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=========================== TOPICS UNDER THE SYLLABUS VIII. Banking Laws A. The New Central Banking Act (R.A. 7653) =========================== A. The New Central Banking Act (R.A. 7653) 1. State Policies and Creation of the Bangko Sentral ng Pilipinas (BSP) The Bangko Sentral ng Pilipinas (BSP) is the States Central Monetary Authority mandated in the 1987 Philippine Constitution, which shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit 2. Responsibility and Primary Objective Primary Objectives: a. To maintain price stability conducive to a balanced and sustainable growth of the economy; b. To promote and maintain the monetary stability and convertibility of the peso; c. To provide policy directions in areas of money, banking and credit, with supervision over operations of banks and with regulatory powers over operations of finance companies, and non-bank financial institutions performing quasibanking functions. Roles of BSP: a. Banker of Government The Act as a banker of the Government, its political subdivisions and instrumentalities, and their cash balances should be deposited to the BSP, with only minimum working balances to be held by government-owned banks, and such other banks incorporated in the Philippines as the Monetary Board may prescribe. b. Representation with the International Monetary Board To represent Government in all dealings, negotiations and transactions with the IMF, and shall carry such accounts as may result from the Philippine membership in or operations with the said Fund. c. Representation with Other Financial Institutions May represent the Government in dealings, negotiations or transactions with the World Bank and with other foreign or international financial institutions or agencies. d. Fiscal Operations Shall open a general cash account for the Treasurer of the Philippines, in which the liquid funds of the Government shall be deposited, and with transfer of funds to be made only upon the order of the Philippine Treasurer (Villanueva, 2009). Other Basic Functions of BSP: 1. It shall have the sole power and authority to issue currency within the territory of the Republic of the Philippines; 2. The power to issue regulations to prevent the circulation of foreign currencies, or currency substitutes as well as the reproduction of facsimiles of BSP notes; 3. It has the power to investigate, make arrests, conduct searches and seizure for the purpose of maintaining the integrity of the currency; 4. To engage in foreign engage transactions in order to maintain price stability; 5. To make rediscounts, discounts, loans and advances to banking and other financial institutions to influence the volume of credit consistent with the objectives of price stability; 6. To engage in open market operations--purchase and sale of securities ---exclusively in accordance with its objectives of achieving price stability; 7. To engage in marketing and stabilization of securities for the account of the government; 8. To act as the financial advisor of the government; (Sundiang, 2006) 3. Monetary Board---Powers and Functions Corporate Powers The BSP is a government owned and controlled corporation that is invested by law with corporate powers. The corporate powers specified in Section 5 of the New Central Bank Act are as follows: a. The power to adopt, alter and use a corporate seal which shall be judicially noticed; b. To enter into contracts; c. To lease or own real and personal property; d. To sell or otherwise dispose of its real and personal property; e. To sue and be sued; f. To perform any and all things that may be necessary or proper to carry out the purposes of the New Central Bank Act; g. To compromise, condone or release, in whole or in part, any claim of or settled liability (Sundiang, 2006). The BSP powers and functions are exercised by the Monetary Board. Composition of the Monetary Board: There are 7 members who are appointed by the President of the Republic of the Philippines. They are only appointed once. a. Governor, as Chairman; b. A member of the Cabinet designated by the President of the Philippines; c. Five (5) members who shall come from the sector, all of whom shall serve full-time.

