READING MATERIAL NO.

1
BSA-LAW 4

Banking Laws

THE NEW CENTRAL BANK ACT

State Policies

The State shall maintain a central monetary authority to function and operate as
an independent and accountable body corporate in discharging its mandated
responsibilities concerning money, banking and credit. The central monetary
authority, while being government-owned, shall enjoy fiscal and administrative
autonomy.

Creation and nature of the Bangko Sentral ng Pilipinas (BSP)

What are the responsibilities of BSP?

● To provide directions in the areas of money, banking and credit

● Supervise the operations of banks
● Regulate the operations of finance companies and non-bank financial
institutions performing quasi-banking functions, referred to as quasi banks
and institutions performing similar functions.

What is the primary objective of the BSP?

● To maintain price stability and convertibility of the peso conducive to a

balanced and sustainable growth of the economy.

What are the supervisory and regulatory powers of BSP ?

● Issuance of standards of operation for uniform applications to all

institutions or functions covered
● Conduct of examination to determine compliance with laws and
regulations if circumstances warrant as determined by the Board
● Oversee to ascertain that laws and regulations are complied with
 ● Conduct investigation which shall not be oftener that once a year from
last day of examination to determine whether an institution is conducting
business on a safe and sound basis
● Inquire into the solvency and liquidity of the institution
● Enforce prompt corrective action

Who exercises the powers and functions of the BSP?

● Its Monetary Board, composed of seven (7) members appointed by the
President of the Philippines, as follows:
-Governor of the BSP (Chairman)
-A member of the Cabinet to be designated by the president of the
Philippines
-Five (5) members who shall come from the private sector

How does the BSP handles Banks in Distress?

Conservatorship
Receivership
Closure
Liquidation

Conservatorship

What are the grounds for Conservatorship?

● There must be a report submitted by the appropriate supervising or

examining department of the BSP
● There must be a finding by the Monetary Board based on the report that
a bank or quasi-bank is in a state of continuing inability or unwillingness to
maintain a condition of liquidity deemed adequate to protect the
interests of depositors and creditors.
● The Board of Directors must be informed in writing of the order of the
Monetary Board directing conservatorship.

What are the powers of a conservator?

● Take charge of the assets, liabilities, and the management thereof

● Reorganize the management of the subject bank
● Collect all monies and debts due to said bank; and
● Exercise all powers necessary to restore its viability
When is the conservatorship terminated?

The conservatorship shall not exceed one (1) year. Before that, the
conservatorship may be terminated by the Monetary Board when:

● it is satisfied that the institution can continue to operate on its own and the
conservatorship is no longer necessary, or
● it determines that the continuance in business of the institution would
involve probable loss to its depositors or creditors, in this case, the
institution shall either be under receivership or liquidation.

Receivership

What are the grounds for Receivership?

● There must be a report submitted by the appropriate supervising or

examining department of the BSP

● There must be a finding by the Monetary Board based on the report that
a bank is unable to pay its liabilities as they become due in the ordinary
course of business ( does not include inability to pay because of
extraordinary demands induced by financial panic in the banking
community)

● The bank has insufficient realizable assets to meet its liabilities as

determined by BSP

● The bank cannot continue in business without probable losses to its

depositors and creditors

● The bank has wilfully violated a cease and desist order that has become
final, involving acts or transactions which amount to fraud or a dissipation
of the assets of the institution

Who can be designated as a Receiver?

● Philippine Deposit Insurance Corporation is the statutory receiver of

banks
● Any person of recognized competence in banking or finance maybe
designated as receiver for quasi-banks
 What are the duties of a Receiver?

● Immediately gather and take charge of all the assets and liabilities of
the institution and administer the same for the benefit of its creditors
● Exercise the general powers of a receiver under the Revised Rules of
Court
● Deposit or place the funds of the institution in non-speculative
investments
● Determine as soon as possible, but not later than ninety (90) days from
take-over, whether the institution maybe rehabilitated or otherwise
placed in such a condition so that it may be permitted to resume
business with safety to its depositors, creditors and the general public
(determination for the resumption of business is subject to prior
approval of the Monetary Board)
● Pay or commit any act that will involve the transfer or disposition of any
asset of the institution except administrative expenditures.

