Professional Documents
Culture Documents
| © 2014-2015
SPECIAL COMMERCIAL LAWS (MIDTERM)
HISTORY OF BANKS IN THE PHILIPPINES
During the Spanish era, organizations such as churches and hospitals engaged in lending activities so that the income would be used to
fund their respective activities. It was almost non-profit but to fund their operations, they needed income
Eventually came the Americans together with foreign banks. It was during this period where Bank of the Philippine Islands (BPI) and
Philippine National Bank (PNB) were established
1948: It was only much later that the government attempted to put a structure or regulate the banking system. This was in 1948 where the
Charter of the Central Bank of the Philippines was passed. This Charter took effect January 3, 1949.
Jan. 3, 1949: Coincidentally, this was also the same day that the General Banking Act (RA 337) was passed. The General Banking Act
attempted to regulate the establishment of domestic banks and entry of foreign banks; also to determine the powers of domestic banks
and their foreign counterparts. This was the first attempt to regulate the banking industry
1955: The law on Secrecy of Bank Deposits was passed. This was basically a law that was passed to entice people to deposit their money
with banks. Prior to this, there was no such rule, so each bank was not prohibited to divulge. So to prevent this and entice people, this was
passed. Currently, there are exceptions to this.
1963: The Charter of the Philippine Deposit Insurance Commission (PDIC) was passed. This was when deposits where subject to deposit
insurance, to further entice people to put their money in the bank
July 3, 1993: The New Central Bank Act (RA 7695) was passed. This is the Central Bank law that we have now. With this, all the powers of
the Central Bank, established in 1948, were given to what we now call the Bangko Sentral ng Pilipinas (BSP)
1994: RA 7721 was passed, liberalizing the entry of foreign banks in the Philippines. With this, from the 30% allowable shareholdings of
foreign banks, it was increased to 60%. So foreign banks can now own up to 60% shares of domestic banks. And in some exceptions, they
can also establish branches here fully owned by foreign banks, but only for a very limited period.
Atty G: It was only a limited period, I think it was around 7 years from the time of passage of the law
Recently, around May 2014: Congress passed RA 10641 which allows now the full entry of foreign banks in the Philippines. It now allows
100% ownership of foreign banks in domestic banks, as well as establishment of foreign branches without limitation
April 12, 2000: General Banking Law was passed. If you see GBL, it means the current law. If General Banking Act, that would be the law.
This is now repealed by the GBL. This was for recognition that the financial market was rapidly expanding and changing. They needed a law
that can adapt and at the same time, sustain the growth of the economy.
The declaration of policy of GBL actually recognizes 2 things about the banking system.
a. As payment system
As a payment system, banks allow the efficient and effective consummation of commercial transactions
How? Allowing clearing of checks, or electronic transfers of money
It would be so difficult if you are Lucio Tan and you want to buy PAL. If you do it in cash, you will be bringing a truckload of money.
So with a bank, you just give a check or through a wire transfer
Also in case of foreign transactions. Example you have a supplier in Africa, you can do a bank-to-bank transfer of payment
c. As financial intermediaries
Example. I am an inventor. I invent something that I think will benefit everyone. But to do that, I need a factory for
manufacturing. I don’t have money, so where will I go? Not to loan sharks. Go to banks. They will normally offer less interest
In that way, the banks extend credit to investors/entrepreneurs. The bank gets the money from deposits. Someone deposits
with the bank some millions. Here comes the investor also wanting to borrow. Ordinarily, the millionaire and the inventor
would not have met. The inventor would not have availed of the former’s cash. But because of the bank, the source and user
of money come together
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Banks bring together the source of the funds as well as the users of such funds.
Sec. 2. Declaration of Policy. 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.
Again, these three roles are recognized as the roles of the bank which are essential to the development of the national economy. And
this is basically what this first sentence of the declaration of policy means. The second sentence on the other hand, basically gives an
overview of what the general banking law contains.
2. The State, through the GBL, 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
So there are 3 things that GBL intends to establish with respect to the banking system:
a. There has to be a stable and efficient banking and financial system (Good corporate governance)
So how is this done? What kind of regulation? The GBL PROMOTES GOOD CORPORATE GOVERNANCE. If you go over the
provisions of GBL, you will see some restrictions with respect to the dealings between banks, directors, officers, and
shareholders. Like for one,
1) The GBL requires that a certain number of people must be independent directors.
Directors are people who make decisions for a corporation. As you will know in your corporation code, a director will
have to be a shareholder. A director that is not a shareholder is not qualified to act as such. Normally, directors are
people who have substantial interest in the corporation. INDEPENDENT directors are the opposite of this, these are
persons who are NOT substantial holders, NOT officers of the bank or any of its parent, affiliates or subsidiaries.
The law requires that the Board of Directors of a bank must include independent directors. Why? Because, in an ordinary
director sitting in the board, there will always be a conflict of interest between trying to earn as much for the bank to
the detriment of the public. You have a vested interest in the good performance of your company. So what the law says
that at the very least, the BOD of the bank must include independent directors who have no interest. It means that they
will not benefit regardless of how the bank will perform. Why? These are the people that the law expects will look out
for the benefit of the public rather than the performance of the bank. So GBL requires that a certain percentage must
be independent directors.
So the GBL says that hey bank, you can only lend to your DOSRI up to 25% of your total loan portfolio. Anything in excess
of that will be invalid. So there’s a limitation of how much a bank can lend in its DOSRI for the protection of the public.
The Bangko Central have this fit and proper rule. They have to ensure that the persons are fit and proper for their
positions. The moment that you are elected, you have to go through BSP approval, you CANNOT perform your functions
right away. This is also required in the GBL.
1) Competitiveness
Through the GBL, the law or the state allows the easier entry of foreign banks into the Philippines, sets up the mode of
how banks can be established. Basically intending to increase the number of banks in the Philippines because the policy of
the state is that the more competition there is among banks, the better it is for the economy. They want to establish and
promote competition among banks.
2) Transparency
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The GBL requires that financial statements of banks will have to be published because this allows the public to judge for
themselves whether or not they are willing to put their money on that particular bank. Financial Records of banks are open
to public access.
THE BANKING BUSINESS IS FIDUCIARY IN NATURE BECAUSE IT IS IMBUED WITH PUBLIC INTEREST
CASE: EQUITABLE PCI VS TAN
Facts:
Tan had an account with PCI. On May 13, he issued a check postdated May 30 in favor of Sulpicio Lines. The latter deposited the check and
the amount was immediately debited by PCI. Tan thereafter issued 3 checks payable to ASELCO but such were dishonored for lack of sufficient
funds. As a result, the electric supply of the 2 power mills was cut off. Tan sued for payment of losses and damages by PCI.
Ruling:
A reading of the check would readily show that it was indeed postdated May 30. The date written clearly appears 5/30/1992. Therefore, the
appellee bank and its personnel erred in debiting the amount of the check even before the check’s due date.
The law imposes on banks high standards in view of the fiduciary nature of banking. The court finds that its negligence is the proximate
cause of respondent’s loss. Payment made before the date specified by the drawer is clearly against the drawee bank’s duty to its client. The
law allows the grant of exemplary damages to set an example for the public good. The banking system has become an indispensable institution
in the modern world and plays a vital role in the economic life of every civilized society. Banks have attained an ubiquitous presence among
our people, who have come to regard them with respect and gratitude and most of all, confidence. For this reason, banks should guard against
injury attributable to negligence or bad faith on its part. Since the banking business is impressed with public interest, of paramount importance
thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence is expected, and high standards of
integrity and performance are even required of it.
Discussion:
Post-dated check is one where the date of payment is subsequent to the issuance of the check. In this case, it was issued May 13 and it was
supposed to be paid on May 30. Since the bank immediately debited the account, Tan was then left with insufficient funds to cover for the
3 subsequent checks he issued. As a result, his power was cut off. Bank’s contention was that they debited it immediately because of the
way he allegedly wrote the date “5/3/0/1992”. SC said it is absurd to write a slant between 3 and 0. We’ll go with the regular way. Thus, the
bank is liable.
The bank was also assessed for exemplary damages. This is usually awarded against businesses imbued with public interest
There is a recognition here that for the banking business to survive, there has to be the trust and confidence of the public
This is the reason why there is the FIDUCIARY NATURE banking nature, because the very survival of banks depends on whether or not the
public is willing to put their money in the bank. The bank needs the trust and confidence of the public. So that is why the bank should act
with the highest standard of integrity and performance is required
Discussion:
The SC here cited the case of Simex vs CA, wherein it was ruled that the bank is under obligation to treat the accounts of its depositors with
meticulous care. So even if that person is a long-time contact of the bank, it does not excuse the bank’s negligence in making sure he
signed under the correct name
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Central Bank said that you can’t fault us because you authorized this person who’s worked with you for 5 years. We already know him. But
SC said that does not excuse you. No matter how long you transacted with this person, each transaction will still have to be meticulously
examined. This is under the fiduciary nature of banking.
So one aspect of fiduciary nature of banking is that the bank will have to observe the highest integrity and performance with respect to
treatment of accounts of its depositors
Discussion:
Note that: The arrangement was not sanctioned by the bank. It was a private arrangement between Ramos and Tan.
Note that: the check deposited was a stale check. This is one which has not been enchased within 6 months from its issuance. When a check
is stale, the drawee bank is not supposed to accept the check anymore. However, Tan was able to encash it. He changed the date of the
check to make it current. Ramos questioned it because she did not consent to the change of date.
The bank said that the arrangement was between Tan and Ramos, the bank had nothing to do with it. This is actually against the rules of
the bank. Tan was guilty of misconduct, but the bank is still responsible.
The fiduciary nature is also with respect to hiring and supervision of employees, because banks can only act through its officers and
employees. Necessarily, the fiduciary nature extends to them. The bank, then, must make sure that in the hiring, selection and supervision,
it must also exercise a high standard.
KEY POINTS
The banking business is fiduciary nature because according to Equitable vs. Tan, the bank operates with PUBLIC INTEREST. It has a vital role
in the economy which can only be fulfilled if the bank has the trust and confidence of the public. And this is why the banks will have to
exercise highest standards of integrity and performance
This high standard will reflect not only on treatment of accounts of its depositors, but also with hiring and supervision of employees. This
is because banks can only act through them. Even if it is the fault of the employee, the bank can still be held liable.
If the mistake is made by the depositor himself? (see case below)
CASE: TAN VS CA
Facts:
Tan was travelling to Manila, and to avoid carrying cash, he secured a cashier’s check from PCIB Puerto Princesa branch and deposited
the check with his account in RCBC Binondo. It was an out-of-town check. When he deposited it, he used a local deposit slip, which resulted to
the check being sent to the clearing house. A local check is one issued and deposited in the same territory. It was returned for being “missent”.
RCBC debited the amount from account of Tan without informing him. Believing that the check was deposited, he issued 2 checks which were
returned for insufficiency of funds. Tan alleged to have suffered humiliation and loss of face.
Ruling:
Respondent bank cannot exculpate itself from liability by claiming that the depositor “impliedly” instructed it to clear his check by
filing a local deposit slip. In Citytrust vs. IAC, it was ruled that depositors are not concerned with banking procedure. That is the responsibility
of the bank and its employees. Bank clients are supposed to rely on the services extended by the bank, including assurance that their deposits
will be credited to them as soon as they are made.
Discussion:
SC said in the first place, the teller should not have accepted it because your teller is expected to know the internal rules. The client is not
expected to know the same.
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The client was not held at fault and the bank was held liable for damages
A mistake made by the client does not necessarily mean that the bank can be exempted from liability
This is still because of the fiduciary nature of banking. They are expected to exercise a high degree of diligence
CLASSIFICATION OF BANKS
1. UNIVERSAL BANKS
Sundiang: Banks that have authority to exercise, in addition to the powers and functions of commercial banks, powers of an investment
house and the power to invest in non-allied enterprises
Can act as an investment house unlike a commercial bank, which is different from setting up investments
Investment house: an entitiy which undertakes to sell the securities of the issuing companies. What sets it apart is that it guarantees
the sale of these securities. It acts as an underwriter of these securities. They guarantee that these securities will be sold.
Example. San Miguel will want to issue 1M worth of shares. They won’t just sell it to the public because they don’t have the capacity.
It will contact a bank that has an investment house and the bank will undertake to sell these securities with a promise that if not all are
sold, they will pay the remainder. It undertakes to sell and is also allowed to guarantee the sale of those securities. Only a universal
bank can do this. Commercial banks cannot
Banks can invest in allied enterprises, which can be financial or non-financial; or non-allied enterprises.
Non-allied means that the operation is not related to banking at all, like a real estate company, or construction
Only universal banks can invest in non-allied enterprises
Basically, a universal bank is like a commercial bank with greater powers. So it is called expanded commercial bank
Under the General Banking Act, it was just commercial bank. When BSP gave out additional powers, they were then known as
expanded commercial bank. But now with GBL, they are now known as universal banks
2. COMMERCIAL BANKS
Sundiang: Banks that are given all such power necessary to engage in commercial banking in addition to general corporate powers;
commercial banking includes the power to accept drafts, issue letters of credits, discounting and negotiation of negotiable instruments
and evidence of debt, accept and create demand deposits and the like
They perform ordinary banking functions such as deposits, loans, opening accounts, granting letters of credits. Universal banks can
also do these.
3. THRIFT BANKS
Sundiang: Include savings and mortgage banks, private development banks, and stock savings and loan associations
They are geared towards small and medium entrepreneurs- the middle class. Those who do not need much capital can instead go to a
thrift bank instead of universal banks
4. RURAL BANKS
Banks which are usually found in the provinces for promotion of rural development
5. COOPERATIVE BANKS
Primarily provide financial, banking and credit services to cooperative organizations and their members.
6. ISLAMIC BANKS
Made in accordance with RA 6848
Why is there a need to set up a bank based on religion?
Because there are certain regular banking rules that which are considered as unfit to some religious teachings e.g. :
Interest
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When you borrow from the bank, they will always impose interest. In fact, when you
deposit, there is also an interest which means the Muslims cannot go to a regular bank. So a special
bank must be created to meet their requirements which would be consistent with their belief.
These banks are necessary to make sure that all banking needs of the public are addressed. That is why there are classifications.
ORGANIZATION OF BANKS
An ordinary corporation has 1 franchise from the SEC- the certificate of registration that is basically a document that proves that it
is a juridical person that which is alive. But how many franchise/es does a bank require?
2 franchises
1) Primary –Certificate of registration of SEC
2) Secondary- banking license, Certificate of authority to operate
You apply first to the BSP. What is needed before the monetary board issues this certificate? Applicant must first intend
to organize a stock corporation (meaning the capital is divided into shares and can distribute surplus profits as
dividends pursuant to Sec. 3 of the Corporation Code) because at this point, there is no corporation yet. Second, it
intends that its funds are obtained from the public (which shall mean 20 or more persons). Third, the minimum capital
requirement prescribed by the Monetary board for each category of banks are satisfied (which means the paid-up
capital stock). The authorized capital stock is the maximum, the portion of the authorized capital owned by the
stockholders is the subscribed capital stock and the portion of the subscribed capital which is actually paid is the paid
up capital stock.
Aside from these things, the BSP shall also assess the banks’ ownership structure, directors and senior management,
its operating plan and internal controls as well as its projected financial condition and capital base. If it finds everything
in order, all the requirements under section 8, the bank will then issue the certificate.
