1st EXAM COVERAGE

GENERAL BANKING LAW (GBL)

I. GENERAL CONCEPTS

BANKS

Banks are entities engaged in the lending of funds obtained in the form
of deposits from the public (Sec. 3.1, GBL).

It is required that banks are (i) stock corporations and that (ii) its funds
are obtained from the public, meaning deposits of twenty (20) or more
persons and (iii) that the minimum capital requirements prescribed by
the Monetary Board for each category of banks are satisfied (Sec. 8,
GBL).

NOTE: HOWEVER, banks and quasi-banks may not

incorporate as One Person Corporations (Sec. 116, R.A. No.
11232, otherwise known as the Revised Corporation Code of
the Philippines).

Examples of engaged in banking functions:

1. An investment company which loans out the money of its
customers, collects the interest and charges a commission to both
lender and borrower is a bank (Western Investment Banking v.
Murray).
[NOTE: An investment company may be considered as
engaged in banking functions if it accepts deposits and
loans out the money it receives.]

2. A stock corporation may be considered engaged in banking if it is

lending money to shareholders who are required to deposit certain
sums as security (Karp v. Harlem Business Protective Corporation,
259 NYS 921).

3. A department store is engaged in banking functions when it

received deposits up to a certain amount, issues passbooks
 therefor, pays interests on the amount deposited and pays the
principal with interest on demand in money or in goods. (MacLaren
v. State, 124 NW 667)

HOWEVER, a corporation organized as an investment house engaged

in “investing, reinvesting or trading in securities” is not performing in
banking functions. Hence, banking laws are inapplicable to the
respondent corporation (Banas v. Asia Pacific Finance Corporation, GR
128703).

Banks should be distinguished from Quasi-banks, which are entities that

do not accept deposits.

QUASI-BANKS AND DEPOSIT SUBSTITUTES

Quasi-banks are entities engaged in the borrowing of funds through the

issuance, endorsement or assignment with recourse or acceptance of
deposit substitutes for purposes of relending or purchasing of receivables
and other obligations (Sec. 4, GBL).

Subsection X234.1 of the Manual of Regulations for Banks (MORB)

provides for the following essential elements of quasi-banking:
1. Borrowing funds for the borrower’s own account;
2. Twenty (20) or more lenders at any one time;
3. Methods of borrowing are issuance, endorsement or acceptance
of debt instruments of any kind, other than deposits, such as
acceptances, promissory notes, participations, certificates of
assignments or similar instruments with recourse, trust
certificates, repurchase agreements, and such other instruments
as the Monetary Board may determine; and
4. The purpose of which is (1) relending, or (2) purchasing
receivables or other obligations.

Deposit substitutes are alternative forms 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 relending or purchasing of receivables and other obligations
(Sec. 95, NCBA).
NOTE: Commercial, industrial and other non-financial
companies, which borrow fund through any of these means
for the limited purpose of financing their own needs or the
needs of their agents or dealers, shall not be considered as
performing quasi-banking functions (Sec. X234.3[a], MORB).

NOTE: Universal banks and Commercial banks may exercise

quasi-banking functions without securing prior authority
from the Monetary Board (MB), while other banks must
secure such prior MB authority.

2012 BAR QUESTION

XYZ Corporation is engaged in lending funds to small vendors in

various public markets. To fund the lending, XYZ Corporation
raised funds through borrowings from friends and investors. Is
XYZ engaged in the business of banking?

SUGGESTED ANSWER: NO. XYZ Corporation is not engaged in

banking business because the funds that it lends do not come
from deposit. XYZ Corporation is engaged in quasi-banking.
Section 4 of the General Banking Law provides that Quasi-banks
refer to entities engaged in the borrowing of funds through the
issuance, endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes of relending or
purchasing of receivables and other obligations. The business of
XYZ falls squarely within the definition.

2010 BAR QUESTION

Differentiate “bank deposits” and “deposit substitutes”.

SUGGESTED ANSWER: Banks deal with deposits which are

governed by the law on loans. Deposits are normally in the form
of cash or legal tender. Quasi-banks deal with deposit
substitutes which are 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 relending or
purchasing of receivables and other obligations. These
instruments may include, but need not be limited to, bankers
acceptances, promissory notes, participations, certificates of
assignment and similar instruments with recourse, and
repurchase agreements (Sec. 95, RA 7653, the New Central
Bank Act[NCBA]).

NATURE OF BANKING BUSINESS

A bank has a vital role in providing an environment conducive to the

sustained national economy. Banking is fiduciary in nature that requires
high standards of integrity and performance (Sec. 2, GBL). The fiduciary
nature of banking requires banks to assume a degree of diligence higher
than that of a good father of a family. Article 1172 of the Civil Coode
states that the degree of diligence required of an obligor is that
prescribed by law or contract, and absent such stipulation then the
diligence of a good father of a family. Section 2 of RA 8791 prescribes the
statutory diligence required of from banks – that banks must observe
“high standards of integrity and performance” in servicing their
depositors (Consolidated Bank v. CA, 410 SCRA 562, 11 September
2003).

Fiduciary – One assumes to act as an agent for another and the other
reposes confidence in him, although there is no written contract or no
contract at all (Miguel v. CA, 29 SCRA 760 [1969]).

2010 BAR QUESTION

How do you characterize the legal relationship between a

commercial bank and its safety deposit box client?

SUGGESTED ANSWER:
The prevailing rule in American Jurisprudence – that the
relation between a bank renting out safe deposit boxes and its
customers with respect to the contents of the box is that of
 bailor and bailee, the bailment being for hire and mutual
benefit has been adopted in this jurisdiction (Sia v. CA, 222
SCRA 24[1993]).

The following are the consequences of nature of its business:

1. Banks are subject to heavy and close supervision and/or

regulation by the Bangko Sentral ng Pilipinas (BSP) (Central
Bank of the Phil. v. CA, 208 SCRA 652).

2. Banks are required to exercise utmost diligence in the handling

of deposits (Simex International vs. CA, 183 SRA 361).

3. A special rule is observed in cases of strikes and lockouts.

Any strike or lockout involving banks, if unsettled after seven (7)
calendar days shall be reported by the BSP to the Secretary of
Labor who has two (2) options: (1) he may assume jurisdiction over
and decide the dispute or (2) certify the same to the NLRC for
compulsory arbitration. The law also allows the President of the
Philippine to, at any time, intervene and assume jurisdiction over
such labor dispute in order to settle or terminate the same (Sec. 22,
GBL).