What is the main purpose of the Receiver?

● To recommend the rehabilitation of liquidation of the institution.

● The appointment of a receiver operates to suspend the authority of the
bank and of its directors and officers over its property and effect. The
properties of the institution may only be administered for the benefit of its
creditors. It is equivalent to an injunction to restrain the bank officers from
intermeddling with the property of the bank in any way.

Thus, when an institution is placed under receivership, it is prohibited to do

new business. However, the receiver is obliged to collect debts owing to the
bank.

What happens when the Receiver determines that the institution cannot be
rehabilitated or resume business?

The Monetary Board will notify the Board of Directors of its findings and
thereafter, the receiver will file ex-parte with the proper RTC a petition for
assistance in the liquidation of the institution and convert the assets to money
to pay debts of the institution. The actions of the Monetary Board is final and
executory and may only be restrained set aside except on petition for
certiorari filed by the stockholders representing the majority of the capital.
Closure

The Monetary Board may order the closure of a bank or quasi-bank for causes
that the institution is unable to pay its liabilities as they become due; has
insufficient realizable assets — as determined by the BSP — to meet its liabilities;
cannot continue in business without involving probable losses to its depositors or
creditors; or has willfully violated a cease and desist order under that has
become final. The Monetary Board can do so summarily and without prior
hearing. It shall be final and executory and may not be restrained or set aside
except on petition for certiorari.

What is the Close Now-Hear Later Scheme?

No prior hearing is necessary in appointing a receiver and in closing a bank. It is

enough that subsequent judicial review is provided for.

Liquidation

Under what circumstances may a bank be ordered liquidated?

● When the bank is insolvent or that its continuance would involve probable
loss to its depositors and creditors
● The bank cannot resume business with safety to its creditors

- By filing a Petition for Assistance in the liquidation of the institution with

the RTC.

How the BSP Handling Exchange Crisis?

Legal Tender Power

Rate of Exchange

What is a Legal Tender?

● All notes and coins issued by the BSP

 Coins shall be legally tender in amounts not exceeding P50.00 for
denominations of 25 centavos and above, and in amounts not exceeding
P20.00 for denominations of 10 centavos or less.

The BSP has the sole authority to replace currency unfit for circulation and retire
or call in for replacement all types of notes which are more than 10 years old.

Who determines rate of Exchange?

The Monetary Board determines the exchange rate policy of the Country, and
the rates at which the BSP shall buy and sell spot exchange, and establish
deviation limits from the effective exchange rate.

LAW ON SECRECY OF BANK DEPOSITS

What is the Purpose of the Law?

By making it absolutely confidential in general all deposits of whatever nature

with banks and other financial institutions in the country, the law hopes to
discourage private hoarding and at the same time encourage the people to
deposit their money in banking institutions so that it may be utilized by way of
authorized loans and thereby assist in economic development.

Deposits Covered

All bank deposits of whatever nature with banks o banking institutions in the
Philippines, including investments in bonds issued by the government of the
Philippines, its political subdivisions and its instrumentalities , are considered
absolutely confidential in nature and may not be examined, inquired or looked
into by any person, government official, bureau or office.

Exceptions

● Written permission or consent in writing by the depositor;

● In cases of impeachment;
● Upon order of the court in cases of bribery or dereliction of duty of public
officials;
● Upon order of the court in cases where the money deposited or invested
is the subject matter of the litigation;
● 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;
● The BIR can inquire into bank deposits in an application for compromise of
tax liability or determination of a decedent’s gross estate;
● 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;
● 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);
● The Bangko Sentral can examine bank accounts in the course of its
periodic or special examination regarding compliance with Anti-Money
Laundering Law.

Garnishment of Deposits, Including Foreign Deposits

What is the coverage of the Foreign Currency Deposit Act of the Philippines?

● All foreign currency deposits are considered as absolutely confidential in

nature and in no instance shall such foreign currency deposits be
examined, inquired or looked into by any person or legislative or any other
entity whether public or private.

Is there an exemption?

ONLY upon the written permission of the depositor.

