BANKING LAWS

TABLE OF CONTENTS

A. The New Central Bank Act

Republic Act No. 7653

B. The General Banking Act

Republic Act No. 337

In General
Establishment of Domestic Banks
Licensing of Foreign Banks
Commercial Banking Corporations and Universal Banks
Thrift Banks Act of 1996
Republic Act No. 7906
Building and Loans Associations
Rural Banks Act of 1992
Republic Act No. 7353

C. An Act Liberalizing the Entry of Foreign Banks

Republic Act No. 7721

D. Offshore Banking System Law

Pres. Decree No. 1034

E. Foreign Currency Deposits Act

Republic Act No. 6426, as amended

F. An Act Creating the PDIC

Republic Act No. 3531

G. The Truth in Lending Act

Republic Act No. 3765
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BANKING LAWS

H. Law on Secrecy of Bank Deposits

Republic Act No. 1405

Note: We have included several banking laws which are not in the bar
coverage. Likewise, we have incorporated several laws on non-bank
financial intermediaries. Since they are not covered by the bar exam, the
reviewee has the option of not reading them.

BANKING AND FINANCE IN GENERAL

Two types of financing

1. equity

2. debt-financing

A cross-breed of the two may also occur.

Intermediaries

1. Banks

2. Non-bank financial intermediaries

3. Exchanges

4. Others i.e. secondary markets

Function of intermediaries

1. “Brokering” or matching investors with those in need of financing

2. Help in diminishing risks to investors

3. Provide liquidity
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BANKING LAWS

NEW CENTRAL BANK ACT

Republic Act No. 7653

Approved 14 June 1993

IN GENERAL

Mandate

The Bangko Sentral ng Pilipinas is the State’s central monetary

authority, mandated in the 1987 Constitution, which shall function and
operate as an independent and accountable body corporate in the
discharge of its mandated responsibilities concerning money, banking
and credit. [Section 1, RA 7653]

The Bangko Sentral shall enjoy fiscal and administrative autonomy.

[Section 1, RA 7653]

Objectives

1. The primary objective of the Bangko Sentral is to maintain price stability

conducive to a balanced and sustainable growth of the economy.

2. It shall also promote and maintain monetary stability and the

convertibility of the peso.

3. It shall also provide policy directions in the areas of money, banking and
credit.

4. It has supervision over banks and has regulatory powers over the
operations of finance companies and non-bank financial intermediaries
performing quasi-banking functions. [Section 3, RA 7653]
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Typical functions of the Bangko Sentral

1. Supervision over banks and regulation of non-bank financial

intermediaries engaged in quasi-banking functions

2. Bank of issue: as such, it has the sole power and authority to issue
currency

3. Custodian of the nation’s reserves of foreign currency

As such, it ensures convertibility of the peso and backs up Philippine

currency.

4. It has control of credit

a. regulating money supply i.e. reserve requirements for banks

b. open market operations i.e. Tbills

c. controlling interest rate

5. Lender of last resort

It has a "rediscounting window,” allowing banks to sell their promissory

notes to it.

6. Custodian of cash reserves of banks

7. Government banker, agent and advisor

8. Central clearance and settlement agency

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Fiscal policy v. monetary policy

Fiscal policy is concerned with revenue generation and expenditure

while monetary policy involves regulating money supply and price
stability.

The Bangko Sentral will now concentrate on monetary policy and shed
off fiscal responsibilities which in the past had distracted it from its
primary function. [Section 129, RA 7653]

MONETARY BOARD AND GOVERNOR

Monetary Board

The powers and functions of the Bangko Sentral are exercised by the
Monetary Board.

The Board is composed of seven (7) members appointed by the

President for a term of six (6) years. No member may be reappointed
more than once.

The seven members are:

1. The Governor as Chairman;

2. A member of the Cabinet designated by the President; and

3. Five (5) members who shall come from the private sector, all of
whom shall serve full-time.

Qualifications of the members of the Monetary Board

1. Must be natural born citizens of the Philippines

2. At least thirty five (35) years of age, with the exception of the Governor
who should at least be forty (40) years old
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3. Good moral character

4. Of unquestionable integrity

5. Of known probity and patriotism

6. With recognized competence in social and economic disciplines

Disqualifications

In addition to the disqualifications imposed by Republic Act No. 6713, a

member of the Monetary Board is disqualified from being a director,
officer, employee, consultant, lawyer, agent or stockholder of any bank,
quasi-bank or any other institution which is subject to supervision or
examination by the Bangko Sentral, in which case such member shall
resign from, and divest himself of any and all interests in such
institution before assumption of office as member of the Monetary
Board.

The member of the Monetary Board coming from the private sector shall
not hold any other public office or public employment during their
tenure.

No person shall be a member of the Monetary Board if he has been

connected with any multilateral banking or financial institution or has a
substantial interest in any private bank in the Philippines, within one (1)
year prior to his appointment; likewise, no member of the Monetary
Board shall be employed in any such institution within two (2) years
after the expiration of his term except when he serves as an official
representative of the Philippine Government to such institution.
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Quorum in the Monetary Board

The presence of four (4) members shall constitute a quorum. However,

in all cases, the Governor or his duly designated alternate shall be
among the four.

Withdrawal of persons having a personal interest

In addition to the requirements of Republic Act No. 6713, any member

of the Monetary Board with personal or pecuniary interest in any matter
in the agenda of the Monetary Board shall disclose his interest to the
Board and shall retire from the meeting when the matter is taken up.
The decision taken on the matter shall be made public. The minutes
shall reflect the disclosure made and the retirement of the member
concerned from the meeting.

Responsibility and liability of the members of the Monetary Board

Members of the Monetary Board, officials, examiners, and employees of

the Bangko Sentral who willfully violate RA 7653 or who are guilty of
negligence, abuses or acts of malfeasance or misfeasance or fail to
exercise extraordinary diligence in the performance of his duties shall
be held liable for any loss or injury suffered by the Bangko Sentral or
other banking institutions as a result of such violation, negligence,
abuse, malfeasance, misfeasance or failure to exercise extraordinary
diligence.

Similar responsibility shall apply to members, officers and employees of

the Bangko Sentral for;

1. The disclosure of any information of a confidential nature, or any

information on the discussions or resolutions of the Monetary
Board, or about the confidential operations of the Bangko Sentral,
unless the disclosure is in connection with the performance of
official functions with the Bangko Sentral, or is with prior
authorizaytion of the Monetary Board or the Governor; or
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2. The use of such information for personal gain or to the detriment

of the Government, the Bangko Sentral or third parties.

However, any data or information required to be submitted to the

President and/or Congress, or to be published under the provisions of
RA 7653 shall not be considered confidential.

Authority of Governor to render opinions, decisions or rulings

The Governor of the Bangko Sentral shall have the power to 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. [Section 17(e), RA 7653]

Authority of the Governor in emergencies

In case of emergencies where time is insufficient to call a meeting of the

Monetary Board, the governor with the concurrence of two other
members of the Board may decide any matter or take an action within
the authority of the Board.

He shall thereafter submit a report to the President and Congress within

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 19, RA
7653]
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BANKING LAWS

Outside interests of the Governor and the full-time members of the Board

The Governor of the Bangko Sentral and the full-time members of the
Board shall limit their professional activities to those pertaining directly
to their positions with the Bangko Sentral.

They may not accept any other employment, whether public or private,
remunerated or ad honorem.
Exceptions:

1. Positions in eleemosynary, civic, cultural or religious

organizations

2. Whenever, by designation of the President, the Governor or the

full-time member is tasked to represent the interest of the
Government or other government agencies in matters connected
with or affecting the economy or the financial system of the
country

CERTAIN OPERATIONS OF THE BANGKO SENTRAL

Supervision and examination

The Bangko Sentral shall have supervision over, and conduct periodic or
special examination of, banking institutions and quasi-banks, including
their subsidiaries and affiliates engaged in allied activities.

This power however is subject to the provision of existing laws

protecting or safeguarding the secrecy or confidentiality of bank
deposits as well as investments of persons, natural or juridical, in debt
instruments issued by the Government. [Section 25, RA 7653]

Subsidiary and affiliate

A subsidiary means a corporation more than fifty percent (50%) of the

voting stock of which is owned by a bank or quasi-bank and an affiliate
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BANKING LAWS

means a corporation the voting stock of which, to the extent of fifty

percent (50%) or less, is owned by a bank or quasi-bank or which is
related or linked to such institution or intermediary through common
stockholders or such other factors as may be determined by the
Monetary Board.

No restraining order on power of examination

No restraining order or injunction shall be issued by the court enjoining

the Bangko Sentral from examining any institution subject to
supervision or examination by the Bangko Sentral, unless there is
convincing proof that the action of the Bangko Sentral is plainly
arbitrary and made in bad faith and the petitioner or plaintiff files with
the clerk or judge of the court in which the action is pending a bond
executed in favor of the Bangko Sentral, in an amount to be fixed by the
court. [Section 25, RA 7653]

Prohibitions on personnel of the Bangko Sentral

In addition to the prohibitions found in RA 3019 and 6713, personnel of

the Bangko Sentral are hereby prohibited from:

1. Being an officer, director, lawyer or agent, employee, consultant or

stockholder, directly or indirectly, of any institution subject to
supervision or examination by the Bangko Sentral, except non-
stock savings and loan associations and provident funds organized
exclusively for employees of the Bangko Sentral, and except as
otherwise provided in RA 7653;

2. Directly or indirectly requesting or receiving any gift, present or

pecuniary or material benefit for himself or another, from any
institution subject to supervision or examination by the Bangko
Sentral;

3. Revealing in any manner, except upon orders of the court, the

Congress or any government office or agency authorized by law,
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BANKING LAWS

or under such conditions as may be prescribed by the Monetary

Board, information relating to the condition or business of any
such institution. This prohibition shall not apply to the giving of
information to the Monetary Boar or the Governor of the Bangko
Sentral, or to any person authorized by either of them, in writing,
to receive such information; and

4. Borrowing from any institution subject to supervision or

examination by the Bangko Sentral unless said borrowings are
adequately secured, fully disclosed to the Monetary Boar, and
shall be subject to such further rules and regulations as the
Monetary Board may prescribe.

CONSERVATORSHIP V. RECEIVERSHIP

CONSERVATOR

Grounds for appointment of conservator

The Monetary Board may appoint a conservator whenever it 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. [Section 29, RA 7653]

The conservator should be competent and knowledgeable in bank

operations and management. The conservatorship shall not exceed one
(1) year.

Powers of conservator

1. Take charge of the assets, liabilities and management of the bank or

quasi-bank

2. Reorganize the management

3. Collect all monies and debts due said institution

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4. Exercise all powers necessary to restore its viability

Extent of the power of the conservator

The conservator has the power to overrule or revoke the actions of the
previous management and board of directors of the bank or quasi-bank.

However, the power cannot extend to the post-facto repudiation of

perfected transactions, otherwise they would infringe against the non-
impairment clause of the Constitution.

Section 28-A of RA No. 265 merely gives the conservator the power to
revoke contracts that are deemed to be defective under existing law (i.e.,
void, voidable, unenforceable, or rescissible); hence, the conservator
merely takes the place of a bank’s board of directors. What the board of
directors cannot do, such as repudiating a contract validly entered into
under the doctrine of implied authority, the conservator cannot do
either. [First Philippine International Bank v. CA, 252 SCRA 255
(1986)]

Termination of conservatorship

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 determine that the continuance in business of the institution
would involve probable loss to its depositors or creditors, in which case
proceedings for receivership and liquidation shall be pursued. [Section
29, RA 7653]
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BANKING LAWS

PROCEEDINGS IN RECEIVERSHIP AND LIQUIDATION

Grounds for proceedings in receivership and liquidation

The Monetary Board shall institute proceedings for receivership

whenever it finds that a bank or quasi-bank:

1. 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;

2. Has insufficient realizable assets to meet its liabilities;

3. Cannot continue in business without involving probable loss to its

depositors or creditors; or

4. Has willfully violated a cease and desist order that has become
final, involving acts or transactions which amount to fraud or a
dissipation of the assets of the institution.

No need of prior notice and hearing

In such cases, the Monetary Board may summarily and without need for
prior hearing, forbid the institution from doing business in the
Philippines and designate the Philippine Deposit Insurance Corporation
as receiver of the banking institution. [Section 30, RA 7653]

Who acts as receiver

For a bank, the Philippine Deposit Insurance Corporation shall serve as

receiver; for a quasi-bank, any person of recognized competence in
banking or finance may be designated as receiver.
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BANKING LAWS

Tasks of the receiver

The receiver shall immediately (1) gather and take charge of all assets
and liabilities of the institution, (2) administer the same for the benefit
of its creditors, and (3) exercise the general powers of a receiver. (4)
The receiver shall determine as soon as possible, but not later than
ninety (90) days from takeover, 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.

Resumption

Any determination for the resumption of business of the institution shall

be subject to prior approval of the Monetary Board.

Liguidation

If the receiver determines that the institution cannot be rehabilitated or

permitted to resume business, 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.

Procedure for liquidation

The receiver shall then:

1. File ex parte with the proper regional trial court, and without the
requirement of prior notice or any other action, a petition for
assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine Deposit Insurance
Corporation in the case of a bank or by the Monetary Board in the
case of a quasi-bank;

2. Upon acquiring jurisdiction, the court shall, upon motion by the

institution, assist the enforcement of individual liabilities of the
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BANKING LAWS

stockholders, directors and officers, and decide on other issues as

may be material to implement the liquidation plan adopted; and

3. Convert the assets of the institution to money, dispose of the same

to creditors and other parties, for the purpose of paying the debts
of such institution in accordance with the rules on concurrence
and preference of credit under the Civil Code of the Philippines
and he may, in the name of the institution, institute such actions as
may be necessary to collect and recover accounts and assets of, or
defend any action against, the institution.

Custodia legis and exemption from levy, attachment or execution

The assets of an institution under receivership or liquidation shall be

deemed in custodia legis in the hands of the receiver and shall, from the
moment the institution was placed under such receivership or
liquidation, be exempt from any order of garnishment, levy, attachment,
or execution. [Section 30, RA 7653]

Actions of Monetary Board final and may be questioned only through

certiorari

The actions of the Monetary Board taken regarding the designation of a

conservator and appointment of a receiver shall be final and executory
and may not be restrained or set aside by the court except on petition
for certiorari on the ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion as to amount to lack
or excess of jurisdiction.

The petition for certiorari may only be filed by the stockholders of

record representing the majority of the capital stock within ten (10)
days from receipt by the board of directors of the institution of the order
directing receivership, liquidation or conservatorship.
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Designation of conservator not precondition to designation of receiver

The designation of a conservator or the appointment of a receiver shall

be vested exclusively with the Monetary Board.

