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BANKING LAWS

A. The New Central Bank Act (R.A. 7653)


1. State policies
Section 1
The State shall maintain a central monetary authority that shall function and
operate as an independent and accountable body corporate in the discharge
of its mandated responsibilities concerning money, banking and credit. In line
with this policy, and considering its unique functions and responsibilities, the
central monetary authority established under this Act, while being a
government-owned corporation, shall enjoy fiscal and administrative
autonomy.
2. Creation of the Bangko Sentral ng Pilipinas (BSP)
Section 2
There is hereby established an independent central monetary authority,
which shall be a body corporate known as the Bangko Sentral ng Pilipinas,
hereafter referred to as the Bangko Sentral.
The capital of the Bangko Sentral shall be Fifty billion pesos
(P50,000,000,000), to be fully subscribed by the Government of the Republic,
hereafter referred to as the Government, Ten billion pesos (P10,000,000,000)
of which shall be fully paid for by the Government upon the effectivity of this
Act and the balance to be paid for within a period of two (2) years from the
effectivity of this Act in such manner and form as the Government, through
the Secretary of Finance and the Secretary of Budget and Management, may
thereafter determine.
3. Responsibility and primary objective
Responsibility:
The Bangko Sentral shall provide policy directions in the areas of money,
banking, and credit. It shall have supervision over the operations of banks
and exercise such regulatory powers as provided in this Act and other
pertinent laws over the operations of finance companies and non-bank
financial institutions performing quasi-banking functions, hereafter referred to
as quasi-banks, and institutions performing similar functions. (Sec.3, Par.1)
Primary Objective:
The primary objective of the Bangko Sentral is to maintain price stability
conducive to a balanced and sustainable growth of the economy. It shall also
promote and maintain monetary stability and the convertibility of the peso.
(Sec.3, Par.2)
4. Monetary board
Section 15.

- powers and functions

(a)
(b)
(c)
(d)

(e)

Issue rules and regulations it considers necessary for the effective


discharge of the responsibilities and exercise of the powers
Direct the management, operations, and administration of the Bangko
Sentral, reorganize its personnel, and issue such rules and regulations as
it may deem necessary or convenient for this purpose.
Establish a human resource management system which shall govern the
selection, hiring, appointment, transfer, promotion, or dismissal of all
personnel.
Adopt an annual budget for and authorize such expenditures by the
Bangko Sentral as are in the interest of the effective administration and
operations of the Bangko Sentral in accordance with applicable laws and
regulations.
Indemnify its members and other officials of the 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

In the event of a settlement or compromise, indemnification shall be provided only


in connection with such matters covered by the settlement as to which the Bangko
Sentral is advised by external counsel that the person to be indemnified did not
commit any negligence or misconduct. The costs and expenses incurred in
defending the aforementioned action, suit or proceeding may be paid by the Bangko
Sentral in advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of the member, officer, or employee to
repay the amount advanced should it ultimately be determined by the Monetary
Board that he is not entitled to be indemnified as provided in this subsection.
5. How the BSP handles banks in distress
a) Conservatorship (Section 29)
Conservator is a person appointed if the bank is in the state of illiquidity or the bank
fails or refuses to maintain a state of liquidity adequate to protect its depositors and
creditors. The bank still has more assets than its liabilities but its assets are not
liquid or not in cash thus it cannot pay its obligation when it falls due.
The conservator should be competent and knowledgeable in bank operations and
management. The conservator shall:
To take charge of the assets, liabilities, and the management
Report and be responsible to the Monetary Board and shall have the power to
overrule or revoke the actions of the previous management and board of
directors of the bank or quasi-bank.
Collect all monies and debts due said institution
Exercise all powers necessary to restore its viability
b) Closure (Section 30)
The Monetary Board can close a bank or quasi bank in the following cases:
a. Is unable to pay its liabilities as they become due in the ordinary course of
business.
b. Insufficient realizable assets, as determined by the Bangko Sentral, to meet
its liabilities.

