Banking and Financial Institution

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BUKIDNON STATE UNIVERSITY

KALILANGAN SATELLITE CAMPUS
P-3 Central Poblacion,Kalilangan Bukidnon
www.buksu.gov.ph
COURSE GUIDE AND

RESOURCE KIT
FMPr3
BANKING &
FINANCIAL
INSTITUTION
Mariel Crista C. Maravillosa

Instructor 1
Course Guide and Resource Kit GE7-Science,Technology & Society

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TABLE OF CONTENTS
I. COURSE ANALYSIS
 Course Description
 Course Goals
 Course Outline
 Course Material
 Course Requirements
 Recommended Study Sequence, Learning Plan, Student Version
Syllabus
II. YOUR INSTRUCTOR
III. ASSIGNMENTS
 Assignment 1- Open and maintain a savings account in any commercial bank
with online banking services
 Assignment 2- Open the enrolled savings account to online
 Assignment 3- Banking Photo Collage
 Assignment 4- “What are you banking for?”
IV. COURSE POLICIES & REQUIREMENTS

V. LECTURE NOTES, HAND-OUTS
 Chapter 1- Banking and Banking Perspective
 Chapter 2- Bank Organization and Management
 Chapter 3- Bank Supervision and Examination
 Chapter 4- Bank Credits Instruments and Bank Reports
 Chapter 5- The Commercial Bank
 Chapter 6- The Deposit Functions
 Chapter 7- The Loans and Discount Functions
 Chapter 8- The Exchange Function
 Chapter 9- Trust Function
 Chapter 10- PDIC and Bank Reserves
VI. RUBRICS
 Topic Presentation
 Case Analysis
 Photo Collage

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I. COURSE ANALYSIS
A. COURSE DESCRIPTION
CONGRATULATIONS for enrolling FMPr3, Banking & Financial Institution!
Please read this course guide carefully and completely.
This course is designed to develop an understanding of financial institutions and

financial markets and their relationship to public policies and management policies.
Included are studies of market structure, profit strategies, relationship of commercial
banks and other financial institutions, problems of asset prices.
This is a study of the banking and financial services sector, focusing on their role in
the functioning and well-being of the economy. This course introduces the
importance of financial system and its different institutions like: Central Bank,
Islamic Banks, specialized banks, investment banks and companies, non-banking
banking institutions, international financial institutions. Furthermore, this course
provides many banks activities in the form of local and foreign operations, whether
these activities were in the form of direct and indirect facilities, financial investments
or many other banking activities. This course focuses on identifying the nature of
bank sources and its uses also the scope of local as well as foreign banking
operations, and the relation between sources and applications of banks funding also
the result of these operations on bank’s financial position.
This is in accordance with the CHED Memorandum Order No. 17 Series of 2017.
B. COURSE GOALS
At the end of the course, the graduate students are expected to:
 Trace the history, nature, and development of banking and recognize its
importance to the growth of the economy.
 Analyze the operations and management of banks.
 Develop an understanding of banks and other financial institutions and their
relationship to public policies and management policies as well as their overall
significance to the country’s economy.
 Support the advocacies of the different types of banks for the development
and growth of the economy.
 Differentiate accounting procedures being adopted and practices by banks and
other business entities, respectively.
 Adopt changes in the financial industry to cope up with the latest trends in
banking.
 Contribute to the capital formulation of the banking industry through opening
an individual personal savings account in any commercial banks.
 Take part in monitoring online transactions by registering the savings account
opened in online banking.
 Participate in banking operations through sustaining withdrawal and
depository transactions
 Develop appropriate values such as respect and politeness to various
employees, bank offices, as well as fellow clients.
 Demonstrate strong support to the different financial programs of the agencies
administering banks and other financial institutions such as Bangko Sentral ng
Pilipinas, Anti-Money Laundering Council, Insurance Commission, and
others.

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 Practice what student have learned in school when they will become
employees of a bank or any financial institution.
C. COURSE OUTLINE
The course is simply structured. It was composed of 10 Chapters. From chapter 1 to 2
for the coverage of Mid-term examination period and chapter 3-10 for the coverage of
final term examination period.
CHAPTER 1: Banks and Banking Perspectives

CHAPTER 2: Bank Organization and Management
CHAPTER 3: Bank Supervision and Examination
CHAPTER 4: Bank Credit Instruments and Bank Reports
CHAPTER 5: The Commercial Bank
CHAPTER 6: The Deposit Functions
CHAPTER 7: The Loan and Discount Functions
CHAPTER 8: The Exchange Function
CHAPTER 9: Trust Function
CHAPTER 10: PDIC and Bank Reserves
D.COURSE MATERIALS
The course package for FMPr3 consist of the following:
1. The Course Textbook: < Indicate the book and the author>
2. Required Reading:
Almina-Mutya, Ruby (2007). Introduction to Philippine Money, Credit, and Banking. 2nd
National Bookstore, Mandaluyong City
Cloudhey, Moorad (2011). An Introduction to Banking: Liquidity Risk and Asset-Liability

Management, John Wiley and Sons. LTD, West Sussex United Kingdom
Croushore, Dean (2012). Money and Banking. Cengage Learning Asia Phil. Ltd.
Gomez, Clifford (2012). Banking and Finance: Theory, Law, and Practice. PHI Learning
Private Limited, New Delhi, India
Laman, Rose Marie B., Laman, Vincent Patrick B., and Evia, Emiliana P. (2008). Financial
System, Market, and Management – BASICS. GIC Enterprises & Co., Inc. Manila,
Philippines
Leuterio, Macedes M. and Estepa, Consuelo B. (2004). (Latest Edition). Banking

Theoryand Practice, Revised Edition. Anvil Publishing, Inc., Pasig City.
Moyer, R. Charles, et al. (2006). Contemporary Financial Management Fundamentals. South-

Western, Singapore
Munaleed Harwn, D. (2009). Modern Banking: Theory and Practice. PHI Learning Private
Limited. New Delhi, India
Orcullo, Norberto Jr. (2009). Principles of E-Commerce/E-Business (Theories and Applications).

Rex Printing Company, Inc. Quezon City
Pagoso, Cristobal (2010). Money, Credit, and Banking. Rex Bookstore, Inc., Quezon City
Rose, Peter S. and Hudgins, Sylvia C. (2013). Bank Management and Financial Service, Ninth
Edition. McGraw – Hill Education (Asia), New York
Sethi, Jyotsha and Nish-wan, Bhatia (2007). Elements of Banking and Insurance. PHI
Learning. New Delhi, India

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3. Course Guide and Resource Kit. These include the course description, course
outline, requirements, general guidelines and instructions, module activities,
reading materials, and an assignment pack.
4. Videos on related topics.
5. Both documents are provided in soft copy pdf format.
E. COURSE REQUIREMENTS
For FMPr3, you are required to study the course materials listed and go through the
course activities. For me to assess learning outcomes, you are expected to: submit 3
assignments, sit for an authentic assessment, participate in our class activities and
pass our term examination.
Major Output: Topic presentation of assigned topic (By group), Class participation,
Assignments, Long Quiz and Term Examination
For FMPr3, you are required to study and understand the course materials listed and go
through the activities. To assess learning outcomes, students are required to:
 Pass the long quizzes and term examination.

 Submit white folder (consists of the programme, hand-outs, rubrics,
documentation and result of short quizzes) for topic presentation.
 Class participation such as , oral recitation of topics in the course outline,
individual and pair seat works, group work/collaborative output.
 Submit your assignment on or before the deadline.
 Submit pertinent data required in the ILP during my absence on the class.
Task Due Date Percentage Grading

System
Topic Presentation on assigned
topic
Chapter and Long Exam
Assignment 1 TBA
Assignment 2 TBA
Assignment 3 TBA
Assignment 4 TBA
Group Activity & Class 80%

Participation
 Getting to Know Me and You

 Orientation and Oral
Recitation on VGMO &
Quality Policy
 Group activity through
poster making
60%
 Group Creative Presentation
(e.g. role playing,
broadcasting, variety show,
talk show, etc.)

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 Group/Hub Discussion
 Problem- Solving
 Reporting
Oral Recitation/Short
Quizzes/Activity/Attendance
Chapter 1 -Topic Presentation
Chapter 3-Topic Presentation
Chapter 5-Topic Presentation
20%
100%
Term Exam 40%
TOTAL 100%
TOPIC PRESENTATION. You are required to have a topic presentation in assigned

topic once in the whole semester. This is one of the major outputs of the subject. You will
be given topic by your instructor before the discussion of Chapter 1.
CHAPTER OR LONG EXAMINATION. Chapter or long exam will be administered at
the end of the chapter and you have to get the passing score or more than that. This is
one of the major outputs of the subject.
GROUP ACTIVITY/CLASS PARTICIPATION. Class participation such as , oral
recitation of topics in the course outline, individual and pair seat works, group
work/collaborative output will be conducted as necessary for the assessment of the
student every after discussion. This is one of the major outputs of the subject.
ASSIGNMENTS. You will be given five (4) major assignment comprising 60% of your
Final Term Grade. These will be given ahead of time for greater preparation and
submission should be done on or before the deadline. Strictly, late submission will not
be accepted to be fair with everyone
F.RECOMMENDED STUDY SEQUENCE/ LEARNING

PLAN/STUDENT VERSION SYLLABUS
I have designed a sequence of learning activities for you to cope with the requirements
of the course. However, please consider this merely as a guide. You may deviate this and
utilize the learning sequence and style that you are most comfortable with.

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WEEK CHAPTER/LESSON/TASK
1 Institutional Core Learning
Leveling of expectations
Course Guide Familiarization
2-3 Chapter 1- Banks & Banking Perspectives
4-5 Chapter 2- Bank Organization & Management
6-8 Chapter 2- Bank Organization & Management
9 MIDTERM EXAM WEEK
10-11 Chapter 3- Bank Supervision and Examination
11-12 Chapter 4- Bank Credit Instruments and Bank Reports
13-14 Chapter 5- The Commercial Bank
Chapter 6- The Deposit Functions
15-16 Chapter 7- The Loans and Discount Functions
Chapter 8- The Exchange Function
Chapter 9- Trust Function
17 Chapter 10- PDIC and Bank Reserves
18 FINAL EXAMINATION
II. INSTRUCTOR
I am Mariel Crista C. Maravillosa, your Instructor for FMPr3. Everybody calls me Mariel.
For my students, the other calls me as Ma’am Yel.
I took my BS Business Administration major in Banking and Finance from Bukidnon

State University in 2011; earned 24-units Professional Education units at Valencia
Colleges Incorporated; earned 18 units in Masters in Business Management major in
Business Management at Bukidnon State University – Main Campus and plan to enroll
this next school semester for the completion of my post graduate study.
You may contact me at the following email address mmarielcrista@gmail.com.
As my students, I feel that it is incumbent upon me to brief you about my predisposition

towards this course.
As you know, we operate within policies and guidelines set out by the Main Campus.
However, I have noted that students tend to procrastinate if they are left on their own.
Hence, regular update may be called for to alert you of your responsibilities.
This means that:
1. You will have to submit your assignment and activities on deadline.

2. Our class activities are asynchronous and may be read in advanced in any order
at any time; and
3. In short, please follow the scheduling given in your Course Guide.
Please bear in mind that the responsibility for learning falls squarely upon your
shoulders. In case you succeed, the credit belongs to you exclusively. In case you fail,
you have no one to blame but yourself. However, this does not mean that learning
should be an individual activity. You are fully encouraged in form support groups or

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online study group among yourselves. Start communicating with your classmates to
form these workgroups.
Remember also that you require specific qualities in order to succeed. Paramount among
these qualities in discipline, focus, and determination. You should likewise possess an
analytical or critical mind.
You should know that you are expected to demonstrate academic integrity and
intellectual honesty in your work. The University has a strict rule on intellectual
dishonesty. Anyone found guilty of plagiarism can be automatically suspended for at
least one year or expelled outright depending on the gravity of the case. So, make sure
you do all the requirements on your own. ALL materials lifted from secondary sources
must be CITED properly.
III. ASSIGNMENT
Follow these guidelines strictly when submitting your requirements.
1. Submit your assignments on or before the deadline.

2. When submitting your Assignments, indicate the Assignment number, e,g,.
Assignment 1, Assignment 2, Assignment 3, Assignment 4.
BUKIDNON STATE UNIVERSITY Educate

.
KALILANGAN SATELLITE CAMPUS Innovat
Central Poblacion,Kalilangan Bukidnon
FMPr3 – BANKING AND FINANCIAL INSTITUTION
ASSIGNMENT :
Name:
Course & Year:
Date Submitted:
Class Schedule:
Name of the Instructor:
3. Use A4 Size bond paper, font size 12, Times New Roman, 1.5 spacing and normal
margins.
Assignment 1.
Due Date:
Activity: Open and maintain a savings account in any commercial bank with online
banking services.