In your application, you must submit your organizational documents. These are the AOI, the by-laws and treasurer’s
affidavit the documents that you need to organize a corporation. The BSP through the Monetary Board will examine
these organizational documents and once it finds that everything is in order based on Sec.14, it will issue the certificate
of authority to register.
Take note that the SEC is mandated both under the Corporation code and the General Banking law not to approve the
application of an entity which will engage in banking functions without a certificate of authority to register from the
Bangko Sentral. Once the SEC finds that everything is in order, it will then issue the certificate of registration or
certificate of incorporation.
The moment that you have your certificate of incorporation from the SEC, now you go back to the Bangko Sentral and
now you apply for the authority to operate pursuant to Sec 6. Take note that the certificate of incorporation issued by
the SEC is your PRIMARY franchise, this is your authority to say that “I am now a corporation a juridical entity”. But this
alone will not allow you to operate your business, it’s not enough because Sec 6 requires that you need the certificate
of authority to operate which in turn will now be your secondary license.
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But what happens if a corporation without getting this certificate of authority to operate will start accepting
deposits? Who is authorized to determine WON entity is engaged in banking functions? Take note that a
corporation without a banking license cannot operate as a bank, but it does not really stop people from acting
as banks even without license. So the monetary board can determine, and if it finds that a certain entity is
engage without license, it can go to court and penalize that person/entity. The power of the monetary board
is ONLY TO DETERMINE whether or not a person/ entity is engaged in banking functions. If it determines that
is a violation of GBL and Central Bank Act for which there are penalties, of course the Monetary board
CANNOT IMPOSE THESE PENALTIES - so the Monetary board will have to go to COURT to get the sanctions.
Take note under Sec. 6, the Monetary Board is also authorized to:
examine, inspect, or investigate the books and records of any such person or entity,
administer oaths
compel the presentation and production of books, documents, papers or records
For Foreign Nonbank Individual and Corporation its 40%. What do you mean by a domestic bank?
It is a bank incorporated in the Philippines. It does not say anything that it is Filipino or Foreign owned. It
simply means it is incorporated under Philippine laws.
For Filipinos, 40%. So for example Mr. A is a foreigner owning 40% of the share of XY Bank, then here comes Z corporation which is another
foreign corporation wanting to own 40%, allowed? BOTH are foreign. Another example- all Domestic B corporation & P corporation, both
each 40% of 123 Bank. Allowed? The basis will now be Section X126.1 of the Manual of Regulation for Banks (MORB).
For foreign Individuals & Nonbank Corporation, each may own or control 40% of a Universal (UB), Commercial (KB) & Thrift (TB) Banks.
Provided that the aggregate shall NOT exceed 40% of the UB/KB & 60% of TB. For non Filipino citizens, each/in aggregate may own 60% (Sec
X126.1a).
For Filipino individual &domestic nonbank corporation may each own up to 40% of UB, KB or TB and up to 60% of RB. No ceiling on aggregate
ownership by such in a domestic bank (Sec X126.1c). So Mr. B can own up to 40% and another Filipino corporation can get to own another
40%. Together, there can be 80% because there is no limit in their aggregate shareholdings.
If Z corporation, take a look at who are the shareholdings of Z, if shareholders of Z is more than 50% foreigners, Z is a foreign shareholder
and subject to the aggregate limit. If P corporation has a shareholding of 51% Filipinos, it is a Filipino citizen, not a foreign corporation and
is not subject to the aggregate limit.
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the voting stock of RB. Provided that said relationship must be fully disclosed in all transactions by such individuals or family groups or
related individuals.
Situation 1. Corporation X owned by A & B, another Corporation Y, also owned by A & B, can corp X own 40%? Yes. Can corp Y own also 40%?
Pursuant to X126.1g, Two or more corporations owned or controlled by the same family group or same group of persons shall be
considered related interest but may each own up to 40% of the voting stock of a UB, KB or TB and up to 60% of a RB. Provided that said
relationship must be fully disclosed in all transactions by such corporation or related groups of persons with the bank.
Situation 2. A owns 40% of a bank, A fully owns X corporation, and X corp wants 40% again of the same bank. Can this be done?
Pursuant to X126.1d, an individual and a corporation or corporations which are wholly-owned or majority of the voting stock of which is
owned, by him, may own only up to a combined 40% of the voting stock of a UB, KB, or TB, and up to a combined 60% of the voting stock
of a RB.
What’s the difference between the first situation and the second?
In the 1st situation, corporations are owned by groups of persons although they are considered as related interests, there is still a group and
not just one individual. In the 2nd situation, we are only talking about 1 individual and a corporation wholly owned by him. In which case, the
law considers them as one, with a combined limit of 40%.
Directors are at least 5 and a maximum of 15 except when there is a merger or consolidation in which case, not more than 21. A merger
happens when 2 corporations combine or 1 is absorbed by another. Why does the law want to entice corporations to merge? (Section 15 &
17)
Because the policy of the law is that these smaller banks if they get together- they merge or consolidate, they will become stronger and
they will have more assets. So the policy is to promote merger or consolidation of banks. But the law recognizes that the limit on the
number of directors can be a hindrance because obviously, the directors of both banks would want to maintain their own position. So to
allow for these mergers or consolidations to actually happen, the law says okay there’s a merger or consolidation, the bank can have 21
directors. So this is the purpose of the exception.
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They shall only serve for ONE term. The term of an independent director is 1 year, you have to be elected again for another year. But an
independent director can be elected for 5 consecutive years. If he has been elected for 5 consecutive years, he CANNOT be elected on the
6th year, or 7th year. On the 8th year he CAN after what we call the 2 years cooling off period, and can serve for another 5 years, so a total
of 10 years of service. However, to be allowed another 5 years, you must not have done something during the 2 year cooling off period that
would disqualify you from being an independent director.
For example, after you have served full 5 years, you have acted as an adviser to the bank during the cooling off period, you will no longer
be qualified for the next 5 years. Moreover, if an independent director has elected and served for only 1 year, then after that he has not
been elected the 2nd year, then in the 3rd he CAN be elected subsequently or thereafter. There’s no prohibition. Since what the law requires
is when an independent director has served for 5 consecutive years, then there’s the cooling off period. If you serve for every other year,
the cooling off period will NOT be required. But you can only serve a total of 10 years but no cooling off period.
The fit and proper rule as discussed earlier is part of the corporate governance requirements for banks under the GBL. The Monetary
Board is given the power to prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed
as bank directors or officers. And disqualify those found unfit. As mentioned before, in an ordinary corporation, once you elect your
directors and officers- that’s it. No other act is required. But for banks, once elected they have to submit their bio data and resume of all
their elected directors to the Bangko Sentral who will say whether or not such are qualified are disqualified. So without approval of the
Monetary Board, the directors or officers cannot start their duties as such.
BANK BRANCHES
Pursuant to Section 20, Bank branches are allowed to be used as outlets for the presentation or sale of the financial products of its allied
undertaking or of its investment house units.
Allied Undertakings are those enterprises which are related to the operations of the bank such as credit card companies, insurance
companies, lending institutions and finance companies.
The rule is that these allied enterprises or allied undertaking of banks can present their products within the banking premises or within the
bank office. It has to be an allied undertaking – an affiliate or subsidiary of the bank.
For example, X bank. Can it sell the products of its affiliate finance company of car loans? Can car loans be presented in X bank offices? Yes,
because it is a product of an allied undertaking of the bank. The finance company is related to the bank, an affiliate of the bank.
What if the finance company is not related or is a third person in relation to the bank, can it sell its product within bank premises? No.
If there’s an Insurance Co. and it’s an affiliate of the bank, it can sell its product within bank premises. If the insurance company is a third
person, not related to the bank, it CAN sell pursuant to Sec. 375 of the Insurance Code (R. A. 10607).
Section 375. The term bancassurance shall mean the presentation and sale to bank customers by an insurance company
of its insurance products within the premises of the head office of such bank duly licensed by the Bangko Sentral ng
Pilipinas or any of its branches under such rules and regulations which the Commissioner and the Bangko Sentral ng
Pilipinas may promulgate. To engage in bancassurance arrangement, a bank is not required to have equity ownership of
the insurance company. No insurance company shall enter into a bancassurance arrangement unless it possesses all the
requirements as may be prescribed by the Commissioner and the Bangko Sentral ng Pilipinas.
"No insurance product under this section, whether life or non-life, shall be issued or delivered unless in the form
previously approved by the Commissioner.
Take note that under this rule, it states ‘any insurance company’ so an insurance company is allowed even if
it’s not an allied enterprise or undertaking.
But of course, subject to the rules and regulations which the Commissioner and the Bangko Sentral ng Pilipinas
may promulgate but no such rule has been promulgated yet. So this provision is not yet in effect. But
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technically, this Section 375 amends Section 20 of the General Banking Law. But we don’t know yet the rules
that will be set by the Commissioner and the Bangko Sentral.
Cross-Selling is the process of selling or presenting the financial products within the banking premises. It’s when you
present the products of the allied undertaking or investment house within bank premises.
Bancassurance if presenting insurance products.
Discussion:
The basis of imposing damages against the bank is breach of contract/culpa contractual. SC said there was breach of contract of loan.
However, this is not an ordinary contract of loan. The rule in Obligations and Contracts is that the parties are only bound by the stipulations
of the contract.
Are banks required to stipulate on the fiduciary nature and high standard of diligence in the contract? SC said they are not. The declaration
of policies under the GBL is deemed written into the contract. There is no need for an express stipulation.
However, this fiduciary duty does not change or transform the nature. The relationship is still a debtor-creditor relationship. Even if the
fiduciary nature is deemed written into the contract, it does not convert it to trust agreement.
Failure of the bank to comply with the contract which is to allow the client to withdraw the money from the bank does not result in a breach
of trust. It is merely a breach of an obligation to pay.
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There is merit in the contention that their liability is civil in nature and thus, public respondents have no jurisdiction over the charge of
estafa. It must be pointed out that when private respondent David invested his money on time and savings deposits with the aforesaid bank,
the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Bank deposits are in the nature of
irregular deposits. They are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be
treated as loans and are to be covered by the law on loans. Current and savings deposits are loans to a bank because it can use the same.
Hence, the relationship between the private respondent and Nation Savings and Loan Association is that of creditor and debtor;
consequently, the ownership of the amount deposited was transmitter to the bank upon the perfection of the contract and it can make use
of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the bank has the
obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the
failure of the bank to return the amount deposited will not constitute estafa but only give rise to a civil liability over which public respondents
have no jurisdiction.
Discussion:
Estafa here was allegedly committed through violation of paragraph 1(b) Article 315 of the RPC: “By misappropriating or converting, to the
prejudice of another, money, goods, or any other personal property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of or to return the same, even though such obligation
be totally or partially guaranteed by a bond; or by denying having received such money, goods, or other property.”
So for example, if it is a contract of deposit and you failed to return the very same thing under the contract f deposit, then you can be liable
for estafa under 315 (b), because you have to return the very same thing you received. So this was the basis of the case filed by the depositor
against Guingona and the rest
When the time comes to repay, the bank does not have to return the exact same bills and coins. It only needs to repay the same amount
3 consequences of declaring that a deposit is a contract of loan:
a. The moment you deposit the funds, there is transfer of ownership
b. The bank can now use the funds in any way it sees fit. As owner, it can keep it or lend it
c. When it comes for repayment, it is obligated to return the same amount
Thus, there is no criminal consequence/liability in failure to return the money. This is simply a civil matter: non-payment of loan, and not a
breach of trust or failure to return the money received in trust
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SC ruled that undoubtedly, the bank has a right of set-off (legal compensation). It is a right recognized for banks because the
relationship/contract between the parties is that of debtor and creditor, or a contract of loan. It is a mode of extinguishing an obligation.
This happens when two parties are both creditors and debtors of each other
When all the elements (above) are present, compensation takes place by operation of law. This rule on compensation will apply to banks
because banks and depositors are debtors and creditors of each other
The problem in this case was how that right was exercised because according to the SC, Hey bank, this is your long-term creditor. You
should have informed him that you already debited his account, so it was held liable for damages. But it was only in the manner of setting
off since banks have that right
Discussion:
Preference of credit comes into play only upon insolvency or liquidation of a corporation. If it is an ongoing concern, or it has the ability to
meet its debts as they become due, there is no such thing as preference of credits. They only come in when the assets of the corporation
are no longer sufficient to meet its liabilities. When this happens, there is preference as to who gets paid first over the insufficient assets.
The spouses claim they are preferred creditors because of the judgment they secured.
SC said deposits are only ordinary credit and do not enjoy any preference. Being ordinary credit, the depositors will have to wait until all
the preferred credits have been paid. If there are still assets left, the depositors will now share in those assets in proportion to their deposit
amounts. No preference with respect to other credits; no preference with respect to each other. They share equally in their rights in
proportion to the amount of their deposits.
When you deposit with a bank, you are merely an ordinary creditor of the bank. You do not acquire any lien on the properties of the bank,
like the chairs or table. You only have an ordinary loan, there is no lien on specific credits. Remember, the nature of a preferred credit is
that it creates a lien on a specific property of the insolvent corporation. That’s why if you have a mortgage, that becomes a preferred credit
because the mortgage creates a lien over the property. A deposit does not doe that because it is a simple loan, it does not have a security.
So a depositor cannot convert his ordinary credit to a preferred credit
As a depositor, you can file a case (even after the corporation is declared insolvent) but only if your claim is disputed and only for the
purpose of fixing the amount of the claim. However, this judgment will not make your credit a preferred credit if your judgment is still that
you are a depositor of the bank. It will just say this is the amount you are entitled to recover. It doesn’t create any preference, you are still
an ordinary creditor of the bank. As long as judgment will just establish that you are a depositor of the bank, that will not create any
preference because the concept of a deposit really is just a simple loan, thus it does not create any lien.
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o They can only enter into savings deposit and time deposit. So, they cannot enter into demand
deposits
Insane/demented
With civil interdiction
Deaf-mutes who cannot read or write
II. Kinds of accounts natural persons can enter into
i. Individual account
One person opens an account
ii. Joint account
Kinds:
And/or account – only one signature of any of the depositors is necessary for withdrawal
And account – all signatures of the depositors are necessary
They are owned by more than 1 depositor, not just limited to two persons.
2. Juridical Persons
iii. Corporate accounts
Accounts entered into by corporations, partnership, associations; by juridical persons
B. Types of Deposits
1. Demand Deposit
They are normally not interest bearing because when you maintain a demand deposit from a bank, there is no certainty as
when you will withdraw the money. So the bank will be forced to keep a certain amount of money to make sure that when
you withdraw it, they can provide you. In other words, when the bank is required to keep the money, it cannot use the money
for any other purposes- it cannot lend or invest the money. So the money does not earn for the bank and in turn, it will not
earn for you.
Pursuant to Section 33, the a bank other than a universal or commercial bank cannot accept or create demand deposits except
upon prior approval and subject to such conditions and rules as may be prescribed by the Monetary Board. So ordinarily, ONLY
Universal and Commercial banks can create demand deposits or checking accounts, the other banks should get special
authority from the Monetary Board.
2. Savings Account
Interest bearing; most common type usually evidenced by a passbook.
3. Negotiable Order of Withdrawal Account (NOW)
A combination of both demand and savings deposit. It is interest-bearing that combine the payable on demand feature of
checks and investment feature of savings account.
