MODULE II

Bank Organization, Management, Supervision

and Examination

Lesson 1 The General Aspects in Establishing Banks,

Organization, Management and Administration

Lesson 2 Licensing of Foreign Banks, Banks are

Established as Corporations, Bank Location and
Role of Regulatory Government Bodies in
Bank Organization

Lesson 3 The Board of Directors, Bank Officers, Bank

Operations and Personal and Educational
Qualities of a Banker

Lesson 4 The Purpose of Examination and Supervision,

External Supervision, Mechanics of Supervision,
Internal Controls and Programming Controls

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MODULE II
Bank Organization, Management,
Supervision and Examination

 INTRODUCTION

This module presents the general aspects in establishing

banks, organization, management and administration; licensing of
foreign banks, banks are established as corporations, bank location
and role of regulatory government bodies in bank organization; the
board of directors, bank officers, bank operations and personal and
educational qualities of a banker; and the purpose of examination
and supervision, external supervision, mechanics of supervision,
internal controls and programming controls.

OBJECTIVES

After studying the module, you should be able to:

1. discuss the application to open or organize a bank and the

procedures for establishing a domestic and foreign bank
2. describe the role of regulatory government bodies in organizing
a bank
3. identify the members of the board of directors and officers of a
bank
4. discuss the operation of a bank
5. enumerate and discuss the personal and educational qualities
of a banker
6. define bank examination and supervision
7. discuss the purpose of bank examination and supervision
8. discuss the external supervision of a bank
9. describe the mechanics of a bank supervision and examination
10. discuss the internal controls and programming controls of a
bank

 DIRECTIONS/ MODULE ORGANIZER

There are four lessons in the module. Read each lesson

carefully then answer the learning activities and summative test to
find out how much you have benefited from it. Work on these
exercises/activities carefully and submit your output to your
instructor/professor.

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In case you encounter difficulty, discuss this with your

instructor/professor during the face-to-face meeting.

Good luck and happy reading!!!

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Lesson 1

 The General Aspects in

Establishing Banks,
Organization, Management
and Administration

General Aspects in Establishing Banks

1. Economic justification for banks.

In determining this particular aspect, the organizer must

be armed with facts and figures which they have to analyze
carefully before they can proceed with their project. They
have to ascertain the degree of competition in this business –
the degree of risks, the potential customers, the availability of
manpower, the businesses and products within the locale, the
habits and customs of the people, and such other matters
which will contribute to the bank’s successful operation. If this
aspect is established beyond reasonable doubt and within
sound judgment that a bank is needed, then the organizers
may proceed with their plan.

2. Selection of stockholders
The organizers also have to contend themselves with the
selection of the stockholders. This is an essential consideration
in setting up a bank because it is on such choice that a bank
may depend its success or failure. To mention few things, the
organizers have to make sure that these men are of good moral
character, have adequate knowledge on the business of
banking, equipped with the necessary capital, known in the
community as honest and righteous citizens, and above all,
they are both willing and able to contribute to the bank’s
success. Such considerations regarding the tapping of men to
own the bank is of paramount importance because it is from
these group of men that members of the board of directors
may come from.

3. Determination of the kind of bank to be formed

Determination of the type of bank depends upon the

economic survey. The survey will include the level of income in
the community, the businesses and the industries, the
population of the place, the number of banks or financial
institutions, and factors which will lead to a decision on the

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size of the organization to be set up. The chosen type of bank

will determine the amount of capital to be raised.

4. Determination of the amount of capital to be raised

The organizers will find it easier to determine the

amount of capital to be raised after they have agreed on the
type of bank. They must be aware that at least the minimum
requirements should be meet. These are to cover
organizational expenses, to carry on operations which will
require current capital, to provide for the acquisition of fixed
assets; and to include enough room for the initial cost of
operation. In a nutshell, there must be enough capital to see
the bank through until it has gained prominence and has
become profitable.

Organization, Management and Administration

When the preliminary steps have been tackled, then the

organizers can proceed to the most exacting part of the job – the
formal establishment of the bank itself. In this regard, the Philippine
banking laws and the Corporation Code shall serve as guide to the
organizers. To start with, the New General Banking Act (Republic Act
879) requires that all banks shall be established as corporations. With
the exception of building and loan associations, all banking
institutions shall be Stock Corporation, and shall without exception
issue par value stocks. For a better perspective on the establishment
of domestic banks, quoted hereunder are the pertinent provisions of
the New General Banking Act.

Section 8. Organization. The Monetary Board may

authorize the organization of a bank or quasi-bank subject to
the following conditions:

8.1 That entity is a stock corporation;

8.2 That its funds are obtained from the public,

which shall mean twenty (20) or more persons;
and

8.3 That the minimum capital requirements

prescribed by the Monetary Board for each
category of banks are satisfied.