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3. Term: 6 years Qualifications of the Members of the Board: a. Must be a natural-born citizens of the Philippines; b. At least 35 years of age with the exception of the Governor, who should at least be 40 years of age; c. Of good moral character, of unquestionable integrity, of known probity and patriotism. d. With recognized competence in social and economic disciplines. Grounds for Removal of a Member of the Board: The President may remove any member of the Board for any of the following reasons: a. Subsequent disqualification b. Physical or mental incapacity that he cannot properly discharge his duties and responsibilities and such incapacity has lasted for more than 6 months. c. Guilty of acts or operations which are of fraudulent or illegal character or which are manifestly opposed to the aims and interests of the BSP; d. No longer possessing qualifications specified in the Act. The major functions of the Monetary Board include the power to: 1. Issue rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the powers vested in it; 2. Direct the management, operations, and administration of Bangko Sentral, organize its personnel and issue such rules and regulations as it may deem necessary or desirable for this purpose; 3. Establish a human resource management system which governs the selection, hiring, appointment, transfer, promotion, or dismissal of all personnel; 4. Adopt an annual budget for and authorize such expenditures by Bangko Sentral as are in the interest of the effective administration and operations of Bangko Sentral in accordance with applicable laws and regulations; and 5. Indemnify its members and other officials of Bangko Sentral, including personnel of the departments performing supervision and examination functions, against all costs and expenses reasonably incurred by such persons in connection with any civil or criminal action, suit or proceeding, to which any of them may be made a party by reason of the performance of his functions or duties, unless such members or other officials is found to be liable for negligence or misconduct.. The Governors Powers and Duties as a Chief Executive Officer: The Governor is the chief executive officer of BSP and is required to direct and supervise the operations and internal administration of BSP. Specifically, the Governor: 1. prepares the agenda for the meetings of the Monetary Board and submits policy recommendations for consideration of the Board; 2. executes and administers policies and measures approved by the Monetary Board; appoints and fixes the remunerations and other emoluments of personnel, as well as imposes disciplinary measures upon personnel of the Bangko Sentral; renders opinions, decisions, or rulings, which shall be final and executory until reversed or modified by the Monetary Board, on matters regarding application or enforcement of laws pertaining to institutions supervised by the BSP and laws pertaining to quasibanks, as well as regulations, policies or instructions issued by the Monetary Board, and the implementation thereof; and Exercises such other powers as may be vested in him by the Monetary Board. Serves as the principal representative of the Monetary Board and of the BSP. As such, the Governor is empowered to: a. Represent the Monetary Board and the BSP in all dealings with other offices, agencies and instrumentalities of the Government and all other persons or entities, public or private, whether domestic, foreign or international; and b. Sign contracts entered into by the BSP, notes and securities issued by the BSP, all reports, balance sheets, profit and loss statements, correspondence and other documents of the BSP.

4.

5. 6.

Disqualifications: 1. In addition to the disqualifications imposed by Republic Act No. 6713, a member of the Monetary Board is disqualified from being a director, officer, employee, consultant, lawyer, agent or stockholder of any bank, quasi-bank or any other institution which is subject to supervision or examination by the Bangko Sentral, in which case such member shall resign from, and divest himself of any and all interests in such institution before assumption of office as member of the Monetary Board. 2. The member of the Monetary Board coming from the private sector shall not hold any other public office or public employment during their tenure. 3. No person shall be a member of the Monetary Board if he has been connected with any multilateral banking or financial institution or has a substantial interest in any private bank in the Philippines, within one (1) year prior to his appointment; likewise, no member of the Monetary Board shall be employed in any such institution within two (2) years after the expiration of his term except when he serves as an official representative of the Philippine Government to such institution. Responsibility and liability of the members of the Monetary Board a. Members of the Monetary Board, officials, examiners, and employees of the Bangko Sentral who willfully violate RA 7653 or who are guilty of negligence, abuses or acts of malfeasance or misfeasance or fail to exercise extraordinary diligence in the performance of his duties shall be held liable for any loss or injury suffered by the Bangko Sentral or other banking institutions as a result of such violation, negligence, abuse, malfeasance, misfeasance or failure to exercise extraordinary diligence.

