Definition, Banks

Sec. 3.1. of R.A. 8791 (The General Banking Law of 2000), " Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits.

You go to banks to deposit money and others, to apply for loan. So basically, being in the banking business is being in a money business. It’s all about the money according to Atty. Gaviola.

Do you think banks are important to the economy?

Sec. 2, The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy xxx

1st illustration: Imagine you buy a house for Php 35 million; you will be bringing around the Php 35 million with you.2nd illustration: You are a very rich person and you would buy all the share of San Miguel Corp. that would be billions of pesos, you will be bringing all that cash with you.3rd illustration: You have a brilliant idea in mind for a very good business, but you do not have cash, where will you go? Can you just imagine the economy without banks?

Banks, Roles1. As financial intermediary-

It’s basically like a market which brings together the source of funds in the form of deposits and those who wants to use those funds in the form of loans. It basically mediates between the sources and the users of funds.

2. Vital role in money supply-Central Bank prints the money. They literally make money. Once Central Bank prints the money, it releases it to the public. Do you notice when the general public is suppose to get an inflow of cash, e.g. Christmas time, we normally see that most of the currencies are new.

Role in monetary supply when banks help expand the amount of currency flowing in the economy by releasing loan. They can also deflate the amount of currency circulating by not releasing loans and by getting deposits.

3. Payment facility-In the illustrations given, instead of bringing cash, you can just write a check. Just go to the bank and present it for payment or have the banks transfer the money in your account. Example, the other party to the transaction is in the U.S., you can do money transfer thru banks. You can just wire the money. The bank will receive your money and it will wire the money to its partners in the U.S.

Sec. 2, The State recognizes xxx the fiduciary nature of banking that requires high standards of integrity and performance.

Banking business is one considered as vested with public interest and the nature of relationship between a bank and its depositor is considered fiduciary so that the bank has responsibility to exercise the diligence of more than a good father of a family. Banks are required to exercise more than ordinary diligence because of fiduciary nature. Can you imagine if banks are very lax with lending money and they just open one day and close the next day? Nobody would want to deposit their money in banks and if nobody would want to deposit their money and just keep it in their house under their beds, the access to capital would be limited, how could the economy roll then? The General Banking Law of 2000 is enacted with that in mind, to protect the public interest.

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The nature of banking business is fiduciary and that it is vital to the economy as found in Section 2 of the General Banking Law.

2 aspects of the nature of banks as recognized by the General Banking Law

Section 2 of the GBL:

1. It plays a vital role in the sustained development of the national economy2. It is fiduciary in nature

Specific roles of a bank with respect to the economy:

1. Banks act as financial intermediaries. They bring together the sources and users of funds 2. Banks play a role in money supply. Why is money supply important? Money supply is important

because the amount of money circulating in the market determines your inflation or deflation rate. The more money there is you will have the tendency of deflation. The lesser money is inflation. But how do banks play a role in money supply? For example: if banks increase their time deposit interest rates the tendency is for the people to deposit their money in banks thereby lessening money circulation. But if banks decrease their time deposit rates the tendency is for people to keep money away from banks and keep it within circulation. Banks also loan money. If its loan interest is high people will not borrow from banks, they will go to other sources. Again, it will lessen money supply. But if banks lower their interest, people will be encouraged in borrowing money from banks thus increasing money supply and circulation. Again, money supply is important because the amount of money circulating in the market determines your inflation or deflation rate.

3. Banks also act as payment facilities. How? Banks issue checks etc. for payment.

So these are the specific vital roles of a bank in the economy.

There is also a fiduciary nature in the banking industry such that it requires high standard degree of integrity and importance.

So what is the nature of the relationship between banks and its depositors?

There exists a fiduciary relationship. But basically, it involves a debtor-creditor relationship. Banks and its depositors enter into a contract of loan. But it is not an ordinary contractual relationship because there is a fiduciary nature involved.

Central Bank v. City Trust

- What is the relationship between a bank and its depositors?A contract between the bank and its depositor is governed by the civil code on simple loans. There exists a debtor-creditor relationship between the parties. But it is not an ordinary contractual relationship because a fiduciary relationship is involved. Banks should observe the highest degree of diligence which must be higher than that of a good father of a family. This is true even in the absence of an express stipulation in their contract.

Ordinarily, if you are a debtor in an obligation and you are required to deliver something to a creditor? What is the degree of care required? Ordinary diligence is required or the diligence of a good father of a family.

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Now, what is the degree of care required of a bank? Equitable PCI vs. Tan.

Banks should observe the highest degree of diligence which must be higher than that of a good father of a family.

The degree of diligence required of a Bank is extended also to its employees. Westmont Bank v. dela rosa-Ramos

The duty of the bank to exercise the highest degree of diligence is not only limited to recording its transactions but also in the selection and supervision of its employees because any negligence of its employees is attributable to the bank. Note that the liability of a bank is primary and direct.

What if the depositor is negligent which resulted into a loss? Ramon Tan v. CA

Depositors have no knowledge with respect to technicalities in the banking industry. Even, there is a patent error on the part of the depositor banks can still be held liable if its employees are also negligent because depositors are not expected to know the internal rules and procedures of a bank. So, banks should exercise greater caution.

Because of the important roles and the fiduciary nature of banks the GBL has set a framework to ensure that the banking practice is safe and sound.

So, what are the frameworks in the GBL? (Summary of the provisions of the GBL)

1. It provides rules for corporate governance – it provides for independent directors, limits on transactions involving related interests. So, the GBL imposes internal rules like who can be directors, who are disqualified.

2. Ensures market discipline- it made the banking system more transparent by requiring banks to report their activities to the Bangko Sentral.

3. It opened the market to foreign banks.4. It provides for external governance which allows the Bangko Sentral to supervise, monitor and

regulate the operations of Banks.

Define Banks:

Section 3.1."Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits.

Republic v. Security

- Expanded definition : A bank has been defined as "a moneyed institute founded to facilitate the borrowing, lending, and safe-keeping of money and to deal in notes, bills of exchange, and credits

Lending alone will not make an entity a bank. But when you accept deposits and then you use the same money to lend it to someone you are engaged in a banking function. You must obtain a license or authority to act and function as a bank and this license can be obtained from the Bangko Sentral.

Classification of Banks

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1. Universal Banks – meaning? What does it do? Used to be known as expanded commercial banks because aside from exercising the functions of commercial banks it also exercises the functions of an investment house and has the power to invest in non-allied enterprises.

2. Commercial Banks – Banks which perform ordinary banking functions. But if it exercises expanded powers it becomes a universal bank

3. Thrift Banks – governed by the Thrift Banks Act. The purpose of thrift banks is to accumulate savings and invest these savings into financing or loan for homebuilding, household finance and furtherance of other national economic benefits. It also includes financing for agricultural services, industry and housing and providing financing for small and medium enterprises. What does that tell you? The function of thrift banks is to address the financing needs of individuals and small and medium term enterprises. For example, if you need money to buy a house then it is better to go to thrift banks rather going to commercial banks because thrift banks offer better terms and conditions. But if you are going to buy an airplane you don’t go to thrift banks because that is no longer small or medium term.

4. Rural Banks – Rural Banks are engaged in functions which facilitate development particularly in rural areas.

5. Cooperative Banks – defined by the Cooperative Code. It is organized to provide financing for cooperatives and for its members.

6. Islamic Banks governed by the Islamic Bank Act

Why do you think there is a need for a Islamic Bank?

There should be a special Bank that should cater the needs of Islamic individuals because there are some banking practices which are inconsistent and contrary to Islamic customs.

If a corporation tends to incorporate you need to register with the SEC. Cite Section 17( last paragraph ) of the Corporation Code. Based on the last paragraph, you will note that the articles of incorporation of a company is required to be registered with the SEC otherwise you will not be validly incorporated. Section 17 of the CC further requires that there must also be certificate of authority from the Bangko Sentral before the articles of incorporation of a bank or quasi-bank can be registered with the SEC. Now, Section 8, 14, 6 of the GBL provides the process on how to secure the certificate of authority

First, let’s go to Section 8 of the GBL.

SECTION 8.Organization. — The Monetary Board may authorize the organization of a bank or quasi-bank subject to the following conditions:

8.1.That the entity is a stock corporation (7);

Comments: A stock corporation is one which has capital and divides its capital into shares and has the power to declare profits/dividends.

8.2.That its funds are obtained from the public, which shall mean twenty (20) or more persons (2-Da); and

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8.3.That the minimum capital requirements prescribed by the Monetary Board for each category of banks are satisfied. (n)

Comments: But what is only required is the Subscribed Capital Stock and the Paid-up Capital stock.

No new commercial bank shall be established within three (3) years from the effectivity of this Act. In the exercise of the authority granted herein, the Monetary Board shall take into consideration their capability in terms of their financial resources and technical expertise and integrity. The bank licensing process shall incorporate an assessment of the bank's ownership structure, directors and senior management, its operating plan and internal controls as well as its projected financial condition and capital base.

The Monetary board may authorize the organization of a bank or quasi-bank. So, the first step is to secure a certificate of authority from the Monetary Board before you can establish a bank.

Upon compliance with the requirements, the Monetary Board will then issue the certificate of authority to establish a bank. Thereafter, you will then be required to apply for an authority to register as a Bank under Section 14 of the GBL.

SECTION 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; and

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. (9)

The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless accompanied by a certificate of authority from the Bangko Sentral. (10) Cdpr

After, compliance with all these requirements you will then go to the SEC to register your articles of Incorporation. The moment you are issued with your certificate of incorporation that does not mean that you can already operate as a Bank because Section 6 of the GBL requires any entity to secure an authority to operate a Bank.

SECTION 6.Authority to Engage in Banking and Quasi-Banking Functions. — No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions.

Your certificate of incorporation is your primary franchise while your certificate of authority to operate a Bank is your secondary franchise. What if your corporate term expires? What will happen to a Bank? The Bank will be dissolved because your secondary franchise (authority to operate) is co-terminus with your primary franchise. So, if the corporate term expires the secondary franchise (authority to operate a Bank) also expires. Once your primary franchise is renewed, your secondary franchise is also renewed. But you have to amend your articles of incorporation and you have to register it thus you need to obtain first a

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certificate of authority to register from the Monetary Board. Thus, the Monetary Board will always review it.

SECTION 9.Issuance of Stocks. — The Monetary Board may prescribe rules and regulations on the types of stock a bank may issue, including the terms thereof and rights appurtenant thereto to determine compliance with laws and regulations governing capital and equity structure of banks: Provided, That banks shall issue par value stocks only.

BSP allows banks to issue common or preferred shares as well as redeemable and convertible shares. It also allows the issuance of warrants and options. But the share must be with a par value or a par value share. A par value share is a share with a fixed value which is stated in the articles of incorporation. A bank cannot have a no par value share. So, the moment they incorporate they must specify in the articles of incorporation the fixed value of the share.

SECTION 10.Treasury Stocks. — No bank shall purchase or acquire shares of its own capital stock or accept its own shares as a security for a loan, except when authorized by the Monetary Board: Provided, That in every case the stock so purchased or acquired shall, within six (6) months from the time of its purchase or acquisition, be sold or disposed of at a public or private sale. (24a) cdphil

Treasury stocks are outstanding stocks/shares which have already been issued by a corporation but reacquired by the corporation.

G.R: Banks are not allowed to have treasury shares/stock.

Exception: If it is authorized by the Monetary Board.

If a bank purchases the shares of its subsidiary or affiliate, is the transaction covered by the restriction? No, because the law says “own shares”. Section 10

Appraisal right – right of a dissenting stockholder to require the corporation to purchase his share.

The rule is that a shareholder of a bank cannot exercise his appraisal right unless there is an authority from the Monetary Board because when you exercise an appraisal right the shares becomes treasury shares/stocks. So, we apply Section 10.

Who can be stockholders of a bank?

1. Individuals (Filipino citizen/ foreign citizen)2. Juridical Persons (non-bank, foreign and domestic / bank, foreign and domestic)

Limits of stockholdings in a single bank

**** Foreign individuals and non-bank corporations may own or control up to 40% of the voting stock of a domestic bank; provided, that the aggregate foreign-owned voting stock owned by the foreign individuals and non-bank corporations in a domestic bank shall not exceed 40% of the outstanding voting stock of the bank. The percentage of foreign–owned voting stock in a bank shall be determined by the citizenship of the individual stockholders in that bank.

Example 1.

Mr. A (foreigner) ----- 40%

Mr. B (foreigner) ----- 5%

= B is no longer allowed to own 5% since the aggregate ownership will already exceed 40% as allowed by law.

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**** A Filipino individual and a domestic non-bank corporation may each own up to 40% of the voting stock of a domestic bank. There shall be no ceiling on the aggregate ownership by such individuals and non-bank corporations in a domestic bank.

Example 2.

Mr. A (Filipino)--------40%

Mr. B (Filipino) -------5%

= allowed since there is no ceiling on aggregate ownership

However, if the domestic non-bank is wholly-owned or majority of the shares is owned by the individual, the 40% individual limit will apply.

*** Stockholdings of family groups or related interests. Individuals related to each other within the fourth civil degree of consanguinity or affinity, whether legitimate, illegitimate or common law, shall be considered family groups or related interests but may each own up to 40% of the voting stock of a domestic bank: Provided, that said relationship must be fully disclosed in all transactions by such individuals or family groups or related interests.

Example 3.

Husband ----- 40%

Wife -----------40%

= allowed since each may own up to 40% of the voting stock of a domestic bank but full disclosure required

Citizenship of a Corporation

Example 1.

ABC Corporation is owned by XYZ Corp ( 30% foreigner, 70% Filipino)

= It is a Filipino bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation. (it needs more than 50% of the voting stocks to be considered controlling)

Example 2.

ABC Bank is owned by XYZ Corp. XYZ Corp is owned by 40% Filipino and the other 60% foreigner

= It is a foreign bank. We have to apply the Control Test in which we will disregard the minority.