c. It cannot continue in business without involving probable losses to its


depositors or creditors.
d. It violated a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the
assets of the institution.
c) Receivership (Section 30)
Receiver is a person appointed if bank is already insolvent which means that its
liabilities are greater than his assets. The receiver shall:
Immediately gather and take charge of all the assets and liabilities of the
institution.
Administer the same for the benefit of its creditors, and exercise the general
powers of a receiver under the Revised Rules of Court.
Shall not, with the exception of administrative expenditures, pay or commit
any act that will involve the transfer or disposition of any asset of the
institution: Provided, that the receiver may deposit or place the funds of the
institution in non-speculative investments.
Determine as soon as possible but not later than ninety (90) days, whether
the institution may 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: Provided, That any determination for the
resumption of business of the institution shall be subject to prior approval of
the Monetary Board.
d) Liquidation
Liquidation is an act of settling a debt by payment or other satisfaction. It is also the
act or process of converting assets into cash especially to settle debts. (Blacks Law
Dictionary)
A liquidator of a distressed bank can prosecute and defend suits against the bank
and foreclosure mortgages in behalf of the bank because the Central Bank is vested
with the authority to take charge and administer the monetary as well as the
banking systems of the country. It also includes the power to determine and
examine the financial conditions of the banks for the purpose of closure on the
ground of insolvency. (Banco Filipino v. Central Bank, G.R. No. 70054, Dec. 11,
1991)
6. How the BSP handles exchange crisis
a) Legal tender power (Section 52)
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: Provided, however, That, unless
otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not
exceeding Fifty pesos (P50.00) for denominations of Twenty-five centavos and
above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of
Ten centavos or less.
b) Rate of exchange

(Section 74)
The Monetary Board shall determine the exchange rate policy of the country.

The Monetary Board shall determine the rates at which the Bangko Sentral
shall buy and sell spot exchange, and shall establish deviation limits from the
effective exchange rate or rates as it may deem proper.

The Monetary Board shall similarly determine the rates for other types of
foreign exchange transactions by the Bangko Sentral, including purchases
and sales of foreign notes and coins, but the margins between the effective
exchange rates and the rates thus established may not exceed the
corresponding margins for spot exchange transactions by more than the
additional costs or expenses involved in each type of transactions.
(Section 67)
The Bangko Sentral takes action when the international stability of peso is
threatened:

Whenever the international reserve of the Bangko Sentral falls to a level


which the Monetary Board considers inadequate to meet prospective net
demands on the Bangko Sentral for foreign currencies, or whenever the
international reserve appears to be in imminent danger of falling to such a
level, or whenever the international reserve is falling as a result of payments
or remittances abroad which, in the opinion of the Monetary Board, are
contrary to the national welfare, the Monetary Board shall:
a. Take such remedial measures as are appropriate and within the powers
granted to the Monetary Board and the Bangko Sentral.
b. Submit to the President of the Philippines and to Congress a detailed
report which shall include, as a minimum, a description and analysis of:
1. The nature and causes of the existing or imminent decline.
2. The remedial measures already taken or to be taken by the
Monetary Board.
3. The monetary, fiscal or administrative measures further
proposed.
4. The character and extent of the cooperation required from other
government agencies for the successful execution of the policies
of the Monetary Board.
(Section 72)
The emergency restrictions on foreign exchange operations are the following:

Temporarily suspend or restrict sales of exchange by the Bangko Sentral;

Subjecting all transactions in gold and foreign exchange to license by the


Bangko Sentral;

Requiring that any foreign exchange thereafter obtained by any person


residing or entity operating in the Philippines be delivered to the Bangko
Sentral or to any bank or agent designated by the Bangko Sentral for the
purpose, at the effective exchange rate or rates.
In order that the Bangko Sentral may at all times have foreign exchange resources
sufficient to enable it to maintain the international stability and convertibility of the
peso, or in order to promote the domestic investment of bank resources, the
Monetary Board may require the banks to sell to the Bangko Sentral or to other
banks all or part of their surplus holdings of foreign exchange. (Section 76)