4. Time Deposits
An account with fixed term
The interest in banks will depend on the commitment of the depositor on how long he will maintain the deposit with the bank. The longer
the commitment, the higher the interest because in that case, the bank can use it for long term investments thus earning higher income
for the bank.
INSURED DEPOSITS refer to the amount deposited in the bank which upon insolvency of the bank which the deposit was made, the
depositor may recover up to P500,ooo. So the maximum insured deposit is 500k.
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7) If A has 300k in his individual acct
He has 900k joint acct with B,
He has 900k joint acct with C &
He has 200k joint acct with D
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) pursuant to Section 4 (g) of RA 3591 as amended by Section 3 of RA 9576.
A can recover 300k for his individual account and 500k as aggregate interest
But of course, you are more protected if you separate your deposits into two since per
account, it is considered one 500k. But all in all, you can never recover in excess of 500k.
8) If A has 600k in his individual acct
He has 400k with B
He has 800k with C
For A - 500k for his individual, 200k for joint w/ B & 250k for joint w/ C = 950k
For B – 200k
For C – 250k
9) If A has 500k in his individual acct
He has 600k with B (A&B)
He has 500k with C (A&C)
He has 450k with B & C. (A, B &C)
For A - 500k for individual, 650k for joint but since it can never exceed 500k for joint, so = 1Million
For B – 400k (250 + 150)
For C – 400k (250 + 150)
Pursuant to Section 4 (g) of RA 3591 as amended by Section 3 of RA 9576.
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. (R.A. 1405)
CASE: BSB VS GO
Facts:
Ricardo Bangayan (husband of Sally) as president of BSB Group, Inc. filed a complaint for estafa and qualified theft against Sally Go.
Sally Go allegedly indorsed check amounting to P1, 534,135.50 to her personal banking account at Security Bank instead of being turned over to
the company’s coffers. Sally Go filed a motion to quash noting that in the complaint affidavit, there was no mention of the said bank account.
Bangayan opposed on the ground that the complaint showed that there were two checks which she allegedly deposited. Sally Go filed a
supplemental motion and then invoked the privilege of confidentiality under R. A. 1405. BSB contended that the account contains the
proceeds of the check and thus falls among the exception in Section 2 of R.A. 1405 that money deposited or invested is the subject matter of
the
Ruling:
The subject matter of the action in the case at bar is to be determined from the indictment that charges Sally Go with the offense,
and not from the evidence. In the criminal information, Sally Go was charged with qualified theft. The information makes no factual allegation
that in some material way involves the checks sought to be suppressed neither do the allegations make mention of the supposed bank
account in which the funds represented by the checks have allegedly been kept. In other words, it can hardly be inferred that the account is
the subject of the inquiry. Moreover, should there be doubts in upholding the absolutely confidential nature of bank deposits against authority
to inquire, such doubts must be resolved in favor of the former.
Discussion:
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. (R. A. 1405)
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Two allied purposes of the Bank Secrecy Law
1) To discourage private hoarding
2) Encourage the people to deposit their money in banking institutions
The BSB contended that the subject money is among the exception, specifically the fourth exception which is case where the money
deposited or invested is the subject matter of the litigation
There was no mention of the checks allegedly stolen neither was there any mention of the accounts where the checks were supposedly
deposited in the information. The accounts and the money deposited therein were no longer subjects of the litigation.
You can consider it to be subject of litigation only when you look at the pleading and it is part of the allegations there that the issue is
considered to be that money in that particular account identified in the pleading. Therefore, it must be alleged in the pleading.
In the case at bar, there was never any allegations in the complaint and just said in general terms that she stole money in the amount
of 1 million plus and that was it. So the SC said, this account and the money deposited therein cannot be considered as subject matter
of litigation.
Discussion:
The bank, PNB itself was the one who invoked the secrecy of bank deposits and it said that it is not allowed to divulge the records of
the depositors because of R.A. 1405.
The DOJ invoked the last part of Section 8 of R.A. 3019 which states that “bank deposits shall be taken into consideration in the
enforcement of this section, notwithstanding any provision of the law to the contrary”.
Section 8 does not expressly provide that in cases of unexplained wealth, the deposits of the person under investigation can be
inquired upon. There was nothing there.
The Supreme court said that the last phrase of Section 8 of Anti Graft and Corrupt Practices Act is actually sufficient to constitute an
exception to the bank secrecy law such that it went on to say that this basically amends R.A. 1405.
Other than that, if such Section is not sufficient, the cases of unexplained wealth can be considered as similar to cases of bribery and
dereliction of duty which is expressly allowed under R.A. 1405 for the deposit to be inquired into.
So Anti Graft and Corrupt Practices Act is among the exceptions to the Bank Secrecy Law and the basis for that is PNB vs Gancayco
because the law is not really clear on it. So the real basis is this case, PNB vs Gancayco.
CASE: GSIS vs CA
Facts:
A surety agreement was made between Domsat and GSIS where the former obtained a security bond from the latter to secure the
payment of the loan from the banks. Domsat failed to pay the loan and GSIS refused to comply with its obligation reasoning that Domsat did
not use the loan proceeds for the payment of the rental. GSIS alleged that Domsat transferred 11 Million U.S. dollars from Korea, to New York
and from there to Binondo Branch of Westmont Bank. The Banks filed a complaint against Domsat and GSIS. GSIS requested Westmont Bank
through a subpoena to produce documents saying that it is among the exceptions and invoked R.A. 1405. RTC quashed such subpoenas and
ruled the absolute confidentiality of foreign currency deposits and may be examined only when there is written permission from the depositor.
CA declared that Domsat’s deposits is covered by R. A. 6426 and such testimony of incumbent president of Westmont Bank is not the written
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consent contemplated in law however, production of some documents does not involve the examination of Domsat’s account since it will never
be known how much money was deposited into. The Bank maintains that R. A. 1405 is not applicable.
Ruling:
The two laws R.A. 1405 & R. A. 6426 both support the confidentiality of bank deposits. There is NO conflict between them. R. A. 1405
covers all bank deposits in the Philippines and no distinction was made between domestic and foreign deposits. Thus, it is a law of general
application. On the other hand, R. A. 6426 is a special law designed especially for foreign currency deposits. Applying Sec. 8 of R. A. 6426,
absent the written permission of Domsat, Westmont Bank cannot be legally compelled to disclose the bank deposits of Domsat, otherwise it
might expose itself to criminal liability.
Discussion:
GSIS invoked R.A. 1405 or the Bank Secrecy Law, GSIS is saying that the money deposited in the account is the subject matter of litigation
and so under R.A. 1405, it is exempt from the confidential nature of bank deposits.
Westmont Bank invoked R. A. 6426.
There is no conflict between the two laws since R. A. 1405 applies to all types of deposit in the Philippines in general while R. A. 6426
applies specifically to foreign currency deposits.
If it is a foreign currency deposit account, apply Foreign currency deposit law.
If it is any other account, apply R. A. 1405.
Since R. A. 6426 has one exception, you cannot apply the exceptions in R. A. 1405.
Unless you get the written permission of the depositor, you cannot look into the foreign currency deposit.
Discussion:
Even when the DOJ Secretary Franklin Drilon was involved, the Supreme Court sarcastically said that hey you great minds or the finest legal
minds of the country, you did not even know what law you should be applying. You are all talking about R.A. 1405 but take a look, this
deposit account is a foreign currency deposit.
So you don’t apply R. A. 1405, you apply R. A. 6426 which there is only one exception and without complying, you cannot examine the
account of the persons involve.
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CASE: REPUBLIC VS EUGENIO
Facts:
Several investigations were conducted by the Ombudsman concerning the award of NAIA Airport 3 to PIATCO. Among the persons
investigated was Pantaleon Alvarez, a chairman of the PBAC Technical Committee NAIA-IPT3 Project and Cheng Yong. Investigation revealed
that Alvarez maintained 8 bank accounts with 6 different banks. To fully inquire into such deposits, AMLC filed for issuance of a bank inquiry
order. The RTC issued orders ex-parte. Upon motion by Alvarez, the orders were lifted, refraining AMLC to inquire. Lilia Cheng who is the wife
of Cheng Yong with whom she jointly owns a bank account filed a TRO and argued that ex-parte bank inquiry orders violated her right. Moreover,
she argued that under the AMLA, such order can only be granted in connection with violations of the AMLA and that the AMLA can not apply to
bank accounts opened and transactions entered into prior to the effectivity of the AMLA.
Ruling:
The AMLA also provides exceptions to the Bank Secrecy Act. Under Section 11, the AMLC may inquire into a bank account upon order of
any competent court in cases of violation of the AMLA, it having been established that there is probable cause that the deposits or investments
are related to unlawful activities as defined in Section 3(i) of the law, or a money laundering offense under Section 4 thereof. There is also no
need for the AMLC to obtain a court order before it could inquire into such accounts. Further, a bank inquiry order may not be availed of ex
parte.
Discussion:
2 issues of the AMLA (1) The interpretation of the phrase “in cases of violation of this Act” (2) Can the AMLC file ex-parte
The contention of the persons being investigated is that the phrase “in cases of violation of this Act” means that before the AMLC can look
into the deposit accounts, there has to be first an actual case filed for violation of the AMLA. They took the term literally.
The SC said the contention is wrong since what it simply means is ‘in the event of’ or in the event there are violations of the AMLA and it
is NOT required for there to be actual cases pending for violation of the AMLA. So you don’t need to file a case to look into the bank
deposits.
On the second issue of ex-parte, meaning on application of one party and the other party will not be allowed to contest. In this case the SC
said that you compare Section 10 and Section 11. Section 10 expressly provides that it is an ex-parte application for a freeze order. But the
phrase is NOT repeated on Section 11 and so obviously, the intention of Congress is for it to be NOT ex-parte. So it’s not allowed. You
cannot do it ex-parte.
Upon learning of the decision in the case of Eugenio, Congress amended Section 11.
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In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a
clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic
Act No. 1405 or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the
bank deposits of the taxpayer.
Under the old provisions of Section 6 of the NIRC the BIR Commissioner can look into bank accounts of the decedent to determine the
gross estate. So when you settle an estate of the decedent, you can go to the bank and ask for certification of the bank accounts
because the BIR will look into that, that is exempt because it is NOT covered under the secrecy law and R. A. 6426.
Again BOTH foreign and Philippine currency.
Also, when you file compromise with the BIR, but in this case you are required to waive the secrecy of bank deposits. So you have to
do it voluntarily- forced voluntary.
1. LOAN FUNCTION
GENERAL GUIDELINES
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.
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
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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.
1. The amount and period of the loan have to be such that they will be for the effective completion of the operations to be financed
The purpose of the loan will have to be disclosed by the borrower to the bank in the application and has to be incorporated in the loan
document
The purpose needs to be expressly stated. The reason is that the amount and the period of the loan are determined by the purpose of
the loan. The amount and period have to be such that will make effective the completion of the operations to be financed. This means
they have to be such amount and period that the purpose can be completed
Thus, it is important to disclose the purpose for the bank to know if the amount given is enough, or that it can know the period for the
payment of the loan. The purpose will determine how much can be granted and for how long the term of payment will be
If the proceeds of the loan are used differently, the bank has the right to terminate the loan agreement and immediately demand
payment
2. The grant of loans shall be consistent with safe and sound banking practices
For the bank, the board of directors (BOD) establishes and provides the specific rules to enforce these safe and sound banking practices
so that the officers will not just grant loans to anyone. They have to establish specific guidelines pursuant to the general guidelines
under the law
The BOD then will specify who can avail such loans, how much, what are the collateral required, the term of the loan, the documentary
requirements; or the specifics, such that in granting loans, the bank will have to comply with its own internal procedure. If it does not
comply with its own procedure, then that is not compliant with safe and sound banking practices
3. The bank must ensure that the would-be borrower would be able to pay the loan in the time stipulated
This is dictated by the fiduciary nature of banking. Remember that the funds used by the banks to grant loans are not its own money
but also borrowed from its depositors. So the bank has this obligation of making sure that the persons to whom they lent money can
also repay them. If such persons cannot repay, the bank cannot also repay the depositors
If the basis of the grant of the loan is a fraudulent financial statement or untrue ITRs, the bank has the right to terminate the loan
SBL says that the bank cannot grant loans to a single individual or corporation more than 20% of the net worth of the bank. However, the
MORB has already increased this to 25% of the total net worth of the bank.
2. Credit accommodations
These are different from a loan. It’s buying a negotiable instrument which will probably be booked as an investment. The
bank gave you money, and later on you will have the obligation of paying the bank if the borrower or maker defaulted. You, probably
as guarantor of that note, will be liable to the bank. However, there is no loan by the bank to you.
So these are transactions not booked as loans but technically, there is still money given by the bank and there is an
expectation of liability on the part of the person being given the money. Example is when the bank buys receivables. Another is X
Corporation issuing bonds, and the bank buys the bonds. The bank gave X Corp money, and X Corp will repay the bank upon maturity
of the bond. This is not a loan, but this will be booked as investment by the bank. But, this is akin to a loan because there is giving of
money and there is expectation of return of money. This is a commitment on the part of the bank to give certain credit to a person but
these credits are not booked as loans but rather as investments.
3. Guarantee
This is not just an irrevocable assurance on the part of the bank to pay money in case of non-payment. This is more general
in as much as it is an irrevocable assurance on the part of the bank to pay money in case another person defaults on a contract
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Example I am a contractor. I have been engaged to build a power plant. This will take billions of pesos. Me as contractor to
be assured of payment, I will require the owner of the power plant to better get a bond in the form of a stand-by letter of credit with
the bank. That bond will say that if he cannot pay me the obligation under the contract, I can go after the bank
Another situation then is I am now the owner of the power plant. I want to be assured that you will really construct the power
plant according to our contract. How do I make sure you will comply? I will also ask for a bond, and this can be in the form of stand-by
letter of credit with the bank. So if you breach the contract, I can go after the bank and ask for payment of damages.
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.
(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
Example: A is a natural person who owns 100% of the shares of X Corp. Can he still avail personally of the 100M loan? NO. This is
because he bank will aggregate all their liabilities
(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
Example: Parent corporations and their subsidiaries. If they all owe money to the bank, the bank will aggregate all their liabilities
35.4. Even if a parent corporation, partnership, association, entity or an individual who owns or controls a majority interest in such
entities has no liability to the bank, the Monetary Board may prescribe the combination of the liabilities of subsidiary corporations or
members of the partnership, association, entity or such individual under certain circumstances, including but not limited to any of
the following situations: (a) the parent corporation, partnership, association, entity or individual guarantees the repayment of the
liabilities; (b) the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership
or association or entity or such individual; or (c) the subsidiaries though separate entities operate merely as departments or divisions
of a single entity.
This enumerates basically the same persons. The difference with this and 35.3 is that the latter applies when the corporation itself and
the individuals are the borrowers of the bank. Their liabilities will be aggregated. In 35.4, the parent or individual is not the borrower
of the bank. Ordinarily if the parent or individual owning majority of the shares of a corporate borrower are not debtors personally of
the bank, their liabilities will not be aggregated except for the circumstances in 35.4. Under the exceptions, even if the parent
corporation or individual stockholder does not owe the bank any money, the bank will still aggregate in these 3 situations.