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b. Similar responsibility shall apply to members, officers and employees of the Bangko Sentral for; 1. The disclosure of any information of a confidential nature, or any information on the discussions or resolutions of the Monetary Board, or about the confidential operations of the Bangko Sentral, unless the disclosure is in connection with the performance of official functions with the Bangko Sentral, or is with prior authorizaytion of the Monetary Board or the Governor; or 2. The use of such information for personal gain or to the detriment of the Government, the Bangko Sentral or third parties. However, any data or information required to be submitted to the President and/or Congress, or to be published under the provisions of RA 7653 shall not be considered confidential. borrowings are adequately secured, fully disclosed to the Monetary Boar, and shall be subject to such further rules and regulations as the Monetary Board may prescribe. HOW BSP HANDLE BANKS IN DISTRESS A. CONSERVATORSHIP -a bank or quasi-bank is 1. in a state of continuing inability or 2. unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors Action of the Monetary Board The Monetary Board may appoint a conservator (who shall be competent and knowledgeable in bank operations and management) for a period not exceeding 1 year i. take charge of the assets, liabilities and management of the bank or quasi-bank in question ii. reorganize the management thereof iii. collect all monies and debts due and iv. exercise all powers necessary to restore its viability, including the power to overrule or revoke the actions of the previous management and board of directors While admittedly, the Central Bank gives vast and farreaching powers to the conservator, such powers must be related to preservation of the assets of the bank, the reorganization of the management thereof, and the restoration of its viability. Such powers, enormous and extensive as they are, cannot extend to post-facto repudiation of perfected transactions, otherwise they would infringe against the non-impairment clause of the Constitution. It merely gives the conservator the power to revoke contracts that are under existing law, deemed to be defective i.e. void, voidable, unenforceable or rescissible. Hence, the conservator merely takes the place of a Banks BOD. What the said Board cannot do such as repudiating a contract validly entered into under the doctrine of implied authority, the conservator cannot do either. Ineluctably, his power is not unilateral, and he cannot simply repudiate valid obligations of the Bank. His authority would be only to bring court actions to assail such contract as he has already done so in the instant case. (First Phil. Intl Bank v. CA, 252 SCRA 259)

c.

Outside interests of the Governor and the full-time members of the Board a. The Governor of the Bangko Sentral and the full-time members of the Board shall limit their professional activities to those pertaining directly to their positions with the Bangko Sentral. b. They may not accept any other employment, whether public or private, remunerated or ad honorem. c. Exceptions: 1. Positions in eleemosynary, civic, cultural or religious organizations 2. Whenever, by designation of the President, the Governor or the full-time member is tasked to represent the interest of the Government or other government agencies in matters connected with or affecting the economy or the financial system of the country Prohibitions on personnel of the Bangko Sentral In addition to the prohibitions found in RA 3019 and 6713, personnel of the Bangko Sentral are hereby prohibited from: 1. Being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the Bangko Sentral, except non-stock savings and loan associations and provident funds organized exclusively for employees of the Bangko Sentral, and except as otherwise provided in RA 7653; 2. Directly or indirectly requesting or receiving any gift, present or pecuniary or material benefit for himself or another, from any institution subject to supervision or examination by the Bangko Sentral; 3. Revealing in any manner, except upon orders of the court, the Congress or any government office or agency authorized by law, or under such conditions as may be prescribed by the Monetary Board, information relating to the condition or business of any such institution. This prohibition shall not apply to the giving of information to the Monetary Boar or the Governor of the Bangko Sentral, or to any person authorized by either of them, in writing, to receive such information; and 4. Borrowing from any institution subject to supervision or examination by the Bangko Sentral unless said

Termination of Conservatorship (a) When MB is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary; or (b) When MB determines that the continuance in business of the institution would involve probable loss to its depositors or creditors, in which case proceedings for receivership and liquidation shall be pursued. B. CLOSURE -prohibit a bank or quasi-bank from doing business in the Philippines Grounds for Closure