The designation of a conservator is not a precondition to the designation

of a receiver.

THE BANGKO SENTRAL AND THE MEANS OF PAYMENT

Unit of monetary value

The unit of monetary value in the Philippines is the peso.

Currency

The word "currency" is hereby defined as meaning all Philippine notes

and coins issued or circulating in accordance with the provisions of RA
7653.

Bank of issue

The Bangko Sentral has the sole power and authority to issue currency
within the territory of the Philippines [Section 50, RA 7653]

Notes and coins issued by the BSP shall be liabilities of the BSP and may
be issued only against and in amounts not exceeding, the assets of the
BSP. Said notes and coins shall be a first and paramount lien on all
assets of the BSP [Section 51, RA 7653]

All notes and coins issued by the BSP are fully guaranteed by the RP and
shall be legal tender in the Philippines for all debts, both public and
private. [Section 52, RA 7653]
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BANKING LAWS

Demand deposits

"Demand deposits" means all those liabilities of the Bangko Sentral and
of other banks which are denominated in Philippine currency and are
subject to payment in legal tender upon demand by the presentation of
checks.

Issue of demand deposits

Only banks duly authorized to do so may accept funds or create

liabilities payable in pesos upon demand by the presentation of checks,
and such operations shall be subject to the control of the Monetary
Board in accordance with the powers granted it with respect thereto
under RA 7653.

Legal character of checks

Checks representing demand deposits do not have legal tender power

and their acceptance in the payment of debts, both public and private, is
at the option of the creditor. [Section 60, RA 7653]

However, a check which has been cleared and credited to the account of
the creditor shall be equivalent to a delivery to the creditor of cash in an
amount equal to the amount credited to his account. [Section 60, RA
7653]

DOMESTIC MONETARY STABILIZATION

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.
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Action when abnormal movements occur in the monetary aggregates,

credit, or price level

Whenever abnormal movements in the monetary aggregates, in credit,

or in prices endanger the stability of the Philippine economy or
important sectors thereof, the Monetary Board shall:

1. Take such remedial measures as are appropriate and within the

powers granted to the Monetary Board and the Bangko Sentral;

2. Submit to the President of the Philippines and the Congress, and

make public, a detailed report which shall includes, as a minimum,
a description and analysis of:

a. The causes of the rise or fall of the monetary aggregates, of

credit or of prices;

b. The extent to which the changes in the monetary

aggregates, in credit, or in prices have been reflected in
changes in the level of domestic output, employment, wages,
and economic activity in general and the nature and
significance of any such changes; and

c. The measures which the Monetary Board has taken and the
other monetary, fiscal or administrative measures which it
recommends to be adopted.

INTERNATIONAL MONETARY STABILIZATION

International monetary stabilization

The Bangko Sentral shall exercise its powers to preserve the

international value of the pesos and to maintain its convertibility into
other freely convertible currencies primarily for, although not
necessarily limited to, current payments for foreign trade and invisibles.
[Section 64, RA 7653]
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BANKING LAWS

International reserves

In order to maintain the international stability and convertibility of the

Philippine peso, the Bangko Sentral shall maintain international
reserves adequate to meet any foreseeable net demands on the Bangko
Sentral for foreign currencies. [Section 65, RA 7653]

Composition of the international reserves

1. Gold

2. Assets in foreign currencies

Action when international stability of the pesos is threatened

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

which the Monetary Board considers inadequate to meet the
prospective net demands on the Bangko for foreign currencies, or
whenever the international reserve appears to be in imminent danger of
falling to such a level, or whenever the international reserve is falling as
a result of payments or remittances abroad which, in the opinion of the
Monetary Board, are contrary to the national welfare, the Monetary
Board shall:

1. Take such remedial measures as are appropriate and within the

powers granted to the Monetary Board and the Bangko Sentral;

2. Submit to the President of the Philippines and the Congress, and

make public, a detailed report which shall includes, as a minimum,
a description and analysis of:

a. The nature and causes of the existing or imminent decline;

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BANKING LAWS

b. The remedial measures already taken or to be taken by the

Monetary Board;

c. The monetary, fiscal or administrative measures further

proposed; and

d. The character and extent of the cooperation required from

other government agencies for the successful execution of
the policies of the Monetary Board.

INSTRUMENTS OF BANGKO SENTRAL ACTION

Means of action

In order to achieve the primary objective of price stability, the Monetary

Board shall rely on its moral influence and the powers granted to it
under RA 7653 for the management of monetary aggregates.

Purchases and sales of gold

The Bangko Sentral may buy and sell gold in any form.

Purchases and sales of foreign exchange

The Bangko sentral may buy and sell foreign notes and coins, and
documents and instruments of types customarily employed for the
international transfe rof funds.

The Bangko Sentral may engage in future exchange operations.

To whom can engage

The Bangko Sentral may engage in foreign transactions with the

following entities or persons only:

1. Banking institutions operating in the Philippines;

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2. The Government, its political subdivisions and instrumentalities;

3. Foreign or international financial institutions;

4. Foreign governments and their instrumentalities; and

5. Other entities or persons which the Monetary Board is hereby

empowered to authorize as foreign exchange dealers.

Foreign asset position of the Bangko Sentral

The Bangko Sentral shall endeavor to maintain at all times a net positive
foreign asset position so that its gross foreign exchange assets will
always exceed its gross foreign liabilities.

Emergency restrictions on foreign exchange operations

Emergency restrictions on foreign exchange operations include:

1. Temporarily suspending or restricting sales of foreign exchange

by the Bangko Sentral;

2. Subjecting all transactions in gold and foreign exchange to license

by the Bangko Sentral; and

3. Requiring that any foreign exchange thereafter obtained by any

person residing or entity operating in the Philippines be delivered
to the Bangko Sentral or to any bank or agent designated by the
Bangko Sentral for the purpose, at the effective exchange rate or
rates. [Section 72, RA 7653]

Emergency restrictions may be imposed for the following purposes:

1. In order to achieve the primary objective of the Bangko Sentral;

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2. To protect the international reserves of the Bangko Sentral in the

imminence of, or during an exchange crisis, or in time of national
emergency; and

3. To give the Monetary Board and the Government time in which to

take constructive measures to forestall, combat, or overcome such
a crisis or emergency. [Section 72, RA 7653]

Such measures may be adopted with the concurrence of at least five (5)
members of the Monetary Board and with the approval of the President
of the Philippines. [Section 72, RA 7653]

Exchange rates

The Bangko Sentral shall determine the exchange rate policy of the
country.

Foreign exchange holdings of the banks

In order that the Bangko Sentral may at all times have foreign exchange
resources sufficient to enable it to maintain the international stability
and convertibility of the peso, or in order to promote the domestic
investment of bank resources, the Monetary Board may require the
banks to sell to the Bangko Sentral or to other banks all or part of their
surplus holdings of foreign exchange. [Section 76, RA 7653]

LOANS TO BANKING AND OTHER FINANCIAL INSTITUTIONS

Guiding principles

The rediscounts, discounts, loans and advances, which the Bangko

Sentral is authorized to extend to banking institutions, shall be used to
influence the volume of credit consistent with the objective of price
stability.
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Types of credit operations

1. Normal credit operations

2. Special credit operations

3. Emergency credit operations

Normal credit operations

1. Commercial credits

2. Production credits

3. Other credits

Commercial credits

The Bangko Sentral may rediscount, discount, buy and sell bills,
acceptances, promissory notes and other credit instruments with
maturities of not more than one hundred eighty (180) days from the
date of their rediscount, discount or acquisition by the Bangko Sentral
and resulting from transactions related to:

1. The importation, exportation, purchase or sale of readily saleable

goods and products, or their transportation within the
Philippines; or

2. The storing of non-perishable goods and products which are duly

insured and deposited, under conditions assuring their
preservation in authorized bonded warehouses or in other places
approved by the Monetary Board.
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Production credits

The Bangko Sentral may rediscount, discount, buy and sell bills,
acceptances, promissory notes and other credit instruments having
maturities of not more than three hundred sixty (360) days from the
date of their rediscount, discount or acquisition by the Bangko Sentral
and resulting from transactions related to the production or processing
of agricultural, animal, mineral, or industrial products.

Other credits

Special credit instruments not otherwise rediscountable under

commercial and production credits may be eligible for rediscounting in
accordance with the rules and regulations which the Bangko Sentral
shall prescribe.

Special credit operation

1. Loans for liquidity purposes

Loans for liquidity purposes

The Bangko Sentral may extend loans and advances to banking

institutions for a period of not more than seven (7) days without any
collateral for the purpose of providing liquidity to the banking system in
times of need. [Section 83, RA 7653]

Emergency loans and advances

In periods of national and/or local emergency or of imminent financial

panic which directly threaten monetary and banking stability, the
Monetary Board may, by a vote of at least five (5) of its members,
authorize the Bangko Sentral to grant extraordinary loans or advances
to banking institutions secured by assets. [Section 84, RA 7653]
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BANKING LAWS

The Monetary Board may, at its discretion, likewise authorize the

Bangko Sentral to grant emergency loans or advances to banking
institutions, even during normal periods, for the purpose of assisting a
bank in a precarious financial condition or under serious financial
pressures brought by unforeseen events, or events which, though
foreseeable, could not be prevented by the bank concerned. This
requires that the Monetary Board has ascertained that the bank is not
insolvent and has the assets to secure the advances and that the
concurrent vote of at least five (5) members of the Monetary Board is
obtained. [Section 84, RA 7653]

OPEN MARKET OPERATIONS FOR THE ACCOUNT OF THE BANGKO SENTRAL

Principle of open market operations

The open market purchases and sales of securities by the Bangko

Sentral shall be made exclusively in accordance with its primary
objective of achieving price stability.

In pursuit of this principle, the Bangko Sentral may engage in the

purchase and sale of government securities as well as issue and
negotiate obligations of the Bangko Sentral.

BANK RESERVES

Reserve requirements

In order to control the volume of money created by the credit operations

of the banking system, all banks operating in the Philippines shall be
required to maintain reserves against their deposit liabilities.

The required reserves of each bank shall be proportional to the volume

of its deposit liabilities and shall ordinarily take the form of a deposit in
the Bangko Sentral. [Section 94, RA 7653]
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No interest on bank reserves

Since the requirement to maintain bank reserves is imposed primarily to

control the volume of money, the Bangko Sentral shall not pay interest
on the reserves maintained with it unless the Monetary Board decides
otherwise as warranted by circumstances. [Section 94, RA 7653]

Deposit substitutes

The term "deposit substitutes" is defined as an alternative form of

obtaining funds from the public, other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for the
borrower's own account, for the purpose of re-lending or purchasing of
receivables and other obligations.

Required reserves against foreign currency

The Monetary Board is similarly authorized to prescribe and modify the

minimum reserve ratios authorized applicable to deposits denominated
in foreign currencies.

Increase in reserve requirements

Whenever in the opinion of the Monetary Board it becomes necessary to

increase reserve requirements against existing liabilities, the increase
shall be made in a gradual manner and shall not exceed four percentage
points in any thirty-day period.

Banks and other affected financial institutions shall be notified

reasonably in advance of the date on which such increase is to become
effective.

Exemption from attachment and other purposes of reserves

Deposits maintained by banks with the Bangko Sentral as part of their

reserve requirements shall be exempt from attachment, garnishment, or
 27
BANKING LAWS

any other order or process of any court, government agency or any

other administrative body issued to satisfy the claim of a party other
than the Government, or its political subdivision or instrumentalities.

SELECTIVE REGULATION OF BANK OPERATIONS

Guiding principle

The Monetary Board shall use the powers granted to it under RA 7653
to ensure that the supply, availability and cost of money are in accord
with the needs of the Philippine economy and that bank credit is not
granted for speculative purposes prejudicial to the national interests.

Regulations on bank operations shall be applied to all banks of the same

category uniformly and without discrimination.

Margin requirements against letters of credit

The Monetary Board may at any time prescribe minimum cash margins
for the opening of letters of credit, and may related the size of the
required margin to the nature of the transaction to be financed.

FUNCTIONS AS BANKER AND FINANCIAL ADVISOR OF THE GOVERNMENT

Designation of Bangko Sentral as banker of the government

The Bangko Sentral shall act as a banker of the Government, its political
subdivisions and instrumentalities.

The Bangko Sentral shall represent the government with the

International Monetary Fund and other financial institutions.
 28
BANKING LAWS

Official deposits

The Bangko Sentral shall be the official depository of the Government,

its political subdivisions and instrumentalities as well as of government-
owned or controlled corporations.

THE MARKETING AND STABILIZATION OF SECURITIES FOR THE ACCOUNT OF THE

GOVERNMENT

Issue of government obligations

The issue of securities representing obligations of the Government, its

political subdivisions or instrumentalities may be made through the
Bangko Sentral, which may act as agent of, and for the account of, the
Government or its respective subdivisions or instrumentality, as the
case may be.

The Bangko Sentral shall not be a member of any stock exchange or

syndicate, but may intervene therein for the sole purpose of regulating
their operations in the placing of government securities. [Section 118,
RA 7653]

Servicing and redemption of public debt

The servicing and redemption of the public debt shall also be effected
through the Bangko Sentral.

Financial advice on official credit operations

Before undertaking any credit operation abroad, the Government,

through the Secretary of Finance, shall request the opinion, in writing, of
the Monetary Board on the monetary implications of the contemplated
action. Such opinion must similarly be requested by all political
subdivisions and instrumentalities of the Government before any credit
operation abroad is undertaken by them.
 29
BANKING LAWS

Whenever the Government, or any of its political subdivisions or

instrumentalities, contemplates borrowing within the Philippines, the
prior opinion of the Monetary Board shall likewise be requested in order
that the Board may render an opinion on the probable effects of the
proposed operation on monetary aggregates, the price level, and the
balance of payments.

In order to assure effective coordination between the economic,

financial and fiscal policies of the government and the monetary, credit
and exchange policies of the Bangko Sentral, the Deputy Governor
designated by the Governor of the Bangko Sentral shall be an ex officio
member of the National Economic and Development Authority Board.

PROHIBITIONS

Prohibitions

The Bangko Sentral shall not acquire shares of any kind or accept them
as coolateral, and shall not participate in the ownership or management
of any enterprise, either directly or indirectly.

The Bangko Sentral shall not engage in development banking or

financing.