Board of Directors

General Rule: 5-15 board of directors, provided that 2 of which should be independent directors

Exception: shall not exceed 21 in case of merger and consolidation

Independent Director

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An independent director shall mean a person who -

(1) Is not or has not been an officer or employee of the bank, its subsidiaries or affiliates or related interests during the past three (3) years counted from the date of his election;

(2) Is not a director or officer of the related companies of the institution’s majority stockholder;

(3) Is not a majority stockholder of the institution, any of its related companies, or of its majority shareholders;

(4) Is not a relative within the fourth degree of consanguinity or affinity, legitimate or common-law of any director, officer or majority shareholder of the bank or any of its related companies;

(5) Is not acting as a nominee or representative of any director or substantial shareholder of the bank, any of its related companies or any of its substantial shareholders; and

(6) Is not retained as professional adviser, consultant, agent or counsel of the institution, any of its related companies or any of its substantial shareholders, either in his personal capacity or through his firm; is independent of management and free from any business or other relationship, has not engaged and does not engage in any transaction with the institution or with any of its related companies or with any of its substantial shareholders, whether by himself or with other persons or through a firm of which he is a partner or a company of which he is a director or substantial shareholder, other than transactions which are conducted at arms’ length and could not materially interfere with.

Meeting

= can be done through teleconferencing and video-conferencing

Limitation: every member of the board shall participate in at least 50% and shall physically attend at least 25% of all board meetings.

What is required from the bank in accordance with the fit and proper rule?

a. Banks shall submit to the appropriate department of the Supervision and Examination Sector (SES) a bio-data of their directors and officers after their election or appointment, in a prescribed form and within the deadline indicated in Appendix 6.

b. Banks shall submit to the appropriate department of the SES for evaluation, a list of the incumbent members of the board of directors and officers (chief executive officers down the line) after the annual election of the board of directors as provided in the bank’s by-laws. Any change in the composition of the board of directors shall also be reported to the BSP after the election or appointment of a member.

c. If after evaluation, the Monetary Board shall find grounds for disqualification, the director/officer so elected/appointed may be removed from office even if he/ she has assumed the position to which he/ she was elected/appointed pursuant to Section 9-A of R.A. No. 337, as amended.

Qualification of a director

a. He shall be at least twenty-five (25) years of age at the time of his election or appointment;

b. He shall be at least a college graduate or have at least five (5) years experience in business;

c. He must have attended a special seminar on corporate governance for board of directors conducted or

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accredited by the BSP: Provided, That incumbent directors as well as those elected after 17 September 2001 must attend said seminar on or before 30 June 2003 or within a period of six (6) months from date of election for those elected after 30 June 2003, as the case may be; and

d. He must be fit and proper for the position of a director of the bank. 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.

= absence of 2 and 4, one cannot be a director anymore

= absence of 1 and 3, temporary only

Disqualification of Directors

a. Permanently disqualified

(1) Persons who have been convicted by final judgment of a court for offenses involving dishonesty or breach of trust such as, but not limited to, estafa, embezzlement, extortion, forgery, malversation, swindling, 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 judgment of a court sentencing them to serve a maximum term of imprisonment of more than six (6) years;

(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 who were found to be culpable for such institution’s closure as determined by the Monetary Board;

(6) Directors and officers of banks found by the Monetary Board as administratively liable for violation of banking laws, rules and regulations where a penalty of removal from office is imposed, and which finding of the Monetary Board has become final and executory; or

(7) Directors and officers of banks or any person found by the Monetary Board to be unfit for the position of directors or officers because they were found administratively liable by another government agency for violation of banking laws, rules and regulations or any offense/violation involving dishonesty or breach of trust, and which finding of said government agency has become final and executory.

b. Temporarily disqualified

(1) Persons who refuse to fully disclose the extent of their business interest or any material information to the appropriate department of the SES when required pursuant to a provision of law or of a circular, memorandum, 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, and directors who failed to physically attend for whatever reasons in at least twenty-five percent (25%) of

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all board meetings in any year, except that when a notarized certification executed by the corporate secretary has been submitted attesting that said directors were given the agenda materials prior to the meeting and that their comments/decisions thereon were submitted for deliberation/discussion and were taken up in the actual board meeting, said directors shall be considered present in the board meeting. This disqualification applies only for purposes of the immediately succeeding election;

(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 where he/she is a director or officer, or at least two (2) obligations with other banks/FIs, under different credit lines or loan contracts, are past due pursuant to Sec. X306;

(b) Obligations shall include all borrowings from a 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, endorser or surety for loans from such FIs;

(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 who have been convicted by a court for offenses involving dishonesty or breach of trust such as, but not limited to, estafa, embezzlement, extortion, forgery, malversation, swindling, 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, violation of banking laws, rules and regulations or those sentenced to serve a maximum term of imprisonment of more than six (6) years but whose conviction has not yet become final and executory;

(5) Directors and officers of closed banks 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 department of the SES of such directors’ election/reelection;

(7) Directors who failed to attend the special seminar for board of directors required under Item “c” of Subsec. X141.2. 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, or after the lapse of five(5) years from the time they were officially advised by the appropriate department of the SES of their disqualification;(9) Those under preventive suspension;(10) Persons with derogatory records as certified by, or on the official files of, the judiciary, NBI, Philippine National Police (PNP), quasi-judicial bodies, other government agencies, international police, monetary

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authorities and similar agencies or authorities of foreign countries for irregularities or violations of any law, rules and regulations that would adversely affect the integrity of the director/officer or the ability to effectively discharge his duties. This disqualification applies until they have cleared themselves of the alleged irregularities/violations or after a lapse of five (5) years from the time the complaint, which was the basis of the derogatory record, was initiated;(11) Directors and officers of banks found by the Monetary Board as administratively liable for violation of banking laws, rules and regulations where a penalty of removal from office is imposed, and which finding of the Monetary Board is pending appeal before the appellate court, unless execution or enforcement thereof is restrained by the court;(12) Directors and officers of banks or any person found by the Monetary Board to be unfit for the position of director or officer because they were found administratively liable by another government agency for violation of banking laws, rules and regulations or any offense/violation involving dishonesty or breach of trust, and which finding of said government agency is pending appeal before the appellate court, unless execution or enforcement thereof is restrained by the court; and(13) Directors and officers of banks found by the Monetary Board as administratively liable for violation of banking laws, rules and regulations where a penalty of suspension from office or fine is imposed, regardless whether the finding of the Monetary Board is final and executory or pending appeal before the appellate court, unless execution or enforcement thereof is restrained by the court. The disqualification shall be in effect during the period of suspension or so long as the fine is not fully paid.

Compensation of DirectorsGeneral Rule: Monetary Board cannot regulate the compensation

Exception: in exceptional cases (in the exercise of police power)

Cross- Selling

= needs monetary board approval since if the product is sold by the bank, the public will have an impression that they are covered by the PDIC when in fact it is not

= selling financial products of its allied undertakings or its investment house units

= to be cross-selling, it should be the employees of the bank who are engaged in the selling of products, not its affiliates.

Two basic functions of a Bank:

1. Deposit Function- secures funds from the public2. Loan Function- brings out the funds to the public for lending purposes

DepositThe unpaid balance of money or its equivalent received by a bank in the (see phone)

- RA 8791. Sec. 3.1."Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits.

Deposit contract: (under the Civil Code) is a contract whereby the principal obligation of which is to safekeep and to return the exact property. For example, I deposit to you P1,000.00 with serial number 1234xxx, if it is a contract of deposit what should be returned to me is the exact number of the bills bearing the same serial number 1234xxx.

- This is not similar with deposit function of a bank because the law that applies in the deposit of the bank is the Law on simple loan as stated in Article 1980, NCC: Fixed, savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.

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So in effect, the Civil Code says that whatever deposits in the bank is not covered by the provisions on deposit contracts but rather they are covered by provisions on contracts of loan

Nature of Deposits in Bank: Guingona vs. Fiscal of Manila. The case filed here was estafa, the basis of which was the Art. 315(1B) of RPC: xxx obligation to return the same thing xxx. So the argument here was that since the bank accepts deposits, they have the obligation to return the same thing and by their failure to do that they are guilty of estafa.

(RPC: estafa: misappropriation: obligation to return the same thing: can’t apply.)

SC: no estafa. Not deposit contract.

1. Ownership is actually transferred to the bank. 2. The bank has the right to use the money any way it wants to. 3. No obligation to return the very same thing.

** deposits of the bank is not contract of deposit but rather of the Contract of loan.

Consolidated Bank vs. CA: SC: the liability of the bank: culpa contractual not a quasi-delict.

- The nature of the deposits was a simple loan but the fiduciary relationship between the bank and its depositor does not convert the contract into a trust. It remains merely a simple loan. Thus, if you breach a loan contract you remain civilly liable. It will remain a loan agreement.

Associated Bank vs. Tan: In this case, the bank credited the uncleared check and recorded it as a deposit even if it was not yet cleared. Bank treated Tan as debtor with respect with the P100K check which bounced off. The Bank set off the account of Tan against the perceived debts of Tan which was the amount of bounced check. Banks generally have the right to set off. As a collecting bank, it acted as an indorser. If a check bounces, the indorser has the obligation to give written notice but in the case, the bank did not do this.

The relationship between the bank and depositor is that of Creditor-debtor such that the bank has the right to set-off against the depositor since the depositor is the creditor. So if the depositor is a debtor in some other transaction, the bank has a right to set off.

Central Bank vs. Morfe: ordinarily, a depositor of a bank is not a preferred creditor. He is just a general creditor and has the same rights as the other creditors of a bank based on simple loan. He doesn’t enjoy any preference. In the case, the spouses tried to circumvent this rule by securing judgment in court for the payment of money to have preference. In the order of preference, judgment takes place or enjoys preference over ordinary credits. SC said that the judgment was not valid, since the case was filed after declaration of insolvency of the bank. BUT if the case was filed before such declaration, it enjoys then the preference as judgment. Since in the case, the judgment was invalidated, they go back to simple loans and they have same rights as all other creditors. So a depositor does not have preference with respect to credit to the bank. He enjoys the same rights as an ordinary unsecured creditor.

WHO ARE ALLOWED TO MAKE DEPOSITS IN BANK?

G.R.: Persons capacitated to enter into contract, of age, not incapacitated, whether natural or juridical.

Exc.: PD 734 (AUTHORIZING MINORS TO DEPOSIT WITH AND WITHDRAW FROM BANKS)

Sec. 1. Minors who are (supposedly not capacitated):

1. at least seven years of age,

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2. are able to read and write, 3. have sufficient discretion, and are 4. not otherwise disqualified by any other incapacity, are hereby vested with special capacity and power, in their own right and in their own names, to make savings or time deposits with and withdraw the same as well as receive interests thereon from banking institutions, without the assistance of their parents or guardians, the provisions of existing laws and regulations to the contrary notwithstanding.

** Parents may nevertheless deposit for their minor children and guardians for their wards

TYPES OF ACCOUNT:

1. Individual Account- deposit by yourself2. Joint Account - 2 or more persons deposited under their own names

Kinds of Joint Account:

A. And/Or Account - signature of one B. And Account - need signature of both depositors for withdrawal

Corporate entities can deposit. In fact in Corporation Code, in order for the corporation to be incorporated it needs Bank certificates and you need a treasurer’s affidavit stating that the amount of the required paid-up capital has been deposited in a bank. So all corporations can’t be incorporated without bank accounts.

TYPES OF DEPOSITS:

1. Demand Deposits- deposits which are subject to payment on demand upon presentation of check. Normally, Non-interest bearing2. Savings Deposits - interest - bearing account which are withdrawable upon the presentation of a withdrawal slip. So you have to go over the counter in order to withdraw from a savings deposit. 3. Negotiable Order Withdrawal (NOW)- a combination of both: withdrawable upon demand at the same time it is an interest bearing account.4. Time Deposits- interest bearing deposits with specific and long-term maturity date. 5. Long-Term Negotiable certificates of Deposits - deposits are negotiable but has a minimum maturity of 5 years.

SURVIVORSHIP AGREEMENT- an agreement where the joint account holders have a standing agreement that if one of them dies everything goes to the survivor. Valid; an aleatory contract supported by lawful consideration, whereby joint depositors permit either of them to withdraw the whole deposit during their lifetime, and transferring the balance to the survivor upon the death of one of them.

Insured Deposit (RA 9576)- the amount due to any bona fide depositor for legitimate deposits in an insured bank net of any obligation of the depositor to the insured bank as (See phone)

SECRECY OF BANK DEPOSITS

Primary Law: RA 1405 - the general law in Bank secrecy (it applies to all types of deposits in general).

Section 2.All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or

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invested is the subject matter of the litigation.

BSP vs. Sally Go: The purpose of the bank secrecy law:

1. To discourage private hoarding. 2. To encourage depositors to deposit their money in the bank without the fear of being looked into. There would be then increase of capital to loan to the public; thus helping in the development of the economy. With regard to the Exceptions. SC: the legal order, regardless of the expanding list of exceptions, is still to preserve the confidentiality of the deposits. There is much disfavor in construing these primary and supplemental exceptions in a manner that would authorize unbridled discretions whether governmental or otherwise in utilizing these exemptions as authority for unwarranted inquiry into bank accounts. The exemptions must be construed Strictly.

PNB vs. Gancayco: Sec. 8, RA 3019- although there is no exemption granted under that specific provision of RA 1405, it is one of the exemptions. SC: Unexplained wealth is similar or analogous to bribery or dereliction of duty of public officials.

COVERED TRANSACTIONS: in excess of P500K within one banking day. In other words if you deposit P499,000 that’s ok, you are safe. But if you deposit P500K + P1= the bank is obliged to report you to the Anti-Money Laundering Council because automatically that transaction is considered a covered transaction.

The reporting requirement also applies for suspicious transactions. Ex. Ordinary government employee, just a staff in provincial office then suddenly you deposit in a month P1M, staggardly not more than P500K in a day. Ordinarily, that employee don’t earn P1M except when he wins it a lotto. So when the source of deposit is unclear, it is considered suspicious transaction.

REPUBLIC ACT NO. 9194. AN ACT AMENDING REPUBLIC ACT NO. 9160, OTHERWISE KNOWN AS THE "ANTI-MONEY LAUNDERING ACT OF 2001"

SECTION 1.Section 3, paragraph (b), of Republic Act No. 9160 is hereby amended as follows:

"(b)'Covered transaction' is a transaction in cash or other equivalent monetary instrument involving a total amount in excess of Five hundred thousand pesos (P500,000.00) within one (1) banking day."

