CHAPTER 4

BANK SUPERVISION AND EXAMINATION

Purpose of Examination and Supervision

The bank examination and supervision is done internally and externally. This is
undertaken to insure the safe and efficient operations of any bank. The external
supervision comes from agencies of the government and is not in any way connected with
banks management. This is done to ensure that they conduct their business properly and
lawfully.

Purposes:
a. To find out whether banks are doing their business in conformity with the banking
laws and that of the rules and regulation of the central bank and other government
agencies.

b. Determine how soundly the bank I financially. The examiners should establish the
fact that the bank owns the assets, that the titles to property are good, that the
assets are properly valuated in the books, and that they are of acceptable quality.

c. Examination is more for discovering the unsound and unsafe practice and to offer
remedies or solutions for such practice. Some of such practices are granting of big
loans to a single interest, receiving collaterals of inferior quality, laxity in collection
of loans, payment of excessive salaries of dividends, keeping incomplete or
inaccurate records and payment of unreasonably high rate of interests on time
deposits. These practices serve to jeopardize not only the stockholders but also the
depositor’s interest.

External Supervision

In the Philippines, the Supervision and Examination Sector of the Bangko Sentral is
charged with responsibility of conducting spot and regular checks on all banking
institutions. It is therefore, a vital arm of the Bangko Sentral. It is headed by a Deputy
Governor and staffed by examiners and other administrative personnel.

The Major functions of this sector are the chartering of banks, supervisions ad
examinations of banking and other non-bank financial institutions.

Provisions of the New Central Bank Act:

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Sec.25 Supervision and Examination – The Bangko Sentral shall supervision over, and
conduct periodic or special examination of banking institutions and quasi-banks, including
their subsidiaries and affiliates engaged in allied activities.
For purposes of this section, a subsidiary means a corporation more than fifty
percent (50%) of the voting stock of which is owned by a quasi-bank and an affiliate means
a corporation the voting stock of which, to the extent of fifty percent (50%) of 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.

Sec.26 Bank Deposits and Investments - Any director, officer or stockholder who, together
with his related interest, contracts a loan or any form of financial accommodation from : (1)
his bank; or (2) from a bank (a) which is a subsidiary of a bank holding company of which
both his bank and the lending bank are subsidiaries or (b) in which is controlling
proportion of shares is owned by the same interest that owns a controlling proportion of
shares of his bank, in excess of five percent (5%) of the capital and surplus of the bank, or
in the maximum amount permitted by law.

Sec.27 Prohibition
(a) An officer, director lawyer, or agent or stockholder subject to supervision by the
Bangko Sentral, except non-stock saving loans associations and provident funds
organized exclusively for employees of the BSP.
(b) Directly or indirectly requiring or receiving any gift, present or pecuniary or
material benefit for himself or another, from any institution subject to supervision
or examination by the BSP.
(c) Revealing in any manner, except under the court, the Congress or any government
office or agency authorized by law, or under such conditions as may be prescribed
by the Monetary Board, information relating to the condition or business of any
institution.
(d) Borrowing from any institution subject to supervision or examination of the BSP
shall be prohibited unless said borrowings are adequately secured, fully disclosed to
the Monetary Board may prescribe.

Sec.28 Examination and Fees. The supervising and examining department head, personally
or by deputy, shall examine the book and every banking institution once in every twelve
(12) months, and such other times as the Monetary Board by an affirmative vote of five (5)
members: may deem expedient and to make a report to the Monetary Board.
Banking and quasi-banking institutions which are subject to examination by the BSP
shall pay to the BSP, within the first thirty (30) days of each year, an annual fee in an
amount equal to a percentage prescribed by the Monetary Board.

Sec.29 Appointment of Conservator. Whenever on the basis of the report submitted by the
appropriate supervising or examining department, the Monetary Board finds that a bank or
a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of
liquidity deemed adequate to protect the interest of depositors and creditors.
The Monetary Board may appoint a conservator with such powers as the Monetary
Board shall deem necessary to take charge of the assets, liabilities, and the management,
collect all monies and debts due said institutions, and exercise all powers necessary to
restore its viability. The conservator shall report and be responsible to the Monetary Board

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and shall have the power to overrule or revoke the actions of the previous management
and board of directors of the bank or quasi-bank.

The conservator shall be competent and knowledgeable in bank operations and

management. The conservatorship shall not exceed one (1) year. The Conservator shall
receive remuneration to be fixed by the Monetary Board in an amount not to exceed two-
thirds (2/3) of the salary of the president of the institution on one(1) year, payable in
twelve (12) equal monthly payments.

The Monetary Board shall terminate the conservatorship when it is satisfied that the
institution can operate on its own and the conservatorship is no longer necessary. The
conservatorship is likewise terminated, should the Monetary Board, on basis of the report
of the conservator or of its findings, determine that the continuance in business of the
institution would involve probable loss to its depositors or creditors or creditors, in which
case the provision of Sec.30 shall apply.

Sec.30 Proceedings in Receivership and Liquidation. Monetary Board finds that a bank or
quasi-bank:
a. Is unable to pay its liabilities as they become due in the ordinary course of business.
b. Have insufficient realizable assets, as determined by the BSP to meets its liabilities.
c. Cannot continue in business without involving probable losses to its depositors or
creditors.
d. Involving acts or transactions which amount to fraud or a dissipation of the asset of
the institution.