4. The Mirror Doctrine does not apply to banks.

As a rule, the Court would not expect a mortgagee to conduct an
exhaustive investigation of the history of the mortgagor’s title before
he extends a loan. But petitioner PNB is not an ordinary mortgagee;
it is a bank. Banks are expected to be more cautious than ordinary
individuals in dealing with lands, even registered ones, since the
business of banks is imbued with public interest. It is of judicial
notice that the standard practice for banks before approving a loan
is to send a staff to the property offered as collateral and verify the
genuineness of the title to determine the real owner or owners (PNB
v. Corpuz, G.R. 180945, Feb. 12, 2010)

DILIGENCE REQUIRED OF BANKS

It is well-settled that banks are engaged in a business impressed with
public interest and it is their duty to protect in return their many clients
and depositors who transact business with them. They have the
obligation to treat their client’s account meticulously and with the
highest degree of care, considering the fiduciary nature of their
relationship. The diligence required of banks, therefore, is more than that
of a good father of a family.

Every client should be treated with equality by a banking institution

regardless of the amount of his deposits and each client has the right to
expect that every centavo be entrusts to a bank would be handled with
the same degree of care as the accounts of other clients.

Banking business is so impressed with public interest where the trust

and confidence of the public in general is of paramount importance such
that the appropriate standard of diligence must be a high degree of
diligence, if not the utmost diligence (BA v. Phil Racing, G.R. NO. 150228,
July 30, 2009).

II. CLASSIFICATION OF BANKS

AUTHORITY TO INCORPORATE AND OPERATE

1. A banking or quasi-banking corporation cannot be incorporated

without authority from the BSP. The Articles of Incorporation to be filed
with the Securities and Exchange Commission (SEC) should be
accompanied by the favorable recommendation of the BSP, otherwise, it
shall not be accepted or approved (Sec. 14, GBL).

2. An entity that is performing banking or a quasi-banking function

cannot operate without a certificate of authority from the BSP (Sec. 6,
GBL).

CLASSIFICATION OF BANKS (CUT-RICO)

1. Universal Bank (UB) – banks that have authority to exercise:

a. the powers and functions of commercial banks;
 b. the powers of an investment house;
c. the power to invest in non-allied enterprises (Sec. 23, GBL);
d. ownership of up to 100% of the equity in a thrift bank, a rural
bank, or a financial allied enterprise (Sec. 25, GBL) or non-
financial allied enterprise (Sec. 26, GBL); and
e. ownership of up to 100% of the voting stock of only one (1) other
universal or commercial bank, if publicly listed universal banks
(Sec. 25, GBL).
f. or accept or create demand deposits (Sec. 33, GBL);
g. engage in quasi-banking functions (Sec. 6, GBL).

2. Commercial Bank (KB) – banks that are given, in addition to the

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

(TRAIN-QO-BREAD)
a. accepting drafts and Issuing letters of credit;
b. Discounting and negotiating promissory notes, drafts, bills of
exchange, and other evidences of debt;
c. accepting or creating demand deposits;
d. Receiving other types of deposits and deposit substitutes;
e. Buying and selling foreign exchange and gold or silver bullion;
f. Acquiring marketable bonds and other debt securities; and
g. Extending credit
h. own up to 100% of the equity of a Thrift or Rural bank (Sec. 31,
GBL);
i. own up to 100% of the equity of in a Non-financial allied
enterprises (Sec. 32, GBL);
j. or Accept or create demand deposits (Sec. 33, GBL);
k. invest (which shall be a minority holding) in Other Financial
allied enterprises (Sec. 31, GBL); and
l. engage in Quasi-banking functions (Sec. 6, GBL).

DISTINGUISHING A UNIVERSAL BANK FROM A COMMERCIAL BANK

As to powers
A universal bank is a commercial bank with the authority to exercise the
powers of an investment house and invest in allied and non-allied
enterprises (Secs. 23 and 24, GBL). A commercial bank, on the other
hand, can only invest in allied enterprises (Sec. 30, GBL).

Non-allied enterprise performs activities that have no relation

at all to banking (e.g. construction, trading, manufacturing,
mining).

Allied enterprises are classified into “financial allied

enterprises” (e.g. credit card, leasing companies, investment
houses, financing insurance companies) and “non-financial
allied enterprises”, activities that do not involve money
matters (e.g. warehousing, safety deposit box, providing
computer services).

FINANCIAL ALLIED NON-FINANCIAL ALLIED

UNDERTAKINGS UNDERTAKINGS
1. Leasing companies 1. Warehousing companies;
including leasing of 2. Storage Companies;
stalls and spaces in a 3. Safety Deposit Box Companies;
commercial 4. Companies primarily engaged in the
establishment; management of mutual funds but not in
2. Banks; mutual funds themselves;
3. Investment Houses; 5. Management corporations engaged or to
4. Financing be engaged in an activity similar to the
Companies; management of mutual funds;
5. Credit Card 6. Companies engaged in providing
Companies; computer services;
6. Financial 7. Insurance agencies/brokerages;
Intermediaries 8. Companies providing drying and/or
catering to small and milling facilities for agricultural crops
medium scale such as rice and corn;
industries including 9. Service Bureaus organized to perform for
venture capital and in behalf of banks and non-banks
corporation (VCC) financial institutions the services allowed
 7. Companies engaged to be outsourced under Circular No. 268;
in stock 10. Philippine Clearing House Corporation
brokerage/securities (PCHC) and Philippine Central Depository,
dealership; and Inc. (PDIC) and
8. Companies engaged 11. Such other similar activities as the
in foreign exchange Monetary Board may declare as non-
dealership/brokerage financial allied undertakings of banks.
.

As to equity investments

POINT OF UNIVERSAL BANK COMMERCIAL BANK

DISTINCTION (Secs. 24-28) (Secs. 30-32)
Total Investment in 50% of net 35% of net worth
allied enterprises worth
Total Investment in 50% of net N/A
non-allied worth
enterprises
Equity investment in 25% of net 25% of net worth
any enterprise worth (Allied enterprise
only)
Equity investment in 100% of equity 100% of equity
financial allied
enterprise; thrift NOTE: In other
bank, rural bank, or financial allied
any financial allied enterprises,
enterprise (Sec. 25) investment shall
remain a minority
holding
(Sec. 31)
Equity investment in 100% of equity 100% of equity
non-financial allied
enterprises
Equity investment in Shall not exceed N/A
a single non-allied 35% of the total
enterprise equity in that
enterprise nor shall
 it exceed 35% of the
voting stock in that
enterprise
Equity investment in 40% 40%
quasi-banks

3. Rural Bank (RB) – banks that are created to make needed credit
available and readily accessible in the rural areas for the purpose of
promoting comprehensive rural development (Sec. 2, RA 7353).