SECTION 2.Section 3 of the same Act is further amended by inserting between paragraphs (b) and (c) a new paragraph designated as (b-1) to read as follows:

"(b-1)'Suspicious transaction' are transactions with covered institutions, regardless of the amounts involved, where any of the following circumstances exist:

"1.there is no underlying legal or trade obligation, purpose or economic justification;

"2.the client is not properly identified;

"3.the amount involved is not commensurate with the business or financial capacity of the client;

"4.taking into account all known circumstances, it may be perceived that the client's transaction is structured in order to avoid being the subject of reporting requirements under the Act;

"5.any circumstance relating to the transaction which is observed to deviate from the profile of the client and/or the client's past transactions with the covered institution;

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"6.the transaction is in any way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed; or

"7.any transaction that is similar or analogous to any of the foregoing."

**So, if there are suspicious transactions, even below P500K, the bank must report to AMLC. And when the bank reports to AMLC because of a covered or suspicious transaction that is not a violation of the Bank secrecy law, it is an exception.

** Sec. 11 RA 9160, as amended, is the authority of AMLC to examine bank deposits in case of violations of the act in connection with unlawful activity: RA 9194: SECTION 3.Section 3(i) of the same Act is further amended to read as follows:

"(i)'Unlawful activity' refers to any act or omission or series or combination thereof involving or having direct relation to the following:

"(1)Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended;

"(2)Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic Act No. 9165, otherwise known as the Comprehensive Dangerous Drugs Act of 2002;

"(3)Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended, otherwise known as the Anti-Graft and Corrupt Practices Act;

"(4)Plunder under Republic Act No. 7080, as amended;

"(5)Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended;

"(6)Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602;

"(7)Piracy on the high seas under the Revised Penal Code, as amended and Presidential Decree No. 532;

"(8)Qualified theft under Article 310 of the Revised Penal Code, as amended;

"(9)Swindling under Article 315 of the Revised Penal Code, as amended;

"(10)Smuggling under Republic Act Nos. 455 and 1937; SEIDAC

"(11)Violations under Republic Act No. 8792, otherwise known as the Electronic Commerce Act of 2000;

"(12)Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against non-combatant persons and similar targets;

"(13)Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the Securities Regulation Code of 2000;

"(14)Felonies or offenses of a similar nature that are punishable under the penal laws of other countries."

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- so if there is a probable cause that the account stemmed from unlawful activity, the AMLC can examine the bank account and there is no violation of the bank secrecy law.

Republic vs. Eugenio: an offshoot of PIATCO. The anti-money laundering aspect.

Sec. 11 of Anti-Money Laundering Law - upon order of any competent court based on an application in cases of violation of this Act.

According to the respondents in the case, sec. 11 only applies when there is actual case pending in court. So they took the word “cases” literally. SC said no. It should be interpreted as in the event as there are violations of the act. So even if no court cases pending yet, AMLC can look into the bank accounts.

Sec. 11 is not ex parte as the law did not provide that it should be ex parte. This case was promulgated in 2008. Now, in 2012, Congress passed RA 10167, making changes Sec. 11 of the law. It now says “upon ex parte application”. Now allows for ex parte application. Need not notify the account holder, his bank account can be examined.) This is just a reiteration of the BSP ruling that because of the bank secrecy act, the confidentiality of bank deposits remains the basic state policy in the Philippines. The secrecy of bank deposits is still the general rule. And the exceptions are strictly construed.

In this case also was the passing mention of Sec. 8, RA 3019 as a recognized exception. Actually it is not really the law because there is nothing in RA 3019 that made it an exception but it is the SC ruling in PNB v. Gancayco reiterated in Banco Filipino vs. Purisima.

RA 10167. SECTION 2. Section 11 of RA 9160 is hereby amended to read as follows:

"SEC. 11.Authority to Inquire into Bank Deposits. — Notwithstanding the provisions of Republic Act No. 1405, as amended; Republic Act No. 6426, as amended; Republic Act No. 8791; and other laws, the AMLC may inquire into or examine any particular deposit or investment, including related accounts, with any banking institution or non-bank financial institution upon order of any competent court based on an ex parte application in cases of violations of this Act, when it has been established that there is probable cause that the deposits or investments, including related accounts involved, are related to an unlawful activity as defined in Section 3(i) hereof or a money laundering offense under Section 4 hereof; except that no court order shall be required in cases involving activities defined in Section 3(i)(1), (2), and (12) hereof, and felonies or offenses of a nature similar to those mentioned in Section 3(i)(1), (2), and (12), which are Punishable under the penal laws of other countries, and terrorism and conspiracy to commit terrorism as defined and penalized under Republic Act No. 9372."

"The Court of Appeals shall act on the application to inquire into or examine any depositor or investment with any banking institution or non-bank financial institution within twenty-four (24) hours from filing of the application."

"To ensure compliance with this Act, the Bangko Sentral ng Pilipinas may, in the course of a periodic or special examination, check the compliance of a Covered institution with the requirements of the AMLA and its implementing rules and regulations."

"For purposes of this section, 'related accounts' shall refer to accounts, the funds and sources of which originated from and/or are materially linked to the monetary instrument(s) or property(ies) subject of the freeze order(s)."

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"A court order ex parte must first be obtained before the AMLC can inquire into these related Accounts: Provided, That the procedure for the ex parte application of the ex parte court order for the principal account shall be the same with that of the related accounts."

"The authority to inquire into or examine the main account and the related accounts shall comply with the requirements of Article III, Sections 2 and 3 of the 1987 Constitution, which are hereby incorporated by reference."

OTHER LAWS:

RA 9372 (prevents terrorism). Human Security Act. SECTION 27.Judicial Authorization Required to Examine Bank Deposits, Accounts, and Records. — The provisions of Republic Act No. 1405 as amended, to the contrary notwithstanding, the justices of the Court of Appeals designated as a special court to handle anti-terrorism cases after satisfying themselves of the existence of probable cause in a hearing called for that purpose that: (1) a person charged with or suspected of the crime of terrorism or conspiracy to commit terrorism, (2) of a judicially declared and outlawed terrorist organization, association, or group of persons; and (3) of a member of such judicially declared and outlawed organization, association, or group of persons, may authorize in writing any police or law enforcement officer and the members of his/her team duly authorized in writing by the anti-terrorism council to: (a) examine, or cause the examination of, the deposits, placements, trust accounts, assets and records in a bank or financial institution; and (b) gather or cause the gathering of any relevant information about such deposits, placements, trust accounts, assets, and records from a bank or financial institution. The bank or financial institution concerned shall not refuse to allow such examination or to provide the desired information, when so ordered by and served with the written order of the Court of Appeals.

RA 10168 The Terrorism Financing Prevention and Suppression Act of 2012. (prevent financing of terrorism)

SECTION 10.Authority to Investigate Financing of Terrorism. — The AMLC, either upon its own initiative or at the request of the ATC, is hereby authorized to investigate: (a) any property or funds that are in any way related to financing of terrorism or acts of terrorism; (b) property or funds of any person or persons in relation to whom there is probable cause to believe that such person or persons are committing or attempting or conspiring to commit, or participating in or facilitating the financing of terrorism or acts of terrorism as defined herein.

The AMLC may also enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the government, including government-owned and -controlled corporations in undertaking measures to counter the financing of terrorism, which may include the use of its personnel, facilities and resources.

For purposes of this section and notwithstanding the provisions of Republic Act No. 1405, otherwise known as the "Law on Secrecy of Bank Deposits", as amended; Republic Act No. 6426, otherwise known as the "Foreign Currency Deposit Act of the Philippines", as amended; Republic Act No. 8791, otherwise known as "The General Banking Law of 2000" and other laws, the AMLC is hereby authorized to inquire into or examine deposits and investments with any banking institution or non-bank financial institution and their subsidiaries and affiliates without a court order.

Sundiang also gives other exemptions: In cases of stagnant accounts, accounts which are not moving for 10 years, the banks are supposed to report it to the treasury.

FOREIGN CURRENCY DEPOSIT: RA 6426

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Nothing in RA 1405 that says na it is only for peso deposit but subsequently RA 6426 was enacted which specifically provides for confidentiality of foreign deposits.

GSIS vs. CA: reconciled the two laws. RA 6426 did not repeal RA 1405. Rather RA 1405 applies to all kinds of deposits, therefore it is a general law while RA 6426 applies to foreign currency deposit, therefore a special law. Thus, taken together, they can exist at the same time.

RA 1405: 4 exemptions:

1. written permission of the depositor,

2. impeachment,

3. upon order of a competent court in cases of bribery or dereliction of duty of public officials,

4. in cases where the money deposited or invested is the subject matter of the litigation.

RA 6426, applies to foreign currency deposits. 1 exemption: written permission of the depositor.

- can exist together

Compare (include also)

* RA 9160, Sec. 9 & 11 - so the anti money laundering law also expressly exempts it from confidentiality of foreign deposits.

* RA 10168, Sec. 10 - AMCL exempts from bank secrecy requirements under the foreign secrecy deposit. So this one is another exception of RA 6426.

**So aside from the exemption under RA 6426, RA 9160 and RA 10168 also provides for exemption from the bank secrecy requirement under the foreign currency deposit act.

* RA 9372 - only an exception to RA 1405.

RA 9194. SECTION 6.Section 9(c) of the RA 9160 is hereby amended to read as follows:

"(c)Reporting of Covered and Suspicious Transactions. — Covered institutions shall report to the AMLC all covered transactions and suspicious transactions within five (5) working days from occurrence thereof, unless the Supervising Authority prescribes a longer period not exceeding ten (10) working days.

"Should a transaction be determined to be both a covered transaction and a suspicious transaction, the covered institution shall be required to report the same as a suspicious transaction.

"When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees shall not be deemed to have violated Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791 and other similar laws, but are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person, the fact that a covered or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. In case of violation thereof, the concerned officer and employee of the covered institution shall be criminally liable. However, no administrative, criminal or civil proceedings, shall lie against any person for having made a covered or suspicious transaction report in the regular performance of his duties in good faith, whether or not such reporting results in any criminal prosecution under this Act or any other law.

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"When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees are prohibited from communicating directly or indirectly, in any manner or by any means, to any person or entity, the media, the fact that a covered or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. Neither may such reporting be published or aired in any manner or form by the mass media, electronic mail, or other similar devices. In case of violation thereof, the concerned officer and employee of the covered institution and media shall be held criminally liable."

INSURED DEPOSITS

- All deposits in the banks are covered with insurance. The insurer is PDIC. The covered amount is P500,000.

How is determined?

RA 9576 (AN ACT INCREASING THE MAXIMUM DEPOSIT INSURANCE COVERAGE, AND IN CONNECTION THEREWITH, TO STRENGTHEN THE REGULATORY AND ADMINISTRATIVE AUTHORITY, AND FINANCIAL CAPABILITY OF THE PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC), AMENDING FOR THIS PURPOSE REPUBLIC ACT NUMBERED THREE THOUSAND FIVE HUNDRED NINETY-ONE, AS AMENDED, OTHERWISE KNOWN AS THE PDIC CHARTER, AND FOR OTHER PURPOSES).

Insured Deposit: SECTION 3.Section 4 (g) of the same Act is hereby amended to read as follows:

"(g)The term 'insured deposit' means the amount due to any bona fide depositor for legitimate deposits in an insured bank net of any obligation of the depositor to the insured bank as of the date of closure, but not to exceed Five hundred thousand pesos (P500,000.00). Such net amount shall be determined according to such regulations as the Board of Directors may prescribe. In determining such amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his benefit either in his own name or in the name of others. A joint account regardless of whether the conjunction 'and', 'or', 'and/or' is used, shall be insured separately from any individually-owned deposit account: Provided, That (1) If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the maximum insured deposit shall be divided into as many equal shares as there are individuals, juridical persons or entities, unless a different sharing is stipulated in the document of deposit, and (2) If the account is held by a juridical person or entity jointly with one or more natural persons, the maximum insured deposit shall be presumed to belong entirely to such juridical person or entity: Provided, further, That the aggregate of the interests of each co-owner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit of Five hundred thousand pesos (P500,000.00): Provided, furthermore, That the provisions of any law to the contrary notwithstanding, no owner/holder of any negotiable certificate of deposit shall be recognized as a depositor entitled to the rights provided in this Act unless his name is registered as owner/holder thereof in the books of the issuing bank: Provided, finally, That, in case of a condition that threatens the monetary and financial stability of the banking system that may have systemic consequences, as defined in Section 17 hereof, as determined by the Monetary Board, the maximum deposit insurance cover may be adjusted in such amount, for such a period, and/or for such deposit products, as may be determined by a unanimous vote of the Board of Directors in a meeting called for the purpose and chaired by the Secretary of Finance, subject to the approval of the President of the Philippines."

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- PDIC P500,000 per depositor not per account. So if I have 3 accounts with P500K each, how much am I insured? Only P500,000.

- if joint account, insured amount, considered separate.

1. If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the maximum insured deposit shall be divided into as many equal shares as there are individuals, juridical persons or entities, unless a different sharing is stipulated in the document of deposit,

- ex. Husband and wife would have a deposit of P800,000 in a bank. How much entitled to? Husband is covered for P400K, wife is also covered for P400K.

2. If the account is held by a juridical person or entity jointly with one or more natural persons, the maximum insured deposit shall be presumed to belong entirely to such juridical person or entity: Provided, further, That the aggregate of the interests of each co-owner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit of Five hundred thousand pesos (P500,000.00).

- Ex. 2 accounts of P800,000 each. Covered for only P500,000.

LOAN FUNCTIONS

GENERAL GUIDELINES IN GRANTING LOAN AND OTHER CREDIT ACCOMODATIONS: (3)

RA 8791: SECTION 39.Grant and Purpose of Loans and Other Credit Accommodations. — A bank shall grant loans and other credit accommodations only in amounts and for the periods of time essential for the effective completion of the operations to be financed. Such grant of loans and other credit accommodations shall be consistent with safe and sound banking practices. (75a)

The purpose of all loans and other credit accommodations shall be stated in the application and in the contract between the bank and the borrower. If the bank finds that the proceeds of the loan or other credit accommodation have been employed, without its approval, for purposes other than those agreed upon with the bank, it shall have the right to terminate the loan or other credit accommodation and demand immediate repayment of the obligation. (77)

SECTION 40.Requirement for Grant of Loans or Other Credit Accommodations. — Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.