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Instruction: By having deposit and withdrawal transactions every month. Provide a

screenshot of the transaction monthly (with date of the every month) and submit a hard
copy on or before the deadline.
Assignment 2.
Due Date:
Activity: Enroll the opened savings account to online banking
Instruction: Submit a pertinent data that could support the enrollment of your savings
account to online banking.
Assignment 3.
Due Date:
Activity: Banking Collage
Instruction: Cut out pictures in magazines or newspaper that demonstrate how banking
and financial institution play a major role in the economy. You may also opt to print out
pictures from websites and other sources. Explain it in class.
Assignment 4.
Due Date:
Activity: What are you Banking on?
Instruction: You need to answer the following question below.
1. Realistic but disciplined plans that you can make to create support systems that
you can bank on.
2. Personal skills of two other individuals that you might be able to bank on.
3. Past two friendships that you may continue to bank on.
FINAL TERM EXAMINATION: (TBA)

Due Date:
IV. COURSE POLICIES AND REQUIREMENTS

1. Students shall provide (1) ¼ index card, a notebook and (1) piece of 1x1 ID picture
in white background. This will be used for class participation, attendance and
monitoring.
2. Learning contracts should be signed by guardian/parents/spouse and should be
submitted on next meeting.
3. Students are encouraged to speak in English every class
meeting/inquiry/consultation period.
4. Your assignment will be submitted on or before the deadline.
5. The conduct of the course adheres to the policies set the BukSU Student
Handbook and so students are required to observe the provisions under the Handbook.
Aside from the policies set in the aforementioned, the following classroom policies
should also be observed by the students enrolled in this course.
6. CLASS ATTENDANCE. Regular class attendance, as reflected in the Student
Handbook, is expected to be complied for all student. Absences due to illnesses or other
valid reasons should be reported to the OSS and to the instructor concerned
immediately. To monitor attendance, an attendance shall be passed around every

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meeting. It is the responsibility of all students to sign the attendance sheet. Failure to do
so will be considered a cut. Departure before classes end will also be considered a cut. A
maximum of eleven absences is allowed for the semester for an MWF class schedule,
while maximum of seven absences is allowed for the semester for a TTH class schedule.
7. TARDINESS. Students who are late for 3 consecutive meetings will be marked 1
day absent. Attention should be called for those student who leave the class early and
destruct other students or maybe disrupt the learning environment.
8. CLASS PARTICIPATION/INSTRUCTOR’S ASSISTANCE. Formal lectures,
seatwork, individual reports and group dynamics/presentation will be the mode of
instruction. Students are encouraged to get involved and/or actively participate in all
classroom related activities. Thus, students must come to class well-prepared. In case of
academic difficulty or problem, students could always consult or seek instructor’s
assistance. Schedule of consultation is available below.
9. CLASSROOM BEHAVIOR AND CIVILITY. Proper behavior and respect to
instructor and classmate is expected to all student and is deemed necessary. Private
conversations resulting to other students’ disturbance is highly discouraged. Always
have a favorable attitude.
10. DRESS CODE AND APPEARANCE. Students must come to class wearing the
complete set of uniform during weekdays. However, during Wednesday, all students
are required to wear their business attire. Students are encouraged to have proper and
appropriate grooming at all times. Female students are not allowed with bright colored
hair. Male students are not allowed to wear earrings. They also must have proper
haircut.
11. CELLULAR PHONES. Students are expected to keep all electronic gadgets in
silent or airplane mode, except in cases of emergencies with the instructor’s permission.
12. CHEATING. As reflected in the Student Handbook, all forms of cheating must be
subject for disciplinary action. Thus, it is strictly prohibited. Any student caught cheating
in any forms will be dealt with accordingly. Violations may result to an automatic “5.0”
grade for the particular examination taken.
13. COMPLIANCE TO COURSE REQUIREMENTS. Observance of deadlines for
course requirements and attendance of quizzes and major examinations on regular
schedule must be complied strictly. Failure to comply with the said conditions may have
corresponding point’s deduction.
14. CLASSROOM MANAGEMENT:
 Chairs should be arranged before and after the classes are recited.
 Cleanliness of the classroom should be ensured at all times. There should be no
littering and garbage should be properly disposed.
 The use of electronic gadgets like cell phones, tablets and laptops are prohibited
except during activities where their use is required.
 Class recitations and/or presentations should be conducted in a polite manner.
 Help create and achieve a positive classroom learning environment to make
learning a valuable experience for everyone.
15. COURSE-SPECIFIC POLICIES.
 All students are required to comply with the requirements and the agreed method
of submitting course requirements.
 Observe the deadlines. All requirements should be submitted on or before the
deadline.
 Expect that there may be additional requirements as needed during the semester.
 Removal exam is conducted once (1) only.
16. CONSULTATION HOURS. MWF (1:00-3:00PM), TTH (1:00-3:00PM)
V. LECTURE NOTES, HAND – OUTS

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Bukidnon State University

City of Malaybalay
College of Business
FM103 (Banking and Financial Institutions)
CHAPTER 1
BANK AND BANKING PERSPECTIVES
Historical Perspective of the World

 2000 BC- early banking practices started in the Babylon, credit transactions
engaged evidenced by tablets of clay.
 4th Century BC - temples, public bodies and private firms deal in deposits and
loaning of funds.
 2nd century A.D- transactions were registered by public notaries.
 8th century- bank drafts and checks were in wide use in Assyria.
 Medici family ushered in the 2nd period of Florentine financial power.
 16th Century- ruled by Fugger Family. John’s Laws financial system almost
spelled ruin to France.
Philippine Banking History
Spanish Era
 16th century that OBras Pias, the first financial institution was organized
flourishing galleon trade between the Philippines and Mexico. Its capital came
from pious catholics and funds were loaned out interest.
 Banco Español – Filipino (1828) first established commercial bank performing
general banking functions and partly financed foreign trade. October 17, 1854 it
was given a privilege note of issue. Today its bearing name is Bank of The
Philippine Islands ( Banco delas Islas Filipinas)
 Opening of Suez Canal (1869) led to accessibility of European markets.
 Chartered Bank of India, Australia, and China establishes branches in the
country.
 Monte de Piedad (1882) a savings bank.
 Banco Peninsular Ultramarino in Madrid – put up a branch in the Philippines in
1853.
American Era
-Banks continue to do business and soon joined by the branches of International
Banking Corporation and the Guaranty Trust Company. Postal Savings bank was also
created as parcel to the bureau of post.Banks established after World War I ,Yokohama
Specie bank (1919) , China Banking Corporation (1920), Peoples Bank and Trust
Company and the Mercantile Bank of China (1926).
- Upon establishment of Commonwealth, Netherlands Indische Handels bank opened
(1973) The Philippine bank of Commerce was the first private bank with genuine
Filipino capital (1938). In 1939 Bank of the Commonwealth, Philippine Bank of
Communications and the government-owned Agricultural- Industrial bank commenced
commercial banking operations.
Japanese Era
-During the Japanese occupation only Filipino and Japanese-owned banks were given
permission to operate. The Southern Development Bank opened a branch in Manila in
(1942) which acted as fiscal agent of the Japanese government in the Philippines.

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Postwar Era
- Presidential Directive, Executive Order 96, invalidated all Japanese occupation
deposits. Executive Order 48 paved the way for the reopening of the pre-war banks.
Rehabilitation Finance Corporation was created by virtue of Republic Act 85 0n January
2, 1947 which took over the functions of the Agricultural Industrial Bank. In 1948
General Banking Act passed into law. It provided the definitive rules of conduct of all
banking institutions. In1949 republic act No. 265 known as Central bank Act was passed.
In 1972, Presidential Decree no. 72 was issued amending Republic act no. 265 in attuned
in changing economics. In 1973 Constitution, Presidential decree no. 1801 designated
central Bank of the Philippines as the central monetary authority which was adopted
aimed by the 1987 Constitution.
Philippine Banking Today

Republic Act No. 7653 or the New Central Bank Act of 1993, governs Philippine banking
today. It provides for the establishment of an independent monetary authority to be
known as Bangko Sentral ng Pilipinas (BSP).
The business of banking has changed irreversibly. Developments in technology have
more contributions in these irreversible changes in the banking system. Technology has
brought us E-Banking, the provision of banking services. The devise used to provide e-
banking services are called E-money which can be divided into three groups.
a. Access devices- these allow people to withdraw or deposit cash, transfer funds
and pay bills from their bank accounts without physically going to the banks or
writing a check.
b. Card-based products – these are prepaid cards in which funds are stored in
electronic form on a computer chip embedded in cards.
c. Prepaid software products or network money – involve funds that are stored in
electronic form and are transferred over communication networks among
participants in network.
Republic Act No. 8791 known as General Banking Law of 2000, institutionalized a
certain mass of banking reforms in the Philippines. It provides regulation of the
organization and operation of banks, quasi-banks, and trust entities.
Republic Act No. 9160 known as the Anti-Money Laundering Act of 2001, was passed
into law on 29 September 2001.
On April 19, 2000 the Monetary Board approved the issuance of Circular No. 237,
consolidating and clarifying all existing rules and regulations on mergers and
acquisitions. Bank mergers and consolidations are distinguished as follows:
 Merger- is the absorption of one or more corporations by another existing
corporation which retains its identity and takes over the rights, privileges,
franchises, and properties and assumes all liabilities and obligations of the
absorbed corporations.
 Consolidation-the union of two or more corporations into a single new
corporation, called the consolidated corporation.
Banks – shall refer to entities engaged in lending of funds obtained in the form of
deposits.
Nature Of Banking Business

“Banks makes money out of other people’s money”
Principle of Banking Business

 A certain amount deposited will support several times as much in credit, known
as the partial reserve system.
 A greater portion of deposits in commercial banks arises out of the proceeds of
loans.

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Types of Banks
As to ownership
a. Privately owned- organized and capitalized by private citizens for their profit.
b. Publicly owned- organized by the state and sometimes has a minimum private
ownership.
As to place of Incorporation
a. Domestic – incorporated under Philippine Laws. Majority of the stocks are
owned by Filipinos.
b. Foreign- incorporated under laws of other country although the bank might be
doing business in the Philippines.
As to Structure
a. Stock corporation- when they sell shares of stocks to the general public to raise
capital.
b. Non-stock Corporations- the organization is on a membership basis. Such as
savings and loans associations.
As to Function
a. Commercial bank – is one that receives demand deposits and gives out short-
term loans.
b. Trust company – an institution which deals in fiduciary activities such as
administrator of estates , guardians of minor’s interest, executor of last wills and
testaments, registrar and transfer agent of stocks and bonds and similar activities.
c. Savings Bank- one which primarily receives for safekeeping funds from persons
who have no immediate need for cash and invests these finds in long-term
investment.
d. Rural Bank- organized primarily to cater the needs of small farmers, small
business, small cottage industries, and cooperative associations. They also receive
deposits and loan out funds.
e. Development Bank- takes care of giving loans to be used for developing the
economy and may therefore engage in medium and long-term lending. The
organization of private development banks shall be, under the control and
supervision of the Development Bank of the Philippines (formerly Rehabilitation
Finance Corporation).
f. Cooperative bank- organized to furnish the credit needs of duly registered and
operating cooperative associations of different kinds.
g. Investment Bank - one which assist government bodies and newly organized
corporations to raise funds for capital through the sale of stocks and bonds.
h. Central Bank- is a bank of banks, as it does not deal directly with the public.
As to Management
a. Unit Bank- one where ownership is concentrated on one corporation which does
banking business independent of others.
b. Group Banking - When a majority portion of stocks of two more banks are held
by a holding company, this is considered as group banking.
c. Branch Banking – is one where there is a head office and two or more branches.
d. Chain Banking – When one or more persons control the activities of banks, it’s
known as chain banking.

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Economic Significance of Bank

- A bank facilitates dealings between debtors and creditors because it acts as an
intermediary in the flow of credit funds. It allows others the use of idle funds of the
community in productive activities.
- Creates money out of proceeds of loans.
- Maintains foreign trade.
Why The State Supervises Banks

-The state does not only supervise banks, but with the advent of central banking,
it also controls the bank’s operation.
Reasons:
1. The banks are entrusted with other people’s money. Mismanagement or
malfeasance in the duties of the board of directors will result to banking failure.
2. The state wants to assure that the banks will perform their functions in the best
interest of their clients through the honest and efficient conduct of their functions.
3. The banks may either abuse their power or use them prudently.
4. The Banks, furthermore, are quasi-public corporations and as in all other
corporations of this calling, the state must exert its restraining influence to
safeguard the welfare of its constituents.
It is not the critic who counts, the credit belongs to the man who is actually in the
arena, who strives valiantly; who errs and come short again and again; because there is
no effort without error and shortcomings. – Theodore Roosevelt—

City of Malaybalay
College of Business
CHAPTER 2
BANK ORGANIZATION

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Bank Organization– the chapter provides the basic information about establishing a
bank, including pertinent laws, rules and regulations.
General Aspects in establishing Banks

1. Economic Justification for banks - ascertain the degree of competition in the
business, the degree of risk, potential customers, availability of manpower, the
businesses and products within the locale, the habits and custom of people, and
such other matters which will contribute to the bank’s successful operation.
2. Selection of stockholders - should ascertain they are of good moral character,

adequate knowledge in the business of banking, equipped with the necessary
capital, known in the community as honest and righteous citizens and are both
willing and able to contribute the banks success.
3. Determination of the kind of bank to be formed – depends on the economic survey;

income of the community, business and industries , the population of the place
and number of banks and factors which lead to a decision on the size of the
organization to be set up.
4. Determination of the amount of capital to be raised – depends on the type of bank.

They must be aware that at least the minimum requirements should be met. These
are to cover organizational expenses; to carry on operations which will require
current capital; to provide for acquisition of fixed assets and include enough room
for the initial cost of operation.
Organization, Management, and Administration
The New General Banking Act (RA 8791) – requires that all banks shall be established as
corporations. With the exception of building and loan associations, all banking
institutions shall be stock corporations and shall without exception issue par value
stocks.
Provisions of the New Central Bank Act

Sec. 8 Organization- The monetary Board may authorize the organization of the bank or
quasi-bank subject to the following conditions:
8.1 That an entity is a stock corporation;
8.2 That its funds are obtained from the public, which shall mean twenty (20) or
more persons;
8.3 That the minimum capital requirements prescribed by the Monetary Board for
each category of banks are satisfied.
Sec.9 Issuance of Stock. The Monetary Board may prescribe rules and regulations on the
type of stocks a bank may issue; including the terms thereof and rights appurtenant
thereof to determine compliance with the laws and regulations governing capital and
equity structure of banks; provided , that banks shall issue par value stock only.
Sec.10 Treasury Stocks. No Bank shall purchase or acquire of its own capital stock or
accept its shares as a security for loan, except when the stock so Foreign Stockholdings.
Foreign individuals and non-bank corporations may own or control up to forty percent
(40%) of voting stock of a domestic bank. This rule shall apply to Filipinos and Domestic
non-bank corporations.
The percentage of foreign-owned voting stocks in a bank shall be determined by the

citizenship of the individual stockholders in that bank. The citizenship of the corporation
which is a stockholder in a bank shall follow the citizenship of the controlling
stockholders of the corporation, irrespective of the place of incorporation.

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Sec. 12 Stockholdings of Family Groups or Related Interest. -Stockholdings of individuals

related to each other within the fourth degree of consanguinity or affinity, legitimate or
common law, shall be considered family groups or related interest and must be fully
disclosed in all transactions by such an individual with the bank.
Sec.13 Corporate Stockholdings. Two or more corporations owned or controlled by the

same family group or same group of persons shall be considered related interest and
must be fully disclosed in all transactions by such corporations or related groups of
persons with the bank.
Sec.14 Certificate of Authority to register. The Securities and Exchange Commission shall
not register the articles of incorporation of any bank, or any amendment thereto, unless
accompanied by a certificate of authority issued by the Monetary Board, under its seal.
Such certificate shall not be issued unless the Monetary Board is satisfied from the
evidence submitted to it:
14.1 That all requirements of existing laws and regulations to engage in the
business for which the applicant is proposed to be incorporated have been
complied with;
14.2 That the public interest and economic conditions, both general and local
justify the authorization:
14.3 That the amount of capital, the financing , organization, direction and
administration, as well as the integrity and responsibility of the organizers and
administrators reasonably assure the safety of deposits and the public interest.
The Securities and Exchange Commission shall no register the by-laws of any bank, or
any amendment thereto, unless accompanied by a certificate.
Sec.15 Board of Directors. The provisions of the Corporation Code to the contrary
notwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members
of the board of directors of a bank, two (2) of whom shall be independent directors. An
“independent directors “ shall mean a person other than an officer or employee of the
bank, its subsidiaries or affiliates, or related interests.
Non-Filipino citizens may become member of the board of directors of a bank to the
extent of the foreign participation in the equity of said bank.
The meetings of the board of directors may be conducted through modern technologies
such as, but not limited to, teleconferencing and video-conferencing.
Furthermore, in conformity with the Corporation Code and the Basic Guidelines in
establishing banks, the following points must also be taken into account:
a. That there should be not less than five (5) nor more than fifteen (15) incorporators.
In case there are more than fifteen (15) persons initially interested in organizing
and investing in proposed bank, the excess may be listed among the original
subscribers in the Articles of Incorporation;
b. That at least twenty five percent (25%) of the total authorized capital stock shall
be subscribed by the subscribers of the proposed bank and at least twenty five
percent (25%) of such subscription shall be paid-up, provided that in no case shall
the paid-up capital be less than the minimum required capital;
c. That a majority of the incorporators are resident of the Philippines;
d. Incorporators must possess the capacity to contract, which means that they must
be of majority age; and are competent to enter into contractual obligations; and
e. That the number of members of the board of directors of the bank shall not be less
than five (5) nor more than fifteen (15) and shall always be in odd number and at
least two (2) of the directors are “independent directors”.
Sec. 16 Fit and Proper Rule. To maintain the quality of bank management and afford better
protection to depositors and the public in general, the Monetary Board shall prescribe,
pass upon review the qualifications and disqualifications of individuals elected or
appointed bank directors or officers and disqualify those found unfit.