Rural banks may extend loans and advances primarily for the purpose of
meeting the normal credit needs of farmers, fishermen or farm families
as well as cooperatives, merchants, private and public employees (Sec. 6,
RA 7353), accept savings and time deposits, act as correspondent of
other financial institutions, perform other banking services, and, with
Monetary Board approval, accept current or checking accounts, act as
depository of municipal, city or provincial funds, and invest in allied
undertakings (Sec. 12, RA 7353).

4. Thrift Bank (TB) –banks established for the purpose of meeting the
needs for capital, personal and investment credit or medium- and long-
term loans for Filipino entrepreneurs and promoting agriculture and
industry and at the same time place within easy reach of the people the
medium- and long-term facilities at reasonable cost (Sec. 2, RA 7906).

Thrift banks 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 or household
finance, whether secured or unsecured, or in financing for
 homebuilding 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 may determine as necessary in the
furtherance of national economic objectives;

(2) Providing short-term working capital, medium- and long-term

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

(3) Providing diversified financial and allied services for its chosen
market and constituencies specially for small and medium
enterprises and individuals (Sec. 3, RA 7906).

5. Cooperative Bank (CB) – banks organized for the primary purpose of

providing a wide range of financial services to cooperatives and their
members (Art. 23, Republic Act No. 6938, as amended by R.A. No. 9520).

Cooperative banks primarily provide financial, banking and credit

services to cooperative organizations and their members (Sec. 100, RA
No. 6938, as amended).

6. Islamic Bank (IB) (R.A. No. 6848)

Al-Amanah Islamic Investment Bank of the Philippines (AAIIBP) is created

to promote and accelerate the socio-economic development of the
Autonomous Region by performing banking, financing and investment
operations and to establish and participate in agricultural, commercial
and industrial ventures based on the Islamic concept of banking. (Sec. 3,
RA 6848)

All business dealings and activities of the Islamic Bank shall be subject
to the basic principles and rulings of Islamic Shari'a within the purview
of the aforementioned declared policy. (Sec. 3, RA 6848)

Islamic banking business means banking business whose aims and

operations do not involve interest (riba) which is prohibited by the
Islamic Shari'a principles (Sec. 44, RA 6848)
The AAIIBP may perform the following banking services:

a. Open current or checking accounts;

b. Open savings accounts for safekeeping or custody with no

participation in profit and losses except unless otherwise
authorized by the account holders to be invested;

c. Accept investment account placements and invest the same for a

term with the Islamic Bank's funds in Islamically permissible
transactions on participation basis;

d. Accept foreign currency deposits from banks, companies,

organizations and individuals, including foreign governments;

e. Buy and sell foreign exchange;

f. Act as correspondent of banks and institutions to handle

remittances or any fund transfers;

g. Accept drafts and issue letters of credit or letters of guarantee,

negotiate notes and bills of exchange and other evidence of
indebtedness under the universally accepted Islamic financial
instruments;

h. Act as collection agent insofar as the payment orders, bills of

exchange or other commercial documents are exclusive of riba or
interest prohibitions;

i. Provide financing with or without collateral by way of leasing, sale

and leaseback, or cost plus profit sales arrangement;

j. Handle storage operations for goods or commodity financing

secured by warehouse receipts presented to the Bank;

k. Issue shares for the account of institutions and companies

assisted by the Bank in meeting subscription calls or augmenting
their capital and/or fund requirements as may be allowed by law;
 l. Undertake various investments in all transactions allowed by
Islamic Shari'a in such a way that shall not permit the haram
(forbidden), nor forbid the halal (permissible) (Sec. 6, RA 6848).

7. Other classification of banks as determined by the MB of the BSP.

Government banks refer to universal or commercial banks owned or

controlled by the national government such as the Development Bank of
the Philippines, the Land Bank of the Philippines and the Al-Amanah
Islamic Investment Bank. (Miravite, J. (2013), Bar Review Materials in
Commercial Law)

DISTINCTIONS BETWEEN TYPES OF BANKS

1. As to capitalization – they have different minimum capitalization

requirements

2. As to purpose – some of the banks have specific purposes and social

functions (i.e. Rural Banks are meant to hasten rural development).

3. As to powers or functions – there are functions and powers that are

not exercised by one that are exercised by others. Some banks may
exercise certain powers only upon prior approval of the Monetary
Board. Thus: (i) only universal banks and commercial banks can
create and accept demand deposits without separate authority from
the Monetary Board while other banks must secure authority from the
Monetary Board; (ii) only universal banks may act as investment
houses; (iii) generally, only universal banks and commercial banks
may be involved in quasi-banking functions.

4. As to who can be directors – Public officers can be directors of Rural

Banks (Sec.5, R.A. No. 7353) while such officers are prohibited from
being directors or officers of other types of banks (Sec. 19, GBL).

5. As to incorporators – Consistent with the provisions of the Corporation

Code, incorporators of banks are natural persons. By way of
exception, rural banks can be organized or established by juridical
 persons, particularly cooperatives and corporations primarily
organized to hold equities in rural banks (Sec. 4, R.A 7353).

6. As to foreign equity- A rural bank must be wholly owned by Filipinos

(Sec. 4, R.A. No. 7353) while other banks require only forty percent
(40%) Filipino ownership of their voting stocks. (NOTE: However, RA
No. 10641 allows 100% ownership of Foreign Banks under certain
conditions)

7. As to necessity of public offering – Public offering of shares is

necessary for domestic banks seeking authority to act as universal
bank while there is no such requirement for other banks.

III. BANK OPERATIONS

DIRECTORS AND OFFICERS

COMPOSITION OF BOARD

1. There shall be at least five (5), and a maximum of fifteen (15)

members of the board of directors of bank, two (2) of whom shall be
independent directors (Sec. 15, GBL).

In the case of a bank merger or consolidation, the number of

directors shall not exceed twenty-one (21) (Sec. 17, GBL)

An independent director shall mean a person other than an officer

or employee of the bank, its subsidiaries or affiliates or related
interests (Sec. 15, GBL). An independent director of a bank may
only serve as such for a total of five (5) consecutive years (Sec
X141.2, MORB [2013]).

2. Non-Filipino citizens may become members of the board of

directors of a bank to the extent of the foreign participation in the
equity of said bank (Sec. 15, GBL).
 3. The law provides that no appointive or elective public official,
whether full-time or part-time, shall at the same time serve as
officer of any private bank, save in cases where such service is
incident to financial assistance provided by the government or
government-owned or controlled corporation to the bank or unless
otherwise provided under existing laws.

