase, it must
be sold.
B. Foreign Stockholdings
Foreign individuals and non-bank corporations may own or control up to 40%
of the voting stock of a domestic bank.
Foreign Banks Liberalization Act, R.A. 7721, as amended by R.A. 10641

 Allowed increased foreign participation in financial system by
allowing entry of Foreign Banks and increase in ownership of Foreign
Bank in Domestic Banks.
 Modes of Entry
o by acquiring, purchasing or owning up to one hundred
percent (100%) of the voting stock of an existing bank;
o by investing in up to one hundred percent (100%) of the
voting stock of a new banking subsidiary incorporated under
the laws of the Philippines; or
o by establishing branches with full banking authority
 Equal Treatment with Domestic Banks
 Participation in Foreclosure Proceedings
C. Family Groups or Related Interests
A. Full Disclosure is required
III. Board of Directors
A. Number – 5 to 15, 2 of whom shall be independent
B. In case of Merged or Consolidate Banks – the number of directors shall not
exceed 21.
C. Meetings – may be through modern technologies. By laws must provide that
meetings should be held only within PH.
A. Directors or Trustees cannot attend or vote by proxy at board
meetings
D. MB may regulate payment of compensation and other benefits in the cases
of: (CUU)
A. Bank is under comptrollership or conservatorship;
B. Conducting business in an unsafe or unsound manner;
C. Is in unsatisfactory financial condition.
IV. Fit and Proper Rule
A. Powers of the Monetary Board
A. Review the qualifications and disqualifications of bank directors or
officers and disqualify those found unfit.
B. Disqualify, suspend, or remove any bank director or officer who
commits or omits an act which render him unfit for the position
C. Determination of fitness to position, the ff are considered:
1. Integrity
2. Experience
3. Education
4. Training
5. Competence
B. Disqualifications
PERMANENT TEMPORARY
1. Convicted by Final Judgment 1. Refusal of full disclosure of business
 for offenses involving dishonesty or interest or material information
breach of trust 2. Directors who have been absent or
i. estafa, embezzlement have not participated in more 50% of
ii. extortion all board meetings. Physically absent
iii. forgery for more than 25% of the meeting
iv. malversation 3. Delinquent in payment of their
v. swindling obligations
vi. theft 4. Conviction of offenses same as No.1
vii. falsification (PERMANENT DQ) but the conviction
viii. bribery has not yet become final and
ix. BP 22 executory.
x. Anti-Graft R.A. 3019 5. Directors & Officers of closed/quasi-
xi. R.A. 7613 banks/trust entities pending their
 with imprisonment sentence of clearance by MB.
more than 6 years 6. Directors who failed to
 for violation of banking laws, rules observe/discharged their duties and
and regulations responsibilities.
2. Judicially declared insolvent, 7. Directors who failed to attend the
spendthrift, or incapacitated to special seminar for BOD.
contract 8. Persons dismissed/terminated from
3. Directors, officers, EE of closed/quasi employment for cause
banks/trust: FINAL and EXECUTORY 9. Those under preventive suspensions
 who are found to be culpable for 10. Persons with derogatory record
such institution’s closure 11. Same offenses as No. 3 in
 Administratively liable for violation PERMANENT DQ but not yet Final
of banking laws, rules and and Executory
regulations
 Held by another gov’t agency
administratively liable for violation
of banking laws, rules and
regulations or any offense involving
dishonesty or breach of trust
C. Disqualifications/Prohibitions under
A. Corporation Code
1. Convicted by FJ of an offense with imprisonment sentence of
more than 6 years
2. Violation of Corporation Code committed within 5 years prior
to the date of his election or appointment
B. NCBA
1. Member of MB prohibited from becoming a director, officer,
stockholder of any bank or quasi-bank.
2. Member of MB cannot hold any other public office or public
employment
3. No appointment in MB, if he has been connected with any
multilateral banking or financial institution, substantial
interest, within 1 yr. prior to appointment.
C. PDIC
1. Convicted of any criminal offense involving dishonesty or a
breach of trust.
D. R.A. 7353
1. All members of BOD of a Rural Bank shall be citizens of PH
E. Appendix 38, Manual of Regulations for Banks
1. Any officer or employee of CDA shall be disqualified to be
elected or appointed to any position in a Coop Bank.
D. Prohibition on Public Officials
A. No appointive or elective public official shall be at the same time
serve as officer of any private bank. Except: if such service is
incident to financial assistance provided by the gov’t or GOCC to
the bank.
V. Banking Days and Hours
A. Number of Days and Hours
A. shall transact business on all working days for at least 6 hours a day.
VI. Automated Teller Machines
VII. Independent Auditor
VIII. Financial Statements
IX. Publication of Capital Stock
X. Settlement of Disputes
A. BSP shall be consulted
XI. Strikes and Lockouts
A. Unsettled Labor disputes after 7 days. BSP shall report to Secretary of Labor
for decision
B. Banks must inform the BSP on status of labor disputes
A. Cause of the strike/lockout and bank’s management position
B. Bank operations affected.
XII. Laws Governing Other Types of Banks
A. Thrift Banks Act
B. Rural Banks Act
C. Cooperative Code
CHAPTER 3 - DEPOSIT FUNCTIONS OF BANKS
I. NATURE OF BANK DEPOSITS

What is the Nature of Bank Deposits?
Fixed, savings, and current deposits of money in banks and similar institutions are
considered simple loans.
Basis?
Civil Code Art. 1980 – “shall be governed by the provisions concerning simple loan.”
There is a debtor-creditor relationship between the bank and its depositor. The bank is the
debtor and the depositor is the creditor. (BPI v Franco, 2007
Implication
- Ownership is transferred to the bank such that it can use the money deposited
- Bank as debtor has the duty to return money of the same amount upon demand
- Failure to return is NOT estafa
Interest
- Bank depositors, as creditors, earn interest on the money deposited
What is the degree of care that banks are required to observe?

“By the nature of its functions, a bank is required to take meticulous care of the deposits of
its clients, who have the right to expect high standards of integrity and performance from it.
BPI v Casa Montessori
“Utmost Diligence” also used in other jurisprudence
Their duty to depositors has also been characterized as fiduciary.
Basis of Higher Degree of Care

- Public Interest
Note that banks are also to keep bank accounts SECRET. Why?
To foster CONFIDENCE from the public
II. ADMINISTRATION
The GBL mandates banking institutions to require the submission of 3 SPECIMEN

SIGNATURES to from each depositor who wish to open deposit accounts. Specimens are to
be updated at least every 5 years. Banks may require depositors to update sooner.
Requisites For Minors To Be Depositors:

- for minors to be allowed to open deposit accounts without consent of their parents or
guardians, the following must be present:
1. at least 7 years of age;
2. able to read and write;
3. have sufficient discretion;
4. not otherwise disqualified by any other incapacity
- parents or guardians may open deposit accounts for minor children
- Restriction as to Minor Depositors in Thrift Banks: in thrift banks, parents or guardians may
prohibit the bank from making payment to the minor and to make payment to him by
sending a notice
Requisites For CORPORATIONS to Be Depositors:

The requisites depend on when the accounts are to be opened.
Before Incorporation After Incorporation

When payment of subscription is in cash, Issuance by BOARD of Directors of a
SEC requires a BANK CERTIFICATE OF RESOLUTION authorizing the signatories
DEPOSIT of paid-up capital to be and specifying the depositary bank.
NOTARIZED in the place where signed.
HOW ARE MATURED TIME DEPOSITS/DEPOSIT SUBSTITUTES TO BE TREATED?

Time Of Payment Of Interest
- At maturity, upon withdrawal, in advance
- If in advance, shall NOT exceed the interest for 1 year.
MATURED TD/DS are to be treated as a SAVINGS DEPOSIT.
CLEARING CUT-OFF TIME

General Rule: ALL deposits and withdrawals during regular banking hours shall be credited
or debited to deposit liability accounts on the date of receipt or payment thereof.
When are Cut-off Times?

Depends on whether the bank has a clearing arrangement with the BSP.
If there is a BSP clearing arrangement

- not earlier than 2 hours in head office and 3.5 hours in branches
NO clearing arrangement
- 2 hours before clearing time
DEFINE AVERAGE DAILY BALANCE/maintaining balance:

- Amount at the end of a banking day/period that is used by banks to compute finance
charges, etc.
The Following are RULES ON MAINTAINING BALANCE:

- Banks may impose service charge or maintenance fee for accounts with balances below the
average daily balance but it must be must be properly disclosed in the terms and conditions
of the deposit
When do accounts become DORMANT?

When the account has no activity either deposits or withdrawals,
CURRENT/CHECKING ACCOUNTS become dormant after a period of 1 year; while SAVINGS
ACCOUNTS, after a period of 2 years.
What is the notice requirement for the imposition of dormancy fees?
When the Average Daily Balance is below the minimum for 2 consecutive months, and after
giving notice to the depositor, banks may impose dormancy fees
Define SURVIVORSHIP AGREEMENT:

DEFINITION: It is an agreement between Joint and several owners of a deposit that either of
them could withdraw any part or the whole of said account during the lifetime of both, and
the balance, if any, upon the death of either, shall belong to the survivor.
What is the nature of a Survivorship Agreement?

- Aleatory Contract (see: Civil Code Art. 1790)
- NOT ILLEGAL PER SE BUT may violate laws (example: used to cloak an inofficious donation;
impairs legitimes)
III. KINDS OF DEPOSITS

What are the KINDS OF DEPOSITS?
1. Demand Deposits
2. Savings Deposits
3. Negotiable Order of Withdrawal Accounts
4. Time Deposits
5. Foreign Currency Deposits
A. Demand Deposits
Definition
- all liabilities of the BSP and other banks which are denominated in Philippine Currency and
are subject to payment in legal tender upon demand, usually by presentation of checks
Checks are Bills of Exchange drawn on banks and are payable on demand.
There is an agency contract between a bank and a holder where the holder is the principal
and the bank is the agent.
What Banks are allowed WITHDRAWAL BY CHECK?

In Demand Deposits, Universal or Commercial Banks are allowed Withdrawal by check even
without prior BSP authorization. Thrift Bank, Rural Bank, Cooperative Bank may only do so
WITH prior authority from BSP.
DUTY OF THE BANKS IN RELATION TO CHECKS:

Banks have the duty to honor checks.
- provided the account has sufficient funds
- no duty to make partial payments
Banks have the duty to know the signatures of its customers.

- It is negligence on the part of the bank when it does not ascertain the
authenticity of the drawer’s signature appearing in a check
On the other hand, it is the RESPONSIBILITY OF DRAWER to personally keep track of his
available balance and make sure that the checks he issues are funded.
What is the significance of Crossing a Check?

Crossing a check means that it is issued only for the purpose of deposit only; that it may be
negotiated only once; and as a warning to all those who come across it that the encashment
must be for this purpose.
Why are Cashier’s Check considered ‘good as cash’?

- The may be treated as a Promissory Notes as their mere issuance is also their
acceptance by the bank.
Who are prohibited from maintaining demand deposits?

The following persons are prohibited from maintaining demand deposits or current accounts
with the bank office in which they are assigned:
a. All officers
b. Employees of the bank’s cash department/cash units
c. Other employees who have direct and immediate responsibility in the handling of
transactions/ or records pertaining to demand deposits or current accounts.
B. SAVINGS DEPOSITS
As a rule, banks are prohibited from issuing/accepting withdrawal slip without requiring the
depositors to present their passbook.
As an exception, the BSP may allow a no passbook system: i.e. atm cards
Savings Accounts may be individual or joint.
Compare ‘and’ accounts from ‘and/or ‘ accounts

AND AND/OR
Both signatures required for withdrawal Signature of sufficient to effect withdrawal
Must be with knowledge & consent Even without knowledge or consent
C. Negotiable Order of Withdrawal Accounts

NOW Accounts are interest-bearing deposit accounts that combine the payable on demand
feature of checks and investment feature of savings
GEN: Only Universal or Commercial Banks

Exception: Thrift Bank/ Rural Bank/ Cooperative Bank WITH prior approval from BSP
D. TIME DEPOSITS
- those Issued for a specific period or term
E. Foreign Currency Deposits

- deposits denominated in other currency
- must be by authority of BSP (Sec. 2, FCDA)
- Aside from GBL, also regulated by AMLA
- GENERAL RULE: Anonymous Or Numbered accounts not allowed; exception: numbered
accounts allowed in foreign currency deposits
- note under the AMLA, that banks must still be able to ID who the depositor is when
required by the law/government
F. Deposit Substitute (Quasi-Banking)

Requisites
1) Borrowing funds from borrower’s own account
2) 20 or more lenders at any given time
3) Methods of borrowing: issuance, endorsement, or acceptance of debt instruments of any
kind, other than deposits
4) Purpose is re-lending or purchasing receivables
VI. UNCLAIMED BALANCES

What are UNCLAIMED BALANCES?
- credits or deposits of money, bullion, security or other evidence of indebtedness of any
kind, and interest thereon with banks, buildings and loan associations, and trust
corporations, as hereinafter defined, in favor of any person known to be dead or who has
not made further deposits or withdrawals during the preceding ten years or more.
What are to be done to unclaimed balances?

1) The Treasurer of the Philippines must publish a statement of unclaimed balances once a
week of three consecutive weeks in at least two newspapers of general circulation in the
locality where the banks are situated; and notify the OSG.
2) OSG shall then undertake Escheat proceedings.
3) Unclaimed balances shall be deposited with the Treasurer of the Philippines.
PRIVACY
Constitution
Bill of Rights
Civil Code
Article 26
Article 32
Revised Penal Code

Article 227 - 230
Other special laws

Anti-Wiretapping Act
Data Privacy Act
The Data Privacy Act (RA 10173)
Data subject refers to an individual whose personal information is processed.

Consent of the data subject refers to any freely given, specific, informed indication of will,
whereby the data subject agrees to the collection and processing of personal information. It
shall be evidenced by written, electronic or recorded means.
Personal information refers to any information from which the identity of an individual is
apparent or can be reasonably and directly ascertained
Personal information controller refers to a person or organization who controls the
collection, holding, processing or use of personal information
Personal information processor refers to any natural or juridical person qualified to act as
such under this Act to whom a personal information controller may outsource the
processing of personal data pertaining to a data subject.
Processing refers to the collection, recording, organization, storage, updating or modification,
retrieval, consultation, use, consolidation, blocking, erasure or destruction of data.
Privileged information refers to any and all forms of data which are privileged
communication by law.
Sensitive personal information refers to personal information:
(1) race, ethnic origin, marital status, age, color, and religious, philosophical or political
affiliations;
(2) health, education, genetic or sexual life of a person, or to any proceeding for any offense
committed or alleged to have been committed by such person
(3) Issued by government agencies peculiar to an individual
(4) Classified by law.
Scope. – This Act applies to the processing of all types of personal information and to any
natural and juridical person involved in personal information processing including those
personal information controllers and processors who, although not found or established in
the Philippines, use equipment that are located in the Philippines, or those who maintain an
office, branch or agency in the Philippines subject to the immediately succeeding paragraph
(qualified under this law, data processing may be outsourced): Provided, That the
requirements of Section 5 (Protection Afforded to Journalists and Their Sources) are complied
with.
This Act does not apply to the following:

Information necessary in order to carry out the functions of public authority which includes
the processing of personal data for the performance by the independent, central monetary
authority and law enforcement and regulatory agencies of their constitutionally and
statutorily mandated functions. Nothing in this Act shall be construed as to have amended
or repealed Republic Act No. 1405, otherwise known as the Secrecy of Bank Deposits Act;
Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act; and Republic
Act No. 9510, otherwise known as the Credit Information System Act (CISA);
Information necessary for banks and other financial institutions under the jurisdiction of the
independent, central monetary authority or Bangko Sentral ng Pilipinas to comply with
Republic Act No. 9510, and Republic Act No. 9160, as amended, otherwise known as the Anti-
Money Laundering Act and other applicable laws;
The processing of personal information shall be allowed, subject to compliance with the
requirements of this Act and other laws allowing disclosure of information to the public and
adherence to the principles of transparency, legitimate purpose and proportionality.
Personal information must be:
(a) Collected for specified and legitimate purposes determined and declared before, or as
soon as reasonably practicable after collection, and later processed in a way compatible with
such declared, specified and legitimate purposes only;
(b) Processed fairly and lawfully;
(c) Accurate, relevant and, where necessary for purposes for which it is to be used the
processing of personal information, kept up to date; inaccurate or incomplete data must be
rectified, supplemented, destroyed or their further processing restricted;
(d) Adequate and not excessive in relation to the purposes for which they are collected and
processed;
(e) Retained only for as long as necessary for the fulfillment of the purposes for which the
data was obtained or for the establishment, exercise or defense of legal claims, or for
legitimate business purposes, or as provided by law; and
(f) Kept in a form which permits identification of data subjects for no longer than is necessary
for the purposes for which the data were collected and processed: Provided, That personal
information collected for other purposes may lie processed for historical, statistical or
scientific purposes, and in cases laid down in law may be stored for longer periods: Provided,
further,That adequate safeguards are guaranteed by said laws authorizing their processing.
The personal information controller must ensure implementation of personal information
processing principles set out herein.
Criteria for Lawful Processing of Personal Information

processing of personal information shall be permitted only if not otherwise prohibited by law,
and when at least one of the following conditions exists:
(a) The data subject has given his or her consent;