Take note that 35.2 provides that the SBL can be increased by additional 10% of the net worth but only if there are securities which are
the negotiable documents of title covering readily marketable non-perishable goods covered by insurance
Readily marketable means there is already somebody waiting to buy it
Non-perishable means it will not perish lol. If something perishes, it deteriorates and rots. So this means not agricultural.
Examples: Gold, silver, similar metals. These are commodities traded in a ready market. If you have negotiable documents of title, you
can avail of an increase. The total will now be 35% but the additional 10% must be secured with negotiable documents of title
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; 20
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(a) loans and other credit accommodations secured by obligations of the Bangko Sentral or of the Philippine Government;
These are non-risk securities. This is because the only time the government will not be fulfilling its obligation to pay its securities
is when there is total anarchy and in which case the SBL does not really matter. Under normal circumstances, the government will
pay. So if your loan is secured by BSP notes or treasury bills, this will not be part of your SBL and you can borrow whatever amount
you want. The government wasn’t you to invest more in government securities
(b) loans and other credit accommodations fully guaranteed by the government as to the payment of principal and interest
This will normally happen in BOT transactions (Build Operate Transfer) or in PPP transactions (Public Private Partnership). This is
when the government will contract with a private person to build an infrastructure for public purpose like skyways, NLEX, SLEX
or the 3rd Mactan Bridge they’re contemplating. This will take a lot of capital so the government will have the guarantee payment
of this.
(c) loans and other credit accommodations covered by assignment of deposits maintained in the lending bank and held in the Philippines
Example. The bank will lend you 100M but it will also require you to deposit 100M in the bank. Why is this exempt? Because the
bank has the right to offset. This is fully secured. It can offset at any time.
(d) loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits
Margin deposits are pursuant to some undertaking by a bank. Going back to the example, the contractor will tell the owner that
he does not trust the owner. He says, hey I don’t trust you better get a letter of credit to make sure I’m covered in case you don’t
pay. So the owner goes to the bank which also says, I don’t trust you. I will issue this 2B worth letter of credit but you have to put
in deposits here so that when the letter is called for, there is a deposit we can use to pay.
This is the margin deposit, this is like a guarantee for a guarantee to be given by the bank. The letter of credit is the guarantee to
the contractor from the bank. And the bank will also require you to maintain a margin deposit. So this is not subject to any risk
because of the margin deposit.
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.
If improvements are not insured, they have no loan value
Appraised value: the fair market value of the property made by the bank. The bank cannot just rely on the appraisal of the borrower.
Discussion:
The bank is not bound by whatever appraisal given by the borrower. The bank has the obligation to conduct its independent appraisal.
JUNIOR ENCUMBRANCE
Can a JUNIOR ENCUMBRANCE be constituted over real property?
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Yes. A senior encumbrance is the first obligation whereas a junior encumbrance is the subsequent obligation. 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 loan able amount which is the 75% ceiling. So senior loan and junior loan taken together must
NOT EXCEED the loan able value of the property.
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.
A certified latest statement of account showing the outstanding balance of the loan including interest and arrearages, from the senior
mortgagee shall be presented to the bank.
In case several loans are granted on the security of the same property, the total amount of the loans shall not, at any time, exceed the total
loan value of the said property.
Discussion:
There were 3 obligations: (1.) promissory note obligating themselves to pay the amount of P80,000 secured by REM, (2) loan
obligations for his export advances amounting to P1, 281,748, and a (3) suretyship agreement was executed for the payment of
P100,000 plus all obligations which the latter incurred and would incur from Maybank
There was a redemption offer of P312,000
The issue in this case whether or not the deposits made by the obligors constituted a valid tender of the redemption price
In order to know WON this is a valid redemption price, there’s a need to know how much is the total obligation first.
Because there was a dragnet clause in the real estate mortgage, so the SC said that ALL the obligations of the debtor-mortgagors are
covered by the real estate mortgage which includes the security agreement and the export advances.
In the part of the export advances the SC said that your business is a sole proprietorship, if it is such then it means that there is no
separate and distinct personality unlike a corporation which has a separate and distinct personality from its stockholders, directors
and its officers. So the debt and obligation of the business is the obligation of the proprietor.
In this case, since this is a sole proprietorship then the obligation of the company is the obligation of the proprietor. And the proprietor
is covered by the dragnet clause. So the obligation was more than 1million pesos therefore, the payment is not sufficient to effect a
valid redemption.
The reason why people would enter in this dragnet clause is that it operates as a convenience and accommodation to the borrowers
as it makes available additional funds without their having to execute additional security documents thereby saving time, travel, loan
closing costs, cost of extra legal services, recording fees, etc. This being the case, a dragnet clause benefits the borrower and as such,
it is a valid stipulation. Being a valid stipulation, it can be upheld and in this case, it was.
But this dragnet clause is actually strictly construed by the courts because in the first place, the loan documents are prepared by the
bank, so this is a contract of adhesion which you cannot really negotiate to the bank regarding the terms of the loan.
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The spouses Don & Georgia Alviar are the registererd owners of a land. This case involves 3 promissory notes secured by different
securities namely (1) P250, 000 REM with a blanket mortgage clause, (2) P2,640,000 secured by a hold out foreign currency deposit and (3)
P544, 000 secured by Clean Phase out or temporary overdraft to be converted into an ordinary loan. Subsequently, these were secured by
chattel mortgage and a deed of assignment of certain promissory notes. For failure to pay, Prudential Bank foreclosed the property covered
by the P250, 000. Prudential Bank contended that the dragnet clause expressly covers not only the P250,000 but also the two other promissory
notes, that regarding the second promissory note there is no law which prohibits an obligation form being covered by more than one security
and that since the third promissory note was obtained by the corporation, the corporate veil should be pierced because such was used for
personal purposes or household construction. The Sps Alviar contended on the other hand that dragnet clause cannot be applied to
subsequent loans since these are covered by separate promissory notes and provide for a different form of security.
Ruling:
It was improper for the petitioner to seek foreclosure of the mortgage property because of nonpayment of these promissory notes.
While the existence of a dragnet clause cannot be denied, there is a need to respect the existence of other security given. The foreclosure of
the property should only be for the P250, 000 and for any amount not covered by the security for the second promissory note.
Discussion:
The Supreme court made a test to determine whether or not subsequent loans are covered by the dragnet clause.
There were 3 issues raised in this case (1) the validity of the dragnet clause, (2) coverage of the dragnet clause & (3) propriety of seeking
foreclosure of the mortgaged property for the nonpayment of the three loans.
For our purposes, the issue relevant is the coverage of the dragnet clause. In connection with this, our real question or our 1st issue is
1.) whether or not the dragnet clause can cover obligations secured or incurred by third persons or persons other than the debtor
which was first covered by the initial REM, 2.) whether or not the dragnet clause can cover obligations secured by other collaterals.
For our 1st issue- The difference between that Sarmiento case is that what was involved there is Sole proprietorship which would entail
that there was no separate and distinct personality, while in this Alviar case, this involves a corporation and the rule is that it has a
separate and distinct personality from its directors or officers. So the loan of the corporation is NOT the personal loan of their
stockholders, while the loan of the sole proprietor business is a loan of the sole proprietor himself. In that Sarmiento case, SC said yes
you can add the loan. In this Alviar case, no you cannot because debtor here is the corporation and not the mortgagor in the REM.
For our second issue- The SC described the dragnet clause as a continuing offer by the mortgagor to the bank, that if I have
subsequent loans or I borrow some more money, here is this property, continue to use this as the security for my other loans. So it is
an offer by the mortgagor. A sign that the bank did NOT accept such offer is when the bank requires additional security on top of the
REM, thereby rejecting the offer of a continuing security. It rejects the offer because it did not want to rely on such security and instead
wanted a new security. The test espoused is the “RELIANCE ON THE SECURITY TEST”, whether the second loan was made in reliance
on the original security. Because the bank did not rely on the 1st security, the extent of the loan covered by another security cannot be
touched or cannot be covered by the dragnet clause. The bank needs to exhaust first the security covering the second loan before it
can resort to the dragnet clause.
For example, if the hold out agreement is P1.5 Million, the bank needs to get or exhaust the hold out agreement first. You have to
compensate or offset the deposit of P1.5 Million, the balance of P500,000 that is now the time you will have to get it through the
foreclosure mortgage. In other words, you cannot foreclose if you do not exhaust the 2nd security first.
In the 2011 bar, the question of what a dragnet clause is was asked. The thing with Commercial law bar, the examiners are fond of
having the examinees define terms. You have to be vigilant on these terms- dragnet clause/ blanket mortgage clause and reliance on
security test.
Take note that the Blanket Mortgage clause is subject to the rule on junior encumbrances. The total loan that can be covered by the
property should never exceed 75% of the appraised value of the property. This is subject to the loan able amount limit.
AMORTIZATION
SECTION 44. Amortization on Loans and Other Credit Accommodations. — The amortization schedule of bank loans and other credit
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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 least annually: Provided, however, That when the borrowed funds are to be
used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the
initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial
amortization date be later than five (5) years from the date on which the loan or other credit accommodation is granted.
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.
With regards to amortization, the loans shall be paid based on the amortization schedule of the bank. And the amortization schedule
will be based on the purpose. We shall remember that Section 39 states that the amount and the term of the loan will depend on the
operations to be financed or the purpose of the loan. So similarly, Section 24 says that the amortization schedule, meaning the payment
schedule will have to be based on the operations to be financed.
If the term of the loan is more than 5 years, you have to pay at least once a year or at least annually. So if it’s a long term loan -10 years,
30 years, you are required to pay the loan at least once a year. Can it be more than once a year? Every quarter? Yes. Every 2 years? No.
If the loan is for the purpose or is such that it will not generate income right away, the bank is allowed to impose a moratorium on
the payment for the first 5 years. So it’s an exemption to the rule that it shall be paid once a year. But not more than 5 years which
means that on the 6th year, you should start your annual payment.
PREPAYMENT
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.
Prepayment is allowed. In your obligations and contracts, and under the civil code, if the obligation is one with the period, the period
is for the benefit of the borrower and the creditor such that the creditor cannot require the borrower to pay ahead of time and the
debtor cannot require the creditor to accept payment ahead of time especially if the loan is subject to interest. Because if the term is
ten years, you repay on the 6th year, that will make the creditor lose the interest for the remaining 4 years. So lugi. Now, there’s an
exception under the general banking law since the law expressly provides that the debtor is allowed to prepay the loan. So it is now
the lookout of the bank to ensure that the contract provides that if the borrower prepays, you will still pay interest for the remaining
period or even just a discounted interest. Because now, the debtor can force the bank to accept payment. You don’t apply the Civil
Code, you apply the GBL.
A bank CAN grant a loan with NO COLLATERAL subject to such regulations that the Monetary Board may provide.
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Section 47 of GBL Only at the time of the registration of the certificate of sale but NOT more than 3 months whichever is
earlier
Discussion:
The bank used 18% interest from the consumption loan basing from the General Banking Law. However, Tuble insisted on Act 3135 as
amended in relation to Section 28 of Rule 39 of the Rules of Court which allows an interest of 1% per month if the foreclosed property
is redeemed. The SC decided that the applicable law is the General Banking Law because the creditor is the bank, do NOT use the real
estate mortgage law, nor the Rules of Court.
However, Asia Trust was incorrect in applying the 18% interest because the GBL states that it should be the interest thereon that is
stipulated on the real estate mortgage. Since there was no interest agreed, there should be no interest imposed. Besides, when you
file the foreclosure, you are only claiming the real estate loan and you did not claim anything else so you cannot impose the additional
payments in the redemption price.
If the creditor/mortgagee is a bank, use the General Banking law.
When you come across a case, take a look at who creditor is. If the creditor is a bank, then apply Section 47. But the question
is, when will the period start running?
CASE: CIR vs UCPB
Facts:
UCPB granted loans to George C. Co, Go Tong Electrical Supply Co., Inc. and Tesco Realty Co. that caused to be secured by real estate
mortgages. They failed to pay causing UCPB to file a petition for extrajudicial foreclosure. The extrajudicial foreclosure specifically the public
auction happened on Dec 31, 2001. The executive judge approved it on March 1, 2002. UCPB paid creditable withholding tax and documentary
stamp tax only on July 5, 2002.The BIR contented that it was late in paying the taxes, they should have paid from the date of the foreclosure
sale on Dec 31, 2001 and further said that it lapsed three months after specifically on March 31, 2002. UCPB protested that period lapsed on
June 1, 2002 or 3 months after the executive judge approved the issuance of the certificate of sale.
Ruling:
The executive judge approved the issuance of the certificate of sale to UCPB on March 1, 2002. Consequently, the 3-month redemption
period ended only on June 1, 2002 and only on this date did the deadline for the payment of CWT and DST on the extrajudicial foreclosure sale
become due.
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Discussion:
Take note here that the debtor/ mortgagor is a corporation or a juridical person.
The rule in terms of payment of CWT & DST is that Creditable Expanded Withholding Tax should be paid within 10 days following the end
of the month in which the redemption period expires, while Documentary Stamp Tax be paid within 5 days from the end of the month
when the redemption period expires.
The contention of the CIR is that the redemption period ends on March 31, 2002- so payment be made April 5/ April 10.
The contention of UCPB is that the redemption period ends on June 1, 2002- so the payment be made July 5 / July 10. You don’t count it
starting June 1, you count it 5 days, 10 days after the end of the month of the transaction, so since the transaction occurred June 1, the
deadline would have been July 5 or 10.
The transaction here means the date when the sale of the bank was completed. It was completed when the owners of the property could
no longer redeem it. So basically, you base the payment of the taxes from the time when the period of the redemption expires.
The Supreme Court ruled that UCPB was correct. Count the redemption period NOT from the time of the auction sale but from the time
of the issuance of the certificate of sale.
You pay the mortgage loan, plus interest stated and the cost & expenses of the sale less the income from the transaction. Take note that
the redemption price is also different. If it is done by judicial foreclosure, the redemption price is based on the judgment debt- on how
much is the debt based on the order of the court. If it is done by extrajudicial foreclosure, the redemption price is based on the purchase
price during the auction sale with interest of 1% per month. But if the bank is the creditor, GBL law states that redemption price is paying
the mortgage loan, interest stated and the cost & expenses of the sale.
Discussion:
If you are not able to redeem, the mortgagor will lose all his interest to the property and the courts will issue its writ of possession
which becomes a ministerial duty.
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;
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;
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;
53.4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment
management/advisory/consultancy accounts; and
53.5. Rent out safety deposit boxes.
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
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2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all
types of securities
3. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible
with banking business
Example. In Taxation Law, banks can be Authorized Agent Banks to receive payment of taxes
4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment
management/advisory/consultancy accounts
Under the Deposit transaction, although it is a simple contract of loan, the fiduciary nature of banking is deemed written into the contract.
This is still governed by GBL Sec 2. What about sec 53? What is the nature of the obligation of the bank here?
Nos. 2, 3 & 4: Contract of Agency
A person who is the principal authorizes another person who is the agent within the authority given.
Nos. 1 & 5: Contract of Deposit
This is not the same as the deposit function. The bank acts as a DEPOSITARY. This is the deposit contract as defined under the Civil Code
where the bank will receive the funds or asset for the purpose of safekeeping and returning the same thing to the depositor
CONSEQUENCES OF THE NATURE OF SEC 53: (as agency contract and deposit contract)
1. They are governed by the Civil Code and not by the GBL
2. The bank has the obligation to segregate the funds received under sec 53 from its own funds. Thus, there is no transfer of ownership
unlike in a deposit transaction. Since there is no transfer of ownership, the bank cannot comingle the funds
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SECTION 36. Restriction on Bank Exposure to 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.
Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to
the bank than those offered to others. After due notice to the board of directors of the bank, the office of any bank director or officer
who violates the provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions of
the New Central Bank Act.
The Monetary Board may regulate the amount of loans, credit accommodations and guarantees that may be extended, directly or
indirectly, by a bank to its directors, officers, stockholders and their related interests, as well as investments of such bank in
enterprises owned or controlled by said directors, officers, stockholders and their related interests. However, the outstanding loans,
credit accommodations and guarantees which a bank may extend to each of its stockholders, directors, or officers and their related
interests, shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital
contribution in the bank: Provided, however, That loans, credit accommodations and guarantees secured by assets considered as non-
risk by the Monetary Board shall be excluded from such limit: Provided, further, That loans, credit accommodations and advances to
officers in the form of fringe benefits granted in accordance with rules as may be prescribed by the Monetary Board shall not be
subject to the individual limit.
The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to loans, credit accommodations and
guarantees extended by a cooperative bank to its cooperative shareholders.
DOSRI
1. Directors
These are those persons who have been elected by the stockholders and qualified by the Monetary Board under the fit and proper
rule
2. Officers
The office must be found in the by-laws (the internal laws). If your office is not found there, you are not a corporate officer but only
an employee, even if the President appointed you
3. Stockholders
Persons who have subscribed to the shares of the bank
4. Related Interests
X126.1 (e). Stockholdings of family groups or related interests: Individuals related to each other within the fourth 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 forty percent (40%) of the voting stock of a domestic bank: Provided, That said relationship must be fully
disclosed in all transactions by such corporations or related groups or persons with the bank.
When we were discussing stockholdings of a bank on related interests, this is not the same with that. For DOSRI purposes, it stops at
the 1st degree of consanguinity
Ex. Not related interests: your grandchildren, grandparents
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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
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
Partnerships where the DOSRI is a general partner. That partnership will also be a related interest to the DOS
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
A is a stockholder of a bank. He is co-owner with B of a certain parcel of land. If this property co-owned by A and B is mortgaged
to secure an obligation with the Bank, B will become a related interest with the stockholder A
EXCEPT if what is mortgaged is only the interest of A. B will only become a related interest if the property is mortgaged as a whole
The relationship is by co-ownership of the property. So when B applies for a loan in the bank and he uses the same property as
collateral, he will be subject to sec 36. But if B applies for a loan and uses another property, he will not be a related interest. The
relationship with only be with respect to the co-owned property
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: Provided, further, That 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
SELF-DEALING TRANSACTIONS
SELF-DEALING TRANSACTIONS: Dealings between the bank and its directors, officers, stockholders and related interests
GR: Generally allowed provided you comply with the restrictions under Sec 36 which governs transactions between the bank and DOSRI
Transaction entered into must be ARMS-LENGTH transaction
It has to be made where parties negotiate on equal footing. One does not exert undue influence on the other
We don’t want these DOSRI to influence the bank to giving them more favorable terms than those given to the general public. The
transaction has to be arms-length so the terms will not be less favorable to the bank than those given to the public
“Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable
to the bank than those offered to others.”
Policy is DOSRI transactions are allowed when they comply with sec 36 and done in an arms-length manner
2. Reportorial requirement: The resolution approving the loan shall be entered in the records of the bank and a copy of the entry shall be
transmitted forthwith to the Supervising and Examination Sector of the BSP
Transmit a copy the resolution, not the contract, approving the transaction
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3. Ceilings (under the MORB)
A. Aggregate Ceiling
15% of the total loan portfolio of the bank or 100% of the combined capital accounts whichever is lower
B. Individual Ceiling
Amount equivalent to the DOSRI’s respective unencumbered deposits and book value of their paid-in capital contribution in the bank
Example. A is a stockholder of a bank and has paid-in capital of 50M, and deposits of 0.
He has no unencumbered deposits, so base it on his paid-in capital of 50M, which is the limit
Ex 2. A has loan from bank – 30M; housing loan under Fringe benefit plan of bank – 30 M
We are within the limit. According to the law, excluded are loans, credit accommodations and advances:
i. to officers in the form of fringe benefits granted in accordance with rules as may be prescribed by the Monetary Board
shall not be subject to the individual limit
ii. extended by a cooperative bank to its cooperative shareholders
iii. covered by non-risk securities
Ex 3. A has 50M unencumbered deposit and 50M paid-up. What’s the limit? 100 M
A has unsecured loan- 30M; loan secured by REM- 50M; fringe benefit plan/housing loan- 20M; loan secured by non-risk
security- 30M.
Is he within the limit? How much? This is 80M composed of unsecured loan and loan with REM. Exclude the others. He is
within limit of 100M. REM is not non-risk collateral. Non-risk collaterals are those we took up in SBL: government securities,
cash deposits, margin deposits, etc. Non-risk do not include REM or chattel mortgages.
CASE: GO vs BSP
Facts:
The offense allegedly committed by Go was “the said accused, being then the Director and the President and Chief Executive Officer
of the Orient Bank unlawfully borrow the deposits or funds of the said banking institution and/or become a guarantor, indorser or obligor for
loans from the said bank to others, knowing fully well that the same has been done without the written approval of the majority of the Board
of Directors.”
Go argued that the charge was not only vague, but also did not constitute an offense. He posited that Section 83 of RA 337 penalized
only directors and officers of banking institutions who acted either as borrower or as guarantor, but not as both. Go also argued his limit was
not even shown as DOSRI
Ruling:
Under Section 83, RA 337, the following elements must be present to constitute a violation of its first paragraph:
1. the offender is a director or officer of any banking institution;
2. the offender, either directly or indirectly, for himself or as representative or agent of another, performs any of the following acts:
a. he borrows any of the deposits or funds of such bank; or
b. he becomes a guarantor, indorser, or surety for loans from such bank to others, or
c. he becomes in any manner an obligor for money borrowed from bank or loaned by it;
3. the offender has performed any of such acts without the written approval of the majority of the directors of the bank, excluding
the offender, as the director concerned.
A simple reading of the above elements easily rejects Go's contention that the law penalizes a bank director or officer only either for
borrowing the bank's deposits or funds or for guarantying loans by the bank, but not for acting in both capacities. The essence of the crime is
becoming an obligor of the bank without securing the necessary written approval of the majority of the bank's directors.
Discussion:
Each violation of the requirements is a separation offense. His charge was that he did not secure the approval. He cannot put up the
defense that they did not put his ceiling limitation because that is different.
There are 3 requirements under the law: approval requirement, reportorial requirement, and ceiling requirement. These are different
requirements and all of them have to be complied with. You do not have to violate all of them, violation of one is sufficient because they
are different violations.
So showing the limit is not necessary because the charge was a separate violation
As to the 2nd issue, he said his charge was vague because of the use of and/or. SC said it does not matter as long as you oblige yourself
with the bank, you have to secure approval. It does not matter if direct or indirect manner, whether as guarantor or not
Important thing here is that the 3 requirements are different and separate offenses
Sec 36 says “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…” So it does not matter if you are
just surety/guarantor; still comply with sec 36.
The reason for Sec 36 is protection to the public especially to the depositors. This is where the bank gets their money and the bank
cannot just give the money to the DOSRI without limitations. This is to prevent fraud.
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RULES FOR INVESTMENT OF BANKS IN 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.
Sec 51 sets out the rule that a bank cannot engage in real estate business. When it acquires real estate, it can only hold such real estate for
the purpose of the conduct of its own operations/business. It cannot lease out or enter into sale and resale of real estate. However, the
ownership of real properties is also subject to the limitation that the total value of these investments should not exceed 50% of the
combined capital accounts of the bank
The investments in real estate that are covered by this limitation are the actual investment in real property or the land, improvements
thereon, office equipment, and even the equity investment, which means the investment in shares of the bank in a company engaged in
real estate business. This means all your investments in real estate which includes all these mentioned is subject to the limitation of not
exceeding 50% of the combined capital accounts
Sec 52 says that when a bank acquires property that was mortgaged to it, or transferred to it in dacion, or acquired by it in a judicial sale,
these properties for the 1st five years are not included in determining whether or not the bank has reached its limit. It does not mean these
properties will be excluded from the limit because the limit is not based on the value of the investments, it is based on your combined
capital accounts.
Example. The 50% of your combined capital accounts is 800M. You have real property that you use in business is 500M. You are within the
limit here.
Ex 2. In addition to the 500M, you also acquired properties that were mortgaged to you by 400M. This is still within the limit because you
don’t include this amount in the 500M for comparing with the limit of the 50%. You don’t really include the value of the real property in
determining the limit. In determining the limit, you only use the combined capital accounts. But in comparing whether or not you have
exceeded the limit, you exclude the 400M but only for the first 5 years from the time that these properties were acquired by the bank.
After 5 years, if you still have not gotten rid of these properties, they will now be included in determining whether or not you have reached
the limit
Ex. 3. What is now your total investment? 900M. You have now reached the limit because your limit remains at 800M and now your
investment is 900M. So you don’t use the value of investment to determine the limit but use it to determine if you have complied with the
limit. Again, the limit is not based on your investment but on the combined capital accounts.
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period unless such bank has exerted its best efforts to dispose of the property in good faith but failed. However, inquiries as to whether the
banks exerted best efforts to dispose of the property can only be done if said banks fail to dispose of the same within the period provided.
Such inquiry is furthermore irrelevant to the issues in the case at bar.
Discussion:
The CA said that the lease contract is against public policy because CA said under sec 52, the bank has to get rid of those properties in 5
years. By entering into lease contracts, the bank conveyed an intention of not disposing the properties for at least 2 years. It is indirectly
violating sec 52 which mandates that banks should dispose of the real property within 5 years.
SC said CA is wrong because banks have 5 years to dispose of the property. WON it had the intention or exerted best efforts to dispose of
the property, this is not the question that has to be answered within the first 5 years. Within that period, the bank can do whatever it
wants with the property. It is only after the lapse of the period will the question of best efforts arise. Within 5 years, you don’t look at the
intention of the bank. In can do whatever it wants provided after 5 years it has to dispose, and must show it exerted best efforts.
Here, the lease contract is valid because it is only for 2 years
PROHIBITIONS
SECTION 54. Prohibition to Act as Insurer. — A bank shall not directly engage in insurance business as the insurer.
Does this contradict our discussion on cross-selling? Or even with the provision under the Revised Insurance Code on bancassurance?
It does not conflict because bancassurance provides representation by any insurance company even if the bank has no equity in that
company. (This revised the cross-selling rule)
There is no conflict because in sec 54 what is prohibited is that the bank itself will act as insurer. In sec 365 of the Insurance Code, a
3rd party insurance company WON it is allied with the bank will go to bank premises and sell their insurance products there. The bank
here is not the insurer. The company is just using the bank premises to sell.
2. Prohibited Transactions
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55.1 B says it Is prohibited “(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”
Is this the Bank Secrecy Law? No because this talks about the other banking services in sec 53. This is not pertaining to deposit
transaction because sec 55.4 talks about the prohibition with respect to deposit transactions. 55.1 pertain to those funds or assets
acquired by the bank under sec 53 or in its custodian function
This means even sec 53 are covered by confidentiality. But the bank can be compelled to divulge based on a court order
55.1 E says it is prohibited to “(e) Outsource inherent banking functions”
The inherit banking functions are loans and deposits. You cannot outsource any transaction of the bank relating to loans and deposit
Under the old MORB, 2012 version, it will provide the functions which a bank can outsource. Under the 2013 MORB, what is provided
there are the inherent functions of the bank which cannot be outsourced. Other than those functions, the bank can already outsource
those.
162.2. Prohibition against outsourcing of inherent banking functions. No bank shall outsource inherent banking
functions such as:
a. Services normally associated with placement of deposits and withdrawals including the recognition based on
recording of movements in the deposit accounts;
b. Granting of loans and extension of other credit exposures;
c. Position-taking and market risk-taking activities;
d. Managing of risk exposures; and
e. Strategic decision-making
Appraisal of loans or when you value the collateral, that can be outsourced because that s not related to granting loans
Credit card services, collection of loans, ATM maintenance, book keeping functions can be outsourced. SO anything not found in the
enumeration can be outsourced because they are not considered inherent
Discussion:
SC said this is a management prerogative to outsource banking functions, and even then, this is allowed by the BSP because the
functions outsourced are not inherent banking functions.
Example. We had a client who wanted to put up a Point-Of-Sale system (POS). They wanted to put in their stores a POS system where
you can pay with your debit card and the clerk of the store can just give you money as change. You have 5K in your debit card and your
purchase is only 3K. You can tell the store clerk give me the 2K change in cash. They asked if they can do it. We said NO because that is
TELLERING function. You are basically withdrawing from your account. That’s a debit card, thus a savings account. When you asked
the clerk to give you your money, she is acting as a bank teller because you are withdrawing from her. They did not believe us so they
went to BSP. BSP also said they cannot do that because that is an inherent banking function. Apparently, that’s done in other countries
but not here. Such functions have to be done within bank premises.
EQUITY INVESTMENTS
INVESTMENT is when you acquire something with the intention of keeping it for the long term either for the purpose of control or income
You want to control, so you buy equity securities and keep it for the long term, or you want to earn from that investment for the long term
or you want regular income from that asset
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Allied enterprises include financing companies, credit card companies; or companies whose operations are similar or related to banking
operations
Non-allied enterprises are not related to banking operations such as agriculture, manufacturing. They basically change their output; this is
not related to banking at all
Under sec 23, only UB can invest in non-allied enterprise. Sec 24 says UB can invest in both allied enterprises (AE) and non-allied
enterprises (NAE) subject to limitations
SECTION 23. 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 an investment house as provided in existing laws and the power to invest in non-allied enterprises as
provided in this Act.
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
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.
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.
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)
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 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. (21-B)
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.
LIMITATIONS
1. Investor Limitation – when you base it on the net worth of the bank, that is an investor limitation because that is based on the investor
itself, the bank
a. Aggregate investment: Total investment in AE and NAE does not exceed 50% of the net worth of the bank
b. Single enterprise AE or NAE: not exceed 25% of net worth of the bank
Basis: sec 24.1 and sec 24.2
2. Investee Limitation
a. Allied enterprise
i. Financial allied enterprise
100% of the equity in a thrift bank, a rural bank or other financial allied enterprise (sec 25)
Another UB/KB
1. Publicly-listed: 100% of the voting stock
2. Not publicly-listed: 49% minority interest
ii. Non-financial allied enterprise - 100% of the equity (sec 26)
b. Non-allied enterprise
Not exceeding 35% of the total equity in that enterprise nor shall it exceed 35% of the voting stock in that enterprise
Equity is different from voting stock. Equity is the total capital which can be voting or non-voting
2. Investee Limitation
a. Financial Allied Enterprise
i. Thrift bank or rural bank: 100% of the equity
ii. Other financial allied enterprise: 49% of the equity; minority interest (MORB, 378)
So this is different from the limit in UB because TB, RB and other FAE have the same limit for UB
iii. Another UB/KB
Publicly-listed: 100% of the voting stock
Not publicly-listed: 49% minority interest
ATTY: So this is actually VERY EASY to remember. Basta allied, it’s just 100 or 49. 49 lang ang UB with respect to another UB/KB if it’s not
publicly-listed. All the rest, 100. Ang KB, mu 49 lang with respect to another UB/KB if it’s not publicy-listed, same rule sa UB. It will also be
40 with respect to other FAE which are not TB or RB.