A recognized exception is provided under Section 5 of the Rural

Banks Act of 1992 which state that: “nothing in this Act shall be
construed as prohibiting any appointive or elective official from
serving as director, officer, consultant or in any capacity in the
bank.”

QUALIFICATIONS

1. FIT AND PROPER RULE

Under the Fit and Proper Rule, the Monetary Board is authorized to pass
rules provided for the qualifications and disqualifications of individuals
elected or appointed bank directors of officers and to disqualify those
unfit after due notice (Sec.16, GBL).

In determining whether an individual is fit and proper to hold the

position of a director or officer of a bank, regard shall be given to his
integrity, experience, education, training, and competence (Sec. 16,
GBL).

REGULATION OF THE COMPENSATION AND OTHER BENEFITS

To protect the funds of depositors and creditors, the Monetary Board

may regulate the payment by the bank to its directors and officers of
compensation, allowance, fees, bonuses, stock options, profit sharing
and fringe benefits only in exceptional cases and when the
circumstances warrant, such as but not limited to the following:
1. When a bank is under comptrollership or conservatorship; or
2. When a bank is found by the Monetary Board to be conducting
business in an unsafe or unsound manner; or
 3. When a bank is found by the Monetary Board to be in an
unsatisfactory financial condition (Sec. 18, GBL).

MEETINGS

The meetings of the board of directors may be conducted through

modern technologies such as, but not limited to, teleconferencing and
video-conferencing (Sec. 15, GBL).

PROHIBITION ON PUBLIC OFFICIALS

No appointive or elective public official, whether full-time or part-time
shall at the same time serve as officer of any private bank (Sec. 19, GBL).

Exception:
1. when the service of the public official is incident to financial
assistance provided by the government or a government-owned
or controlled corporation to the bank; or
2. when the existing laws provide otherwise (e.g. Rural banks
allow public officials, elective or appointive, to serve in a rural
bank in any capacity (Sec. 5, R.A. No. 7353).

OWNERSHIP OF REAL PROPERTY

1. Any bank may acquire real estate as shall be necessary for its own
use in the conduct of its business:
a. Provided that the total investment in such real estate and
improvements thereof, including bank equipment, shall not
exceed fifty percent (50%) of combined capital accounts:
b. Provided that the equity investment of a bank in another
corporation engaged primarily in real estate shall be considered
as part of the bank's total investment in real estate, unless
otherwise provided by the Monetary Board. (Sec. 51, GBL)

2. However, a bank may acquire, hold, or convey real property under the
following circumstances:
 a. Such as shall be mortgaged to it in good faith by way of security for
debts;
b. Such as shall be conveyed to it in satisfaction of debts previously
contracted in the course of its dealings; or
c. Such as it shall purchase at sales under judgments, decrees,
mortgages, or trust deeds held by it and such as it shall purchase to
secure debts due it.

Any real property acquired or held under the circumstances

enumerated in the above paragraph shall be disposed of by the bank
within a period of five (5) years or as may be prescribed by the
Monetary Board: Provided, however, That the bank may, after said
period, continue to hold the property for its own use, subject to the
limitations of the preceding Section (Sec. 52, GBL). These properties
are referred to as ROPOA (Real and Other Properties Owned or
Acquired).

FUNCTIONS OF BANKS
1. Deposit Function
2. Loan Function

OTHER FUNCTIONS
Universal banks and commercial banks (as well as other banks
depending on the type of bank and/or the corresponding authority given
by the Monetary Board) may also exercise any of the following functions:
1. Receive in custody funds, documents and valuable objects;
2. Act as financial agent and buy and sell, by order of and for the
account of their customers, shares, evidences of indebtedness and
all types of securities;
3. Make collections and payments fir the account if others and
perform such other services for their customers as are not
incompatible with banking business;
4. Upon prior approval of the Monetary Board, act as managing
agent, adviser, consultant or administrator of investment
management/advisory/consultancy accounts; and
5. Rent out safety deposit boxes.
PROHIBITED ACTS

1. Banks are prohibited from engaging in insurance business as insurer

(Sec. 54, GBL). However, it can indirectly engage in the insurance
business by distributing product of insurance. (Sec. 53.3, GBL)

2. Outsourcing of functions is generally prohibited. Example: A bank

cannot hire another company to accept deposits (Sec. 55.1, GBL).

3. No bank or quasi-bank shall declare dividends under any of the

following conditions:
a. if it is greater than its accumulated net profits then on hand,
deducting therefrom its losses and bad debts.; or
b. If at the time of its declaration, its clearing account with the
Bangko Sentral is overdrawn;
c. It is deficient in the required liquidity floor for government
deposits for five (5) or more consecutive days;
d. It does not comply with the liquidity standards/ratios prescribed
by the Bangko Sentral for purposes of determining funds
available for dividend declaration; or
e. It has committed a major violation as may be determined by the
Bangko Sentral.
4. Without order of a court of competent jurisdiction, disclose to any
unauthorized person any information relative to the funds or
properties in the custody of the bank belonging to private individuals,
corporations, or any other entity (Sec. 55.1, GBL).

1980 BAR QUESTION

K borrows P200,000 from Eternity Banking Corporation which,

in accordance with its credit criteria, grants loans the security of
a condominium unit with an appraised value of P 1.5 million.
ABC Credit Services Inc., a corporation engaged in the gathering
of credit information, sends a letter to the bank inquiring about
any property of K which the bank holds and, if any, to furnish
the description of the property. Jose Santos, Vice-President of
the bank, in his reply thereto discloses the details of the
property mortgaged.
 Did the bank officer violate any existing legal provision?

SUGGESTED ANSWER: YES, Jose Santos violated the

prohibition to disclose to any unauthorized person any
information relative to the funds or properties in the custody of
banks belonging to private individuals, corporations or any other
entity, unless there is an order of a court of competent
jurisdiction (Sec. 55.1[b], GBL).

III. A. DEPOSIT FUNCTION

Bank deposits are not true deposits but are simple loans.

Bank deposits are in the nature of irregular deposits (Serrano v. Central,

96 SCRA 96). They are not true deposits but are simple loans (Allied v
Lim, 549 SCRA 504).

Fixed, savings and current deposits of money in banks and similar

institutions shall be governed by the provisions concerning simple loans
(Art. 1980, Civil Code).

Simple loan or mutuum is a contract whereby one of the parties delivers

to another, money or other consumable thing and the latter acquires
ownership thereof upon the condition that the same amount of the same
kind and quality shall be paid. Banks where monies are deposited are
considered the owners. (People v. Puig, 563 SCRA 577)

The relationship between banks and creditors is that of a debtor and

creditor, respectively. The depositor lends the bank money and the bank
agrees to pay the depositor on demand (Central v. Citytrust, 578 SCRA
27).