TRANSITORY PROVISIONS

Phaseout of fiscal agency functions

Unless circumstances warrant otherwise and approved by the Congress

Oversight Committee, the Bangko Sentral shall within a period of three
(3) years but in no case longer than five (5) years from the approval of
RA 7653, phase out all fiscal agency functions, and transfer the same to
the Department of Finance. [Section 129, RA 7653]

Phaseout of regulatory powers over the operations of finance corporations

and other institutions performing similar functions
 30
BANKING LAWS

The Bangko Sentral shall within a period of five (5) years from the
effectivity of RA 7653 phase out its regulatory powers over finance
companies without quasi-banking functions and other institutions
performing similar functions, the same to be assumed by the Securities
and Exchange Commission. [Section 130, RA 7653]

GENERAL BANKING ACT

Republic Act No. 337, as amended

An act regulating banks and banking institutions and for other purposes
Approved 23 February 1995

IN GENERAL

Rule on bank operations

Only entities duly authorized by the Monetary Board of the Bangko

Sentral may engage in the lending of funds obtained from the public
through the receipt of deposits of any kind and all entities regularly
conducting such operations shall be considered as banking institutions.

Banks or banking institutions

Entities engaged in the lending of funds obtained from the public

through the receipt of deposits of any kind, and all entities regularly
conducting such operation.

Banks or banking institutions must be duly authorized by the Monetary

Board of the Central Bank.

Public shall mean twenty or more lenders.

 31
BANKING LAWS

Quasi-banking functions

“Quasi-banking functions” shall mean borrowing funds, for the

borrower’s own account, through the issuance, endorsement or
acceptance of debt instruments of any kind other than deposits, or
through the issuance of participations, certificates of assignment, or
similar instruments with recourse, trust certificates, or of repurchase
agreements, from twenty or more lenders at any one time, for purposes
of re-lending or purchasing of receivables and other obligations.

However, commercial, industrial, and other non-financial companies,

which borrow funds through any of these means for the limited
purposes of financing their own needs or the needs of their agents or
dealers, shall not be considered as performing quasi-banking functions.

Financial intermediaries

“Financial intermediaries” shall mean persons or entities whose

principal functions include the lending, investing or placement of funds
or evidence of indebtedness or equity deposited with them, acquired by
them or otherwise coursed through them, either for their own account
or for the account of others.

Non-banking financial institutions performing quasi-banking functions

The following entities shall not be considered as banking institutions

but shall be subject to regulation by the Monetary Board:

1. Entities regularly engaged in the lending of funds or purchasing of

receivables or other obligations with funds obtained from the
public through the issuance, endorsement or acceptance of debt
instruments of any kind for their own account, or through the
issuance of certificates of assignment or similar instruments with
recourse, trust certificates, or of repurchase agreements, whether
any of these means of obtaining funds from the public is done on a
regular basis or occasionally.
 32
BANKING LAWS

2. Entities regularly engaged in the lending of funds which receive

deposits occasionally.

3. Trust companies, building and loan associations, and non-stock

savings and loan associations.

These entities will be subject to regulation by the Monetary Board which

may include, but need not be limited to:

1. the imposition of net worth to risk assets ratios;

2. reserve requirements;

3. interest rate ceilings;

4. methods of computation thereof;

5. prescribing charges which may be collected;

6. minimum capitalization; and

7. submission of statistical reports.

Non-bank financial intermediaries

The operations and activities of non-bank financial intermediaries,

except insurance companies, shall be subject to regulation by the
Monetary Board which may include, but need not be limited to, the
imposition of constraints covering the:

1. minimum size of funds received;

2. methods of marketing and distribution;

3. terms and maturities of funds received; and

 33
BANKING LAWS

4. uses of funds.

If such entities are authorized by the Central Bank to perform quasi-

banking functions, they may be further subject to regulation as
discussed below. Note: Sec. 130 of the CB Act phasing out the regulation
of MB over NBFCs not engaged in quasi-banking functions.

Determination of functions

The determination of whether a person or an entity is a) performing

banking or quasi-banking functions; or b) engaged in other types of
financial intermediation shall be decided by the Monetary Board, subject
to judicial review.

Regulation

“Regulation” shall mean the issuance of rules of conduct or the

establishment of modes or standards of operation for uniform
application to all institutions or functions covered, taking into
consideration in determining such coverage 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. In
some instances, these entities may be subject to special examination.

Supervision

“Supervision” shall include not only the issuance of rules but also the
overseeing to ascertain that regulations are complied with, investigating
or examining to determine whether an institution is conducting its
business on a sound financial basis, and inquiring into the solvency and
liquidity of the institution.
 34
BANKING LAWS

Relationship between bank and depositor

Fixed savings and current deposits of money in banks and similar

institutions shall be governed by the provisions concerning simple loan.
In other words, the relationship between the bank and the depositor is
that of a debtor and creditor.

In the case of rent of safety deposit box. The contract is a special kind of
deposit and cannot be characterized as an ordinary contract of lease
because the full and absolute possession and control of the deposit box
is not given to the renters. The prevailing rule is that the relation
between the bank renting out and the renter is that of bailer and bailee
the bailment being for hire and mutual benefiit. [CA Agro-industrial
Dev. Corp. v. CA, 219 SCRA 426 (1983)]

Types of deposits

1. Time Deposit-Interest rate stipulated depending on the number of days.

During this period, the money deposited cannot be withdrawn. The
bank uses this money to lend to others. That is why in these accounts,
the depositor is paid higher rates of interest for the use of the money.

2. Savings deposit-Interest fixed under the fine prints, if one deposits

today, he cannot withdraw the amount not until 60 days later. The bank
can lend out such funds; that is why it pays interests on such deposits.

3. Demand deposit or current accounts- No interest is fixed by the bank

because the depositor can take out his funds any time. It is called
demand deposit because the depositor can withdraw the money
deposited on the very same day when he deposited it. Note: As a
general rule, only commercial banks can accept demand deposits on
checking accounts. By way of exception, savings banks and even rural
banks, are allowed by the CB to accept checking accounts because their
capitalizaition may be large.
 35
BANKING LAWS

Money market transactions

Money market is a market dealing in standardized short-term credit

instruments (involving large amounts) where lenders and borrowers do
not deal directly with each other but through a mediator or dealer in the
open market.

It involves “commercial papers” which are instruments “evidencing

indebtedness of any person or entity… which are issued, endorsed, sold or
transferred or in any manner conveyed to another person or entity, with
or without recourse.”

The fundamental function of the money market devise in its operation is

to match and bring together in a most impersonal manner both the “fund
users” and the “fund suppliers.”

The money market is an “impersonal market” free from personal

considerations. The market mechanism is intended to provide quick
mobility of money and securities.

The General Banking Act discriminates against banks in two aspects

1. Period- Under the Civil Code, a period is presumed to be for the benefit
of both parties. Insofar as banks are concerned, the period is always for
the benefit of the debtor if the bank is the creditor. The debtor can
compel the creditor bank to accept payment of a debt before it is due,
and recover interest deducted in advance.

2. Foreclosure of mortgage-

The general rule is that there is no right of redemption in judicial

foreclosure of mortgage. There is only 90 day equity redemption
period.
 36
BANKING LAWS

The exception is with the banks aside from the 90-day equity
redemption period, banks are required to give a one-year
redemption period.

Alien bank mortgage

An alien bank can bid in a public auction of mortgaged property if such

property was mortgage to it in the course of an ordinary banking
transaction. If the mortgage was not within the normal banking
transaction, it must be prohibited from bidding.

Mortgage loans

Loans against real estate security shall not exceed 70% of the appraised
value of the real estate security, plus 70 %of the appraised value of the
improvements with title to the property being with the mortgagor.

Loans on the security of chattels shall not exceed 50% of the appraised
value of the security.

Classification of banks

1. Commercial banks

2. Thrift banks

a. Savings and mortgage banks

b. Stock savings and loan associations

c. Private development banks

3. Rural banks
 37
BANKING LAWS

Indispensable to the national interest

The banking industry is hereby declared as indispensable to the national

interest and, notwithstanding the provisions of any law to the contrary,
any strike or lockout involving banks, if unsettled after seven (7)
calendar days, shall be reported by the Central Bank to the Preside who
shall immediately certify the same to the appropriate court, government
agency or commission for resolution.

ESTABLISHMENT OF DOMESTIC BANKS

Form of organization

Domestic banking institutions, except building and loan associations,

shall be organized in the form of stock corporations.

No banking institution shall issue no-par value stock.

The Securities and Exchange Commission shall not register the articles
of incorporation of any bank, or any amendment thereto, unless
accompanied by a certificate of authority issued by the Monetary Board,
under its official seal.

At least two thirds of the members of the board of directors of any bank
or banking institution which may be established after the approval of
this Act shall be Filipino citizens.

Requisites for issuance of certificate of authority

Such certificate shall not issue unless the Monetary Board is satisfied
from the evidence submitted to it:

1. That all the requirements of existing laws and regulations to

engage in the business for which the applicant is proposed to be
incorporated have been complied with;
 38
BANKING LAWS

2. That the public interest and economic conditions, both general

and local, justify the authorization; and

3. That the amount of capital, the financing organization, direction

and administration, as well as the integrity and responsibility of
the organizers and administrators reasonably assure the safety of
the interests which the public may entrust to them.

Receipt and disposition of deposits

No bank which may be established and licensed to do business in the

Philippines shall receive deposits, unless incorporated under the laws of
the Republic of the Philippines.

This prohibition, however, shall not apply to branches and agencies of

foreign banks which, at the time of approval of the General Banking Act,
are actually receiving deposits.

After approval of the Act, all deposits so received by such branches and
agencies of foreign bank shall not be invested in any manner outside the
territorial limits of the Republic of the Philippines.

Voting stock requirements

At least seventy percent (70%) of the voting stock of any banking

institution which may be established after the approval of the Act shall
be owned by citizens of the Philippines, except where a new bank is
established as a result of: a) the local incorporation of any of the existing
branches or agencies of foreign banks in the Philippines; or b) the
consolidation of existing banks in any of which there are foreign owned
voting stocks at the time of consolidation.

The Monetary Board may, with the approval of the President, increase
the percentage of foreign-owned voting stocks in any domestic bank
from thirty percent (30%) to forty percent (40%).
 39
BANKING LAWS

The percentage of foreign-owned voting stocks in a bank shall be

determined by the citizenship of the individual stockholders in that
bank. In the case of corporations owning bank shares, the citizenship of
each stockholder in that corporation shall be the basis of computing the
percentage.

Ownership of stocks in banks by corporations

The total voting stocks which any corporation, including its wholly or
majority owned subsidiaries, may own in any bank shall not exceed
thirty percent (30%) of the voting stock of that bank.

In the case of a corporation which is wholly owned, or the majority of

the voting stock of which is owned, by any one person or by persons
related to each other within the third degree of consanguinity or affinity,
that corporation may own not more than twenty percent (20%) of the
voting stock of any bank.

LICENSING OF FOREIGN BANKS

License to conduct business

No foreign bank or banking corporation formed, organized or existing

under any law other than those of the Philippines shall be permitted to
transact business in the Philippines, or maintain by itself or assignee any
suit for the recovery of any debt, claims, or demand whatsoever, until
after it shall have obtained, upon order of the Monetary Board, a license
for that purpose from the Securities and Exchange Commission.

No foreign building and loan association or building and loan association

not formed, organized, or existing under the laws of the Philippines shall
be permitted to transact business in the Philippines.
 40
BANKING LAWS

Requisites for issuance of license

1. Public and economic conditions, both general and local, justify the
issuance of such order.

2. The foreign bank or banking corporation is solvent and in sound

financial condition.

3. A duly appointed agent in the Philippines has been authorized to accept

summons and legal processes.

Investment rights

1. Foreign banking institutions without branches in the Philippines,

including their wholly or majority owned subsidiaries and their holding
companies having majority holding in such foreign banking institutions,
may invest, with prior approval of the Monetary Board, in equities of
local companies engaged in financial allied undertakings. However, they
shall maintain minority participation in such enterprise.

2. With prior approval of the Central Bank, these foreign entities may also
purchase equities in domestic banks, subject to restrictions.

Revocation of license

1. The foreign bank is in imminent danger of insolvency.

2. Its continuance in business will involve probable loss to those

transacting business with it.
 41
BANKING LAWS

CLASSIFICATION OF PRIVATE BANKS

COMMERCIAL BANKING CORPORATIONS AND UNIVERSAL BANKS

Commercial bank

A commercial banking corporation, in addition to the general powers

incident to corporations, shall have all such powers as shall be necessary
to carry on the business of commercial banking:

1. By accepting drafts and issuing letters of credit, by discounting

and negotiating promissory notes, drafts, bills of exchange, and
other evidences of debts;

2. By receiving deposits;

3. By buying and selling foreign exchange and gold or silver bullion;

and

4. By lending money against personal security or against securities

consisting of personal property of mortgages on improved real
estate and the insured improvements thereon.

A commercial bank may also accept or create demand deposits subject

to withdrawal by check.

A commercial bank may offer NOW accounts (special types of savings

deposit which can be withdrawn by means of a Negotiable Order of
Withdrawal and is offered only to natural persons).

A commercial bank may likewise acquire readily marketable bonds and

other debt securities subject to such rules as the Monetary Board may
promulgate.
 42
BANKING LAWS

A commercial bank, finally, may invest to the extent allowed under

applicable law and regulations in equities of allied undertaking, whether
financial or non-financial.

Investment in allied undertakings

Commercial banks, including Government banks and foreign banks with

existing local branches, may invest in equities of allied undertakings.

Equity investments shall not be permitted in non-related activities.

Limitations on investments in allied undertakings:

1. The total investment in equities shall not exceed twenty five

percent (25%) of the net worth of the bank.

2. The equity investment in any one enterprise shall not exceed

fifteen percent (15%) of the net worth of the bank;

3. The total equity investment of the bank in any single enterprise

shall remain a minority holding in that enterprise; and

4. The equity investment in other banks shall be deducted from the

investing bank’s net worth for purposes of computing the
prescribed ratio of net worth to risk assets.

Financial allied undertakings

1. Leasing companies

2. Banks

3. Investment houses

4. Financing companies
 43
BANKING LAWS

5. Credit card operations

6. Financial institutions catering to small and medium scale

enterprises

Non-financial allied undertakings

1. Warehousing companies

2. Storage companies

3. Safe deposit box companies

4. Companies engaged in the management of mutual funds but not in

the mutual funds themselves

5. Management corporations engaged or to be engaged in activity

similar to the engagement of mutual funds

6. Companies engaged in the provision of computer services

7. Insurance agencies

8. Companies engaged in home building and home development

9. Companies providing drying and/or milling facilities for

agricultural crops

Universal bank or expanded commercial banking authority

The Monetary Board may authorize -- to further national development

objectives or support national priority projects -- a commercial bank, a
bank authorized to provide commercial banking services, as well as a
government owned and controlled bank, to operate under an expanded
commercial banking authority.
 44
BANKING LAWS

By virtue of such expanded power, the universal bank may, in addition

to powers authorized for commercial banks:

1. Exercise the power of an Investment House as provided in PD 129;

2. Invest in the equity of a non-allied undertaking; or

3. Own a majority or all of the equity in a financial intermediary

other than a commercial bank or a bank authorized to provide
commercial banking services.