No commercial bank shall be established within three

(3) years from the effectivity of this Act. In the exercise of the
authority granted herein, the Monetary Board shall take into
consideration their capability in terms of their financial

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resources and technical expertise and integrity. The bank

licensing process shall incorporate an assessment of the bank’s
ownership structure, directors and senior management, its
operating plan and internal controls, as well as its projected
financial condition and capital base.

Section 9. Issuance of Stocks. The Monetary Board may

prescribe rules and regulations on the types of stock a bank
may issue, including the terms thereof and the rights
appurtenant thereto to determine compliance with laws and
regulations governing capital and equity structure of banks:
provided, that banks shall issue par value stock only.

Section 10. Treasury Stocks. No bank shall purchase or

acquire shares of its own capital stock or accept its own shares
as a security for a loan, except when authorized by the
Monetary Board: Provided, that in every case the stock so
purchased or acquired shall, within six (6) months from the
time of its purchase or acquisition, be sold or disposed of at a
public or private sale.

Section 11. Foreign Stockholdings. Foreign individuals

and non-bank corporations may own or control up to forty
percent (40%) of the voting stock of a domestic bank. This rule
shall apply to Filipinos and domestic non-bank corporations.
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.

Section 12. Stockholdings of Family Groups or Related

Interests. 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.

Section 13. Corporate Stockholdings. 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.

Section 14. Certificate of Authority to Register. The

Securities and Exchange Commission shall not register the
articles of incorporation of any bank, or any amendment
thereto, unless accompanied by a certificate of authority

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issued by the Monetary Board, under its seal. Such certificate

shall not be issued unless the Monetary Board is satisfied from
the evidence submitted to it:

14.1. That all requirements of existing laws and

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

14.2. That the public interest and economic conditions,

both general and local, justify the authorization;
and

14.3. That the amount of capital, the financing,

organization, direction and administration, as
well as the integrity and responsibility of the
organizers and administrators reasonably assure
the safety of deposits and the public interest.

The Securities and Exchange Commission shall not

register the by laws of any bank, or any amendment thereto,
unless accompanied by a certificate of authority from the
Bangko Sentral.

Section 15. Board of Directors. The provisions of the

Corporation Code to the contrary notwithstanding, 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. An "independent director" shall mean a
person other than an officer or employee of the bank, its
subsidiaries or affiliates or related interests.

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. The meetings of the board of
directors may be conducted through modern technologies such
as, but not limited to, teleconferencing and video-
conferencing.

Furthermore, in conformity with the Corporation Code

and the Basic Guidelines in Establishing Banks, the following
points must also be taken into account:

a) That there should be not less than five (5) nor more
than fifteen (15) persons initially interested in
organizing and investing in the proposed bank, the
excess may be listed among the original subscribers in
the articles of Incorporation;

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b) That at least twenty-twenty five (25%) of the total

authorized capital stock shall be subscribed by the
subscribers of the proposed bank and at least twenty-
five (25%) of such subscription shall be paid-up,
provided that in no case shall the paid-up be less than
the minimum required capital;

c) That a majority of the incorporators are residents of the

Philippines;

d) Incorporators must possess the capacity to contract,

which means that they must be of majority age; and are
competent to enter into contractual obligations; and

e) That the number of members of the board of directors

of the bank shall not be less than five (5) nor more than
fifteen (150 and shall always be in odd number and at
least (2) of the directors are “independent directors.”

Section 16. Fit and Proper Rule. To maintain the quality

of bank management and afford better protection to
depositors and the public in general, the Monetary Board shall
prescribe, pass upon and review the qualifications and
disqualifications of individuals elected or appointed bank
directors or officers and disqualify those found unfit.

After due notice to the board of directors of the bank,

the Monetary Board may disqualify, suspend or remove any
bank director or officer who commits or omits an act which
render him unfit for the position.

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.

Section 17. Directors of Merged or Consolidated Banks.

In the case of a bank merger or consolidation, the number of
directors shall not exceed twenty-one (21).

Section 18. Compensation and Other Benefits of

Directors and Officers. 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:

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18.1. When a bank is under comptrollership or

conservatorship; or

18.2. When a bank is found by the Monetary Board to

be conducting business in an unsafe or unsound
manner or

18.3. When a bank is found by the Monetary Board to

be in an unsatisfactory financial condition.

Section 19. Prohibition on Public Officials. Except as

otherwise provided in the Rural Banks Act, 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 a government-owned or
controlled corporation to the bank or unless otherwise
provided under existing laws.

Section 20. Bank Branches. Universal or commercial

banks may open branches or other offices within or outside the
Philippines upon prior approval of the Bangko Sentral.
Branching by all other banks shall be governed by pertinent
laws.