Toward this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or other credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation.

In formulating rules and regulations under this Section, the Monetary Board shall recognize the peculiar characteristics of microfinancing, such as cash flow-based lending to the basic sectors that are not covered by traditional collateral.

1. A bank shall grant loans and other credit accommodations only in amounts and for the periods of time essential for the effective completion of the operations to be financed.

- The amount and the period of the loan should be consistent with the purpose of the loan. The purpose of all loans and other credit accommodations shall be stated in the application and in the contract

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between the bank and the borrower. If the bank finds that the proceeds of the loan or other credit accommodation have been employed, without its approval, for purposes other than those agreed upon with the bank, it shall have the right to terminate the loan or other credit accommodation and demand immediate repayment of the obligation.

2. Such grant of loans and other credit accommodations shall be consistent with safe and sound banking practices.

- the bank should establish, design and implement written policies and measures in identifying, monitoring, controlling risk. Before you even start operations lending money, you have to know the guidelines in lending money to lessen the risk. Must have a set of written policies to control the credit risk. These are the Credit policies of a bank. Bank must establish and implement them. Who are responsible for establishing these? Primarily: by the Board of Directors, Secondarily: Monetary Board intervenes, give own terms and condition (Sec. 43, RA 8791).

These credit policies must be in writing so everyone can see and implement it. It can be changed only upon the approval of the Board.

- The credit policies should contain: who would be eligible to loan, how much can be lent, what is the type of credit (whether secured, unsecured, long-term, short-term, revolving credit), terms and conditions of payment.

3. Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.

MORB Section X304:

In addition to the usual information sheet about the borrower, a bank shall require from the credit applicant the following:

a. A copy of the latest ITR of the borrower and his co-maker, if applicable, duly stamped as received by the BIR;

b. Except as otherwise provided by law and in other regulations, if the borrower is engaged in business, a copy of the borrower’s latest financial statements as submitted for taxation purposes to the BIR; and

c. A waiver of confidentiality of client information and/or an authority of the bank to conduct random verification with the BIR in order to establish authenticity of the ITR and accompanying financial statements submitted by the client.

The documents under Items “a” and ”b” above shall be required to be submitted annually for as long as the loan and/or credit accommodation is outstanding. The consistency of the data/figures in said ITRs and financial statements shall also be checked and considered in the evaluation of the financial capacity and creditworthiness of credit applicants. The waiver of confidentiality of client information and/or an authority of the bank to conduct random verification with the BIR need not be submitted annually since once submitted these documents remain valid unless revoked.

Should the document(s) submitted prove to be spurious or incorrect in any material detail, the bank may terminate any loan or other credit accommodation granted on the basis of said document(s) and shall have the right to demand immediate repayment or liquidation of the obligation. Moreover, the bank may seek redress from the court for any harm done by the borrower’s submission of spurious documents.

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RA, 8791. SECTION 43.Authority to Prescribe Terms and Conditions of Loans and Other Credit Accommodations. — The Monetary Board may, similarly, in accordance with the authority granted to it in Section 106 of the New Central Bank Act, and taking into account the requirements of the economy for the effective utilization of long-term funds, prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action.

The Monetary Board shall regulate the interest imposed on microfinance borrowers by lending investors and similar lenders, such as, but not limited to, the unconscionable rates of interest collected on salary loans and similar credit accommodations.

- currently, the MB has not prescribed maximum maturities. The only requirement was that: § X306.3 Renewals/extensions. No loan shall be renewed or its maturity date extended unless the corresponding accrued interest receivable shall have been paid.

- in other words, must fully pay the interest payable in order to extend or renew the loan.

BSP Circular 799, July 2013 - rate of interest without stipulation in loan contracts: 6% per annum.

As you know, the MB has taken out the rule on usury. There is no marked ceiling on the interest under the loan but the SC is allowed to determine if it is just and equitable.

So eastern shipping case ruling that the moment there is demand (if there is no stipulation) the interest rate would be 12% ( and that the moment there is judgment another 12% )is no longer applicable. So for loan and forbearance, interest rate is now at 6%. This is in line with MB’s power to determine interest rate.

SECTION 37. Loans and Other Credit Accommodations Against Real Estate. — Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations against real estate shall not exceed seventy-five percent (75%) of the appraised value of the respective real estate security , plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees

How does a bank ensure that the debtor’s obligation would be paid?

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The bank can ask for a security.

What are the properties that can be considered as security for bank loans?

Real estate- under the GBL it covers real estate and insured improvements. Chattels and Intangible properties

How does the bank determine the amount of the loan?

Ceiling on Real estate- 75% of the appraised value Ceiling on insured improvements- 60% of the appraised value

What do you mean by appraised value?

The value as determined by the estimate of an independent appraiser.

Who has the obligation to hire an independent appraiser?

The banks because they would take the risk if the property is overvalued.

(Central bank vs CA)

The SC held that the banks are obligated to determine the value of the security and can’t rely on the value as declared by the borrower. The value declared by the borrower is immaterial. The bank should make an independent valuation of the property and if by chance the property is overvalued it is the bank which bears the risk of loss. The bank is bound by their valuation.

SECTION 38. Loans and Other Credit Accommodations on Security of Chattels and Intangible Properties. — Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations on security of chattels and intangible properties, such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed seventy-five percent (75%) of the appraised value of the security, and such loans and other credit accommodations may be made to the title-holder of the chattels and intangible properties or his assignees

What are the types of assets that can be used as a security for bank loans?

Real estate Chattels and Intangible properties.

How much is the loanable amount for each type of asset?

Real property= 75% of the appraised value Intangible and personal= 75% of the appraised value

Can the bank set a lower ceiling? Yes Higher? No.

Can the monetary board prescribe higher? Yes Lower? Yes.

So the monetary board has the power to move the ceiling, whether up or down. Banks on the other hand can only move it down but cannot exceed the ceiling.

Basis: section 37 and 38 :“Except as the Monetary Board may otherwise prescribe”

Can one constitute a Junior Mortgage on your property? A secondary mortgagee.

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For REAL ESTATE mortgage the bank is allowed to be a junior mortgagee. Provided that the sum total of the loan covered by the senior mortgage and loan to be granted does not exceed the loanable amount which is the 75% ceiling.

X311.1 Loans secured by junior mortgage on real estate. Banks may also grant loans on the security of junior mortgages on real estate: Provided, That for such loans to be considered as adequately secured under Sections 37 and 38 of R.A. No. 8791, the sum total of the loans to be granted and the outstanding balance of the loan granted on the senior mortgage shall not, at any time, exceed the loan value of subject real estate security based on the appraisal of the real estate by the junior mortgagee.

For CHATTELS and INTANGIBLES?

Not allowed, they have to be unencumbered.

Sec. X312 Loans and Other Credit Accommodations Secured By Chattels and Intangible Properties. Loans and other credit accommodations on the security of chattels and intangible properties, such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed seventy-five percent (75%) of the appraised value of the security, and such loans and other credit accommodations may be made to the title-holder of the unencumbered chattels and intangible properties or his assignees: Provided, That in the case of intangible properties, appraisal thereof shall be conducted by an independent appraiser acceptable to the BSP.

What is the security under section 37? REAL ESTATE MORTGAGE

Section 38? CHATTEL MORTGAGE

Can a REAL ESTATE mortgage secure FUTURE OBLIGATIONS?

Yes, you can have a dragnet clause.

How about a CHATTEL MORTGAGE?

No, because you have to make an affidavit of good faith describing the loan. You have to make an affidavit for every obligation.

(Prudential bank vs Alviar)

SC said that there was a dragnet clause, a provision in a mortgage contract which subsumes future obligations. A security given to the creditor which would cover future obligations of the debtor. The dragnet clause is a valid provision as held by the SC.

In a dragnet clause there is a continuing offer of security on the part of the debtor. It is up to the creditor to accept or not accept the security. When the creditor requires a second security for a subsequent loan it would have the effect of not accepting the continuing offer. The obligation covered by another security would not be covered by the dragnet clause, however if there is an excess or if the debt is not fully covered by the security then the excess would be covered by the dragnet clause. The part not covered by the second security is covered by the dragnet clause.

The subsequent security given must be exhausted before going after the security given for the dragnet clause.

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SC said the loan by spouses in behalf of corporation not covered by dragnet. Because it is a Corporation and has a separate legal entity.

(Republic vs Sarmiento)

Dragnet or Blanket Mortgage Clause

Specifically phrased to subsume all debts of past or future origins. Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each transaction.

A dragnet clause operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having ti execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, etc.

Loan by spouses in behalf of the business covered by dragnet because it is a sole proprietorship and the spouses executed a surety agreement making them solidarily liable for the loan.

What about if the loan has no security? Is that allowed?

Yes. It must comply with the financial capacity required of a debtor and a co-maker, a co-maker is not needed if he has a good track record.

SECTION 41. Unsecured Loans or Other Credit Accommodations. — The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks.

X319 Loans Against Personal Security. The grant, renewal, restructuring or extension of unsecured loans shall, in addition to the requirements of Sec. X304, be made under the signature of the principal borrower and at least one(1) co-maker, except that a co-maker is not required when the principal borrower has the financial capacity and good track record of paying his obligations.

What other limitations are there in the GBL?

35.1. Except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees as may be defined by the Monetary Board that may be extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed twenty percent (20%) of the net worth of such bank. The basis for determining compliance with single-borrower limit is the total credit commitment of the bank to the borrower.

SINGLE BORROWER’s LIMIT- designed to lower the credit risk. To spread out loans to many persons. To prevent the bank from concentrating its resources to a few persons.

A loan given to a single borrower shall not exceed 25% of the net worth of the bank. (25% as provided by a Circular).

Total credit commitment- the total credit the person may avail whether fully availed or not. How much you are willing to grant to such person.

The total credit commitment would include the total amount of loans, credit accommodations and guarantees.

What transactions covered by the SBL?

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Section 35.3 the ceiling will not only pertain to direct loans but also for transactions which hold you indirectly liable.

35.3. The above prescribed ceilings shall include: (a) the direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general indorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such bank; (b) in the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; (c) in the case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and (d) in the case of a partnership, association or other entity, the liabilities of the members thereof to such bank.

How can the ceiling be increased?

35.2 The monetary board can increase as much as 10% of the net worth of the bank provided there are additional securities.

35.2. Unless the Monetary Board prescribes otherwise, the total amount of loans, credit accommodations and guarantees prescribed in the preceding paragraph may be increased by an additional ten percent (10%) of the net worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance.

What obligations are not included in the ceiling?

35.5. For purposes of this Section, loans, other credit accommodations and guarantees shall exclude: (a) loans and other credit accommodations secured by obligations of the Bangko Sentral or of the Philippine Government; (b) loans and other credit accommodations fully guaranteed by the government as to the payment of principal and interest; (c) loans and other credit accommodations covered by assignment of deposits maintained in the lending bank and held in the Philippines; (d) loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits; and (e) other loans or credit accommodations which the Monetary Board may from time to time, specify as non-risk items. (secured by government undertakings)

How should the amortization schedule be designed?

In accordance with the purpose of the loan.

Rules on payment of the loan?

1. Based on amortization schedule based on the purpose of the loan.2. Maturity for more than 5 years, periodic amortizations annually.3. Cannot generate revenues right away, bank allowed to defer payments provided it is not later

than 5 years after the grant of the loan.

SECTION 44. Amortization on Loans and Other Credit Accommodations. — The amortization schedule of bank loans and other credit accommodations shall be adapted to the nature of the operations to be financed.

In case of loans and other credit accommodations with maturities of more than five (5) years, provisions must be made for periodic amortization payments, but such payments must be made at

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least annually: Provided, however, That when the borrowed funds are to be used for purposes which do not initially produce revenues adequate for regular amortization payments there from, the bank may permit the initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial amortization date be later than five (5) years from the date on which the loan or other credit accommodation is granted. (79a)

In case of loans and other credit accommodations to microfinance sectors, the schedule of loan amortization shall take into consideration the projected cash flow of the borrower and adopt this into the terms and conditions formulated by banks. (n) Are you allowed to Prepay the loan?

Yes, the period is for the benefit of both creditor and debtor.

SECTION 45. Prepayment of Loans and Other Credit Accommodations. — A borrower may at any time prior to the agreed maturity date prepay, in whole or in part, the unpaid balance of any bank loan and other credit accommodation, subject to such reasonable terms and conditions as may be agreed upon between the bank and its borrower.

If you want to prepay can the bank require you to pay for the unearned interest?

authors say that the bank can require the borrower to pay for the unearned interest. Such may be stated in the agreement and may even provide for a penalty because the period is for the benefit of both creditor and debtor.

RULES ON FORECLOSURE

SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration. (78a) Redemption: a bank can foreclose if the borrower can’t pay, extrajudicial or judicial.

What is the rule with redemption?

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One year redemption applies to judicial and extrajudicial foreclosure, if the mortgagor is a natural person.

In your CREDIT TRANSACTIONS: if creditor is not a bank you have one year to redeem in an extrajudicial foreclosure. On judicial foreclosure no right to redeem but only an equity of redemption which should not exceed 90 days or confirmation of the sale.

In the General Banking Law:

If the creditor is a bank and the owner of the property foreclosed is a natural person regardless of being an extrajudicial or judicial foreclosure you always have one year to redeem.

So you take a look at who the creditor is, if the creditor is a bank you apply the General Banking Law which allows a one year redemption period. If the creditor is not a bank then apply 3135 or the Rules of Court.

If the debtor is a Juridical person, redemption should be done before the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. This rule would apply in an extrajudicial foreclosure.

In other words if the foreclosure is judicial and the borrower is a Juridical entity, you still have the one year period to redeem.

