BANKING

INDUSTRY

Submitted By:
De Lara, Pia
Mendoza, Eleanor
Romares, Adarose

Submitted To:
Mrs. Sitte Ayesa Lacelle Gadia
Introduction
A nation’s banking system is fundamental to a healthy and properly functioning
economy. Banks are not just vital for the individual financial management of consumers,
it also serves a greater purpose to the grander scheme of things – the economy. The
banking and finance sector performs a critical function in the Philippine economy as it is
primarily responsible for the mobilization of domestic savings and the conversion of
these funds into directly productive investments. The role of banks in the economy is to
promote capital formation, investment in enterprises, promotion of trade industry,
Development of agriculture, balanced development of different regions, Influencing
economic activity, implementation of monetary policy, monetization of the economy, and
lastly is export promotion cells. It is very important for the banking and finance sector to
continue finding ways to encourage households to save their unspent income in various
financial assets so that these resources could be used and transformed into loans that
will finance the expansion of directly productive business ventures.
The financial system is composed of two general groups namely: banks and non-bank
financial institutions. Banking institutions include: universal banks, commercial banks,
thrift or savings banks and the rural and cooperative banks. These institutions are
allowed to collect savings and time deposits to fund loans and also perform the function
of providing credit and payment services. Large banks, particularly the universal and
commercial banks, are allowed to engage in other intermediation activities such as
investment banking and may offer other forms of portfolio investment instruments and
insurance products.
Non-bank financial institutions on the other hand, are composed of insurance
companies, pension fund institutions, investment banks, financing companies,
pawnshops and mutual fund institutions. These institutions are not allowed to collect
deposits but may encourage the general public to invest household savings in various
financial instruments. Premium payments for term insurance policies, regular
contributions to pension funds, investment into mutual funds or purchases of shares of
stock in financing companies and pawnshops are some of the ways by which non-bank
financial institutions can source funds in order to finance lending and or investment
operations.
Nature of Industry
A. Service-oriented Industry
The banking and finance sector is primarily responsible for mobilizing domestic savings
and converting these funds into directly productive investments. Financing the needs of
firms which desire to raise productive capacity by purchasing additional capital
equipment, acquiring or leasing idle property, building and expanding factories, and
increasing inventory are responsible for sustaining economic growth in the long term,
alongside the creation of new jobs.
Banks perform the function of safekeeping money and valuables and extending loans,
credit and payment services in the form of checking accounts, money orders, cashier’s
checks as well as the issuance of debit and credit cards. Large banks (particularly the
universal and commercial banks) are also allowed to engage in other intermediation
activities such as investment banking (underwriting debt instruments and or stocks for
other firms) and may offer other forms of portfolio investment instruments and insurance
products.
B. Industry Sub-sectors
i. Banks and Non-Bank Financial Institutions
The financial system is composed of two general groups namely: bank and non-bank
financial institutions. The banking institutions include the universal banks, commercial
banks, thrift or savings banks, and the rural and cooperative banks.
Universal and commercial banks have the largest resources and offer the widest variety
of banking services outside of collecting deposits and providing loans. These other
services include underwriting and other functions of investment houses,investing in
equities and non-allied undertakings. Thrift banks include savings and mortgage banks,
private development banks, stock savings and loan associations and micro-finance thrift
banks. They accumulate the savings of depositors and provide housing loans and
financing for short-term working capital as well as medium and long term financing to
small and medium scale enterprises engaged in agriculture, services, and industry.
Rural and cooperative banks promote and expand the rural community by mobilizing
savings and extending loans and other financial services to farmers to help with the
purchase of seeds, livestock, fertilizers, and other farm inputs and the marketing of their
produce.
Non-bank financial institutions, on the other hand, are composed of insurance
companies, pension fund institutions, investment banks, financing companies,
pawnshops, and mutual fund institutions.
There are several types of non-bank financial institutions offering a wide variety of
services such as investment houses, financing companies, investment companies,
securities dealers/brokers, lending investors, government non-bank financial institutions,
venture capital corporations, non-stock savings and loans associations, pawnshops and
credit card companies.
Industry’s Prudential Regulation