EXAMPLES: Net worth is 1B. 50% is 500M; 25% is 250M. Assuming we meet with investee limitations, let’s figure out investor limitations of UB
1. You have investment in 3 companies. A- 100M; B- 100M; C- 250M. We meet the limitation here. For individual limitation, nothing exceeds
250M. For aggregate limitation, we have 450M. We meet both limitations
2. Investment in A- 250M; B- 250M. Single limitation and aggregate limitation (500M) are met.
3. Investment in A- 200M; B- 300M. We meet the aggregate of 500M, but we don’t meet single limitation FOR B ONLY because investment in
B is 300M and the limit is 250M.
ATTY: No need to memorize, just familiarize yourselves with these (di ba na pareha ra? O.O)
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2. From the public
Public means 20 or more persons (whereas if you borrow money from 19 or less people it’s considered private placement).
3. The mode of borrowing is through issuances, endorsement or assignment with recourse or acceptance of deposit substitutes.
Deposit substitutes are mere debt instruments and what makes it a deposit substitute is that the debt instrument has to be with recourse
-which means in case of dishonor of the instrument, the holder can go back to the seller. It has a recourse against the seller. The seller
guarantees the performance of the instrument. If the issuance is without recourse, then it falls out of the definition of quasi-banking
function. But if the instrument is silent, it is presumed to be with recourse.
These four elements must exist before there can be a quasi-banking function. You are not supposed to borrow from the public under
a quasi-banking function unless you are authorized by the Bangko Sentral. If you do borrow without authority, that is a violation of the
New Central Bank Act and there are penalties.
We have this client engaging in retail trade. They have this team and they would get several buyers or clients to post cash bond and
earn interest, in return of the cash bond, they can sell what they want. The persons depositing money can sell the notes and the person
who buys the notes can go to the grocery of the retailer and they can buy items on credit. Now, this retailer wanted to regularize all
their transactions because they want to sell their shares into the stock exchange, to do initial public offering. They were basically
borrowing money from the public, persons who deposited are more than 20 in number. We were asked whether it is a violation. So we
have to discuss the elements:
1. Is there borrowing? There was no loan, it was given in a form of security
2. From the public? Yes.
3. Issuing deposit substitutes? No. it has to be debt instruments. When it is rendered to you, there’s money. Here, it’s not
money, but grocery items.
4. Purpose of relending? No. It was basically to secure payment of the goods bought on credit.
So NO. You make sure that you comply with the Philippine Consumer Act because although this is not a quasi-banking
function, it is a form of a sale on credit transaction.
TRUST
It is defined as a written relationship between a person having an equitable ownership in a property (Trustor) and another person who
owns the legal title (Trustee) with the equitable ownership of the former entitling him to require the performance of certain duties and
the exercise of certain powers from the latter which performance can be compelled by the courts.
Under the Civil Code, there is express and implied trust. We are to discuss express trust and not implied because under the GBL, trust
operations are always express, the activities are always done by professional trust entities.
Law says
Section 79. Authority to Engage in Trust Business. - 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.
In order to be able to engage, you need to have the authority from the Monetary Board.
If I have the client who wants me to manage his share and he gives me a voting trust, is there a trust relationship?
Yes. Legal ownership is transferred, and beneficial ownership remains to the trustor.
But does this mean I have to secure an authority from the Monetary Board?
No, since it is only a one time transaction. In order to say that you are engaged in the trust business, there must be a recurring
activity resulting from a trustor and a trustee involving the appointment of a trustee for the admistration, holding, and
management of funds and property for the use, advantage and benefit of the trustor.
Who can engage? Is it limited to banks?
No. Under the old banking act, the requirement to secure was only limited to banks. So non-bank entitites were running
amok, no one was regulating them. So now, other persons can.
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A trust entity shall administer the funds or property under its custody with the diligence that a prudent man would exercise in the
conduct of an enterprise of a like character and with similar aims. Based on American Jurisprudence, the prudent man rule says that
the prudence, diligence, care and the skill of a trustee is that of an expert professional trustee.
If you are under a trust, you are not allowed to use the money to deal with yourself or your related interest. (i.e. buy your own property,
lend it to your wife) even if it is beneficial to the trustor. Why? This is to avoid conflict of interest. Getting advantage for yourself to the
detriment of the trustor.
3. The funds or property of the trust will be kept from the general funds or property of the trustee. (Section 87 of GBL)
In relation to section 92, 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. So if the trustee cannot pay his obligations and here comes his creditor wanting to garnish the
trustee’s funds or property, that creditor cannot garnish the property of the trust even if technically, it belongs to the trustee. But if
the trustee did not comply and he made, kept the properties as his own, there is the chance that property may be garnished or
attached. In which case, trustee can be liable civilly or criminally- that is estafa.
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.
In reality, the last one–to establish and manage common trust funds has been abolished by the Bangko Sentral. The purpose of
this common trust funds is to pull your resources. Now it is replaced by Unit Investment Trust Funds (UITF)- investments that you
can buy from trust entities, pulling money together and bank will manage it. The one who can sell must be a trust entity. If a bank
sells a UITF, you have to make sure it is a licensed trust entity since this is a separate license from your banking license. This is
different from quasi-banking functions since even the UB and KB needs to secure another license to engage in trust functions.
The mutual fund on the other hand is a trust but not registered as a trust entity.
FOREIGN BANKS
Banks formed, organized and existing under the laws other than the laws of the Republic of the Philippines.
A domestic bank is a bank which is organized, formed and existing under the laws of the Philippines.
The test that we follow with respect to the nationality of the bank is the Nationality test – the place where it is incorporated.
A bank is considered a citizen where it is incorporated. If you are incorporated under the Philippine laws, regardless of who your
stockholders are, you are considered a domestic bank, whereas if it is incorporated under the laws outside the Philippines, even if bank is
100% Filipino owned, it is a foreign bank.
How can foreign bank enter or get a license in the Philippines?
Under R.A. 7721, the modes of entry are -you acquire the shares of an existing bank up to 60%, invest on a new subsidiary up to 60% or open
a bank in the Philippines. But this law has already been amended. The first amendment is Section 72 of the GBL which states that for the
first seven years from the time of the enactment of the GBL, FB are allowed to own up to 100% of the equity of a domestic bank. But only
for that seven year period. And after the lapse of the seven year period, you cannot acquire 100%, only the 60% going back to RA 7721. But
those who acquired 100% under the seven year rule, they are allowed to continue their 100% shareholding. But they are not allowed to
dispose of it. Because if they dispose it with another foreign bank, the 7 year period has already lapsed. So that other foreign bank will have
to comply with the 60%. So again, this is Section 72 of the GBL reconciling R.A. 7721. But this has become moot because of R.A. 10641 which
allows full entry of foreign banks in the Philippines- now 100%. So:
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Of the three, in the first two you have a domestic bank or have already been incorporated under the law of the Philippines. Going back to
section 11 of the GBL, Domestic Banks can be owned by foreign individuals and nonbank corporations both in individual and aggregate limit
only up to 40%. If the shareholder is a banking corporation, the limit is 100%. Section 11 made a reservation that stockholders are nonbank
individuals or nonbank corporations . Why the reservation? Because the law has a different rule for foreign banks – they are allowed to own
100% shares of domestic corporation. So with domestic banking corporations, if the shareholder of a domestic bank is a Filipino either
individual or nonbank corporation- subject to 40% limit except that there is no aggregate limit. If it’s a domestic corporation, you go back
to allowable investments of UB & KB- you can own 100% of a TB or RB. If you’re a UB or KB, you are still allowed to own another domestic
bank (UB or KB) but only minority shareholdings (49%) except if you are publicly listed in which case you can own 100%. So same with Foreign
banks, they can own 100% of the domestic bank.
Can you relate everything class? It’s very simple to remember (*everyone laughed). Domestic banks, who are allowed to be shareholders?
It could be foreign or Filipino. If Foreign, consider if it is a bank (100% pursuant to R.A. 10641) or nonbank (40% pursuant to Section 11 of the
GBL). If Filipino, consider if it is a bank or nonbank- if it is a bank then under the investments of banks, the UB or KB can own 100% of a TB
or RB and only minority shareholdings if it is for another UB or KB unless publicly listed (in which case it can be 100%) and if it is nonbank
then it’s 40% individual limitation only pursuant to Section 11.
So specifically when we say foreign banks license to do business in the Philippines, what are we really talking about? It is the 3rd one. We
can’t include the first two since they are considered as domestic banks and therefore covered by the GBL. The third is your foreign bank
license to do business in the Philippines pursuant to the Foreign bank law or R.A. 7721 as amended by R.A. 10641- an act allowing the full
entry of Foreign banks in the Philippines. So R.A. 7721 as amended by R.A. 10641 primarily will govern and suppletory by the GBL or NCBA.
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
“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”
It will now be governed by the laws of the country of the bank’s nationality.
Foreign Banks:
a) As far as OPERATIONS are concerned- it will be governed by R.A. 7721 as amended by R.A. 10641, GBL and NCBA
b) As far as their CREATION, FORMATION, DISSOLUTION, RELATIONSHIP, etc. – law of bank’s nationality.
This has another similar provision under Section 20 which provides that the head office and the branches of the head office are considered
as one – the One unit rule for domestic banks. For Foreign banks, branches within the Philippines are considered as one.
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If the head office in another country has creditors, and it has become insolvent, can the creditors proceed against the assets of the branch?
NOT until all the depositors or creditors in the Philippines have been paid. They have a preference with respect to the branch assets.
Citybank Manila attempted to say that under the one unit rule, we are considered as one with all other branches. Because we are one, if
you owe us money and you have a deposit in our branches, then legal compensation takes place. It used Section 20, 74 & 75 of the GBL to
foster its claim
SC said that with respect to Section 20, you cannot use it since it only refers to a domestic bank, refers to the head office and the branches
of a domestic bank-a universal or commercial bank established in the Philippines.
With respect to Section 74, SC said that it is also not applicable because you are talking about the branch outside the Philippines- the Geneva
branch. This only applies to branches of the Foreign bank within the Philippines.
Citybank was saying, hey SC look at Section 75, this is one example or one embodiment that we are one unit with our head office with all
the branches around the world because it provides that we require head office to guarantee all our branches here in the Philippines.
However, with respect to Section 75, SC said that the Home Office Guarantee only applies for the protection of the depositors in the
Philippines. In case of a foreign bank, the head office is located outside our jurisdiction, outside the Philippines. So we needed Section 75 in
order to make the head office liable here and to hold them answerable. It is for the purpose of protecting the depositors in the Philippines,
you CANNOT use it in reverse, that is not what the law contemplates. You cannot use it to make the depositor liable for something outside
of the Philippines.
Citybank was not allowed to compensate because the other branch in Geneva is not considered as one unit with the local branch.
In the loan-you are the debtor and Citybank is the creditor, while in the deposit- you are the creditor and Citybank Manila is the debtor.
An essential element for legal compensation is that the parties must be mutually creditors and debtors to each other. In this case, they are
\\not. So you and Citybank Manila are not mutually creditors and debtors of each other.
SEC. 5. Section 8 of Republic Act No. 7721 is hereby amended to read as follows:
“SEC. 8. Equal Treatment. – Foreign banks authorized to operate under Section 2 of this Act, shall perform the same functions, enjoy
the same privileges, and be subject to the same limitations imposed upon a Philippine bank of the same category. The single
borrower’s limit of a foreign bank branch shall be aligned with that of a domestic bank.
“The foreign banks shall guarantee the observance of the rights of their employees under the Constitution.
“Any right, privilege or incentive granted to foreign banks or their subsidiaries or affiliates under this Act, shall be equally enjoyed by
and extended under the same conditions to Philippine banks.” (R.A. 10641)
If the branch is licensed to a Universal bank, it has all the powers of a Domestic Universal bank. If it is licensed as a Commercial
bank, it has all the powers of a Commercial bank.
Can foreign bank be allowed as a mortgagee for a real property? (Remember that foreigners aren’t allowed to own land in the
Philippines.) YES.
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SEC. 6. A new provision in Section 9 is hereby inserted in the same Act, in lieu of the original provisions of Section 9 repealed by
Section 11 of Republic Act No. 10000. Section 9 shall now read as follows:
“SEC. 9. Participation in Foreclosure Proceedings.—Foreign banks which are authorized to do banking business in the Philippines
through any of the modes of entry under Section 2 hereof shall be allowed to bid and take part in foreclosure sales of real property
mortgaged to them, as well as to avail of enforcement and other proceedings, and accordingly take possession of the mortgaged
property, for a period not exceeding five (5) years from actual possession: Provided, That in no event shall title to the property be
transferred to such foreign bank. In case said bank is the winning bidder, it shall, during the said five (5)-year period, transfer its rights
to a qualified Philippine national, without prejudice to a borrower’s rights under applicable laws. Should the bank fail to transfer such
property within the five (5)-year period, it shall be penalized one half (1/2) of one percent (1%) per annum of the price at which the
property was foreclosed until it is able to transfer the property to a qualified Philippine national.”
POLICY
The BSP is a central monetary authority which has fiscal and administrative autonomy
SECTION 1. Declaration of Policy. - 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.
o Establish an independent and accountable body corporate through fiscal and administrative autonomy
1. Fiscal autonomy – being financially independent from other government agencies
a. Creation of their own source of income
Examples:
BSP can create its own sources of income through imposition of fines and fees
It can buy and sell government securities (only)
It can also give out loans to banking institutions and they can also earn interest
b. Ability or right to allocate resources with wisdom and dispatch as their needs may require
Aside from creating their own income, they also have the right to determine where they will spend that income
These 2 principles must be met. They are able to create their own income and are able to dispose of that income in the way
they see fit
Examples
It can determine the salaries of its officers and employees. This is one of the powers of the Monetary Board (MB) under
sec 15
It can create its own annual budget without interference from other government agencies (sec 15)
2. Administrative autonomy – operational independence; the BSP can determine how it will run its own operations without interference
from other government agencies
It is allowed to issue rules and regulations for banks
Under sec 50, BSP through MB is also allowed to issues rules and regulations for its own internal operations
MB has the power to govern BSP without interference from the government’s executive branch
SEC. 3. Responsibility and Primary Objective. – 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 quasibanks, and institutions performing similar functions.
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.
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GENERAL RESPONSIBILITY
The Bangko Sentral shall provide policy directions in the areas of money, banking, and credit
3. Supervise and regulate the operations of banks and other financial institutions
We had this under GBL in sec 4
SECTION 4. Supervisory Powers. — The operations and activities of banks shall be subject to supervision of the Bangko Sentral.