Limitations on exercise of power as investment house

Universal bank may perform the functions of an investment house either

directly OR indirectly through a subsidiary investment house (it cannot
perform such functions both directly and indirectly).

If performed directly, such functions shall be undertaken by a separate

and distinct department in the bank.

If performed indirectly through an investment house, universal bank

may not directly exercise such powers as are exclusively reserved to
investment houses.

Limitations on equity investment of a universal bank

1. The total investment in equities shall not exceed fifty percent (50%) of
the net worth of the bank.

2. The equity investment in any one enterprise whether allied or non-

allied shall not exceed fifteen percent (15%) of the net worth of the
bank.

3. The equity investment of the bank, or of its wholly- or majority-owned

subsidiary, in a single non-allied undertaking shall not exceed thirty five
 45
BANKING LAWS

percent (35%) of the total equity in the enterprise nor shall it exceed
thirty five percent (35%) of the voting stock in that enterprise.

4. The equity investment in other banks shall be deducted from the

investing bank’s net worth for purposes of computing the prescribed
ratio of net worth to risk assets.

Capitalization

Commercial bank - P 2 billion

Universal bank - P 4.5 billion

Ownership in a thrift bank or rural bank

A commercial bank or any bank authorized to provide commercial

banking services, or to operate under an expanded commercial banking
authority may own more than thirty percent (30%) of the voting stock
of a thrift bank or a rural bank up to a majority or all of the equity
thereof.

Subject to the prior approval of the Monetary Board.

Combined capital accounts

The combined capital accounts of each commercial bank shall not be less
than an amount equal to ten percent (10%) of its risk assets

Risk assets is defined as its total assets minus the following assets:

1. Cash on hand;

2. Amounts due from the Central Bank;

 46
BANKING LAWS

3. Evidence of indebtedness of the Philippine Government or Central

Bank or any other evidence of indebtedness fully guaranteed by
the Philippine Government;

4. Loans to the extend covered by hold-out on, or assignment of,

deposits maintained in the lending bank and held in the
Philippines;

5. Loans or acceptances under letters of credit to the extend covered

by marginal deposits; and

6. Other non-risk items which the Monetary Board may, from time to
time, authorize to be deducted from total assets.

Purchase, holding or conveyance of real estate

Any commercial bank may purchase, hold, and convey real estate for the
following purposes:

1. Such as shall be necessary for its immediate accommodation in the

transaction of its business;

2. Such as shall be mortgaged to it in good faith by way of security

for debts;

3. Such as shall be conveyed to it in satisfaction of debts previously

contracted in the course of its dealings; and

4. Such as its shall purchase at sales under judgments, decrees,

mortgages, or trust deeds held by it and such as it shall purchase
to secure debts due to it.

However, no such bank shall hold the possession of any real estate
under mortgage or trust deed, or the title and possession of any real
estate purchased to secure any debt due to it, for a longer period than
five years.
 47
BANKING LAWS

Establishment of branches

Any commercial bank organized under Philippine laws may, with the
prior approval of the Monetary Board, establish branches in the
Philippines or branches and agencies outside the Philippines, and the
bank shall be responsible for all business conducted in such branches to
the same extent and in the same manner as though such business had all
been conducted in the head office.

A bank and its branches shall be treated as a unit.

THRIFT BANKS

Thrift banks

“Thrift banks” shall include savings and mortgage banks, private

development banks, and stock savings and loan associations organized
under existing laws and any banking corporation that may be organized
for the following purposes:

1. Accumulating the savings of depositors and investing them

together with capital loans secured by bonds, mortgages in real
estate and insured improvements thereon, chattel mortgage,
bonds, and other forms of security or in loans for personal and
household finance, whether secured or unsecured, or in financing
for home building and home development, in readily marketable
and debt securities; in commercial papers, and accounts
receivables, drafts, bills of exchange, acceptances or notes arising
out of commercial transactions; and in such other investments
and loans which the Monetary Board will determine as necessary
in the furtherance of national economic objectives;

2. Providing short term working capital, or medium- and long-term

financing to businesses engaged in agriculture, services, industry
and housing; and
 48
BANKING LAWS

3. Providing diversified financial and allied services for its chosen

market and constituencies especially for small and medium
enterprises and individuals.

Scope of authority

Thrift banks may:

1. Accept savings and time deposits;

2. Act as correspondent for other financial institutions;

3. Purchase, hold and convey real estate;

4. Open letters of credit;

5. extend credit facilities to private and government employees;

6. Extend credit against the security of jewelry, precious stones and

similar articles;

7. Accept foreign currency deposits;

8. Invest in equity of allied undertakings;

9. Rediscount papers with the PNB, LBP, DBP, and other GOCCs;

10. Issue domestic letters of credit;

11. Invest in marketable bonds and other debt securities;

12. Grant loans, secured or not secured; and

13. With prior approval of the Monetary Board:

a. Open current or checking accounts;

 49
BANKING LAWS

b. Act as collection agent for government entities;

c. Act as official depository of national agencies and municipal,

city or provincial funds where the bank is located;

d. Issue mortgage and chattel certificates;

e. Engage in quasi-banking and money market operations; and

f. Offer NOW accounts.

Thrift banks may perform services similar to those offered by

commercial banks under an expanded authority when permitted by the
Bangko Sentral ng Pilipinas.

Capitalization

Capitalization may vary according to the location of the head office:

Within Metro Manila - P250 million

Outside Metro Manila - P 40 million

Incentives and exemptions

1. Reserve requirement differential

2. Liberalized branching rules

3. Notices of statement of condition

4. Tax exemptions

5. Exemption from publication requirement

 50
BANKING LAWS

6. Exemption from notarial charges

7. Exemption from registration fees

Equity ownership

At least 40% of the voting stock of a thrift bank shall be owned by

Filipino citizens.

Exception: In case of merger or consolidation of existing Thrift Banks

with foreign holdings, the resulting holding shall not be increased but
may be reduced and, once reduced, shall not be increased thereafter
beyond 60% of the voting stock of the Thrift Bank.

Minors as depositors

Minors in their own rights and in their own names may make deposits
and withdraw the same, and may receive dividends and interests.

If the guardian shall give notice in writing to any thrift bank not to make
payments of deposits, dividends or interest to the minor of whom he is
the guardian, then such payment shall be made only to the guardian.

BUILDING AND LOAN ASSOCIATIONS

Building and loan associations

Building and loan associations are corporations whose capital stock is

required or is permitted to be paid in by the stockholders in regular,
equal periodical payments and whose purpose is:

1. to accumulate the savings of its stockholders;

2. to repay to said stockholders their accumulated savings and

profits upon surrender of their shares;
 51
BANKING LAWS

3. to encourage industry, frugality, and home building among its

stockholders; and

4. to loan its funds, and funds borrowed for the purpose, to

stockholders on the security of unencumbered real estate and
with the pledge of shares of the capital stock owned by such
stockholders as collateral security.

Prohibition

It shall be unlawful for any building and loan association to make any
loan upon property that is suitable for us only as theatre, public hall,
church, convent, school, club, hotel, garage, or other public building.
Monetary Board may grant exemptions in cases of public hall, school,
hotel and other public buildings to facilitate the investment of idle funds.

Investment in bonds

With the approval of the Monetary Board, a building and loan

association may also invest such of its funds as may otherwise remain
idle in bonds and obligations of the Republic of the Philippines or any of
its subdivisions, or GOCCs.

Capital stock

The capital stock of such associations shall be paid in by the

stockholders in regular, equal, periodical payments known as dues, at
such times and in such amounts as shall be provided in their by laws.

The dues on each share of stock subscribed for by a stockholder shall

continue to be paid by the stockholder to the association until the share
has been duly withdrawn, cancelled, or forfeited or until the share has
reached its matured value.
 52
BANKING LAWS

Matured value is when the due paid on each share and the net earnings
thereof, in accordance with the by laws, shall amount to the matured of
the share.

Certificates of stock

Certificates of stock shall be issued to each stockholder upon the

payment of the membership fees and first installment of the dues.

Installment shares v. paid-up shares

While still being paid, the shares are called installment shares. After
they are fully paid, they are called paid-up shares.

Once paid-up, relationship between the association and stockholder is

changed into that of debtor and creditor.

Free shares and pledged shares

Shares which have not been pledged as security for the payment of a
loan shall be called “free” shares,” and shares which have been so
pledged shall be called “pledged shares.”

Surrender of shares

Stockholders may surrender their shares and withdraw from the

association after paying twelve (12) monthly installment of dues upon
giving sixty (60) days’ notice in writing to the board of directors and the
withdrawal value shall be the total sum of the dues paid thereon plus
not less than ninety percent (90%) of all dividends earned by such
shares up to the end of the last preceding fiscal period plus such interest
for the time elapsed since the end of the period as shall be allowed by
the board of directors.
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BANKING LAWS

Stockholders who have not paid twelve (12) monthly installments of

dues may, after giving sixty (60) days’ notice to the board, surrender
their shares and withdraw from the association, and the withdrawal
value shall be the total sum of the due paid thereon plus such dividend
or interest as may be allowed by the board of directors.

RURAL BANKS

Scope of authority

A rural bank may perform any or all of the following services:

1. Extend loans and advances primarily for the purpose of meeting

the normal and credit needs of farmers, fishermen, or farm
families as well as cooperatives, merchants, private and public
employees;

2. Accept savings and time deposits;

3. Ac as correspondent bank of other financial institutions;

4. Rediscount paper with the LBP, DBP, or any other bank, including
its branches and agencies.

5. Act as a collection agent;

6. Offer other banking services as provided in Section 772 of RA 337,

as amended;

7. Extend financial assistance to private and public employees in

accordance with RA 3779, as amended; and

8. With prior approval of the Monetary Board:

a. Accept current or checking accounts;

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BANKING LAWS

b. Accept NOW accounts;

c. Act as trustee over estates or properties of farmers and

merchants;

d. Act as official government depository;

e. Sell domestic drafts; and

f. Invest in allied undertakings.

Rationale

The rationale behind rural banking system is the need to promote

comprehensive rural development with the end in view of the following:

1. A more equitable distribution of opportunities, income and

wealth;

2. A sustained increase of goods and services produced by the nation

for the benefit of the people; and

3. An expanding productivity as a key to raising the quality of life for

all.

This can be achieved by making credit available and readily accessible in

the rural areas.

Capital stock

With the exception of shareholdings of corporations organized primarily

to hold equities in rural banks, and of Filipino-controlled domestic
banks, the capital stock of any rural bank shall be fully-owned and held
by Philippine citizens or entities qualified under Phil. law to own and
hold such capital stock.
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BANKING LAWS

Board

All members of the BOD shall be Filipino citizens.

However, there is no prohibition against any appointive or elective

public official from serving as director, officer, consultant or in any
capacity in the bank.

Incentives

Foreclosure of mortgages exempt from newspaper publication

requirements if the loan, excluding interest due and unpaid, does not
exceed P100,000.

Exempt from payment of all taxes, fees and charges of whatever nautre
and description, except corporate income taxes and local taxes, fees and
charges for aperiod of five years from the date of commencement of
operations.

Free from notarization fees

Free from registration fees and DST in RD.

ACT LIBERALIZING ENTRY OF FOREIGN BANKS

Republic Act No. 7721

An act liberalizing the entry and scope of operations of foreign banks in the
Philippines and for other purposes

Declaration of policy

The State shall:

1. Develop a self-reliant and independent national economy

effectively controlled by Filipinos; and
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BANKING LAWS

2. Encourage, promote and maintain a stable, competitive, efficient

and dynamic banking and financial system.

Pursuant to this policy, the Philippine banking and financial system is

hereby liberalized to create a more competitive environment and
encourage greater foreign participation through increase in ownership
in domestic banks by foreign banks and the entry of new foreign bank
branches.

In allowing increased foreign participation in the financial system, it

shall be the policy of the State that the financial system shall remain
effectively controlled by Filipinos.

Three (3) modes of entry for foreign banks

The Monetary Board may authorize foreign banks to operate in the

Philippine banking system through any of the following modes of entry:

1. by acquiring, purchasing or owning up to sixty percent (60%) of

the voting stock of an existing bank;

2. by investing in up to sixty percent (60%) of the voting stock of a

new banking subsidiary incorporated under Philippine laws; or

3. by establishing branches with full banking authority.

A foreign bank or a Philippine corporation, however, may own up to

sixty percent (60%) of the voting stock of only one domestic bank or
new banking subsidiary.

Guidelines for entry

In approving entry applications of foreign banks, the Monetary Board

shall:
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BANKING LAWS

1. ensure geographic representation and complementation;

2. consider strategic trade and investment relationships between the

Philippines and the country of incorporation of the foreign bank;

3. study the demonstrated capacity, global reputation for financial

innovations and stability in a competitive environment of the
applicant;

4. see to it that reciprocity rights are enjoyed by Philippine banks in

the applicant’s country; and

5. consider willingness to fully share their technology.

Only those among the top one hundred fifty (150) foreign banks in the
world or the top five (5) banks in their country of origin as of the date of
application shall be allowed entry in (b) and (c) of modes of entry.

In approving entry, Monetary Board shall adopt such measures as may

be necessary:

1. to ensure that, at all times, the control of seventy (70%) of the

resources or assets of the entire banking system is held by
domestic banks which are at least majority-owned by Filipinos;

2. prevent a dominant market position by one bank or the

concentration of economic power in one or more financial
institutions, or in corporations, partnerships, groups or
individuals with related interests; and

3. secure the listing in the Philippine Stock Exchange of the shares of

stocks of banking corporations established under (a) and (b)
modes of entry.

To qualify to establish a branch or subsidiary, the foreign bank applicant

must be widely-owned and publicly-listed in its country of origin, unless
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BANKING LAWS

the foreign bank applicant is owned by the government of its country of

origin.

Capital requirements

Locally incorporated subsidiaries shall have the same minimum capital

requirements as domestic banks of the same category.

For foreign bank branches, they shall permanently assign capital of not
less than the U.S. dollar equivalent of P210,000,000.00 at the exchange
rate on the date of effectivity of this law.

The permanently assigned capital shall be inwardly remitted and

converted into Philippine currency.

Branches

A foreign bank shall be entitled to three (3) branches upon remittance of

minimum capital requirement.

A foreign bank may open three (3) additional branches in locations

designated by the Monetary Board by inwardly remitting and converting
into Philippine currency as permanently assigned capital the U.S. dollar
equivalent of P35,000,000.00 per additional branch at the exchange rate
on the date of effectivity of this law.

Total number of branches for each new foreign bank entrant shall not
exceed six (6).