The receiver shall immediately take charge of all the assets and liabilities of the
institution. He shall determine as soon as possible, but not later than ninety (90) days
from takeover, whether the institution may be rehabilitated or placed in such condition
so that it may be permitted to resume business.

If the receiver determines that the institution cannot be rehabilitated or permitted

to resume business in accordance with the next preceding paragraph. The receiver
shall:
a. File ex parte with the proper regional trial court, and without 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 PDIC.
b. Convert the asset of the institution into money, dispose of the same to creditors
and other parties, for the purpose of paying debts of such institution in
accordance with the rules on concurrence and preference of credit under the
Civil Code of the Philippines. The asset of an institution under the receivership
or liquidation shall be deemed in custodialegisin the hands of receiver and shall,
from the moment the institution was placed under such receivership or
liquidation, be exempted from any order of garnishment, levy, attachment, or
execution.

Sec.31 Distribution of Assets. In case of liquidation of a bank or quasi-bank, after payment of

the cost of proceedings, including reasonable expenses and fees of the receiver to be
allowed by the court, the receiver shall pay the debts of such institution, under order of the
court.

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Sec.32 Disposition of Revenues and Earnings – All revenues and earnings realized by the
receiver in winding up shall be used to pay the costs, fees, and expenses mentioned in
preceding section, salaries of such personnel whose employment is rendered necessary in
the discharged of liquidation together with other additional expenses caused thereby.

Sec.33 Disposition of Banking Franchise-The BSP may, if public interest so requires, award
to an institution, upon such terms as the Monetary Board may approve. Provided, that
whatever proceeds may be realized from such award shall be subject to the appropriate
exclusive disposition of the Monetary Board.

Sec.34 Refusal to Make Reports on Permit Examination- Any officer, agent, manager etc…
subject to supervision or examination by the BSP within purview of this Act, who willfully
refuses to file the required report or permit any lawful examination into the affairs of such
institution shall be punished by a fine not less than 50,000 or not more than 100,000 or by
imprisonment of not less than (1) year or not more than (5) years or both, in discretion of
the court.

Sec.35 False Statement- the willfully making of a false or misleading statement on a material
fact to the Monetary Board or to the examiners of the BSP shall be punished by a fine of not
less than one (100,000) or not more than (200,000), or by imprisonment of not more than
(5) years.

Sec. 36 Proceedings Upon Violation of this Act and Other Banking Laws, Rules, Regulations,
Orders or Instructions.
- Whenever a bank or quasi-bank or any person or entity, willfully violates this act or
other pertinent laws enforced by BSP or any rule issued by the Monetary Board, this
act be punished by a fine of not less than (50,000) or not more than (200,000) or by
imprisonment of not less than (2) years or not more than (10) years, or both.

Sec.37. Administrative Sanctions on Banks and Quasi-banks - Without prejudice to the

criminal sanctions against the culpable persons provided in section 34, 35 and 36, the
Monetary Board may, at its discretion, impose upon any bank or quasi-bank their directors
or officers, for any willful violation o its charter by laws, willful delay in the submission of
reports or publications thereof as required by law, rules and regulations.

Mechanics of Examination
-Bank examiners examine bank’s books at any time during banking hours. Examiner
takes possession of the banks books and documents which are owned by the bank or
pledged by debtors as collaterals. Analysis involves the classification of assets as to quality,
valuation, and assurance that everything is in order. This would lead to the conclusion on
how efficient the management is and on how effective the policies are. If there are any
violations, immediate steps are suggested and are taken up to correct the banks position.

Programming of Controls
a. Embezzlement – the taking of funds that belongs to depositors and customers.

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 b. Defalcation – the misappropriation of funds which belongs to stockholders such as
income, fees, and commissions or through fictitious notes or fraudulent expense
vouchers.
c. Peculation- would mean all kinds of embezzlement, defalcation, or misappropriation
of funds.
d. Examination- the review and analysis of the assets and liabilities of a bank to
determine their existence, values and true ownership, and to ascertain that
everything in regard to said assets and liabilities is in order.

Causes of Peculation
1. Gambling- simply a recreation then it becomes a habit and finally a status symbol
that must be maintained.
2. Pride and Envy – A man working in a bank consumed by pride and envy will do most
everything to get even.
3. Living beyond ones income– keeping up with rich neighbors and thus spending well
beyond one’s income could also lead to embezzlement.
4. Unsound salary policies- the rising prices without commensurate salary adjustments
may invite one to commit peculation.
5. Poor employee relations- officers may look down on their subordinates and even go
to the extent of emphasizing this cleavage between them in public places.
6. Immorality- bank officers and employees are not free from temptation to commit
crimes against morality.

Preventive Measures - the most effective prevention against peculation is the

establishment of sound and adequate internal controls. To be effective, it should compose
of two parts:
a. First part is setting up procedures where the work of one person shod checked and
proven by another. Adopting a system where an entire department or section
should not be under the complete control of one person but rather that another
person should exercise the right to approve; and to prevent anyone person to have
custody and control over any of the major subsidiary accounts.
b. Second part constitute of procedures and routines to determine that the work
performed balances and that everything is in order in relation to the general ledger
accounts. The use of daily proof sheets, periodical statement reconciliation of
accounts, reports, and similar activities are the objects of this phase of internal
control.

“No matter how far you travel, you can never get away from yourself”

-Haruki Murakami- 