Does the prohibition against the examination of bank deposits preclude

garnishment in satisfaction of a judgment?

No. The remedy of garnishment is not an inquiry into the bank deposit of the
defendant but merely an order to the bank cashier to inform the court whether
or not the defendant had a deposit therein which the bank could order to be
held intact and not allow any withdrawal until further orders.
GENERAL BANKING LAW OF 2000

Definition and Classification of Banks

Banks defined: Entities engaged in the lending of funds obtained in the form of
deposits.

Note: For an institution to be a bank, it must:

1. REGULARLY engage in the business of receiving funds from the public

in the form of deposits of any kind, and
2. In the business of lending said funds

Banks are classified into:

The Philippine banking system is composed of universal and commercial banks,

thrift banks, rural and cooperative banks.

● Universal and commercial banks represent the largest single group,

resource-wise, of financial institutions in the country. They offer the widest
variety of banking services among financial institutions. In addition to the
function of an ordinary commercial bank, universal banks are also
authorized to engage in underwriting and other functions of investment
houses, and to invest in equities of non-allied undertakings.

● Thrift Banks are composed of savings and mortgage banks, private

development banks, stock savings and loan associations and
microfinance thrift banks. Thrift banks are engaged in accumulating
savings of depositors and investing them. They also provide short-term
working capital and medium- and long-term financing to businesses
engaged in agriculture, services, industry and housing, and diversified
 financial and allied services, and to their chosen markets and
constituencies, especially small- and medium- enterprises and individuals.

● Rural and cooperative banks are the more popular type of banks in the
rural communities. Their role is to promote and expand the rural economy
in an orderly and effective manner by providing the people in the rural
communities with basic financial services. Rural and cooperative banks
help farmers through the stages of production, from buying seedlings to
marketing of their produce. Rural banks and cooperative banks are
differentiated from each other by ownership. While rural banks are
privately owned and managed, cooperative banks are organized/owned
by cooperatives or federation of cooperatives.

The BSP likewise releases selected statistics on non-banks with quasi-banking

functions . This group consists of institutions engaged in the borrowing of funds
from 20 or more lenders for the borrower's own account through issuances,
endorsement or assignment with recourse or acceptance of deposit substitutes
for purposes of relending or purchasing receivables and other obligations.

Distinction of Banks from Quasi-Banks

The term "quasi-banking activities" means borrowing funds from twenty or more
personal or corporate lenders at any one time, through the issuance,
endorsement or acceptance of debt for the borrower's own accounts, or
through the issuance certificates of assignment or similar instruments, with
recourse, or of repurchase agreements for purposes of relending or purchasing
receivable and other similar obligations.

Provided, however, that commercial, industrial and other non-financial

companies which borrow funds 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."

Bank Powers

http://www.bsp.gov.ph/regulations/regulations.asp?type=1&id=779

Diligence Required of Banks- Relevant Jurisprudence

Banking business is so impressed with public interest where the trust and
confidence of the public in general is of paramount importance, and it is their
duty to protect in return their clients and depositors who transact business with
them. Thus, the diligence required of banks is more than that of a good father of
family.

Nature of Bank Funds

Bank deposits are in the nature of irregular deposits. They are not true deposits
but are simple loans.

The relationship between banks and creditors is that of a debtor and creditor.
The depositor lends the bank the money and the bank agrees to pay the
depositor on demand.

Banks where monies are deposited are considered as the owners.

Bank Deposits

Demand deposit – are subject to withdrawal either by check or through ATM,

also known as current or checking accounts. The bank may or may not pay
interest on these accounts.

Savings deposit – interest-bearing deposits which are withdrawable either upon

presentation of a withdrawal slip or through the ATM.

Negotiable Order of Withdrawal accounts- interest-bearing savings deposit

which are withdrawable by means of negotiable orders of withdrawal.

Time deposits – interest-bearing deposits with specific maturity dates and

evidence by certificates issued by the bank.

Stipulation on Interests

Grant of Loans and Security Requirements

a) Ratio of Net Worth to Total Risk Assets
b) Single Borrower’s Limit
 Purpose: To prevent banks from making excessive loans and
other credit accommodations to a single borrower, and to
safeguard the banks from putting too large a risk exposure to a
single client.