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After due notice to the board of directors of the bank, the Monetary Board may
disqualify, suspend, or remove any bank director or officer who commits or omits an act
which render him unfit for the position.
In determining whether an individual is fit and proper to hold the position of a director
or officer of a bank, regard shall be given to hid integrity, experience, education,
training, and competence.
Sec. 17 Directors of Merged or Consolidated Banks. In the case of a bank merger or

consolidation, the number of directors shall not exceed twenty –one (21).
Sec.18 Compensation and Other benefits of Directors and Officers. To protect the funds of
depositors and creditors, the Monetary Board may regulate the payment by the bank of
its directors and officers of compensation, allowances, fees, bonuses, stock options,
profits sharing, and fringe benefits only in exceptional cases and when the
circumstances warrant, such as :
18.1 When a bank is under comptrollership or conservatorship; or
18.2 When a bank is found by the Monetary Board to be in an unsatisfactory
financial condition.
Sec. 19 Prohibition on Public Officials. Except as otherwise provided in the Rural Banks
Act, no appointive or elective public officials, whether full-time or part-time, shall at the
same time serve as officer of any private bank, save in case where such service is
incident to financial assistance provided by the government or a government owned or
controlled corporation to the bank or unless otherwise provided under existing laws.
Sec.20 Bank Branches. Universal or commercial banks may open branches or other offices
within or outside the Philippines upon prior approval of the Bangko Sentral. Branching
by all other banks shall be governed by pertinent laws.
A bank may, subject to prior approval of the Monetary Board, use any or all of its
branches as outlets for the presentation and/or sales of the financial products of its allied
undertaking or if its investment house units.
A bank authorized to established branches or other offices shall be responsible for all
business conducted in such branches and offices to the same extent and in the same
manner as though such business had all been conducted in the head office. A bank and
its branches and offices shall be treated as one unit.
Sec.21 Banking Days and Hours. Unless otherwise authorized by the Bangko Sentral in the
interest of the banking public, all banks including their branches and offices shall
transact business on all working days for at least six (6) hours a day. In addition, banks
or any of their branches or offices may open for business on weekends or holidays for
atleast three (3) hours a day; provided, that banks which opt to open on days other than
working days shall report to the Bangko Sentral the additional days during which they
or their branch or offices shall transact business.
Sec.22 Strikes and Lockouts. The banking industry is hereby declared as indispensable to
the national interest and notwithstanding the provisions of any law to the contrary, any
strike or lockout involving banks, if unsettled after seven (7) calendar days shall be
reported by the Bangko Sentral to the Secretary of Labor who may assume jurisdiction
over the dispute or decide it or certify the same to the National Labor Relations
Commission for compulsory arbitration. However, the President of the Philippines may
at any time intervene and assume jurisdiction over such labor dispute in order to settle
of terminate the same.
Licensing of Foreign Banks
Sec.72 Transacting Business in the Philippines- the entry of foreign banks in the
Philippines through the establishment of branches shall governed by the provisions of
the Foreign Banks Liberalization Act. The conduct of offshore banking unit in the
Philippines shall be governed by Presidential Decree No. 1034, known as “Offshore
Banking System Decree”.

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Sec. 73 Acquisition of Voting stock in a Domestic Bank – The Monetary Board may
authorized the foreign bank to acquire up to 100% of the voting stock of only one (1)
bank organized under the laws of the Republic of the Philippines.
Sec.74 Local Branches of Foreign banks. – In the case of foreign banks which have more than
one (1) branch in the Philippines, all such branches shall be treated as one (1) unit for the
purpose of this Act, and all references to the Philippines branches of foreign banks shall
be held to refer to such units.
Sec.75 Head Office Guarantee- the head office of such branches shall fully guarantee the
prompt payment of all liabilities of its Philippine branch. Residents and citizens of the
Philippines who are creditors of a branch in the Philippines of a foreign bank shall have
preferential rights to the asset of such branch in accordance with existing laws.
Sec.76 Summon and Legal Process. Summons and legal foreign process served upon the
Philippine agent or head of any foreign bank designated to accept service there of shall
give jurisdiction to the courts over such bank, and service of notice on such agent or
head shall be as binding upon the bank which he represents as if made upon the bank
itself.
Sec.77 Laws Applicable – Any foreign bank licensed to do business in the Philippines shall
be bound by the provision of this act, all other laws, rules, and regulations applicable to
banks organized under the laws of the Philippines of same class, except those that
provide for the creation, formation, organization or dissolution of corporations or for
fixing of the relations, liabilities , responsibilities, or duties of stockholders, members,
directors, or officers of corporation to each other or to the corporation.
Sec.78 revocation of License of a Foreign Bank. – if it finds that the foreign bank is insolvent
or in imminent danger thereof or that its continuance in business will involve probable
loss to those transacting business with it. After the revocation of its license, it shall be
unlawful for any such foreign bank to transact business in the Philippines unless its
license is renewed or reissued.
Why Banks are established as Corporations

-A corporation is formed by a number of persons who pool in their resources to enter a
business for profit. Banks, which by their nature, deal in large amount of capital.
Furthermore, loans are given out for long durations in some instances and only an entity
with a long tenure could be beneficial in such case. A corporation then meets the test of
its perpetual life.
-The risk of an investor is also limited to the extent of his contribution in the business,
And above all a corporation’s charter represents a tripartite contract among the state, the
stockholders, and the bank.
Role of Regulatory Government Bodies I Bank Organization
-The role of the regulatory government bodies’ organization is to facilitate the processing
and approval of pertinent documents to make the organization legal.
-The Security and Exchange Commission, for its part, also examine the papers to see to it
that all requirements are met before issuing the certificate of incorporation.
‘’When we position our backpacks low across our backs, the load seems heavier to
carry, but when we hitched higher up nearer our shoulders, the weight is lightened”
Think About this:

“It is not the load that weighs you down but THE WAY YOU CARRY IT’’

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City of Malaybalay
College of Business
CHAPTER 3
BANK MANAGEMENT
Board of directors – composed of a number agreed upon as contained in the by-laws. It

is headed by a chairman whose duty is to preside over the meetings of the board.
Qualifications:
1. Every Director shall own at least one (1) share of the capital stock of the
corporation.
a. Educational Attainment
b. Adequate competency and understanding of business
c. Age requirement
d. Integrity, probity
e. Assiduousness
2. At least two thirds of the members of the board of directors shall be Filipino
Citizen.
3. The proposed director of a bank shall be subject to qualifications and other

requirements of existing law, rules and regulations of the Bangko Sentral.
Responsibilities:
Firstly – They are duty bound to adopt measures that shall safeguard the depositor’s
interest.
Secondly – They must make sure to compensate the stockholders fairly enough in
exchange for the risk they undertake and capital they invest.
Thirdly – The directors are responsible to the regulatory and supervisory agencies
who keep surveillance over the management of the bank’s affairs to allow maximum
safety to depositors.
Standing Committees:
1. The Executive Committee – deals with administrative matters; often prepares the
groundwork for board meetings.
2. Loans and discount committee – all matters pertaining to loans and discounts, to
lines of credit and other related to the loaning function of the bank.
3. Investment committee – concern with the banks investment portfolio; passed
judgment on what securities the bank should purchase and in what amounts.
4. Trust committee – fiduciary function of the bank; how funds will be invested; how
much to charge clients, and how to administer trust agreements.

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5. Examination committee – improvised methods to conduct such internal

examination.
Liabilities of the Board of Directors – arise in their incompetence and negligence in the
discharged of their duties.
Limitations- Sec.55. Prohibited Transactions
a. Make false entries in the bank reports or participate in fraudulent transactions.

b. Disclose to any unauthorized person any information relative to the funds or
properties in the custody of the bank.
c. Accept gifts, fees, commission in connection with the approval of a loan.
d. Overvalue security for the purpose of influencing in any way the actions of the
bank.
e. Outscore inherent banking functions.
Bank Officers:
 President – presides board meetings if he is also the chairman. Implements policies
promulgated by the board. He is the court of last resort when the board is in
session.
 Vice-President – acts in behalf of the president if the president is absent.
 Cashier – cash custodian.
 Comptroller – takes care of all accounting and statistical work of the bank.
 Auditor – verifies the accounts resulting from banking transactions.
Bank Operation:
 Executive Function – a banker must of necessity be faced with the policy-making,

with establishing harmonious relations with customers in order to get business,
with gathering facts and figures about the depositors and debtors, with recruiting
personnel to do the minor operations and with similar duties involving the caliber
of an executive.
 Teller Function – he must then act as teller I manifold ways. He accepts deposit,
changes checks for cash, changes big bills with smaller denominations, releases
checks or cash representing loans, receives payment for loans and other teller
functions.
 Bookkeeping Function – keep faithful record of the events and accounts passing
through his hands. He may also be called upon to summarize and interpret the
facts and figures.
Personal and Educational Qualities of a Banker

-A potentially efficient banker must possess a character above suspicion and integrity
of the highest order:
 He should be patient, understanding, cordial and respectful.
 He should be well versed in banking principles and practices.
 He should a good command of the medium of communication.
 He should have a working knowledge of law, economics, accounting,
management, public relations, and business psychology
Qualifications of a director:
A director shall have the following minimum qualifications:
1. He shall be at least twenty-five (25) years of age at the time of his election or
appointment;

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2. He shall be at least a college graduate or have at least five (5) years experience
in business;
3. He must have attended a special seminar on corporate governance for board of
directors conducted by the BSP or by seminar providers accredited by the BSP not
later than six (6) months from the date of his election, and
4. He must be fit and proper for the position of a director of the bank/quasi-
bank/trust entity. In determining whether a person is fit and proper for the
position of a director, the following matters must be considered:
- integrity/probity;
- competence;
- education;
- diligence; and
- experience/training.
Qualifications of an officer.
An officer shall have the following minimum qualifications:
1. He shall be at least twenty-one (21) years of age;
2. He shall be at least a college graduate, or have at least five (5) years experience
in banking or trust operations or related activities or in a field related to his
position and responsibilities, or have undergone training in banking or trust
operations acceptable to the appropriate supervising and examining
department of the BSP: Provided, however, That trust officers shall have at least
two (2) years of actual experience or training in trust operations or fund
management or other related fields;
3. He must be fit and proper for the position he is being proposed/appointed to.
In determining whether a person is fit and proper for a particular position, the
following matters must be considered:
- integrity/probity;
- competence;
- education;
- diligence; and
- experience/training.
For commercial banks, the President must, in addition to the abovementioned minimum
qualifications, have at least two (2) years experience in banking and/or finance. For thrift
banks and rural banks, any one of the President, Chief Operating Officer or General
Manager must, in addition to the abovementioned minimum qualifications, have at least
two (2) years experience in banking and/or finance. The foregoing qualifications for
officers shall be in addition to those already required or prescribed under existing laws.
Disqualifications of a director. Without prejudice to specific provisions of law

prescribing disqualifications for directors, the following are disqualified from becoming
directors:
a. Permanently disqualified
Directors/officers/employees permanently disqualified by the Monetary Board
from holding a director position:
1. Persons who have been convicted by final judgement of the court for offenses
involving dishonesty or breach of trust such as, but not limited to, estafa,
embezzlement, extortion, forgery, malversation, swindling and theft, robbery,
falsification, bribery, violation of B.P. Blg. 22, Violation of Anti-Graft and Corrupt
Practices Act and Prohibited Acts and Transactions Under Section 7 of R. A. No.
6713 (Code of Conduct and Ethical Standards for Public Officials and Employees);
2. Persons who have been convicted by final judgement of a court sentencing

them to serve a maximum term imprisonment of more than six (6) years;

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3. Persons who have been convicted by final judgment of the court for violation of
banking laws, rules and regulations;
4. Persons who have been judicially declared insolvent, spendthrift or

incapacitated to contract;
5. Directors, officers or employees of closed banks/quasi-banks/trust entities who

were found to be culpable for such institution’s closure as determined by the
Monetary Board.
b. Temporarily disqualified
Directors/officers/employees disqualified by the Monetary Board from holding a

director position for a specific/indefinite period of time. Included are:
1. Persons who refuse to fully disclose the extent of their business interest or any
material information to the appropriate supervising and examining department
when required pursuant to a provision of law or of a circular, memorandum or
rule or regulation of the BSP. This disqualification shall be in effect as long as the
refusal persists;
2. Directors who have been absent or who have not participated for whatever
reasons in more than fifty percent (50%) of all meetings, both regular and special,
of the board of directors during their incumbency, or any twelve (12) month
period during said incumbency.
3. Persons who are delinquent in the payment of their obligations as defined

hereunder:
a. Delinquency in the payment of obligations means that an obligation of a
person with a bank/quasi bank/trust entity where he/she is a director or
officer, or at least two obligations with other banks/financial institution,
under different credit lines or loan contracts, are past due pursuant to Secs.
X306 and 4308Q of the Manual of Regulations;
b. Obligations shall include all borrowings from abank/quasi bank

obtained by:
i. A director or officer for his own account or as the representative or
agent of others or where he/she acts as a guarantor, indorser, or
surety for loans from such financial institutions;
ii. The spouse or child under the parental authority of the director or
officer;
iii. Any person whose borrowings or loan proceeds were credited to

the account of, or used for the benefit of a director or officer;
iv. A partnership of which a director or officer, or his/her spouse is

the managing partner or a general partner owning a controlling
interest in the partnership; and
v. A corporation, association or firm wholly-owned or majority of

the capital of which is owned by any or a group of persons
mentioned in the foregoing Items (i), (ii) and (iv);
This disqualification shall be in effect as long as the delinquency persists.
4. Persons convicted for offenses involving dishonesty, breach of trust or violation

of banking laws but whose conviction has not yet become final and
executory;

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5. Directors and officers of closed banks/quasibanks/ trust entities pending their

clearance by the Monetary Board;
6. Directors disqualified for failure to observe/discharge their duties and

responsibilities prescribed under existing regulations. This disqualification
applies until the lapse of the specific period of disqualification or upon approval
by the Monetary Board on recommendation by the appropriate supervising and
examining department of such directors’ election/reelection;
7. Directors who failed to attend the special seminar for board of directors
required under Item 3 of Sub secs. X141.2/4141Q.2. This disqualification applies
until the director concerned had attended such seminar;
8. Persons dismissed/terminated from employment for cause. This

disqualification shall be in effect until they have cleared themselves of
involvement in the alleged irregularity or upon clearance on their request from
the Monetary Board after showing good and justifiable reasons;
9. Those under preventive suspension; or
10. Persons with derogatory records with the National Bureau of Investigation
(NBI), court, police, Interpol and monetary authority (central bank) of other
countries (for foreign directors and officers) involving violation of any law, rule or
regulation of the Government or any of its instrumentalities adversely affecting
the integrity and/or ability to discharge the duties of a bank/quasi bank/trust
entity director/officer. This disqualification applies until they have cleared
themselves of involvement in the alleged irregularity.
Disqualifications of an Officer
1. The disqualifications for directors mentioned in Sub secs. X143.1 and 4143Q.1
shall likewise apply to officers, except that stated in Items b.2 and b.7.
2. Except as may be authorized by the Monetary Board or the Governor, the

spouse or a relative within the second degree of consanguinity or affinity of any
person holding the position of Chairman, President, Executive Vice President or
any position of equivalent rank, General Manager, Treasurer, Chief Cashier or
Chief Accountant is disqualified from holding or being elected or appointed to
any of said positions in the same bank/quasi-bank; and the spouse or relative
within the second degree of consanguinity or affinity of any person holding the
position of Manager, Cashier, or Accountant of a branch or office of a bank/quasi-
bank/trust entity is disqualified from holding or being appointed to any of said
positions in the same branch or office.
3. In the case of Universal Banks, Commercial Banks, and Thrift Banks, any
appointive or elective official whether full time or part time, except in cases where
such service is incident to financial assistance provided by the government or
government-owned or controlled corporations or in cases allowed under existing
law.
4. In the case of Cooperative Banks, any officer or employee of the Cooperative

Development Authority or any elective public official, except a barangay official.
5. Except as may otherwise be allowed under C.A. No. 108, otherwise known as
“The Anti-Dummy Law”, as amended, foreigners cannot be officers or employees
of banks.