B. Law on Secrecy of Bank Deposits (R.A. 1405, as amended)


1. Purpose
(Section 1)
It is hereby declared to be the policy of the Government to give encouragement to
the people to deposit their money in banking institutions and to discourage private
hoarding so that the same may be properly utilized by banks in authorized loans to
assist in the economic development of the country.
2. Prohibited acts
(Section 2)
Examination, inquiry, or looking at 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.
(Section 3)
Disclosure to any person other than those mentioned in Section two hereof any
information concerning said deposits.
3. Deposits Covered
(Section 2)
All deposits of whatever nature with banks or banking institutions in the
Philippines.
Investments in bonds issued by the Government of the Philippines, its
political subdivisions and its instrumentalities.
4. Exceptions
(Section 2)
Here are the instances where examination or disclosure of information about
deposits can be allowed:
Written permission of the depositor.
In cases of impeachment.
Upon order of a competent court in cases of bribery or dereliction of duty of
public officials.
In cases where the money deposited or invested is the subject matter of the
litigation.
5. Garnishment of deposits, including foreign deposits
Garnishment is a warning to a person in whose hands the effects of another are
attached not to pay the money or deliver the property of the defendant in his hands
to him, but to appear and answer the plaintiffs suit. (Black's Law Dictionary)
Foreign currency deposits shall be exempt from attachment, garnishment, or any
other order or process of any court, legislative body, government agency or any
administrative body whatsoever. (Section 8, RA 6426)

Procedure for Garnishment (Section 208, RA 8424)


Bank accounts shall be garnished by serving a warrant of garnishment upon
the taxpayer and upon the president, manager, treasurer or other responsible
officer of the bank. Upon receipt of the warrant of garnishment, the bank
shall turn over to the Commissioner so much of the bank accounts as may be
sufficient to satisfy the claim of the Government.
6. Penalties for violation
(Section 5)
Any violation of this law will subject offender upon conviction, to an imprisonment of
not more than five years or a fine of not more than twenty thousand pesos or both,
in the discretion of the court.
General Banking Act (R.A. 8791)
1. Definition and classification of banks
"Banks" shall refer to entities engaged in the lending of funds obtained in the form
of deposits. (Sec.3, Par.1)
Classification of Banks
(Section 3, Par.2) Banks shall be classified into:
a. Universal banks - Primarily governed by the General Banking Law (GBL), can
exercise the powers of an investment house and invest in non-allied
enterprises and have the highest capitalization requirement.
b. Commercial banks - Ordinary banks governed by the GBL which have a lower
capitalization requirement than universal banks and can neither exercise the
powers of an investment house nor invest in non- allied enterprises.
c. Thrift banks These are (i) Savings and mortgage banks, (ii) Stock savings
and loan associations, and (iii) Private development banks, as defined in
Republic Act No. 7906 (hereafter the "Thrift Banks Act");
d. Rural banks Mandated to make needed credit available and readily
accessible in the rural areas on reasonable terms and which are primarily
governed by the Rural Banks Act of 1992 (RA 7353).
e. Cooperative banks - Those banks organized whose majority shares are owned
and controlled by cooperatives primarily to provide financial and credit
services to cooperatives. It shall include cooperative rural banks. It is
governed by Republic Act No. 6938 (hereafter the "Cooperative Code");
f. Islamic banks are banks whose business dealings and activities are subject
to the basic principles and rulings of Islamic Sharia, such as the Al Amanah
Islamic Investment Bank of the Philippines which was created by RA 6848,
otherwise known as the "Charter of Al Amanah Islamic Investment Bank of
the Philippines"; and
g. Other classifications of banks as determined by the Monetary Board of the
Bangko Sentral
ng Pilipinas. (6-Aa)
2. Distinction of banks from quasi-banks and trust entities

QUASI-BANKS
"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 Republic Act No. 7653. (Section 4)
TRUST ENTITIES
Only a stock corporation or a person duly authorized by the Monetary Board to engage in trust business
shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or
behoof of others. For purposes of this Act, such a corporation shall be referred to as a trust entity.
(Section 79)

3. Bank powers and liabilities


a) Corporate powers
All powers provided by the corporation code like issuance of stocks and
entering into merger or consolidation with other corporation or banks.
b) Banking and incidental powers
Not expressly stated but are deemed to be within the capacity of corporate
entities.
4. Diligence required of banks - relevant jurisprudence
Extraordinary Diligence is the degree of diligence required of banks in handling
deposits. It is that extreme measure of care and caution which persons of unusual
prudence and circumspection use for securing and preserving their own property or
rights. The law requires common carriers to render service with the greatest skill
and utmost foresight.
Jurisprudence:

(PCI Bank vs. CA, 350 SCRA 446, PBCom vs. CA, G.R. No. 121413, 29 Jan.
2001)
The appropriate standard of diligence must be very high, if not the highest,
degree of diligence; highest degree of care.
(Reyes v. CA, G.R. No. 118492, Aug. 15, 2001)
This applies only to cases where banks are acting in their fiduciary capacity,
that is, as depository of the deposits of their depositors.
(Reyes v. CA, G.R. No. 118492, Aug. 15, 2001)
The degree of diligence required of banks, is more than that of a good father
of the family where the fiduciary nature of their relationship with their
depositors is concerned, that is, depositary of deposits. But the same higher
degree of diligence is not expected to be exerted by banks in commercial
transactions that do not involve their fiduciary relationship with their
depositors, such as sale and issuance of foreign exchange demand draft.