Head office guarantee

The head office of foreign bank branches shall guarantee prompt

payment of all liabilities of its Philippine branches.
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BANKING LAWS

Equal treatment

Foreign banks authorized to operate under the law 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.

These limits include, among others, the single borrower’s limit and
capital to risk asset ratio as well as the capitalization required for
expanded commercial banking activities under the General Banking Act
and other related laws of the Philippines.

OFFSHORE BANKING SYSTEM LAW

Presidential Decree No. 1034

Authorizing the establishment of an offshore banking system in the
Philippines
Approved 30 September 1976

Offshore banking

Offshore banking shall refer to the conduct of banking transactions in

foreign currencies involving the receipt of funds from external sources
and the utilization of such funds in transactions with non-residents or
other offshore banking units.

Offshore banking unit

Offshore banking unit shall mean a branch, subsidiary or affiliate of a

foreign banking corporation which is duly authorized by the Central
Bank to transact offshore banking business in the Philippines.

Deposits

Deposits shall mean funds in foreign currencies which are accepted and
held by an offshore banking unit in the regular course of business, with
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BANKING LAWS

the obligation to return an equivalent amount to the owner thereof, with

or without interest.

Who are qualified to operate an offshore banking unit?

Only banks which are organized under any law other than those of the
Republic of the Philippines, their branches, subsidiaries or affiliates,
shall be qualified to operate offshore banking units in the Philippines.

Local branches of foreign banks already authorized to accept foreign

currency deposits under RA 6426 may opt to apply for authority to
operate an offshore banking unit under PD 1034. However, upon their
receipt of a corresponding certificate of authority to operate as an
offshore banking unit, the license to transact business under RA 6426
shall be deemed automatically withdrawn.

Certificate of authority to operate

The Monetary Board is authorized to issue certificates of authority to

operate offshore banking units.

In issuing such certificate, the Monetary Board shall take into

consideration the applicant’s:

1. Liquidity and solvency position;

2. Net worth and resources;

3. Management;

4. International banking expertise;

5. Contribution to the Philippine economy; and

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BANKING LAWS

6. Other relevant factors such as participation in equity of local

commercial banks and appropriate geographic representation.

The Central Bank is authorized to collect a fee of not less than US

$20,000 upon issuing any certificate of authority to operate and
annually thereafter on the anniversary date of such certificate.

Corporate undertaking

No application to operate as an offshore banking unit shall be

considered unless the applicant shall have first submitted to the Central
Bank a sworn undertaking of its head office or parent or holding
company, duly supported by an appropriate resolution of its board of
directors, that, among other things:

1. It will, on demand, provide the necessary specified currencies to

cover liquidity needs that may arise or other shortfall that its
offshore banking unit may incur;

2. The operations of its offshore banking unit shall be managed

soundly and with prudence;

3. It will train and continually educate a specific number of Filipinos

in international banking and foreign exchange trading with a view
to reducing the number of expatriates;

4. It will provide and maintain in its offshore banking unit net office
funds in the minimum amount of US $ 1,000,000; and

5. It will start operations of its offshore banking unit within 180 days
from receipt of its certificate of authority to operate such unit.
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BANKING LAWS

Transactions of offshore banking units

Transactions of offshore banking units with non-residents or with other

offshore banking units shall be freely allowed, but safeguards will be
established to prevent circumvention of foreign exchange regulations.

Transactions of offshore banking units with residents of the Philippines,

including those with local commercial banks and local branches of
foreign banks authorized to receive foreign currency deposits under RA
6426, shall be subject to applicable law and regulations.

Tax and other incentives

The provisions of any law to the contrary notwithstanding, the

transactions of offshore banking units with non-residents and other
offshore banking units shall be subject to a five percent (5%) tax on the
net income from such transactions which shall be in lieu of all taxes on
the said transactions.

The transactions of offshore banking units with local commercial banks,

including branches of foreign banks that may be authorized by the
Central Bank to transact business with offshore banking units, shall
likewise be subject to the same tax, except net income from such
transactions as may be specified by the Secretary of Finance, upon
recommendation of the Monetary Board, to be subject to the usual
income tax payable by banks.

Any income of non-residents from transactions with said offshore

banking units shall be exempt from any tax.

In the case of transaction with residents (other than other offshore

banking units or local commercial banks including local branches of
foreign banks that may be authorized by the Central Bank to transact
business with offshore banking units), interest income from loans
granted to such residents shall be subject only to a ten percent (10%)
withholding tax as final tax.
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BANKING LAWS

Effect of certain laws

The Usury Law, Uniform Currency Law, and PDIC law shall not apply to
transactions and/or deposits in offshore banking units in the
Philippines.

The provisions of RA 1405 or the Law on Secrecy of Bank Deposits shall

apply to deposits in offshore banking units.

FOREIGN CURRENCY DEPOSIT ACT

Republic Act No. 6426, as amended

An act instituting a foreign currency deposit system in the Philippines and for
other purposes
Approved 04 April 1974

Authority to deposit foreign currencies

Any person, natural or juridical, may deposit with such Philippine banks
in good standing, as may upon application be designated by the Central
Bank for the purpose, foreign currencies which are acceptable as part of
the international reserve.

Exception

Foreign currencies which are required by the Central Bank to be

surrendered in accordance with the provisions of RA 7653 may not be
deposited.

Authority of the banks to accept foreign currency deposits

The banks designated by the Central Bank shall have the authority:

1. To accept deposits and to accept foreign currencies in trust;

2. To issue certificates to evidence such deposits;

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BANKING LAWS

3. To discount said certificates;

4. To accept said deposits as collaterals for loans subject to such

rules and regulations as may be promulgated by the Central Bank;
and

5. To pay interest in foreign currency on such deposits.

Foreign currency cover requirements

Depositary banks shall maintain at all times a one hundred percent

(100%) foreign currency cover for their liabilities, except as the
Monetary Board may otherwise prescribe or allow.

At least fifteen percent (15%) of such cover shall be in the form of

foreign currency deposit with the Central Bank and the balance in the
form of foreign currency loans or securities, which loans or securities
shall be of short term maturities and readily marketable.

Foreign currency cover shall be in the same currency as that of the

corresponding foreign currency deposit liability, unless the Monetary
Board may otherwise prescribe or allow.

The Central Bank may pay interest on the foreign currency deposit, and
if requested, shall exchange the foreign currency notes and coins into
foreign currency instruments drawn on its depositary banks.

Central Bank may exempt from the 15% foreign currency cover in the
form of foreign currency deposit with the Central Bank in cases of
depository banks which, on account of their net worth, resources, past
performance, or other pertinent criteria, have been qualified by the
Monetary Board to function under an expanded foreign currency
deposit system.
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BANKING LAWS

Said banks may also be exempt from the limitations on the maturity
periods for loans and securities subject to prior approval by the Central
Bank.

Withdrawability and transferability of deposits

There shall be no restriction on the withdrawal by the depositor of his

deposit or on the transferability of the same abroad except those arising
from the contract between the depositor and the bank.

Tax exemption

All foreign currency deposits made under RA 6426, as amended, as well

as foreign currency deposits authorized under PD 1304, including
interest and all other income or earnings of such deposits, are hereby
exempted from any and all taxes whatsoever irrespective of whether or
not these deposits are made by residents or non-residents so long as the
deposits are eligible or allowed under the said laws and, in the case of
non-residents, irrespective of whether or not they are engaged in trade
or business in the Philippines.

Secrecy of foreign currency deposits

All foreign currency deposits authorized under RA 6426, as amended by

PD 1305, as well as foreign currency deposits authorized under PD
1034, are hereby declared as and considered of an absolutely
confidential nature and, except upon the written permission of the
depositor, in no instance shall foreign currency deposits be examined,
inquired or looked into by any person, government official, bureau or
entity whether public or private.

Unlike the Law on Secrecy of Banks Deposits Act, there is only one
exception for foreign currency deposits and that is when there is a
written permission from the depositor.
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BANKING LAWS

Exemption from attachment, garnishment and other process

Foreign currency deposits shall be exempt from attachment,

garnishment, or any other order or process of any court, legislative
body, government agency, or any administrative body whatsoever.

Salvacion v. Central Bank of the Philippines

278 SCRA 27

FACTS:

Greg Bartelli, an American tourist, was arrested for committing four

counts of rape and serious illegal detention against Karen Salvacion. Police
recovered from him several dollar checks and a dollar account in the China
Banking Corp. He was, however, able to escape from prison. In a civil case filed
against him, the trial court awarded Salvacion moral, exemplary and
attorney’s fees amounting to almost P1,000,000.00.

Salvacion tried to execute the judgment on the dollar deposit of Bartelli

with the China Banking Corp. but the latter refused arguing that Section 11 of
Central Bank Circular No. 960 exempts foreign currency deposits from
attachment, garnishment, or any other order or process of any court,
legislative body, government agency or any administrative body whatsoever.

Salvacion therefore filed this action for declaratory relief in the Supreme
Court.

ISSUE: Should Section 113 of Central Bank Circular No. 960 and Section 8 of
Republic Act No. 6426, as amended by PD 1246, otherwise known as the
Foreign Currency Deposit Act be made applicable to a foreign transient?

HELD: The provisions of Section 113 of Central Bank Circular No. 960 and PD
No. 1246, insofar as it amends Section 8 of Republic Act No. 6426, are hereby
held to be INAPPLICABLE to this case because of its peculiar circumstances.
Respondents are hereby required to comply with the writ of execution issued
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BANKING LAWS

in the civil case and to release to petitioners the dollar deposit of Bartelli in
such amount as would satisfy the judgment.

RATIO:

Supreme Court ruled that the questioned law makes futile the favorable
judgment and award of damages that Salvacion and her parents fully deserve.
It then proceeded to show that the economic basis for the enactment of RA No.
6426 is not anymore present; and even if it still exists, the questioned law still
denies those entitled to due process of law for being unreasonable and
oppressive. The intention of the law may be good when enacted. The law failed
to anticipate the iniquitous effects producing outright injustice and inequality
such as the case before us.

The SC adopted the comment of the Solicitor General who argued that
the Offshore Banking System and the Foreign Currency Deposit System were
designed to draw deposits from foreign lenders and investors and,
subsequently, to give the latter protection. However, the foreign currency
deposit made by a transient or a tourist is not the kind of deposit encouraged
by PD Nos. 1034 and 1035 and given incentives and protection by said laws
because such depositor stays only for a few days in the country and, therefore,
will maintain his deposit in the bank only for a short time. Considering that
Bartelli is just a tourist or a transient, he is not entitled to the protection of
Section 113 of Central Bank Circular No. 960 and PD No. 1246 against
attachment, garnishment or other court processes.

Further, the SC said: “In fine, the application of the law depends on the
extent of its justice. Eventually, if we rule that the questioned Section 113 of
Central Bank Circular No. 960 which exempts from attachment, garnishment,
or any other order or process of any court, legislative body, government
agency or any administrative body whatsoever, is applicable to a foreign
transient, injustice would result especially to a citizen aggrieved by a foreign
guest like accused Greg Bartelli. This would negate Article 10 of the New Civil
Code which provides that “in case of doubt in the interpretation or application
of laws, it is presumed that the lawmaking body intended right and justice to
prevail.””
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BANKING LAWS

Deposit insurance coverage

The deposits under RA 6426 shall be insured under the provisions of RA

3591, as amended, or the Charter of the Philippine Deposit Insurance
Corporation.

Insurance payment shall be in the same currency in which the insured

deposits are denominated.

ACT CREATING THE PHILIPPINE DEPOSIT INSURANCE CORPORATION

Republic Act No. 3591

An act establishing the Philippine Deposit Insurance Corporation, defining its
powers and duties and for other purposes
22 June 1963

Creation of PDIC

There is hereby created a Philippine Deposit Insurance System which

shall insure the deposits of all banks which are entitled to the benefits of
insurance under RA 3591.

PDIC may also be appointed as receiver of a banking institution.

Deposit

The term “deposit” means the unpaid balance of money or its equivalent
received by a bank in the usual course of business and for which it has
given or is obliged to give credit to a commercial, checking, savings, time
or thrift account or which is evidenced by a passbook, check and/or
certificate of deposit, printed or issue in accordance with Central Bank
rules and regulations and other applicable laws, together with such
other obligations of the bank which, consistent with banking usages and
practices, the Board of Directors shall determine and prescribe by
regulations to be deposit liabilities of the bank.
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BANKING LAWS

Provided that any obligation of a bank which is payable at the office of

the bank located outside of the Philippines shall not be a deposit for any
of the purposes of this Act or included as part of the total deposits or of
insured deposits.

Provided further, that, subject to the approval of the Board of Directors,

any insured bank which is incorporated under the laws of the
Philippines which maintains a branch outside the Philippines may elect
to include for insurance its deposit obligations payable only at such
branch.

Insured deposit

The term “insured deposit” means the net amount due to any depositor
for deposits in an insured bank (after deducting offsets) less any part
thereof which is in excess of one hundred thousand pesos (P100,000).
Therefore, the maximum amount of insured deposit for every depositor
is only P100,000.

All these types of deposits are covered: demand, savings and time
deposits; if a depositor has all three types of accounts, he can only
recover up to P100,000. He is considered as one depositor.

In determining such amount due to any depositor, there shall be added

together all deposits in the bank maintained in the same capacity and
the same right for his benefit either in his own name or in the name of
others. Banks and its branches considered as one unit.

The provisions of any law to the contrary notwithstanding, an

owner/holder of any negotiable certificate of deposit shall be recognized
as a depositor entitled to the rights provided in this Act unless his name
is registered as owner/holder thereof in the books of the issuing bank.
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BANKING LAWS

Insurance of deposits in foreign currency

Deposit obligations in foreign currency of any insured bank are likewise

insured.

Deposit insurance coverage and payment for insured deposits

maintained in foreign currencies in a closed insured bank shall be
determined in accordance with the following rules:

1. The deposit in foreign currency shall be converted into its

equivalent amount in Philippine pesos at the interbank rate
obtaining on the date the bank was closed or on insolvency, and
the insurance coverage shall extend to such computed amount,
but in no case to exceed P40,000 for each depositor; and

2. The liability of PDIC to each depositor shall be payable in

Philippine pesos in the amount of insurance coverage as
computed above.

Trust funds

The term means funds held by an insured bank in a fiduciary capacity

and include, without being limited to, funds as trustee, executor,
administrator, guardian or agent.

Trust funds are not considered as insured deposits.

Deposit insurance coverage

The deposit liabilities of any bank or banking institution, which is

engaged in the business of receiving deposits, shall be insured with the
PDIC.

Coverage is compulsory.
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BANKING LAWS

Termination of insured status

Two instances: when it fails or refuses to pay assessment and when it

becomes insolvent.