An effective prudential regulator is central to a safe and sound banking system. In the
Philippines, that role is fulfilled entirely by the BSP. Section 4 of the Genera Banking
Law expressly states that the 'operations and activities of banks shall be subject to
supervision of the Bangko Sentral'. Supervision, as defined in Section 4, not only
contemplates the promulgation by the BSP of rules of conduct and standards of
operations for banks (now set out in the Manual of Regulations for Banks, as
supplemented or modified by the BSP from time to time), but also visitorial powers; that
is, the conducting of examinations and investigations of the activities of banks with a
view to determining their compliance with those rules and standards, and enforcing
prompt and corrective action in cases of breaches of the same. Ultimately, the aim is to
ensure the continued solvency and liquidity of banks.
The Bangko Sentral ng Pilipinas (BSP) is the independent central monetary authority of
the Philippines that has regulatory and supervisory power over banks and non-bank
financial institutions. The BSP supervises the nation’s banking system. Non-bank
financial institutions such as insurance companies and investment houses are overseen
by the Insurance Commission and Securities and Exchange Commission respectively.
Management of banks
The management of a locally incorporated bank (such as a subsidiary of a foreign bank)
is vested in a board of directors with five to 15 members, at least two of whom must be
independent directors. Foreign nationals may become directors to the extent of the
foreign equity in the bank concerned. The Monetary Board has prescribed the criteria
for individuals to be elected as bank directors, in line with the fit and proper rule, to
maintain the quality of bank management, and better protect depositors and the public
in general. Here, the Monetary Board considers the integrity, experience, education,
training and competence of the individual concerned. The election of bank directors
must be confirmed by the Monetary Board.
The BSP published the Handbook on Corporate Governance 'to improve corporate
governance in the Philippine banking system'. The BSP also issued the rules of
procedure on administrative cases involving directors and officers of banks.It is also
aligning its rules with international best practices that foster good corporate governance
in the banking sector, such as the Principles for Enhancing Corporate Governance
promulgated by the Basel Committee on Banking Supervision. In this regard, the BSP
has required each bank to appoint a full-time chief compliance officer to manage a
compliance system designed to identify and mitigate business risks that may erode the
franchise value of the bank.
Conduct of business
Section 2 of the GBL requires banks to exercise 'high standards of integrity and
performance'. A breach of this fiduciary duty could make the erring bank liable for
damages to its customers, and result in the conduct of banking business in an unsafe
and unsound manner that may lead to a bank run and eventual insolvency. To minimize
this systemic risk, prudential measures have been put in place in the GBL and the
Manual of Regulations for Banks. Apart from the capital adequacy discussed earlier,
these measures include the reserve requirement, single borrower's limit (SBL), the
directors, officers, stockholders and related interests (DOSRI) limit, loan-loss
provisioning and equity investment limit.
i Reserves
Banks are required to maintain reserves against their deposit and deposit-substitute
liabilities. The reserve requirements are not static, as they may be varied from time to
time by the Monetary Board. The BSP imposed a unified reserve (initially of 18 per cent)
for the deposit and deposit-substitute liabilities of universal and commercial
banks.These reserves, aside from being an instrument of monetary policy of the BSP,
have a prudential purpose, since they serve as a ready source of funds that will respond
to an unusually large number of withdrawals of deposits taking the shape of a bank run.
Under manageable circumstances, the reserves and other funds at the bank's disposal
should stem the run.
ii SBL
The SBL serves to allocate bank resources to different sectors of the economy. It
prevents banks from making excessive loans and other credit accommodations to a
single borrower or corporate group. Thus, banks are prohibited from placing all their
eggs in the basket of a single client, thereby safeguarding them from too large a risk
exposure to a single client. Currently, the SBL is 25 per cent of the net worth of a bank.
iii DOSRI limit
The general policy behind the DOSRI limit is to level the lending field between insiders
(namely, directors, officers, stockholders and their related interests) and outsiders. The
rules require that loans and other credit accommodations to DOSRI are to be in the
regular course of business and upon terms no less favorable to the bank than those
offered to those outside the DOSRI circle. The aim is to prevent banks from becoming a
captive source of finance of the DOSRI.
The existing DOSRI rules have three ceilings: an individual ceiling, an aggregate ceiling
and a ceiling on unsecured loans. The individual ceiling relates to the total allowable
outstanding direct credit accommodation to a DOSRI, which is an amount equivalent to
the individual's unencumbered deposits in the lending bank plus the book value of the
paid-capital contribution therein. It is also required that the unsecured credit
accommodations must not exceed 30 per cent of the total DOSRI credit
accommodations. On the other hand, the aggregate ceiling refers to the total credit
accommodations to DOSRI: this is 15 per cent of the total loan portfolio of the bank or
100 per cent of its net worth, whichever is lower.
iv Loan-loss provisioning
Appendix 15 to the Manual of Regulations for Banks contains the basic minimum
guidelines for setting up allowances for credit losses (ACL) in respect of banks 'with
operations that may not economically justify a more sophisticated loan loss estimation
methodology or where practices fell short of expected standards'. Loans and other
credit accommodations with unpaid principal or interest are to be classified (as pass,
especially mentioned, substandard, doubtful or loss, as the case may be) and provided
with ACL based on the number of days of missed payments.
v. Equity investment limit
There are limits as to how much universal and commercial banks can invest in equities
of enterprises. Under Section 24 of the GBL, the total investment by a universal bank in
equities of allied and non-allied enterprises must not exceed 50 per cent of its net worth,
while its equity investment in any one enterprise is not to exceed 25 per cent of its net
worth. On the other hand, the total investment by a commercial bank in equities of allied
enterprises must not exceed 35 per cent of its net worth, while the individual limit is 25
per cent of its net worth. It must be stressed that only universal banks can invest in non-
allied enterprises. In all cases, the approval of the Monetary Board is required.
The bank is subject to certain confidentiality obligations. Any information relating to the
funds or properties of clients of a bank are to be kept confidential by that bank and its
directors, officers, employees or agents.
vi. Funding
Funding for banks comes from equity contributions from its shareholders, and from
loans and credit accommodations from the BSP and other lenders.
The BSP has prescribed certain minimum levels of capitalization for banks. For
instance, a universal bank (with more than 100 branches) must have a minimum paid-in
capital of 20 billion Philippine pesos at the time of its establishment, while a commercial
bank (with the same number of branches) must have 15 billion Philippine pesos.
Furthermore, the risk-based capital adequacy ratio of universal and commercial banks
has continued to be above the BSP's minimum ratio of 10 per cent and the Basel
Accord's standard ratio of 8 per cent, despite global financial uncertainties. The BSP, for
its part, provides rediscounting and other credit facilities to banks, including loans for
liquidity purposes and emergency loans during periods of financial panic that directly
threaten monetary and banking stability.