5. Nature of bank funds and bank deposits


The function of the bank is to receive money from depositors with the obligation of
safely keeping it and returning the same.
All kinds of bank deposits are loan. The bank can make use as its own the money
deposited. Said amount is not being held in trust for the depositor nor is it being

kept for safekeeping. (Tang Tiong Tick v. American Apothecaries, G.R. No. 43682,
Mar. 31, 1938)
6. Stipulation on interests

Central Bank Circular 416


12% per annum in cases of loans, forbearance of money, goods and credits,
and judgment involving such loan or forbearance, in the absence of express
agreement as to such rate of interest.
Interest accruing from unpaid interest

7. Grant of loans and security requirements


a) Ratio of net worth 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 which may include contingent accounts.
Provided, that such ratio shall be applied uniformly to banks of the same
category. (Section 34)
b) Single borrowers limit
The basis for determining compliance with single-borrower limit is the total
credit commitment of the bank to the borrower. (Section 35)
c) Restrictions on bank exposure to DOSRI (directors, officers,
stockholders and their related interests)
No director or officer of any bank shall, directly or indirectly, for himself or as
the representative or agent of others, borrow from such bank nor shall he
become a guarantor, indorser or surety for loans from such bank to others, or
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: Provided, That 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 Bangko Sentral. 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. (Section 36)
8. Penalties for violations
(Section 91)
A trust entity or any of its officers and directors found to have willfully violated any
pertinent provisions of this Act, shall be subject to the sanctions and penalties
provided under Section 66 of this Act as well as Sections 36 and 37 of the New
Central Bank Act.
a) Fine, imprisonment
Fines in amounts as may be determined by the Monetary Board to be
appropriate, but in no case to exceed P30,000 a day for each violation,
taking into consideration the attendant circumstances, such as the nature
and gravity of the violation or irregularity and the size of the bank or quasi
bank.

b) Suspension or removal of director or officer


If the offender is a director or officer of a bank, quasi-bank or trust entity,
the Monetary Board may also suspend or remove such director or officer.
(Section 66)
c) Dissolution of bank
If the violation is committed by a corporation, such corporation may be
dissolved by quo warranto proceedings instituted by the Solicitor General.
(Section 66)
C. Philippine Deposit Insurance Corporation Act
1. Basic policy
The Corporation shall, as a basic policy, promote and safeguard the interests of the
depositing public by way of providing permanent and continuing insurance coverage on
all insured deposits. (Section 1, as amended RA 9302)
2. Concept of insured deposits
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. (Section 3, RA 9576)
3. Liability to depositors
a) Deposit liabilities required to be insured with PDIC

Any obligation of a bank which is payable at the office of the bank located
outside of the Philippines shall not be a deposit for any of the purposes of this
Act or included as part of the total deposits or of insured deposit. (Section 2,
RA 9576)
Subject to the approval of the Board of Directors, any insured bank which is
incorporated under the laws of the Philippines which maintains a branch
outside the Philippines may elect to include for insurance its deposit
obligations payable only at such branch. (Section 2, RA 9576)

b) Commencement of liability
Whenever an insured bank shall have been closed by the Monetary Board
pursuant to Section 30 of R.A. 7653, payment of the insured deposits on such
closed bank shall be made by the Corporation as soon as possible either (1)
by cash or (2) by making available to each depositor a transferred deposit in
another insured bank in an amount equal to insured deposit of such
depositor. (Section 14, RA 3591, as amended)
c) Deposit accounts not entitled to payment
(Section 2, RA 9576)

1.
2.
3.
4.