So the rule in section 47,

Natural person whether Judicial or Extrajudicial you have one year to redeem. Juridical entity and a Judicial foreclosure you have one year to redeem. Juridical entity and an Extrajudicial foreclosure redemption before the registration of

sale but not later than 3 months.

(GC Dalton vs. equitable)

The mortgagee was a Juridical Entity and it was an Extrajudicial foreclosure.

The SC said that the issuance of a writ of possession is ministerial because the mortgagee already held title to the property, in fact the mortgagor cannot redeem the property anymore because the period for redemption has already expired the moment the certificate of sale was registered with the register of deeds. The mortgagee already became the owner of the foreclosed property.

What about the payment for redemption? How much should be paid?

Amount due under mortgage Interest under the mortgage Cost and expenses from sale less income derived from sale.

This is different from the rules of court and 3135. NOT the purchase price from the auction sale.

(Asiatrust vs tuble)

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When the debtor redeemed the property, the loan was P400,000 he was required to pay 1.2 million which included 18% interest based on the mortgage deed according to the GBL. Debtor said it should only be 1% per month based on the Rules of Court. So which law should apply? The GBL or the Rules of Court?

The SC said the Bank is correct; the GBL is a special and subsequent law so it should govern. So when mortgagee is a bank, redemption price is based on the mortgage document under the GBL.

Further, the SC did not allow the book value of the car, salary loan, car insurance and litigation expenses to be included in the redemption price. Sec 47 is strict on what you can include in the redemption price. Amount under the mortgage, interest under the mortgage and cost and expenses of the sale. No other amounts included.

TERM OF INDEPENDENT DIRECTOR:

One of the disqualifications was if he served for as director or officer for 3 years in the same bank. Does that apply to a person serving as such independent director?

The MORB allows the independent director allows serving as such for 5 consecutive years. After the 5 years there is a cooling off period of 2 years, during such he should not be connected with the bank. After the cooling off period he may again serve as an independent director for another 5 consecutive years, after that a perpetual disqualification as an independent director.

(5-2-5-perpetual disqualification)

Basic function of a bank which is loan, they are authorized to grant loans subject to certain limitations under the General Banking Law and MORBs. Among the limitations is what we call the single borrower’s limit which is under the GBL, must not exceed 20% of the net worth of the bank which could be increased to another 10 % subject to certain conditions. Other restrictions are for loans which are secured by certain collaterals e.g. real estate.

Sec 37. Loans and Other Credit Accommodations Against Real Estate. — Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations against real estate shall not exceed seventy-five percent (75%) of the appraised value of the respective real estate security, plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees.

The Monetary Board is allowed/authorized to make changes in the limits thru MORBs.

With respect to chattel Mortgage-

Sec. 38. Loans and Other Credit Accommodations on Security of Chattels and Intangible Properties. — Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations on security of chattels and intangible properties, such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed seventy-five percent (75%) of the appraised value of the security, and such loans and other credit accommodations may be made to the title-holder of the chattels and intangible properties or his assignees.

Other limitations imposed by law on granting loans would be limitations with respect for loan or credit accommodations granted by banks with for their own directors, officers, stockholders and their related interest.

The general rule when it comes to self-dealing transactions?

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The law prohibits bias or favoritism with for their own directors, officers, stockholders and their related interest (DOSRI).

The rule is self-dealing transactions are allowed, but to prevent a situation that the bank will give undue favor to its own DOSRI, GBL regulates the transaction between a bank and its DOSRI.

General rule when it comes to transaction between the bank and its DOSRI? How will the transaction be handled? How will you ensure that there is no favoritism?

1st The transaction should be in the ordinary course of the business of the bank.2nd Dealings should be upon terms not less favorable to the bank than those offered to others.

Does the law allow the transaction to the detriment of the DOSRI and favorable to the bank? What the law requires? When can you say the terms are fair?

-the terms offered to the general public or persons not related. The terms given to the DOSRI are similar to public or 3rd person. Meaning the transaction is arms -length transaction as if there is no relation between the banks and DOSRI. The terms should be similar to those given to the general public. That is the simple meaning of Sec. 36. Terms does not have to favor the bank to the detriment of the DOSRI. What is required under the law is that the terms given to the gen pub should also be similar to the terms given to DOSRI. You do not give terms to the DOSRI that are more favorable to them than what you actually give to the public. So the transaction should be in the ordinary course of the business of the bank and should be arms-length.

To prevent undue favoritism to the DOSRI, the law allows certain additional requirements before a DSORI is allowed to loan.

1st Sc. 36 xxx written approval of the majority of all the directors of the bank, excluding thedirector concerned.

If there are 15 directors, how many directors should vote? Eight (8) directors. Why? It is the majority of the total number of directors. As you know, you do not need all the directors to attend a meeting in order for a meeting to be valid. It is only important that you have a quorum and you have a quorum if you have the majority. In this case you have quorum if you have 8 directors attending the meeting. For this transaction to be valid, all 8 must vote in favor. Normally, ordinary corporate business if 8 attended and 5 voted in favor, that is already passed. But for this DOSRI transaction the number voting must be based not on the directors attending but on the number of directors stated in the articles. And if 8 directors voted because only 8 attended the meeting but one of them is the director concerned, do you have a valid approval? You do not because the vote of the majority must exclude the person concerned. Take note: the voting 8 must not include the director concerned.

What is the form of the approval?The approval should be in the form of a board resolution. The required approval shall be entered

upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko Sentral.

When will it be submitted?Under MORB, it is within 20 days from the date of approval of the majority of the board.

Go vs. bspIn this case Go was sued for the violation of Sec. 83 of General Banking Act now Sec. 36 of the

General Banking Law. He was the President/CEO and yet he was able to borrow and/or act as guarantor for loan acquired by other person in the same bank. He borrowed and became guarantor. He questioned the information because under the law it only punishes borrowing and be a guarantor separately and second according to him the prosecution failed to state that the borrowing made exceeded the limits provided by the law.

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What was the offense allegedly committed by Mr. Go? Sec 83 allows 3 offenses. The third provision which is catch-all provision in essence, he incurs

any liability to the bank. The court said that even though he was alleged to be borrower and or guarantor of the bank the essence there is that he incurs liability to bank because there was no written approval by the board. What was the offense allegedly committed by Mr. Go? It is borrowing or allowing himself to be a guarantor for a loan secured by third persons from the bank. Is this in itself an offense, if you borrow? It becomes an offense if it is without the written approval of the majority of the board. That is the criminal act. That is the violation.

Under the Sec. 36 of GBL (Sec. 83 of the General Banking Act before), the first offense is failure to acquire the necessary approval of the board of directors.

Offenses that can be committed under Sec. 36 (based on the Go Case)1. failure to secure the written approval of the majority of the members of the board of directors

Exception (GBL): if the loan is under a fringe benefit plan which was approved by the BSP

2. failure to give a copy of the approval or resolution of the board to BSP (reportorial requirement)

3. failure to comply with the ceiling requirement= failure to comply to any one of them will constitute a separate offense since each is independent from the other

= all three should be complied with in order to have a valid self-dealing transaction

Exclusions from Individual Ceiling

The following loans, other credit accommodations and guarantees shall be excluded in determining compliance with the individual ceiling.

a. Loans, other credit accommodations and guarantees secured by assets considered as non-risk by the Monetary Board; Assets considered as non-risk shall refer to the following:

(1) Cash;

(2) Debt securities issued by the BSP or the Philippine government;

(3) Deposits maintained in the lending bank and held in the Philippines;

(4) Debt securities issued by the U.S. government;

(5) Debt securities issued by central governments, central banks of foreign countries and multilateral financial institutions such as International Finance Corporation, Asian Development Bank and World Bank, with the highest credit quality given by any two (2) internationally accepted rating agencies; and

(6) deposits of clients of related nongovernmental organizations (NGOs)/ foundations, that are engaged in retail microfinance operations, and are maintained with the related lending bank and held in the Philippines

b. Loans, other credit accommodations and advances to officers in the form of fringe benefits granted in accordance with existing regulations; and

c. Loans, other credit accommodations and guarantees extended by a Coop Bank to its cooperative shareholders.

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Ceiling Requirement

1. Individual Borrower = limited to unencumbered deposits and book value of their paid-in capital contribution in the bank= the actual ceiling/limit applies to each individual DOSRI

= implication: each DOSRI ceiling is individual to that particular DOSRI, the formula is the same but the limit is not the same for all

Unencumbered deposits shall refer to savings, time and demand deposits, which are not subject to an assignment or hold-out agreement or any other encumbrance

Paid-in capital is the amount that the stockholders actually paid regardless of the amount

Book Value of the paid-in capital contribution shall mean the proportional amount of the bank’s total capital accounts as the corresponding paid-in capital contribution of each of the bank’s directors, officers, stockholders and their related interests bear to the total paid-in capital of the bank

Limitation: the unsecured portion should not exceed 30% of the total loan portfolio (actual loans of DOSRI)

2. Aggregate Ceiling = 15% of the total loan portfolio of the bank or 100% of the net worth whichever is lower

= it is the total loan that a bank may give to its DOSRIs

Limitation of unsecured portion: 30% of the aggregate ceiling or 30% of the outstanding loans whichever is lower

1. For example you have a director with an

* Unencumbered Deposits of P50M

* Book Value of Paid-In Capital of P50M

* Unsecured Loan of P30M

* Loan with REM of P70M

How much is the Individual Ceiling? P100M.

Total Loan? P100M

Allowable Unsecured Loan? P30M

Do we have compliance with GBL and MORB here? Yes. There is compliance with unsecured and Individual Ceiling

What about the unsecured loan, is there compliance? How much is allowable? 30% of Total Loan Portfolio of the particular DOSRI. (not based on Individual Ceiling but on Actual Loan)

2. Unencumbered Deposit = 0Book value of paid-in capital = P50M

Total Unsecured Loan = P30M

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Non-Risk Loan = P50M

Loan with REM = P20M

How much is the total actual loan? P100M (Total Unsecured Loan = P30M; Non-Risk Loan = P50M

Loan with REM = P20M)

How much is the Individual Ceiling? P50M (Unencumbered Deposit = 0; Book value of paid-in capital = P50M)

Does the loan comply with the limits, are we compliant with the ceiling? Yes. Non-Risk Loan of P50M is excluded in computation for ceiling. So total loan subject to the ceiling is P50M.

Did we comply with the unsecured limit? Yes since P30M is within the 30% of the total loan portfolio as the total loan is P100M.

3. Unencumbered Deposit = P50M

Book value of paid-in capital = P50M

Unsecured Loan = P30M

Fringe Benefit Loan = P40M

Loan with REM = P70M

How much is the total Actual Loan? P140M

Individual Ceiling? P100M

Unsecured Ceiling? P42M

Are we compliant with individual ceiling? Total loan is P140M but we don’t include all of it for the determination of the ceiling. Total loan applicable to the ceiling is P100M as the fringe benefit loan of P40M is excluded. So we are compliant with the individual ceiling.

Are we compliant with the unsecured loan ceiling? Yes. Because our unsecured loan is only P30M.

C. Unencumbered Deposit = 0Book value of paid-in capital = P50M

Unsecured Loan = P30M

Non-Risk Loan = P50M

Housing Loan for Fringe Benefit Loan = P40M

Loan with REM = P20M

How much is the Total Actual Loan? P140M (Unsecured Loan = P30M; Non-Risk Loan = P50M; Housing Loan for Fringe Benefit Loan = P40M; Loan with REM = P20M)

How much is the Individual Ceiling? P50M

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How much is the Unsecured Ceiling? P42M

Did we comply with Individual Ceiling? Yes. Because out of the P140M total actual loan, we take out the Non-Risk Loan of P50M and Housing Loan for Fringe Benefit Loan of P40M, thus total loan of P50M. So we complied with the ceiling.

How about the Unsecured? Yes. We are also compliant with total unsecured ceiling.

So two exclusions from the ceilings: Non risk loan and fringe benefit loans

Who are considered directors for purposes of these dealings: Directors are those who are elected and qualified to be directors of a bank.

Who are officers? Officers are those enumerated in § X142.1 Definition of officers. Officers shall include the president, executive vice president, senior vice-president, vice president, general manager, treasurer, secretary, trust officer and others mentioned as officers of the bank, or those whose duties as such are defined in the by-laws, or are generally known to be the officers of the bank (or any of its branches and offices other than the head office) either through announcement, representation, publication or any kind of communication made by the bank: Provided, That a person holding the position of chairman or vice-chairman of the board or another position in the board shall not be considered as an officer unless the duties of his position in the board include functions of management such as those ordinarily performed by regular officers: Provided, further, That members of a group or committee, including sub-groups or sub-committees, whose duties include functions of management such as those ordinarily performed by regular officers, and are not purely recommendatory or advisory, shall likewise be considered as officers. (As amended by Circular No. 562 dated 13 March 2007)

Who are Stockholders? Stockholders are holders of one percent (1%) or more of the total subscribed capital stock of the bank.

So for example if you are a holder of only 0.1%, you are not considered a DOSRI. So you don’t need to comply with this. Subscribed ha not the authorized capital stock, meaning the outstanding capital stock.

§ X326.1c. Stockholder shall refer to any stockholder of record in the books of the bank, acting personally, or through an attorney-in-fact; or any other person duly authorized by him or through a trustee designated pursuant to a proxy or voting trust or other similar contracts, whose stockholdings in the lending bank, individual and/or collectively with the stockholdings of: (i) his spouse and/or relative within the first degree by consanguinity or affinity or legal adoption; (ii) a partnership in which the stockholder and/or the spouse and/or any of the aforementioned relatives is a general partner; and (iii) corporation, association or firm of which the stockholder and/or his spouse and/or the aforementioned relatives own more than fifty percent (50%) of the total subscribed capital stock of such corporation, association or firm, amount to one percent (1%) or more of the total subscribed capital stock of the bank.

** Stockholders need not be beneficial stockholders because even if you are just a holder of a voting trust and your trust cover 1% or 1% or more of the total subscribed capital stock of the bank, you are still considered a stockholder.

Who are Related Interest?