(b) The processing of personal information is necessary and is related to the fulfillment of a
contract with the data subject or in order to take steps at the request of the data subject prior
to entering into a contract;
(c) The processing is necessary for compliance with a legal obligation to which the personal
information controller is subject;
(d) The processing is necessary to protect vitally important interests of the data subject,
including life and health;
(e) The processing is necessary in order to respond to national emergency, to comply with
the requirements of public order and safety, or to fulfill functions of public authority which
necessarily includes the processing of personal data for the fulfillment of its mandate; or
(f) The processing is necessary for the purposes of the legitimate interests pursued by the
personal information controller or by a third party or parties to whom the data is disclosed,
except where such interests are overridden by the Bill of Rights
Sensitive Personal Information and Privileged Information. – The processing of sensitive

personal information and privileged information shall be prohibited, except:
(a) The data subject has given his or her consent

(b) The processing of the same is provided for by existing laws and
regulations: Provided, That such regulatory enactments guarantee the protection of the
information: Provided, further, That the consent of the data subjects are not required by law;
(c) The processing is necessary to protect the life and health of the data subject or another
person, and the data subject is not able to express his or her consent prior;
(d) The processing is necessary to achieve the lawful and noncommercial objectives of public
organizations and their associations: Provided, That such processing is only confined and
related to the bona fide members: Provided, further, the information are not transferred to
third parties: Provided, finally, That consent of the data subject was obtained prior;
(e) The processing is necessary for purposes of medical treatment, and an adequate level of
protection of personal information is ensured; or
(f) The processing concerns such personal information as is necessary for the protection of
lawful rights and interests of natural or legal persons in court proceedings, or the
establishment, exercise or defense of legal claims, or when provided to the government or
public authority.
Subcontract of Personal Information. – A personal information controller may subcontract

the processing: Provided, That the personal information controller shall be responsible for
ensuring that proper safeguards are in place
National Privacy Commission

To administer and implement the provisions of this Act, and to monitor and ensure
compliance
Rights of the Data Subject

1. Be informed
2. Be furnished
3. Access
4. Dispute
5. Suspend, withdraw, block
Data subject can transmit rights, obtain a copy in a certain format.
Except if processing is only for the needs of scientific and statistical research, investigations in
any criminal, administrative or tax liabilities.
Security of Personal Information

Security of Sensitive Personal Information in Government
Safeguards; Implementation
Accountability
Responsibility for information under its control
Prohibited Acts
Unauthorized Processing
Access due to negligence
Improper disposal
Processing for Unauthorized Purposes
Unauthorized access or intentional breach
Concealment of security breaches
Malicious disclosure
Unauthorized disclosure
SECRECY OF BANK DEPOSITS (RA 1405)
Purposes
1. to give encouragement to the people to deposit their money in banking institutions
2. to discourage private hoarding
3. properly utilized by banks in authorized loans
4. to assist in the economic development of the country
Coverage
1. All deposits of whatever nature with banks or banking institutions in the Philippines
Deposits refer to money or funds placed with a bank that can be withdrawn on the depositor’s
order or demand, such as deposit accounts in the form of savings, current and time deposits.
2. including investments in bonds issued by the Government of the Philippines, its

political subdivisions and its instrumentalities
Investments in Government Bonds refer to investments in bonds issued by the Government of

the Philippines, its political subdivisions and its instrumentalities. Government bonds are debt
securities which are unconditional obligations of the State, and backed by its full taxing power.
Government bonds include treasury bills, treasury notes, retail treasury bonds, dollar linked
peso notes, and other risk-free bonds.
The General Banking Law prohibits bank directors, officers, employees or agents from
disclosing to any unauthorized person, without order of a competent court, any information
relative to funds or properties belonging to private individuals, corporations, or any other
entity in the custody of the bank.
Prohibited acts and persons liable in RA 1405

Any official or employee of a banking institution who makes a disclosure concerning bank
deposits to another in any instance not allowed by law
Foreign Currency Deposit Act (RA 6426)

Foreign currency deposits refer to funds in foreign currencies which are accepted and held by
authorized banks in the regular course of business with the obligation to return an equivalent
amount to the owner thereof, with or without interest.
Coverage
All foreign currency deposits are absolutely confidential and cannot be examined, inquired, or
looked into by any person, government official, bureau or office, whether judicial or
administrative or legislative, or any other private or public entity. Foreign currency deposits
are also exempt from attachment, garnishment, or any other order or process of any court,
legislative body, government agency or any administrative body whatsoever.
Revised Non-Stock Savings and Loan Association Act of 1997 (RA 8367)
Non-Stock Savings and Loan Associations (“Association”) are non-stock, non-profit

corporations engaged in the business of accumulating the savings of its members and using
such accumulations for loans to members to service the needs of households by providing
long-term financing for home-building and development and for personal finance.
Coverage
All deposits of whatever nature with an Association in the Philippines are hereby considered
as of an absolutely confidential nature and may not be examined, inquired or looked into by
any person, government official, bureau or office. (Section 6, RA 8367)
Deposits in an Association are obtained from its members. Membership in an Association shall
be confined to a well-defined group of persons. An Association shall not transact business
with the public.
1989 Charter of the Al-Amanah Islamic Investment Bank of the Philippines Act (RA 6848)
Coverage
Banking transactions relating to all deposits of whatever nature are confidential
Prohibited acts and persons liable RA 6848
It is unlawful for an official or employee of the Islamic Bank or any person as may be
designated by the Board of Directors to examine or audit the books of the Bank to disclose or
reveal to any person any confidential information.
EXCEPTIONS TO THE SECRECY OF BANK DEPOSITS

Bank deposits and investments in government bonds may be examined, inquired or looked
into under limited exceptions.
RA 1405 (Essentially the same for other deposits)

Bank deposits and government bond investments may be examined, inquired and looked into
in the following instances:
1) Upon written permission or consent in writing by the depositor.
For consent to be valid, it should be made knowingly, voluntarily and with sufficient
awareness of the relevant circumstances and likely consequences.
2) In cases of impeachment
President, Vice President, members of the Supreme Court, members of the Constitutional
Commissions, Ombudsman for culpable violation of the Constitution, treason, bribery, graft
and corruption, other high
crimes or betrayal of public trust.
3) Upon order of a competent court in cases of bribery or dereliction of duty of public officials.
4) In cases where the money deposited or invested is the subject matter of the litigation.
The money deposited should be the very thing in dispute. (Mellon Bank, N.A. v. Magsino,
[1990])
RA 6848
1) Inspection by bank auditor
2) In cases where the money deposited or the transaction concerned is the subject of a court
order
Garnishment
Disclosures by authorized and responsible bank officials are allowed in the following
instances:
1) turn-over to the Commissioner of Internal Revenue of the amount in bank accounts as may
be sufficient to satisfy the writ of garnishment issued to collect delinquent taxes (RA 8424,
Tax Reform Act); and
2) submission of report, and turn-over to, the court officer or executing sheriff of garnished
amounts pursuant to a writ of garnishment in satisfaction of a judgment (Rule 39, Rules of
Court; China Banking Corporation v. Ortega [1973]).
Secrecy and exception from attachment and garnishment cannot be used as a device for
wrongdoing
Disclosure by a bank officer or employee upon order of the court in connection with a deposit
in a closed bank that was used in the perpetration of anomalies. (Soriano v. Manuzon, C.A.
G.R.-S.P No. 87634)
(RA 6426; Foreign currency deposit)
The garnishment of a foreign currency deposit account of a non-resident alien found guilty of
raping a minor was allowed on the basis of equity. (Salvacion v. Central Bank of the Philippines,
[1997])
***A co-payee of a check who filed a suit for recovery of sum of money was considered, in a
pro hac vice ruling by the Supreme Court, as a depositor in view of the distinctive
circumstances of the case. (China Banking Corporation v. Court of Appeals, [2006])
Graft and Corruption

The Ombudsman has the power to issue subpoena and subpoena duces tecum, take testimony
in any investigation or inquiry, as well as examine and access bank accounts and records.
The power of the Ombudsman to subpoena deposit information of a government official may
be exercised when the following conditions concur:
(1) there must be a case pending before a court of competent jurisdiction;
(2) the account must be clearly identified;
(3) the inspection must be limited to the subject matter of the pending case;
and
(4) the bank personnel and the account holder must be notified to be present during the
inspection. (Marquez v. Desierto, [2001])
Bank deposits of a public official, his spouse and unmarried children may be taken into
consideration in the enforcement of Section 8 of The Anti-Graft and Corrupt Practices Act (RA
3019).
Section 8 – Dismissal due to unexplained wealth
Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason
is seen why these two classes of cases cannot be excepted from the rule making bank deposits
confidential. (Phil. National Bank v. Gancayco, [1965])
Plunder is analogous to bribery. The exception in the law that is applicable in bribery also
applies to plunder. The overt or criminal acts as described in Section 1(d) of Republic Act No.
7080 would make the similarity between plunder and bribery even more pronounced since
bribery is essentially included among these criminal acts. (Ejercito v. Sandiganbayan, [2006])
Authority to Inquire into Bank Deposits under the AMLA

The Anti-Money Laundering Council may be authorized to examine and inquire into bank
deposits or investments with banks or non-bank financial institutions –
“SEC. 11. Authority to Inquire into Bank Deposits. – Notwithstanding the provisions of
Republic Act No. 1405, as amended; Republic Act No. 6426, as amended; Republic Act No.
8791; and other laws, the AMLC may inquire into or examine any particular deposit or
investment, including related accounts, with any banking institution or non-bank financial
institution upon order of any competent court based on an ex parte application in cases of
violations of this Act, when it has been established that there is probable cause that the
deposits or investments, including related accounts involved, are related to an unlawful
activity as defined in Section 3(i) hereof or a money laundering offense under Section 4
hereof; except that no court order shall be required in cases involving activities defined in
Section 3(i)(1), (2), and (12) hereof, and felonies or offenses of a nature similar to those
mentioned in Section 3(i)(1), (2), and (12), which are Punishable under the penal laws of
other countries, and terrorism and conspiracy to commit terrorism as defined and penalized
under Republic Act No. 9372.”
“The Court of Appeals shall act on the application to inquire into or examine any deposit or
investment with any banking institution or non-bank financial institution within twenty-four
(24) hours from filing of the application.”
“For purposes of this section, ‘related accounts’ shall refer to accounts, the funds and sources
of which originated from and/or are materially linked to the monetary instrument(s) or
property(ies) subject of the freeze order(s).”
“A court order ex parte must first be obtained before the AMLC can inquire into these
related Accounts: Provided, That the procedure for the ex parte application of the ex parte
court order for the principal account shall be the same with that of the related accounts.”
“The authority to inquire into or examine the main account and the related accounts shall
comply with the requirements of Article III, Sections 2 and 3 of the 1987 Constitution, which
are hereby incorporated by reference.”
General Rule: The deposits covered by the law are considered as absolutely confidential in
nature and may not be examined, inquired or looked into by any person, governmental
bureau or office.
Exception: Periodic or Special Examination
BSP may inquire into or examine any deposit or investment with any banking institution or
non- bank financial institution when the examination is made in the course of a periodic or
special examination.
Disclosure is allowed made in the course of a special or general examination of a bank that is
allowed by Monetary Board after being satisfied that there is reasonable ground to believe
that a bank fraud or serious irregularity has been or being committed and that it is necessary
to look into the deposit to establish such fraud or irregularity.
Disclosure is allowed when made by an independent auditor hired by the bank to conduct its
regular audit provided that the examination is for audit purposes only and the results shall be
for the exclusive use of the bank.
Exception: In- Camera inspection by the Ombudsman
Requisites:
i. Pending case before a court of competent jurisdiction;
ii. Account must be clearly identified;
iii. Inspection is limited to the subject of the pending litigation;
iv. The bank personnel and account holder must be notified to be present during the
inspection; and
v. Inspection must cover only the account identified in the pending case.
Section 15(8) of RA 6770 (The Ombudsman Act of 1989) provides as one of the powers of the
Ombudsman:
(8) Administer oaths, issue subpoena and subpoena duces tecum, and take testimony in any
investigation or inquiry, including the power to examine and have access to bank accounts
and records.
Investigation by the Office of the Ombudsman is not considered pending litigation before any
court of competent authority. Such investigation would not warrant the opening of the bank
account for inspection.
Exception: Preliminary Attachment
Section 10 Rule 57 of the Rules of Court provides:
Section 10. Examination of party whose property is attached and persons indebted to him or
controlling his property; delivery of property to sheriff. — Any person owing debts to the party
whose property is attached or having in his possession or under his control any credit or other
personal property belonging to such party, may be required to attend before the court in
which the action is pending, or before a commissioner appointed by the court, and be
examined on oath respecting the same. The party whose property is attached may also be
required to attend for the purpose of giving information respecting his property, and may be
examined on oath. The court may, after such examination, order personal property capable
of manual delivery belonging to him, in the possession of the person so required to attend
before the court, to be delivered to the clerk of the court or sheriff on such terms as may be
just, having reference to any lien thereon or claim against the same, to await the judgment in
the action.
Exception: Disclosure of Dormant Accounts
Unclaimed Balances Act
Section 2 of Act No. 3936 provides: Sec. 2. Immediately after the taking effect of this Act and
within the month of January of every odd year, all banks, building and loan associations, and
trust corporations shall forward to the Treasurer of the Philippines a statement, under oath,
of their respective managing officers, of all credits and deposits held by them in favor of
persons known to be dead, or who have not made further deposits or withdrawals during the
preceding ten years or more, arranged in alphabetical order according to the names of
creditors and depositors, and showing:
"(a) The names and last known place of residence or post office addresses of the persons in
whose favor such unclaimed balances stand;
"(b) The amount and the date of the outstanding unclaimed balance and whether the same is
in money or in security, and if the latter, the nature of the same;
"(c) The date when the person in whose favor the unclaimed balance stands died, if known,
or the date when he made his last deposit or withdrawal; and
"(d) The interest due on such unclaimed balance, if any, and the amount thereof.
"A copy of the above sworn statement shall be posted in a conspicuous place in the premises
of the bank, building and loan association, or trust corporation concerned for at least sixty
days from the date of filing thereof: Provided, That immediately before filing the above sworn
statement, the bank, building and loan association, and trust corporation shall communicate
with the person in whose favor the unclaimed balance stands at his last known place of
residence or post office address.
"It shall be the duty of the Treasurer of the Philippines to inform the Solicitor General from
time to time the existence of unclaimed balances held by banks, building and loan
associations, and trust corporations.
Exception: Authority of the Commissioner of Internal Revenue to Inquire into Deposits
Section 6 of the 1997 NIRC provides:
The Commissioner of Internal Revenue may inquire into the bank deposits of:
i. A decedent to determine his gross estate; and
ii. Any taxpayer who has filed an application for compromise of his tax liability under
Seection 204 (A) (2) by reason of his financial incapacity to pay his tax liability. He
must file a writte waiver of his privilege under RA 1405 or other general or special
laws and such waiver shall constitute the authority of the Commissioner to inquire
into the bank deposits of the taxpayer.
Exception: Waiver by DOSRI
Section 26 of the New Central Bank Act provides:
SEC. 26. Bank Deposits and Investments. _ Any director, officer or stockholder who, together
with his related interest, contracts a loan or any form of financial accommodation from: (1)
his bank; or (2) from a bank (a) which is a subsidiary of a bank holding company of which both
his bank and the lending bank are subsidiaries or (b) in which a controlling proportion of the
shares is owned by the same interest that owns a controlling proportion of the shares of his
bank, in excess of five percent (5%) of the capital and surplus of the bank, or in the maximum
amount permitted by law, whichever is lower, shall be required by the lending bank to waive
the secrecy of his deposits of whatever nature in all banks in the Philippines. Any information
obtained from an examination of his deposits shall be held strictly confidential and may be
used by the examiners only in connection with their supervisory and examination
responsibility or by the Bangko Sentral in an appropriate legal action it has initiated involving
the deposit account.
Exception: Human Security Act
The justices of the CA designated as a special court to handle anti- terrorism cases may
authorize the examination of bank deposits of:
i. A person charged with or suspected of the crime of terrorism or conspiracy to
commit terrorism;
ii. A judicially declared and outlawed terrorist organization, association, or group f
persons, and
iii. A member of such judicially declared and outlawed organization, association or
group of persons.
CHAPTER 4
INVESTMENTS, LOANS AND OTHER FUNTIONS OF BANKS
I. OPERATIONS OF UNIVERSAL BANKS
Equity- refers to a stock of any class having unlimited dividend rights, regardless of whether
the stock is preferred
Powers of a Universal Bank (Section 23, GBL)
1. Powers of a commercial bank
-General powers incident to a corporation
-All such powers as may be necessary to carry on the business of commercial banking
i. Accept drafts
ii. Issue letters of credit
iii. Discount PNs, drafts bills of exchange, and other evidences of debt
iv. Receive deposits and deposit substitutes
v. Buy and sell forex, gold and silver bullion
vi. Acquire marketable bonds and securities
vii. Extend credit
2. Powers of investment houses
3. Power to invest in non-allied enterprises
Equity Investments in either:

1. Allied Enterprises- either: 1.) Financial 2.) Non-Financial
2. Non-Allied Enterprises
General Rule:
1. Total investment in equities of both allied and non-allied= NOT exceed 50% net
worth of the bank.
2. Equity Investment in any one enterprise, either non-allied or allied = NOT exceed
25% of the net worth of the bank.
Equity Investments in Financial Allied Enterprises

1. Universal Bank can own up to --- 100% of the equity in a:
- Thrift bank
- Rural Bank
- Financial Allied Enterprise (leasing company, financial companies, investment
houses, stock brokerage companies, forex dealers, etc.)
2. A publicly-listed universal or commercial bank may own--- 100% of the voting stock of
ONLY ONE other Universal or Commercial Bank.
What are Allied Undertakings? They are related services that may be rendered by banks.
Financially Allied Undertakings that banks may invest in equities:
1. Leasing of companies including leasing of stalls and spaces. Provided: bank investment
of such leasing company shall be limited only in cases of conversion of outstanding
loan obligations into equity (loan to equity conversion agreement)
2. Banks
3. Investment houses
4. Financing companies
5. Credit Card companies
6. Financial institutions catering to small and medium scale industries including venture
capital corporation (VCC)
7. Companies engaged on stock brokerage/securities dealership
8. Companies engaged in foreign exchange dealership/brokerage
In addition:
1. Insurance companies
2. Holding companies provided investments are confined to allied or non-allied
undertakings allowed for Universal Banks
How to determine if undertaking is Allied? Primary purpose of the AOI and the volume of its
principal business
Non-Financial Allied Undertakings

1. Warehousing companies
2. Storage companies
3. Safe deposit box companies
4. Companies primarily engaged in management of mutual funds but not the mutual
fund themselves
5. Management corporations engaged in activities similar to mutual funds
6. Companies engaged I providing computer services
7. Insurance agencies or brokerages
8. Companies engaged in home building and home development
9. Companies providing drying/milling facilities for agricultural crops (rice or corn)
10. Service bureaus organized to perform services allowed to be outsourced.
11. Philippine Clearing House Corp., Phil. Central Depository Inc. and Fixed Income
Exchange
12. Other similar activities as the MB may declare as non-financial allied undertakings.
Prohibited to invest in mutual funds: there is a moral hazard that the public may be misled
to think that the bank is guaranteeing their investments.
Equity Investments in Non-Allied Enterprise

- Only Universal Banks can invest in non-allied enterprises
- Non-allied enterprises: businesses not connected with banking
Requirement: Prior approval of the Monetary Board

Except: individual investments in
1. Enterprises engaged in physically productive activities in
-agriculture
-mining
-quarrying
-manufacturing
-public utilities
- construction
-wholesale trade
-community and social services
2. Industrial parks projects/industrial estate development
3. Financial and commercial complex projects arising or in connection with the Govt.’s
privatization program
4. Other broad categories the MB may declare as appropriate.
Exception to the Exception: approval of MB is still required if the investment re in relation to

major acquisitions or investments by bank.
Limitations: Equity of the bank shall not exceed 35% of the total equity in that enterprise nor
exceed 35% of the voting stock in that enterprise.
II. Powers of a Commercial Bank (Section 29, GBL)
1. General powers incident to a corporation

2. All such powers as may be necessary to carry on the business of commercial banking
viii. Accept drafts
ix. Issue letters of credit
x. Discount PNs, drafts bills of exchange, and other evidences of debt
xi. Receive deposits and deposit substitutes
xii. Buy and sell forex, gold and silver bullion
xiii. Acquire marketable bonds and securities
xiv. Extend credit
Commercial banks may also:

1. Invest in the equities of allied enterprises only
2. Purchase, hold and convey real estate
3. Receive in custody funds, documents and valuable objects
4. Act as financial agent and buy and sell, by order of and for account of their customers,
shares, evidences of indebtedness and all types of securities
5. Make collection and payments for the account of others and perform other services
for their customers not incompatible with banking business
6. Upon prior approval of MB, act as managing agent , consultant, adviser or
administrator of investment/management accounts
7. Rent out safety deposit boxes
8. Engage in quasi-banking functions
Limitations as to its Investment

*Acquisition of such equity is subject to prior approval of the MB
1. Total investment in equities of allied enterprises- NOT exceed 35% of the net worth
of the bank
2. Equity Investment in any one enterprise- NOT exceed 25% of the net worth of the
bank
If investment is in Financial Allied Enterprises:

1. Commercial bank- may own up to 100% equity of thrift bank or rural bank but it may
not own 100% equities of other financial allied enterprises
2. If equity investment is on other financial allied enterprises including another
commercial bank- investment shall remain a minority holding in that enterprise.
If investment is in Non-Financial Allied Enterprises:
1. May own up to 100% of equity in nonfinancial allied enterprises
III. Risk-Based Capital
What is a risk-based capital? It represents an amount of capital based on an assessment of

risks that a company should hold to protect its customers against adverse developments.
RISK-BASED CAPITAL
 The minimum ratio prescribed by the Monetary Board which the net worth of a bank
must bear to its risk assets
 MB may require or suspend compliance with such ratio whenever necessary for a
maximum period of one year; Provided that such ratio will be applied uniformly to all
banks of the same category (Sec. 34)
Effects of non-compliance with the prescribed minimum ratio (Sec 34.):

1. Distribution of net profits by such bank and may require that part or all of the net
profits be used to increase the capital accounts of the bank until the minimum
requirement has been met
2. Restrict or prohibit the acquisition of major assets and the making of new investments
by the bank, with the exception of purchases of readily marketable evidences of
indebtedness of the Republic of the Philippines and of the Bangko Sentral and any
other evidences of indebtedness or obligations the servicing and repayment of which
are fully guaranteed by the Republic of the Philippines, until the minimum required
capital ratio has been restored.
3. In case of a bank merger or consolidation, or when a bank is under rehabilitation
under a program approved by the Bangko Sentral, the Monetary Board may
temporarily relieve the surviving bank, consolidated bank, or constituent bank or
corporations under rehabilitation from full compliance with the required capital ratio
under such conditions as it may prescribe
I. LIMIT ON LOANS, CREDIT ACCOMMODATIONS AND GUARANTEES

 SINGLE BORROWERS LIMIT
o Imposing loan limits as a measure to deter banks from
concentrating their resources to 1 borrower
o The total amount of loans, credit accommodations and
guarantees as may be defined by the Monetary Board that may
be extended by a bank to any person, partnership, association,
corporation or other entity shall at no time exceed 20% of the
net worth of such bank
 Note: Manual of Regulations for Banks (MORB by the
BSP)
 Sec. X303(a) (2009) (Note Circular 425 of 2004
of BSP)
o Rate: 20% -> 25%
 Exceptions:
i.) As the Monetary Board may otherwise prescribe for
reasons of national interest
ii.) Deposits of rural banks with government-owned or -
controlled financial institutions like the Land Bank of
the Philippines, the Development Bank of the
Philippines, and the Philippine National Bank are
exempted from the Single Borrower’s Limit imposed
by the General Banking Act (As per Sec. 17 of R.A.
No. 7353, An Act Providing for the Creation,
Organization and Operation of Rural Banks, and for
Other Purposes)
iii.) In municipalities and cities where there are no
government banks, the deposits of rural
banks/cooperative banks in private banks in said
areas but no deposits in private banks located in
other municipalities/cities
iv.) Outstanding balance of the deposit in a private
depository bank being used by thrift banks, rural
banks or cooperative banks with authority to
accept/create demand or current deposits, to fund
checks cleared through the said private depository
banks, even if there is a government-owned or
controlled financial institution in the area (MORB,
Sec. X303.5)
v.) The total amount of loans, credit accommodations
and guarantees prescribed in the preceding
paragraph i) may be increased by an additional 10%
of the net worth of such bank provided the
additional liabilities of any borrower are adequately
secured by trust receipts, shipping documents,
warehouse receipts or other similar documents
transferring or securing title covering readily
marketable, non-perishable goods which must be
fully covered by insurance (Sec. 35.2)
a. Exception: Unless otherwise prescribed by the
Monetary Board
b. In exercising this authority, the Monetary Board
prescribes that:
i. Bills of exchange drawn in good faith
against actually existing values which
are past due or the maturities of which
have been extended shall be considered
additional loans subject to the 10% loan
limit
ii. Commercial or business papers
purchased by a bank from small and
medium enterprise (SME) which
became past due or the maturities of
which have been extended shall be
considered as additional loan by the
bank to the purchaser of goods or
services from the SME subject to the
increased SBL of 10%, provided that the
purchasers are companies with credit
ratings of at least “AA-“ or its equivalent
from a Bangko Sentral-recognized rating
agency
 Take Note:
 Basic for determining compliance
o Total credit commitment of the bank to
the borrower
 Inclusions to the Limit (Coverage)
o The prescribed ceilings shall include the following:
i.) The direct liability of the maker or acceptor of paper
discounted with or sold to such bank and the
liability of a general indorser, drawer or guarantor
who obtains loan or other credit accommodation
from or discounts paper with or sells papers to such
bank;
ii.) In the case of an individual who owns or controls a
majority interest in a corporation, partnership,
association or any other entity, the liabilities of said
entities to a bank;
iii.) In the case of a corporation, all liabilities to a bank
of all subsidiaries in which such corporation owns or
controls a majority interest;
iv.) In the case of a partnership, association or other
entity, the liabilities of the members thereof to a
bank;
v.) Loans and other credit accommodations as well as
deposits maintained with, and usual guarantees by
a bank to any other bank or non-bank entity,
whether locally or abroad, shall be subject to the
prescribed loan limits; and
vi.) Liabilities to the bank of borrowers whose papers
were rediscounted by banks with the Bangko
Sentral until such papers are paid by borrowers
 Note:
o Term “Control of Majority Interest”
 Synonymous to “controlling
test”
 Exists when the parent owns
directly or indirectly through
subsidiaries more than ½ of the
voting power of an enterprise
 UNLESS, in exceptional
circumstance, it can be
clearly demonstrated
that such ownership
does not constitute
control
 Also exist even when the parent
owns ½ or less of the voting
power of an enterprise where
there is:
a. Power over more than
½ of the voting rights by
virtue of an agreement
with other investors; or
b. Power to govern the
financial and operating
policies of the
enterprise under a
statute or an
agreement; or
c. Power to appoint or
remove the majority
members of the board
of directors or
equivalent governing
body; or
d. Power to cast the
majority votes at
meetings of the board
of directors or
equivalent governing
body; or
e. Any other arrangement
similar to any of the
above
o 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:
a. The parent corporation,
partnership, association,
entity or individual
guarantees the repayment
of the liabilities;
b. The liabilities were incurred
for the accommodation of
the parent corporation or
another subsidiary or of the
partnership or association
or entity or such individual;
or
c. The subsidiaries though
separate entities operate
merely as departments or
divisions of a single entity
 Exclusions from Loan Limit
o The following are excluded from the application of the SBL
(Single Borrowers Limit)/Loans, other credit accommodations
and guarantees shall exclude:
i.) Loans and other credit accommodations secured by
obligations of the Bangko Sentral or of the Philippine
Government;
 Purpose: to encourage investments by the
public and by financial and investment
institutions in government securities
 Reason: the State undoubtedly is always solvent
 Loans indirectly guaranteed by the government
are excluded provided that such indirect
guarantee covers full payment of the loan’s
principal and interest
 Bank deposits secured by the government
securities pursuant to a deed of assignment
executed by the depositing bank are excluded
ii.) Loans and other credit accommodations fully
guaranteed by the government as to the payment of
principal and interest;
iii.) Other non-risk items as determined by the Monetary
Board, such as:
a. Loans secured by the U.S. Treasury Notes and
other securities issued by central governments
and central banks of foreign countries with the
highest credit quality given by 2 internationally
accepted rating agencies
b. Discounts of bills of exchange drawn in good
faith against actually existing values, and
discount of commercial or business paper which
are actually owned by the person, company,
corporation or association negotiating the same
c. Portion of loans and other credit
accommodations covered by guarantees of
international/regional institutions/multi-lateral
financial institutions where the Philippine
Government is a member/shareholder, such as
the International Finance Corporation and the
Asian Development Bank
d. Loans granted to foreign embassies considered
as loans to their respective central
governments;
iv.) Loans and other credit accommodations covered by
assignment of deposits maintained in the lending bank
and held in the Philippines;
v.) Loans, credit accommodations and acceptances under
letters of credit to the extent covered by margin
deposits;
vi.) Interbank loan transactions excluded from the
application of SBL as discussed
 Bank Guarantee
o An irrevocable commitment of a bank binding itself to pay a sum
of money in the vent of non-performance of a contract by a
third party
 A commitment separate and distinct from the principal
debt or contract
o By a bank to any other bank or non-bank entity - subject to the
limits prescribed
 Contingent Accounts
o Certain types may be included among those subject to the
prescribed limits as may be determined by the Monetary Board
 Assignment of Credits
o An agreement by virtue of which the owner of a credit, known as
the assignor, by a legal cause, and without the need of the
consent of the debtor, transfers his credit and its accessory rights
to another, known as the assignee, who acquires the power to
enforce it to the same extent as the assignor could have enforced
it against the debtor
o 3rd party steps into the shoes of the original creditor as subrogee
of the latter
o Example: Sale, Dation in payment, guaranty
 No Pacto Commissorio in Assignment of Deposits
o G.R.: the creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them (otherwise null and void)
o Pacto Commissorio
 A provision for the automatic appropriation of the
pledged or mortgaged property by the creditor in
payment of the loan upon its maturity
 Prohibited
o To protect the obligor, pledger, or
mortgagor against being overreached by
his creditor who holds a pledge or
mortgage over property whose value is
much more than the debt
 Sanctions
o Violation = subject to monetary and non-monetary penalties
(Sec. X303.5)
o Determining whether there is a violation of the SBL limit
 Reckoning point is the time when the loan is granted
o Non-imposition of criminal or administrative penalties:
 Subsequent event or cause that is beyond the control of
the bank, or involuntary on its part
 Where the loan, after the grant, exceeds the prescribed
limit due to substantial prepayment by another borrower
thereby lowering the ceiling
II. RESTRICTIONS ON BANK EXPOSURE TO DIRECTORS, OFFICER, STOCKHOLDER AND
THEIR RELATED INTERESTS (DOSRI RULE)
 Self-Dealing Transactions
o DOSRI lending (unqualified) = major factor in the collapse of
banks
 HOWEVER, DOSRI lending or self-dealing transaction,
also known as insider lending and related-party lending,
is not prohibited
 Natural for banks to encourage its own DOSRI to
borrow, within the allowed limits, from the bank
 It improves credit efficiency
 Bank’s DOSRI should patronize their own
company but it must be done in an arm’s length
manner
o Being insiders do not mean that the
DOSRI should get better terms when
they borrow from the bank
 Statutory Requirements for DOSRI Transactions
i. General Policy
o Dealings with any of its DOSRI
 In the regular course of business and upon terms not less
favorable to the bank than those offered to others
ii. Approval Requirement
o Written Approval
 Of the majority of all members of the bank’s board of
director, excluding the director concerned
 Determination of majority = based on the total number
of directors of the bank as provided in its Articles of
Incorporation and By-Laws
o Failure to secure
o Renders the bank director or officer concerned liable for
prosecution and, upon conviction, subjects him to the penalty
provided in the 3rd sentence of the 1st paragraph of Sec. 83
iii. Reportorial Requirement
o Approval
 Be entered upon the records of the corporation, and a
copy of the entry be transmitted to the appropriate
supervising and examining department of the Bangko
Sentral
o Addressed to the bank
o Failure to do so
 Subjects it to quo warranto proceedings under Sec. 87 of
R.A. 337 (now Sec. 36 of R.A. No. 8791)
iv. Ceiling Requirement
o Imposes a limit on the amount of loans, credit accommodations
and guarantees extended to the bank’s DOSRI
 Amount equivalent to their respective unencumbered
deposits and book value of their paid-in capital
contribution in the bank
o Directed at the bank
o A prosecution for violation of the 1st Paragraph of Sec. 83 does
not require an allegation that the loan exceeded the legal limit
 Compliance with the ceiling requirement does not
dispense with the approval requirement
v. Waiver of Secrecy of Deposit for DOSRI transactions
o A DOSRI who contracts a loan or any financial accommodation in
his bank, in excess of 5% of the capital and surplus of the bank or
in the maximum amount permitted by law, whichever is lower
 Required to waive the secrecy of his deposits of whatever
nature in all banks in the Philippines
o Rationale: to strengthen the power of the Bangko Sentral to
control insider lending and to curb unsound banking practices
that led to bank failures in the 1980s
o Note (for Waiver of Secrecy):
 The DOS (Director, Officer, Stockholder) should himself
be the borrower or recipient of the loan or financial
accommodation
 If the borrower is the Related Interest but NOT the
director, officer or stockholder himself, the Director,
Officer or Stockholder is NOT required to waive the
secrecy of his bank deposits
o Note (overall as to Requirements):
 Failure to comply with (i) approval, (ii) reportorial, and
(iii) ceiling requirements
 Paves the way for the prosecution of 3 different
offenses, each with its own set of elements
o A successful indictment for failing to
comply with the approval requirement
will not necessitate proof that the other
2 were likewise observed
o Go v. Bangko Sentral, G.R. No. 178429,
October 23, 2009 (604 SCRA 322)
 A fraudulent borrowing
 Covered by DOSRI rules for being an indirect
borrowing
 Person charged with estafa under Art. 315(1)(b)
of the Revised Penal Code can likewise be
charged with DOSRI violations
o Soriano v. People, G.R. No. 162336,
February 1, 2010 (611 Scra 191)
 Persons Covered
1. Directors
2. Officers
3. Stockholders
4. Related Interests
o Directors
 Include:
 Directors who are named as such in the articles
of incorporation;
 Directors duly elected in subsequent meetings of
the stockholders; and
 Those elected to fill vacancies in the board of
directors
o Officers
 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 heard 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
o Stockholder
 Include:
 Any stockholder of record in the books of the
bank, acting personally, or through an attorney-
in-fact; or any others person duly authorized by
him or through a trustee designated pursuant to
a proxy or voting trust or other similar contracts,
who stockholdings in the lending bank,
individually and/or collectively with the
stockholdings of:
i. His spouse and/or relative within the 1st
degree by consanguinity or affinity or legal
adoption;
ii. A partnership in which the stockholder
and/or the spouse and/or any of the
aforementioned relatives is a general
partner; and
iii. Corporation, association or firm of which the
stockholder and/or his spouse and/or the
aforementioned relatives own more than
50% of the total subscribed capital stock of
such corporation, association of firm,
amount to 1% or more of the total subscribed
capital stock of the bank
o Related Interest
 Monetary Board defines such as referring to any of the
following:
 Spouse or relative within the first degree of
consanguinity or affinity, or relative by legal
adoption, of a director, officer or stockholder of
the bank;
 Partnership of which a director, officer, or
stockholder of a bank or his spouse or relative
within the first degree of consanguinity or
affinity, or relative by legal adoption, is a general
partner;
 Co-owner with the director, officer, stockholder
or his spouse or relative within the first degree of
consanguinity or affinity, or relative by legal
adoption, of the property or interest or right
mortgaged, pledged or assigned to secure the
loans or other credit accommodations, except
when the mortgage, pledge or assignment covers
only said co-owner's undivided interest;
 Corporation, association, or firm of which a
director or officer of the bank, or his spouse is
also a director or officer of such corporation,
association or firm, except:
o Where the securities of such
corporation, association or firm are listed
and traded in the big board or
commercial and industrial board of
domestic stock exchanges and less than
fifty percent (50%) of the voting stock
thereof is owned by any one person or by
persons related to each other within the
first degree of consanguinity or affinity;
or
o Where the director, officer or
stockholder of the bank sits as a
representative of the bank in the board
of directors of such corporation:
Provided, That the bank representative
shall not have any equity interest in the
borrower corporation except for the
minimum shares required by law, rules
and regulations, or by the by-laws of the
corporation;
o Where the corporation is at least 99%-
owned by a non-stock corporation as
defined in Sec. 87 of the Corporation
Code of the Philippines, provided that the
purpose of the loan is to finance hospitals
and other medical services, provided
further that the load is fully secured;
provided furthermore that in case of
items (a), (b) and (c) above, the
borrowing corporation is not among
those mentioned in items (v), (vi), (vii)
and (viii) of this paragraph
 Corporation, association or firm of which any or
a group of directors, officers, stockholders of the
lending bank and/or their spouses or relatives
within the first degree of consanguinity or
affinity, or relative by legal adoption, hold or own
at least twenty percent (20%) of the subscribed
capital of such corporation, or of the equity of
such association or firm;
 Corporation, association or firm wholly or
majority-owned or controlled by any related
entity or a group of related entities mentioned in
items (ii), (iv) and (v) of this paragraph;
 Corporation, association or firm which owns or
controls directly or indirectly whether singly or as
part of a group of related interest at least twenty
percent (20%) of the subscribed capital of a
substantial stockholder of the lending bank or
which controls majority interest of the bank;
 Corporation, association or firm in which the
lending bank and/or its parent/subsidiary holds
or owns at least twenty percent (20%) of the
subscribed capital of such corporation, or in the
equity of such association or firm, or has an
existing management contract or any similar
arrangement with the lending bank or its
parent/subsidiary
 Effect of Violation
o After due notice to the board of directors
 Office of any bank director or officer who violates may be
declared vacant and the director or officer shall be
subject to the penal provisions provided in the New
Central Bank Act
 Limits of Loans
o Monetary Board may regulate the amount of loans, credit
accommodations and guarantees that may be extended, directly
or indirectly, by a bank to its directors, officers, stockholders and
their related interests, as well as investments of such bank in
enterprises owned or controlled by said directors, officers,
stockholders and their related interests
o The outstanding loans, credit accommodations and guarantees
which a bank may extend to each of its stockholders, directors,
or officers and their related interests, shall be limited to an
amount equivalent to their respective unencumbered deposits
and book value of their paid-in capital contribution in the bank
 Exclusions to the Limit
o Loans, credit accommodations and guarantees secured by assets
considered as non-risk by the Monetary Board shall be excluded
from such limit
o Loans, credit accommodations and advances to officers in the
form of fringe benefits granted in accordance with rules as may
be prescribed by Monetary Board shall not be subject to the
individual limit
o The limit on loans, credit accommodations and guarantees shall
not apply to loans, credit accommodations and guarantees
extended by a cooperative bank to its cooperative shareholders
 Applicability of DOSRI Rules and Regulations to Government
Borrowings
o DOSRI Rules and Regulations shall also apply to loans, other credit
accommodations, and/or guarantees granted to the National
Government or Republic of the Philippines (ROP), its political
subdivisions and instrumentalities as well as government-owned
or controlled corporations (GOCCs)
 Note clarifications provided by law
Letters of Credit
Letter of Credit- an engagement by the bank or other person made at the request of a
customer that the issuer will honor drafts or other demands for payment upon compliance
with the conditions specified in the credit.
Nature of Letters of Credit