Should any bank fail or refuse to pay any assessment required to be paid
by such bank, and should the bank not correct such failure or refusal
within 30 days after written notice has been given by the PDIC, the
insured status of such bank shall be terminated by the Board of
Directors.

The bank shall give written notice of such termination to each of the
depositors and the PDIC shall publish the notice of the termination of
the insured status of the bank.

After the termination of the insured status of the bank, deposits of each
depositor in the bank, less all subsequent withdrawals from any
deposits of such depositor, shall continue to be insured for a period of
90 days.

Unsafe or unsound practices

These refer to any action or lack of action which is contrary to generally

accepted standards of prudent operation, the possible consequences of
which, if continued, would result in abnormal risk of loss or damage to a
bank, depositors and its shareholders or even the depletion of the
Insurance Fund administered by the PDIC.

Cease and desist order (CDO)

A cease and desist order shall refer to the Order issued by PDIC, through
its Board of Directors, to a member insured bank, or its directors or
agents to correct (a) unsafe or unsound practices in conducting the
business of the bank, (b) violations of any law or regulation to which the
insured bank is subject, or (c) violations of the provisions of RA 3591, as
amended or any order, rule or instruction issued by the PDIC or any
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BANKING LAWS

written condition imposed by PDIC in connection with any transaction

with or grant by the PDIC.

The object of the CDO is to protect depositors and the PDIC against
existing or potential risk exposures from said practices or violations.

Payment of insured deposit

An insured bank shall be deemed closed on account of insolvency when

ordered closed by the Monetary Board.

Whenever an insured bank shall have been closed on account of

insolvency, payment of insured deposits in such bank shall be made by
PDIC as soon as possible either (1) by cash or (2) making available to
each depositor a transferred deposit in another insured bank in an
amount equal to the insured deposit of such depositor.

Proof of claims may be required by PDIC before payment. If it is not

satisfied, PDIC may require the final determination of a court of
competent jurisdiction before paying such claim.

Depositor shall retain his claim against the bank for any uninsured
portion of his deposit.

Bar of claim by depositor

If, after the PDIC shall have given at least three months’ notice to the
depositor by mailing a copy thereof to his last known address appearing
on the records of the closed bank, the depositor in the closed bank shall
fail to file a claim for his insured deposit from the PDIC within eighteen
(18) months after the Monetary Board shall have ordered the closure of
said bank, all rights of the depositor against the PDIC with respect to the
insured deposit shall be barred, and all rights of the depositor against
the closed bank and its shareholders or the receivership estate to which
the PDIC may have become subrogated, shall thereupon revert to the
depositor.
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BANKING LAWS

Provided, that the claimant shall enforce his duly filed claim against the
PDIC within one year after the eighteen-month period heretofore
mentioned.

Subrogation

The PDIC, upon payment, shall be subrogated to all rights of the

depositor against the closed bank to the extent of such payment.

Payments made by PDIC shall be considered as a preferred credit similar

to taxes.

Discharge of the PDIC

The PDIC shall be discharged from its obligation to a depositor upon

payment of an insured deposit by itself or upon payment of a
transferred deposit to any person by the new bank or by an insured
bank in which a transferred deposit has been made available.

Other powers of PDIC

1. Provide financial assistance to an insured bank in danger of closing.

2. Borrow from the Central Bank and from any bank designated as
depository or fiscal agent of the Philippine Government.

3. Issue bonds, debentures and other obligations with the approval of the
President of the Philippines.

4. Act as receiver of any banking corporation.

Receiver

Receiver includes a receiver, commission, person, or other agency

charged by law with the duty to take charge of the assets and liabilities
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BANKING LAWS

of a bank which has been forbidden from doing business in the

Philippines, as well as the duty to gather, preserve, and administer such
assets and liabilities for the benefit of the depositors and creditors of
said bank, and to continue into liquidation whenever authorized under
RA 3591, as amended, or other laws, and to dispose of the assets and to
wind up the affairs of such bank.

THE TRUTH IN LENDING ACT

Republic Act No. 3765

An act to require the disclosure of finance charges in connection with
extensions of credit
Approved 22 June 1963

Declaration of policy

It is hereby declared to be the policy of the State to protect its citizens

from a lack of awareness of the true cost of credit to the user by assuring
a full disclosure of such cost with a view of preventing the uninformed
use of credit to the detriment of the national economy.

Finance charge

“Finance charge” includes interest, fees, service charges discounts, and

such other charges incident to the extension of credit.

Credit

“Credit” means any loan, mortgage, deed of trust, advance, or discount;

any conditional sales contract; any contract to sell, or sale or contract of
sale of property or services, either for present or future delivery, under
which part or all of the price is payable subsequent to the making of
such sale or contract; any rental purchase contract; any contract or
arrangement for the hire, bailment, or leasing of property; any option,
demand, lien, pledge of other claim against, or for the delivery of,
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BANKING LAWS

property or money; any purchase, or other acquisition of, or any credit

upon the security of, any obligation or claim arising out of any of the
foregoing; and any transaction or series of transactions having a similar
purpose or effect.

Creditor

“Creditor” means any person engaged in the business of extending credit

(including any person who, as a regular business practice, makes loans
or sells or rents property or services on a time, credit, or installment
basis, either as principal or as agent) who requires as an incident to the
extension of credit the payment of a finance charge.

Disclosure of finance charges

Any creditor shall furnish to each person to whom credit is extended,

prior to the consummation of transaction, a clear statement in writing
setting forth the following information:

1. The cash price or delivered price of the property or service to be

acquired;

2. The amounts, if any, to be credited as down payment and/or trade

in;

3. The difference between the amounts set forth under clauses (1)
and (2);

4. the charges, individually itemized, which are paid or to be paid by

such person in connection with the transaction but which are not
incident to the extension of credit;

5. The total amount to be financed;

6. The finance charge expressed in terms of pesos and centavos; and

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BANKING LAWS

7. The percentage that the finance charge bears to the total amount
to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.

Penalty for failure to disclose prescribed information

Any creditor who, in connection with any credit transaction, fails to

disclose to any person any information in violation of Republic Act No.
3765 or any regulation issued pursuant thereto shall be liable to such
person in the amount of P100 or in an amount equal to twice the finance
charge required by such creditor in connection with such transaction,
whichever is greater, except that such liability shall not exceed P2000
on any credit transaction.

Action to recover such penalty

Action to recover such penalty may be brought by such person within

one year from the date of occurrence of the violation in any court of
competent jurisdiction.

In any such action in which any person is entitled to a recovery, the

creditor shall be liable for reasonable attorney’s fees and court costs as
determined by the court.

Effect of non-disclosure on contract or transaction

It shall not affect the validity or enforceability of any contract or

transaction.

Willful violation of the law

Any person who willfully violates any provision of this Act or any
regulation extended thereto shall be fined by not less than P1000 nor
more than P5000, or imprisonment for not less than six (6) months nor
more than one year, or both.
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Consolidated Bank and Trust Corporation v. Court of Appeals

G.R. No. 91494, 14 July 1995

Banks are allowed to collect handling charges on loans over P500,000

with a maturity of 730 days or less. However, in the case at bar, Consolidated
Bank was not allowed to collect from the private respondents handling
charges because it failed to conform to the Truth in Lending Act.

All banks and non-bank financial intermediaries authorized to engage in

quasi-banking functions are required to strictly adhere to the provisions of
Republic Act No. 3765, otherwise known as the Truth in Lending Act, and shall
make the true and effective cost of borrowing an integral part of every loan
contract. The promissory notes signed by private respondents do not contain
any stipulation on the payment of handling charges. Petitioner bank, therefore,
cannot charge private respondent such handling charges.

International Harvester Macleod, Inc. v. Medina

G.R. No. 33623, 22 March 1990

Mariano Medina, Jr. purchase on installment 24 truck engines from

International Harvester Macleod, Inc. (IHMI). The latter imposed and collected
the total sum of P325,596 as finance charges on the installment sales as
evidenced by a Retail Notes Analysis and covering transmittal letters, which
were prepared by IHMI, delivered to, and signed by Medina. In the Retail Notes
Analysis, IHMI used the works “Finance Income Unearned,” “Finance Rate,”
“Rate per year,” “Total Amount Finance,” and “Date Finance Begun,” to denote
certain entries therein.

The trial court ruled that IHMI imposed and collected the amount of
P325,596 purely as financing charges and this is conclusive of the fact that it
engaged in the business of a financing company without authority from the
Securities and Exchange Commission in gross violation of Republic Act No.
5980 or the Finance Company Act.

The Supreme Court reversed, ruling that IHMI is not engaged in the
business of a financing company.
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Evidently, the financing transactions that is regulated by Republic Act

No. 5980 involves the buying, discounting or factoring of promissory notes
and sales on credit or installment. IHMI did not purchase from itself the Retail
Notes Analysis executed by Medina. IHMI only extended credit to Medina by
allowing him to pay for the 24 truck engines in installment. While the
increased price of the sale included a “financing charge,” that charge was
simply another name for the interest to be paid by the installment buyer on
the deferred payment of the purchase price of the vehicles sold and delivered
to him by IHMI.

The use of the words “finance charge,” “financing,” or “finance

operation” in the documents prepared and letters sent by IHMI to Medina was
in compliance with the Truth in Lending Act which requires a creditor (or
seller) to fully disclose to the debtor (or buyer) the true cost of credit “with a
view of preventing the uninformed use of credit to the detriment of the
national economy.”

IHMI used the word “finance charge” instead of “interest” in the Retail
Notes Analysis which it delivered to Medina because that is the term used in
the Truth in Lending Act.

IHMI correctly pointed out that its transaction with Medina differs from
a financing transaction under Republic Act No. 5980 in that there were only
two parties in its transaction with Medina, namely: IHMI and Medina; while in
a financing transaction under Republic Act No. 5980, there are three parties
involved, namely: (1) the installment buyer; (2) the seller; and (3) the
financing company. The buyer executes a note or notes for the unpaid balance
of the price of the thing purchased by him on installment. The seller assigns
the notes or discounts them with a financing company which is subrogated in
the place of the seller as creditor of the installment buyer.

The transaction between IHMI and Medina did not involve any
discounting, factoring or assignment of IHMI’s credit against Medina to a
finance company. The transaction was bilateral, not trilateral. No financing
company stepped into the shoes of IHMI as assignee or purchaser of IHMI’s
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credit against Medina. Medina himself, not a financing company, paid IHMI for
the truck engines. Medina made his installment payments or amortization to
IHMI and not to a financing company.

Since IHMI’s business of selling trucks in installment is not the business

of a financing company under Republic Act No. 5980, it did not need SEC
authorization to engage in it.

LAW ON SECRECY OF BANK DEPOSITS

Republic Act No. 1405, as amended

An act prohibiting disclosure of or inquiry into, deposits with any banking
institution and providing penalty therefor

Policy of the law

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. [Section 1, RA 1405]

General rule

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. [Section 2, RA 1405]

It shall be unlawful for any official or employee of a bank to disclose to

any person, other than those mentioned in Section 2 hereof, any
information concerning said deposits. [Section 3, RA 1405]
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Exceptions

1. upon written permission of the depositor, including:

a. in determining estate of a decedent; and

b. tax compromise cases;

2. In cases of impeachment;

3. Upon order of a competent court in cases of bribery or dereliction of

duty of public officials;

4. In cases where the money deposited or invested is the subject matter of

the litigation; and

5. Cases of unexplained wealth under Republic Act No. 3019 or the Anti-
Graft and Corrupt Practices Act.

Penalty for violation of law

Any violation of this law will subject offender upon conviction to an

imprisonment of not more than five (5) years or a fine of not more than
twenty thousand pesos (P20,000) or both, in the discretion of the court.
[Section 5, RA 1405]

Tatalon Barrio Council v. Chief Accountant, et. al.

GR No. 18360, 31 January 1963

In this case, the Supreme Court ruled that savings and current accounts are
privileged documents which fall within the protection of Republic Act No.
1405, and their disclosure can only be justified under any of the cases
enumerated in Section 2 of the Act, which do not include the prosecution of
criminal actions for violation of the provisions of the Anti-Graft and Corrupt
Practices Act and of Article 216 of the Revised Penal Code. This has since been
overturned by the case of PNB v. Gancayco.
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Philippine National Bank v. Gancayco

GR No. 18343, 30 September 1965

FACTS:

Emilio Gancayco and Florentino Flor, as special prosecutors of the

Department of Justice, required the Philippine National Bank to produce at a
hearing the records of the bank deposits of Ernesto Jimenez, former
administrator of the Agricultural Credit and Cooperative Administration, who
was then under investigation for unexplained wealth.

PNB refused to disclose his bank deposits, invoking Section 2 of

Republic Act No. 1405. On the other hand, the prosecutors cited the Anti-Graft
and Corrupt Practices Act, particularly Section 8 therewith, to wit:

“Section 8. Dismissal due to unexplained wealth. - If in accordance

with the provisions of RA 1379, a public official has been found to
have acquired during his incumbency, whether in his name or in
the name of other persons, an amount of property and/or money
manifestly out of proportion to his salary and to his other lawful
income, that fact shall be a ground for dismissal or removal.
Properties in the name of the spouse and unmarried children of
such public official, may be taken into consideration, when their
acquisition through legitimate means cannot be satisfactorily
shown. Bank deposits shall be taken into consideration in the
enforcement of this section, notwithstanding any provision of law to
the contrary.”

PNB then filed an action for declaratory judgment in the CFI of Manila
which ruled that Section 8 of the Anti-Graft and Corrupt Practices Act clearly
intended to provide an additional ground for the examination of bank
deposits. Hence, this appeal.

ISSUE: Whether or not a bank can be compelled to disclose the records of

accounts of a depositor who is under investigation for unexplained wealth?
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HELD: Yes. Republic Act No. 3019 provided another exception to Section 2 of
Republic Act No. 1405.

RATIO:

No reconciliation is possible between Republic Act No. 1405 and

Republic Act No. 3019 as the two laws are so repugnant to each other. Thus,
while Section 2 of Republic Act No. 1405 provides that bank deposits are
“absolutely confidential … and, therefore, may not be examined, inquired or
looked into,” except in those cases enumerated therein, Section 8 of Republic
Act No. 3019 (Anti-graft law) directs in mandatory terms that bank deposits
“shall be taken into consideration in the enforcement of this section,
notwithstanding any provision of law to the contrary.” The only conclusion
possible is that Section 8 of the Anti-Graft Law is intended to amend Section 2
of Republic Act No. 1405 by providing an additional exception to the rule
against the disclosure of bank deposits.

