BANKING LECTURE: CHAPTER 10 and 11

CHAPTER 10 Philippine Deposit Insurance Corporation

Purpose: To give peace of mind to depositors. Depositors must be given peace of
mind as to the money they are placing in the banks. The law, in order to give more
peace of mind to depositors, gave rise to the Philippine Deposit Insurance
Corporation (PDIC).
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The insurance coverage only covers deposits. It does not cover money
market, mutual fund, unit investment trust funds, etc. STRICTLY ONLY
DEPOSITS.

What is insurance?
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Insurance is a contract whereby an insurance company undertakes to

indemnify beneficiaries in case in the occurrence of unforeseen events. In the
case of deposits, there is a commitment on the part of the PDIC, whenever
the depositor cannot be accommodated by the bank on account of the bank
has been mismanaged or under receivership, at least the depositor can still
recover money.
Initially, the maximum deposit coverage is P500,000. If your deposit is more
than P500,000, then you can wait for the liquidation of the bank to collect
your money.

What is the PDIC?

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It is a government entity. It is a government owned and controlled corporation

(GOCC).
Main purpose: To insure the deposit of any depositor but up to a maximum of
P500,000.
PDIC has same qualities as any private corporation. It has its own board of
directors, it can enter into transactions, it can hire employees, it can sue and
be sued.
It can exercise all other powers that the Corporation Code may allow it to do.
Most famous activity: To act as a receiver or liquidator to banks that are in
precarious situations. That is why there is always a close coordination
between PDIC and BSP because BSP implements the General Banking Law
and serves as the watchdog of the depositors to protect the depositors from
mismanaged banks.
PDIC will always rely on the BSP as to the situation of the banks.
Composition of Board of Directors:
o Secretary of Finance
o BSP Governor
o PDIC President appointed by the President of the Philippines (term of 6
years)
o 2 members from the private sector

What is the job of the PDIC?

Basically, insurance. To insure deposits.

Conducts examination of banks
In case of closed banks, acts as a receiver or liquidator.
CLOSE NOW, HEAR LATER SCHEME
o Purpose: To prevent further losses of the bank.

How are premiums paid?

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Through assessment of banks. The bank is the one who pays premium.

What is the concept of insured deposits?

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All of the deposits but there are qualifications

Some people may have so many deposits in a bank or several branches. If
you have deposits in all branches of a bank, it will be aggregated into one.
PDIC will only be compensating you for P500,000 because insurance is not a
way of getting rich, but rather a form of indemnification.
In case the indemnification is not full, for example if you have a P2M deposit
in the bank and the bank became bankrupt, how much will you get from
PDIC? Only P500,000 and just wait for the liquidation of the bank. It takes
time because liquidation has to follow the procedure prescribed by law.
If a person has two or more deposits, it will always be aggregated into one.
That is why splitting of accounts is not favored.

Are foreign currency deposits covered by PDIC?

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Yes, foreign currency deposits are covered.

Ordinarily, the bank cannot accept foreign currency deposits unless it has a
FCDU (Foreign Currency Deposit Unit) license.
General Rule: A bank can only accept peso deposit.
Exception: the introduction of FCDU which allowed banks to accept foreign
currency as deposits.
However, if you do not have a FCDU license, which is separately issued for
the bank, you cannot accept foreign currency as deposit.
If a bank has such license and you deposit foreign currency, that deposit is
insured by the PDIC. They will be paid in the same currency in which they
deposited. Except in option banking, it is not covered.

What are the financial transactions of the bank that are not covered by
the PDIC?
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Bonds, securities, trust accounts (quasi banking)

Quasi banking activity means they deal with deposit substitutes. Deposit
substitutes is an alternative other than deposits for the purpose of financing
the needs of the bank. Examples: drafts, money market.
These will not be insured by the PDIC.
Mutual funds, unit investment trust funds, investment management account,
trust agreement- not covered by PDIC

What gives comfort to the client if it is not insured by the PDIC?

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Fiduciary nature of trust entities

Trust entities must have a license, it has a bond in case of breach and the
person can always go after the bank for such breach as well as sanctions.