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When you inspire others to LIVE, LEARN, LAUGH, and LOVE, you do the same for
yourself……..
What you can get out of life comes from what you put into it.
Make life as beautiful as your heart.

City of Malaybalay
College of Business
CHAPTER 4
BANK SUPERVISION AND EXAMINATION
Purpose of Examination and Supervision
The bank examination and supervision is done internally and externally. This is
undertaken to insure the safe and efficient operations of any bank. The external
supervision comes from agencies of the government and is not in any way connected
with banks management. This is done to ensure that they conduct their business
properly and lawfully.
Purposes:
a. To find out whether banks are doing their business in conformity with the
banking laws and that of the rules and regulation of the central bank and other
government agencies.
b. Determine how soundly the bank I financially. The examiners should establish
the fact that the bank owns the assets, that the titles to property are good, that the
assets are properly valuated in the books, and that they are of acceptable quality.
c. Examination is more for discovering the unsound and unsafe practice and to offer
remedies or solutions for such practice. Some of such practices are granting of big
loans to a single interest, receiving collaterals of inferior quality, laxity in
collection of loans, payment of excessive salaries of dividends, keeping
incomplete or inaccurate records and payment of unreasonably high rate of
interests on time deposits. These practices serve to jeopardize not only the
stockholders but also the depositor’s interest.
External Supervision
In the Philippines, the Supervision and Examination Sector of the Bangko Sentral
is charged with responsibility of conducting spot and regular checks on all banking
institutions. It is therefore, a vital arm of the Bangko Sentral. It is headed by a Deputy
Governor and staffed by examiners and other administrative personnel.

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The Major functions of this sector are the chartering of banks, supervisions ad
examinations of banking and other non-bank financial institutions.
Provisions of the New Central Bank Act:
Sec.25 Supervision and Examination – The Bangko Sentral shall supervision over, and
conduct periodic or special examination of banking institutions and quasi-banks,
including their subsidiaries and affiliates engaged in allied activities.
For purposes of this section, a subsidiary means a corporation more than fifty
percent (50%) of the voting stock of which is owned by a quasi-bank and an affiliate
means a corporation the voting stock of which, to the extent of fifty percent (50%) of less,
is owned by a bank or quasi-bank or which is related or linked to such institution or
intermediary through common stockholders or such other factors as may be determined
by the Monetary Board.
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 is controlling
proportion of shares is owned by the same interest that owns a controlling proportion of
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.
Sec.27 Prohibition
(a) An officer, director lawyer, or agent or stockholder subject to supervision by the
Bangko Sentral, except non-stock saving loans associations and provident funds
organized exclusively for employees of the BSP.
(b) Directly or indirectly requiring or receiving any gift, present or pecuniary or
material benefit for himself or another, from any institution subject to supervision
or examination by the BSP.
(c) Revealing in any manner, except under the court, the Congress or any
government office or agency authorized by law, or under such conditions as may
be prescribed by the Monetary Board, information relating to the condition or
business of any institution.
(d) Borrowing from any institution subject to supervision or examination of the BSP
shall be prohibited unless said borrowings are adequately secured, fully disclosed
to the Monetary Board may prescribe.
Sec.28 Examination and Fees. The supervising and examining department head,
personally or by deputy, shall examine the book and every banking institution once in
every twelve (12) months, and such other times as the Monetary Board by an affirmative
vote of five (5) members: may deem expedient and to make a report to the Monetary
Board.
Banking and quasi-banking institutions which are subject to examination by the
BSP shall pay to the BSP, within the first thirty (30) days of each year, an annual fee in an
amount equal to a percentage prescribed by the Monetary Board.
Sec.29 Appointment of Conservator. Whenever on the basis of the report submitted by the
appropriate supervising or examining department, the Monetary Board finds that a bank
or a quasi-bank is in a state of continuing inability or unwillingness to maintain a

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condition of liquidity deemed adequate to protect the interest of depositors and

creditors.
The Monetary Board may appoint a conservator with such powers as the
Monetary Board shall deem necessary to take charge of the assets, liabilities, and the
management, collect all monies and debts due said institutions, and exercise all powers
necessary to restore its viability. The conservator shall report and be responsible to the
Monetary Board and shall have the power to overrule or revoke the actions of the
previous management and board of directors of the bank or quasi-bank.
The conservator shall be competent and knowledgeable in bank operations and

management. The conservatorship shall not exceed one (1) year. The Conservator shall
receive remuneration to be fixed by the Monetary Board in an amount not to exceed two-
thirds (2/3) of the salary of the president of the institution on one(1) year, payable in
twelve (12) equal monthly payments.
The Monetary Board shall terminate the conservatorship when it is satisfied that
the institution can operate on its own and the conservatorship is no longer necessary.
The conservatorship is likewise terminated, should the Monetary Board, on basis of the
report of the conservator or of its findings, determine that the continuance in business of
the institution would involve probable loss to its depositors or creditors or creditors, in
which case the provision of Sec.30 shall apply.
Sec.30 Proceedings in Receivership and Liquidation. Monetary Board finds that a bank or
quasi-bank:
a. Is unable to pay its liabilities as they become due in the ordinary course of
business.
b. Have insufficient realizable assets, as determined by the BSP to meets its
liabilities.
c. Cannot continue in business without involving probable losses to its depositors or
creditors.
d. Involving acts or transactions which amount to fraud or a dissipation of the asset
of the institution.
The receiver shall immediately take charge of all the assets and liabilities of the
institution. He shall determine as soon as possible, but not later than ninety (90) days
from takeover, whether the institution may be rehabilitated or placed in such
condition so that it may be permitted to resume business.
If the receiver determines that the institution cannot be rehabilitated or permitted

to resume business in accordance with the next preceding paragraph. The receiver
shall:
a. File ex parte with the proper regional trial court, and without requirement of
prior notice or any other action, a petition for assistance in the liquidation of
the institution pursuant to a liquidation plan adopted by the PDIC.
b. Convert the asset of the institution into money, dispose of the same to
creditors and other parties, for the purpose of paying debts of such institution
in accordance with the rules on concurrence and preference of credit under the
Civil Code of the Philippines. The asset of an institution under the
receivership or liquidation shall be deemed in custodialegisin the hands of
receiver and shall, from the moment the institution was placed under such
receivership or liquidation, be exempted from any order of garnishment, levy,
attachment, or execution.
Sec.31 Distribution of Assets. In case of liquidation of a bank or quasi-bank, after payment

of the cost of proceedings, including reasonable expenses and fees of the receiver to be
allowed by the court, the receiver shall pay the debts of such institution, under order of
the court.

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Sec.32 Disposition of Revenues and Earnings – All revenues and earnings realized by the
receiver in winding up shall be used to pay the costs, fees, and expenses mentioned in
preceding section, salaries of such personnel whose employment is rendered necessary
in the discharged of liquidation together with other additional expenses caused thereby.
Sec.33 Disposition of Banking Franchise-The BSP may, if public interest so requires, award
to an institution, upon such terms as the Monetary Board may approve. Provided, that
whatever proceeds may be realized from such award shall be subject to the appropriate
exclusive disposition of the Monetary Board.
Sec.34 Refusal to Make Reports on Permit Examination- Any officer, agent, manager etc…
subject to supervision or examination by the BSP within purview of this Act, who
willfully refuses to file the required report or permit any lawful examination into the
affairs of such institution shall be punished by a fine not less than 50,000 or not more
than 100,000 or by imprisonment of not less than (1) year or not more than (5) years or
both, in discretion of the court.
Sec.35 False Statement- the willfully making of a false or misleading statement on a

material fact to the Monetary Board or to the examiners of the BSP shall be punished by
a fine of not less than one (100,000) or not more than (200,000), or by imprisonment of
not more than (5) years.
Sec. 36 Proceedings Upon Violation of this Act and Other Banking Laws, Rules, Regulations,
Orders or Instructions.
- Whenever a bank or quasi-bank or any person or entity, willfully violates this act
or other pertinent laws enforced by BSP or any rule issued by the Monetary
Board, this act be punished by a fine of not less than (50,000) or not more than
(200,000) or by imprisonment of not less than (2) years or not more than (10)
years, or both.
Sec.37. Administrative Sanctions on Banks and Quasi-banks - Without prejudice to the

criminal sanctions against the culpable persons provided in section 34, 35 and 36, the
Monetary Board may, at its discretion, impose upon any bank or quasi-bank their
directors or officers, for any willful violation o its charter by laws, willful delay in the
submission of reports or publications thereof as required by law, rules and regulations.
Mechanics of Examination
-Bank examiners examine bank’s books at any time during banking hours.
Examiner takes possession of the banks books and documents which are owned by the
bank or pledged by debtors as collaterals. Analysis involves the classification of assets as
to quality, valuation, and assurance that everything is in order. This would lead to the
conclusion on how efficient the management is and on how effective the policies are. If
there are any violations, immediate steps are suggested and are taken up to correct the
banks position.
Programming of Controls
a. Embezzlement – the taking of funds that belongs to depositors and customers.
b. Defalcation – the misappropriation of funds which belongs to stockholders such as
income, fees, and commissions or through fictitious notes or fraudulent expense
vouchers.
c. Peculation- would mean all kinds of embezzlement, defalcation, or
misappropriation of funds.
d. Examination- the review and analysis of the assets and liabilities of a bank to
determine their existence, values and true ownership, and to ascertain that
everything in regard to said assets and liabilities is in order.

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Causes of Peculation
1. Gambling- simply a recreation then it becomes a habit and finally a status symbol
that must be maintained.
2. Pride and Envy – A man working in a bank consumed by pride and envy will do
most everything to get even.
3. Living beyond ones income– keeping up with rich neighbors and thus spending well
beyond one’s income could also lead to embezzlement.
4. Unsound salary policies- the rising prices without commensurate salary
adjustments may invite one to commit peculation.
5. Poor employee relations- officers may look down on their subordinates and even go
to the extent of emphasizing this cleavage between them in public places.
6. Immorality- bank officers and employees are not free from temptation to commit
crimes against morality.
Preventive Measures - the most effective prevention against peculation is the

establishment of sound and adequate internal controls. To be effective, it should
compose of two parts:
a. First part is setting up procedures where the work of one person shod checked
and proven by another. Adopting a system where an entire department or section
should not be under the complete control of one person but rather that another
person should exercise the right to approve; and to prevent anyone person to
have custody and control over any of the major subsidiary accounts.
b. Second part constitute of procedures and routines to determine that the work
performed balances and that everything is in order in relation to the general
ledger accounts. The use of daily proof sheets, periodical statement reconciliation
of accounts, reports, and similar activities are the objects of this phase of internal
control.
“No matter how far you travel, you can never get away from yourself”
-Haruki Murakami- 

City of Malaybalay
College of Business
CHAPTER 5
BANK CREDIT INSTRUMENTS

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Negotiability of Credit Instruments
 Credit takes place when there is the creditor’s belief or faith in the borrower’s
willingness and ability to pay. Hence the borrower can command in exchange for
a written or oral promise to pay either money or goods.
 The banks use negotiable documents in plying their trade and the most common
of these are the bills of exchange, the promissory note, and the check. However,
not all instruments used by the banks are unlimited acceptance.
 To be fully negotiable, an instrument’s must contain essentials of negotiability. It

must be in writing and signed by the drawer or maker; it must be made payable
to order or to bearer; it must be payable on demand or at a future determinable
time; and there must an unconditional order or promise to pay.
General Divisions of Credit Instruments
In order to distinguish one instrument from another, the following is a short

description of each. A general division between the credit instruments is that of promise
to pay and orders to pay:
]
Promise to Pay
Promissory Note - is an unconditional promise for the maker to pay a sum certain in
money to order or to bearer on demand or at a future determinable time. When the note
is secured, it is called a collateral promissory note.
Bank note - is an unconditional promise of a bank to pay a sum certain in money on

demand. Such note is used as a substitute for money. Essential Features of a note:
a. It is a Direct Obligation of the issuing bank.

b. It is negotiated by simple delivery by reason of the fact that it is a bearer
instrument.
c. The transferee acquires a clean title to it and becomes the creditor and the note
can be circulated for longer periods of time before it is finally redeemed.
d. The notes are also in handy sizes and convenient denominations.
Banker’s Acceptance - a bankers acceptance contains the banks promise to pay a draft
that is presented to it for acceptance. To constitute the bank’s intention of honoring the
instruments, the word “ACCEPTED” is stamped on the face of the draft and it is duly
signed by the bank’s representative.
Letter of Credit – a letter of credit is also a promise of a bank to honor drafts drawn
against it or for its account. A bank substitutes its credit for that of the accredited buyer
and promises to pay the beneficiary or his representative upon presentation of a draft,
subject to the condition in the letter of credit.
Bank Notes Distinguished from Standard Money

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 Bank notes are practically like money the only divergence of the note from the
real money is the fact that the notes represent private bank credit rather than the
state’s credit.
 The note is declared as legal tender either fully or on a limited scale.
 Like money, bank notes are fiduciary in nature and their circulation is dependent
upon the credit of the issuing bank.
 Bank notes however, necessitate final redemption into standard money.
 Therefore, they merely represent the government’s notes.
Bank Notes Distinguished from Deposits
 The circulation of bank notes and deposits necessitates legal reserves. However,
where deposits are concerned,
Bank’s keep larger reserves because bank notes circulate longer while checks
drawn against deposits could immediately be presented for payment when
endorsed.
 Deposits necessitate the use of the checks to circulate them; bank notes in
themselves constitute the means of payment.
 In the case of deposits as well as in issuing notes, the bank becomes a debtor to
the depositor or the note holder.
Orders to Pay
 Bills of Exchange - is an order of one person/bank (drawer) to another

person/bank (drawee) to pay a third person (payee) a sum certain in money or
demand or at some specified future time. A bill of exchange is also in the form of
a check or a draft.
 Check - is the order of a depositor to his bank to pay a third person or himself a
sum certain in money on demand. Such is commonly known as a personal check.
When the bank’s cashier is the drawer of the check, it is known as cashier’s check.
When the manager of a business concern is the drawer, it is termed a manager’s
check.
NOW Account. NOW stands for “Negotiable Order of Withdrawal”. It earns interest
and account holders can write as many NOW checks as they want on the account. It
has a feature of a savings deposit as it earns interest. It is also like a current/checking
account as it offers depositors the convenience of issuing checks for payments.
Types of checks other than negotiable instruments:

 Rubber or Bouncing check – is one which is returned for insufficiency of funds.
 Crossed check- one which is intended only for deposit.
 Certified check- is one which is confirmed to have existing funds.