With regard to the claim that disclosure would be contrary to the policy
making bank deposits confidential, it is enough to point out that while Section
2 of Republic Act No. 1405 declares bank deposits to be “absolutely
confidential,” it nevertheless allows such disclosure in the following instances:
(1) Upon written permission of the depositor; (2) In cases of impeachment;
(3) Upon order of a competent court in cases of bribery or dereliction of duty
of public officials; (4) In cases where the money deposited is the subject of the
litigation.

Cases of unexplained wealth are similar to cases of bribery or dereliction

of duty and no reason is seen why these two classes of cases cannot be
excepted from the rule making bank deposits confidential. The policy as to one
cannot be different from the policy as to the other. This policy expresses the
notion that a public office is a public trust and any person who enters upon its
discharge does so with the full knowledge that his life, so far as relevant to his
duty, is open to public scrutiny.
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Banco Filipino Savings and Mortgage Bank v. Purisima

GR No. 56429, 28 May 1988

The Bureau of Internal Revenue accused Customs special agent Manuel

Caturla before the Tanodbayan of having illegal acquired property manifestly
out of proportion to his salary and other lawful income. During the
preliminary investigation, the Tanodbayan issued a subpoena duces tecum to
the Banco Filipino Savings and Mortgage Bank, commanding its representative
to appear at a specified time at the Office of the Tanodbayan and furnish the
latter with duly certified copies of the records in all its branches and extension
offices of the loans, savings and time deposits and other banking transactions,
in the names of Caturla, his wife, Purita, their children, and/or Pedro Escuyos.

Caturla moved to quash the subpoena for violating Sections 2 and 3 of

RA 1405 which was denied by the Tanodbayan. In fact, the Tanodbayan issued
another subpoena which expanded its scope including the production of bank
records not only of the persons enumerated above but of additional persons
and entities as well.

The Banco Filipino filed an action for declaratory relief with the CFI of
Manila which was denied by the lower court. Thus this special civil action of
certiorari in the SC.

The issue here is whether or not the Law on Secrecy of Bank Deposits
precludes production by subpoena duces tecum of bank records of transactions
by or in the names of the wife, children and friends of a special agent of the
Bureau of Customs accused before the Tanodbayan of having allegedly
acquired property manifestly out of proportion to his salary and other lawful
income in violation of RA 3019?

The Supreme Court ruled in the negative.

In PNB v. Gancayco, we ruled that: “while Section 2 of Republic Act No.

1405 provides that bank deposits are “absolutely confidential … and, therefore,
may not be examined, inquired or looked into,” except in those cases enumerated
therein, Section 8 of Republic Act No. 3019 (Anti-graft law) directs in mandatory
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terms that bank deposits “shall be taken into consideration in the enforcement of
this section, notwithstanding any provision of law to the contrary.” The only
conclusion possible is that Section 8 of the Anti-Graft Law is intended to amend
Section 2 of Republic Act No. 1405 by providing an additional exception to the
rule against the disclosure of bank deposits.”

The inquiry into illegally acquired property - or property not

legitimately acquired - extends to cases where such property is concealed by
being held by or recorded in the name of other persons. This proposition is
made clear by RA 3019 which quite categorically states that the term
“legitimately acquired property of a public officer or employee shall not
include … property unlawfully acquired by the respondent, but its ownership
is concealed by its being recorded in the name of, of held by, respondent’s
spouse, ascendants, descendants, relatives or any other persons.

To sustain the petitioner’s theory, and restrict the inquiry only to

property held by or in the name of the government official or employee, or his
spouse and unmarried children is unwarranted in the light of the provisions of
the statutes in question, and would make available to persons in government
who illegally acquire property an easy and fool-proof means of evading
investigation and prosecution; all they have to do would be to simply place the
property in the possession or name of persons other than their spouse and
unmarried children. This is an absurdity that we will not ascribe to the
lawmakers.

Philippine Commercial & Industrial Bank, et. al. v. Court of Appeals, et. al.
GR no. 84526, 28 January 1991

A group of laborers obtained a favorable judgment against the

Marinduque Mining and Industrial Corporation for the payment of backwages
amounting to P205,853 before the National Labor Relations Commission. A
writ of execution was issued and the Deputy Sheriff served the writ, but it was
unsatisfied. The sheriff prepared on his own a Notice of Garnishment
addressed to six banks in Bacolod City, including petitioner PCIB, directing the
bank concerned to issue a check in satisfaction of the judgment.
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While the in house lawyer of the Corporation warned the PCIB to

withhold any release of its deposit with the bank, the bank issued a manager’s
check in the amount of P37,466 which was the exact balance of the private
respondent’s account as of that day. The said check was also encashed by the
sheriff the next day.

Marinduque Mining thus filed a complaint before the RTC of Manila

against PCIB and the deputy sheriff, alleging that its current deposit with the
petitioner bank was levied upon, garnished, and with undue haste unlawfully
allowed to be withdrawn, and notwithstanding the alleged unauthorized
disclosure of the said current deposit and unlawful release thereof, the latter
have failed and refused to restore the amount of P37,466 to the former’s
account despite repeated demands.

Trial court rendered judgment in favor of Marinduque Mining

Corporation. On appeal, the Court of Appeals initially reversed the trial court’s
order but later affirmed it. Thus, this petition to the SC.

The issue is whether or not the petitioners violated RA 1405, otherwise

known as the Secrecy of Bank Deposits Act, when they allowed the sheriff to
garnish the deposit of Marinduque Mining Corporation? SC held no.

The SC first ruled that the release of the deposit by the bank was not
done in undue and indecent haste. We find the immediate release of the funds
by the petitioner bank on the strength of the notice of garnishment and writ of
execution, whose issuance, absent any patent defect, enjoys the presumption
of regularity.

The SC likewise did not find any violation whatsoever by the petitioners
of RA 1405, otherwise known as the Secrecy of Bank Deposits Act. The Court,
in China Banking Corporation v. Ortega, had the occasion to dispose of this
issue when it stated, to wit:

“It is clear from the discussion of the conference committee report

on Senate Bill No. 351 and House Bill No. 3977, which later became
Republic Act No. 1405, that the prohibition against examination of
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or inquiry into a bank deposit under Republic Act No. 1405 does not
preclude its being garnished to insure satisfaction of a judgment.
Indeed, there is no real inquiry in such a case, and if existence of the
deposit is disclosed, the disclosure is purely incidental to the
execution process. It is hard to conceive that it was ever within the
intention of Congress to enable debtors to evade payment of their
just debts, even if ordered by the Court, through the expedient of
converting their assets into cash and depositing the same in a bank.”

Since there is no evidence that the petitioners themselves divulged the

information that the private respondent had an account with the petitioner
bank and it is undisputed that the said account was properly the object of the
notice of garnishment and writ of execution carried out by the deputy sheriff, a
duly authorized officer of the court, we cannot therefore hold the petitioners
liable under RA 1405.

Mellon Bank v. Magsino et. al.

GR No. 71479, 18 October 1990

This case involves the erroneous transfer of US $1,000,000 to Victoria

Javier instead of US $1,000 only. Dolores Ventosa requested the transfer of
$1000 from the First National Bank of West Virginia, USA to Victoria Javier in
Manila through the Prudential Bank. Accordingly, the First National Bank
requested the petitioner, Mellon Bank, to effect the transfer. Unfortunately, the
wire sent by Mellon Bank to Manufacturers Hanover Bank, a correspondent of
Prudential Bank, indicated the amount transferred as “US $1,000,000.00”
instead of US $1,000.00. Hence, Manufacturers Hanover Bank transferred one
million dollars less bank charges of $6.30 to the Prudential Bank for the
account of Victoria Javier.

Javier opened a new dollar account in Prudential Bank and deposited

$999,943. Immediately, thereafter, Javier and her husband made withdrawals
from the account, deposited them in several banks only to withdraw them
later in an apparent plan to conceal, launder and dissipate the erroneously
sent amount. One of the things they bought was real property in California,
USA which was the subject of an action for recovery by Mellon Bank. Later, it
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filed a case in the Philippines for the recovery of the whole amount, including
the purchase price of the real property located in the US.

Among other things, private respondents raised the issue of whether or

not, by virtue of the principle of election of remedies, an action filed in
California, USA, to recover real property located therein and to constitute a
constructive trust on said property precludes the filing in our jurisdiction of
an action to recover the purchase price of said real property. SC ruled that the
filing of a recovery suit in the US does not preclude the filing of an action in the
Philippines for the recovery of the purchase price.

With regard to our subject matter, Erlinda Baylosis of the Philippine

Veteran’s Bank and Pilologo Red, Jr. of Hongkong and Shanghai Banking
Corporation were required to give testimonies with regard to the deposits and
checks issued by the private respondents Javier, et. al.. These testimonies were
questioned for being immaterial and irrelevant as well as covered by RA 1405
on confidentiality.

SC said: Private respondents’ protestations that to allow the questioned

testimonies to remain on record would be in violation of the provisions of RA
1405 on the secrecy of bank deposits is unfounded. Section 2 of said law
allows the disclosure of bank deposits in cases where the money deposited is
the subject matter of the litigation. Inasmuch as the civil case is aimed at
recovering the amount converted by the Javiers for their own benefit,
necessarily, an inquiry into the whereabouts of the illegally acquired amount
extends to whatever is concealed by being held or recorded in the name of
persons other than the one responsible for the illegal acquisition.

NON-BANK FINANCIAL INTERMEDIARIES

NON-BANK FINANCIAL INTERMEDIARIES

1. The Investment House Law

Pres. Decree 129
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2. Investment Company Act

Republic Act No. 2629

3. Financing Company Act

Republic Act No. 5580, as amended

4. Pawnshops
Pres. Decree No. 114

5. Trust Corporations
Chapter VII, General Banking Act

THE INVESTMENT HOUSES LAW

Presidential Decree No. 129

Governing the establishment, operation and regulation of Investment Houses
15 February 1973

Investment houses

An investment house is any enterprise which engages in the

underwriting of securities of other corporations.

Under its Rules and Regulations, an investment house is defined an “any

enterprise which engages or purports to engage, whether regularly or
on an isolated basis, in the underwriting of securities of another person
or enterprise, including securities of the Government and its
instrumentalities.

Underwriting

Underwriting is the act or process of guaranteeing the distribution and

sale within the Philippines of securities of any kind issued by another
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corporation. The distribution and sale may be on public or private

placement basis.

Private placement

Refers to the underwritten sale of securities to less than 20 persons or

enterprises.

Public placement

Refers to the underwritten sale of securities to at least 20 persons or

enterprises.

Organization and citizenship requirements

Investment Houses shall be organized in the form of stock corporations.

At least forty percent (40%) of the voting stock of any Investment House
shall be owned by citizens of the Philippines.

In determining the percentage of foreign-owned voting stocks in

Investment Houses, the basis for the computation shall be the
citizenship of each stockholder, and, if the stockholder is a corporation,
the citizenship of the individual stockholders holding voting rights in
that corporation.

In approving foreign equity applications in Investment Houses, the SEC

shall approve such applications only if the same or similar rights are
enjoyed by Philippine nationals in the applicant’s country.

Foreign nationals may become members of the board of directors to the

extent of the foreign participation in the equity of said enterprise.
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Capital requirements

In the case of newly-organized Investment Houses, the minimum paid-in

capital shall be three hundred million pesos (P300,000,000).

The Monetary Board may prescribe a higher minimum capitalization in

order to promote and ensure the stability of the Philippine capital
market and the competitiveness of the investment house industry in line
with the national economic goals.

Requirements for registration

The Securities and Exchange Commission shall not register the articles
of incorporation of any Investment House, or any amendment thereto,
unless it is satisfied from the evidence submitted to it:

a. That all the requirements of the PD 129 and of existing laws or

regulations to engage in the business have been complied with;

b. That the proposed enterprise will not be in conflict with public

interest and economic growth; and

c. That the amount of capital, the proposed organization, direction

and administration, as well as the integrity, experience and
expertise of the organizers and the proposed managerial staff,
provide reasonable assurance that the enterprise will be
conducted with financial prudence.

Prohibition

No Investment House shall engage in banking operations as defined in

Section 2 of Republic Act No. 337, as amended.
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Powers of investment houses

In addition to the powers granted to corporations in general, an

Investment House is authorized to do the following:

1. Arrange to distribute on a guaranteed basis securities of other

corporations and of the Government or its instrumentalities.

2. Participate in a syndicate undertaking to purchase and sell,

distribute or arrange to distribute on a guaranteed basis securities
of other corporations and of the Government or its
instrumentalities.

3. Arrange to distribute or participate in a syndicate undertaking to

purchase and sell on a best-efforts basis securities of other
corporations and of the Government or its instrumentalities.

4. Participate as soliciting dealer or selling group member in tender

offers, block sales, or exchange offering of securities; deal in
options, right or warrants relating to securities and such other
powers which a dealer may exercise under the Securities Act.

5. Promote, sponsor, or otherwise assist and implement ventures,

projects and programs that contribute to the economy’s
development.

6. Act as financial consultant, investment adviser, or broker.

7. Act as portfolio manager and/or financial agent.

8. Subject to prior approval by the Monetary Board, the provisions of

Chapter IV of the Central Bank Charter, and such rules and
regulations as may be issued by the Monetary Board, engage in
foreign exchange operations.
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9. Act as trustee of a trust fund or trust property, subject to the

provisions of the General Banking Act.

Conversion into a commercial bank

An Investment House may be converted into a commercial bank

authorized to operate under an expanded commercial banking
authority, subject to applicable laws and regulations and with prior
approval of the Monetary Board.

Central Bank regulatory powers

Investment Houses shall be subject to such regulations of the Central

Bank on non-bank financial intermediaries as may be promulgated.

The regulations which may include, but need not be limited to a)

minimum size of fund acceptance or receipt, b) methods of marketing
and distribution, c) terms of placement and maturities, and d) uses of
funds may be modified by the Monetary Board insofar as they apply to
Investment Houses.

Quasi-banking powers

The Monetary Board may, at its discretion, determine whether

Investment Houses may be permitted to perform quasi-banking
functions.

If the Monetary Board decides to permit Investment Houses to engage in

quasi-banking functions, the Board may require as a condition
precedent the obtaining of a certificate of authority for the purpose from
the Monetary Board.

Whenever the Monetary Board authorizes an Investment House to

engage in quasi-banking functions, it may subject said Investment House
to further regulations, which may include but need not necessarily be
limited to a) liquidity reserve requirements; b) capital-to-risk assets
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BANKING LAWS

ratios; c) interest rate ceilings; and d) such other constraints as the

Board may deem necessary.

Dealer or broker

An Investment House may engage in the business of a dealer or a broker

under the Securities Act without obtaining a separate license for the
purpose.

Use of the term “Investment House”

No person, association, partnership or corporation other than those

duly licensed as an Investment House shall advertise or hold itself out as
being engaged in the business of an Investment House.