** only up to P500,000 and aggregated if so many deposits

What if the bank is in a very bad situation?
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PDIC will acts as a receiver, they will get rid of all the officers of the bank
(President up to lowest officer). PDIC comes in and appoints his own people.
The receiver will do everything to rehabilitate the bank.
If it is successful, the bank is rehabilitated.
Supposing rehabilitation does not succeed? Then bank will be up for
liquidation. Despite all efforts to rehabilitate the bank, the final step is to
close the bank.

What happens if there is liquidation of the bank?

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Convert all its assets into cash.

If a corporation voluntarily dissolves corporation, apply to SEC for dissolution.
It doesnt mean that a corporation is dissolved just because of insolvency.
Ordinary corporations can be dissolved when it is no longer profitable and the
amount of the shares of the shareholders will be returned to them.
In PDIC, dissolution is because bank is already in bad shape. Its assets must
be converted to cash so that depositors who have not been indemnified for
their deposits as a whole because of the maximum deposit insurance
coverage of P500,000, they will be compensated.

What are behest loans?

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Behest loans are loans where the money of the bank is given to persons
which are undervalued. For example, the collateral in a mortgage is
undervalued, that is a behest loan.

Concurrence and Preference of Credits

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Arts 2241, 2242, 2244

Purpose: When it comes to a point where a debtor has no more assets, he
has only 1 peso asset to satisfy 2 peso liability, that is an insolvency
situation. How to resolve? (Financial Rehabilitation Act)
Pay first mortgages. If there are excess, pay now under Art 2242
preferred credit (taxes).
All payments that partake a payment of deposit in banks are similar to taxes.
Example: If your deposit is P1M in a bank, and the deposit insurance is only
P500,000 as per PDIC, you will still have P500,000 receivable. If the
corporation is liquidated, you will be paid first. Under Art 2244, deposits are
just like taxes in terms of priority.

Subrogation
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When PDIC pays the depositor, it is subrogated to the position of the

depositor. This is true in any kind of insurance. In insurance, there is always
subrogation because insurance is always a form of indemnification. If the

PDIC pays the depositor, it will now go after the injuring party for
reimbursement. PDIC pays depositor, what is the recourse? Go after the bank
for mismanaging the deposit of the depositor and he will be subrogated for
the action to run after that bank.
Appeals
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When it comes to the point that the bank is appealing, only the Court of
Appeals can issue injunctions. If there are damages, then it can be under
Supreme Court, but it is conditioned on placement of a bond.

CHAPTER 11: ANTI MONEY LAUNDERING ACT

Purpose: Because of the proliferation of dirty money, this act was enacted to
prevent the sanitization of dirty money through the use of the banking system,
insurance companies or use of SEC by organizing corporations.

If it goes through such systems without being questioned, the dirty money
will become clean money.

Dirty Money
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Those that comes from dubious sources (kidnapping for ransom, drugs,
piracy, gambling, plunder)
If case this happens and the amount deposited is big, the bank will
always question two types of transactions:
o Covered transaction
o Suspicious transaction

What is a covered transaction?

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If you deposit money more than P500,000 or more than 10,00 USD, it is
incumbent upon the bank to interview and ask where you got the money.
They ask what is your business, your profession, how do you have such
money. There will be a report to be completed and an interview.
If you cannot explain where you got such money, there will be a report
submitted to the Anti- Money Laundering Council to see whether the
transaction is legitimate or not.

Integration
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Very hard to catch; mixing dirty money with clean money.

Layering
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When you avail of so many corporate structures, and through the medium of
transfer of funds, you cannot know where money came from.

Safe Harbor provision

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If ever there is a conclusion that the transaction is suspicious and it was

reported to AMLC of BSP, and it turned out that it wasnt, there is no liability
and will be immune from suit.

What if the BSP finds that the transaction is suspicious?

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File a petition to the Court of Appeals to freeze the account.

** read BSP Circular 706

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It is required that all banks must implement this circular and the compliance
officer of the bank must spearhead the implementation of this to maintain
independence, reporting will be done directly to Board of Directors.
Provides ethical and professional standards to make bank free from any dirty
money

Composition of Anti-Money Laundering Council

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BSP governor
Insurance Commission
SEC Chairman
These three are part of the council because these institutions are used as
channels for money-laundering and for dirty money.

Exception to Bank Secrecy Law

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Anti- Money Laundering Law is exempted from secrecy of deposits

Covered Institutions
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All institutions which handle money