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(a) Unable to pay its liabilities as they become due in the ordinary course of business (cash flow test) BUT: shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community. (b) Insufficient realizable assets to meet its liabilities (balance sheet test) (c) Cannot continue in business without involving probable losses to its depositors and creditors (d) Willfully violated a cease and desist order under Sec. 37 (administrative sanctions) that has become final and involves acts or transactions which amount to fraud or dissipation of assets (e) Notifies the BSP or publicly announces a bank holiday (f) Suspends the payment of its deposit liabilities continuously for more than 30 days (g) Persists in conducting its business in an unsafe or unsound manner This may be done summarily and without need of prior hearing. Note that during conservatorship, no claims can be paid. Sec. 29 of the Central Bank Act does not contemplate prior notice and hearing before a bank is placed under receivership. It is enough that such action is made the subject of a subsequent judicial review. The Close now and hear later scheme under the Act is for the purpose of protecting the depositors, creditors, stockholders and the general public. (Central Bank vs. CA, 220 SCRA 536) C. RECEIVERSHIP Who are Receivers? (a) For Banks PDIC (b) For Quasi-Banks Any person of recognized competence in banking or finance Functions of Receiver (a) Immediately gather and take charge of all the assets and liabilities of the institution, administer the same for the benefit of its creditors e.g. Collect pre-existing debts Foreclose mortgages security (b) Exercise the general powers of a receiver (c) Determine as soon as possible, but not late than 90 days from takeover, whether the institution can be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors, and the general public. BUT: any determination for resumption of business shall be subject to the prior approval of the Monetary Board. If the receiver determines that the institution cannot be rehabilitated or permitted to resume business, then the MB shall notify in writing the board of directors of the institution of its findings and direct the receiver to proceed with the liquidation of the institution. Appointment of a receiver operates to suspend the authority of a bank and its directors and officers over its properties and effects, such authority being reposed in the receiver, and in this respect, the receivership is equivalent to an injunction to restrain the bank officers from intermeddling with the property of the bank in any way. The receiver only has the authority to administer the properties of the bank for the benefit of the creditors. Consequently, the receiver has no authority to approve the acts of ownership, such as the grant of exclusive option to purchase a particular property of the bank. (Abacus Real Estate Dev. Center vs. Manila Banking Corp., 452 SCRA 97) D. LIQUIDATION -from the determination of receiver if institution cannot be rehabilitated or permitted to resume business Duties of the Receiver/Liquidator File ex parted with the RTC a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the PDIC for banks, and by MB for quasi-banks Upon motion by receiver, upon RTCs acquisition of jurisdiction, RTC shall assist enforcement of the individual liabilities of the stockholders, directors, and officers and decide on other issues as may be material to the liquidation plan adopted Receiver shall convert the assets to money and proceeds shall be applied in paying the debts of the institution in accordance with rules on concurrence and preference of credit Receiver shall institute such actions as may be necessary

(1)

(2)

(3)

(4)

The assets under receivership or liquidation deemed in custodia legis, in the hands of the receiver and shall be exempt from any order of garnishment, levy, attachment or execution Phases of Liquidation Proceeding (Pacific Banking vs. CA, GR 109373, March 20, 1995) First: Approval and disapproval of claims (a) all money claims against the bank are required to be filed with the liquidation court (b) phase may end with the declaration by the court whether claim is with basis or not; if with basis, classified whether ordinary or preferred (c) order by court is final and may be appealed by the party aggrieved Second: Approval by the court of the distribution plan prepared by the duly appointed liquidator (a) order disposes of the issue of how much property is available for disposal (b) payment of all allowed claims DISTINGUISH BETWEEN REHABILITATION LIQUIDATION Is a winding up of settling with creditors and debtors. It is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the LIQUIDATION AND

REHABILITATION Connotes a reopening or reorganization. It contemplates a continuance of corporate life and activities in an effort to restore and reinstate the

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process of reducing assets to cash, discharging liabilities and dividing surplus or loss. corporation to its former position of successful operation and solvency. However: unless otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not exceeding Fifty pesos P50 for denominations of 25 centavos and above, and in amounts not exceeding P20 for denominations of 10 centavos or less. (Sec. 52) Philippine currency notes have no limit to their legal tender power. Pursuant to BSP Circular No. 537, Series of 2006, coins in denomination of 1-, 5- and 10-piso shall be legal tender in amounts not exceeding P1,000 while 1-, 5- and 10- and 25-sentimo shall be legal tender in amounts not exceeding P100 B. RATE OF EXCHANGE The MB shall determine the exchange rate policy of the country to ensure orderly conditions in the market BSP maintains a floating exchange rate system. Exchange rates are determined on the basis of supply and demand in the foreign exchange market. C. EMERGENCY RESTRICTIONS ON EXCHANGE OPERATIONS: To give MB and the Government time in which to forestall, combat or overcome such crisis or emergency, MB with concurrence of at least 5 of its members and with the approval of the President may: (a) temporarily suspend or restrict sales of exchange by BSP (b) subject all transactions in gold and foreign exchange to license by the BSP; and (c) may require that any foreign exchange obtained by any person residing or entity operating in the Philippines be delivered to the BSP or to any bank or agent designated by the BSP HOWEVER: foreign currency deposit made under FCDU Law shall be exempt from these requirements D. SECTION 105. The Monetary Board may at any time prescribe minimum cash margins for the opening of letters of credit, and may relate the size of required margin to the nature of the transaction to be financed. E. SECTION 106. In order to promote the liquidity and solvency of the banking system, the Monetary Board may issue such regulations as it may deem necessary with respect to the maximum permissible maturities of the loans and investments which the banks may make, and the kind and amount of security to be required against various types of credit operations of the banks. DEMAND DEPOSITS this term refers to all those liabilities of the BSP and of other banks, which are denominated in Philippine currency, and are subject to payment in legal tender upon demand by the presentation of checks (Sec. 58). Only banks duly authorized may accept funds, or create liabilities payable in pesos upon demand by presentation of checks, and such operations shall be subject to the control of the Monetary Board. LEGAL CHARACTER OF CHECKS the checks representing demand deposits do not have legal tender power, and their acceptance in the payment of debts; both public and private, is at the option of the creditor. However, a check which has been cleared and credited to the account of the creditor, shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. (Sec.60)