The consequences of the creditor-debtor relationship are as follows:

1. The bank can make use as its own the money deposited. Said amount
is not being held in trust for the depositor nor is it being kept for
safekeeping. (Tang Tiong Tick v American Apothecaries, 65 Phil 414)
2. Third persons who may have a right to the money deposited cannot
hold the bank responsible unless there is a court order or
garnishment. The duty of the bank is to its creditor-depositor and not
to third persons. If a third person has a valid right over the money
deposited, he must prove the same before a court of competent
jurisdiction.

3.

3.a. The officers of the bank cannot be held liable for estafa if they are
authorized the use of the money deposited by the depositor. There
would be no liability for estafa under Articles 315 (1)(b) of the Revised
Penal Code(RPC) even if the bank failed to return the amount
deposited.

[NOTE: In order that a person can be convicted under Articles 315 (1)
(b) of the Revised Penal Code (RPC), it must be proven that he has the
obligation to deliver or return the same money, goods or personal
property that he received. By virtue of the creditor-debtor relationship
between the depositor and the bank, the bank only has the obligation
to return the amount deposited and not to return or deliver the same
money that was deposited.]

The failure of the Bank to return the amount deposited will not
constitute estafa through misappropriation punishable under Article
315, par. l(b) of the Revised Penal Code, but it will only give rise to
civil liability. (Guingona, Jr., vs. The City Fiscal Of Manila, G.R. No. L-
60033 April 4, 1984). 

3.b. If an employee who is entrusted with possession of the money

deposited takes the same money, the crime committed by the
employee is Qualified Theft.

For instance, a teller was convicted for Qualified Theft since the teller
occupies a position of confidence, and the bank places money in the
teller’s possession due to the confidence reposed on the teller (Roque
v. People, G.R. No. 138954, November 25, 2004).
 A Branch Operations Officer was convicted of Qualified Theft because
he was holding such position which gave him not only sole access to
the bank vault but also control of the access of all bank employees in
the branch, to confidential ad highly delicate computerized security
systems designed to safeguard the integrity of the telegraphic fund
transfers and account names of bank clients. The management of the
bank reposed its trust and confidence in the Operations Officer, which
he exploited to enrich himself to the prejudice of the bank. (People v.
Sison, G.R. No. 123183, January 19, 2000)

HOWEVER, by way of exception, a President of a bank may be held

liable for Estafa instead of Qualified Theft. A President of the bank is a
fiduciary with respect to the bank’s funds, and he holds the same in
trust or for administration for the bank’s benefit. As a fiduciary, when
such bank president makes it appear through falsification that an
individual or entity applied for a loan when in fact such individual or
entity did not, and the bank president obtains the loan proceeds and
converts the same, estafa is committed(People v. Go, G.R. No. 191015,
August 6, 2014)

4. The bank has the right to compensation. The relationship between a

bank and its depositor is that of creditor and debtor – a bank has the
right to set-off the deposits in its hands for the payment of a depositor’s
indebtedness (Equitable PCI Bank v. Ng Sheung Ngor, 541 SCRA 223).
Legal Compensation under Article 1278 of the Civil Code may take place
when all the requisites in Article 1279 are present, as follows:

(1) That each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other;

(2) That both debts consists in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable; and

 (5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor.

5. No breach of trust on the part of the bank in case of failure to honor

its obligations (deposits). A bank’s failure to honor a deposit is failure
to pay its obligation as debtor and not a breach of trust arising from
the depository’s failure to return the subject matter of deposit
(Serrano v. CA, 96 SCRA 96).

KINDS OF DEPOSITS

The basic types of deposits are: a) demand deposits, b) savings account,

c) NOW Accounts, and d) time deposits

1. Demand deposits refer to all those liabilities of banks which are

denominated in Philippine currency and are subject to payment in
legal tender upon demand by presentation of checks subject to the
following rules:

a. Generally, only a universal bank or commercial bank can accept

or create demand deposits. Other banks cannot accept demand
deposits except upon prior approval of the Monetary Board (Sec. 33,
GBL).

Demand deposits are deposits subject to withdrawal either by check

or through the automated tellering machines. They are otherwise
known as current or checking accounts. (Miravite, J. (2013), Bar
Review Materials in Commercial Law). They are non-interest bearing
except upon special arrangement (Ignacio, L. (2016), Banking &
Allied Laws).

2. Savings account. Savings deposits are interest-bearing deposits which

are withdrawable either upon presentation of a properly accomplished
withdrawal slip together with the corresponding passbook or through
the automated tellering machines.
 a. Banks are prohibited from issuing/accepting withdrawal slips or
any other similar instruments designed to effect withdrawals of
savings deposits without requiring the depositors concerned to
present their passbooks and accomplishing the necessary
withdrawal slips, except for bank authorized by the BSP to adopt
the no passbook withdrawal system (Sec. X214, Manual of
Regulations for Banks, or MORB).

b. The requirement of presentation of passbooks is usually included in

the terms and conditions printed in the passbooks. A bank is
negligent if it allows the withdrawal without requiring the
presentation of a passbook (Sundiang, Sr., (2014) Reviewer on
Commercial Law, p. 317).

3. Negotiable Order of Withdrawal Accounts (NOW) are interest-bearing

deposit accounts that combine the payable on demand feature of
checks and investment feature of savings accounts (Sundiang, Sr.,
(2014) Reviewer on Commercial Law, p. 317).

NOW Accounts are withdrawable by means of Negotiable Orders of

Withdrawal (Miravite, J. (2013), Bar Review Materials in Commercial
Law).

4. Time deposit are interest-bearing deposits with specific maturity dates

and evidenced by certificates issued by the bank(Miravite, J. (2013),
Bar Review Materials in Commercial Law).

NOTE: Demand, savings, NOW accounts, time deposits and deposit

substitutes shall not be subject to interest ceilings (Sec. X242,
MORB).

III. B. LOAN FUNCTION

RULES and RESTRICTIONS

1. A bank shall grant loans and other credit accommodations only in
amounts and for the periods of time essential for the effective
completion of the operations to be finance (Sec. 39, GBL).

2. Such grant of loans and other credit accommodations shall be

consistent with safe and sound banking practices (Sec. 39, GBL).

3. Before granting a loan or other credit accommodation, a bank must

ascertain that the debtor is capable of fulfilling his commitments to
the bank. (Sec. 40, GBL)

PAYMENTS

1. The amortization schedule of bank loans and other credit

accommodations shall be adapted to the nature of the operations to be
financed (Sec. 44, GBL).