§ X326.1e. Related interest shall refer to any of the following:

(1) Spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of a director, officer or stockholder of the bank;

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(2) Partnership of which a director, officer, or stockholder of a bank or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, is a general partner;

(3) Co-owner with the director, officer, stockholder or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of the property or interest or right mortgaged, pledged or assigned to secure the loans or other credit accommodations, except when the mortgage, pledge or assignment covers only said co-owner’s undivided interest;

(4) Corporation, association, or firm of which a director or officer of the bank, or his spouse is also a director or officer of such corporation, association or firm, except (a) where the securities of such corporation, association or firm are listed and traded in the big board or commercial and industrial board of domestic stock exchanges and less than fifty percent (50%) of the voting stock thereof is owned by any one (1) person or by persons related to each other within the first degree of consanguinity or affinity; or (b) where the director, officer or stockholder of the bank sits as a representative of the bank in the board of directors of such corporation: Provided, That the bank representative shall not have any equity interest in the borrower corporation except for the minimum shares required by law, rules and regulations, or by the by-laws of the corporation, or (c) where the corporation is at least ninety-nine percent (99%) owned by a non-stock corporation as defined in Section 87 of the Corporation Code of the Philippines: Provided, That the purpose of the loan is to finance hospitals and other medical services: Provided, further, That the loan is fully secured: Provided, furthermore, That in the case of Items “(a)”, “(b)” and “(c)” above, the borrowing corporation is not among those mentioned in Items “e(5)”, “e(6)”, “e(7)” and “e(8)” of this Section;

(5) Corporation, association or firm of which any or a group of directors, officers, stockholders of the lending bank and/or their spouses or relatives within the first degree of consanguinity or affinity, or relative by legal adoption, hold or own at least twenty percent (20%) of the subscribed capital of such corporation, or of the equity of such association or firm;

(6) Corporation, association or firm wholly or majority-owned or controlled by any related entity or a group of related entities mentioned in Items “e(2)”, “e(4)” and “e(5)” of this Section;

(7) Corporation, association or firm which owns or controls directly or indirectly whether singly or as part of a group of related interest at least twenty percent (20%) of the subscribed capital of a substantial stockholder of the lending bank or which controls majority interest of the bank pursuant to Subsec. X303.1;

(8) Corporation, association or firm which has an existing management contract or any similar arrangement with the parent of the lending bank; and

(9) Non-governmental organizations (NGOs)/foundations that are engaged in retail microfinance operations which are incorporated by any of the stockholders and/or directors and/or officers of related banks.

The general principles and standards that will govern the business relationships between banks and their related NGOs/foundations engaged in retail microfinance are found in Appendix 27.

Sec. X327 Transactions Covered. The terms loans, other credit accommodations and guarantees as used herein shall refer to transactions of the bank which involve the grant of any loan, advance or other credit accommodation in any form whatsoever, whether renewal, extension or increase, and shall include:

a. Any advance by means of an incidental or temporary overdraft, cash item, “vale”, etc.;b. Any advance of unearned salary or other unearned compensation for periods in excess of thirty (30) days;

c. Any advance by means of DAUDs;

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d. Outstanding availments under an established credit line;

e. Drawings against an existing letter of credit;

f. The acquisition of any note, draft, bill of exchange or other evidence of indebtedness upon which the bank’s DOSRIs may be liable as makers, drawers, acceptors, endorsers, guarantors or sureties;

g. Indirect lending such as loans or other credit accommodations granted by another financial intermediary to said DOSRIs from funds of the bank invested in the other institution’s trust or other department when there is a clear relationship between the transactions;

h. The increase of an existing indebtedness, as well as additional availments under a credit line or additional drawings against a letter of credit;

i. The sale of assets, such as shares of stock, on credit; and

j. Any other transactions as a result of which the bank’s DOSRIs become obligated or may become obligated to the lending bank, by any means whatsoever to pay money or its equivalent.

Sec. X328 Transactions Not Covered. The terms loans, other credit accommodations and guarantees as used herein shall not refer to the following:

a. Advances against accrued compensation, or for the purpose of providing payment of authorized travel, legitimate expenses or other transactions for the account of the bank or for utilization of maternity and other leave credits;

b. The increase in the amount of outstanding credit accommodations as a result of additional charges or advances made by the bank to protect its interest such as taxes, insurance, etc.;

c. The discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, including, but not limited to, the acquisition by a domestic bank of export bills from any of its DOSRI which are drawn in accordance with the terms and conditions of the covering letters of credit: Provided, That the transaction shall automatically be subject to the ceilings as herein provided once the DOSRI who is a party to the transaction becomes directly liable to the bank;

d. Transactions with a foreign bank which has stockholdings in the local bank where the foreign bank acts as guarantor through the issuance of letters of credit or assignment of a deposit in a currency eligible as part of the international reserves and held in a bank in the Philippines to secure other credit accommodations granted to another person or entity: Provided, That the foreign bank stockholder shall automatically be subject to the ceilings as herein provided in the event that its contingent liability as guarantor becomes a real liability; and

e. Interbank call loan transactions.

OTHER BANKING SERVICES. (The Non-Basic Functions)

SECTION 53.Other Banking Services. — In addition to the operations specifically authorized in this Act, a bank may perform the following services:

53.1.Receive in custody funds, documents and valuable objects;

Comments:

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(- this is a real deposit contract. Not a loan contract. There is no transfer of ownership. The purpose here is for the safekeeping of the property delivered to the bank.) (Sesbreno vs ca. In that case, Pilipinas was held liable by the Supreme Court for failure to comply with the obligation to deliver the securities deposited with it. What’s important in this case is that it gives us the description of the purpose of the first banking service. CUSTODIANSHIP FUNCTION. “custodianship agreements are designed to facilitate transactions in the money market by providing a basis for confidence on the part of the investors or placers that the instruments bought by them are effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those instruments will be there available to the placers of funds should they have need of them.” Meaning if I buy something and the transaction has not yet been completed, as much as possible, I don’t want the vendor to hold on the property that I bought because he might sell it again. So the function of the bank is to act as an independent person to whom the property can be delivered until the transaction is concluded. This is similar to the function of a bank when it acts as an escrow agent. An escrow is when certain properties are delivered to the bank by third persons for safekeeping and when the conditions of the activity are complied with then the escrow agent will have to deliver the property in accordance with the conditions. For example, I own shares and I sell it to a third person. Now, under the Corporation Code, the shares cannot be transferred to the buyer in the books of the Corporation until I secure a certification from the BIR that the required taxes are paid. Now, getting a certification would take months. But the buyer already paid the money. And the seller is willing to give up the security. However, in that situation the buyer cannot still be recorded as the owner in the books of the corporation because the certification is not yet obtained. So, the seller is still considered as the owner of the shares as reflected in the books until the certification is obtained. The seller can therefore say that he is still the owner and sell it to another person despite payment by the buyer. So to prevent that situation the escrow agent or the bank as a custodian can keep the shares. So the parties will deliver the shares and the money payment to the bank, as custodian, and the bank will keep hold of it. But when the certification is secured by the parties, the bank will then give the shares to the buyer and the money to the seller. That is a custodianship function of the bank. This is a contract of deposit. There is no transfer of ownership.)

53.2.Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities;

Comments:

This is a contract of agency.

53.3.Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business;

Comments:

Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business. This is also a contract of agency. An example of this is when the BIR or other companies (VECO, GLOBE) designate certain banks as collection agents. Especially the BIR authorizes banks which the NIRC calls as authorized agent banks.

In the case of PCIB v. C.A, PCI Bank was the collector of the BIR. Ford paid taxes thru PCI Bank by issuing Citi Banks checks. Ford initially issued a 4million check. This check was then cleared by Citi Bank but when the money went to PCIB, PCIB received instructions from the bookkeeper of Ford to hold the 4million check. This check is a crossed-check so it is for deposit only. The Ford employee asked PCIB to issue two (2) managers check which PCIB granted. SC held PCIB liable for those checks. In fact, Citi

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Bank was not held liable with respect to those checks. SC said PCIB should have acted only on the instructions of its principal which is the BIR. It should not have taken instructions from Ford, particularly Ford’s bookkeeper when in fact PCIB have not verified the authority of the bookkeeper to ask for the issuance of the managers check. SC said that it was admitted PCIB Bank was authorized to accept payments in behalf of the BIR. As an agent of BIR, PCI Bank is duty bound to consult its principal regarding the unwarranted instructions given by the payor to its agent. PCI Bank as the agent has the responsibility that the crossed-checks (for deposit only) are deposited in the payees (BIR) account only. PCI Bank as agent should receive instruction only from its principal (BIR) and to no one else. So when a Bank acts as a collecting agent there exist a principal agent relationship.

53.4.Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts;

Comments:

Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts. This is an investment management agreement. When a bank acts an investment manager there exist a contract of agency not a trust. The bank is not allowed to make a guarantee on the returns of investment and the investment is not covered by PDIC. So when you allow the bank to manage your funds you could lose the whole investment because that is not covered by insurance.

53.5.Rent out safety deposit boxes.

Comments:

This is considered as a contract of deposit. So when the bank acts an agent or custodian, the funds or property received by the bank under such capacity should be kept separate from the bank assets.

The bank shall perform the services permitted under Subsections 53.1, 53.2, 53.3 and 53.4 as depositary or as an agent. Accordingly, it shall keep the funds, securities and other effects which it receives duly separate from the bank's own assets and liabilities.

The Monetary Board may regulate the operations authorized by this Section in order to ensure that such operations do not endanger the interests of the depositors and other creditors of the bank.

In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days, the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of the Philippine Deposit Insurance Corporation. (72a)

MAJOR INVESTMENTS

Banks are allowed to invest but the Monetary board shall establish a criteria.

Sec 50.  the Monetary Board shall establish criteria for reviewing major acquisitions of investments by a bank including corporate affiliations or structures that may expose the bank to undue risks or in any way hinder effective supervision.

Comments:

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In fact, the GBL allows 4 limitations on what can be invested on by banks.

One limitation is the ceiling on real estate.SECTION 51.Ceiling on Investments in Certain Assets. — Any bank may acquire real estate as shall be necessary for its own use in the conduct of its business: Provided, however, That the total investment in such real estate and improvements thereof, including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts: Provided, further, That the equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the bank's total investment in real estate, unless otherwise provided by the Monetary Board. (25a) CdprBank may invest in real estate Provided, however, That the total investment in such real estate and improvements thereof including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts; Provided, further, That the equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the bank’s total investment in real estate, unless otherwise provided by the Monetary Board.Why is that class? Because real estate is not a liquid asset. So there must be a ceiling on non-liquid assets because Banks need money. Another, real estate is always subject to price fluctuation. It is not very stable. So the GBL regulates it. Take note, investment in real estate does not only include direct investments but also indirect investments such as ownership of real estate companies. So whatever equity investments owned by the bank in companies engaged in real esate, that is considered in determining whether or not it complies with the 50% ceiling.

Sec 52, however, provides:

Sec. 52. Acquisition of Real Estate by Way of Satisfaction of Claims. – Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following circumstances:

52.1. Such as shall be mortgaged to it in good faith by way of security for debts;  

52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; (DACION en PAGO) or 

52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it.

Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue to hold the property for its own use, subject to the limitations of the preceding Section.

So the properties obtained in the above-mentioned circumstances within the first 5 years are excluded in determining the 50% ceiling. But they have to be disposed of within the 5 year period.. If they are not disposed within the said period the banks may keep these properties but this time it will be subject to the 50% ceiling.

In the case of Union Bank vs. tiu involving the contract of lease entered into by the Bank, the C.A said the contract of lease entered by the bank violates Section 52 of the GBL because by entering into that contract there was no intention to dispose the properties subject of the lease agreement. But the SC did not agree with the C.A. SC said that in entering in the lease contract does not necessarily mean that the Bank has no intention of disposing the subject properties because anyway the bank has 5 years to

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dispose such property. Sc said that Section 52.2 contemplates a dacion en pago. There appears to be no legal impediment for a bank to lease a real property it received in satisfaction of debts within the 5 year period. So the bank is allowed to hold the real property for 5 years without such property being included in the determination of the ceiling.

Now let’s go to the prohibitions. Under Sec 54:

A bank shall not directly engage in insurance business as the insurer.

Comments:

How does this reconcile with the 2nd paragraph of Sec. 20?

Sec 20(2) 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 sale of the financial products of its allied undertaking or of its investment house units.

We said that allied undertaking of a bank includes an insurance company. Therefore, subject to compliance under the MORB, a bank may be allowed to sell insurance policies in the bank premises. Is there a conflict between Sec 54 and Sec 20? There is no conflict because Sec. 20 only allows use of a bank of any or all of its branches as outlets for the presentation and/or sale of the financial products while the prohibition in Sec. 50 refers to the bank acting as an insurer. So the bank cannot act as an insurer but in can sell the insurance policies of its allied undertaking. The New Insurance Code (Sec. 375 - bank assurance) has impliedly amended Sec. 20 of the GBL. Sec 375 of the New Insurance Code. Bank Assurance is the presentation and sale to bank customers by an insurance company of insurance products within the premises of the head office of the bank duly licensed by the BSP or any of its branches under such rules and regulations which the Commissioner and the BSP may promulgate. So that is the reproduction of Sec. 20 of the GBL.. Sec. 375 of the NIC further provides that for a bank to engage in a bank assurance arrangement, a bank is not required to have equity ownership of the insurance company. Sec. 20 requires that it should be an allied undertaking. When it is an allied undertaking the bank is required to own shares in the insurance company. So the old rule is that a bank can only sell the insurance policy of its allied undertaking. Meaning, its subsidiary.

But with the advent of the new insurance code which was passed late last year. Banks are now allowed to sell insurance products even of non-allied undertakings meaning insurance companies of which it has no equity. But of course this is subject to the rules to be promulgated by the insurance commissioner, but there are no such rules yet.

How do we reconcile?

First of all a bank can never act as an insurer, that is prohibited. Section 20 allows a bank to sell the products of its allied undertaking in the bank premises, but that has now become broader with the advent of the new insurance code which now allows banks to sell insurance products of insurance companies that they have no equity holdings with. So BPI can sell ACSA which is an allied undertaking of Metro Bank.

Bank assurance- selling of insurance products in bank premises (maybe it will come out in the bar)

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What other prohibitions are there?