Effects of Liquidation of a Bank or a Quasi-Bank (a) After payment of the cost of the proceedings, including reasonable expenses and fees of the receiver to be allowed by the court, the receiver shall pay the debts of such institution, under order of the court, in accordance with the rules on concurrence and preference of credit as provided in the Civil Code. (Sec. 31) (b) All revenues and earnings realized by the receiver in winding up the affairs and administering the assets of any bank or quasi-bank within the purview of this Act shall be used to pay the costs, fees and expenses mentioned in the preceding section, salaries of such personnel whose employment is rendered necessary in the discharge of the liquidation together with the other additional expenses caused thereby. (Sec.32) The balance of revenues and earnings, after the payment of all said expenses, shall form part of the assets available for payment of creditors. A liquidation proceeding is a single proceeding Although the claims are litigated in the same proceeding, the treatment is individual. And the Order issued relative to a particular claim applies only to said claim, leaving the other claims unaffected, as each claim is considered separate and distinct from the others. The exclusive jurisdiction of the liquidation courts pertains only to the adjudication of claims against the bank, and does not cover the reverse situation where it is the bank which files a claim against another person. (Manalo vs. CA, 366 SCRA 752) The actions of the MB under Sec. 29 (appointing a conservator) and Sec. 30 (closing a bank) are final and executory and may not be restrained or set aside by a court EXCEPT:on petition for certiorari on the ground of excess of jurisdiction or with grave abuse of discretion filed by stockholders of record representing the majority of the capital stock within 10 days from receipt by the BOD of the institution of the order directing conservatorship, receivership or liquidation Note that the twin requirement of majority of stockholders and filing within 10 days should be observed or else action will be dismissed. A bank ordered closed by the MB retains its juridical personality which can sue or be sued through its liquidator HOW THE BSP HANDLES EXCHANGE CRISIS A.LEGAL TENDER POWER when the currency is offered in payment of a debt, public or private, the same must be accepted. All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private.