Industry Grouping of Banking Institutions

In addition, Under the industry grouping of banking institutions (except Central Banking)
are nine (9) general categories of occupations namely: 1) Statisticians; 2) Accountants
and Auditors; 3) Economists; 4) Bookkeepers; 5) Accounting and Bookkeeping Clerks;
6) Statistical and Finance Clerks; 7) Tellers; 8) Customer Service Representative and
Associates in Call Centers and; 9) Unskilled workers except Janitors, Messengers and
Freight Handlers. These categories of occupations were set and identified by their
numbered codes under the Philippine Standard for Occupation Classification (PSOC).
The banking institutions (except Central Banking) industry group, on the other hand, is
number coded under the Philippine Standard for Industrial Classification (PSIC J6510).
The non-bank financial intermediation sector (PSIC J66) contains ten (10) general
categories of occupations, where eight (8) of these occupations are identical to those in
the banking industry. The two (2) other occupations which differentiate the non-bank
financial intermediation sector are: Securities and Finance Dealers and Brokers (PSOC
3411) and Debt Collectors and Related Workers (PSOC 4215).
Industry Core Occupation and Function
The core occupations in banking mainly focus on the performance of the core banking
functions particularly the mobilization and accumulation of savings and time deposits,
the provision of loans to businesses, consumers and real estate mortgages and the
facilitation of payments in the financial system. These core occupations cannot be
outsourced because of the need to have direct contact between the banks and their
customers . Banks develop relationships with customers in order to build up the clients
trust and confidence in the financial institution considering that most transactions
involve the safe keeping of hard earned savings, the availment of loans as well as
repayment of other contractual obligations.
These core occupations include the following:
• Bank tellers – responsible for processing transactions for customers which include
cashing checks, accepting deposits as well as loan payments, withdrawing funds from
customer’s accounts, opening and closing accounts, verifying customer’s identity prior
to a transaction and the preparation of daily transaction reports. Marketing the bank’s
various financial services is also expected from this frontline position. Fresh college
graduates are normally hired for this position. They are expected to be computer
literate, are proficient in arithmetic, have good interpersonal and oral communication
skills and possess the ability to listen well to customers and provide the appropriate
service. Most of the training is done on the job with complete supervision by
experienced tellers and branch officers (Kolakowski, 2013).
• Loan officers - assist potential borrowers with their loan applications, determine the
type of loans suitable for their projects, assess the credit worthiness of borrowers and to
a certain extent market loan programs to various industries. The position requires a
Bachelor’s degree in finance, accounting or economics. A Master’s degree in Business
Administration will be an advantage alongside accumulated work experience. Loan
officers must have strong quantitative and analytic skills (Kolakowski, 2013).
• Investment bankers – raise funds for corporations by structuring the issuance of
securities such as stocks and bonds, advice corporations on mergers and acquisitions.
They must possess strong quantitative analytical abilities and excellent sales skills. A
Bachelor’s degree in finance, accounting or economics will be required. A Master’s
degree in Business Administration will also be an advantage alongside extensive work
experience in the investment banking functions (Kolakowski, 2013).
• Accountants, Auditors and Bookeepers – responsible for recording all transactions
entered into by the bank, produce the financial reports needed by both management
and banking regulatory agencies and ensure that all declarations made in the financial
statements are supported by official documents to preserve the truth and integrity of the
reports. A bachelor’s degree in accounting is required alongside the passing of the
Certified Public Accountants Licensure Examinations.
PART TWO: RISKS IN BANKING INDUSTRY
Introduction
We live in an uncertain world where we don’t know for sure what will occur in the future.
Risk is uncertainty that matters because it affects peoples’ welfare. In banking, it is
exposure to the uncertainty of an outcome because of the position or stake a bank
takes in the market.
The business of banking is one of taking risk. Risk will arise from the various products
and services of the banks like lending, treasury, online banking, payment services and
the like. Banks are exposed to both financial and non-financial risk.
Example of financial risks are credit risk, market risk, and asset and liability
management risk. Non-financial risks include operational risk, legal and compliance risk,
strategic risk and reputational risk. Other risks identified for today’s more complex world
as observed in an article by Snena Sutania include systemic risk, cyber security risk,
moral hazard and open-banking risk.
FINANCIAL RISKS:
✓ Credit risk is the result of failure to pay obligations by the bank borrower or counter-
party regarding the terms agreed with the bank. This includes both uncertainties
involved in repayment of bank dues and repayment of dues on time. The classic
example of this risk is the subprime crisis that affected global and national banks with
heavy losses due to incorrect evaluation and monitoring of potential default rates on
mortgage payments by subprime borrowers. The bank’s lending units are exposed to
this risk.
✓ Market risk is defined as the risk of losses in on- or off- balance sheet positions that
arise from movement in market prices. This can be subdivided into: interest risk ( due to
change in interest rates), equity risk (due to change in stock prices), commodity risk
(due to change in commodity prices) and foreign exchange risk (due to exchange rate
fluctuations affecting the bank’s assets or liabilities).
✓ Asset and liability management risk arises from the bank’s balance sheet
mismatches. This happens when banks generate fund from short-term deposits yet lend
to corporations, investors and individuals on a long-term tenor and may at some point
expose the banks to maturity mismatch in the banking book. It also includes liquidity
risk, the inability of a bank to finance its day to day operations.
NON-FINANCIAL RISKS:
✓ Operational risk pertains to the “risk of everything other than the market and credit
risk”. In simpler terms, it is a result from inadequate or failed internal processes, people,
systems or external events.
✓ Legal risk is the possibility that lawsuits, adverse judgments or faulty contracts disrupt
or adversely affect the operations or conditions of the bank, exposing it to penalties,
sanctions or private settlements. On the other hand, compliance risk is the risk arising
from violations with laws, rules and regulations and policies that in one way or another,
when exposed to public, may lead to the next risk which is reputational risk.
✓ Reputational risk which pertains to the loss of trust from public due to negative
perception or image even without the evidence of wrongdoing by the bank.
✓ Strategic risk is about loss in earnings, capital or reputation due to changes in the
business environment, adverse strategic decision and improper implementation of
decisions that may be responsive to changes in the economic industry.