SECTION 55. Prohibited Transactions. —

55.1. No director, officer, employee, or agent of any bank shall —

(a) Make false entries in any bank report or statement or participate in any fraudulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or any person;

(b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail;

(c) Accept gifts, fees or commissions or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank;

(d) Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank; or

(e) Outsource inherent banking functions.

55.2. No borrower of a bank shall —

(a) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank;

(b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof;

(c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or

(d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application.

55.3. No examiner, officer or employee of the Bangko Sentral or of any department, bureau, office, branch or agency of the Government that is assigned to supervise, examine, assist or render technical assistance to any bank shall commit any of the acts enumerated in this Section or aid in the commission of the same. (87-Aa)

The making of false reports or misrepresentation or suppression of material facts by personnel of the Bangko Sentral ng Pilipinas shall constitute fraud and shall be subject to the administrative and criminal sanctions provided under the New Central Bank Act.

55.4. Consistent with the provisions of Republic Act No. 1405, otherwise known as the Banks Secrecy Law, no bank shall employ casual or nonregular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits.

What do you mean by outsourcing of inherent banking functions?

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Any functions involved with deposits and withdrawal because that is what makes you a bank. When you outsource you secure the services of a third person.

There are certain transactions that a bank can outsource with the approval of the monetary board and there are functions that you cannot outsource without the approval of the monetary board. But with deposits you can never outsource, it has to be undertaken by the bank.

Point of sale system? When you pay with your debit card. Can a cashier give money to a person by swiping the debit card?

No, the cashier is in effect being a teller of a bank and you can never outsource inherent banking functions. Withdrawal is part of the deposit function, so not allowed.

Non inherent functions can be outsourced.

Certain functions which can be outsourced but requires the approval of the monetary board.

1. Information Technology of the bank.2. Credit investigation and collection functions3. General book keeping and accounting services. As long as not recording of the deposits

What are the functions which can be outsourced without the approval of the Monetary Board?

1. Security Guards2. Janitors3. Agents for selling properties4. Public relations and advertising.

Conducting Business in an Unsafe or Unsound Manner

In section 56 the only thing you have to take note of here is that the Conducting of business in an Unsafe or Unsound manner, these acts do not constitute a violation of any law, rule or regulation. If you violate a law, rule or regulation automatically you will be penalized.

There are certain grey areas where a bank is not violating a law, rule or regulation but it is conducting its business in an unsafe and unsound manner. The law does not provide what is an unsound and unsafe manner. It is up to the Monetary Board to determine what these acts are.

Unsafe and Unsound Banking practices- any action or lack of action which contrary to generally accepted standards of prudent operations or possible consequences of which if continued would produce abnormal risk or damage to the institution, its shareholders or the general public. Possibility of damage.

It may be a ground for the Monetary Board to impose sanctions.

Examples of Conducting Business in an Unsafe or Unsound Manner:

1. Engaging in highly speculative investments2. Pays excessive cash dividends. Even if within the law3. Inadequate internal control4. Failure to keep adequate records5. Holding on of excessive non-earning assets

Prohibition on Dividend Declaration

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In your Corp. dividends must come from unrestricted retained earnings the same with banks. The Corp Code however provides that a corporation cannot keep unrestricted retained earnings in excess of 100% of its paid up capital, this does not apply to banks. Even if they have sufficient unrestricted retained earnings, more than 100% of paid up capital, they cannot declare dividends under circumstances provided for in 57.1 to 57.4.

So even if exceeded na ang 100% paid up capital and you should already pay dividends, if for example your clearing account with Banko Sentral is negative, then you cannot declare dividends even if you have sufficient retained earnings or your liquidity floor for government deposits is less than the requirement of 50% which is required by the MORB. When govt agencies deposits in banks the law requires that whatever amount they deposit the bank should keep liquid assets at the minimum of 50% of whatever the amount deposited because the govt may need cash right away. If you go lower that 50% for 5 consecutive days you are prohibited from declaring dividends. Next if you don’t comply with the liquidity ratios prescribed by Banko Sentral.

Processing of loan may be outsourced, but the final approval still belongs to the bank.

SECTION 57. Prohibition on Dividend Declaration. — No bank or quasi-bank shall declare dividends greater than its accumulated net profits then on hand, deducting therefrom its losses and bad debts. Neither shall the bank nor quasi-bank declare dividends, if at the time of declaration:

57.1 Its clearing account with the Bangko Sentral is overdrawn; or

57.2 It is deficient in the required liquidity floor for government deposits for five (5) or more consecutive days; or

57.3 It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration; or

57.4 It has committed a major violation as may be determined by the Bangko Sentral

We are now on the operations of banks, particularly universal banks and commercial banks.

Powers of a Commercial Bank

Section 29 (GBL). Powers of a Commercial Bank. - A commercial bank shall have, in addition to the general powers incident to corporations, all 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 deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment.

So class, those powers enumerated in Section 29 are express powers of a commercial bank.

Powers of a Universal Bank

Section 23 (GBL). Powers of a Universal Bank - A universal bank shall have the authority to exercise, in addition to the powers authorized for a commercial bank in Section 29, the powers of

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an investment house as provided in existing laws and the power to invest in non-allied enterprises as provided in this Act. 

1. Those powers enumerated in Section 29, Universal Banks also have them. 2. Powers of an Investment House3. Investment Powers

Now, what is an Investment House?

An entity or firm which is engaged in the underwriting of securities. What is underwriting? Underwriting is basically the dissemination of securities. But the investment house does not issue the securities, the securities are issued by another firm or corporation. The work of an investment house is to underwrite securities and to disseminate it to the public, basically to sell it to the market. For example, we have let’s say SAN MIGUEL who is doing a public offering of its shares. San Miguel does not sell its shares directly to the public. What San Miguel will do is that it will go to a bank and have the bank underwrite the securities which means the bank will basically get the securities and disseminate it or sell it to its customers. But the thing about underwriting is that the bank has to guarantee the sale of the securities that’s why for example, if i underwrite 1Billion worth of San Miguel shares, I guarantee that these 1B shares will be sold. So for example, if I’m only able to sell 800M shares, I have to pay for the other 200M. That is the work of an investment house. It is involved in the underwriting of shares. Not really the issuance because the issuance is from a third organization, firm or corporation. Basically, get the shares from them and disseminate it or sell it to the public on a guaranteed basis. So, a Universal bank has that power, a commercial bank does not.

When we say Securities, it can either be EQUITY or DEBT. So, it can be:

1. Shares of Stock or2. Bonds (Long-term debt instruments)

Universal bank has INVESTMENT POWERS even in Non-allied enterprises. How about Commercial Banks, do they have Investment Powers as well?

Yes, they have investment powers but only in ALLIED ENTERPRISES (financial or non-financial).

Last meeting, we said the Monetary Board has the power to establish the criteria for major investments of banks and the GBL itself provides for criteria and limitation on equity investments that may be made by banks. What do you mean by Equity Investment?

EQUITY INVESTMENT – “Equity” simply means Capital or Shares. So Equity Investment means investment in capital or shares of third party entities. When you say Equity Investment, this is a Permanent Investment. The investment is made in order to have a control or to establish an affiliation or to continue a business advantage over a certain enterprise. So when you make an equity investment in an enterprise, it means that you want to establish a more or less permanent relationship with that enterprise because you want control over their operations.

Kinds of Enterprises that Banks may invest in:

1. Allied Enterpriseso Those entities whose operations are related or connected with the operations of a banko Something to do with bankingo It can be: FINANCIAL OR NON-FINANCIAL

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2. Non-allied Enterpriseso Those entities whose operations are not related to the operations of a bank

Universal Bank Investments

Two Limitations:

1. Based on Net Worth of the Bank (Sec 24)2. Based on the Equity Investment of the Investee Firm (Sec 25-27)

Limitation based on NET WORTH

Section 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 enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial. Except as the Monetary Board may otherwise prescribe:

24.1. The total investment in equities of allied and non-allied enterprises shall not exceed fifty percent (50%) of the net worth of the bank; and (AGGREGATE)

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. (SINGLE)

As used in this Act, "net worth" shall mean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the Bangko Sentral.

The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investments.

Limitation Based on Equity of Investee

Section 25. Equity Investments of a Universal Bank in Financial Allied Enterprises. - A universal bank can own up to one hundred percent (100%) of the equity in a thrift bank, a 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. (21-B; 21-Ca)

What if the Universal Bank is not publicly listed?

A publicly-listed UB or KB may own up to 100% of the voting stock of only one (1) other UB or KB. Otherwise, it shall be limited to a minority holding. (MORB, Sec. X378 third paragraph). Minority holding is less than 50% or 49%.

Section 26. Equity Investments of a Universal Bank in Non-Financial Allied Enterprises. - A universal bank may own up to one hundred percent (100%) of the equity in a non-financial allied enterprise. (21-Ba)

Section 27. Equity Investments 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

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enterprise shall not exceed thirty-five percent (35%) of the total equity in that enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise. 

Take note of the limitations for equity investment of universal banks. There are two limitations. When a bank invests in whatever enterprise, it has to look at two criteria. First, the limitation based on the net worth of the bank itself. Second, the limitation based on the equity of the investee enterprise.

Based on the net worth of the bank, you have:

1. Aggregate – Total Investment in an Allied or Non-Allied cannot exceed 50% of the net worth of the bank.

2. Single/Individual – The investment in that single entity cannot exceed 25% of the net worth of the bank.

Based on equity investment of the investee:

1. For thrift bank, a rural bank or a financial allied enterprise – 100% (voting or non-voting; all the equity)

Take note that the MORB lists down the financial allied enterprises where banks can invest otherwise not allowed. If it’s not in the list, it’s not allowed.

Sec. X377 Financial Allied Undertakings. With prior BSP approval, banks may invest in equities of the following financial allied undertakings, subject to the limits prescribed under Sec. X378:

a. Leasing companies including leasing of stalls and spaces in a commercial establishment: Provided, That bank investment in/acquisition of shares of such leasing company shall be limited/applicable only in cases of conversion of outstanding loan obligations into equity;b. Banks;c. IHs; (INVESTMENT HOUSES)d. Financing companies;e. Credit card companies;f. FIs catering to small and medium scale industries including venture capital corporation (VCC), subject to the provisions of Sec. X379 and its subsections; (FINANCIAL INTERMEDIARIES)g. Companies engaged in stock brokerage/securities dealership; andh. Companies engaged in foreign exchange dealership/brokerage.

In addition, UBs may invest in the following as financial allied undertakings:(1) Insurance companies; and(2) Holding company: Provided, That the investments of such holding company are confined to the equities of allied undertakings and/or non-allied undertakings of UBs allowed under BSP regulations.

The Monetary Board may declare such other activities as financial allied undertakings of banks.

The determination of whether the corporation is engaged in a financial allied undertaking shall be based on its primary purpose as stated in its articles of incorporation and the volume of its principal business.Take Note: Only Universal Bank may invest in Insurance and Holding companies.

Equity Investment of a UNIVERSAL BANKS in FINANCIAL ALLIED ENTERPRISE Sec. 25

For RURAL BANKS and THRIFT BANKS = 100% of the equity (Voting or non-voting)

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CAN a UNIVERSAL BANK acquire another UNIVERSAL BANK or COMMERCIAL

BANK? YES. It can acquire up to 100% of the voting stock provided that the investor

universal bank is publicly listed (listed in the Phil. Stocks exchange).

NOTE: if not publicly listed, can acquire only minority interest (49%)

Equity investment of a UNIVERSAL BANK IN NON-FINANCIAL ALLIED ENTERPRISES Sec. 26

UNIVERSAL BANK may own up to 100% of the equity (voting or non-voting) of non-

financial allied enterprises.

What are the examples of non-financial allied enterprises?

MORB x380: Non financial allied undertakings (note: the list is exclusive)

1. Warehouse companies

2. storage companies

3. safe deposit box companies

4. Companies primarily engaged in the management of mutual funds but not in

the 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/brokerage

8. companies engaged in home building and home development

9. companies providing drying and/or milling facilities for agricultural crops such

as rice and corn

10. service bureaus, organized to perform for and in behalf of banks and NBFIs

the services allowed to be outsourced

11. Philippine clearing house corporation, Philippine Central depositary

12. such other similar activities as the monetary board may declare as non-

financial allied undertaking

Equity investment of a UNIVERSAL BANKS in NON-ALLIED ENTERPRISES Sec.27

two limitations (Categories)

First: The investment shall not exceed 35% of the total equity in that enterprise

Second: it shall not 35% of the voting stock in that enterprise

List of non-allied enterprises under MORB (x1381.1)

1. enterprises engaged in physically productive activities in agriculture, mining and

quarrying, manufacturing, public utilities, construction, wholesale trade and community and social

services

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2. industrial park projects and/or industrial estate development

3. financing and commercial complex projects

4. such other broad categories as the monetary board may declare

LIMITS FOR COMMERCIAL BANKS

TWO LIMITATIONS

1. NET WORTH

2. EQUITY

NOTE: Commercial banks can only invest in ALLIED ENTERPRISES (Financial or non-financial)

Equity investments of a commercial banks Sec.30

The TOTAL INVESTMENT in equities of allied enterprises shall Not exceed 35% of the NET WORTH of the bank

The equity investment in any one enterprise (single enterprise) shall not exceed 25% of the net worth of the bank

Equity investment of a commercial bank in financial allied enterprises Sec. 31

For THRIFT and RURAL Banks = 100 % of the equity For other Financial enterprises, including another commercial bank= Minority

Holding (49%) if not publicly listedCan a commercial bank own equity in another commercial bank? Yes. (Basis is sections 31 and 25)

Can a commercial bank own equity in a universal bank? Yes.

Note: Section 25 provides that a universal and commercial banks may own up to 100% of a voting stock

of other universal or commercial banks provided that the investor universal or commercial bank is publicly

listed.

Can a commercial bank (CB) own equity in another commercial bank?- Yes. To what extent? It depends if the commercial bank is publicly-listed or not.

- If publicly-listed, Sec. 25 of GBL provides “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.”

- If not publicly-listed, Sec.31 provides “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.”