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C. GENERAL BANKING LAW OF 2000 (R.A. NO. 8791) 1. DEFINITION AND CLASSIFICATION OF BANKS a. UNIVERSAL BANKS these used to be called expanded commercial banks and their operations are primarily governed by the General Banking laws. They can exercise the powers of an investment house and invest in non-allied enterprises. They have the highest capitalization requirement. b. COMMERCIAL BANKS these are ordinary or regular commercial banks, as distinguished from a universal bank. They have a lower capitalization requirement than a universal bank and cannot exercise the powers of an investment house and invest in non-allied enterprises. c. THRIFT BANKS shall include savings and mortgage banks, private development banks, and stock savings and loans association organized under existing laws. d. RURAL BANKS - banks which are designed to make needed credit available and readily accessible in the rural areas on reasonable terms. e. COOPERATIVE BANKS one organized, the majority share of which is owned and controlled by cooperatives, primarily to provide financial and credit services to cooperatives. f. ISLAMIC BANKS these are banks the business dealings and activities of which are subject to the basic principles and rulings of Islamic Sharia. The Al Amanah Islamic Investment Bank of the Philippines, which was created by RA 6848, is the only Islamic bank in the country at this time. Created by Congress to promote and accelerate socio-economic development of the Autonomous Region by performing banking, financing and investment operations and to establish and participate in agricultural, commercial and industrial ventures based on the Islamic concept of banking. (Sec. 3 RA. 6848). g. Other Classification of banks as determined by the Monetary Board. viii. 2. DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST ENTITIES a. QUASI-BANKS i. Quasi-Banks shall refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of R.A. 7653 for purposes of relending or purchasing of receivables and other obligations (Sec. 4 par. 3 GBL). ix. b. TRUST ENTITIES i. Any bank, investment house or a stock corporation duly authorized by the Monetary Board to engage in trust, investment management and fiduciary business methodology. A trust business is any activity resulting from trusteeship involving the appointment of a trustee by a trustor for the administration, holding, management of funds and/or properties of the trustor by the trustee for the use, benefit or advantage of the trustor or of beneficiaries. 3. BANK POWERS AND LIABILITIES a. CORPORATE POWERS these are the powers enumerated under the Corporation Code. Section 36 of the Corporation Code provides that every corporation incorporated under this Code has the power and capacity: i. ii. To sue and be sued in its corporate name; Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; To adopt and use a corporate seal; To amend its articles of incorporation in accordance with the provisions of this Code; To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; To enter into merger or consolidation as provided in this Code; To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, that no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation.

iii. iv. v.

vi.

vii.

x.

xi.

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b. BANKING AND INCIDENTAL POWERS All such powers as may be necessary to carry on the business of commercial banking (Sec. 29). i. ii. iii. iv. v. vi. vii. viii. Accepting drafts Issuing letters of credit Discounting and negotiating promissory notes, drafts, bills of exchange and other evidence of debt Accepting or creating demand deposits Receiving other types of deposits and deposit substitutes Buying and selling foreign exchange and gold or silver bullion Acquiring marketable bonds and other debt securities Extending credit employees may be the ones negligent, a banks liability as obligor is not merely vicarious, but primary, as banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. Duty on Bank Accounts of Clients BPI Family Bank v. Franco 538 SCRA 184, 2007 In every case, the depositor expects the bank to treat his account with utmost fidelity, whether such account consists only of a few hundreds of pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever directed. A blunder on the part of the bank, such as the dishonor of the check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation. The point is that as business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. Dealings with Registered Land Ursal v. CA 473 SCRA 52, 2005 Banks cannot merely rely on certificates of title in ascertaining the status of mortgaged properties. As their business is impressed with public interest, they are expected to exercise more care and prudence in their dealings than private individuals. Indeed, the rule that persons dealing with registered land can rely solely on the certificate of tile does not apply to banks. Degree of Diligence Required of Banks as LendersMortgagees Consolidated Rural Bank (Cagayan Valley) v. CA 448 SCRA 347, 2005 Banks, their business being impressed with public interest [in this case taking-up real estate mortgages to secure the loans given], are expected to exercise more care and prudence than private individual in their dealings, even those involving registered lands. Hence, for merely relying on the certificates of title and for its failure to ascertain the status of the mortgaged properties as is the standard procedure in its operations, the bank is a mortgagee in bad faith.

4. DILIGENCE REQUIRED OF BANKS RELEVANT JURISPRUDENCE (Sec. 2) The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. Banks are required to exercise the highest degree of diligence. Fiduciary Nature of Banks Failure on the part of the bank to satisfy the degree of diligence required of banks may warrant the award of damages. Under Sec. 2, the degree of diligence is high standards of integrity and performance.