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Draft- is also an order to pay and is a bill of exchange. Drafts are classified as sight or
demand, time, commercial or bank drafts.
Demand drafts–are instruments which are paid at sight upon presentation.
Time draft– those payable at a future determinable time.
Time sight draft- is payable also after a determinable time but the counting of its maturity
starts from the date of acceptance.
Time date drafts- maturity is counted from the date appearing on its face, or the date the
draft is made.
Commercial/trade draft- when the draft is drawn by a merchant against another.
Bank draft - if drawn by a bank against another bank.
Money Market Instruments
1. Treasury bill- areshort-term securities issued by the country’s treasury. The bill
consists of an obligation to pay the bearer the face value of the bill upon a given
date.
2. Banker’s Acceptance/ Letter of Credit- it I s a time draft and accepted bank. Before
acceptance, the draft is merely an order by the drawer to the bank to pay a
specified sum of money on a specified date to a named person or to the bearer of
the draft; it is not an obligation to the bank.
3. Negotiable Certificates of Deposit (NCD) – are liked fixed deposits except they are
bearer documents. They offer related rate of interest and are completely liquid
because they can be negotiated during the term of the deposit. Most NCD’s have a
term of less than a year. They usually offer rate of return higher than banker’s
acceptances.
4. Commercial paper – short-term commercial paper is a debt instrument commonly

issued by corporations to fund a temporary capital requirement. This form of
corporate borrowing usually matures within one year. Commercial paper is
guaranteed by the company that incurs obligation.
5. Bank Guarantees- a guarantee by Bank (banker’s guarantee) is a written

undertaking wherein the ban agrees to make stipulated payments on your behalf
should you fail to fulfill or carry out specified terms of a contract.
Negotiation - means the transfer of the instrument from one person to another either by
endorsement and delivery, by mere delivery or by assignment. Such transfer will
depend on the tenor of the instrument, particularly to whom it is made payable, or to
what extent is the interest of the transferee.
- When the instrument is payable to order which means that there is a
specified name appearing the payee, the instrument is negotiated by
endorsement and delivery. When, however, the instrument is made
payable to bearer, which, means that there is no specified name as

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payee or when payable to cash, then the negotiation is completed by

mere delivery.
Negotiation has certain conditions:

1. The credit instrument is complete and regular on face value.
2. The holder obtains possession of the instrument before it has become past due
and even without notice that it was previously dishonored.
3. The holder took the instrument in good faith and for value.
4. At the time it was negotiated to the holder, no defects in instruments or title were
detected.
Presentment - means the exhibiting of the instrument at the bank either for payment or
for acceptance. The check should be presented for payment within a reasonable period
of time after its issue according to the Negotiable Instruments Law.
Dishonor - means that the check is refused payment or a time draft is refused
acceptance. The refusal therefore may be termed dishonor by non-payment or non-
acceptance. If this happens, the holders of the instrument may file a protest in writing or
orally. The law prescribes the way a protest is to be made.
Endorsement - forms part of a negotiation of an instrument. It is simply indicated by the

signature of the endorser at the back of the instrument or on some paper attached
thereto. If such case, this is termed special endorsement.
- When a specified person is named as the transferee, followed by the signature

endorser, this is termed special endorsement.
- An endorsement which restricts the further negotiation of the instrument is
deemed as a restricted endorsement.
- An endorsement is qualified when the words “without recourse” appears as
part of the endorsement.
- It transfers the title and warrant the genuineness of the instrument, but does
not guarantee the payment of the endorser in case the bills have defects.
- The liability of the endorser on the note or bill will then be determined
according to the type of endorsement made by him.
Significance of Bank Credit Instruments
- Besides facilitating to a great extent dealings in credit, such bills of exchange

and promissory notes might also bring about losses on the part of the bank.
The bank is also responsible to honor checks for payment, or bills or exchange
in general, it should see to it that its normal cash needs would always be
enough to answer the demands of depositors and customers.
“Let the Lord fight your battles, deal with your problems and direct your direction.
When you have done your best, trust the Lord to do the rest.”

Page 33 of 61

City of Malaybalay
College of Business
CHAPTER 6
BANK REPORTS
Bank reports - are rendered to meet with requirements of the supervisory and
regulatory agencies.
Who needs bank reports?

a. Bank Directors and officers - for wise and judicious action
b. Stockholders – who invest money and assures the safekeeping and eager to find
their shipshape condition.
c. Potential investors- seeking outlets for their excess funds may be enticed if
convinced of the financial strength of the bank.
d. General public- should be made aware of banking functions through the bank
reports.
e.
Chapter IV of the New General Banking Act:

Sec.58. Independent Authority- the Monetary Board (MB) may require a bank, quasi-bank,
or trust entity to engage the services of an independent auditor to be chosen by the bank,
quasi-bank, or trust entity concerned from a list of certified public accountants
acceptable to the Monetary Board. The engagement shall be prescribed either be on a
continuing basis of where the auditor shall act as resident examiner, or on special
engagement.
Sec.59. Authority to Regulate Electronic Transactions – the Bangko Sentral shall have full
authority to regulate the use of electronic devices, such as computers, and processes of
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 of such entity.
Sec.60 Financial Statements – every bank, quasi-bank, or trust entity shall submit to the
appropriate supervising and examining department of the Bangko Sentral financial
statements in such form and frequency as may be prescribed by the BSP. Such
statements shall show the actual financial condition of the institution.
Sec.61 Publication of Financial Statements – Every bank, quasi-bank, or trust entity shall
publish a statement of its financial condition, in English or Filipino, at least once every
quarter in a newspaper of general circulation in the city or province where the principal
in the case of domestic institution, or the principal branch or office in the case of a
foreign bank.
The Monetary Board may allow the posting of the financial statements of a bank,
quasi-bank, or trust entity in public places it may determine in lieu of the publication,
required in the preceding paragraph, when warranted by the circumstances. The
Monetary board, by a vote of at least five (5) of its members, in special case and upon
application of the bank, quasi-bank or trust entity allow such quasi-bank or trust
company to defer for stated period of time the publication of the statement of financial
condition required herein.

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Sec.62 Publication of Capital Stock – A bank, quasi-bank or trust entity incorporated under
the laws of the Philippines shall not publish the amount of its authorized or subscribed
capital stock without indicating at the same time with equal prominence, the amount of
its capital actually paid up.
Types of Bank Reports:
1. Condensed bank statement – the accounts in a statement should appear in

condensed or abbreviated form. This is usually issued for publication or sent to
depositor and stockholders as a means of serving them an opportunity to look
into their particular bank’s financial position. The frequency of publication will be
dependent on the requirement of the supervisory and regulatory agencies.
2. Real bank statement – usually in more detailed form and is prepared for the
regulatory and supervisory agencies. It is also the basis for the preparation of
other reports.
3. Annual reports- some banks offers a “progress report” which contains the resume
of its yearly operation usually in brochure form. Such reports are made available
to the general public as means of advertising. Such report contains the “focal
points” in the bank’s progress. The addition of a new building, the setting up of
branches and the like may be stressed in the brochure through “write-ups’’ or
pictorial reporting.
The Bank Statement – serves to underscore the bank’s position at certain periods of
time.
Most common bank assets or resources are:
1. Cash on Hand - this account represents notes and coins held by the bank to meet
depositor’s withdrawals and other normal cash needs. Such cash may be in the
bank values and/or in the hands of the tellers.
2. Other Cash Resources – comprises of (a) exchanges for the clearing house, (b)
collections in transit, and (c) other cash items. Such detailed classification is
necessary as it reflects different aspects of liquidity in relation to the bank’s
immediate cash needs.
a. Exchanges for the clearing house-consist of checks deposited at or cashed by the

bank preparing the statement during the course of the day which are drawn
on banks within the city that are members of the clearing house.
b. Collections in transit – this account consists of “out-of-town” checks or drafts
drawn on banks outside the city. The bank receiving them for deposits and
collection usually credits the account of the depositor or customer pending
receipt of the proceeds. The entry in the bank’s books is on a deferred basis,
subject to final payment or receipt of the proceeds.
c. Other Cash items – this account may include other miscellaneous items such as
bond coupons for which the depositors have been credited pending collection
of the coupon. Or, in the case where not all banks are members of the clearing

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house, the checks or drafts where not all banks are members of the clearing
house, the checks, or drafts may represent claims against non-member banks.
3. Due from Bank- this represents deposits carried with other banks, usually in the
form of demand deposit.
4. Balances with Foreign Banks – this consists of deposits or funds held abroad mainly
to fill foreign exchange needs.
5. Loans and Discounts – this account is a major item on the banks asset side. It
consists of all promissory notes and bills of exchange held by the bank evidencing
the existence of a debt or securing a debt. Promissory notes mat either be secured
or unsecured.
6. Government Securities – another major item which will serve to buffer any
probable loss of the depositor. It consists of the evidences of indebtedness fully
guaranteed by the Republic of the Philippines in the form of bonds and other
instruments of similar nature.
7. Other securities-This will represent the stocks and bonds or short-term investments
not fully guaranteed by the Philippine government. The securities may belong to
private corporations.
8. Bank Building, Furniture and Fixture- this item represents the monetary value of the
properties owned by the bank to carry on its functions.
9. Other Real Estate Owned- this account arises out of the fact that banks foreclose real
estate mortgages and carry the monetary value of the asset in their books until the
real estate is disposed of. This transaction happens when banks are to accept real
estate as security for loans which turn out to be unpaid.
10. Customer’s Liability under Letters of Credit–bank statements carry in their books an
account representing the customer’s obligation to reimburse the bank by virtue of
the bank’s commitment to substitute its credit for the borrowers by honoring
drafts drawn against it.
11. Customer’s liability Under Acceptances – this is similar to the customer’s liability
under letters of credit except that the banks obligation in this regard is of greater
magnitude. When the bank accepts a draft, it in effect promises to pay the draft
upon presentation.
12. Income accrued but not yet collected – when a bank grant loans with interest
collected at maturity, the bank in effect has future earnings which as yet haven’t
been collected. The interest runs during the entire period. In the case of bond
interest payment accrue but may not as yet be collectible. Hence, such accrue are
considered as bank resources, since eventually they will be realized.
13. Other Assets – This item serves to round-up any or all other assets not otherwise
described in detail.
Bank Liabilities
A. Liabilities

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1. Demand Deposits – represent claims of depositors who withdraw their deposits

by means of checks.
2. Time Deposits- represent claims of depositors who keep their money in the
bank for a specified period of time and for which the bank must likewise be
ready to pay at maturity.
3. Government Deposits – represents deposits, either time or demand, which

belongs to the government of its instrumentalities and political subdivisions.
4. Cashier’s check outstanding – the bank’s cashier, in his official capacity as such
issues checks to either pay the bank’s obligations, to accommodate customer,
or to remit funds.
5. Certified checks outstanding – when the depositors request the bank to certify
his checks, the bank then sets aside the amount of checks by debiting the
depositors account before stamping certification on the face of the check. Upon
certification, the bank assumes the obligation of honoring the check. Therefore
makes the instrument more acceptable.
6. Due to banks-This account represents deposits or balances of other banks with

the bank preparing the statement. Collection items paid for but not yet
remitted by the bank requesting collection may likewise be included in this
item.
7. Letters of credit outstanding – This account arises out of the issuance of letters of
credit for which the bank obligates itself to pay or guarantee payment. The
bank has a right of recourse against the customer whose credit it substitute.
8. Acceptance outstanding – similar to the account letters of credit outstanding

except that it makes the banks obligation more real than contingent. The bank
will then honor the drafts presented to it and will also have the right of
recourse against the customer.
9. Bills payable – This represents the claims of creditors of the bank for funds
borrowed by it.
10. Rediscounted notes – arises out of the used of the endorsed commercial papers
for the purpose of procuring funds. Commercial papers serve as security and
the banks endorsed thereon establishes its obligation in case the primary
debtors fail to pay. Commercial banks discount their notes with the BSP when
they run out of loanable funds or for some other need.
11. Discounts collected but not yet earned – when the bank gives out a loan and
collects interest in advance, the amount deducted is not yet really earned in
full.
12. Other liabilities – this account serves as the counterpart of the “other assets”
and includes all other liabilities not otherwise designated in detail.
B. Reserves
1. Reserve for accrued taxes – tax payment cannot be ascertained thus bank set
aside amounts based on past payments.

