BANKING January 5, 2012

General Banking law, this is where we are now. Alright, we go to classification of banks. Remember the essence of the definition of a bank. It is when it opens itself to the public and obtains deposits from the public at a given interest rate. The legal char of that deposit is a mutuum, a loan. Legally, the depositor is the creditor and the bank is debtor. Out of the total corpus of deposits, that is the loanable funds of the bank. They cannot loan out money to lenders more than what they have by way of deposits. The bank has a separate capital. What is the purpose of this? To provide assets, the bank needs buildings, vehicles. It needs a vault. *Father talks about fire-proof safes* Now the bank has to spend for fixed assets, this is the use of capital. Second, in case of impairments, bad loans, provisions for this can be taken from the capital of the bank. So, the capital is not used to lend, it must be the deposit. It is important to understand that because no matter how healthy the bank, it can never return to the depositors their money at one instance if all of them show up at the same time. So, at any one time, only a minimal portion is required for a bank to keep in order to meet the withdrawal requirements. You change the deposit, and make it to deposit substitutes, then that is a quasibank. If a quasibank receives deposit substitutes and relends it to others, then that is a quasibank. Letters of acceptance, receivables or pure cash, and the quasibank turns around and lends it to a lender who issues his check as payment (because it is short term) and the lending institution issues a commercial paper or note with or without recourse.

What is recourse? If the borrower of the bank should pay, then the one who supplied the cash can run after the defaulting borrower and the quasi bank. That is with recourse. The interest rate there is higher. Without recourse? Interest rate is lower. If the borrower is a blue chip corporation, of well-known reputation, normally the one issuing the deposit substitutes will not ask for recourse. If San Miguel borrows from you, you will not care if it is with recourse or without recourse. Di naman na makadagan. How about trust companies? Normally, banks are also given the authority to be trust companies, e.g. China Bank and trust Company. What is the function of a trustee? To take care of the trust. There are three parties the trustor, the trustee and beneficiary. Let us say, ADDU Faculty Retirement Fund. One of the items considered as an expense, is the provision of a retirement fund approved by the BIR. That contribution is deductible and tax-free (gift tax). Now, that retirement fund should not be part of the corpus of property of the corporation. Why? Because it is for the benefit of the retirees. If that is already vested, the company should not be able to touch it. It might have financial needs and play around with the fund. There should be a wall bet corporation and the retirement funds of the employees. How is that wall maintained? The company has no longer had anything to do with the money of the retirement fund. Who manages it? The trustee, that is the third person involved. The company is the trustor. The employees are the beneficiaries. The third person is the trustee who will oversee the fund. Now, only commercial banks and banks higher in classification are allowed to be trust companies. Now, if you are registered as a trust company, the normal requirement of a bond is no longer required. In ordinary practice, if you are not a licensed trustee and

you are entrusted of a corpus of funds, you must put a bond. Why? To deter the trustee from running away with the money. If he does so, the bond will be forfeited. *Story about Horacio dela Costa* Now, basically, an executor/administrator is a trustee. it has the same functions as a trust corporation. If there is need to liquidate the trust corpus, you have to ask the court to sell properties to pay tax. Disposition is not part of your powers. That is the same function as a trust corporation. You cannot disburse from the fund other than for its purpose of which it was created. The trust fund must be irrevocable. It must be a blind trust. The trust can earn money. Kung naa kay yuta, the trustee should look for renters so it can earn money. Who will discipline the trustee if he acts carelessly? The beneficiaries have to file a case in court impleading the trustee in a case of DAMAGES. Loss incurred by the trust fund by reason of negligence of the trustee. That is the remedy. This is in the case of ordinary trusts. If it is a trust company, then the Central Bank as an overseer of trust companies. You dont have to file a case. Ask Central Bank to investigate. If a bank is at the same time a trust company, so it has two licenses as a commercial/universal bank and as a trust company. So it receives from two sources, one as a corpus of a trust fund and the other from the deposits from the public. Are the moneys received by the bank as a trust company covered by the PDIC or Philippine Depositors Insurance Company? The answer is no. PDIC only covers deposits from the depositors. Suppose a commercial bank folds up as a commercial bank, does it mean that as a trust company it has also folded up? Technically speaking, the two are separate. A trust company even if already a bank in distress, the trust function continues EXCEPT

when the bank has maliciously grabbed out its trust funds and used it in its banking functions. That is an even greater irregularity. It is my submission that the CB cannot have sole and exclusive jurisdiction. Why? Because the trust business involves so many contracts that the civil code belongs to the exclusive jurisdiction of the courts. If the trust fund was engaged in buying of commercial papers, that means it lend out money. What is that? That is mutuum, a loan. The regular courts have jurisdiction over loans.

Many times, it has been asked in the bars, the classes of bank. There are the classes of banks: 1. Universal banks (Section 3.2, Gen Banking Law) 2. Commercial banks 3. Thrift banks a. Savings and mortgage banks b. Stock savings and loan associations c. Private development banks (RA 7906) 4. Rural Banks (100% Filipino ownership) Most of banks that have gone in distress are rural banks. Majority of rural banks are closed or under suspension or are not fully operational, because they lack capitalization. So they have finally decided to open up. Who knows there are outside interest that will come in. I told you before that the buyer of non-performing loans of GSIS and SSS, 40 Billion pesos Housing, it remains unpaid. They were sold for 80% discount. Naa kay outstanding loan that was released before SSS, let us say it is worth 100 thousand and it was never been paid and it is defaulted. It was sold by the SSS for 80% discount. Who was the buyer? It was bought by GE Capital. For the government, the reasoning is this 40 billion in debt that is not in service. Assuming that they are still looking for service, we can no longer ____ because the 40 Billion is not coming back, kay wala namay mamayad. Mas maayo pa ug ibaligya nato naa pa ta makuha.