Fiduciary Obligation of Banks BPI v. Lifetime Marketing Corp. 555 SCRA 373, 2008 The degree of diligence required of banks is more than that of a reasonable man or a good father of a family. In view of the fiduciary nature of their relationship with their depositors, banks are duty-bound to treat the accounts of their clients with the highest degree of care. Fiduciary Obligation of Bank Employees PNB v. Pike 470 SCRA 328 It bears emphasizing that the negligence of banking institutions should never be countenance. Although its

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Relevant Jurisprudence Simex International v. CA, 1990 As a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. PCI Bank v. CA, 2001 Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. PS Bank v. Chowking Food Corp., 2008 It cannot be overemphasized that the banking business is impressed with public interest. Of paramount importance is the trust and confidence of the public in general in the banking industry. Consequently, the diligence required of banks is more than that of the Roman pater familias or a good father of a family. The highest degree of diligence is expected. Bank of America NT&SA v. Philippine Racing Club, 2009 The banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount importance such that the appropriate standard of diligence must be high degree of diligence, if not the utmost diligence. 5. NATURE OF BANK FUNDS AND BANK DEPOSITS The bank can make use as its own the money deposited (Tan Tiong Tick v. American Apothecaries 65 Phil 414, 1938). Said amount is not being held in trust for the depositor nor is it being kept for safekeeping. Art. 1990 (Civil Code). Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. Confidentiality of Bank Deposits The prevailing policy of the matter is to preserve the absolute confidentiality enjoyed by bank deposits. Republic v. Eugenio, 2008 Indeed, by force of statute, all bank deposits are absolutely confidential, and that nature is unaltered even by the legislated exceptions referred to above. There is disfavor towards construing these exceptions in such a manner that would authorize unlimited discretion on the part of the government or of any party seeking to enforce those exceptions and inquire into bank deposits. If there are doubts in upholding the absolutely confidential nature of bank deposits against the affirming authority to inquire into such accounts, then such doubts must be resolved in favor of the former. Such a stance would persist unless Congress passes a law reversing the general state policy of preserving the absolutely confidential nature of Philippine bank deposits. BSP Group, Inc. v. Go, 2010 It is conceded that while the fundamental law has not bothered with the triviality of specifically addressing privacy rights relative to banking accounts, there, nevertheless, exists in our jurisdiction a legitimate expectation of privacy governing such accounts. The source of this right of expectation is statutory, and is found in R.A.No. 1405, otherwise known as the Bank Secrecy Act of 1955. Subsequent statutory enactments have expanded the list of exceptions to this policy yet the secrecy of bank deposits still lies as the general rule, falling as it does within the legally recognized zones of privacy. There is, in fact, much disfavor to construing these primary and supplemental exceptions in a manner that would authorize unbridled discretion, whether governmental or otherwise, in utilizing these exceptions as authority to unwarranted inquiry into bank accounts. It is then perceivable that the present legal order is obliged to conserve the absolutely confidential nature of bank deposits. Bank as a Debtor Deposit is a voluntary agreement, Know Your Customer standards Bank acquires ownership of money deposited; obligation to pay amount, but not obligation to return the same money (Guingona, Jr. v. City Fiscal of Manila 128 SCRA 577, 1984) Payment to proper party-depositor (Fulton Iron Works Co. V. China Banking Corp. 58 Phil. 206, 1930) Deposits are not preferred credits (Central Bank v. Morfe 63 SCRA 114, 1975 Bank has right to compensation (Gullas v. PNB 62 Phil. 519, 1935) No breach of trust - mandamus not a remedy (Lucman v. Malawi 511 SCRA 268, 2006). 6. STIPULATION ON INTEREST Interests on Deposits The Monetary Board has declared that the interest on deposits are not subject to ceilings (Section 242, MORB). Interest or yield on time deposit/deposit substitute may be paid at maturity or upon withdrawal or in advance. However, interest or yield paid in advance shall not exceed the interest for one year (Section 242.1, MORB)

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(ii) Interest on Loans While the Usury Law ceiling on interest rates was lifted by Central Bank Circular 905, nothing in the said circular grants lenders carte blanche authority to raise interest rate to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets (Solangon v. Salazar 360 SCRA 379). Effect of Excessive interest Rates: Art. 1229. The judge shall equitably reduce the penalty when the principal has been partly or irregularly or partly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. Escalation Clause Agreement by the Bank and the borrower that the obligation shall become due and demandable upon default of the latter. While such a agreement is valid, the bank cannot be given unbridled right to adjust the interest rate independently and upwardly. Such would negate the mutuality of contracts Floirendo v. Metropolitan Bank, G.R. No. 148325 September 3, 2007). Floating Rate of Interest While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks to stipulate that interest rate on a loan not be fixed and instead be made dependent upon prevailing market conditions, there should always be a reference rate upon which to peg such variable interest rates (Consolidated Bank and Trust Corporation (Solid Bank) v. CA 356 SCRA 671). a. The ratio applied uniformly to banks of same category. SINGLE BORROWERS LIMIT (SBL)