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2. Reserve for accrued interest – this represents the interest accruals on time
deposits as well as interest payments on money borrowed by the bank.
Interest on deposits is usually computed on the daily balances of depositor’s
accounts or in some other stipulated manner.
3. Reserve for accrued expenses - this constitute the salaries, supplies, and other
expenses estimated on the bank’s budget for the year. The bank builds up this
reserve by distributing the total amount on a monthly basis.
4. Reserve for depreciation on bank properties - this item represents the wear and tear
on the bank’s building, furniture, and fixture.
5. Reserve for depreciation on securities – A portion of the bank’s assets are

composed of securities. This account will represent the cushion or the fall in
the value of the securities held by the bank.
6. Reserve for contingencies – This will represents losses incurred by the bank
either through bad loans or investments. It may also cover the estimated
payment of pending lawsuits.
C. Stockholder’s Equity
-the accounts representing the stockholder’s equity sometimes termed as the
bank’s capital accounts. It is usually a “thin equity” compared to deposit liabilities. It has
been stated that a bank “trades on the equity”. Therefore the Banks net worth represents
how much the depositors could possibly recover in case of loss, not to mention the claim
of stockholders themselves.
1. Capital Stock – This account is carried as per face value of the total number of
stocks appearing in the bank’s Charter.
2. Surplus – may consist of earnings derived from the sale of stock above par or
earnings retained by the management from operations. The surplus account
usually acts as the “shock-absorber” for losses incurred.
3. Undivided profits – this account is gaining more adherents in bank financial

management for the reason that it is transitory nature. This represents earnings
from current operations not yet paid out as dividends.
Minimum Capital Requirement
The Monetary Board shall prescribe the minimum ratio which the net
worth of a bank must bear to its total risk asset which includes contingent
accounts. Monetary Board may require such ratio as the basis of the net worth
and risk assets of a bank and its subsidiaries, financial or otherwise.
Bank Earnings and Expenses
A bank must earn enough to meet its expenses, to cover losses, as well as to
provide a return on the stockholders investments. A bank’s profit and loss
statement (or income statement) is singular in the sense that it deals mainly on
financial transactions and the accounts are confined to the sources of income and
the disposition of the same.
Criticism on Published Statements

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1. Published statements are too abbreviated as to give any significant detail in

banking operations.
2. The ordinary layman is not conversant with banking functions, or perhaps even
with the banks, so he cannot understand the significance of the accounts
appearing in the statement.
3. The asset and liabilities are so combined as to make it possible to “look through”
or discover the real picture of the bank unless one is an expert in financial
statement analysis.
4. The real picture of the banks financial position as reflected in the financial reports
will depend largely on how the accountant estimates the valuation of assets and
how completely he enumerates the liabilities.
“Live in such a way that those who will know you but don’t know GOD will come to
know GOD because they know you”

City of Malaybalay
College of Business
CHAPTER 7
COMMERCIAL BANKS
Commercial bank - deals in multifarious functions and services. Bangko Sentral requires
P2,400.00 (in million pesos) as the minimum level of capitalization.
Amended Minimum Capital Requirements for Banks
Existing Minimum Revised Minimum

Bank Category/Network Size
Capitalization Capitalization
Universal Banks P 4.95 billion2/
 Head Office only P 3.00 billion

 Up to 10 branches 1/ 6.00 billion
 11 to 100 branches1/ 15.00 billion
 More than 100 branches1/ 20.00 billion
Commercial Banks 2.40 billion2/
 Head Office only 2.00 billion

 Up to 10 branches1/ 4.00 billion
15.00 billion

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 More than 100 branches1/
Thrift Banks
Head Office in:
 Metro Manila 1.00 billion2/

 Cebu and Davao cities 500 million2/
 Other Areas 250 million2/
Head Office in the National Capital Region (NCR)
 Head Office only 500 million

 Up to 10 branches1/ 750 million
2.00 billion
 More than 50 branches1/
Head Office in All Other Areas Outside NCR

 11 to 50 branches1/ 400 million
 More than 50 branches1/ 800 million
Rural and Cooperative Banks

Head Office in:
 Metro Manila 100 million2/

 Cebu and Davao cities 50 million2/
 Other cities 25 million2/
 1st to 4th class municipalities 10 million2/
 5th to 6th class municipalities 5 million2/
Head Office in NCR

Head Office in All Other Areas Outside NCR (All

Cities up to 3rd Class Municipalities)
 Head Office only

80 million
Head Office in All Other Areas Outside NCR (4th

to 6th Class Municipalities)
 Head Office only

40 million
Note: 1/ Inclusive of Head Office

2/ With no distinction for network size
Functions of Commercial Bank

1. Deposit Function – a commercial bank primarily receives demand deposits which
can only be withdrawn by means of checks. It may also receive time deposits.

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2. Loan Function – It advances sums of money for relatively short period of time to
persons engaged in commerce and trade. It charges interest on such loans at legal
rates.
3. Exchange Function – this refers to the transfer of funds without the physical
transfer of cash. Commercial banks deal in offsetting of book entries either
domestically or internationally. Credit instruments are used in effecting transfer
or swapping of credit.
4. Trust function – engage in fiduciary activities such as administrators of estates,

guardians of minor’s interest, registrars and transfer agents of stocks and bonds;
executors of last wills and testaments, and other similar functions.
5. Advisory Function – Commercial banks, through their experienced officers, given

expert advice to clients on their business dealings.
Banks Services
1. Rental of safe deposit boxes – valuables are kept in specially constructed vaults to
allow maximum safety from fire, burglary and other risks.
2. Sale of drafts and cashier’s checks – commercial banks also undertake the sale of
drafts and the cashier’s checks. The bank charges a small fee for this service.
3. Sale of traveler’s checks – a traveler is provided a safe medium of exchange through

this service of commercial banks. The traveler is made to sign twice, once when
buying the checks (when he signs all of them) and again when he uses the check
for payment (when he signs each one as it is used).
4. Collection Agent– to facilitate transactions between foreign creditors and debtors or

even in domestic trade, the commercial bank acts, as collection agent for a
nominal fee. Instruments for collection are represented be drafts, checks, bond
coupons, promissory notes and others.
5. Credit Information – commercial banks used credit information not only within
their own offices but also disseminate such information to others who need the
same.
6. Payrolls – bank employees are also assigned to prepare payroll payment by

inserting the correct amounts in envelopes to cover salaries of employees of
business concerns.
General Banking Law of 2000 (R.A 8791) under Chapter IV, Articles II and Articles III,
Section 53 arequoted hereunder:
Sec.29 Powers of a Commercial Bank – Commercial bank shall have, in addition to the
general powers incident to corporations, al such powers as may be necessary to carry on
the business of commercial banking, such as accepting drafts and issuing letters of credit;
discounting and negotiating promissory notes, drafts, bills of exchange, and other
evidences of debt; accepting or creating demand deposits; receiving other types of
deposits and deposits substitute; buying and selling foreign exchange and gold or silver

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bullion; acquiring marketable bonds and other debt securities; and extending credit,
subject to such rules as the Monetary Board may promulgate.
Sec.30 Equity Investments of a Commercial bank – commercial bank may, subject to the
conditions stated in the succeeding paragraphs, invest only in the equities of allied
enterprise as may be determined by the Monetary Board. Allied enterprises may either
be financial no n-financial.
Except as the Monetary Board may otherwise prescribe:

30.1 The investment in equities of allied enterprises shall not exceed 35% of the
net worth of the bank.
30.2 The equity investment in any one enterprise shall not exceed 25% of the net
worth of the bank.
Sec.31 Equity Investments of a Commercial bank in Financial Allied Enterprises – A

commercial bank may own up to one hundred (100%) of the equity of thrift bank or
rural bank. Where the equity investment of a commercial bank is in other financial allied
enterprises, including another commercial bank, such investment shall remain a
minority holding in that enterprise.
Sec.32 Equity Investment of a Commercial Bank in Non-Financial Allied Enterprise – A

commercial bank may own up to one hundred percent (100%) of the equity in non-
financial allied enterprises.
Universal Bank
Universal Bank – is also a commercial bank. A UB exercises the power and services
authorized for a KB. Required minimum capital is P 4,950.0 (in million pesos). Also
called an expanded commercial bank (EKB).
Sec.23 Powers of a Universal Bank – shall have the authority to exercise the power
authorized for a commercial bank in section 29 the powers of investments house as
provided in existing laws and the power to invest in non-allied enterprises as provided
in this Act.
Sec.24 Equity Investments of a Universal bank – a universal bank may, subject to the
conditions stated in the succeeding paragraph, invest in the equities of allied and non-
allied enterprise as may be determined by the Monetary Board. Allied enterprise may
either be financial or non-financial. Except as the Monetary Board may otherwise be
prescribe:
24.1 The total investment in equities of allied non-allied enterprise shall not exceed fifty
percent (50%) of the net worth of the bank; and
24.2 The equity investment in any one enterprise, whether allied or non-allied, shall not
exceed twenty five percent (25%) of the net worth of the bank.
Sec.25 Equity Investment of a Universal Bank in Financial Allied Enterprise – A universal

bank can own up to one hundred percent (100%) of the equity in a thrift bank, rural
bank, or a financial allied enterprise. A publicly listed universal or commercial bank
may own up to one hundred percent (100%) of the voting stock of only one other
universal or commercial bank.
Sec.26. Equity Investment of a Universal bank in Non-Financial Allied Enterprise - a universal

bank may own up to one hundred (100%) of the equity in a non-financial allied
enterprise.
Sec.27. Equity Investment of a Universal Bank in Non-Allied Enterprises – the equity

investment of a universal bank, or of its wholly or majority-owned subsidiaries, in a
single non-allied enterprise shall not exceed thirty five percent (35%) of the total equity

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in that enterprise nor shall it exceed thirty five percent (35%) of the voting stock in that
enterprise.
Sec.28 Equity Investment in Quasi-bank – to promote competitive condition in financial

markets, the Monetary Board may further limit to forty percent (40%) equity investment
of universal banks in quasi banks.
Take Note! :
A universal bank may perform the functions of an investment house either directly or
indirectly through a subsidiary investment house. The underwriting of equity securities
and securities dealing shall be subject to pertinent laws and regulation of the Securities
and Exchange Commission (SEC).
Non-Financial Allied Undertakings:
1. Warehousing companies
2. Storage companies
3. Safe deposit box companies
4. Companies primarily engaged in the management of mutual funds but not in
mutual funds themselves.
5. Management corporations engaged or to be engaged in an activity similar to the
management of mutual funds.
6. Companies engaged in providing computer services
7. Insurance agencies/Brokerages.
8. Companies engaged in home building and home development.
9. Companies providing drying and/or milling facilities for agricultural crops.
10. Service Bureaus organized to perform for and in behalf of banks and non-bank
financial institutions as the services allowed to be outsourced under Circulation
No. 268. Provided, that data processing companies may be allowed to invest up to
40% in the equity service bureaus.
11. Philippine Clearing House Corporation (PCHC) and the Philippine Deposit
Insurance Corporation (PDIC)
12. Such other similar activities as the Monetary Board may declare as non-financial
allied undertakings of banks.
Financial Allied Undertakings

1. Leasing companies including leasing of stalls and spaces in a commercial
establishments; provided that bank investment in/acquisition of shares of such
leasing company shall be limited/applicable only in cases of conversion of
outstanding loan obligation into equity;
2. Investment houses
3. Banks
4. Financing companies
5. Credit card companies
6. Financial institution catering to small and medium scale industries including
venture capital corporations (VCC)
7. Companies engaged in stock brokerage/securities dealership
8. Companies engaged in foreign exchange dealership/brokerage.
In addition the UB’s may invest in the following as financial allied undertakings:
a. Insurance Companies

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b. Holding companies, provided that the investment of such holding company are
confined to the equities of allied undertakings and /or non-allied undertakings of
the UB’s allowed under the BSP regulations.
Departmentalization
1. Cash department – the cashier heads this department, which will take care of the
deposit function of the bank and allied activities. It may be sub-divided into New
Accounts, Signature Controls, Safe Deposit Boxes, and Armored Car Services.
2. Loan and Discount Department – headed by a loan officer. Sometimes called the
credit department. It takes care of everything connected with loans. It is also
conveniently divided into sections which may include that of Small Loans, Bank
Credit Investigation, Rediscounting, Statistics, Loan Releases, Renewals,
Collections and others.
3. Trust Department – headed by a trust officer who is well-versed in trust functions.

It deals more on legal officer’s work and a lawyer would be ideal for this job. The
divisions will be line with the fiduciary activities.
4. Foreign Department – deals in exchange on the international level, although it also

attends to some domestic exchanges. It is devoted to the processing of
applications for letters of credit, the buying and selling of foreign exchange, and
similar transactions.
5. Accounting Department – takes care of all the transactions of the bank. It puts in
order all the books, proof sheet, financial statements, and other accounting
procedures used in the bank.
6. Auditing Department – takes care of seeing to it that disbursement are in order by

conducting pre-audits, spot checks on the transactions and physical assets, and
institutes general control on the activities of the bank.
7. Legal Department – it is the duty of this department to see to it that the bank is
amply protected legally for any action that it takes. All matters of legal
importance are referred to it.
8. Administrative Department – the general administration of the bank falls under this
department. Personnel recruiting, hiring, training, and the like may be
undertaken by it.
Forms of Bank Credit
Bank credit – represents the bank’s trust and the confidence in the borrowers willingness
and ability to pay a loan when due. It could also mean the depositors trust in the bank
which makes him put his money for safekeeping. It may be in the form of bank notes,
deposits, letters of credit, lines of credit, acceptances, and notes payable.
Sources of Bank Funds

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The major or primary source of bank funds is the contribution of stockholders and
sizable deposits. The banks will try their best to outdo one another to attract depositor.
While the stockholders are required to put in a minimum amount of capital as initial
outlay before starting their business, the degree of success of a bank with more deposits
would be very much better indeed. Furthermore, earning money on borrowed funds is
the very nature of banking business.
To augment its capital and deposits, the bank also has other sources such as
interest from loans and investments, collection and service fees, earnings on trust,
monetize, depreciation, and others.
“If any of you lacks wisdom, he should ask God, who gives generously to all without
finding fault, and it will be given to him. But when he asks, he must believe and not
doubt, because he who doubts is like a wave of the sea, blown and tossed by the wind.”
– JAMES 1:5-6 -

City of Malaybalay
College of Business
CHAPTER 8
DEPOSIT FUNCTION
Deposits Defined
- Represented by money or representative money entrusted to banks for
safekeeping.
- The keeping of valuables such as jewelry and other important documents.
- Deposits are money borrowed and makes a bank a debtor.
- Deposits are liabilities of the bank, failure on its part to meet the depositors
demand will give the depositor’s right of recourse against the bank.
- Section 58 of the New Central Bank Law of 2000 (7653) which states that the
term “demand deposits” means all those liabilities of the BSP and of other
banks which are denominated in the Philippine currency and are subject to
payment in legal tender upon demand by presentation of checks.
Types of Deposits