What is the system now? Compulsory Salary Deduction. Karon pa sila naghunahuna. Kaning Gobyerno, naay reverse-midas touch. Pag ang gobyerno gunitan ang gold, mubaliktad, reverse-midas touch. You just think of what they could have done. You look around, 5-6 years ago, they have an advertisement, We need lawyers. Laywers who will run after those who did not pay. Pagpahawa ato nila, kinsa man mubantay atong mga balaya. Wala ray semana, lugiton tong balaya. Jealousy, kasilyas, tangtangon man na tanan. (Father talked about harvesting, fertilizers). That is the supposed to be the aim of rural banks, to extend loans. What happened? You are not yet born in 1972 or 1973, Marcos inaugurated MASAGANA 99. The target was 99 sacks of rice to be harvested per hectare. You will borrow this much money from rural banks. Where did the rural banks get their money? From the central bank. What is the collateral? No, there is no collateral. Why was there no collateral? Because at the end end of the loan agreement, there is confession of judgment. I so and so that in case I cannot pay, I confessed judgment that I am guilty. Is that legal? No that is not legal. But during martial law, that is legal. What happened to MASAGANA 99? Complete failure. Wala jud nahitabo. To convince the farmers, what did they do? The agricultural technician was given a commission to convince the farmers to support MASAGAN 99. What happened to Cooperative Rural Banks? Cooperative Rural Bank of Davao. That was in Bankerohan. Wala na na, pati pintura lain na. Cooperative Rural Bank of Tagum, hain naman? Nawala. If you lend a loan to a somebody, the premise is that somebody is an entrepreneur. If you lend to everybody then your assumption is that everybody is an entrepreneur. Pero dili man, not everybody is not an entrepreneur. There are some who are lazy. Now, other classification of banks as determined by the monetary board of Banko sentral ng pilipinas. So there is also Islamic bank, what is the reason? Why is there Islamic bank but no Protestant bank? Buddhist bank? Because of the Islamic Faith. Lending interest is explicitly prohibited by the Koran. Therefore they have to devise a way by which the functions of lending are met indirectly. There are several contracts

to be entered into instead of a simple loan. Catholics used to be against interest. Look at the bible, in the new testament, there is a prohibition in lending with an interest. When we arrived at the time of Christ, that prohibition is no longer effective. (Father talks about the parable relating to servant and interest). What is not allowed now? Usurious interest. Interest that is not reasonable. What is the legal interest now for credit cards? 3% interest monthly? Why is it allowed? Because it is an unsecured debt. Technically, it is in contravention with banking federation but it is supposed to be a short term debt so it doesnt need any collateral. It is now a very vibrant industry in the Philippines. Can Rural Bank engaged in credit card service? No. Commercial Bank? Yes, they can. With much more reason with Universal Bank can engage in alive and unalive(?) industry, directly and indirectly. Directly, the bank itself will issue credit car. indirectly, the universal subsidiary corporation which is a leasing or lending corporation. This corporation will lend or lease you a property. Pahuramon ka ug kwarta gikan sa bangko , palit ka ug sakyanan sa imong ngalan. Prenda nimo sa leasing and dadto ka mag-amortize sa leasing. You can go ahead and fulfill your contract with San Miguel transporting San Miguel beer from Davao City to Darong Davao del Sur to Kidapawan. And the proceeds with that operation leased by San Miguel will go to the leasing company. And if you do not pay, what is the provision there, there is a trust receipt provision. You are saying that you absconded with the proceeds. So criminal case ka. So, if you are a bank, can you engage in insurance business? Also sell insurance at the same time? Certainly, if youre a rural bank, you cannot. Cooperative bank, you cannot. Thrift bank, you cannot. Commercial bank, you cannot since that is not alive industry. You are universal bank, you can indirectly. You can invest in an insurance corporation. Can you make that insurance corporation be the insurer of your mortgages? The answer is yes. And that is mainly the reason why many are objecting with the wisdom that allows a bank that has invested in insurance company to make that insurance company be the insurer of their mortgage because that is conflict of interest. Why is there conflict of interest? The insurance is suppose to cancel incase of failure of the loan. Kuha ka ug 1M para buhat ka ug balay. The bank will not lend you

the money unless you have an insurance covering that money. Suppose that the insurer is partly owned by the bank. Why is their conflict of interest? Because the bank decides the amount to be insured, the premiums to be paid for the insurance. If the contingency insured against happens, the only question is , are you adequately insured or are you not adequately insured? If you are adequately insured, the bank wins. The bank is subrogated to the shoes of the borrower and collects the proceeds of the insurance. If you are not adequately insured, gamay ang premiums imo gibayad mao ng the proceeds will not cover the amount borrowed. But the insurance company yields its busines. So when the contingency happens, who wins in this case? it is the insurance company. So what is the reason in allowing such system even if there is conflict of interest? The reason for allowing that is for convenience. One-stop banking. If there is no insurance there, mangita na pud ka ug lain insurance. So convenience. so that is why they allow the universal banks, one stop. Mangita ka ug credit cards, mangita ka ug insurance, mangita ka ug loan, checking account, tanan, one stop na.