"Supervision" shall include the following:
4.1. The issuance of rules of conduct or the establishment of standards of operation for uniform application to all institutions or
functions covered, taking into consideration the distinctive character of the operations of institutions and the substantive similarities
of specific functions to which such rules, modes or standards are to be applied;
4.2. The conduct of examination to determine compliance with laws and regulations if the circumstances so warrant as determined
by the Monetary Board;
4.3. Overseeing to ascertain that laws and regulations are complied with;
4.4. Regular investigation which shall not be oftener than once a year from the last date of examination to determine whether an
institution is conducting its business on a safe or sound basis: Provided, That the deficiencies/irregularities found by or discovered
by an audit shall be immediately addressed;
4.5. Inquiring into the solvency and liquidity of the institution (2-D); or
4.6. Enforcing prompt corrective action. (n)
The Bangko Sentral shall also have supervision over the operations of and exercise regulatory powers over quasi-banks, trust entities
and other financial institutions which under special laws are subject to Bangko Sentral supervision. (2-Ca)
For the purposes of this Act, "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
(hereafter the "New Central Bank Act") for purposes of relending or purchasing of receivables and other obligations.
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1. Maintain price stability
Money supply affects price stability. The more money circulating in the economy, the lesser its purchasing power, the higher the prices
of goods. If there’s more money, there’ more demand. So the prices of supply go up. If there is less money, less demand, prices of
supply tend to go down. Which is good for us, up or down? Neither. You might say going down is better because you are a consumer;
but you also have to think of the businessmen. If they go down because no ne is buying from them, economy goes down. The job of
the BSP is to balance supply and demand so prices don’t get too high or low. Since prices are affected by money supply, the first basic
function in obtaining price stability is currency issue
a. Currency issue
This is the 1st basic function.
SEC. 50. Exclusive Issue Power. _ The Bangko Sentral shall have the sole power and authority to issue currency, within the
territory of the Philippines. No other person or entity, public or private, may put into circulation notes, coins or any other
object or document which, in the opinion of the Monetary Board, might circulate as currency, nor reproduce or imitate the
facsimiles of Bangko Sentral notes without prior authority from the Bangko Sentral.
The Monetary Board may issue such regulations as it may deem advisable in order to prevent the circulation of foreign
currency or of currency substitutes as well as to prevent the reproduction of facsimiles of Bangko Sentral notes.
The Bangko Sentral shall have the authority to investigate, make arrests, conduct searches and seizures in accordance with
law, for the purpose of maintaining the integrity of the currency.
Violation of this provision or of any regulation issued by the Bangko Sentral pursuant thereto shall constitute an offense
punishable by imprisonment of not less than five (5) years but not more than ten (10) years. In case the Revised Penal Code
provides for a greater penalty, then that penalty shall be imposed.
You know under the RPC, anyone who makes money without authority from BSP will be held liable for falsification or forgery.
That is a crime.
SEC. 51. Liability for Notes and Coins. _ Notes and coins issued by the Bangko Sentral shall be liabilities of the Bangko Sentral
and may be issued only against, and in amounts not exceeding, the assets of the Bangko Sentral. Said notes and coins shall
be a first and paramount lien on all assets of the Bangko Sentral.
The Bangko Sentral's holdings of its own notes and coins shall not be considered as part of it's currency issue and,
accordingly, shall not form part of the assets or liabilities of the Bangko Sentral.
b. Liquidity management
o Under this function, the BSP formulates and implements monetary policy aimed at influencing money supply consistent with its
primary objective to maintain price stability
o Other than currency issue, you can influence money supply by:
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i. Set interest rate policy
They cannot fix interest rates because that depends on the banks but they can set the policy as to how the banks will
determine their interest rates
If there is too much money circulating in the economy, the BSP will set a higher interest rate so that people will want to
deposit their money because it will earn more and it will be a deterrent from borrowing money, because if you borrow money
the interest rate is high. It has the effect of lessening the money circulating in the economy
When the BSP finds that inflation is too low, or inflation rate is going down to the extent that it isn’t desirable anymore, the
BSP can reduce interest rates. People will want to take out their money from banks and instead use it or invest it where it
can earn more. People will be induced to borrow also because the rates they will pay are low.
Through its interest rates policy, BSP can influence money supply
SEC. 61. Guiding Principle. _ The Monetary Board shall endeavor to control any expansion or contraction in monetary
aggregates which is prejudicial to the attainment or maintenance of price stability.
If the BSP finds there is too much money, prices are going up, it will want to contract the money supply. If there is too little
money circulating, it will want to expand money supply. This is done through interest rates policy and open market operations
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(6) negotiable treasury bills, certificates of indebtedness, notes and other negotiable obligations of the Government maturing within
three (3) years from the date of the advance; and
(7) negotiable bonds issued by the Government of the Philippines, by Philippine provincial, city or municipal governments, or by any
Philippine Government instrumentality, and having maturities of not more than ten (10) years from the date of the advance.
The rediscounts, discounts, loans and advances made in accordance with the provisions of this section may not be renewed or
extended unless extraordinary circumstances fully justify such renewal or extension. Advances made against the collateral named in
clauses (6) and (7) of subsection (d) of this section may not exceed eighty percent (80%) of the current market value of the collateral.
o (Those underlined) the BSP has authority to lend money to banks for these purposes
o We also have special credit operations, which are loans for liquidity purposes. Liquidity means your liquid assets or your current
assets are less than your current liabilities. You cannot pay your obligations as they become due, although you have sufficient
assets to pay up your liabilities. It’s just that your assets are not liquid, not cash. So you need more time to convert to cash. You
are not insolvent or bankrupt. If a bank is suffering from liquidity problems, it has sufficient assets but more people are
withdrawing. Then they can borrow from the BSP for 7 days. This will grant them the time to at least convert their non-current
assets into liquid assets or to cash
When the BSP gives loans to these financial institutions, the loans will ultimately go to the public thereby increasing monetary
supply. And when the BSP demands payment, it will also contract the monetary supply. So its role as a lender of last resort affects
price stability
Through these 4 basic functions (a, b, c, d), the BSP tries to maintain price stability. These are the tools used by the BSP
Section 55. Interconvertibility of Currency. - The Bangko Sentral shall exchange, on demand and without charge, Philippine currency of any
denomination for Philippine notes and coins of any other denomination requested. If for any reason the Bangko Sentral is temporarily
unable to provide notes or coins of the denominations requested, it shall meet its obligations by delivering notes and coins of the
denominations which most nearly approximate those requested.
The Bangko Sentral is obliged to exchange one denomination of any other because the currency is the liability of the Bangko Sentral
so you can go there and have the BSP exchange it same goes with bank. Unless the money is a counterfeit.
How do you promote and maintain monetary stability and convertability of the peso?
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BSP is also authorized to purchase and sell Gold- the ultimate currency. Since under the international currency market, your
currency is worthless if not backed up with gold.
Section 74. Exchange Rates. - 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 Bangko Sentral shall not collect
any additional commissions or charges of any sort, other than actual telegraphic or cable costs incurred by it.
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. (NCBA)
3. Financial supervision
Section 4. Supervisory Powers. The operations and activities of banks shall be subject to supervision of the Bangko Sentral. "Supervision"
shall include the following:
4.1. The issuance of rules of, conduct or the establishment standards of operation for uniform application to all institutions or functions
covered, taking into consideration the distinctive character of the operations of institutions and the substantive similarities of specific
functions to which such rules, modes or standards are to be applied;
4.2 The conduct of examination to determine compliance with laws and regulations if the circumstances so warrant as determined by the
Monetary Board;
4.3 Overseeing to ascertain that laws and regulations are complied with;
4.4 Regular investigation which shall not be oftener than once a year from the last date of examination to determine whether an
institution is conducting its business on a safe or sound basis: Provided, That the deficiencies/irregularities found by or discovered by an
audit shall be immediately addressed;
4.5 Inquiring into the solvency and liquidity of the institution (2-D); or
4.6 Enforcing prompt corrective action. (n)
The Bangko Sentral shall also have supervision over the operations of and exercise regulatory powers over quasi-banks, trust entities and
other financial institutions which under special laws are subject to Bangko Sentral supervision. (GBL)
Aspects of supervision:
1. Examination- can look into the documents; active power
2. Oversight- report to you; passive power (Banks are required to report to the BSP in relation to election of BOD, loan, stretch SBL)
3. Investigation- aside from looking at documents, you make verbal inquiries or interviews
4. Enforcing prompt corrective action- if BSP finds that bank is about to breach limits, enforce to comply remedies
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Discussion:
According to PDB, they had no intention of selling, in effect saying that they are still owners of the bills
The CB bills was negotiated PDB to BOC, BOC in turn negotiated it to several others but ultimately, BOC reacquired all and was holding the
CB Bills
When BSP filed interpleader, it told court that it has nothing to do with it, let other parties decide and court allowed such.
The BOC prayed that it be declared the owner of the bills and the money put in escrow be paid to BOC
PDB said that RTC has no jurisdiction, and it lies with BSP since it has power to adjudicate the claim- quasi judicial power
Thus, BSP has quasi-judicial power (See Ruling above for instances when it can exercise such, the entire ruling above-the whole paragraph
was recited by Maam so just be familiar with it)
But of course, if BSP wants to impose a criminal penalty it has to go to court. However, fines, sanctions- the BSP can do them by itself.
The issuance of CB Bills is in accordance to open market operations which is part of the objective to maintain price stability. BSP’s quasi-
judicial power does NOT include the adjudication of ownership of the CB bills
There are 7 basic functions but are grouped into 3 and these are- The objective of –
1.) Price Stability,
2.) Monetary Stability &
3.) Supervision
However, the quasi judicial power is limited only to its SUPERVISORY AND REGULATORY powers. Meaning, no quasi-judicial power if it’s
not within your supervisory power.
So RTC has jurisdiction and thus, may continue hearing the case.
MONETARY BOARD
The Monetary Board is composed of 7 members:
1 of whom is the Governor of BSP,
another is a member of the Cabinet (which does not exactly say who but normally, the Secretary of Finance but law does not
specifically state it should be the SOF),
5 members of private sector which must serve full time so as to avoid conflict of interest.
Limitations to avoid conflict of interest:
1) Anyone who has been affiliated with a bank under the supervisory and regulatory power of the Bangko Sentral cannot join the
Monetary Board for 1 year from the time of his termination with the bank.
2) After you stopped being a member of the MB, you have to wait for 2 years before going back to a banking institution.
Section 19. Authority of the Governor in Emergencies. - In case of emergencies where time is sufficient to call a meeting of the Monetary Board,
the Governor of the Bangko Sentral, with the concurrence of two (2) other members of the Monetary Board, may decide any matter or take
any action within the authority of the Board.
The Governor shall submit a report to the President and Congress within seventy-two (72) hours after the action has been taken.
At the soonest possible time, the Governor shall call a meeting of the Monetary Board to submit his action for ratification.
Section 15. Exercise of Authority. - In the exercise of its authority, the Monetary Board shall:
(a) issue rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the powers vested upon
the Monetary Board and the Bangko Sentral. The rules and regulations issued shall be reported to the President and the Congress within
fifteen (15) days from the date of their issuance;
(b) 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. The legal units of the Bangko Sentral shall be under the exclusive
supervision and control of the Monetary Board
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(c) establish a human resource management system which shall govern the selection, hiring, appointment, transfer, promotion, or dismissal of
all personnel. Such system shall aim to establish professionalism and excellence at all levels of the Bangko Sentral in accordance with sound
principles of management.
A compensation structure, based on job evaluation studies and wage surveys and subject to the Board's approval, shall be instituted as an
integral component of the Bangko Sentral's human resource development program: Provided, That the Monetary Board shall make its own
system conform as closely as possible with the principles provided for under Republic Act No. 6758: Provided, however, That compensation
and wage structure of employees whose positions fall under salary grade 19 and below shall be in accordance with the rates prescribed under
Republic Act No. 6758.
(d) 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; and
(e) 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, suit
or proceedings to which he may be, or is, made a party by reason of the performance of his functions or duties, unless he is finally adjudged in
such action or proceeding to be liable for negligence or misconduct.
The 2nd paragraph regarding the compensation structure of the -Salary Standardization Law as discussed in the case of:
THE GOVERNOR
Section 17. Powers and Duties of the Governor. - The Governor shall be the chief executive officer of the Bangko Sentral. His powers and duties
shall be to:
(a) prepare the agenda for the meetings of the Monetary Board and to submit for the consideration of the Board the policies and measures
which he believes to be necessary to carry out the purposes and provisions of this Act;
(b) execute and administer the policies and measures approved by the Monetary Board;
(c) direct and supervise the operations and internal administration of the Bangko Sentral. The Governor may delegate certain of his
administrative responsibilities to other officers or may assign specific tasks or responsibilities to any full-time member of the Monetary Board
without additional remuneration or allowance whenever he may deem fit or subject to such rules and regulations as the Monetary Board may
prescribe;
(d) appoint and fix the remunerations and other emoluments of personnel below the rank of a department head in accordance with the
position and compensation plans approved by the Monetary Board, as well as to impose disciplinary measures upon personnel of the Bangko
Sentral, subject to the provisions of Section 15(c) of this Act: Provided, That removal of personnel shall be with the approval of the Monetary
Board;
(e) render 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 Bangko Sentral and laws pertaining to quasi-banks,
as well as regulations, policies or instructions issued by the Monetary Board, and the implementation thereof; and
(f) exercise such other powers as may be vested in him by the Monetary Board.
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2. Deputy for Monetary Stability
3. Deputy for Supervisory and Examination
4. Deputy for Resource Management Sector- Internal Operations Of BSP
The place/bldg where money is printed- Security Plant Complex (just in case this is asked in the bar)
CONSERVATORSHIP
SEC. 29. Appointment of Conservator. _ Whenever, on the basis of a report submitted by the appropriate supervising or examining
department, the Monetary Board finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a
condition of liquidity deemed adequate to protect the interest of depositors and creditors, the Monetary Board may appoint a conservator
with such powers as the Monetary Board shall deem necessary to take charge of the assets, liabilities, and the management thereof,
reorganize the management, collect all monies and debts due said institution, and exercise all powers necessary to restore its viability.
The conservator shall report and be responsible to the Monetary Board and shall have the power to overrule or revoke the actions of the
previous management and board of directors of the bank or quasi-bank.
The conservator should be competent and knowledgeable in bank operations and management. The conservatorship shall not exceed
one (1) year. The conservator shall receive remuneration to be fixed by the Monetary Board in an amount not to exceed two-thirds (2/3)
of the salary of the president of the institution in one (1) year, payable in twelve (12) equal monthly payments: Provided, That, if at any
time within the one-year period, the conservatorship is terminated on the ground that the institution can operate on its own, the
conservator shall receive the balance of the remuneration which he would have received up to the end of the year; but if the
conservatorship is terminated on other grounds, the conservator shall not be entitled to such remaining balance. The Monetary Board
may appoint a conservator connected with the Bangko Sentral, in which case he shall not be entitled to receive any remuneration or
emolument from the Bangko Sentral during the conservatorship. The expenses attendant to the conservatorship shall be borne by the
bank or quasi-bank concerned.
The Monetary Board shall terminate the conservatorship when it is satisfied that the institution can continue to operate on its own and
the conservatorship is no longer necessary. The conservatorship shall likewise be terminated should the Monetary Board, on the basis of
the report of the conservator or of its own findings, determine that the continuance in business of the institution would involve probable
loss to its depositors or creditors, in which case the provisions of Section 30 shall apply.