Except as the Monetary Board ay otherwise prescribe for reason of national interest, total amount of loans, credit, accommodations and guarantees that may be extended by a bank to any person, partnership, association or other entity shall at no time exceed 20% of the net worth of such bank. However, in 2010, the SBL was increased to 25% for a period of 3 Years. Further, in 2013, the Bankong Sentral ng Pilipinas issued Circular No. 779 which extended the 25% SBL for another 3 years. Also, unless the Monetary Board prescribes otherwise, the SBL may be increased by an additional 10% of Net Worth, provided that the additional is supported adequately by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully recovered by insurance, which shall include: a. Direct liability of the maker or acceptor of paper discounted with or sold to such bank, and liability of general indorser, drawer or guarantor who obtains a loan or other credit accommodation from, or discounts paper with, or sells papers to such bank; b. In the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities to such bank; c. In case of the corporation, all liabilities to such bank of all subsidies in which such corporation owns or controls a majority interest; and d. In case of a partnership, association or other entity, the liabilities of the members thereof to such bank. Coverage For purposes of the SBL coverage, loans and other credit, accommodations and guarantees shall exclude those which are: Secured by obligations of the BSP or Philippine Government; Fully guaranteed by the Government as to the payment of principal and interest; Covered by assignment of deposits maintained in the lending bank and held in the Philippines; Under letters of credit, to the extent covered by margin deposits; Those which the Monetary Board may, from time to time, specify as non-risk items Loans and other credit accommodations, deposits maintained with, and usual guarantees by a bank to any other banks or non-bank entity, whether locally or abroad. Inclusion of Parent Corporation Even if a parent corporation, partnership, association, entity or an individual who owns or controls a majority

7. GRANT OF LOAN AND SECURITY REQUIREMENTS a. RATIO OF NETWORTH TO TOTAL RISK ASSETS The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets wh.ich may include contingent accounts, and may: Require that such ratio be determined on the basis of the Net Worth and Risk Assets of a bank and is subsidiaries, financial or otherwise; Prescribe composition and manner of determining Net Worth and Total Risk Assets of the banks and their subsidiaries. Provided: (i) The Monetary Board may require or suspend compliance with such ratio whenever necessary for a maximum period of one year;

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interest in such entities has no liability to the bank, the Monetary Board may prescribe the combination of the liabilities of subsidiary corporations or members of the partnership, association, entity or such individual under certain circumstances, including but not limited to any of the following situations: Parent corporation, partnership, association, entity or individual guarantees the repayment of the liabilities; Liabilities were incurred for the accommodation of the parent corporation or another subsidiary or the partnership or association or entity or such individual; or Subsidiaries through separate entities operate merely as departments or divisions of a single entity. (Villanueva, 2009) b. RESTRICTIONS ON BANK EXPOSURE TO DOSRI (Directors, Officers, Stockholders and their Related Interest)

No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others: (1) Borrow from such bank; nor (2) Shall he become a guarantor, endorser, or surety for loans from such bank to others; nor (3) In any manner be an obligor, or incur any contractual liability to the bank. EXCEPT with the written approval of the majority of all the directors of the bank, excluding the director concerned. However, such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the Banko Sentral. After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of the DOSRI restriction may be declared vacant and the director or officer shall be subject to the penal provisions of the New Central Bank Act. DOSRI accounts shall be limited to an amount equivalent to their respective encumbered deposits and book value of their paid-in capital contribution in the bank. Provided: (i) Loans, credit accommodations and guarantees secured by assets considered as non-risk by the Monetary Board shall be excluded from such limits; (ii) Loans, credit accommodations and advances to officers in the form of fringe benefits granted shall not apply to loans, credit accommodations, and guarantees extended by a cooperative bank to its cooperative shareholders.