The Corporation shall not pay deposit insurance for the following accounts or
transactions, whether denominated, documented, recorded or booked as
deposit by the bank:
Investment products such as bonds and securities, trust accounts, and other
similar instruments;
Deposit accounts or transactions which are unfunded, or that are fictitious or
fraudulent;
Deposit accounts or transactions constituting, and/or emanating from, unsafe
and unsound banking practice/s, as determined by the Corporation
Deposits that are determined to be the proceeds of an unlawful activity as
defined under Republic Act No. 9160, as amended.

d) Extent of liability
The amount due to any depositor for 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 P500,00.00 per depositor.
e) Determination of insured deposits
The Corporation shall commence the determination of insured deposits due
the depositors of a closed bank upon its actual takeover of the closed bank.
The Corporation shall give notice to the depositors of the closed bank of the
insured deposits due them by whatever means deemed appropriate by the
Board of Directors: Provided, That the Corporation shall publish the notice
once a week for at least three (3) consecutive weeks in a newspaper of
general circulation or, when appropriate, in a newspaper circulated in the
community or communities where the closed bank or its branches are
located. (Section 16, RA 3591 as added by R.A. 9302)
f) Calculation of liability
(i) Per depositor, per capacity rule
The deposits in the bank shall be added together to maintain the same right and
capacity of the depositors benefit either in his own name and the name of the
others.
(ii) Joint accounts
(Section 4 (g), RA 3591)
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

(iii) Mode of payment


(Section 14, RA 3591)
Payment of the insured deposits on such closed bank shall be made by the
Corporation as soon as possible either (1) by cash or (2) by making available to
each depositor a transferred deposit in another insured bank in an amount equal to
insured deposit of such depositor.
(iv) Effect of payment of insured deposit
(Section 16, RA 3591)
The PDIC shall be subrogated to all rights of the depositor against the closed
bank to the extent of such payment.
The PDIC is discharged from any further liability to the depositor.
(v) Payments of insured deposits as preferred credit under Art. 2244, Civil
Code
All payments by the Corporation of insured deposits in closed banks partake of the
nature of public funds, and as such, must be considered a preferred credit similar to
taxes due to the National Government in the order of preference under Article 2244
of the New Civil Code. (Section 15, RA 3591)
(vi) Failure to settle claim of insured depositor
Failure to settle the claim, within six (6) months from the date of filing of claim for
insured deposit, where such failure was due to grave abuse of discretion, gross
negligence, bad faith, or malice, shall, upon conviction, subject the directors,
officers or employees of the Corporation responsible for the delay, to imprisonment
from six (6) months to one (1) year: Provided, furthermore, That the period shall not
apply if the validity of the claim requires the resolution of issues of facts and or law
by another office, body or agency including the case mentioned in the first proviso
or by the Corporation together with such other office, body or agency. (Section 14,
RA 3591)
(vii) Failure of depositor to claim insured deposits
(a)Examination of banks and deposit accounts
PDIC may conduct examination of banks with prior approval of the Monetary Board:
Provided, that no examination can be conducted within twelve (12) months from the
last examination date.
(b)Prohibition against splitting of deposits
(Section 21, RA 3591)
Splitting of deposits occurs whenever a deposit account with an outstanding
balance of more than the statutory maximum amount of insured deposit maintained
under the name of natural or juridical persons is broken down and transferred into
two (2) or more accounts in the name/s of natural or juridical persons or entities
who have no beneficial ownership on transferred deposits in their names within one
hundred twenty (120) days immediately preceding or during a bank declared bank
holiday, or immediately preceding a closure order issued by the Monetary Board of
the Bangko Sentral ng Pilipinas for the purpose of availing of the maximum deposit
insurance coverage.

The penalty of prision mayor or a fine of not less than Fifty thousand pesos
(P50,000.00) but not more than Two million pesos (P2,000,000.00), or both, at the
discretion of the court, shall be imposed upon any director, officer, employee or
agent of a bank.
(c) Prohibition against issuances of TROs, etc.
(Section 22, RA 3591)
No court, except the Court of Appeals, shall issue any temporary restraining order,
preliminary injunction or preliminary mandatory injunction against the Corporation
for any action under this Act. This prohibition shall apply in all cases, disputes or
controversies instituted by a private party, the insured bank, or any shareholder of
the insured bank.
The Supreme Court may issue a restraining order or injunction when the matter is of
extreme urgency involving a constitutional issue, such that unless a temporary
restraining order is issued, grave injustice and irreparable injury will arise.