Conservatorship is a set of procedure or measure undertaken to restore the viability of the bank
It is an administrative measure: “to take charge of the assets, liabilities, and the management”
Organizational in nature: “reorganize the management”
Financial: “collect all monies and debts due said institution”
Thus, Conservatorship is an organizational, financial and administrative measures which are undertaken in order to restore the viability
of a bank, or to address a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect
the interest of depositors and creditors
If there is an indication that a bank cannot maintain that percentage of liquidity that is sufficient to protect its depositors or creditors,
conservatorship is undertaken to address the situation
It is very comprehensive: administrative, organizational and financial
LIQUIDITY: the ability to pay your liabilities as they become due. Although your assets are enough, you cannot pay your liabilities as they
become due because your assets are not liquid enough; you do not have enough cash. You still have to convert your assets to cash.
Insolvency is different because our assets really are not sufficient to pay your liabilities even if you convert your assets to cash
Conservatorship applies only when there is an issue on liquidity. However, conservatorship is not the only measure. BSP can give out
emergency loans, or they require more capital infusion. This latter power is (as stated under sec 4 of GBL) the power to enforce prompt
corrective action. This is one of the supervisory powers of the BSP. This was undertaken by BSP in that (?) case where the BSP required the
shareholders of the bank to infuse more capital to the bank
IOW, if a bank is experiencing liquidity problems, conservatorship is not the only measure. Normally, there will be less drastic measures like
emergency loans, like in the cases assigned. The emergency loan is under the function as lender of last resort and also to enforce prompt
corrective action
2. Finding by the MB that the bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate
to protect the interest of depositors and creditors
The liquidity status is not sufficient to protect the interest of the depositors and creditors
Even if the bank is still liquid but its liquidity status is very low, the BSP can already enforce the order of conservatorship. The law says
“sufficient to protect”. So the liquidity must not only be present but also sufficient
3. MB must provide the BOD of the bank of the copy of the order of conservatorship
This order contains the finding of the MB that the ground for conservatorship exists. Once that finding is made, the MB will issue an
order declaring conservatorship and that order must be provided to the BOD of the bank
This requirement is found under sec 30 because if you read that carefully, you will see it does not only apply to receivership but also to
conservatorship
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Discussion:
Does the conservator have the power to repudiate or revoke previous acts of the management of the bank? Yes, he has the power
under sec 29
In this case however , the conservator cannot revoke it because the contract was already declared to be a valid contract
Thus, the power can only apply with respect to defective contracts. SC said even Congress cannot repudiate perfected contracts which
are valid because that will violate non-impairment clause of the Constitution. If congress itself cannot repudiate, all the more it cannot
grant that power to the conservator.
This power is limited to revocation of acts/contracts which are defective: void, voidable, unenforceable, rescissible
Even this power is not unilateral; he has to follow the procedure in the Civil Code. If you want to rescind a contract, you have to go to
court to annul it. His authority will only be to bring court actions to assail the contract. He cannot unilaterally revoke it
PRE-TERMINATION OF CONSERVATORSHIP
He cannot serve for more than 1 year
Pre-termination
1. If there is a finding of the conservator as approved by the MB that the bank can continue its operations on its own and that
conservatorship is no longer necessary
Bank can now continue its normal operations free from the conservator and BSP
2. If there is a finding of the inability of the bank to continue its operations without probable loss to its depositors and creditors
Sec 29: “The conservatorship shall likewise be terminated should the Monetary Board, on the basis of the report of the
conservator or of its own findings, determine that the continuance in business of the institution would involve probable loss to
its depositors or creditors, in which case the provisions of Section 30 shall apply.”
Receivership now will take place and sec 30 will be applied
If conservatorship is terminated based on the 2nd ground, we now go to status of receivership
RECEIVERSHIP
It is a condition or a status whereby a receiver is assigned for the purpose of protecting the assets of the bank
Differences between conservatorship and receivership
1. Purpose: In receivership, it is to protect the assets of the bank. In conservatorship, it is to restore the viability of the bank
2. Grounds: There is only 1 ground for conservatorship which is when the bank is in a state of continuing inability or unwillingness to
maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors. In receivership, there are 4
grounds under sec 30
SEC. 30. Proceedings in Receivership and Liquidation. _ Whenever, upon report of the head of the supervising or examining
department, the Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include
inability to pay caused by extraordinary demands induced by financial panic in the banking community; 49
(b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or
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3. Term: Conservator has not more than 1 year. In receivership, there are only 90 days
CASE: RBSM vs MB
Facts:
The comptroller submitted her report and on the basis of the report, SED in turn submitted a report to the MB which issued
a resolution placing RBSM under receivership.
Ruling:
Petitioners' contention has no merit. Banco Filipino and other cases petitioners cited were decided using Section 29 of the
old law (RA 265). Thus in Banco Filipino, we ruled that an "examination [conducted] by the head of the appropriate supervising or examining
department or his examiners or agents into the condition of the bank" is necessary before the MB can order its closure. However, RA 265,
including Section 29 thereof, was expressly repealed by RA 7653 which took effect in 1993. In RA 7653, only a "report of the head of the
supervising or examining department" is necessary. The word "report" has a definite and unambiguous meaning which is clearly different
from "examination." A report, as a noun, may be defined as "something that gives information" or "a usually detailed account or
statement." On the other hand, an examination is "a search, investigation or scrutiny."
Using the literal meaning of "report" does not lead to absurdity, contradiction or injustice. Neither does it defeat the intent
of the legislators. The purpose of the law is to make the closure of a bank summary and expeditious in order to protect public interest.
This is also why prior notice and hearing are no longer required before a bank can be closed.
Laying down the requisites for the closure of a bank under the law is the prerogative of the legislature and what its wisdom
dictates. The lawmakers could have easily retained the word "examination" but they did not and instead opted to use the word "report."
The insistence on an examination is not sanctioned by RA 7653
The absence of an examination before the closure of RBSM did not mean that there was no basis for the closure order. But
it is clear under RA 7653 that the basis need not arise from an examination as required in the old law. We thus rule that the MB had sufficient
basis to arrive at a sound conclusion that there were grounds that would justify RBSM's closure. It relied on the report of Mr. Domo-ong,
the head of the supervising or examining department, with the findings that: (1) RBSM was unable to pay its liabilities as they became due
in the ordinary course of business and (2) that it could not continue in business without incurring probable losses to its depositors and
creditors. The report was a 50-page memorandum detailing the facts supporting those grounds, an extensive chronology of events
revealing the multitude of problems which faced RBSM and the recommendations based on those findings.
MB and BSP complied with all the requirements of RA 7653. By relying on a report before placing a bank under receivership,
the MB and BSP did not only follow the letter of the law, they were also faithful to its spirit, which was to act expeditiously.
Discussion:
It was the comptroller who examined RBSM. SED never made its examination, but MB based its order on the SED report
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Bank argued an examination must be made pursuant to Banco Filipino case. Here it was only based on a report, not an examination.
SED must be required to examine.
SC said they cannot cite Banco Filipino because that was decided under the old law. SC also said if examination was still required,
Congress could have retained “examination” in the law than just putting there “report”
Before, examination was required, but under the new law, only a report is required. That ruling in Banco Filipino no longer applies
2. Insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities
- This is a situation of “ insolvency”. This is also called the BALANCE SHEET TEST since you are only to look at the balance
sheet, assets minus liabilities. If asset is more than liability, you are solvent. If it is less, you are insolvent. In determining
the accounts of the bank, the Bangko Sentral normally has set a technical definition of these accounts. The Bangko
Sentral normally will dictate what could be included in its assets, or liabilities. In applying this test, do we aply Bangko
Sentral’s technical definition or the layman’s definition?
3. cannot continue in business without involving probable losses to its depositors or creditor
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-this is related to conservatorship. The second ground for terminating conservatorship is a ground for receivership. But it
maybe, that there is no more conservatorship based on the equity test.
4. willfully 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
Section 36 of NCBA
5. whenever a bank or quasi-bank persists in carrying on its business in an unlawful or unsafe manner
Section 53 of GBL
6. In case a bank or quasi-bark 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.
-Based on the report of the SED, that any of the grounds exist not all but any one.
3. Decision of Monetary Board to forbid the Bank or Quasi Bank from conducting business in the Philippines
- This is summary in nature, the decision doesn’t need prior notice and hearing. This step is not found under conservatorship and does not
apply to conservatorship. This is another difference between a receivership and conservatorship. When the conservator is assigned, the
bank will continue with its operations to restore viability. But when a receiver is assigned, the bank will stop operations.
Discussion:
Bank said the you did not give us the chance to present evidence that we are not insolvent. You have to allow us to show. So you have
no basis, you should’ve given us prior notice and opportunity to be heard before actual finding of insolvency and actual order of
receivership
There should be no notice since the moment depositors hear such news, everyone will go to the bank and get their money- bank run.
Even if the bank had sufficient money to pay off withdrawals in the normal course of business, now all their liquid assets will be gone.
Or make them all the more unliquid.
The SC said that you don’t give them the chance to be heard because if you weigh the prejudice against the bank and the prejudice
against the public and depositors, the latter should win out.
In any case SC said that due process is sufficient if opportunity to be heard is given subsequently.
4. Furnish a copy of the order of receivership to the Board of Directors of the Bank
- Under Section 30, the majority of the stockholders of the bank may file a petition for Certiorari.
Discussion:
Same issue as Rural Bank of Buhi
It mentioned the “close now and hear later” scheme which also used in section 53 of the GBL.
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The scheme is actually steps 3 and 4 of the order of receivership which means that when BSP finds that there’s ground for receivership
and orders receivership, it also automatically orders the closure of the bank.
This order doesn’t require hearing. Hear later within 10 days after the copy of the order.
There is also the issue of who has authority to question, since the BSP said the BOD no longer has authority because of receivership
and so all the actions may be brought by me as the receiver. So TSB said that’s absurd since of course, you will not file a case against
yourselves questioning the validity of your order.
SC upheld neither. The action can only be brought by the stockholders holding the majority of the outstanding capital stock of the
bank.
In all eventuality, it maybe that the BOD are the ones dissipating the assets, so it is elf-serving of you to question. The person whose
rights need to be protected are the real owners, the stockholders and only they have the personality to question.
The rule of filing of a case by the stockholders is an amendment to the old central bank law.
Assets of the bank are deemed to be in custodia legis. Receiver will now have the authority to gather and take charge of all the
assets, administer the same for the benefit of the creditors and exercise the general powers of the receiver under the rules of
court. Basically, the receiver then replaces the BOD and the officers of the bank.
Discussion:
There was no perfected contract of sale- knowledge of acceptance came after PVB was now under receivership.
Remember, the Civil Code states that an offer becomes ineffective if one of the parties becomes insolvent prior to perfection of
contract.
The SC said that where upon the insolvency of a bank a receiver has been appointed, the assets of the bank pass beyond its control
into the possession and control of the receiver whose duty is to administer the assets for the benefit of the creditors of the bank. Thus
, the appointment of a receiver operates to suspend the authority of the bank and of its directors and officers over its property and
effects, 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 assets of the bank is deemed in custodia legis
Ruling:
The receiver appointed by the Central Bank to take charge of the properties ONLY had the authority to administer the same for the benefit
of the creditors. Granting or approving an “exclusive option to purchase” is not an act of administration, but an act of strict ownership,
involving the disposition of property of the bank. Not being an act of administration, the so-called “approval” of Atty. Renan Santos amounts
to no approval at all.
Discussion:
The SC said the hey you officers, you no longer have the authority to bind the bank.
Here, there was such an approval of the receiver, unlike in the case of Villanueva where there is none. However, it doesn’t matter
because the power of a receiver is only of administration and NOT of strict ownership.
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Section 30. Proceedings in Receivership and Liquidation.
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 but 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. The receiver shall determine as soon as possible, but not later
than ninety (90) days from take over, 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.
If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in accordance with the next
preceding paragraph, the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with
the liquidation of the institution.
Found under Section 30 and you take note of Banco Filipino case where the powers of the receiver are outlined. And there is the issue
that there was this TRO given over the liquidation proceedings, but the receiver continued to file cases against the borrowers of the bank.
So those borrowers said that there’s already a TRO so receiver no longer has authority.
The SC said this is NOT true. There was a TRO only on the liquidation proceedings, the receiver can still do all his other task.
So from receivership, you have 90 days and at the end of such, receiver will determine WON bank will be rehabilitated. If based on Section
30, the bank is on the condition that it can be permitted to do business- then rehabilitate. Or if receiver cannot be rehabilitated, the
Monetary Board shall notify the BOD.
Take note that rehabilitation and liquidation is EXCLUSIVE. You cannot have one if you also have the other. Such is in the case of PNB vs
Vega
Discussion:
The SC said when you liquidate, you convert the assets into cash and you pay off all the creditors. On the opposite end, rehabilitation
which connotes reorganization.
It is similar when you are operating a person, you put him in the ICU- that’s rehabilitation. When he’s in there, you do not cut him out to
donate his organ and give to other persons- that’s liquidation. They cannot exist at the same time.
1. Appointing Authority
Receiver- appointed by the Monetary board, recommended by SED
Liquidator- appointed by the Monetary board, recommended by the receiver
2. Grounds
Receiver- 6 grounds
Liquidator- only 1 (cannot resume business with the safety to its depositors)
3. Term
Receiver- 90 days
Liquidator- indefinite, for as long as it will take convert all assets to cash and pay put liabilities
4. Purpose
Receiver- administer assets
Liquidator- convert assets to cash
5. Sequence
Receiver- always comes first before liquidation
Liquidator- always comes after
Note: Unlike in conservatorship and receivership
6. Nature of proceeding/action
Liquidation- special proceeding
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Facts:
Pacific Banking Corporation was placed under receivership by the Central Bank of the Philippines. Central Bank filed a petition for
assistance in the liquidation. The liquidator received a copy of the order on September 16, 1991 and filed a Motion for Reconsideration and
Clarification order on October 16,1991. The lower court judge denied such motion which order was received on Dec 9. Following day, he filed a
notice of appeal. Respondent judge disallowed the liquidator’s notice of appeal on the ground that such was more than 15 days after the receipt
of such decision.
Ruling:
A petition for liquidation of an insolvent corporation should be classified as a special proceeding and NOT an ordinary action. Such
petition does not seek an enforcement or protection of a right nor prevention or redress of a wrong. What it seeks is merely a declaration so
that its creditors may file their claims. The liquidator filed within 30 days, the respondent judge thus erred in disallowing the appeal.
Discussion:
The SC described liquidation as having 2 phases
1.) Case is filed in court as stated in Section 30. Upon filing, there’s publication and everyone who has a claim in the bank will file the claim
in the liquidation court and such court will determine their claims one by one. There will be as many rulings as there are claims. If there are
1000 creditors, the court will issue 1000 orders. And because each claim is a ruling in itself, the SC said that this is a special proceeding and
therefore, you appeal by records on appeal. How come? Because it maybe that you have one case decided already so you go up but the
records will remain in the trial court because there are still other claims to be adjudicated.
2.) Approval of the rehabilitation plan and actual conversion of the assets into cash and payment of the creditors in the order of preference
as stated in the Civil code. Remember class, deposits are ordinary debts and not preferred so the preferred obligations of the bank are
claims where there’s mortgage or other security, those that will be preferred than the claims of the depositors.
Special proceeding because you don’t adjudicate a right and you don’t declare a status. You merely state what has already been determined.
Because the Bangko Sentral already determined that the bank is insolvent. So the court doesn’t need to make that ruling and will just
confirm the ruling of the Bangko Sentral.
And you have 10 days to question the order of liquidation. The 10 days applies to receivership, liquidation, and conservatorship.
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