In today’s technology-age, it is no wonder that cybersecurity has become a major threat

to the banking industry, with records of hacking incidents in North America’s big banks.
Indeed, banks are now vigilant in keeping electronic information private and safe from
damage, misuse or theft. Open banking risks is the attempt of banks to become fully
digital resulting to an environment that may enable more fraudulent transactions which
will result to or increase cybersecurity risk. Moral hazard refers to the probability of a
bank to take on unprecedented levels of risk without evaluating the economic
soundness of the decision for all parties involved. Systemic risk is the possibility to bring
down the entire financial system on a stand still that was seen during the dot-com
bubble in 1995 or the housing market crash of 2008. This refers mainly to banks
referred to as too big to fail.

Cybersecurity concerns continue to confront financial institutions (both locally and

worldwide). Top cyber-threats include card skimming, phishing attacks, ransomware
and other malware. Accordingly, the BSP has directed banks to adopt advanced
cybersecurity controls and countermeasures, and to improve the management of
information security risks and exposures.

Meanwhile, the money laundering incident in 2016 where proceeds from the hacking of
the Bangladesh Bank were permitted to enter the Philippine financial system prompted
the BSP to update anti-money laundering guidelines. The new regulation emphasizes
the use of a risk-based approach to the KYC processes.

Conclusion
Clearly, banks today are exposed to many risks that require significant resources in a
highly complex ecosystem. Banks can exercise a large degree of control over certain
risks by enabling and investing in efficient internal and external controls, systems and
processes. The skills, knowledge and abilities necessary to handle the function require
the development of sophisticated competencies in the area. Therein lies the challenge
for the the bank’s transformation.
PART THREE: ACCOUNTING AND REGULATORY FRAMEWORK
Banking Industry: Accounting Standards

1. Financial Instruments (IFRS 9/IAS 39, IAS 32)

Banks enter into many complicated transactions, issue various types of compound
financial instruments (in which both equity and liability element is present, e.g.
convertible bond), generate loans to different portfolios of clients with different credit risk
and many others. Within the financial instruments, the hottest issues are as follows:

1.1 Impairment of financial assets

The impairment of financial assets as introduced by IFRS 9 in July 2014 brings many

big challenges especially to banks.

In brief: IFRS 9 introduced expected credit loss model for recognizing loss allowance

to financial assets. And banks are affected severely.