The total amount of loans, credit accommodations and

guarantees that may be extended by a bank to any person,
partnership, association, corporation or other entity shall at no
time exceed 20% of the net worth of such bank. The limit now is
25%.

However, the Bangko Sentral ng Pilipinas (BSP) has increased

the single borrower’s limit (SBL) for banks and non-banks to 30
percent from 25 percent for a period of six months, part of
measures that the BSP is implementing to help the financial
sector continue under a pandemic outbreak lockdown. (BSP
Memorandum No. M-2020-011 (“Additional Operational Relief
for BSFIs Affected by Measures to Manage the Corona Virus
Disease 2019 Situation and its Health and Safety Risks”)

c) Restrictions on Bank Exposure to DOSRI (Directors, Officers,

Stockholders and their Related Interests)

Rationale: 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. It is
essential to impose restrictions on borrowings by bank directors
and officers in order to protect the public especially the
depositors.

There are three (3) restrictions under RA 337:

1. Approval requirement – refers to the written

approval of the majority of the bank’s board of
directors required before bank directors and
officers can borrow money from the bank.
 2. Reportorial requirement – mandates that any
approval should be entered upon the records of
the bank and a copy of the entry be transmitted
to the appropriate supervising department.

3. Ceiling requirement – 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.

Note: Failure to observe the three requirements paves the way

for the prosecution of three different offenses, each with its
own set of elements.

Philippine Deposit Insurance System at a Glance

The Philippine Deposit Insurance Corporation (PDIC) is a government

instrumentality created on 22 June 1963 by Republic Act 3591 entitled, An Act
Establishing the Philippine Deposit Insurance Corporation (PDIC), Defining Its
Powers and Duties and for Other Purposes.

Public Policy Objectives

PDIC was established to promote and safeguard the interests of the depositing
public by way of providing insurance coverage on all insured deposits. PDIC
also aims to strengthen the mandatory deposit insurance coverage system to
generate, preserve, and maintain faith and confidence in the country's banking
system, and protect it from illegal schemes and machinations.

Mandates
Consistent with its public policy objectives, the PDIC has the following mandates:

I. Deposit Insurance. PDIC provides a maximum deposit insurance coverage

of PhP500,000 per depositor per bank. To pay claims on insured deposits,
PDIC builds up the Deposit Insurance Fund (DIF) primarily through
assessments of banks at an annual flat rate of 1/5 of 1% of their total
deposit liabilities.
 II. Receivership of Closed Banks. PDIC proceeds with the liquidation process
upon order of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP).
The assets of the closed bank are managed and eventually disposed of to
settle claims of creditors in accordance with the preference and
concurrence of credits as provided by the Civil Code of the Philippines.

Membership
Membership with PDIC is mandatory for all banks licensed by the BSP to operate
in the Philippines:

● Banks incorporated under Philippine laws, such as commercial banks,

savings banks, mortgage banks, stock savings and loan associations,
development banks, cooperative banks, and rural banks
● Domestic branches of foreign banks

As of 31 December 2017, there are 587 banks in the Philippine banking system.
These consist of 43 commercial banks (including branches of foreign banks), 55
thrift banks (savings banks, mortgage banks, stock savings and loan
associations, and development banks), and 489 rural banks (including
cooperative banks).

Scope of Deposit Insurance Protection

PDIC provides a maximum deposit insurance coverage of PhP500,000 per

depositor per bank. It covers all types of bank deposits in banks whether
denominated in local or foreign currencies. All deposit accounts of a depositor
in a closed bank maintained in the same right and capacity shall be added
together. A joint account shall be insured separately from any individually-
owned deposit account.

As of 31 December 2017, around 57.1 million accounts in 587 banks are covered
by deposit insurance. Of the total number of accounts, 96.3% are with balances
not exceeding the maximum deposit insurance coverage of PhP500,000 per
depositor per bank. For the same period, total deposits in the Philippine banking
system amounted to PhP11.7 trillion, of which 20.8% is covered by deposit
insurance.