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1. Demand Deposits – are those which are withdrawn upon the presentation of checks
during banking hours. This type of deposit does not receive interest in modern
times.
2. Time deposits – are those which can be withdrawn after a certain period of time or
at a designated maturity. The depositors place their excess funds as rime deposits
for varied purposes. For this reason, this type of deposits is further subdivided
into the following:
a. Time certificate of deposits – this is evidenced by a certificate to the effect that the
deposit can only be withdrawn at maturity or after due notice of withdrawal,
usually thirty days, and upon presentation and surrender of the instrument.
b. Special time deposits- this type is evidenced by a written contract to the effect
that neither all nor part may be withdrawn before the maturity date or at least
upon due notice of at least thirty days.
c. Savings deposit – are evidenced by a passbook and can be withdrawn only

upon due notice of at least thirty days or depending upon the individual
bank’s policy .These deposit may be withdrawn on demand provided the
bank is in position to meet the demand of the depositor.
3. Direct or primary deposits – are those which are made “over the counter” when the
depositor himself brings his money and/or checks and other near cash items to
the bank and hands them to the teller. Sometimes, the depositor may send his
representative to deposit for him. For e-bankers, depositors can deposit through
ATM’s after they have registered personally at the bank.
4. Derivative deposits – are created from the proceeds of loans. The borrower enters
into an arrangement that the bank places the loan proceeds under a current
account from which he can draw checks eventually. The derivative deposits
increase the volume of money because they represent new money created by the
bank out of proceeds of the loans.
Kinds of Depositors
The deposits may come from either individuals or businesses and from the
government and its instrumentalities and political subdivision. When funds are
deposited by individuals or businesses, these are known as individual deposits or
business accounts. If the government is the depositor, they are termed government
deposits.
The bank may also deposit money with other banks on reciprocal basis. These are
classified as interbank deposits. The banks are known as correspondents. Such deposits
provide for the exchange of funds between banks for varied purposes.
The deposits made by these depositors may be either demand or time pin conformity
with the method of withdrawal and according to the reason of the deposit in keeping his
funds in the bank. They may also consist of primary or direct deposits or derived from
proceeds of loans.
Motives of Depositors

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1. Safety – the depositors place their excess funds in the bank because they are aware
that modern banks have fireproof and burglarproof safes and vaults to keep
money in.
2. Convenience- when the depositor is prompted by the convenience offered through

depositing, he opens a current account which is serviced by the used of checks.
Thus, he could pay his bills in exact amounts, he could carry large amount of
money safely and portably, he could use his cancelled checks as a receipt, and he
could issue a stop payment order if he draws the check erroneously or loses the
same.
3. Earnings or Income – A person places his money as time deposits if he is after

earnings or income. Only time deposits of varied types earn interest. Service
charges are also nominal if he has pay at all.
4. Accommodation–Business deposit their money because of the special favors they

want from banks. Lines of credit may be accorded to them upon proper
arrangements. They could also deal in trade by having the bank as guarantor
through the issuance of letters of credit.
The Deposit Function

All the officials of the bank down to the entry-level employee perform the deposit
function in the sense that they indirectly contribute to the satisfaction of the customer-
depositor. Directly, however, the teller system employed by banks performs the
operations connected with the receipt of deposits and other allied activities.
The bank if relatively small sized, may employ a single teller system where one
teller performs both the receiving of deposits and the paying out of checks and other
instrument exchanged for cash. Each of the tellers assigned to specific jobs shall,
therefore, have their own responsibilities and duties.
Modern banks have acquired many new methods to improve service as well as
mechanized devices to step up the bank’s multifarious activities. Banks employ several
tellers in order to give maximum service benefits to their customers. Also, teller
functions are done through electronic devices such as ATM’s, phones, mobile and the
internet.
To a bank, the paying teller has a great amount of responsibility because his
negligence may lead to losses on the bank’s part. However, the teller who performs the
first step in the deposit function is the receiving teller; for it is he who accepts deposits
for and in behalf of the bank.
Receiving Teller
 The receiving teller receives and verifies deposit items and deposit slip, gives
proper receipt for the deposit made, distributes the items deposited, and finally
checks and proves the day’s work.
 When a customer-depositor approaches the receiving teller, he hands the duly

accomplished deposit slip indicating there in the cash and other instruments
presenting cash in some detail.
 Upon receipt, the teller examines the deposit slip to ascertain, among other things.
He also sees the detailed description of the credit instruments are in order. Then

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he segregates the currency into the different denominations in the compartments

for this purpose in the drawer. He examines closely the credit instruments for any
defects and if he finds none, marks them non-negotiable. After the verification, he
places the duplicate of the deposit ticket into the machine to acknowledge receipt
of the deposit indicated passbook.
 At the end of the day, the teller sorts out all the items deposited comprising of
cash, checks, and other credit instruments ready for distribution to the proper
departments. As the teller performs the other functions, he fills in the proof sheet
indicating the deposits received and at the end of the day, he merely goes over the
same to see for errors.
 In the receipt of the item deposited, the receiving teller exercises due care and
diligence in examining the cash and the credit instruments so that he may be
relieved of the responsibilities attached to his duties. In regard to the currency, the
teller is responsible for:
a. Errors in counting the money deposited.
b. Presence of mutilated or counterfeit money.
For the credit instrument that the teller receives for deposits, he has to be careful in
order to avoid responsibilities in connection with:
1. Postdated checks – checks which are dated after the date of deposit are known as
post-dated checks. The teller should not receive such checks for deposit as he
cannot be sure whether they shall be honored.
2. Stale checks – are those are dated very much earlier, say about a month, from the
date of deposit.
3. Material alterations – may be on the date, the amount (that is, the amount in words
do not tally with the amount in figures), the payee. The teller must see to it that
any changes made on the face of the instrument are properly initialed by the
drawer.
4. Wrongly endorsed instruments – In case the instrument is not endorsed according to

the name appearing on its face, the teller should require the depositor to correct
the wrong endorsement. The teller should make the depositor correct the
endorsement by making the endorser sign his regular signature with the middle
initial. This will ensure the identity of the endorser beyond reasonable doubt, and
also his corresponding liability.
For both currency and credit instruments, the teller is responsible for:
1. Carelessness in adding deposit slips – this refer to proof sheets rather than the
individual deposit slip. It may be that the teller is not very careful in adding so
that the amount of deposits may not tally with the actual currency and credit
instruments.
2. Carelessness in designating the account to be credited – it may happen that there are
several depositors with identical names. The teller must see to it that the right
person is duly credited for the deposit. Careless crediting of proper accounts may
eventually lead to bank embarrassment or even loss. The teller should make it a
point to check the account number.

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Deposit Slips (Tickets) and deposits Items

The deposit function entails the distribution of the deposit slips and the deposit
items. Such function is performed by the receiving teller. The distribution is handled
physically as follows:
1. Deposit Slips – are the forms filled in by the depositor when he makes a
deposit.
2. Deposit Items – comprises of cash and credit instruments or other items and are
distributed as follows
The Paying Teller

Also is the one who pays out cash in exchange for checks and other instruments.
Attached to his duties, he examines the items exchanged for cash in relation to:
a. The date of the check- he makes sure that the check is neither post-dated nor stale. If
post-dated he must not pay, if stale he should likewise not pay but request the
person presenting it to refer the same to the drawer of the check. He also checks
the regularity of the date of the check.
b. Wrong endorsement- the receiving teller must be sure that the endorsement is
correctly effected at the back of the instrument.
c. Material Alteration- this refers to the erasures or change in the date, the payee, or
the amount in words and figures.
d. Forgery- this is the concern of the paying teller as he access to the depositor’s
specimen signature before payment.
e. Crossed check – are of two kinds, either crossed specially or generally. The paying
teller should scrutinize the check to determine the extent of the bank’s
commitment on such checks.
f. Stop-payment order – when a check is lost or for any other reason the owner wishes
to withhold its payment, the drawer requests the bank to stop its payment, the
bank provides a signal to indicate “Stop Payment Order”.
g. Insufficient funds – the paying teller must also determine whether or not the
drawer of the check has sufficient funds to cover the same.
h. Erroneous payment– A paying teller should count the money to be paid at least
twice. For he may overpay or underpay.
i. Supply of cash – a paying teller, through constantly doing the same work, should
be in a position to know how much gets from the cashier to meet requirements.
Current versus Savings Account

There are some significant differences which the tellers must be aware of
and which the depositor must know in order to keep his account with the bank.
Such distinctions will be in the initial deposit, the service fees, the penalty for
issuance of bouncing checks, the age of depositor, the minimum balances for
purposes of interest payments or imposition of service charges and others.

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“There is no such thing as loss. There is only the opportunity to begin again.

City of Malaybalay
College of Business
CHAPTER 9
PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC)
Role of PDIC
 It is the 2nd pillar of support to the Philippine banking industry.
 It provides the adequate depositor protection and education, and the immediate
processing and settlement of depositors claims.
 An attached agency of Department of finance wherein it is a government
corporation created by virtue of R.A. 3691 for the purpose of insuring deposits in
banks that are entitled to the benefit of insurance.
 Includes receivership and liquidation as its additional important functions.
 The PDIC draws upon its net insurance reserves or consolidated resources in the
carrying out of its operation.
 It extends insurance coverage to 967 member banks, composed of 52 commercial
banks, 116 thrift banks, and 799 rural banks.
Board of Directors: Composition and Authority
The following constitute the membership of the board of directors:

1. The Secretary of Finance, who is ex-officio chairman of the board without
compensation.
2. The governor of the Bangko Sentral, who is an ex-officio member of the board
without compensation.
3. The president of the corporation, who is appointed by the president of the

Philippines from either the government or private sector to serve on full-time
basis for a term of six (6) years. The president also serves as vice chairman of the
board.

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4. Two (2) members from the private sector are appointed for a term of six (6) years
without reappointment by the president of the Philippines.
The Board of Directors shall have the authority:
1. To prepare and issue rules and regulations it considers necessary for the effective
discharge of its responsibilities.
2. To direct the management, operations, and administration of the corporation.
3. To appoint, establish the rank, fix the remuneration, and remove any officer or
employee of the Corporation for cause, subject to Civil Service and pertinent
compensation laws
4. To authorize such expenditures by the corporation as are in the interest of the

effective administration and operation of the Corporation.
President: Powers and Duties
1. To prepare the agenda for the meeting of the board and to submit for the
consideration of the board the policies and measures.
2. To execute and administer the policies and measures approved by the board.
3. To direct ad supervise the operations and internal administration of the

corporation in accordance with the policies established by the board.
4. To represent the Corporation, upon prior authority of the board.
5. To authorize, with his signature, upon prior authority of the board, contracts
entered into by the corporation, notes and securities issued by the corporation,
notes and the annual reports, balance sheets, profits and loss statement
correspondence and other documents of the corporation.
6. To represent the corporation, either personally or through counsel, in all legal

proceedings or actions.
7. To delegate, with prior approval of the board of directors, his power to represent
the corporation to other officers of the corporation.
8. To exercise such powers as may be vested in him by the board.
Sources of Funds
 The principal sources of funds are the capital infusion of the government in the
form of a Permanent Insurance Fund (PIF) which is initially capitalized at P5
million, incomes from insurance premium assessments on member banks, and
investments in government securities.
 Investments increased as debts were reduced with the strengthening of capital

and greater collection in premiums.

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Termination and Reinstatement of Insured Status of Banks

Pursuant to the provision in R.A 3591 as amended and in relation to the PDIC
Amendment Rules and Regulations, PDIC issued the ff. guidelines on the termination
and reinstatement of insured status of banks due to non-payment of assessment:
1. PDIC shall terminate the insured status of a bank upon its continued failure or
refusal to pay the assessment, due semi-annually, computed by multiplying the
assessment rate as determined by the PDIC Board of Directors and the banks
liability for deposits.
2. First demand letter shall be sent to banks through registered mail. Interest charges
at the legal rate of 12% per annum, reckoned from due date/s, shall be imposed
upon these banks.
3. Failure to comply within 30 days after receipt of the first demand letter shall
constitute willful failure or refusal by the bank to file the required certified
statement and pay the corresponding assessment and interest charges. Then PDIC
shall send the second demand letter through registered mail.
4. Termination proceedings of the banks insured status shall start (30) days after
receipt by the bank of the PDIC’s second demand letter.
5. The third demand letter shall be sent to the bank through registered mail and
final demand letter , the PDIC shall terminate the bank’s insured status which
shall be effective after lapse of (30) days.
6. The order of termination shall be final and executory until set aside, modified or
suspended by the PDIC Board of Directors.
7. The corporation shall published the order of termination of the insured status in a
newspaper and/or local circulation for (3) consecutive days. Upon receipt of the
order of termination from corporation, the bank shall give written notice to such
termination to each of the depositors. Failure by the bank to do so shall be subject
to a fine of not exceeding (P1,000) per day or render criminally liable for violation
which is punishable by a fine not more than (P20,000) and by imprisonment of not
more than (5) years.
8. Failure of the bank for whatever reason to give written notice to the depositors
shall not in any way affect the validity and effectivity of the order of termination
of insured status against the depositors of the bank.
9. The insured deposits of each depositor in the bank as of the effective date of
termination, less all subsequent withdrawals/ debit adjustments from any
deposits of such depositor, shall continue to be insured for a period of (90)days
from the date of such termination.
10. The bank whose insured status has been terminated shall not advertise nor hold
itself out as having insured deposits unless, in the same connection, the bank shall
state with equal prominence that such additions to the insured deposit and new
deposits made after such termination are not so insured.

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11. A bank whose insured status has been terminated ma request for the
reinstatement of its insured status by means of a written application filed with the
Corporation. The PDIC Board of Directors may approve such application based
on the recommendation that: (a) the cause or causes for termination of insured
status has/have been corrected, and (b) that the bank may continue to operate
with insurance cover to its depositors, creditors, and the general public, thereby
not exposing the Deposit Insurance Fund to undue risk.
Payment of Insurance Deposit Claims
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. The amount in excess of P100,000 coverage, if
the closed bank is not rehabilitated or taken over by another bank, can still be
claimed upon final liquidation of the remaining assets of the closed bank. The
claim may be filed with the liquidator of the closed bank after filing the claim for
insured deposits.
“Always keep your words sweet and soft.

Just in case you need to eat it, you can swallow it well.”
-Oprah Winfrey-

City of Malaybalay
College of Business
CHAPTER 10
BANK RESERVES
Primary Reserves
 Consist mainly of highly liquid assets of the bank and its main objective is to
maintain the bank liquidity and solvency.
 The bank keeps primary reserve in the form of non-earning assets.
 A bank may keep primary reserve in the form of cash in vaults, deposits with the
central bank (legal reserve); deposit with other banks, exchanges or the clearing
house and checks for collection. These items may fall under the classification of
excess reserves, working reserves, or legal reserves.
 The banks do their best to keep the right amount of primary reserves, not too
much to deny the bank income from investment neither too little to jeopardize the
bank’s position in the community.
Legal Reserves
 Form part and parcel of the primary reserve. Sometimes alluded to as required
uniformly and without discrimination on all banks.