Majority of other types of companies can use simplified approach permitted by IFRS 9

for the impairment of financial assets and calculate loss allowances solely in the amount
of life-time expected credit losses. 

However, banks cannot use simplified approach for the biggest group of their financial
assets – loans, because the loans do not fall within the exception.

Banks need to apply 3-stage general model for recognizing loss allowances. It means
that banks must:

 Decide whether the individual financial assets will be monitored collectively (lots

of similar loans with lower volumes?) or individually (big loans?)
 Carefully analyze the financial assets and assess to what stage does the
financial asset belong:
1. Performing, or
2. With significantly increased credit risk, or
3. Credit impaired.
 Based on the stage, bank must evaluate how to calculate loss allowance equal
to:

1. 12-month expected credit loss, or

2. Life-time expected credit loss

 For the above calculation, bank must collect big volume of datato estimate:

1. Probability of default within 12 months;

2. Probability of default beyond 12 months;
3. Credit losses in the case of default

 Bank may need to categorize its loan into various portfolios and monitor

relevant information for each portfolio separately, based on some common
characteristics.

All these tasks bring significant tasks for IT department, account managers dealing with
the clients, statistic people and many other involved in order to upgrade the internal
systems, so that all the information is provided on time and in sufficient quality.
 

1.2 Classification and measurement of financial instruments

Financial assets make up most of banks’ assets. 

Currently, standard IFRS 9 classifies the financial assets based on 2 tests:

 Contractual cash flows test, and

 Business model test.

Based on the assessment of these tests, the financial asset can be classified either as
measured at:

 Amortized cost, or 

 At fair value through profit or loss (FVTPL), or 
 At fair value through other comprehensive income (FVOCI; and here, further
accounting depends on the type of an asset).

The banks and other financial institutions, mainly companies trading securities,
investment funds and similar entities, need to dedicate their time and effort in order
to analyze their own business model for individual portfolios of financial assets
and then decide on their classification and measurement.

Here, the standard IFRS 13 Fair Value Measurement comes to the light. This standard
sets principles for determining the fair value and therefore, it becomes very important in
the financial reporting of any bank.
 

1.3 Distinguishing liabilities from equity 

Banks enter into various contracts and transactions related to money and financial
instruments – we have already said that.

The standard IAS 32 Presentation of financial instruments gives us more precise rules
on how to correctly distinguish between these two types of instruments and
Because incorrect identification of equity/liability/mix can lead to wrong presentation of
bank’s financial results including various rations assessing bank’s capital and financial
situation. 

2 . Presentation of financial statements (IAS 1, IAS 7, IFRS 7)

Banks present their financial position and financial performance in totally different way
than other companies. 

2.1 Statement of financial position in a bank (IAS 1)

The standard IAS 1 Presentation of Financial Statements does not prescribe the format

of the statement of financial position – however, it brings some examples of accepted
formats. 

When you look at the statement of financial position of any bank, you will not see the
balance sheet that you are used to in other types of companies, starting with non-
current assets (property, plant and equipment, intangibles), followed by current assets
(inventories, receivables, cash), and then the second part starting with equity, non-
current liabilities finishing with current liabilities.

What you would see instead is the statement in which individual items are ordered by
their liquidity, starting from the most liquid assets, finishing with the least liquid ones.
The equity & liabilities part corresponds with the assets – it starts with the current
liabilities in a descending order of liquidity and finishing with equity.

 
2.2 Statement of profit or loss and other comprehensive income in a bank (IAS 1)

Similarly as with the statement of financial position, IAS 1 does not prescribe the
exact format of the statement of total comprehensive income. 

It is up to entity’s choice to present its results in a format fitting the best the entity’s
business. No surprise that banks’ statements of profit or loss and other comprehensive
income usually start with interest income and interest expenses. Interest income
and expenses are the most important caption for the bank as that’s what banks
usually do – they deposit your money and give you the interest (=their interest expense)
and they lend you money + charge you the interest (=their interest revenue).
 

2.3 Statement of cash flows.

When you prepare the statement of cash flows, you normally classify individual cash
flows into 3 parts:

1. Operating part,
2. Investing part, and
3. Financing part.

Although IAS 7 Statement of Cash Flows gives you examples of items reported under

each heading, this basically does not apply for banks.

The reason is that the bank’s principal revenue and cash flow generating activities are
totally different from other companies.

Therefore, while you normally see interest paid in financing part and acquisition of
securities in investing part, for banks all these activities are reported in operating part.
We can continue like that with the other items too: including profit from trading activities,
etc.
 

2.4 Disclosures

On top of disclosures presented by other non-financial companies, banks must present

a number of other disclosures related to their activities. The most important disclosures
are:

1. Capital disclosures under IAS 1:

Here, the bank presents how it manages capital, with focus on:
2.