2. Loans and other credit accommodations with maturities of more than

five (5) years, provisions must be made for periodic amortization
payments, but such payments must be made at least annually (Sec.
44, GBL).

3. A borrower may at any time prior to the agreed maturity date prepay,
in whole or in part, the unpaid balance of any bank loan and other
credit accommodation, subject to such reasonable terms and
conditions as may be agreed upon between the bank and its borrower
(Sec. 45, GBL).

SINGLE BORROWER’S LIMIT

CEILING
Except as the Monetary Board may otherwise prescribe for reasons
of national interest, the total amount of loans, credit
accommodations and guarantees as may be defined by the
Monetary Board that may be extended by a bank to any person,
partnership, association, corporation or other entity shall at no
 time exceed twenty five percent (25%) of the net worth of such
bank (as increased by BSP Circular No. 425). The basis for
determining compliance with single-borrower limit is the total
credit commitment of the bank to the borrower (Sec. 35.1, GBL).

Unless the Monetary Board prescribes otherwise, the total amount

of loans, credit accommodations and guarantees prescribed in the
preceding paragraph may be increased by an additional ten percent
(10%) of the net worth of such bank provided the additional
liabilities of any borrower are adequately secured by trust receipts,
shipping documents, warehouse receipts or other similar
documents transferring or securing title covering readily
marketable, non-perishable goods which must be fully covered by
insurance (Sec. 35.2, GBL).

Net worth means the total and unimpaired paid-in capital including paid-
in surplus, retained earnings and undivided profit, net valuation of
reserves and other adjustments as may be required by the BSP (Section
24, GBL).

DOSRI ACCOUNTS

Restrictions (not a total prohibition) are imposed on borrowings and

security arrangement by Directors, Officers and Stockholders of the bank
directors, officers, stockholders and their Related Interests (hence, the
term DOSRI)

RATIONALE

Section 83 of RA 337(General Banking Act), as well as other banking

laws adopting the same prohibition, was enacted to ensure that loans by
banks and similar financial institutions to their own directors, officers,
and stockholders are above board. Banks were not created for the benefit
of their directors and officers; they cannot use the assets of the bank for
their own benefit, except as may be permitted by law (Jose C. Go vs.
Bangko Sentral Ng Pilipinas, G.R. No. 178429, October 23, 2009).
 [AUTHOR’S NOTE (A/N): Section 83 of RA 337(General
Banking Act) was adopted by RA 8791(GBL of 2000) and
became the basis of Section 36 thereof.]

NOTE:

1. Loans, credit accommodations or guarantees extended by a

bank to DOSRI are also termed as “insider lending”,
“self-dealing transaction” or “related party lending”.

2. DOSRI loans are not prohibited; they are merely restricted

or regulated, i.e. certain ceilings/limits have to be observed
and certain procedural and reportorial requirements have
to be complied with.

REQUISITES UNDER ARTICLE 26 OF NCBA

1. The borrower is a director, officer or any stockholder of a bank

(and related interests);

2. He contracts a loan or any form of financial accommodation;

3. The load or financial accommodation is from: (1) his bank, or (2)

a bank that is a subsidiary of a bank holding company of which
both his bank and lending bank are subsidiaries, (3) a bank in
which a controlling proportion of the shares is owned by the same
interest that owns a controlling proportion of the shares of his
bank; and

4. The loan or financial accommodation of the director, officer or

stockholder, singly or with that of his related interests, is in excess
of 5% of the capital and surplus of the lending bank or in the
maximum amount permitted by law, whichever is lower.

RESTRICTIONS UNDER THE GBL

DOSRI Accounts are subject to the following rules under Section 36 of

the GBL:
 1. Procedural Requirement. The account should be upon written
approval of the majority of all the directors of the lending bank
excluding the director concerned.

2. Arms Length Rule. The account should be upon terms not less
favorable to the bank than those offered to others.

3. Reportorial Requirement. The resolution approving the loan

shall be entered in the records of the bank and a copy of the entry
shall be transmitted forthwith to the Supervising and Examination
Sector of the BSP.

4. Aggregate Ceilings. The Monetary Board may regulate the

amount of loans, credit accommodations and guarantees that may
be extended, directly or indirectly, by a bank to its directors,
officers, stockholders and their related interests, as well as
investments of such bank in enterprises owned or controlled by
said directors, officers, stockholders and their related interests. The
Manual of Regulations for Banks provide that the aggregate is
fifteen percent (15%) of the total loan portfolio of the bank or one
hundred percent (100%) of the combined capital accounts
whichever is lower.

5. Individual Ceilings. The outstanding loans, credit

accommodations and guarantees which a bank may extend to each
of its stockholders, directors, or officers and their related interests,
shall be limited to an amount equivalent to their respective
unencumbered deposits and book value of their paid-in capital
contribution in the bank.

“Section 83 of RA 337 actually imposes three restrictions: approval,

reportorial, and ceiling requirements.

The approval requirement refers to the written approval of the majority

of the bank’s board of directors required before bank directors and
officers can in any manner be an obligor for money borrowed from or
loaned by the bank. Failure to secure the approval renders the bank
director or officer concerned liable for prosecution and, upon conviction,
subjects him to the penalty provided in the third sentence of first
paragraph of Section 83.

The reportorial requirement, on the other hand, mandates that any

such approval should be entered upon the records of the corporation,
and a copy of the entry be transmitted to the appropriate supervising
department. The reportorial requirement is addressed to the bank itself,
which, upon its failure to do so, subjects it to quo warranto proceedings
under Section 87 of RA 337.20

The ceiling requirement under the second paragraph of Section 83

regulates the amount of credit accommodations that banks may extend
to their directors or officers by limiting these to an amount equivalent to
the respective outstanding deposits and book value of the paid-in capital
contribution in the bank. Again, this is a requirement directed at the
bank. In this light, a prosecution for violation of the first paragraph of
Section 83, such as the one involved here, does not require an allegation
that the loan exceeded the legal limit. Even if the loan involved is below
the legal limit, a written approval by the majority of the bank’s directors
is still required; otherwise, the bank director or officer who becomes an
obligor of the bank is liable. Compliance with the ceiling requirement
does not dispense with the approval requirement.

Evidently, the failure to observe the three requirements under Section 83

paves the way for the prosecution of three different offenses, each with
its own set of elements. A successful indictment for failing to comply with
the approval requirement will not necessitate proof that the other two
were likewise not observed.” (Jose C. Go vs. Bangko Sentral Ng Pilipinas,
G.R. No. 178429, October 23, 2009).