1. It is an entity upon itself because it is:
- Not strictly contractual (no privity and meeting of minds between issuer and
beneficiary) yet it is enforceable
- Not a third party beneficiary contract (issuer must honor drafts despite
problems with the underlying contracts)
- Not an assignment (bank’s customer cannot draw on the letter)
- Not a Suretyship (it entails primary liability)
- Not negotiable instrument (not payable to order or bearer and generally
conditional)
Letter of Credit vs. Guarantee

Letter of Credit Guarantee
Settlement of Dispute not a pre-requisite Settlement of Disputeis a pre-requisite for
for release of funds release of funds
Standby Letter of Credit vs. Surety

Standby Letter of Credit Surety
Ensures non-performance Ensures non-performance
Performance of surety must await the
lengthy and costly determination whether The cash or funds is promptly released and
the obligor indeed defaulted in the be received by the beneficiary before any
performance of its obligations. litigation arises.
Governing Law: Uniform Customs and Practice for Documentary Credits (UCP) and its latest
revision is UCP 600 which took effect last July 1, 2007. However, UCP 6000 must be adopted
in the LC to be applicable.
Parties to a Letter of Credit

1. Buyer- who procures the LC and obliges himself to reimburse the issuing bank upon
receipt of documents of title.
2. Issuing Bank- undertakes to pay the seller upon receipt of the draft and proper
documents of title and to surrender the documents to the buyer upon
reimbursement.
Its obligations are:
1. To make payment to or to the order of the beneficiary
2. Authorize another bank to effect such payment or to accept and pay such drafts
3. Authorize another bank to negotiate or to give value for the drafts, provided the
terms of the Credit are complied with
Note: Obligation is solidary with the person requesting the issuance of LC.
3. The seller- who in compliance with the contract of sale, ships the goods to the buyer
and delivers the documents of title and draft to the issuing bank to recover
payment. It is his obligation to strictly comply with the terms of the Credit in the
performance of his obligation.
Other parties:
1. Advising (notifying) bank- will convery to the seller the existence of the credit
(correspondent of the opening/issuing bank). Its relationship with the issuing bank is
similar to an agency. It will authenticate the Credit it advises.
2. Confirming bank- will lend credence to the letter of credit issued by a lesser known
issuing bank. It not only notifies the beneficiary but also assumes direct obligation to
the seller as if it is the issuing bank. Hence, it can be directly sued by the seller-
beneficiary/
3. Paying bank- undertakes to encash the drafts drawn by the exporter.
4. Negotiating bank- will have the drafts discounted any bank in the city of the
beneficiary). It is a correspondent bank which buys or discounts drafts. Liability only
attaches after negotiation with the seller, because a contractual relationship will
then prevail between them.
3 Distinct and Independent Contracts Involved:

1. Sale between the Buyer and the Seller
2. Contract between Buyer and the Issuing Bank- bank agrees to issue a letter of credit
in favor of the seller subject to reimbursement by the buyer + fee agreed upon.
3. Letter of Credit Proper- bank obligates to pay the seller after presentation to the
bank of documents stipulated upon, usually a document of title.
*if confirming bank is involved, then another contract between the issuing bank and the
confirming bank. And another contract between the confirming bank and the seller.
Independence Principle
- Contracts involved are in a state of perpetual separation
- Contract of sale is independent of the LoC itself and the violation of the Contract
of Sale will not necessarily affect the letter of credit obligation of the issuing
bank with the seller. Any breach or controversy in the original contract of sale or
the other transactions will not affect the Letter of Credit Proper.
- It is also independent of the Contract of Carriage so discrepancy of the amount
of goods described in the invoice will not affect the validity and enforceability of
the LC.
- This principle assures the seller or the beneficiary prompt payment independent
of any breach of the main contract.
- It may be invoked by the Bank and the Seller-Benificiary
Effects:
1. Bank only deals with the documents and not with the goods. Bank is only obliged to
make sure that the tender documents are complete and the terms and conditions of
the letters of credit are strictly complied with. It assumes no other liability as to
genuiness, accuracy, quantity, quality, etc. of the goods.
Fraud Exception (Transfield Phil. Inc. vs. Luzon Hydro Corp.)

- Exists when the beneficiary, for the purpose on drawing on the credit,
fraudulently presents to the confirming bank, documents that contain, expressly
or by implication, material representations of fact that to his knowledge are
untrue.
- Basis: Sec. 5-109 of UCC
- Remedy is Injunction but injunction must not be granted unless:
1. There is clear proof of Fraud
2. Fraud constitutes fraudulent abuse for the independent purpose of the
letter of credit and not only fraud on the main agreement
3. Irreparable injury might follow if injunction is not granted or recovery f
damages would be seriously damages
Exception to the exception:

The Issuer shall honor the presentation if demanded by:
1. Nominated person who has given value in good faith and without notice of the
forgery or material fraud
2. Confirmer honoured its confirmation in good faith
3. Holder in due course of the draft taken after the acceptance by the issuer
4. Assignee of the issuer’s or nominated person who took it for value and without
notice of the forgery or material fraud
The issuer acting in good faith, may honor or dishonour the presentation in any other case
Doctrine of Strict Compliance

- The issuing bank must see to it that the terms of the letters of credit are strictly
complied with.
Kinds of Letters of Credit
1. Confirmed Letter of Credit- whenever the Beneficiary stipulate that the obligation
of the opening bank shall also be made the obligation of the bank to itself. The bank
local to the beneficiary becomes the Confirming Bank.
2. Irrevocable Letter of Credit- definite undertaking on the part of the issuing bank and
constitutes the engagement of that bank to the beneficiary and to the bona fide
holder of the drafts drawn and or documents presented, that the provisions for
payment, acceptance or negotiation contained in the credit will be duly fulfilled,
provided that all the terms and conditions of the credit are complied with. The
issuing bank may not, without the consent of the beneficiary and the buyer, revoke
the undertaking under the credit.
3. Other Kinds of Letter of Credit

- Revolving Letter of Credit-credit that provides for a renewed credit to become
available as soon as the opening bank has advised the negotiating bank that the
drafts already drawn by the beneficiary have been reimbursed to the opening
bank by the buyer.
- Back-to-back Letter of Credit- credit with identical documentary requirements
and covering the same merchandise as another letter of credit, except for a
difference in the price the merchandise as shown by the invoice and the draft.
The second LC can be negotiated only after the first LC is negotiated.
- Standby Letter of Credit- security arrangement for the performance of certain
obligations. It can be drawn against only if there is non-performance and is
issued in lieu of performance bond.
- General Letter of Credit- one addressed to any and all persons without naming
any one in particular.The beneficiary may still transfer its interest though.
Special Letter of Credit on the other hand is addressed to a specific individual so
there is a limit to permissible transfer.
- Straight Letter of Credit- one that does not run in favour of purchasers of drafts
drawn thereunder.
- Fixed Letter of Credit- can be exhausted either when drafts for payment have
been drawn by the beneficiary for the full amount of the credit or when the time
or period for drawing upon the letter has expired.
- Sight Letter of Credit- payable on demand unlike Time Letter of Credit which is
payable within a period of time.
Commercial vs. Standby Letter of Credit

Commercial Standby
used in the trade of goods under Contract secure the performance of some service or
of Sale work so it is payable upon non-
performance of an agreement
Beneficiary must demonstrate by contracts Beneficiary must certify that his obligor has
that he has performed his contract not performed the contract
VII. SECURITIES ON LOANS AND OTHER CREDIT ACCOMMODATIONS (CA)

These are accessory contracts, meaning they cannot have legal effect without a
principal contract.1
A. Types of Securities
(1) Real Security
i. Real Estate
ii. Chattels and Intangible Property Rights (IPR)
Limit on Loans and other CA

Real Estate General rule: Shall not exceed 75% of the appraised
value
of the respective real estate security, plus 60% of the
appraised value of the insured improvements, and
such loans may be made to the owner of the real
estate or to his assignees
Exception: The MB otherwise prescribes (Sec. 37,

GBL)
Security of chattels and intangible General rule: Shall not exceed 75% of the appraised
property rights (patents, value
trademarks, tradenames, and of the security, and such loans and other CA may be
copyrights) made to the titleholder of the chattels and intangible
properties or his assignees
Exception: The MB otherwise prescribes (Sec. 38,

GBL)
(2) Personal Security

i. Guaranty and Suretyship – usually in the form of Joint And Solidary
Agreement (JSA)
 Major Stockholder or corporate officers must give JSS for
loans given to corporations
 Must notify the Surety for any material alteration of terms
or novation.
 Contract of ADHESION  construed against enlarging the
surety’s liability
JSS requirement:
 Creditor Bank may have recourse against the majority
stockholder/corporate officer in case of default.
1
The essential requisites of security contracts are:
(1) These must be meant to secure a principal obligation in that in the event of non-fulfillment
of the obligation, the property subject of the security will be alienated to fulfil the principal
obligation
(2) The mortgagor/pledger must have ABSOLUTE OWNERSHIP
(3) The mortgagor/pledger must have FREE DISPOSAL (no encumbrance) or LEGALLY
AUTHORIZED (if with encumbrance, then must have consent)
 Surety will make sure the loan proceeds is used for the
purpose agreed upon, and would be paid.
B. Trust Receipts
(1) Under the trust receipt arrangement, a bank extends a loan covered by the
Letter of Credit, with the trust receipt as a security for the loan2
Letter of Credit (loan feature)

Trust Receipt (security feature)
(2) Can deposits in a savings account opened by the buyer subsequent to the TR
transaction be applied to outstanding obligations under the TR account?
No, the receipt of the bank of a sum of money without reference to the
trust receipt obligation does not obligate the bank to apply the money
received against the trust receipt obligation. Neither does compensation
arise because compensation is not proper when one of the debts consists in
civil liability arising from criminal.3
(3) Trust receipts explained