1. Descriptive information about capital management strategies,

2. Some numerical data about capital managed, 
3. Whether there are some externally imposed capital requirements for the
bank (and you bet there are!) and 
4. Whether the bank complied and if not, what are consequences.

3. Whole range of disclosures in line with IFRS 7 Financial Instruments:

Disclosures.
These disclosures relate mainly to financial instruments which is what the bank is about
anyway. The focus is on:
4.
1. Significance of financial instruments, including the breakdowns by
categories, fair values and how they were set, accounting policies for financial
instruments, 
2. Risks attached to financial instruments and their nature and extent,
including credit risk, market risk and liquidity risk;
3. Transfers of financial assets

#3 Consolidation and special purpose entities IFRS 10, IFRS 12)

Banks love to use special purpose entities. 

Before some time, it was a “great and creative” way of hiding some undesirable or toxic
assets from the eyes of public, as the special purpose entities were usually not included
in the consolidation (understand: no one saw them).

However, after a few accounting scandals (for example, Enron), there were new and
strong rules adopted. In IFRS, we have the standards IFRS 10 Consolidated Financial
Statements and IFRS 12 Disclosure of Interests in Other Entities, that require inclusion
of structured entities in the consolidation when they meet the conditions (basically,
when banks has control over SPE).

Even today, many banks use literally hundreds of SPEs for various purposes, mostly for
securitization of their loan receivables, holding some tax-efficient leases, for asset-
backed financing, etc.

• Consolidated financial statements

Under PAS 27, all bank/quasi-bank subsidiaries, regardless of type, are

consolidated on a line-by-line basis. For prudential reporting purposes,
however, financial allied subsidiaries, except insurance companies, are
consolidated with the financial statements of the parent bank/QB on a line-
by-line basis. Non-financial allied subsidiaries and insurance subsidiaries,
on the other hand, are accounted for using the equity method.
 

Other issues to watch out

Other critical areas for banks and financial institutions to watch out are mostly the same
as for any other company, but they might be more significant and material:

 Leases – some arrangements are not called “lease”, but their substance is often
a finance lease. As a result, some contracts might be shifted from off-balance sheet into
the balance sheet.
 Employee benefits – banks often provide a range of employee benefits, such
as:
o “Employee loans” at the reduced beneficial interest rate;
o Free bank accounts or other bank’s services to employees,
o Contributions to pension funds
o Health-care schemes for both current and retired employees and many
other.

As a result, the standard IAS 19 Employee Benefits with all its specifics, curls and
curves comes to the daylight.

 Hedge accounting – banks undertake hedges quite often, but they do need to
realize that in order to apply hedge accounting, all the conditions including hedge
documentation, must be met.

BANKING INDUSTRY- REGULATORY FRAMEWORK

• Republic Acts (RA)

R.A. No. Date Description

R.A. 8791 12 General Banking Law of

Apr 2000, an act providing for
2000 the regulation of the
organization and
operations of banks,
quasi-banks, trust entities
and for other purposes

R.A. 9160 29 Anti-Money Laundering

Sep Act of 2001
2001

R.A. 9194 07 An act amending

Mar Republic Act No. 9160,
2003 otherwise known as the
"Anti-Money Laundering
Act of 2001"

R.A. 18 An Act to Further

10167 Jun Strengthen the Anti-
2012 Money Laundering Law,
Amending for the
Purpose Sections 10 and
 11 of Republic Act No.
9160, Otherwise Known
as the "Anti-Money
Laundering Act of 2001",
as Amended, and for
Other Purposes

R.A. 18 An Act Defining the Crime

10168 Jun of Financing of Terrorism,
2012 Providing Penalties
Therefor and for Other
Purposes

R.A. 24 An Act Allowing the

10574  May Infusion of Foreign Equity
2013 in the Capital of Rural
Banks

R.A. 15 An Act allowing the full

10641 July entry of foreign banks in
2015 the Philippines, amending
for the purpose Republic
Act No. 772

Amendme 03 Amendments to the IRR

nts to the July of RA 1000
IRR of RA 2018
10000

R.A. 30 The National Payment

11127 Oct Systems Act
2018

R.A. 14 An Act Amending

11211 Feb Republic Act Number
2019 7653, Otherwise Known
As "The New Central
Bank Act", And for the
Purposes

• Principal governmental and regulatory policies that govern the banking sector
The government recognizes the vital role of banks in providing an environment
conducive to the sustained development of the country’s economy. Accordingly, it is the
government’s policy to promote and maintain a stable and efficient banking system that
is globally competitive, dynamic and responsive to the demands of a developing
economy.