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 The BSP, being the monetary authority, has jurisdiction over all banks and,
therefore requires the setting up of legal reserves. Such reserves are kept at the
banks vault.
 This reserve is usually a percentage of demand and time deposit, which may
either, be in cash or a combination of cash and highly marketable securities.
 The function of legal reserve is to meet the depositors demand for cash.
 The bank can only draw on these reserves from the BSP in cases of extreme need
to meet depositor’s withdrawals.
Republic Act 7653 (New Central Bank Act of 1993) as embodied in Chapter IV, Article
VII, entitled “Bank Reserves:”
Sec. 94 Reserve Requirements- in order to control the volume of money created by the
credit operations of the banking system, all banks operating in the Philippine shall be
required to maintain reserves against their deposit liabilities.
Sec.95 Definition of Deposit Substitute – the term deposit substitute is defined as an

alternative form of obtaining funds from public, other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for the borrowers own
account, for the purpose of relending or purchasing of receivables and other obligations.
Sec.96 Required Reserve Against Peso Deposit – the Monetary Board may fix and, when it
deems necessary, alter the minimum reserve ratios to peso deposits, as well as to deposit
substitute, which each bank and/or quasi-bank may maintain, and such ratio shall be
applied uniformly to all banks of the same category as well as quasi-banks.
Sec. 97 Required Against Foreign Currency Deposits – the Monetary Board is similarly
authorized to prescribe and modify the minimum reserve ratios applicable to deposits
denominated in foreign currencies.
Sec. 98 Reserve Against Unused Balances of Overdraft Lines – in order to facilitate Bangko
Sentral control over the volume of bank credit , the Monetary Board may established
minimum reserve requirements for unused balances of overdraft lines.
Sec. 99 Increase in Reserve Requirements – the increase shall be made in gradual manner
and shall not exceed fourpercentage points in any (30) day period. Banks and other
financial institutions shall be notified reasonably in advance of the date on which such
increase is to become effective.
Sec. 100 Computation on Reserves - The reserve position of each bank or quasi-bank shall
be calculated daily on the basis of the amount, at the close of business for the day, of the
institutions reserve and the amount of its liability accounts against which reserves are
required to be maintained.
Sec. 101 Reserve Deficiencies - whenever the reserve position of any bank or quasi-bank,
computed in the manner specified in the preceding section of this Act, below the
required requirement minimum, the bank or quasi-bank shall pay the BSP one-tenth
percent (1/10 of 1%) per day on the amount of the deficiency on the prevailing 90 day
treasury bill rate plus 3 percentage points whichever is higher.
Sec. 102 Interbank Settlement – the BSP shall established facilities for interbank clearing
under such rules and regulations as the Monetary Board may prescribe. Provided, that
the BSP may charge administrative and other fees for the maintenance of such facilities.
Sec. 103 Exemption from Attachment and Other Purpose – Deposits maintained by banks
with the BSP as part of their reserve requirements shall be exempted from attachment,
garnishments, or any other order or process of any court, government agency or any

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other administrative body issued to satisfy the claim of a party other than the
government, or its political subdivisions or instrumentalities.
Working Reserves
 Another form of primary reserves, composed of vault cash in excess of legal
requirements and balances with other banks which are used to meet the
depositors demand.
 The amount of working reserves varies in size depending upon several factors.
Excess Reserves
 Are those over and above the legal reserve requirements. It could also be the
amount in excess of working reserves.
 Whatever is above the required working reserves may be deemed as excess

reserves.
Factors Affecting Size of Primary Reserve Requirements

1. The number of depositor and the diversity of their business interest.
2. The confidence of the public on the bank.
3. The nature of a bank’s deposits.
4. The percentage of legal reserve requirements.
5. The percentage and quality of the secondary reserve.
6. The demand for loans.
7. Habits and customs of the community
8. Other factors.
Secondary Reserves
 Often alluded to as a bank’s next line of defense
 Composed of earning assets which are easily converted to cash with the least
delay and without loss.
 First major role of this reserve is to replenish the needs of the primary reserve.
 If the cash is not needed, the next function is to keep a maximum percentage of
the bank’s funds invested in earning asset.
Quality of asset:
 The asset must be of high quality, it must be in short duration and it must be
marketable.
Assets in the Secondary reserve:

 Short-term government securities
 Banker’s Acceptances
 Commercial papers
 Loans of a short-term and self-liquidating nature.
Size of Secondary Reserve

 Size of secondary reserve also matters of “rule of a thumb” on the part of the
bank.

Page 55 of 61
 Due to the close link between the primary and secondary reserve, certain factors
influence the size of the latter. Both are used to make sure that the bank meets the
demand of the depositor.
Investment Reserve
 Is an economic rather than an accounting term as in the case of primary and
secondary reserves.
 Assets which do not qualify for the first two reserves could conveniently be
deemed as eligible for the investment reserve.
Assets Eligible for Investment Reserve

 The assets comprising the investment reserves are not as liquid as those in the
primary reserve nor as easily converted into cash as those of the secondary
reserve.
 They are of longer maturities which are spaced at even intervals to allow for a
continuous intake of reinvestment of funds.
 The purpose of having such reserve is to earn and to be able to meet any
unanticipated major losses resulting from bank failure.
 Stock and bonds are popular assets in the investment reserve.
BSP’s Current Policies on Reserve Requirements
1. The Monetary Board, in Circular No. 319 (resolution no.63 dated January 17, 2002) as
amended by MB resolution No. 163 dated 31, January 2002) approved the
reduction in the liquidity reserve requirement against peso demand savings, time
deposits and deposit substitutes liabilities of Universal banks and Commercial
banks, and Non-bank financial Intermediaries with the quasi-banking functions,
by 2 percentage points from 9% to 7%. The regular reserve requirement is at 9%.
2. Reserve Against Peso-Denominated Common Trust funds

- Pursuant to memorandum to All commercial banks and non-bank financial
intermediaries performing trust, other fiduciary business and investment
management activities dated 15 February 2002:
- The monetary Board approved the reduction in the liquidity reserve requirement
against peso denominated common trust funds (CTF) and trust and other
fiduciary activities (TOFA) – others:
From To
a.) For universal banks and commercial banks 10% 8%
b.) For thrift banks to remain at 4%
c.) For non-bank financial intermediaries
With or without quasi-banking functions 10%
8%
3. Reserve Against trust and Other Fiduciary Accounts (TOFA) – Others

- The manual of regulations for the Non-bank financial Institutions, all financial
intermediaries authorized to engage in trust and other fiduciary business shall
maintain regular reserves against Trust and Other Fiduciary accounts (TOFA) ,
others except – a. accounts held under administration, b. bonds issues under deed

Page 56 of 61
of trust or mortgage, c. custodian and safekeeping , d. depository/reorganization .

e. employees benefit plans under trust, f. escrow, g. personal trust (testamentary
or living trust) h. executorship, i. guardianship, j. life insurance trust, k. pre-need
plans (institutional/individual).
The regular reserve against TOFA – Others shall be maintained as follows:

a.) For universal banks and commercial banks 6%
b.) For thrift banks 5%
c.) For non-bank financial intermediaries
With or without quasi-banking functions 6%
d.) For rural banks 4%
4. Form and Compensation

- Deposits maintained by financial intermediaries authorized to engage in trust and
other fiduciary business with the BSP up to forty percent (40%) of the regular
reserve against peso-denominated common trust funds as well as the regular
reserves for TOFA- Others shall be paid interest at 4% per annum based on the
average daily balance of said deposits. to be credited quarterly.

Page 57 of 61
As we look back and wonder how we ever made it through, we realize it’s not because
we were wise, but because GOD has been good; not because we’ve been strong, but
because GOD has been mighty; not because we’ve been consistent, but because GOD has
been faithful to all His promise
VI. RUBRICS FOR GRADING (attached sheets)
 Topic Presentation
 Case Analysis
 Photo Collage

Kalilangan Satellite Campus
Central Poblacion, Kalilangan Bukidnon
FMPr3 – Banking and Financial Institution

Topic Presentation Rubrics
Group Name:
Presentor #:
Name:
Title of the Topic:
Category 10 7 5 3
Focus on Entire Most of the Most of the No
Topic presentation
presentation presentation presentation
is focusedis focused is not was turned
on the on the focused on in.
assigned assigned the assigned
topic and topic but topic.
does not some areas
stray to of the
unrelated presentation
topics depart from
the assigned
topic.
Presentation Followed One of the The There’s no
the 6x6 previously prescribed PPT
standard set described aspects is provided.
of PPT. aspects is missing
missing.
Introduction The One of the More than No
introduction previously one of the presentation
is clear, mentioned previously was turned
engaging aspects of mentioned in.
and the aspects of
previews introduction the
the is lacking introduction
structure of is lacking.
the paper
Conclusion The One of the More than No

Page 58 of 61
conclusion previously one of the presentation

is strong, described previously was turned
ties the aspects of mentioned in
paper the aspects of
together conclusion the
and leaves is lacking conclusion
the reader is lacking
feeling they
understand
what the
presentor
was getting
at.
Score
Mariel Crista C. Maravillosa

STS Instructor
BUKIDNON STATE UNIVERSITY

Malaybalay City, Bukidnon 8700
Tel (088) 813-5661 to 5663; TeleFax (088) 813-2717, www.buksu.edu.ph
CASE STUDY RUBRICS

30 Points 20 Points 10 Points
Clearly and accurately Identified some of the Failed to identify the
identified the contributing contributing factors contributing factors that
factors & provided a that impact on the impact on the root problem.

Page 59 of 61
connection information problem but didn’t

relevant to solving the clearly connect the
case problem. information.
MARIEL CRISTA C. MARAVILLOSA

Instructor

Kalilangan Satellite Campus
Central Poblacion, Kalilangan Bukidnon
FMPr3 – Banking and Financial Institution

Photo Collage Rubrics
Title of the Topic

Name:
Year/Block & Section:
CATEGORY 10 8 5 3
Creativity All of the Most of the Only a few None of the
graphics or graphics or graphics or graphics or objects
objects used in objects used in objects reflect reflects student
the collage the collage student creativity.
reflect reflect student creativity, but
creativity in creativity in the ideas were
their display. their display. typical rather
Student Student only than creative.
utilizes uses pictures
numerous to depict the
materials for themes,
texture. symbols, &/or
characters.
Design Graphics are 1-2 graphics 3-4 graphics Graphics are not an
cut to an are lacking in are lacking in appropriate size
appropriate design or design or shape. Glue marks
size, shape placement. placement. evident. Most of
and are There may be Too much the background is
arranged a few background is showing. It appears
neatly. Care smudges or showing. little attention was
has been taken glue marks. There are given to designing
to balance the No tape marks noticeable the collage
pictures across are obvious smudges or
the area. from the front glue marks.
Items are
glued neatly
and securely.

Page 60 of 61
NO FRAYED
EDGES! No
tape is
showing from
the front!
Looks
professional
and could be
displayed
with
confidence.
Number of The collage There are a The collage The collage has
Items covers the few white has a few large more white space
entire page, spaces pictures, but than pictures
leaving no showing. No does not cover
white space repetition of the whole
showing pictures paper.
Time and Much time Time was It appears the Class time was not
Effort and effort used wisely, student didn’t used wisely and the
went into the but student put in a lot of student put in no
planning and could have effort before additional effort
design of the put in more the
collage. It is time and effort presentation.
clear the at home. The project is
student Project was unfinished or
worked at complete but completed
home as well only showed without color.
as at school. the basics
The project
shows great
detail and
followed the
proposal
exactly.
Student
worked on
this project at
home and
during study
hall.
Time
Titles and Text Titles and text Titles and text Titles and text Titles and/or text
were written were written were mostly are hard to read,
clearly and clearly and clear and even when the
were easy to were easy to somewhat reader is close.
read from a read close-up. easy to read Spelling/Grammar
distance. NO Possible minor close-up errors are
SPELLING OR spelling errors distracting from the
GRAMMAR proje
ERRORS!
Attention to The student The student The student The student's
Theme gives a gives a gives a fairly explanations are
reasonable reasonable reasonable weak and illustrate
explanation of explanation of explanation of difficulty
how every how most how most understanding how
item in the items in the items in the to relate items to
collage is collage are collage are the book.
related to the related to the related to the
book. “No leaf book. For book.

Page 61 of 61
is left many of the

unturned” . items, the
relationship is
clear without
explanation.
MARIEL CRISTA C. MARAVILLOSA

Instructor
End of Course Guide and Kit
GOD BLESS US ALL!!!

KEEPSAFE!
- Maam Yhel -

Banking and Financial Institution

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Page 1 of 61

BUKIDNON STATE UNIVERSITY

COURSE GUIDE AND

Mariel Crista C. Maravillosa

Course Guide and Resource Kit GE7-Science,Technology & Society

IV. COURSE POLICIES & REQUIREMENTS

Course Guide and Resource Kit GE7-Science,Technology & Society

This course is designed to develop an understanding of financial institutions and

Course Guide and Resource Kit GE7-Science,Technology & Society

CHAPTER 1: Banks and Banking Perspectives

Cloudhey, Moorad (2011). An Introduction to Banking: Liquidity Risk and Asset-Liability

Leuterio, Macedes M. and Estepa, Consuelo B. (2004). (Latest Edition). Banking

Moyer, R. Charles, et al. (2006). Contemporary Financial Management Fundamentals. South-

Orcullo, Norberto Jr. (2009). Principles of E-Commerce/E-Business (Theories and Applications).

Course Guide and Resource Kit GE7-Science,Technology & Society

 Pass the long quizzes and term examination.

Task Due Date Percentage Grading

Group Activity & Class 80%

 Getting to Know Me and You

Course Guide and Resource Kit GE7-Science,Technology & Society

TOPIC PRESENTATION. You are required to have a topic presentation in assigned

F.RECOMMENDED STUDY SEQUENCE/ LEARNING

Course Guide and Resource Kit GE7-Science,Technology & Society

I took my BS Business Administration major in Banking and Finance from Bukidnon

You may contact me at the following email address mmarielcrista@gmail.com.

As my students, I feel that it is incumbent upon me to brief you about my predisposition

This means that:

1. You will have to submit your assignment and activities on deadline.

Course Guide and Resource Kit GE7-Science,Technology & Society

Follow these guidelines strictly when submitting your requirements.

1. Submit your assignments on or before the deadline.

BUKIDNON STATE UNIVERSITY Educate

FMPr3 – BANKING AND FINANCIAL INSTITUTION

Course Guide and Resource Kit GE7-Science,Technology & Society

Instruction: By having deposit and withdrawal transactions every month. Provide a

FINAL TERM EXAMINATION: (TBA)

IV. COURSE POLICIES AND REQUIREMENTS

Course Guide and Resource Kit GE7-Science,Technology & Society

V. LECTURE NOTES, HAND – OUTS

Course Guide and Resource Kit GE7-Science,Technology & Society

Bukidnon State University

Historical Perspective of the World

Philippine Banking History

Course Guide and Resource Kit GE7-Science,Technology & Society

Philippine Banking Today

Nature Of Banking Business

Principle of Banking Business

Course Guide and Resource Kit GE7-Science,Technology & Society

Course Guide and Resource Kit GE7-Science,Technology & Society

Economic Significance of Bank

Why The State Supervises Banks

Bukidnon State University

Course Guide and Resource Kit GE7-Science,Technology & Society

General Aspects in establishing Banks

2. Selection of stockholders - should ascertain they are of good moral character,

3. Determination of the kind of bank to be formed – depends on the economic survey;

4. Determination of the amount of capital to be raised – depends on the type of bank.

Organization, Management, and Administration

Provisions of the New Central Bank Act

The percentage of foreign-owned voting stocks in a bank shall be determined by the

Course Guide and Resource Kit GE7-Science,Technology & Society

Sec. 12 Stockholdings of Family Groups or Related Interest. -Stockholdings of individuals

Sec.13 Corporate Stockholdings. Two or more corporations owned or controlled by the