NOTE: The ceilings do not apply to loans, credit accommodations and

guarantees (1) secured by assets considered by the Monetary Board as
non-risk items, (2) under a fringe benefit plan approved by the BSP, and
(3) extended by cooperative banks to its cooperative stockholders.
 2012 BAR QUESTION

All senior officers of ABC Bank are entitled to obtain a housing

loan. X is an Executive Vice President for Operations of ABC
Bank. She obtained a housing loan with the ABC Bank. It is now
argued that the loan is a DOSRI loan and must therefore be
approved by the Board of Directors of the bank. Is the argument
correct?

SUGGESTED ANSWER: NO, the argument is NOT correct. While

the loan is a loan of an officer, the housing loan is not covered
by the DOSRI Rules requiring approval of the Board of Directors.
The housing loan of X is part of the compensation package of the
officer as an employee. Hence, it does not require approval of the
Board.

RESTRICTIONS UNDER NCBA

1. The borrower (director, officer or any stockholder of a bank (and

related interests)) shall be required by the lending bank to waive
the secrecy of his deposits of whatever nature in all banks in the
Philippines (Sec. 26, NCBA).

2006 BAR QUESTION

Pio is the president of Western Bank. His wife applied for a loan
with the said bank to finance an internet café. The loan officer
told her that her application will not be approved because the
grant of loans to related interests of bank directors, officers, and
stockholders is prohibited by the General Banking Law. Explain
whether the loan officer is correct.

SUGGESTED ANSWER: The loan officer is NOT correct. The

General Banking Law (GBL) does NOT prohibit loans to related
interests. What Sec. 36 of the GBL states is that loans to related
interests is allowed provided: a) there is a written approval of the
 majority of all the directors of the bank, excluding the director
concerned; b)the loan shall not be less favorable to the bank
than those offered to others; c) there is a waiver of the secrecy of
bank deposits law; and d) ceiling/limitation is observed.

SANCTION AGAINST DIRECTOR OR OFFICER

After due notice to the board of directors of the bank, the office of any
bank director or officer who violates the provisions of this Section may be
declared vacant and the director or officer shall be subject to the penal
provisions of the New Central Bank Act (Sec. 36, GBL ).

VIOLATION OF DOSRI RULES WILL NOT RENDER A LOAN VOID

The loans, assuming that they were of a Directors, Officers, Stockholders

and their Related Interests (DOSRI) nature without the benefit of the
required approvals or in excess of the Single Borrower’s Limit, would not
be void for that reason – instead, the bank or the officers responsible for
the approval and grant of the DOSRI loan would be subject only to
sanctions under the law. (Republic v. Sandiganbayan, 649 SCRA 47, 12
April 2011)

COLLATERALS

VALUE OF COLLATERALS
The loan shall not exceed 75% of the appraised value of the real property
plus 60% of the appraised value of the improvement or 75% of the
appraised value of the chattel (Sec. 37 and 38, GBL).

[AUTHOR’S NOTE (A/N): Chattels (i.e. car) refer to movable

or personal property (Arts. 416 and 417, Civil Code), as
distinguished from immovable or real property (i.e. parcel of
land, buildings) (Art. 415, Civil Code).]

2008 BAR QUESTION

 Industry Bank, which has a net worth of P 1 Billion, extended a
loan to Celestial Properties Inc. amounting to P270 Million. The
loan was secured by a mortgage over a vast commercial lot in
the Fort Bonifacio Global City, appraised at P350 Million. After
audit, the Bangko Sentral ng Pilipinas gave notice that the loan
to Celestial Properties exceeded the single borrower’s limit of
25% of the bank’s net worth under a recent BSP Circular. In
light of other previous similar violations of the credit limit
requirement, the BSP advised Industry Bank to reduce the
amount of loan to Celestial Properties under pain of severe
sanctions. When Industry Bank informed Celestial Properties
that it intended to reduce the loan by P50 Million, Celestial
Properties countered that the bank should first release a part of
the collateral worth P50 Million. Industry Bank rejected the
counter-proposal, and referred the matter to you as counsel.
How would you advise Industry Bank to proceed, with its best
interest in mind?

SUGGESTED ANSWER: Industry Bank should release a part of

the collateral as countered by Celestial Properties. The release
does not affect the validity of the loan transaction because it is
still adequately secured by the remaining collateral. This is
likewise within the 75% limit on loans and other credit
accommodations.

[A/N: The release of a part of the collateral and reduction of the

loan results to a P220 Million loan secured by P300 Million real
property as collateral. In the instant case, the loan extended is
merely 73% of the appraised value of the real estate security and
hence, it did not exceed the 75% limit.

The Single Borrower’s Limit was used in this problem to justify

the reduction of the loan.]

PROHIBITED ACTS OF BORROWERS

No borrower of a bank shall —

 1. Fraudulently overvalue property offered as security for a loan or
other credit accommodation from the bank;

2. Furnish false or make misrepresentation or suppression of material

facts for the purpose of obtaining, renewing, or increasing a loan or
other credit accommodation or extending the period thereof;

3. Attempt to defraud the said bank in the event of a court action to

recover a loan or other credit accommodation; or

4. Offer any director, officer, employee or agent of a bank any gift, fee,
commission, or any other form of compensation in order to
influence such persons into approving a loan or other credit
accommodation application (Sec. 55.2, GBL).

IV. OWNERSHIP OF BANKS

FOREIGN OWNERSHIP

1. INDIVIDUALS AND NON-BANKS (Sec. 11, GBL)

a. Foreign individuals and non-bank corporations may own or control

up to forty percent (40%) of the voting stock of a domestic bank.
b. The percentage of foreign-owned voting stocks in a bank shall be
determined by the citizenship of the individual stockholders in that
bank. The citizenship of the corporation which is a stockholder in a
bank shall follow the citizenship of the controlling stockholders of
the corporation, irrespective of the place of incorporation. [A/N:
This is known as the CONTROL TEST.]

Controlling stockholders refer to individuals holding more than

fifty percent (50%) of the voting stock of the corporate
stockholder of the bank.

FOREIGN OWNERSHIP IN THRIFT BANKS - In case of a

merger or consolidation with a foreign holding, foreign
ownership is limited to 60% (Sec. 8, Thrift Banks Act).

FOREIGN OWNERSHIP IN RURAL BANKS

 Section 4 of the Rural Banks Act (RA 7353), which
prohibits foreign ownership of the capital stock of a rural
bank, was amended by RA 10574.

(Old law) Sec 4 of the Rural Banks Act – the capital

stock of any rural bank shall be fully owned and held directly
or indirectly by citizens of the Philippines or corporations,
associations or cooperatives qualified under Philippine laws to
own and hold such capital stock.