Primary and secondary legislation

The General Banking Law governs not only universal banks but also commercial banks.
Section 71 provides that the organization, ownership, capitalization and powers of thrift
banks (savings and mortgage banks, stock savings and loan associations, and private
development banks), rural banks, cooperative banks and Islamic banks, as well as the
general conduct of their businesses, are governed by the Thrift Banks Act, the Rural
Banks Act, the Philippine Cooperative Code and the Charter of Al-Amanah Islamic
Investment Bank of the Philippines respectively. The General Banking Law applies,
however, to thrift banks and rural banks insofar as it is not in conflict with the provisions
of the special laws governing such banks. On the other hand, the Philippine
Cooperative Code recognizes the primacy of the General Banking Law in the regulation
of cooperative banks.

The rules implementing the above statutes are embodied in the Manual of Regulations
for Banks (MORB) issued by the Bangko Sentral ng Pilipinas (BSP), the Philippine
central bank. From time to time, additional circulars and other issuances are
promulgated by the BSP to cover new matters, if not to amend, repeal, supplement or
otherwise modify existing rules.

Regulatory authorities

The BSP, through its Monetary Board, is primarily responsible for overseeing banks.
The Philippine Deposit Insurance Corporation (PDIC) can also conduct examination of
banks, with the prior approval of the Monetary Board, provided that no examination can
be conducted by the PDIC within 12 months of the previous examination date.

Regulatory challenges

Among the principal regulatory challenges facing the banking industry at present are
those posed by the use of financial technology, including compliance with know-your-
customer (KYC) requirements, incorporating fin-tech into their systems and structures,
and ensuring cybersecurity.

With the issuance of the implementing rules and regulations of the Data Privacy Act,
banks (as with other entities that collect and process personal information) are expected
to observe certain registration and compliance requirements. The BSP and the National
Privacy Commission are currently reviewing possible overlaps in their functions with a
view to harmonizing them for a more efficient regulatory framework.
Consumer protection

Banks are subject to the BSP’s Financial Consumer Protection Framework, which sets
out the minimum standards of consumer protection in the areas of:

 disclosure and transparency;

 protection of client information;
 fair treatment;
 effective recourse; and
 financial education.

The BSP is responsible for enforcing these rules in the banking sector.

Enforcement

How do the regulatory authorities enforce banking laws and regulations?

Violations of any of the provisions of the General Banking Law are subject to the
penalties and other sanctions under the New Central Bank Act.

Any owner, director, officer or agent of a bank who, being required in writing by the
Monetary Board or by the head of the supervising and examining department of the
BSP, wilfully refuses to file the required report or refuses to permit a lawful examination
into the affairs of such bank, will be punished by a fine of between 50,000 and 100,000
Philippine pesos or by imprisonment of not less than one year or no more than five
years, or both, at the discretion of the court.
Regulatory capital and liquidity
Section 34 of the GBL enjoins the BSP to conform the 'minimum ratio which the net
worth of a bank must bear to its total risk assets' to 'internationally accepted standards,
including those of the Bank of International Settlements relating to risk-based capital
requirements'.
In the case of non-compliance by a bank with the prescribed minimum ratio, the
Monetary Board may, until that ratio is met or restored by the bank:
• limit or prohibit the distribution of net profits by the bank, and require that those profits
be used, in full or in part, to increase the capital accounts of the bank;
• restrict or prohibit the acquisition of major assets by the bank; and
• restrict or prohibit the making of new investments by the bank, with the exception of
purchases of readily marketable evidence of indebtedness of the government and the
BSP, and other evidence of indebtedness or obligations, the servicing and the
repayment of which are fully guaranteed by the government.27
Universal and commercial banks are subject to the capital adequacy standards under
Basel III. The Basel Committee on Banking Supervision had outlined a staggered
implementation of Basel III up to the end of 2018 to allow internationally active banks
time to raise capital organically.
The Secrecy Bank Law

On 09 September 1955, Republic Act No. 1405, otherwise known as An Act Prohibiting
Disclosure of or Inquiry into, Deposits with any Banking Institution (“Bank Secrecy
Law”), was approved. This law was enacted to encourage individuals to deposit their
money in banks instead of hoarding them.

The Bank Secrecy Law protects all deposits of whatever nature in banks or banking
institutions in the Philippines as well as investments in government bond.  This law
prohibits any person, subject to the exceptions below, from disclosing to any person any
information, relative to the funds or properties belonging to the depositors in the custody
of the bank. Simply put, no one can just go to your bank and ask for your bank balance.