The agreements between the parties in the case of LBP vs Perez, et. al. are
not trust receipt transactions because (1) from the start, the parties were
aware that ACDC could not possibly be obligated to reconvey to LBP the
materials or the end product for which they were used; and (2) from the
moment the materials were used for the government projects, they became
public, not LBP’s, property.4
VIII. GRANT AND PURPOSE OF LOANS AND OTHER CREDIT ACCOMMODATIONS
A. Grant of loans
(1) Only in amounts and for the periods of time essential for the effective
completion of the operations to be financed; and
(2) Consistent with safe and sound banking practices. (Sec. 39, GBL)
B. Purpose of loans
Purpose must be stated in the application and in the contract between the bank
and the borrower. (Sec. 39, GBL)
Effect of usage of loan proceeds for purposes other than those agreed upon with
the bank
The bank shall have the right to terminate the loan or other credit
accommodation and demand immediate repayment of the obligation. (Sec. 39,
GBL)
2
Sps. Vintola vs. Insular Bank of Asia and America, G.R. No. 73271, May 29, 1987
3
Metropolitan Bank and Trust Co. v. Tonda, G.R. No. 134436, Aug. 16, 2000
4
When both parties enter into an agreement knowing that the return of the goods subject of the trust receipt is not possible
even without any fault on the part of the trustee, it is not a trust receipt transaction penalized under Section 13 of P.D. 115; the
only obligation actually agreed upon by the parties would be the return of the proceeds of the sale transaction. This transaction
becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the goods.
C. Requirement for Grant of Loans or Other CA
Per MORB, FIs shall require the borrower and his co-maker:
a. Updated ITRs duly stamped as received by the BIR
b. Supporting financial statements, as applicable
c. Waiver of confidentiality of client information and/or an authority of the FI
to conduct random verification with the BIR
FALSE OR INCORRECT STATEMENTS in any material detail -> the bank may
terminate any loan or other CA granted; and have the right to demand
immediate repayment or liquidation of the obligation, except in the following
cases:
(1) Microfinance loans – small loans granted to the basic sectors, as defined in
the Social Reform and Poverty Alleviation Act of 1997 (RA 8425), and other
loans granted to the poor and low-income households for their
microenterprises and small businesses so as to enable them to raise their
income levels and improve their living standards. These loans are granted
on the basis of the borrower’s case flow and are typically unsecured;
(2) Loans to registered Barangay Micro-Business Enterprises (BMBEs);
(3) Interbank loans;
(4) Loans secured by hold-outs on or assignment of deposits or other assets
considered non-risk by the Monetary Board;
(5) Loans to individuals who are not required to file ITRs under BIR regulations;
(6) For borrowers purely earning compensation: BIR Form No. 2316
(Employer’s Certificate of Compensation Payment/Tax Withheld or payslips
for at least three (3) months immediately preceding the date of loan
application;
(7) Loans and other CA not exceeding P3.0 million; or
(8) Loans to start up enterprise borrowers during the first three (3) years of
their operations or banking relationship
D. Reason for Stringent Rules in Granting Loans

The business of a bank is one affected with public interest, for which reason the
bank should guard against loss due to negligence or bad faith.
In approving the loan of an applicant, the bank concerns itself with proper
information regarding its debtors.
A bank and a financial institution engaged in the grant of loans is expected to

ascertain and verify the identities of the persons it transacts business with.
E. Stipulations
The MB may prescribe the maturities, as well as related terms and conditions
for various types of bank loans and other credit accommodations.
Any change by the Board in the maximum maturities shall apply only to loans
and other credit accommodations made after the date of such action.
The MB shall regulate the interest imposed on microfinance borrowers by

lending investors and similar lenders such as, but not limited to, the
unconscionable rates of interest collected on salary loans and similar CA (Sec.
43, GBL)
F. Amortization on loans and other credit accommodations

(1) In case of loans and other CA with maturities of more than 5 years,
provisions must be made for periodic amortization payments, but such
payments must be made at least annually: Provided, however, That when
the borrowed funds are to be used for purposes which do not initially
produce revenues adequate for regular amortization payments therefrom,
the bank may permit the initial amortization payment to be deferred until
such time as said revenues are sufficient for such purpose, but in no case
shall the initial amortization date be later than 5 years from the date on
which the loan or other credit accommodation is granted.
(2) In case of loans and other credit accommodations to microfinance sectors,
the schedule of loan amortization shall take into consideration the projected
cash flow of the borrower and adopt this into the terms and conditions
formulated by banks. (Sec. 44, GBL)
All are subject to such rules as the MB may promulgate. (Sec. 29, GBL)
G. Escalation Clause; When Allowable

For a stipulation on an escalation clause to be valid5, it should specifically
provide:
(1) That there can be an increase in interest if increased by law or by the MB
(2) It must include a provision for reduction of the stipulated interest in the
event that the applicable maximum rate of interest is reduced by law or by
the MB (de-escalation clause)
Effect of Annulment of Escalation Clause

General rule
In case the escalation clause is annulled, the principal amount of the loan is
subject to the original or stipulated rate of interest. Upon the maturity, the
amount due is subject to legal interest at the rate of 6% per annum
Exception
Jurisprudence: even if there is no de-escalation clause, the escalation clause is
still valid if the creditor unilaterally and actually decreased the interest charges
whenever the rate of interest is reduced by law or the MB
H. Unilateral Increase of Rates: VOID

Any contract which appears to be heavily weighed in favor of one of the parties
so as to lead to an unconscionable result is void. Any stipulation regarding the
validity or compliance of the contract which is left solely to the will of one of the
parties is likewise invalid.
5
Escalation clauses are not void per se. However, one “which grants the creditor an unbridled right to adjust the interest
independelty and upwardly, completely depriving the debtor of the right to assent to an important modification in the
agreement” is void.
— Violate the principle of mutuality of contracts
— Art. 1308: the contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of
them
I. While the Usury Law is now legally inexistent, interest must NOT be iniquitous,
unconscionable and exorbitant
Jurisprudence: Interest ranging from 26% to 35% are not usurious but must be
equitably reduced; interest at 5.5% per month or 66% per annum is iniquitous or
unconscionable, and hence, contrary to morals
J. Banks cannot extend peso loans to non-residents
IX. TRUTH IN LENDING ACT (RA 3765)

— The law requiring the disclosure of finance charges in connection with the
extension of credit
A. Policy
To protect its citizens from a lack of awareness of the true cost of credit by
assuring a full disclosure of such cost (prevent uninformed use of credit)
COVERED PERSONS: any creditor who requires as an incident to the extension of
credit, the payment of a finance charge.
B. Disclosure
A creditor, prior to the transaction, shall furnish in writing a clear statement of:
(1) Cash price / delivered price of the property or service to be acquired
(2) Amounts, if any, to be credited as down payment and/or trade-in
(3) Difference between the amounts set forth under clauses (1) and (2)
(4) Charges, individually itemized, paid or to be paid in connection with the
transaction but not incident to the extension of credit
(5) Total amount to be financed
(6) Finance charge expressed in terms of pesos and centavos
(7) Percentage that the finance bears to the amount to be financed expressed as
a simple annual rate on the outstanding unpaid balance of the obligation
C. Penalties in case of failure to disclose

(1) Civil – liability to pay Php100 or in amount equal to twice the finance charged
required by such creditor, whichever is greater (not to exceed Php2,000 on
any credit transaction
(2) Criminal – fined by not less than P1,000 or more than P5,000 or imprisonment
of not less than 6 months, nor more than one year or both.
*Violation shall not affect the validity or enforceability of any contract
D. BSP Circular No. 755

(1) Coverage: Entity with credit-granting facilities (CGEs) – includes corporations,
organizations, partnerships and single proprietorship registered with SEC and
DTI
(2) Registration: to build long term brand value, accountability and transparency
(a) Business name
(b) Directors, Key Officers and Substantial Stockholders
(c) Principal Place of Business
(d) Notarize deed of undertaking for compliance
(e) Other documents required by BSP
(3) Information to be Disclosed:
(a) Total amount to be financed
(b) The finance charges expressed in terms of pesos and centavos
(c) Net proceeds of the loan
(d) The percentage that the finance charge bears to the total amount to be
financed expressed as a simple annual rate or effective annual interest
rate (EIR)
E. BPI v Spouses Yu (G.R. No. 184122; January 20, 2010)

FACTS:
Both the RTC and CA decisions cited BPIs alleged violation of the Truth in Lending
Act and the ruling of the Court in New Sampaguita Builders Construction, Inc. v.
Philippine National Bank to justify their deletion of the penalty charges.
In this case, although BPI failed to state the penalty charges in the disclosure
statement, the promissory note that the Yus signed, on the same date as the
disclosure statement, contained a penalty clause that said: I/We jointly and
severally, promise to further pay a late payment charge on any overdue amount
herein at the rate of 3% per month. The promissory note is an acknowledgment of
a debt and commitment to repay it on the date and under the conditions that the
parties agreed on. It is a valid contract absent proof of acts which might have
vitiated consent.
ISSUE:
Whether the reference to the penalty charges in the promissory note constitutes
substantial compliance with the disclosure requirement of the Truth in Lending
Act.
RULING:
The ruling that is more in point is that laid down in The Consolidated Bank and
Trust Corporation v. Court of Appeals, a case cited in New Sampaguita6. The
Consolidated Bank ruling declared valid the penalty charges that were stipulated
in the promissory notes. What the Court disallowed in that case was the
collection of a handling charge that the promissory notes did not contain.
6
The RTC and CA relied on the ruling in New Sampaguita as authority that the non-disclosure of the
penalty charge renders its imposition illegal. But New Sampaguita is not attended by the same
circumstances. What New Sampaguita disallowed, because it was not mentioned either in the
disclosure statement or in the promissory note, was the unilateral increase in the rates of penalty
charges that the creditor imposed on the borrower. Here, however, it is not shown that BPI increased
the rate of penalty charge that it collected from the Yus.
In this case, the promissory notes signed by the Yus contained data, including
penalty charges, required by the Truth in Lending Act.
FORECLOSURE
I. DEFINITION
It is a remedy available to the mortgagee by which he subject the mortgaged property
to the satisfaction of the obligation which the mortgage was given through the sale of the
property at public auction and the application of the proceeds to the payment of his claims.
II. FORECLOSURE OF PLEDGE

Definition of Pledge
 An accessory, real and unilateral contract by virtue of which the debtor or a
third person delivers to the creditor or to a third person movable property as
security for the performance of the principal obligation, upon the fulfillment
of which the thing pledged, with all its accessions and accessories, shall be
returned to the debtor or to the third person. (Lhuiller Pawnshop vs CIR)
Conditions of Extrajudicial Foreclosure of Pledge
 The debt is due and unpaid
 The sale must be at a public auction
 There must be notice to the pledgor and owner, stating the amount due; and
 The sale must be made with the intervention of a notary public.
Note: In Pledge there is no right of redemption, only equity of redemption.
Rules on the Proceeds of Sale

 Price of sale more than the amount due – The debtor is not entitled to the excess,
unless otherwise agreed; and
 Price of sale less than the amount due – The creditor is not entitled to recover any
deficiency, notwithstanding any stipulation to the contrary. (Art. 2115, NCC)
Bank Deposit as Security
 Bank deposits may be used as security for a separate loan obligation of the depositor.
This may be embodied in a Hold-out Deposit Agreement or in a form of Deed of
Assignment
 In Victoria Yau Chu v. Hon. Court of Appeals, et al., the SC explained that the
assignment of deposit by way of security is in the nature of pledge. However, a public
auction is no longer necessary to satisfy the obligation because the collateral is
money.
III. FORECLOSURE OF REAL ESTATE MORTGAGE
Definition of Real Estate Mortgage

 contract whereby the debtor secures to the creditor the fulfillment of the
principal obligation, especially subjecting to such security immovable property or
real rights over immovable property in case the principal obligation is not
complied with at the time stipulated
Kinds of Foreclosure:
 Extrajudicial - A mortgage may be foreclosed extra-judicially where there is
inserted in the contract a clause giving the mortgagee the prior upon default
of the debtor to foreclose the mortgage by an extra-judicial sale of the
mortgaged property;
 Judicial - A mortgage may be foreclosed judicially by bringing an action for
that purpose in the Regional Trial Court of the province or city the real
property is located or any part thereof lies.
Extrajudicial Foreclosure (Act 3135/ Sec. 47 GBL)
1. NOTICE OF THE SALE - POSTING of the notices of the sale FOR NOT LESS THAN
20 DAYS in at least 3 public places of the municipality or city where the property is
situated.
2. PUBLIC AUCTION/SALE - Time shall be between 9AM and 4PM. It shall be made in
the direction of the sheriff of the province, the justice or auxiliary justice of the
peace of the municipality, or of the notary public of the municipality, who shall
be compensated with P5 for each day of actual work or performance in addition
to his expenses. Anyone may bid at the sale, unless there are stipulations in the
agreement.
3. ISSUANCE OF THE CERTIFICATE OF SALE
4. REGISTRATION/ ANNOTATION
5. POSSESSION - immediately after the date of the confirmation of the auction sale
REDEMPTION
Definition
 transaction by which the mortgagor reacquires or buys back the property, which
may have been passed under the mortgage or divests the property of the lien,
which the mortgage may have created
Right of Redemption
 Natural Persons – one year after sale

 Juridical Persons – three months after foreclosure or not after registration of the
certificate of foreclosure sale, whichever is earlier
Redemption after Statutory Period

1. Agreement – The statutory period of redemption can be extended by agreement of
the parties.
2. Estoppel – It could be said that a bank consented to the extension of the redemption
period specially if it had time to object and did not.
3. Repurchase – Purchaser may or may not resell the property but no law will compel
him to do so.
JUDICIAL FORECLOSURE (Sec. 68 ROC/ Sec. 47 GBL)

1. The mortgagee should file a petition for judicial foreclosure in the court which has
jurisdiction over the area where the property is situated
2. The court will conduct a trial. If, after trial, the court finds merit in the petition, it will
render judgment ordering the mortgagor/debtor to pay the obligation within a period
not less than 90 nor more than 120 days from the finality of judgment.
3. Within this 90 to 120 day period, the mortgagor has the chance to pay the obligation
to prevent his property from being sold. (Equity of Redemption)
4. If mortgagor fails to pay within the 90-120 days given to him by the court, the property
shall be sold to the highest bidder at public auction to satisfy the judgment.
5. There will be a judicial confirmation of the sale.
6. After the confirmation of the sale, the purchaser shall be entitled to

the possession of the property, and all the rights of the
mortgagor with respect to the property are severed or terminated.
Note: Demand is essential in order to constitute a cause of action (No demand, No

default)
Right of Redemption vs. Equity of Redemption
 Right of redemption exists only in extrajudicial foreclosure of the mortgage. No such

right is recognized in a judicial foreclosure except PNB or a bank or banking institution
 Equity of redemption is simply the right of the defendant mortgagor to extinguish the
mortgage and retain ownership of the property by paying the secured debt within the
90-day period after judgment becomes final
Other considerations in Foreclosure
1. A purchaser in case of foreclosure by banks is not required to set up a bond and may
enter the property immediately after the date of the confirmation of sale.
2. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings shall
be given due course only upon the filing by the petitioner of a bond in an amount
fixed by the court conditioned that he will pay all the damages which the bank may
suffer by the enjoining or the restraint of the foreclosure proceeding.
3. Juridical persons whose property is being sold pursuant to an extrajudicial foreclosure
shall have the right to redeem the property until, but not after, the registration of the
certificate of foreclosure sale which in no case shall be more than three months after
foreclosure, whichever is earlier.
4. Real property may be mortgaged to aliens, both individual and corporations.
5. The redemption period is counted from the date of the registration of the certificate
of sale with the Register of Deeds.
6. An action for annulment of the mortgage does not toll the running of the one year
period of redemption.
7. In case of rehabilitation of a corporate debtor, the rights of a creditor bank are merely
suspended
Participation of Foreign Banks

1. Allowed to bid and take part in foreclosure sales of real property mortgaged to
them;
2. To avail of enforcement and other proceedings, and accordingly take possession
of the mortgaged property, for a period not exceeding five years from actual
possession
a. Foreign banks cannot transfer title to the property to such foreign bank.
In case said bank is the winning bidder, it shall, during the said five-year
period, transfer its rights to a qualified Philippine national, without
prejudice to a borrower’s rights under applicable laws. Otherwise, it shall
be penalized one-half of 1% per annum of the price at which the property
is foreclosed until it is able to transfer. (Sec. 9, RA 7721 as amended by
RA 10641
IV. FORECLOSURE OF CHATTEL MORTGAGE
Definition of Chattel Mortgage - an accessory contract where personal property is mortgaged

as security for the performance of an obligation (Art. 2140, NCC)
Kinds of Foreclosure:
a. Judicial
b. Extrajudicial
Procedure of Foreclosure of Chattel Mortgage (Sec. 14, Act 1508)
1. 30 days after the condition of the chattel mortgage is broken, the mortgagee (or his
executor, administrator or assign) may cause the mortgaged property (or any part
thereof) to be sold at public auction.
2. At least 10 days before the sale, the mortgagor and all junior mortgagors must be
informed in writing of the time, place and purpose of the sale.
3. The notice of sale must likewise be posted in at least 2 public places in the municipality
where the mortgagor resides or where the property is situated.
4. Public auction proper.
Application of Proceeds of Sale
1. Costs and expenses of keeping sale;

2. Payment of obligations secured by the mortgage;
3. Claims of persons holding subsequent mortgages in their order, and
4. The balance, if any, shall be paid to the mortgagor, or person holding under him.
5. In case of deficiency, mortgagee may generally recover.
6. Recovery of deficiency not allowed when the transaction secured is sale of personal
property on installment basis under Art. 1484 of the NCC (Recto Law)
Note: In chattel mortgage, there is no right of redemption; only equity of redemption.
In RCBC vs Royal Cargo the SC explained:

Section 13 of the Chattel Mortgage Law allows the would-be redemptioner
thereunder to redeem the mortgaged property only before its sale. Consider the
following pronouncement in Paray:
[T]here is no law in our statute books which vests the right of redemption over
personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have
served as the vehicle for any legislative intent to bestow a right of redemption over
personal property, since that law governs the extrajudicial sale of mortgaged personal
property, but the statute is definitely silent on the point. And Section 39 of the 1997
Rules of Civil Procedure, extensively relied upon by the Court of Appeals, starkly utters
that the right of redemption applies to real properties, not personal properties, sold
on execution. (Emphasis, italics and underscoring supplied)
Unmistakably, the redemption cited in Section 13 partakes of an equity of

redemption, which is the right of the mortgagor to redeem the mortgaged property
after his default in the performance of the conditions of the mortgage but before the
sale of the property to clear it from the encumbrance of the mortgage. It is not the
same as right of redemption which is the right of the mortgagor to redeem the
mortgaged property after registration of the foreclosure sale, and even after
confirmation of the sale.
DEPOSIT INSURANCE
Definition of Terms
 Bank/ Banking Institution - include banks, commercial banks, savings banks,

mortgage banks, rural banks, development banks, cooperative banks, trust
companies, branches and agencies in the Philippines of foreign banks and all other
companies, corporations, partnership performing banking functions in the
Philippines
 Closed Bank – bank placed under liquidation by the Monetary Board
 Insured Bank - any bank the deposit of which are insured in accordance with the
provision of this Act
 Insured Deposit - the amount due to any bona fide depositor for legitimate
deposits in an insured bank net of any obligation of the depositor to the insured
bank as of date of closure, but not to exceed P500,000.00.
A joint account shall be insured separately from any individually-owned

deposit account.
PDIC will not pay deposit insurance for the following accounts or transactions:
1. Investment products such as bonds, securities and trust accounts;

2. Deposit accounts which are unfunded, fictitious or fraudulent;
3. Deposit products constituting or emanating from unsafe and
unsound banking practices;
4. Deposits that are determined to be proceeds of an unlawful activity
as defined under the Anti-Money Laundering Law
*As amended by RA 10846

Philippine Deposit Insurance Corporation
 government instrumentality created in 1963 by virtue of Republic Act 3591 to insure

the deposits of all banks which are entitled to the benefits of insurance
 Overall mandate is to provide deposit insurance coverage for the depositing public to
help promote public confidence and stability in the economy. It ensures prompt
payment of insured deposits, exercises complementary supervision of banks, adopts
responsive resolution methods, and applies efficient management of receivership and
liquidation functions
Functions of PDIC
 Deposit Insurer
 Co-regulator of banks
 Receiver and liquidator of closed banks
PDIC Member Banks
 Banks incorporated under Philippine laws, such as commercial banks, savings banks,
mortgage banks, development banks, rural banks, cooperative banks and stock
savings and loan associations
 Domestic branches of foreign banks
Membership of banks to PDIC is mandatory; hence, all operating banks are members
of PDIC
Maximum Deposit Insurance Coverage
 Effective June 1, 2009, the maximum deposit insurance coverage is P500,000 per
depositor. All deposit accounts by a depositor in a closed bank maintained in the same
right and capacity shall be added together.
 In determining the insured amount, the outstanding balance of each account is

adjusted, such that interests are updated, withholding taxes are deducted, accounts
maintained by a depositor in the same right and capacity are added together; and
whenever applicable, unpaid loans and other obligations of the depositor are
deducted; and in no case shall insured deposit exceed P500,000.
Filing of Claim for Insured Deposit
 24 months from date of bank takeover to file his deposit insurance claim. Otherwise,
all rights of the depositor with respect to the insured deposit shall no longer be
honored. But he may still make a claim against the assets of the closed bank.
Settlement of Claim for Insured Deposit
 The claim for insured deposit should be settled within six (6) months from the date
of filing provided all requirements are met but the claim must be filed within twenty-
four (24) months after bank takeover.
 Deposit records are subjected to an examination prior to the start of
servicing/settlement of claims. Claims are evaluated and processed according to
PDIC's standard procedures.
 The length of time needed for the pre-settlement examination of deposit liabilities of
a closed insured bank largely depends on the completeness and accuracy of records
turned over by the Bank to PDIC and the number of deposit accounts to be examined.
Excess of the Insured Deposit
 It becomes a claim against the assets of the closed bank.

 The claim may be filed with the Liquidator of the closed bank within sixty (60) days
from publication of notice of closure. However, payment of said claim will depend on
the bank’s available assets and approval of the Liquidation Court. The schedule of
payment beyond the P500,000.00 maximum insurance shall be based on priorities
set by law.
Considerations
 In the case where a depositor is the sole beneficial owner of a single, “For the Account
of”, “By”, and “In Trust For” accounts, the consolidated balances of these accounts
shall be insured up to P500,000
 The depositor’s total shares in his/her joint accounts shall be separately insured up to
P500,000
 A joint account regardless of whether the conjunction “and”, “or” or “and/or” is used
shall be insured separately from single accounts
 Unless a different sharing is stipulated in the deposit documents, the insured amount
up to the MDIC of P500,000 shall be divided equally between or among co-owners of
a joint account
 The total shares of a co-owner in several joint accounts may exceed P500,000 but will
only be insured up to the P500,000 MDIC
 Joint accounts held in the names of a juridical entity and a natural person shall be
presumed to belong solely to the juridical entity
Major Investments
Monetary Board shall establish criteria to review major acquisitions/investments by a bank
that may expose it to undue risks.
Bank may acquire real estate for use in the conduct of its business. Investments include
equipment.
Total investment in real estate and improvements including Bank equipment ≥ 50% of the
banks net worth
Equity investment of a bank in another corporation engaged in real estate is considered part
of the bank’s total investment in real estate, unless otherwise provided by the MB
Notwithstanding the limitations, banks may acquire , hold, convey real property by way of
satisfaction of claims:
 Mortgage serving as security for debts
 Satisfaction of Debts
 Purchase at sales under judgments, decrees, mortgages or trust deeds
Real property acquired or held under the above circumstances shall:

be disposed by the banks within a period of 5 years or as may be prescribed by the MB. If the
bank continue to hold the property, after the said period it will be subject to the 50% of
combined capital accounts limitation (section 51 of the GBL).
Other Banking Functions

1. Receive in custody funds, documents and valuable objects.
2. Act as financial agent and buy and sell, by order of and for the account of their
customers, shares, evidences of indebtedness and all types of securities.
3. Make collections and payments for the account of others and perform such other
services for their customers as are not incompatible with banking business.
4. Act as managing agent, adviser, consultant or administrator of investment
management/advisory/consultancy accounts.
5. Rent out safety deposit boxes.
Electronic Transactions
SECTION 59. Authority to Regulate Electronic Transactions. — The BSP shall have full
authority to regulate the use of electronic devices, such as computers, and processes for
recording, storing and transmitting information or data in connection with the operations of
a bank, quasi-bank or trust entity, including the delivery of services and products to customers
by such entity.
Electronic Banking Services and Operations
MORB Section X701 requires :

To provide and/or enhance existing electronic banking services, banks submit to BSP
application describing the services to be offered/enhanced and how it fits the bank’s overall
strategy.
a. Adequate risk management process

b. Manual on corporate security policy – authentication, non repudiation,
authorization, integrity, confidentiality
c. Satisfactory prior testing
d. Business continuity planning process and manuals, etc.
Outsourcing of Information Technology Systems / Processes
Amendments to the Guidelines on Outsourcing: Circular 899, Series of 2016

rd
A bank may outsource to 3 parties or to related companies in the group, certain services or
activities to have access to certain areas of expertise or to address resource constraints.
Provided:
That the bank has in place appropriate processes, procedures and information system that
can adequately identify, monitor, and mitigate operational risks arising from the
outsourced activities
That the bank’s board of directors and senior management shall remain responsible for
ensuring that outsourced activities are conducted in a safe and sound manner and in
compliance with the law and regulations.
Prohibition against outsourcing of inherent banking functions:
1. Services associated with placement of deposits and withdrawals,

recognition based on recording of movements in the deposit accounts.
2. Granting of loans and extension of other credit exposures.
3. Position-taking and market risk-taking activities
4. Managing of risk exposures
5. Strategic decision-making
Allowed with prior approval of BSP:
1. Data imaging, Storage, Retrieval and the like

2. Clearing and processing of checks not included in Philippine Clearing House
Systems
3. Printing of bank deposit statements, bank loan statements and other non-
deposit records, bank forms, etc.
4. Credit investigation and collection
5. Janitorial, procurement, legal services
6. Other services not inherent to banking functions
Authority to outsource:
Only those banks with CAMELS composite rating of at least 3 and a management rating of not
lower 3 shall be allowed to outsource designated activities without prior BSP approval.
Credit Cards Transactions

MORB Sec. 320. – General Policy
• BSP shall foster the development of consumer credit through innovative

products such as credit cards under conditions of fair and sound consumer
credit practices.
• Encourage competition and transparency
• Ensure more efficient delivery of services and fair dealings with customers.
Credit card – any card, plate or other credit device for the purpose of obtaining money,
property, labor or services on credit.
Credit card receivables – total outstanding balance of credit cardholders arising from
purchases of goods and service, CA, annual fees, interest, penalties, insurance fees,
processing/service fees and other charges.
Acceleration clause – provision giving right to demand full payment of obligation in case of
default on non-payment
What to disclose to the cardholder in the contract
 Finance charges, penalties , and fees

 For installment loans, the number of installments, amount and due dates, or
schedules to repay indebtedness
 Conditions when interest may be imposed
 Method of determining balance upon which interest is computed.
 Method of computing interest/delinquency charges
 For foreign currency transactions, the application of payments, manner of
conversion, commission, and other charges
 Table of applicable fees, penalties on credit card transactions, conversion
reference rates, in plain sight and language on materials for marketing credit
cards
Are there any law or regulation which puts a ceiling on fees, charges, and interest rates?
None. However, BSP requires credit card companies / banks to properly disclose these
charges to the cardholder.
Confidentiality of Information
Banks shall keep strictly confidential data of the card holder or consumer except:
• Disclosure of information with consent of the cardholder

• Release, submission or exchange of information with other financial
institutions, credit information bureaus, credit card issuers, their subsidiaries
and affiliates
• Upon orders of court of competent jurisdiction
• Disclosure to collection agencies
• To third party providers who assist or render services in the administration of
credit card business
• Disclosure to third parties, i.e., insurance companies for purpose of insuring
the bank from default or credit loss
Offsets – allowed
• For purposes of transparency and adequate disclosure, credit card issuer shall
inform cardholder in the agreement that use of his credit card will subject his
deposit with the bank to offset against any amount due not paid in accordance
with the agreement contract.
One price tag requirement
Cash price = Card Price: Okay
Cash price < Card Price: Forbidden by law
RA 7394 (Consumer Act of the Philippines): goods and services must not be sold at a higher
price than what is stated and without discrimination to all buyers.
Prohibited Transactions
Examiners or employees of the BSP

of Directors, Officers, Employees, or Agents any office/agency assigned by the Gov't
Banks of Borrowers
of Banks to supervise , examine ore render
techical assistance to any bank
1) Make false entries in any bank report or 1) Attempt to defraud banks in the event
1) Make false report or misrepresentation or
1) To directly act as insurer statement or participate in any fraudulent of a court action to recover a loan or other
suppression of material facts
transactions credit accommodation
2) To declare dividends if at the time of declaration:
2) Overvalue or aid in the overvaluing of any
security for the purpose of influencing in any way
2) Fraudulently overvalue property offered
v Its clearing account with the Bangko Sentral is the actions of any banks
as security for a loan from the bank
overdrawn
v It is deficient in the required liquidity floor for 3) outsource inherent banking functions
3) Offer any director officer employee or
government deposits for 5 or more consecutive days
agent of a bank any gift fee commission or
v It does not comply with the liquidity standards / ratios 4) Without the order of court of competent
any other form of compensation in order
prescribed by the Bangko Sentral for purposes of determining jurisdiction , disclosure to any unauthorized
to influence such person in approving a
funds available for dividend declaration persons any information relative to the funds or
properties in the custody of the bank belonging to loan or other credit accommodation
v It has commited a major violation as may be
application
determined by the Bangko Sentral private individuals , corporatin or any other entity
3) To conduct business in an unsafe and unsound manner

5) Accept gifts or any other form or renumeration
●Act or omission resulted or may result in material loss or in connection with the approval of a loan or credit
damage or abnormal risk or danger to the: accommodation from the said bank
v institution
v institution's depositors ,creditors, investors,
stockholders
v to the Bangko Sentral
v the public in general
●Entering into contracts which is manifestly and grossly

disadvantageous to the banks
●causes undue injury or gave unwarranted benefits to the

bank or any party
4) Unauthorized advertisement or business representation
5) To employ casual or non-regular personnel or too lengthy

probationary personnel in the conduct of its business involving
bank deposits
How the BSP Handles Banks in Distress:
I. CONSERVATORSHIP
Governing Law:
Section 29 and the last 2 paragraphs of Sec. 30 of the NCBA. The same rule also
apply to Quasi-Banks
Grounds for Appointment of Conservator:
a) In a state of continuing inability or
b) Unwillingness to maintain a condition of liquidity deemed adequate to
protect the interest of depositors and creditors
Liquidity:
Ability of an asset to be converted into cash quickly and without any price discount
Solvency
When total assets is less than the total liabilities; ability to pay debts
Duration: Not to exceed 1 year
Qualification of Conservator: Competent and knowledgeable in bank operations an

management
The Monetary Board (MB) has the exclusive power to designate the conservator
Effects of Appointment of Conservator:

1. Banks/quasi-banks retain juridical personality
2. Not a precondition to the designation of a receiver
3. Perfected transactions cannot be repudiated
Powers of conservator:
1. To take charge of the assets, liabilities and the management of bank
2. To reorganize the management
3. Exercise all powers necessary to restore its viability
4. Collect all monies and debts due to the said bank
Termination
The MB shall terminate the conservatorship when it is satisfied that the institution
can continue to operate on its own and the conservatorship is no longer necessary
II. RECEIVERSHIP / CLOSURE
Receivership is equivalent to an injunction to restrain the bank in any way. Thus the
appointment of a receiver operates to suspend the authority of the bank and of its
directors and officers over its property and effects
GROUNDS FOR RECEIVERSHIP
Under the NCBA Under the General Banking Law

a) Inability to pay liabilities as they a) Notification to BSP or public
become due in the ordinary course announcement of a bank holiday
of business b) Suspension of payment of deposit
b) Insufficiency of realizable assets to liabilities continuously for more
meet its liabilities than 30 days
c) Inability to continue business c) Persistence in conducting business
without involving probable losses to in an unsafe and unsound manner
its depositors or creditors
d) Willful violation of a cease and desist
order under Sec 37 that has become
final
Duties of a Receiver:
1. Immediate gathering and taking charge of all the assets and liabilities of the
institution and administering them for the benefit of the creditors
2. Exercise the general powers under the revise Rules of Court
3. May deposit or place funds of the institution on non-speculative investment
4. Determine as soon as possible but not later than 90 days from takeover , whether
the institution should undergo:
 Rehabilitation or
 Liquidation
5. Shall not, with the exception of administrative expenditures, pay or commit any act
that will involve the transfer or disposition of assets
Conservator and Receiver Distinguished:

CONSERVATOR RECEIVER
Appointed for a period of one year to Appointed to manage a bank or quasi-
take charge of the assets, liabilities and bank that is unable to pay its liabilities
management of a bank or a quasi-bank or cannot continue in business without
in a state of continuing inability or probable losses to its depositors or
unwillingness to maintain a condition of creditors, or has willfully violated a
liquidity deemed adequate to protect final cease and desist order involving
the interest of the depositors and acts or transactions amounting to
creditors fraud or dissipation of the assets or
institution. The main purpose of the
receiver is to recommend the
rehabilitation or liquidation of the bank
CLOSE NOW, HEAR LATER SCHEME

Sec 29 of the Central Bank Act does not contemplate prior notice and hearing before
a bank may be directed to stop operations and placed under receivership
Purpose: To prevent unwarranted dissipation of the bank’s asset and as valid

exercise of police power to protect the depositors, creditors’ stockholders
and the general public.
CURRENT AND COMPLETE EXAMINANATION NOT NECESSARY

RA 7653 requires only “a report of the head of the supervising or examining
department” before the bank can be closed and placed under receivership
Remedy: Actions of the MB taken under Sec 29 or 30 shall be final and executory
and may not be restrained or set aside except on petition for certiorari on the
ground that the action taken was in excess of jurisdiction or with such grave abuse
of discretion as to amount to lack or excess of jurisdiction
MANDATORY REQUIREMENTS FOR BANK CLOSURE