(New law), RA 10574 amended Section 4 of the Rural

Banks Act and allowed foreigners to own up to 60% of the
voting stocks in rural banks.

2. FOREIGN BANKS

Foreign banks are not subjects to the 40% limitations prescribed under
Section 11 of the GBL. The law allows 100% foreign bank equity (R.A. No.
10641).

Under the new law, with authority from the Monetary Board, foreign
banks may acquire 100% of the voting stocks of an existing bank or
invest in up to 100% of the voting stocks of a new subsidiary (R.A. No.
10641).

FILIPINO STOCKHOLDINGS

Section 11 of the GBL provides that the rule – limiting ownership and
control of voting stocks to forty percent (40%) of voting stock - shall apply
to Filipinos and domestic non-bank corporations.

NOTE: The restriction on foreigners refers to the total equity

participation, while the restriction on Filipinos and domestic non-bank
corporations refer to individual equity participation.

STOCKHOLDINGS OF FAMILY GROUPS OR RELATED INTERESTS

1. The law does not prohibit ownership of the stock by members of the
same family or related interests.

Family Groups or Related Interests. The law provides that

stockholdings of individuals related to each other within the fourth
degree of consanguinity or affinity, legitimate or common-law, shall
be considered family groups or related interests and must be fully
disclosed in all transactions by such an individual with the bank
(Sec. 12, GBL).

2. Two or more corporations owned or controlled by the same family

group or same group of persons shall be considered related interests
and must be fully disclosed in all transactions by such corporations
or related groups of persons with the bank.(Sec. 13, GBL)

TABLE OF INVESTMENTS BY INDIVIDUAL AND JURIDICAL

INVESTORS

INDIVIDUAL and NON-BANK BANK

CORPORATION
Filipino Foreign Domestic Bank Foreign Bank
40% of the 40% of the 100% of the
voting stock for voting stock for (Please refer to the voting stock a
UBs, KBs, TBs UBs, KBs, TBs succeeding table) domestic bank
and 60% of the and 60% of the (e.g. UBs, KBs,
voting stock for voting stock for TBs, RBs) (R.A.
RBs. RBs. 10641)
Note: This only
applies to a
qualified Foreign
Bank.

The equity investment of a bank in a single financial allied undertaking

shall be within the following ratios in relation to the total subscribed
capital stock and to the total voting stock of the allied undertaking:
 TABLE OF EQUITY INVESTMENTS
(Sec. X378 of MORB, as amended by Circular No. 530, Series of 2006)

INVESTOR
ACTIV UB KB TB RB CB
ITIES Publicly Not Publicly Not
-Listed Listed -Listed Listed
UB 100% 49% 100% 49% 49% 49% 49%
KB 100% 49% 100% 49% 49% 49% 49%
TB 100% 100% 49% 49% 49%
RB 100% 100% 49% 49% 100%
CB NA NA NA NA 30%

NOTE: A publicly-listed UB or KB may own up 100% of the voting stock

of only one other UB or KB. Otherwise, it shall be limited to a minority
holding.

V. TRUST OPERATIONS OF BANKS

A bank may be authorized by the Monetary Board to engage in trust

business and act as trustee or administer any trust or hold property in
trust or on deposit for the use, benefit, or behoof of others (Sec. 79,
GBL). The Securities and Exchange Commission shall not register the
articles of incorporation and by-laws or any amendment thereto, of any
trust entity, unless accompanied by a certificate of authority issued by
the Bangko Sentral (Sec. 81, GBL).

A trust entity shall administer the funds or property under its custody
with the diligence that a prudent man would exercise in the conduct of
an enterprise of a like character and with similar aims (Section 80, GBL).
This is known as the PRUDENT-MAN RULE.

Any activity resulting from a trustor-trusteee relationship (trusteeship)

involving the appointment of a trustee by a trustor for the
administration, holding, management of funds and /or properties of the
trustor by the trustee for the use, benefit or advantage of the trustor or of
the others called beneficiaries (Sec. X403[a], MORB).

A trust-licensed bank may also be involved in other fiduciary business

which refer to any activity resulting from a contract or agreement
whereby a bank binds itself to render services or to act in a
representative capacity such as in an agency, guardianship,
administratorship or wills, properties or estates, executorship,
receivership, and other similar services which do not create or result in a
trusteeship. (Sec. X403[b], MORB)

POWERS OF TRUST ENTITY

A trust entity, in addition to the general powers incident to corporations,

shall have the power to:
1. Act as trustee on any mortgage or bond issued by any municipality,
corporation, or any body politic and to accept and execute any trust
consistent with law;
2. Act under the order or appointment of any court as guardian, receiver,
trustee, or depositary of the estate of any minor or other incompetent
person, and as receiver and depositary of any moneys paid into court
by parties to any legal proceedings and of property of any kind which
may be brought under the jurisdiction of the court;
3. Act as the executor of any will when it is named the executor thereof;
4. Act as administrator of the estate of any deceased person, with the will
annexed, or as administrator of the estate of any deceased person
when there is no will;
5. Accept and execute any trust for the holding, management, and
administration of any estate, real or personal, and the rents, issues
and profits thereof; and
6. Establish and manage common trust funds, subject to such rules and
regulations as may be prescribed by the Monetary Board (Sec. 83,
GBL).

SEPARATION OF TRUST BUSINESS OF BANKS

The law prohibits the integration of the properties and funds of all the
other businesses of the bank with those of the trust

The trust business and all funds, properties or securities received by any
trust entity as executor, administrator, guardian, trustee, receiver, or
depositary shall be kept separate and distinct from the general business
including all other funds, properties, and assets of such trust entity. The
accounts of all such funds, properties, or securities shall likewise be kept
separate and distinct from the accounts of the general business of the
trust entity (Sec. 87, GBL).

VI. FOREIGN BANKS

The laws that govern a foreign bank regarding its (i) creation, formation,
organization or dissolution of corporation, or (ii) for the fixing of the
relations, liabilities, responsibilities or duties of stockholders, directors,
or officers of corporations shall be the laws under which the foreign bank
was formed and not Philippine laws (Sec. 77, GBL)

The Monetary Board may be allowed to revoke the license of a foreign

bank in the following instances:

1. When the foreign bank is insolvent or in imminent danger thereof; and

2. When the continuance in business of the foreign bank will involve

probable loss to those transacting business with it (Sec. 78, GBL)

Once the licensed is revoked, it shall be unlawful for such foreign bank
to transact business in the Philippines unless its license is renewed or
re-issued (Sec. 78, GBL).