Can a commercial bank not publicly listed acquire another universal bank?- Yes. Same rule (minority shareholding)

Can a commercial bank invest in non-allied enterprise?- No. Only universal bank can invest in non-allied enterprise.

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What about an insurance company, what kind of an enterprise is it?- Listed under the MORB (X377) as one of the possible investees as a financial allied enterprise. - BUT: only universal banks can invest in insurance companies.

RECAP NI MA’AM:2 kinds of enterprises that can be an investee of a bank:

1. Allied enterprise – related to the operations of banking; can either be financial allied or non-financial allied

2. Non-allied enterprise- operations are not related at all to banking or financing (e.g. mining, privatization projects)

Universal banks (UBs)- has the power to invest in allied and non-allied enterprisesIts investment is subject to 2 limitations:

1. Limitation based on its Net Worth2. Limitation based on the equity of its investee

Net Worth:1. Total investment (whether allied or non-allied enterprises) - cannot exceed 50% of the net worth

of the bank2. Investment in a single enterprise (whether allied or non-allied) – cannot exceed 25% of the net

worth of the bank Equity of Investee:1. Financial allied [including banks specifically thrift banks (TBs) and rural banks (RBs)] – UBs can

own 100% of the equity2. Publicly-listed (share traded in stock exchange) UBs and CBs – 100% of the voting stock of only

one UB or CB3. Not publicly-listed – limited to minority holding (49%)4. Non-financial allied- up to 100% equity5. Single Non-allied enterprise – shall not exceed 35% of total equity of that enterprise

Commercial Banks (CBs) – can only invest in allied enterprisesLimitations of a Commercial Bank (CB):

Based on Net Worth:a. Total investment (allied only) – shall not exceed 35% of net worth of the bankb. Single allied enterprise – shall not exceed 25% of the net worth of the bank

Based on Equity of Investee:a. Thrift banks/ Rural Banks – up to 100% of the equity of the TB/RBb. Other Financial allied enterprise, including another CB – minority shareholdingsTake Note: CBs are not allowed to invest in some financial allied enterprises like insurance companies and holding companies.c. Non-financial allied enterprise- up to 100%d. UB/CB

If publicly-listed – 100% If not- minority holding Sec.24 and Sec.30 (GBL)- provides that any kind of investment of UB/CB needs approval from

the Monetary Board.

If the lenders are only 19 of course you don’t qualify as a quasi-bank. The purpose of the borrowing must be for (1) relending, or (2) purchasing receivables or other obligations. Basically, the purpose is for financing.

Who may engage in quasi-banking? Can a corporation be formed to engage in quasi-banking?

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Yes, but we have to secure an authority from the Bangko Sentral in order to engage a quasi-banking function. If a corporation engages in quasi-banking functions but does not secure a quasi-banking authority from the Monetary Board that entity may be held liable for sanctions under the GBL or under the New Central Bank Act.

What about banks? Can it engage in quasi-banking functions?

Yes. Sec. 6 provides:No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions.

But Universal banks and commercial banks can engage in quasi-banking functions without need for a separate authority to engage in quasi-banking functions. Can a universal bank or commercial bank invest in a quasi-bank?Yes. Quasi-banks are also considered as a financial allied enterprise. When the universal bank or commercial bank does not want to operate as a quasi-bank it can invest in another quasi-bank. But Sec. 38 provides for a limitation:

SECTION 28.Equity Investments in Quasi-Banks. — To promote competitive conditions in financial markets, the Monetary Board may further limit to forty percent (40%) equity investments of universal banks in quasi-banks. This rule shall also apply in the case of commercial banks. (12-E)

So the Monetary Board can only limit it up to 40%.

What is a trust

It is a fiduciary relationship with respect to property, subjecting the person by whom the title to the property is held to equitable duties to deal with the property for the benefit of another person, which arises through a manifestation of an intention to create it.

So, trust is a relationship. In other words, it is a contract which is fiduciary in nature and the subject of the contract is property. The purpose of that contract is to allow another person to hold legal title over that property and to manage, administer, control that property for the purpose or benefit of another person.

How many parties in a trust agreement?

There are 3 parties. The trustor, trustee and the beneficiary. Trustor- The person who created the trust. Normally, he is the owner of the property. Trustee – A trustee is the one who administers, manage or control the property subject of

the trust. Legal title holder of property Beneficiary –

Can you have a trust agreement without a beneficiary?

Yes. There are trust agreements where the trustor is also the beneficiary

In order for an entity to engage in a trust business, it must be duly authorized by the Monetary Board. It must secure a license from the Monetary Board if you are regularly engaged in trust operations. But if it is only an isolated transaction there is no need to secure an authority.

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Sec. 18 provides for the 2 cardinal principles of a trust contract.

1. It provides for the standard of care required of a trustee which we call as “the prudent man rule. The diligence required of a trustee is the diligence of a prudent man would exercise in the conduct of an enterprise of a like character and with similar aims.

2. Prohibition against self-dealing rule. The trust entity cannot for the account of the trustor or the beneficiary of the trust, purchase or acquire property from, or sell, transfer, assign or lend money or property to, or purchase debt instruments of, any of the departments, directors, officers, stockholders, or employees of the trust entity, relatives within the first degree of consanguinity or affinity, or the related interests, of such directors, officers and stockholders.

- The trustee or trust entity if it is authorized to lend money cannot lend to itself or to its own directors, officers, employees etc. Or if the trust entity is authorized to rent out property it cannot do so to itself or to its directors, officers etc. This is to prohibit a situation where a conflict interest may arise since the trust relationship is fiduciary.

However, there is an EXCEPTION to this rule:

When the transaction is specifically authorized by the trustor and the relationship of the trustee and the other party involved in the transaction is fully disclosed to the trustor or beneficiary of the trust prior to the transaction. Cdt

So this exception is necessary because there may be some instances whereby such transaction is beneficial to the trust. For example, borrowing money from the directors of the trustee because the interest rate is lower compared to others.ai

SECTION 87.Separation of Trust Business from General Business. — The trust business and all funds, properties or securities received by any trust entity as executor, administrator, guardian, trustee, receiver, or depositary shall be kept separate and distinct from the general business including all other funds, properties, and assets of such trust entity. The accounts of all such funds, properties, or securities shall likewise be kept separate and distinct from the accounts of the general business of the trust entity. (61)

Comments:The trust business and all funds, properties or securities received by any trust entity will have

to be kept separate from the general funds of the trust and from those of its other clients. You cannot co-mingle the funds. Unlike in deposits (loan) you can co-mingle the funds because in a contract of loan you acquire both legal and beneficial ownership over those funds. But in trust agreements, although you acquire the legal ownership of the funds, you do not acquire the beneficial ownership of those funds. So, you have to separate your own the properties and the properties of the other trustors or beneficiaries.

In relation to Section 87, Section 92 provides: SECTION 92.Exemption of Trust Assets from Claims. — No assets held by a trust entity in

its capacity as trustee shall be subject to any claims other than those of the parties interested in the specific trusts. (65)

Comments:If the trustee cannot pay his liabilities and here comes the creditor garnishing the assets of the trustee, can the creditor garnish the asset of the trust? They cannot. But can the creditors of the trustor garnish the assets of the trust? Yes. Because the law allows if the parties are interested in the specific trust, meaning if you are the trustor or the beneficiary. Your asset can be subject to case by the creditors of the trust and not by the other clients of the trust entity. That is parallel to the SEGREGATION OF ASSETS RULE. That is another reasons why the assets must be segregated because they cannot be garnished by the parties or other creditors of parties.

Take note of the Powers of the Trust (in re: civil code, civil proc on guardians and receivers)

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　 　 　 SECTION 83.Powers of a Trust Entity. — A trust entity, in addition to the general powers incident to corporations, shall have the power to:

83.1.Act as trustee on any mortgage or bond issued by any municipality, corporation, or any body politic and to accept and execute any trust consistent with law;

83.2.Act under the order or appointment of any court as guardian, receiver, trustee, or depositary of the estate of any minor or other incompetent person, and as receiver and depositary of any moneys paid into court by parties to any legal proceedings and of property of any kind which may be brought under the jurisdiction of the court;

83.3.Act as the executor of any will when it is named the executor thereof;

83.4.Act as administrator of the estate of any deceased person, with the will annexed, or as administrator of the estate of any deceased person when there is no will;

83.5.Accept and execute any trust for the holding, management, and administration of any estate, real or personal, and the rents, issues and profits thereof; and

83.6.Establish and manage common trust funds, subject to such rules and regulations as may be prescribed by the Monetary Board.

Take note, the rule that investment by a trust in real estate is subject to the limitation in Sec. 52. Ownership of real estate by banks, 50% limitation based on the net worth of the bank.

SECTION 89.Real Estate Acquired by a Trust Entity. — Unless otherwise specifically directed by the trustor or the nature of the trust, real estate acquired by a trust entity in whatever manner and for whatever purpose, shall likewise be governed by the relevant provisions of Section 52 of this Act.

SECTION 51.Ceiling on Investments in Certain Assets. — Any bank may acquire real estate as shall be necessary for its own use in the conduct of its business: Provided, however, That the total investment in such real estate and improvements thereof, including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts: Provided, further, That the equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the bank's total investment in real estate, unless otherwise provided by the Monetary Board. (25a) Cdpr

SECTION 52.Acquisition of Real Estate by Way of Satisfaction of Claims. — Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following circumstances:

52.1.Such as shall be mortgaged to it in good faith by way of security for debts;

52.2.Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or

52.3.Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it.

Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue to hold the property for its own use, subject to the limitations of the preceding Section.

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FOREIGN BANKS

Banks can be owned by foreign and Filipino SH. If a SH of a bank is a foreigner, how much is the limitation? 40%. Foreign shareholdings of a bank is 40% whether that shareholding is natural person or juridical person. Provided that if that is a juridical person, it must not be a banking entity. The law says that it is a foreign non-bank corporation. 40% limitation. Why is there a qualification? The law provides for a different limitaion if a shareholder is a foreign bank.

What is a foreign bank? A bank that is formed, organized or existing under any law other than those of the Philippines.

Can a foreign bank do business in the Philippines? Yes it can. Foreigns Bank Liberization Act: RA 7721

SECTION 2.Modes of Entry. — The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any of the following modes of entry:

(i) by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank;

(ii) by investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or

(iii) by establishing branches with full banking authority: Provided, That a foreign bank may avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or a Philippine corporation may own up to sixty percent (60%) of the voting stock of only one (1) domestic bank or new banking subsidiary.

** Ordinary foreign corporations or foreign persons can invest in bank up to 40%. If a foreign corporation is a bank, it can invest up to 60%.

** Are foreign banks allowed to hold 100% of the voting shares of a domestic bank? Yes. For that short period of time, 7 years, from the time of the effectivity of the General Banking Law, foreign banks were allowed to invest up to 100% of the voting shares. Sec. 73. What about those already with existing 60% investment? They were allowed to invest in 40% more, so that they will have 100%. Up to 2007.

SECTION 73.Acquisition of Voting Stock in a Domestic Bank. — Within seven (7) years from the effectivity of this Act and subject to guidelines issued pursuant to the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to one hundred percent (100%) of the voting stock of only one (1) bank organized under the laws of the Republic of the Philippines.

Within the same period, the Monetary Board may authorize any foreign bank, which prior to the effectivity of this Act availed itself of the privilege to acquire up to sixty percent (60%) of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks Act, to further acquire voting shares of such bank to the extent necessary for it to own one hundred percent (100%) of the voting stock thereof.

In the exercise of this authority, the Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos.

Any right, privilege or incentive granted to a foreign bank under this Section shall be equally enjoyed by and extended under the same conditions to banks organized under the laws of the Republic of the Philippines. (Secs. 2 and 3, RA 7721)

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When did this law take effect? 2000. So after 7 years which is in 2007, we now go back to 60%. But those already with 100%, they were allowed to maintain 100%. So those who take advantage of the 7 years moratorium on the 60%, they were allowed to hold on to that 100%. But if you are a new foreign bank coming in, you are only allowed 60% investment because the 7-year period has lapsed.

This is the reason why we have local banks, domestic banks which are wholly-foreign owned, i.e. Citibank, HSBC, because they took advantage of this Section 73.

Now take note that if the bank has more than one branch in the Philippines, Sec. 74, same rule with domestic bank or Philippine banks, they are only treated as one regardless of how many branches they may put up.

SECTION 74.Local Branches of Foreign Banks. — In the case of a foreign bank which has 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 Philippine branches of foreign banks shall be held to refer to such units. (68)

Take note of the requirement in Sec. 75, that the head office is required to wholly guarantee the prompt payment of all liabilities of the Philippine branch.

SECTION 75.Head Office Guarantee. — In order to provide effective protection of the interests of the depositors and other creditors of Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch. (69)

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 assets of such branch in accordance with existing laws. (19)

For the laws applicable, in the operations of the foreign bank in the Philippines, the provisions of the GBL will apply. But with respect to intra-corporate and inter-corporate issues, the foreign law will apply. So for the creation, formation, organization or dissolution of corporations or for the fixing of the relations, liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other or to the corporation, the foreign law will apply.

SECTION 77.Laws Applicable. — In all matters not specifically covered by special provisions applicable only to a foreign bank or its branches and other offices in the Philippines, any foreign bank licensed to do business in the Philippines shall be bound by the provisions of this Act, all other laws, rules and regulations applicable to banks organized under the laws of the Philippines of the same class, except those that provide for the creation, formation, organization or dissolution of corporations or for the fixing of the relations, liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other or to the corporation.

OFFSHORE BANKING UNIT

Presidential Decree No. 1034, otherwise known as the "Offshore Banking System Decree."

Sec. 1(b) "Offshore Banking Unit" shall mean a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Central Bank of the Philippines to transact offshore banking business in the Philippines.

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Sec. 1(a) "Offshore Banking" shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds from external sources and the utilization of such funds as provided in this Decree.

In other words, Local banks or banks which are not owned by foreign banks cannot own offshore banking units. Only branches, subsidiary or affiliate of a foreign banking corporation can be authorized to engage in offshore banking business. So your ordinary banks i.e. Metrobank, BPI, RCBC are not allowed to engage in offshore banking business.

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