1. Examination by the appropriate BSP Department as to the condition of the bank
2. Examination showing that the condition of the banks is one of insolvency, or that its
continuance in business would involve probable loss to its depositors or creditors
3. Director shall inform the MB in writing of such fact
4. Appointment of a receiver
5. Within 60 days, MB determines and confirm if the bank is insolvent and if public
interest requires, shall order liquidation of the Bank
III. LIQUIDATION
Grounds:
1. The condition of the bank is one of insolvency or that its continuance would
involve probable loss to its depositors and creditors and
2. A determination by the MB that the bank cannot be rehabilitated
PROCEDURE:
a) Receiver shall file ex parte with the proper RTC a petition for assistance in
the liquidation of the institution pursuant to a liquidation plan adopted by
the PDIC for general application to all closed banks. In case of quasi-banks,
the liquidation plan shall be adopted by the MB
b) Receiver shall convert the assets of the institution to money for the purpose
of paying the debts of the institution
c) Payment shall be in accordance with the rules on concurrence and
preference of credits
Effect of Receivership and Liquidation
1. Retention of Juridical personality

2. Suspension of Operations
3. Assets are deemed in custodia legis
4. Stay of execution of judgment
5. Bank is not liable to pay interest on deposits which accrued during the
period when the bank is actually closed and non-operational
6. Restriction of the Bank’s Capacity to Act
7. Deposits do not become preferred credits
8. Exclusive jurisdiction of liquidation court
Distribution of Assets:
In case of liquidation of banks or quasi-banks, after payment of cost of proceedings,
after payment of cost of proceedings including reasonable expenses and fees of the
receiver allowed by the court, the receiver shall pay the debts of such institution in
accordance with the rules on concurrence and preference of credits as found in the
Civil Code
CHAPTER 6- FOREIGN BANKS AND TRUST OPERATIONS

I. FOREIGN BANKS
Transacting Business in the Philippines.
• R.A No. 10641, amending R.A. 7721(Foreign Bank Liberalization Act), as amended by
R.A No. 10641 (An Act Allowing the Full Entry of Foreign Banks in the Phils) governs the entry
of foreign banks in the Phils.
• P.D No. 1034 or Offshore Banking System Degree governs the conduct of offshore
banking system in the Phils.
Offshore Banking- conduct of banking transactions in foreign currencies involving
receipt of funds from external sources and the utilization of such funds
Offshore Banking Unit- a branch, subsidiary or affiliate of a foreign banking
corporation which is duly authorized by the BSP to transact offshore business in the Phils.
Notes: Foreign corporations doing business in the Phils. are required to obtain a license.
(Sec. 13 of the Corp. Code)
II. ENTRY OF FOREIGN BANKS ( R.A No. 10641)
The following rules shall govern the liberalized entry and scope of operations of foreign
bank, with prior approval of the BSP‘s Monetary Board (Sec. X105 (2008-X 121) of MORB
2016 and RA 10641:
• By acquiring, purchasing or owning up to 100% of the voting stock of an existing
domestic bank (including banks under receivership or liquidation, provided no final court
liquidation has been issued)
• By investing in up to 100% of the voting stock of a new banking subsidiary
incorporated under the laws of the Phils.
• By establishing a branch and sub-branches will full banking authority
Interested foreign banks shall file with the Office of the Governor, BSP, their application for
authority to operate in the Phils. through any of the modes of entry mentioned above.
Application Requirements for the Entry of Foreign Banks (Appendix 2 of MORB 2016)
• Contribution to the Phil. economy
• Contributions to the local banking industry, including undertaking to share banking
technology
• Corporate plan
• Financial capability and ownership structure
• Head Office guarantee (applicable only to establishment of branch with full banking
authority)
• Certification from the foreign bank applicant’s home country supervisory authority
• Transition Plan (for existing foreign banks opting to change their original entry
mode)
• Divestment Plan for the disposal of title/interest in all land properties held by the
acquired domestic bank
• Other documentation requirements
Additional criteria on the qualification requirements:
• Widely-owned and publicly listed in the country of origin, unless the foreign bank
applicant is owned and controlled by the government of its country of origin
• Established, reputable and financially
Capital requirements of foreign banks:
• For locally incorporated subsidiaries
• For foreign bank branches
A foreign bank shall comply with the minimum capital and prudential capital ratios
applicable to domestic banks of the same category as prescribed under prevailing
regulations
For purposes of compliance with minimum capital regulations, the term” capital of a
foreign bank branch” shall refer of the sum of :
i. Permanently assigned capital
ii. Undivided profits, and
iii. Accumulated net earnings, which is composed of unremitted profits not yet cleared
by the BSP outward remittance and losses in operations less capital adjustments
Permanently assigned capital shall be inwardly remitted and converted into Phil.
currency at the exchange rate prevailing at the time of remittance
Any Net Due from head office, branches, subsidiaries and other offices outside the
Phils., excluding accumulated net earnings, shall be a deductible adjustment to capital
For purposes of compliance with the SBL, the capital of a foreign bank branch,
subject to prescribed adjustments, shall be synonymous to its “net worth”
Transitory provision
• Minimum capital of foreign banks
a. for banks established in the Phils. prior to R.A. 10641 shall comply with the applicable
minimum capital level requirement as prescribed under Subsection X111.1 of the MORB b.
existing foreign banks that do not meet the minimum capital requirements shall submit an
acceptable capital build up as required by Subsection 111.1
• SBL
Loans and credit commitments of foreign bank branches as of 7 August 2014 may be
maintained, but once repaid or expired, shall no longer be increased in excess of the ceiling
allowed
Existing foreign bank branches shall be given until 31 Dec 2019 to us twice the level
of capital defined as net worth, as reference point for purposes of determining the
appropriate SBL
Head Office Guarantee - The head office of foreign bank branches shall guarantee prompt
payment of all liabilities of its Philippine branches, as well as the observance of the
constitutional rights of the employees of such branches.
- The MB shall adopt measures as may be necessary to ensure that at all times the
control of 60% of the resources or assets of the entire banking system is held by domestic
banks, which are majority-owned by Filipinos.
Change from one mode to another
- Foreign banks which are operating in the Phils. may apply for conversion of their
mode of entry by complying with all the applicable requirements and submit an acceptable
transition plan on how to address the implementation of the change in mode of entry.
Listing of shares in the Phil. Stock Exchange (PSE)
Equal treatment – any right, privilege or incentive granted to foreign banks or their
subsidiaries or affiliates under R.A. 7721, as amended by R.A. No. 10641, shall be equally
enjoyed by, and extended under the same conditions, to domestic banks.
Local Branches of Foreign Banks
• The foreign bank branch may open up to five (5) sub-branches as may be approved
by the MB.
• Locally incorporated subsidiaries of foreign banks pursuant to Sec 2(ii) of RA 10641
shall have the same branching privileges as domestic banks of the same category.
• In case of a foreign bank with more than once branch in the Phils., all such branches
shall be treated as one unit for the purpose of the GBL.
Courts obtain jurisdiction over foreign banks through the following:
• Summons and legal process served upon the Phil. agent or head of any foreign bank
designated to accept service shall give jurisdiction to the courts over such bank and services
of notices on such agent or head shall be binding upon the bank which he represents as if
made by the bank itself
• A duly authenticated nomination of an agent or head filed by the foreign bank with
the SEC on the replacement whose authority has been revoked due to mental
incompetence or inability to accept service while still authorized.
• In the absence of the agent or head, or should there be no person to receive the
summons, processes and legal notices, said summons can be made upon the BSP Deputy
Gov. in charge of supervising and examining departments and such service shall be as
effective as if made upon the bank or its duly authorized agent or head.
• In case of service for the bank upon the BSP Deputy Governor In-Charge, the said
Deputy Governor shall register and transmit by mail to the president or secretary of the
bank at its head or principal office a copy, duly certified by him, of the summons, processes,
or notices.
• The sending of such copy of the summons, process, or notice shall be a necessary
part of the services and shall complete the service.
Participation in the foreclosure proceedings (new provision in Sec 9 of R.A. 7721)
• Foreign banks which are authorized to do banking business in the Phils through any
of the modes of entry shall be allowed to bid and take part in foreclosure sales of real
property mortgaged to them, as well as to avail of enforcement and other proceedings, and
accordingly take possession of the mortgaged property, for a period not exceeding five (5)
years from actual possession
• Provided, that in NO event shall title to the property be TRANSFERRED to the foreign
bank
• In case said foreign bank is the winning bidder, it shall, during the said five (5)-year
period, transfer its rights to a qualified Phil. national, without prejudice to a borrower’s
rights under applicable laws.
• Should the bank fail to transfer such property within the five (5)- year period, it shall
be penalized one half (1/2) of one percent (1%) per annum of the price at which the
property was foreclosed until it is able to transfer the property to a qualified Phil. national.
Laws applicable:
• Provisions of R.A. No. 7653 (New Central Bank Act)
• provisions of R.A No. 8791 (the General Banking Law of 2000)
• Sec. 129 of the Corporation Code
Revocation of License of a Foreign Bank – The Monetary Board may revoke the license to
transact business in the Phils of any foreign bank, if it finds that the foreign bank is insolvent
or in imminent danger or the continuance in business will involve probable loss to those
transacting business with it.
III. TRUST OPERATIONS
Authority to Engage in Trust Business
• Trust Business- any activity resulting from a trustor-trustee relationship (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 others called beneficiaries.
• Only a stock corporation or a person duly authorized by the MB to engage in trust
business shall act as a trustee or administer any trust or hold property in trust or on deposit
for the use, benefit, or behoof of others.
Cardinal principle common to all trust and other fiduciary relationship is fidelity.
• Confidentiality
• Scrupulous care
• Safety and prudent management of property (probability of income, proper
accounting, appropriate reporting)
Parties to a trust arrangement: (Art. 1440 of the Civil Code)
• Trustor- the person who establishes the trust
• Trustee- one in whom confidence is reposed as regards property for the benefit of
another person
• Beneficiary- for whose benefit the trust has been created
Kinds of trust arrangement: (Art. 1441 of the Civil Code)
• Express- created by the intention of the trustor or the parties
• Implied- come into being by operation of law
Conduct of Trust Business:
• Prudent man rule
• Transactions requiring prior authority by the trustor and full disclosure of the
trustee and other concerned party
Purchase or acquire property from, or
sell, transfer, assign or lend money or property to, or
purchase debt instruments of, any of the departments, directors, officers,
stockholders, or employees of the trust entity, relatives within the first degree of
consanguinity or affinity, or the related interests, of such directors, officers and stockholders
Powers of a Trust Entity
• Act as trustee on any mortgage or bond issued by any municipality, corporation, or
any body politic and to accept and execute any trust consistent with law.
• Act under the appointment of any court as guardian, receiver, trustee, or depositary
of the estate of any minor or other incompetent person, and as receiver and depositary of
any moneys paid into court by parties to any legal proceedings and of property of any kind
which may be brought under the jurisdiction of the court
• Act as the executor of any will when it is named the executor thereof
• Act as administrator of the estate of any deceased person, with the will annexed, or
as administrator of the estate of any deceased person when there is no will
• Accept and execute any trust for the holding, management, and administration of
any estate, real or personal, and the rents, issues and profits thereof; and
• Establish and managed pooled funds, subject to such rules and regulations as may
be prescribed by the MB
Deposit for the Faithful Performance of Trust Duties – deposit with the BSP as security for
the faithful performance of trust duties, with minimum amount of P500,000.00, in form of
cash or securities.
IV. BOND OF CERTAIN PERSONS FOR THE PERFORMANCE OF DUTIES
• Before an executor, administrator, guardian, trustee, receiver or depositary
appointed by the court enters upon the execution of his duties, he shall upon order of the
court, file a bond in such sum, as the court may direct
• Upon the application of any executor, administrator, guardian, trustee, receiver,
depositary or any other person in interest, the court may, after notice and hearing, order
that the subject matter of the trust or any part thereof be deposited with a trust entity
• Upon presentation of proof to the court that the subject matter of the trust has
been deposited with at trust entity, the court may order that the bond be given by such
persons for the faithful performance of their duties be reduced to such sums as it may deem
proper
• The reduced bond shall be sufficient to secure adequately the proper administration
and care of any property remaining under the control of such persons and the proper
accounting for such property. Property deposited with any trust entity in conformity with
the above provision shall be held in conformity with the above provisions shall be held by
such entity under the orders and direction of the court.
Trust entities are exempted from the Bond requirement
V. OPERATIONS OF TRUST ENTITY
Separation of Trust Business from General Business
• all funds, properties or securities received by any trust entity as executor,
administrator, guardian, trustee, receiver, or depositary shall be kept separate and distinct
from the general business including all other funds, properties, and assets of such trust
entity.
• all moneys, properties or securities received by a bank in its capacity as trustee,
fiduciary, or investment manager shall be kept physically separate and distinct from the
assets of its other businesses and shall be in custody of at least two persons authorized by
the BOD .
BANGKO SENTRAL NG PILIPINAS (BSP)

Primary Objective of BSP
• To maintain price stability which is conducive to a balanced and sustainable growth
of the economy
• To promote and maintain monetary stability and the convertibility of the peso
I. CREATION, RESPONSIBILITIES AND CORPORATE POWERS OF BSP
CREATION OF THE BSP: The creation of a central monetary authority is mandated by the
Constitution under Section 20 Article 12 of the Constitution: “Congress shall establish an
independent central monetary authority. Such shall provide policy direction in the areas of
money, banking and credit. It shall have supervision over operations of banks and exercise
such regulatory powers”.
RESPONSIBILITY OF BSP
• To provide policy directions in the areas of money, banking, and credit.
• To supervise the operations of banks
• To exercise such regulatory powers over the operations of finance companies and
non-bank financial institutions performing quasi-banking functions
CORPORATE POWERS OF BSP
• Adopt, alter or use a corporate seal which shall be judicially noticed
• Enter into contracts
• Lease or own properties and to sell or dispose of the same
• To sue and be sued
• Do and perform any thing necessary to carry out the purposes of this Act
• Acquire and hold assets and incur liabilities in connection with its operations
• Compromise, condone or release liability to the Bangko Sentral
Power to Prosecute of BSP
No imposition of a clear and specific duty for BSP to do the actual prosecution of
those who violate the banking laws
Such prosecutions for violations of banking laws constitutes a public offense hence
anyone can cause the prosecution of such violations.
II. AUTHORITY OF BSP
A. SUPERVISORY POWERS OF BSP
• Issuance of rules of conduct or the establishment of standards of operation for
uniform application to all institutions or functions covered
• Conduct of examination to determine compliance with laws and regulations
• Overseeing to ascertain that laws and regulations are complied with
• Regular investigation not often than once a year
• Inquiring into solvency and liquidity of the institution
• Enforcing prompt corrective action
B. Phase Out of BSP Powers over Buildings and Loan Associations
• WITHIN APERIOD OF 3 YEARS FROM EFFECTIVITY OF THE GBL, It shall phase out and
transfer its supervising and regulatory powers over building and loan associations (BLAs) to
Home Guaranty Corporation (HGC) which shall assume the same.( Sec 94 of GBL)
C. Policy Directions: Ratios, Ceilings and Limitations
Bangko Sentral shall provide policy direction in the areas of money, banking and
credit
It may prescribe ratio on the different types of accounts and practices of banks and
quasi-banks which shall conform to internationally accepted
standards, including those of the Bank for International Settlements (BIS).