However, the rule is not absolute.  The following are the exceptions to the bank secrecy
law:

1.  Written permission or consent in writing by the depositor;

2.  In cases of impeachment;

3.  Upon order of the court in cases of bribery or dereliction of duty of public officials;

4.  Upon order of the court in cases where the money deposited or invested is the
subject matter of the litigation;

5.  Upon a subpoena issued by the Ombudsman concerning an investigation it is

conducting, provided that there must already be a case pending in court, the account be
clearly identified, the inspection be limited to the subject matter of the pending case;
and the bank personnel and the depositor must be notified to be present during the
inspection;

6.  The BIR can inquire into bank deposits in an application for compromise of tax
liability or determination of a decedent’s gross estate;

7.  The Anti-Money Laundering Council (“AMLC”) can examine bank accounts pursuant
to a court order, where there is probable cause that the deposits are related to an
unlawful activity or money laundering offense;

8.  The AMLC can examine bank accounts, WITHOUT a court order, where there is
probable cause that the deposits are related to certain crimes such as kidnapping for
ransom, violation of the Dangerous Drugs Act, hijacking, destructive arson, murder and
violations of RA 6235 (acts inimical to civil aviation);

9.  The Bangko Sentral can examine bank accounts in the course of its periodic or
special examination regarding compliance with Anti-Money Laundering Law.

How about dollar deposits? Now, foreign currency deposits are governed by a different
law, namely Republic Act No. 6426 and has fewer exceptions. You may be curious if
there is any criminal liability for violating the bank secrecy law. Yes, there is criminal
liability.  Any person violating this law may be imprisoned for not more than five (5)
years, or meted a fine not exceeding P20,000.00 or both.

Anti-Money Laundering Law (Republic Act No. 9160)

The Anti-Money Laundering Act of 2001 (AMLA) is the primary AML law in the
Philippines. The AMLA investigates money laundering and other financial crimes to
protect financial institutions and deter criminals from making the Philippines a money
laundering site for criminal proceeds.

Following a number of high-profile money laundering incidents, anti-money laundering

in the Philippines has been subject to increased international scrutiny. One particular
incident saw the theft of almost US$1 billion from the Bangladesh Central Bank, which
was transferred to bank accounts in the Philippines and laundered in the Philippines’
casino system. Responding to the theft, in 2019, Philippine President Rodrigo Duterte
announced his support of revisions to the Anti-Money Laundering Act in order to give
the authorities more powers and enforcement tools when investigating money
laundering and enforcing legislation.

The Philippines also maintains the Anti-Money Laundering Council(AMLC) as a

dedicated AML/CFT authority, tasked with implementing the country’s main AML
legislation: the Anti-Money Laundering Act (2001). The AMLC functions as regulator,
financial intelligence unit and law enforcement agency. Its mandate includes protecting
the Philippines’ financial system from criminal activities and extending cooperation to
other international financial regulators engaged in money laundering investigations. 
Republic Act (RA) No. 11521 further strengthens the Anti-Money Laundering Act
(AMLA) of 2001, including giving additional powers to the Anti Money Laundering
Council (AMLC) and expanding the list of covered persons.

Once published, the law will take effect immediately to allow the Philippines to meet the
Feb. 1 deadline set by the FATF to implement tougher action against “dirty money.”

Under RA 11521, tax crime involving an excess of P25 million was included in the list of
predicate crimes.The AMLC will be given additional but limited investigative powers,
such as the power to apply before a competent court for a search and seizure warrant,
and a subpoena.

It also gives AMLC the authority to preserve, manage or dispose of assets pursuant to a
freeze order, preservation order or judgment of forfeiture. The AMLC may also
implement targeted financial sanctions against the proliferation of weapons of mass
destruction and its financing.

Real estate developers and brokers, as well as Philippine offshore gaming operators
(POGOs) and their service providers were also included as covered persons under
AMLA.

The law also raised the amount for covered transactions to a a single cash transaction
involving an excess of P7.5 million or its equivalent in other currencies.

Outlook and conclusions

The outlook for the Philippine banking system remains positive, as the economy
continues to grow and be resilient amid the global anxiety regarding the inward-looking
policies of the Trump presidency, the trade tensions between the United States and
China and the disruptions being caused by the outbreak of the covid-19 virus. The
banking system will remain 'vibrant, sound and compliant with domestic and
international standards'. With the ongoing economic integration of the Association of
Southeast Asian Nations (ASEAN), the BSP will continue to encourage mergers and
consolidations of domestic banks, as well as require them to raise their capital, to make
them more competitive with their regional counterparts. The Philippines and the rest of
the ASEAN members established the ASEAN Financial Integration Framework for
banking, a feature of which is the launch of the Qualified ASEAN Banks (QABs).
Philippine banks are expected to upgrade themselves as QABs and expand regionally.
REFERENCE:

Lagua, B. (2019, March 8). Risks in banking. The Manila Times.

https://www.manilatimes.net/2019/03/08/business/columnists-business/risks-in-
banking/522124/amp/
Pamfilo, F. J. M. (2019, April 4). Banking Regulation in the Philippines. Lexology.
https://www.lexology.com/library/detail.aspx?g=5a0911c3-b823-4224-b4a7-
f2a2867c23f4
Morales, R. (2020, May 5). The Law Reviews - The Banking Regulation Review.
Thelawreview.Co.Uk. https://thelawreviews.co.uk/title/the-banking-regulation-
review/philippines#footnote-061-backlink

www. bsp. gov. ph