INVESTMENT COMPANY ACT

Republic Act No. 2629

Approved 18 June 1960

Investment company

Any issuer which is or holds itself out as being engaged primarily in the
business of investing, reinvesting, or trading in securities.

Nature and purpose

Investment companies are financial institutions that raise funds by

selling their own issues of securities to individual investors. The funds
obtained will be used to invest in securities of other enterprises.

The objective of an investment company is to provide individual

investors with safe and profitable use of their savings and to relieve
them of the burden of direct responsibility of managing their own
savings.
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Types of investment companies

1. Open-end company - also called mutual funds

2. Closed-end company

Powers and functions

1. Offer for sale, sell, or deliver after sale, within the Philippines, any
security or any interest in any security, whether the issuer of such
security is the investment company or another person.

2. Purchase, redeem, retire, or otherwise acquire or attempt to acquire,

within the Philippines, any security, or any interest in any security,
whether the issuer of such security is such investment company or
another person.

Security

Any note, stock, treasury stock, bond, debenture, evidence of

indebtedness, certificate of interest or participation in any profit-sharing
agreement, collateral trust certificate, pre-organization certificate or
subscription, investment contract, voting trust certificate, certificate of
deposit for a security, fractional undivided interest in oil, gas, or other
mineral rights, or, in general, any interest or instrument commonly
known as a “security” or any certificate of interest or participation in,
temporary or interim certificate for, receipt for, guarantee of, or warrant
or right to subscribe to or purchase, any of the foregoing. (Section 3(bb),
RA 2629).

Note that there is an expanded definition under the Revised Securities

Act.

Form

All shares of its capital stock shall be common and voting shares.
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Capitalization

No public offering may be made unless the investment company has a

paid up capital of at least P500,000 (Section 13(1), RA 2629). However,
Rule 2.1 provides that the minimum subscribed and paid in capital
should be at least 50 million.

FINANCING COMPANY ACT

Republic Act No. 5980, as amended

An Act Regulating the Organization and Operation of Financing Companies

Declaration of policy

It is hereby declared to be the policy of the State to regulate the

activities of financing and leasing companies:

1. to place their operations on a sound, competitive, stable and

efficient basis as other financial institutions;

2. to recognize and strengthen their critical role in providing

medium and long-term credit for investments in capital goods and
equipment especially by small and medium enterprises
particularly in the countryside; and

3. to curtail and prevent acts or practices prejudicial to the public

interest.

As such, they may be in a better position to extend efficient service in a

fair manner to the general public and to industry, commerce and
agriculture and thereby more fully contribute to the sound development
of the national economy.
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Financing companies

Financing companies are corporations, except banks, investment

houses, savings and loans associations, insurance companies,
cooperatives, and other financial institutions organized or operating
under special laws, which are primarily organized for the purpose of
extending credit facilities to consumers and to industrial, commercial, or
agricultural enterprises.

It may extend such credit:

1. by direct lending; or

2. by discounting or factoring commercial papers or accounts

receivable; or

3. by buying and selling contracts, leases, chattel mortgages, or other

evidences of indebtedness; or

4. by financial leasing of movable as well as immovable property.

Financial leasing

Financial leasing is a mode of extending credit through a non-cancelable

lease contract under which the lessor purchases or acquires, at the
instance of the lessee, machinery, equipment, motor vehicles,
appliances, business and office machines, and other movable or
immovable property in consideration of the periodic payment by the
lessee of a fixed amount of money sufficient to amortize at least seventy
percent (70%) of the purchase price or acquisition cost, including any
incidental expenses and a margin of profit over an obligatory period of
not less than two (2) years.

During the two-year period, the lessee has the right to hold and use the
leased property with the right to expense the lease rentals paid to the
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lessor. Lessee also bears the cost of repairs, maintenance, insurance and
preservation of the leased property.

However, lessee has no obligation or option to purchase the leased

property from the owner-lessor at the end of the lease contract.

Liability of lessors

Financing companies shall not be liable for loss, damage or injury caused
by a motor vehicle, aircraft, vessel, equipment, machinery or other
property leased to a third person or entity except where the motor
vehicle, aircraft, vessel, equipment, machinery or other property is
operated by the financing company, its employees or agents at the time
of the loss, damage or injury.

Rights and powers of financing companies

Financing companies shall have the following powers, in addition to

those granted by this Act and by other laws:

1. Engage in quasi-banking and money market operations with the

prior approval of the Bangko Sentral.

2. Engage in trust operations subject to the provisions of the General

Banking Act upon prior approval of the Bangko Sentral.

3. Issue bonds and other capital instruments subject to pertinent

rules and regulations of the Bangko Sentral.

4. Rediscount their paper with governmental financial institutions

subject to relevant laws, rules and regulations.

5. Participate in special loan or credit programs sponsored by or

made available through governmental financial institutions.
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6. Provide foreign currency loans and leases to enterprises who earn

foreign currency by exports or other means, subject to existing
laws and rules and regulations of the Bangko Sentral.

Form of organization and capital requirements

Financing companies shall be organized in the form of stock

corporations at least forty percent (40%) of the voting stock of which is
owned by citizens of the Philippines.

They shall have paid-up capital of not less than ten million pesos
(P10,000,000) in case the financing company is located in Metro Manila
and first class cities, five million pesos (P5,000,000) in other classes of
cities, and two million five hundred thousand pesos (P2,500,000) in
municipalities.

No foreign national may be allowed to own stock in any financing

company unless the country of which he is a national accords the same
reciprocal rights to Filipinos in the ownership of financing companies or
their counterpart entities in such country.

Requirements for registration

Aside from requiring compliance with the provisions of the Corporation

Code, the SEC shall not register the articles of incorporation of any
financing company unless its office is satisfied on the evidence
submitted to it, that:

1. All the requirements of existing laws to engage in the business for

which the applicant is proposed to be incorporated or organized
have been complied with;

2. The organization, direction and administration, as well as the

integrity and responsibility of the organizers and administrators
reasonably assure the protection of the interest of the general
public; and
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3. All the requirements of RA 5980 have been complied with.

Revocation and suspension of registration

1. Financing company is insolvent

2. It violated any provision of the law

Supervision and regulation

The SEC is empowered to enforce the provisions of RA 5980, as

amended, and issue implementing regulations except insofar as the
Bangko Sentral may have supervisory authority for financing companies
licensed to perform quasi-banking functions, and insofar as the
Monetary Board has authority to prescribe financing company rates and
charges.

Prohibited acts

The Act imposes a fine of not less than P10,000 but not more than
P100,000, or imprisonment of not more than six(6)months or both, at
the discretion of the court, on "persons, associations, partnerships or
corporations, including managing officers thereof," upon the following
unlawful acts:

1. Engaging in the business of finance companies without authority

from the SEC through advertisement in whatever from, or through
other representations without authority.

2. Using trade or firm name containing the words "financing

company" or "leasing company" or "finance and leasing company"
or "finance and investment company" or any other designation
that would give the public the impression that it is engaged in the
business of a financing company or leasing company without
authority.
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3. Holding themselves out to be financing companies without

authority from the SEC.

4. Any officer, employee, or agent of a financing company who shall

knowingly and willingly make any statement in any application,
report or document required to be filed under the Act, which is
false or misleading with respect to any material fact, or overvalue
or aid in overvaluing any securities for the purpose of influencing
in any way the action of the company on any loan, or discounting.

5. Any officer, employee or examiner of the SEC directly charged

with the implementation of the Act who shall commit, connive,
aid or assist in the commission of acts enumerated above.

PAWNSHOPS

Presidential Decree 114

in relation to CB Circular No. 374

Pawnshop

A pawnshop is a person (single proprietorship) or entity

(corporation/partnership) engaged in the business of lending money on
personal property delivered as security for loans.

Purpose of the law

To regulate the establishement of pawnshops and to place their

operation on any sound and stable basis:

1. To derive maximum benefit as source of credit

2. To prevent and mitigate practices prejudicial to the public; and

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BANKING LAWS

3. To prescribe minimum requirements

Requirements for establishing a pawnshop

1. Registration

a. With DTI if single proprietorship

b. With SEC if corporation or partnership

c. In all cases, with the BSP

d. With the Board of Investments if there is foreign equity

participation

2. Secure a license to operate from the LGU concerned

3. Minimum paid in capital of P100,000

4. Citizenship

a. If single proprietor, must be a Filipino

b. If partnership, 70% of capital owned by Filipinos

c. If corporation, 70% of voting capital should be owned by Filipinos

d. If no voting stock, 70% of members entitled to vote should be

Filipinos

General requirements as to operation

Owner who has other businesses not directly related or incidental to his
pawnshop business must keep the latter separate from his other
businesses.
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BANKING LAWS

Maintain adequate security i.e. fire and burglar proof safe where
pawns/records are kept.

Insure place of business and pawns against fire and burglars.

Accountable officers/employees shall be bonded.

Accounting records

Loans cannot be less than 30% of the appraised value of the personal
property unless the borrower stipulated in writing that he is borrowing
a lesser amount.

In addition to interest charges, pawnshops may impose a maximum

service charge of P5.00 but in no case to exceed 1% of the principal loan.

No other charges, fees, and commissions shall be collected by pawnshop

in connection with the loan transaction or payment thereof. Borrower
shall not pay insurance premiums.

Conduct of business

1. Borrower offers to pledge personal property as security for loan.

2. Property is appraised.

3. Loan agreement is entered into.

4. Pawnshop issues receipt (pawn ticket).

5. Pawnshop lends money to pawner.

6. Pawner pays charges not to exceed P5.00.

7. Pawned property is placed in vault/safe.

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8. If upon maturity, borrower fails to pay, pawnshop will wait for 90 days
after maturity before it can sell the thing pledged at a public auction.

9. Pawnshop has to comply with notice requirements, to wit:

a. Before the 90-day period expires, notice to the borrower that the
pawn will be sold if not redeemed within 90 days from maturity
specifying time, date, and place of auction sale.

b. If there is no redemption, pawnshop will sell the pawn after

publishing a notice of sale in at least two newspapers in the
city/municipality of operation six (6) days before the date of sale.
In remote areas where there is no newspaper, by posting at City
Hall or Municipal Building and two other conspicuous public
places where pawnshop operates.

c. Sale of pawn by auctioneer/notary public to higher bidder.

Supervisory powers of the Bangko Sentral

BSP official in charge of non-bank financial intermediaries or authorized

agent may inspect, examine, and investigate the records of pawnshop to
ensure compliance with PD 114.

Said official or agent makes recommendations to the Monetary Board.

Impose penalties for violation of PD 114.

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TRUST CORPORATIONS

Chapter VII
General Banking Act

Trust corporation

A trust corporation is any corporation formed or organized for the

purpose of acting as trustee, administering any trust or holding property
in trust or on deposit for the use, benefit or behoof of others.

A corporation or a bank may engage in the business of a trust

corporation.

Standard of care

A trust company or any bank authorized to engaged in the business of a

trust company shall administer the funds or property under its custody
with the skill, care, prudence and diligence necessary under the
circumstances then prevailing that a prudent man, acting under like
capacity and familiar with such matters, would exercise in the conduct
of an enterprise of a like character and with similar aims.

No trust company or bank engaged in the business of a trust company

shall, for the account of the trustor or the beneficiary of the trust,
purchase or acquire property from, or sell, transfer, assign or lend
money or property to, or purchase debt instruments of any of the
departments, directors, officers, stockholders, or employees of the trust
company or bank, or relatives within the first degree of consanguinity or
affinity, or the related interests, of such director, officers, and
stockholders, unless the transaction is specifically authorized by the
trustor and the relationship of the trustee and the other party involved
in the transaction is fully disclosed to the trustor or beneficiary of the
trust prior to the transaction.

Powers (in addition to general powers incident to corporations)

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1. To act as trustee on any mortgage or bond issued by any municipality,

corporation, or any body politic and to accept and execute any other
municipal or corporate trust not inconsistent with law.

2. To act under the order or appointment of any court of record as

guardian, receiver, trustee or depository of the estate of any minor,
insane person, idiot, habitual drunkard, or other incompetent or
irresponsible person, and as receiver and depository 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 by
property legal proceedings.

3. To act as the executor of any last will or testament when it is named in

the last will and testament as the executor thereof.

4. To act under appointment of a court of competent jurisdiction 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, and when in either case there is no person qualified,
competent, willing, able and entitled to accept such administration.

5. To accept and execute any legal trust confided to it by any court of

record or by any person or corporation for the holding, management,
and administration of any estate, real or personal, and the rents, issues,
and profits thereof.

6. To establish and manage common trust funds, subject to such rules and
regulations as may be prescribed by the Monetary Board.

Commercial banking activity

A trust company may, with the approval of the Monetary Board, do a

commercial banking business, but such business must be kept separate
and distinct from its trust business.
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BANKING LAWS

Any banking corporation may, with the approval of the Monetary Board,
be authorized to engage in the business of a trust company, but it shall
be subject to the provisions on trust operations.

Bond/security requirements and paid in capital

Except as may otherwise be provided in this Act, no bond or other

security shall be required from any trust company for the faithful
performance of its duties as trustee, executor, administrator, guardian,
receiver or depositary.

However, the court officer appointing such company as trustee,

executor, administrator, guardian, receiver or depositary may, upon
proper application, showing special cause therefor, require any
corporation which shall seek to be or shall have been so appointed to
give adequate security for the protection of the funds or property
confided to the corporation and, upon failure of such corporation to give
the security required, its appointment as trustee, executor,
administrator, guardian, receiver or depositary shall be revoked.

Section 65, however, provides: “As security for the faithful performance
of its trust duties, every trust company, before transacting trust
business, shall carry on deposit with the Central Bank, cash or securities
approved by the Monetary Board in an amount equal to not less than
two hundred and fifty thousands pesos (P250,000). This may be
increased by the Central Bank.

Paid in capital and surplus of the company must be at least equal to the
amount required to be deposited with the central Bank.

Separation of trust funds and property

All moneys, properties, or securities received by any trust company shall

be kept separate and distinct from all other funds, properties and assets
of its general business.
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The accounts of all such moneys, properties or securities shall likewise

be kept separate and distinct from the accounts of its general business.

Capital stock may be invested

The capital stock and funds of a trust company may be loaned or

otherwise invested as its by laws prescribe; if it does a commercial
banking business in addition to its trust business, the investment of its
funds other than trust funds shall be governed by the relevant
provisions of the General Banking Act.

Surplus and dividend

Every trust company, before the distribution of a dividend, shall carry to

surplus 10% of its net profits accruing since the last preceding dividend
until the surplus shall amount to 20% of its authorized capital stock and
no part of the surplus shall at any time be paid out in dividends, but
losses accruing in the course of its business may be charged against the
surplus.