The Monetary Board may exempt particular categories of transactions from such
ratios, ceilings and limitations,
III. MONETARY BOARD
Composed of seven (7) members appointed by the President of the Philippines for a
term of six (6) years.
MEMBERS OF THE MB (2017)
• Amando M. Tetangco, Jr., Chairman
• Carlos Dominguez III, Secretary of the Department of Finance ( MEMBER OF
CABINET)
• Alfredo C. Antonio
• Juan D. De Zuñiga, Jr
• Valentin A. Araneta
• Felipe M. Medalla
• Armando L. Suratos
Composition of the Monetary Board
• the Governor who shall be the Chairman of the MB. He shall be head of a
department and his appointment shall be subject to confirmation by the CA. In case of
absence in meeting, designate deputy governor
• a member of the Cabinet to be designated by the Pres. Whenever unable to attend a
meeting, he shall designate an Undersecretary in his Department to attend
• 5 who shall come from the private sector, all of whom shall serve full-time
Provided that of the members first appointed under the provisions of this
subsection,
3 of the members = term of 6 years
2 members = term of 3 years
No member of the MB may be reappointed more than once
QUALIFICATIONS OF THE MB
• natural-born citizens of the Philippines
• at least thirty-five (35) years of age XPN: Governor who should at least be 40 years
of age
• of good moral character
• of unquestionable integrity
• of known probity and patriotism
• with recognized competence in social and economic disciplines
AUTHORITY OF MB
Issue rules and regulations it considers necessary for the effective discharge of the
responsibilities and exercise of the powers
Direct the mgmt, operations & administration of the Bangko Sentral
Establish a HR system which shall govern the selection, hiring, appointment,
transfer, promotion, or dismissal of all personnel.
Adopt annual budget
Indemnify on costs incurred by persons in connection with civil or criminal action
which he may be, or is, or a party
IV. BSP GOVERNOR AND DEPUTY GOVERNORS
The BSP Governor is the chief executive officer
POWERS AND DUTIES:
• prepare the agenda for the meetings
• execute and administer the policies and measures
• direct and supervise the operations and internal administration of the Bangko
Sentral.
• appoint and fix the remunerations and other emoluments of personnel below the
rank of a department head approved by the MB
• render opinions, decisions, or rulings, which shall be final and executory until
reversed or modified by the MB
• exercise such other powers as may be vested in him by MB .
BSP GOVERNOR AS REPRESENTATIVE OF BSP & MB

His powers and duties include the ff:
• Represent the MB & BSP in all dealings with the Government
• Sign BSP extended contracts, notes, securities, reports etc
• Represent BSP either personally or through counsel in any legal proceeding
• Delegate powers to represent BSP on the aforementioned powers
BSP DEPUTY GOVERNOR
• BSP Governor appoint s not more than 3 Deputy Governors with the approval of the
MB
• It does all the functions assigned by the Governor as well as the MB
• In case of the absence of the Governor:
- it acts as the chief executive & exercises the powers and perform the duties of the
Governor
- In Gov’t meetings: Vested with authority to participate and vote
V. Operations of the BSP
Research and Statistics
Authority to Obtain Data and Information
Training of Technical Personnel
Supervision and Examination
Research and Statistics of the Bangko Sentral: Section 22 - The Bangko Sentral shall prepare
data and conduct economic research for the guidance of the MB in the formulation and
implementation of its policies.
Authority to Obtain Data and Infromation
Authority to request from Gov’t offices and instrumentalities or GOCC’s any data
which it may require for proper discharge of functions
Governor or authorized representative have power to issue subpoena for
production of books and records
Data on individual firms gathered by other units and departments shall not be
available to any person or entity outside of Bangko Sentral except under order of court or
conditions prescribed by MB
Training of Technical Personnel: The Bangko Sentral shall promote and sponsor the training
of technical personnel in the field of money and banking.
Supervision and Examination
To Supervise and Conduct periodic or special examinations of banking institutions
and quasi-banks, including their subsidiaries and affiliates
Authority of Dept Heads & Examiners:
• authorized to administer oaths to any director, officer, or employee of any
institution under supervision or subject to their examination
• to compel the presentation of all books, documents, papers or records necessary in
their judgment to ascertain the facts relative to the instituion under supervision and
examination
VI. EXAMINATION OF BANKING INSTITUTIONS
Frequency of Examination: Examine the books once in every 12 months OR at times as the
MB by an affirmative vote of 5 members may deem expedient and to make a report of such
to MB
- Interval of 12 months between annual examinations
Service Fees: Pay within 30 days of each year, ANNUAL FEE in an amount = Percentage as
may be prescribed by MB of its average total assets during the preceding year as shown on
end of month balance sheets MINUS cash on hand and amounts due from the banks
VII. PENALTIES FOR VIOLATIONS
Violations
• Refusal to Make Reports or Permit Examination
• Willful Making of a False or Misleading Statement on a Material fact
• Violation of NCBA and other Banking Laws, Rules, Regulations
Offenders
• Director, officer of a bank, quasi bank or trust entity: MB may also SUSPEND OR
REMOVE such
• Corporation: Corporation may be DISSOLVED by quo warranto proceedings
instituted by the Solicitor General
Administrative Violations and Penalties
• Willful violation of charter or by laws
• Willful delay in submission of reports or publications required
• Refusal to permit examination into affairs of the institution
• Willful making of a false or misleading statement to Board or appropriate
supervising and examining department or examiners
• Willful failure or refusal to comply with banking laws, orders, regulations
• Commission of irregularities
• Conducting business in unsafe or unsound manner
Administrative Sanctions
• Fines in amounts as may be determined by the MB to be appropriate
• Suspension of rediscounting privileges or access to Bangko Sentral credit facilities
• Suspension of lending or foreign exchange operations or authority to
accept new deposits or make new investments
• Suspension of interbank clearing privileges
• Revocation of quasi banking license
Currency, Monetary Stabilization and Functions of the BSP

The Unit of Monetary Value
• The unit of monetary value in the Philippines – PESO “P”
• Peso is divided into 100 equal parts called Centavos “C”
Currency Definition
– All Philippine notes and coins issued or circulating in the accordance
with the provisions of the NCBA
– Value of Currency
– A currency has value because people are willing to accept it in exchange
of goods and services and in payment for debts
Issue of Means of Payment
Exclusive Issue Power:
– The Bangko Sentral shall have the sole power and authority to issue
currency, within the territory of the Philippines.
– The MB may issue regulations as it may deem advisable in order to
prevent the circulation of foreign currency, currency substitutes, and
facsimiles
– BSP shall have the authority to investigate, make arrests, conduct
searches and seizures for the purpose of maintaining the integrity of the
currency
– Issue of Means of Payment
Liability for Notes and Coins
– Notes and coins issued by the BSP shall be liabilities of the BSP and
may be issued only against and in amounts not exceeding, the assets of
the BSP.
• First and paramount lien on all assets of BSP
– BSP’s holdings of its own notes and coins shall not form part of the
assets or liabilities of the BSP
Legal Tender Power
– Section 52 of the NCBA: All notes and coins issued by the BSP shall be
fully guaranteed by the Government of the RP and shall be legal tender
in the Philippines for all debts, both public and private
• Provided however, unless otherwise fixed by the MB, coins shall
be legal tender in amounts not exceeding (P50.00) for
denomination of (c25) and above and in amounts not exceeding
(P20.00) for denominations of (c10 or less)
– Section 60 of the NCBA: 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, 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.
– Circular No. 537 S 2006
• Maximum amount of coins to be considered as legal tender is
adjusted as follows:
– (P1000.00) for denominations of (1, 5, 10 peso coins)
– (P100.00) for denomination of (1, 5, 10, 25 centavo
coins)
Characteristics of the Currency
• MB, with the approval of the President of the Philippines, shall prescribe:
– Denominations, dimensions, designs, inscriptions, and other
characteristics issued by the BSP
• Provided: notes shall state that they are liabilities of the BSP and
are fully guaranteed by the Government of RP.
• Notes shall bear the SIGNATURES, in facsimile, of the
President of the Philippines and of the Governor of the BSP
• MB, with the approval of the President of the Philippines, shall prescribe:
– Weight, fitness, design, denominations, and other characteristics of the
coins
Printing of Notes and Minting of Coins
• MB shall prescribe the amounts of notes and coins to be printed and minted,
and the conditions to which the printing of notes and the minting of coins shall
be subject.
• All expenses incurred in the printing of notes and the minting of coins shall be
for the account of the BSP.
Interconvertibility of Currency
• BSP shall exchange , on demand and without charge, Philippine Currency of
any denomination for Philippines notes and coins of any other denomination
requested.
• If for any reason the BSP is temporarily unable to provide notes or coins of the
denomination requested, it shall meet its obligations by delivering notes and
coins of the denominations which most nearly approximate those requested.
Replacement of Currency Unfit for Circulation
• BSP shall withdraw from circulation and shall demonitize all notes and coins
which for any reason are unfit for circulation and shall replace them
– Provided: BSP shall not replace notes and coins:
• Identification of which is impossible
• Coins which show signs of flipping, clipping or perforation
• Notes which have lost more than 2/5 of their surface or all the
signatures inscribed thereom
• Notes and coin in such mutilated conditions shall be withdrawn from circulation
and demonitized without compensation to the bearer
Retirement of Old Notes and Coins
• BSP may call in for replacement notes of any series or denomination which are
more than 5 years old and coins which are more than 10 years old.
• Notes and coins called in for replacement shall remain legal tender for 1 year
from the date of call
• After this period, they shall cease to be legal tender but during the following
year or for such period as the MB may determine, they may be exchanged at par
and without charge in the BSP
• After the expiration of this latter period, the notes and coins which have not
been exchanged shall cease to be a liability of the BSP and demonitized.
Domestic Monetary Stabilization
• Whenever abnormal movements in the monetary aggregates, in credit, or in
prices endanger the stability of the Philippine economy or important sectors
thereof, the MB shall:
– Take such remedial measures as are appropriate
– Submit to the President and Congress, and make public, detailed report
whenever:
a. Monetary aggregates, or the level of credit increases or decreases by
more than 15%
b. Cost of living index increases by more than 10%
c. When in its judgment the circumstances so warrant
- MB shall submit the reports and shall state
whether said changes in the monetary aggregates,
credit, cost of living represent a threat to the
stability of the Philippine economy
Purchases and Sales of Gold
- BSP may buy and sell gold in any form, subject
to such regulations as MB may issue
- Purchases and sales of gold shall be made in
national currency at the prevailing international
market price as determined by the MB
Purchases and Sales of Foreign Exchange
BSP may buy and sell foreign notes and coins and documents and
instruments of types customarily employed for the international transfer
of funds.
BSP may engage in the foreign exchange transactions with the following
persons:
a. Banking institutions
b. Government
c. International
d. Foreign government
e. Other entities
Foreign Asset Position of the Bangko Sentral
BSP shall endeavor to maintain at all times a net positive foreign asset
position so that its gross foreign exchange assets will always exceed its
gross foreign liabilities
Emergency Restrictions on Exchange Operations
MB with concurrence of at least 5 of its members and with the approval
of the President:
Temporarily suspend or restrict sales of exchange
Subject all transactions in gold and foreign exchange to license
by the BSP
Foreign exchange be delivered to the BSP or agent of the BSP
Acquisition of Inconvertible Currencies
BSP shall avoid the acquisition and holding of currencies which are not
freely convertible, and may acquire such currencies in an amount
exceeding the minimum balance necessary to cover current demands for
said currencies only when, and to the extent, that such acquisition is
considered by the MB to be in the national interest.
Exchange Rates
MB shall determine the exchange rate policy.
MB shall determine the rates for other types of foreign exchange
transactions by the BSP, including purchases and sales of foreign notes
and coins
Operations with Foreign Entities
MB may authorize the BSP to grant and receive loans from foreign
banks and other foreign or international entities, both public and private.
Upon authority of the MB, the BSP may pledge any gold or other assets
which it possesses as security against loans which it receives from
foreign or international entities.
Loans to Banking and Other Financial Institutions
Authorized Types of Credit Operations
a. Commercial Credits
i. BSP may rediscount, discount, buy and sell
bills, acceptances, promissory notes and other
credit instruments with maturities of not more
than 180 days from the date of their
rediscount, discount, acquisition by the BSP
and resulting from transactions related to:
1. Importation, exportation, purchase or
sale, transportation of readily saleable
goods
2. Storing of non-perishable goods and
products which are duly insured and
deposite
b. Production credits
i. BSP may rediscount, discount, buy and sell
bills, acceptances, promissory notes and other
credit instruments having maturities of not
more than 360 days from the date of their
rediscount, discount, or acquisition by the
BSP and resulting from transactions related to
the production or processing of agricultural,
animal, mineral or industrial products.
c. Other Credits
Special credit instruments not otherwise
rediscountable under Commercial and
Production Credits, may be eligible for
rediscounting.
Advances
BSP may grant advances against the
following kinds of collaterals for fixed
periods:
1. Gold coins
2. Securities
3. Credit instruments under subsection a
4. Credit instruments under subsection b
not exceeding 360 days
5. Utilized portions
6. Negotiable treasury bills
7. Negotiable bonds
8. Loans to Banking and Other Financial
Institutions
Loans for Liquidity Purposes
BSP may extend loans and advances to banking
institutions for a period of not more than 7 days
without any collateral for the purpose of providing
liquidity to the banking system in times of need.
Emergency Loans and Advances
Nature: A credit facility intended to assist a bank experiencing
serious liquidity problems arising from causes beyond the
control of the bank management.
When Granted
In period of national or local emergency or of
imminent financial panic
During normal periods
Limits
Not exceed 50% of total deposits and deposit
substitutes of the banking institution and shall be
disbursed in two or more tranches
First Tranche
Limited to 25% of the total deposit and deposit
substitutes of the institution and shall be secured by
government securities
If the circumstances surrounding the emergency
warrant a loan or advance greater than the amount
provided above, first tranche may exceed 25% of the
bank’s total deposits and deposit substitutes if
adequately secured
Second Tranche
MB may by a vote of at least 5 of its members,
authorize the release of a subesquent tranche on
condition the principal stockholders of the
institution:
Furnish an acceptable undertaking to
indemnify and hold harmless from suit a
conservator whose appointment the MB may
find necessary at any time
Provide acceptable security
Overdraft: Whenever a financial institution incurs an
overdraft in its account with the BSP, the same shall be
eliminated within 5 consecutive banking days.
Bank Reserves
Reserve Requirements
Maintain reserves against their deposit liabilities.
Provided: MB, may at its discretion, also require all
banks and quasi-banks to maintain reserves against
funds held in trust and liabilities for deposit
substitutes.
Reserves against deposit substitutes shall be
determined in the same manner as provided for
reserve requirements against regular bank depositis
Reserve Requirements
MB may exempt from reserve requirements deposits
and deposit substitutes with remaining maturities of
two years or more, as well as interbank borrowings
BSP shall not pay interest on the reserves maintained
with it unless the MB decides otherwise as warranted
by circumstances
Deposit Substitutes: 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.
Instruments may include but not be limited to:
Banker’s acceptances
Promissory notes
Participation
Certificates of assignment
Repurchase agreements
Reserve Deficiencies
Whenever the reserve position of any bank or quasi
bank is below the required minimum, the bank or
quasi-bank shall pay the BSP, (1/10 of 1%) per day
on the amount of the deficiency or prevailing 91-day
treasury bill rate plus 3% points, whichever is higher
Provided: banks and quasi-banks shall
ordinarily be permitted to offset any reserve
deficiency occurring on one or more days of
the week with any excess reserves which
they may hold on other days of the same
week
Interbank Settlement
BSP shall establish facilities for interbank clearing
under such rules and regulations as the MB may
prescribe
Deposit reserves maintained by the banks in the BSP
shall serve as basis for the clearing of checks and
settlement of interbank balances
Any bank which incurs on overdrawing in its deposit
account with the BSP shall fully cover said overdraft,
including interest thereon at a rate equivalent to (1/10
of 1%) per day or the prevailing 91-day treasury bill
rate plus 3% points, whichever is higher not later than
the next clearing day.

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CHAPTER 2 – ORGANIZATION, MANAGEMENT AND ADMINISTRATION OF BANKS, QUASI-

BANKS AND TRUST ENTITIES

 Head Office only 3.00 billion

 Head Office only 2.00 billion

Head Office in all other areas outside NCR

Foreign Banks Liberalization Act, R.A. 7721, as amended by R.A. 10641

CHAPTER 3 - DEPOSIT FUNCTIONS OF BANKS

I. NATURE OF BANK DEPOSITS

What is the degree of care that banks are required to observe?

“Utmost Diligence” also used in other jurisprudence

Their duty to depositors has also been characterized as fiduciary.

Basis of Higher Degree of Care

The GBL mandates banking institutions to require the submission of 3 SPECIMEN

Requisites For Minors To Be Depositors:

Requisites For CORPORATIONS to Be Depositors:

Before Incorporation After Incorporation

HOW ARE MATURED TIME DEPOSITS/DEPOSIT SUBSTITUTES TO BE TREATED?

MATURED TD/DS are to be treated as a SAVINGS DEPOSIT.

CLEARING CUT-OFF TIME

When are Cut-off Times?

If there is a BSP clearing arrangement

DEFINE AVERAGE DAILY BALANCE/maintaining balance:

The Following are RULES ON MAINTAINING BALANCE:

When do accounts become DORMANT?

Define SURVIVORSHIP AGREEMENT:

What is the nature of a Survivorship Agreement?

III. KINDS OF DEPOSITS

What Banks are allowed WITHDRAWAL BY CHECK?

DUTY OF THE BANKS IN RELATION TO CHECKS:

Banks have the duty to know the signatures of its customers.

What is the significance of Crossing a Check?

Why are Cashier’s Check considered ‘good as cash’?

Who are prohibited from maintaining demand deposits?

Savings Accounts may be individual or joint.

Compare ‘and’ accounts from ‘and/or ‘ accounts

Both signatures required for withdrawal Signature of sufficient to effect withdrawal

Must be with knowledge & consent Even without knowledge or consent

C. Negotiable Order of Withdrawal Accounts

GEN: Only Universal or Commercial Banks

E. Foreign Currency Deposits

F. Deposit Substitute (Quasi-Banking)

VI. UNCLAIMED BALANCES

What are to be done to unclaimed balances?

Revised Penal Code

Other special laws

The Data Privacy Act (RA 10173)

Data subject refers to an individual whose personal information is processed.

This Act does not apply to the following:

Criteria for Lawful Processing of Personal Information

(a) The data subject has given his or her consent;

Sensitive Personal Information and Privileged Information. – The processing of sensitive

(a) The data subject has given his or her consent

Subcontract of Personal Information. – A personal information controller may subcontract

National Privacy Commission

Rights of the Data Subject

Data subject can transmit rights, obtain a copy in a certain format.

Security of Personal Information

SECRECY OF BANK DEPOSITS (RA 1405)

2. including investments in bonds issued by the Government of the Philippines, its

Investments in Government Bonds refer to investments in bonds issued by the Government of

Prohibited acts and persons liable in RA 1405

Foreign Currency Deposit Act (RA 6426)

Non-Stock Savings and Loan Associations (“Association”) are non-stock, non-profit