A bank may, subject to prior approval of the Monetary

Board, use any or all of its branches as outlets for the
presentation and/or sale of the financial products of its allied
undertaking or of its investment house units.

A bank authorized to establish branches or other offices

shall be responsible for all business conducted in such branches
and offices to the same extent and in the same manner as
though such business had all been conducted in the head
office. A bank and its branches and offices shall be treated as
one unit.

Section 21. Banking Days and Hours. Unless otherwise

authorized by the Bangko Sentral in the interest of the banking
public, all banks including their branches and offices shall
transact business on all working days for at least six (6) hours a
day. In addition, banks or any of their branches or offices may
open for business on Saturdays, Sundays or holidays for at least
three (3) hours a day: provided that banks which opt to open
on days other than working days shall report to the Bangko
Sentral the additional days during which they or their branches
or offices shall transact business.

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For purposes of this Section, working days shall mean

Mondays to Fridays, except if such days are holidays.

Section 22. Strikes and Lockouts. The banking industry is

hereby declared as indispensable to the national interest and,
notwithstanding the provisions of any law to the contrary, any
strike or lockout involving banks, if unsettled after seven (7)
calendar days shall be reported by the Bangko Sentral to the
Secretary of Labor who may assume jurisdiction over the
dispute or decide it or certify the same to the National Labor
Relations Commission for compulsory arbitration. However, the
President of the Philippines may at any time intervene and
assume jurisdiction over such labor dispute in order to settle or
terminate the same.

The organizers and/or incorporators must therefore bear

in mind that in the drafting of the articles of incorporation all
the provisions of the laws upon which the charter of a bank
will rest shall be followed to avoid undue delay in receiving the
grant of authority by the state.

Briefly, incorporation will entail the drafting of the

articles of incorporation, which is accompanied by the sworn
statement of the temporary treasurer as well as financial
statements required by the Securities and Exchange
Commission where the papers will be scrutinized and finally
registered. This office will also require, in the case of the
banks, the Certificate of Authority to Organize issued by the
Bangko Sentral ng Pilipinas. Such authority will be the “green
light” for the organizers to proceed with the formal
establishment of a bank. The Securities and Exchange
Commission charges an examination and filing fee which shall
be “one-tenth of one per centum of the authorized capital
stock but in no case shall the fee be less than twenty-five
pesos or more than one thousand pesos” (for stock
corporations) and “that the fee for the examination and filing
of the articles of incorporation of a non-stock corporation shall
be twenty-five pesos,” as provided for in section 1(a) Republic
Act No. 944. If all the papers are in order, the Certificate of
Incorporation shall then be issued by the Securities and
Exchange Commissioner. The Certificate of authority to
Operate is then given by the Monetary Board.

Within one month from the date of the registration of

the articles of incorporation, the by-laws shall also be
presented and registered with the Securities and Exchange
Commission. Before that, however, the drafted by-laws must
undergo the scrutiny of the BSP’s Department of Supervision
and Examination. A fee is also charged for filing the by-laws.

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 LEARNING ACTIVITY

When the preliminary steps have been tackled, then the organizers
can proceed to the most exacting part of the job – the formal establishment
of the bank itself. In this regard, the Philippine banking laws and the
Corporation Code shall serve as guide to the organizers. To start with, the
New General Banking Act (Republic Act 879) requires that all banks shall be
established as corporations.

Identify the section that is being referred to on the following:

1. Stockholdings of Family Groups or Related Interests

2. Prohibition on Public Official
3. Treasury Stocks
4. Banking Days and Hours
5. Organization
6. Foreign Stockholdings
7. Certificate of Authority to Register
8. Issuance of Stocks
9. Board of Directors
10. Directors of Merged or Consolidated Banks
11. Fit and Proper Rule
12. Bank Branches
13. Strikes and Lockouts
14. Corporate Stockholdings
15. Compensation and Other Benefits of Directors and
Officers

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Lesson 2

 Licensing of Foreign Banks, Banks are

Established as Corporations, Bank
Location and Role of Regulatory
Government Bodies in Bank Organization

For a broader scope on the aspect of bank organization, the licensing

of foreign banking institution is also cited. Pertinent provisions for this
purpose as embodied in the New General Banking Act are quoted
hereunder.

Licensing of Foreign Banks

Section 72. Transacting Business in the Philippines. The

entry of foreign banks in the Philippines through the
establishment of branches shall be governed by the provisions
of the Foreign Banks Liberalization Act. The conduct of
offshore banking business in the Philippines shall be governed
by the provisions of the Presidential Decree No. 1034,
otherwise known as the "Offshore Banking System Decree."

Section 73. Acquisition of Voting Stock in a Domestic

Bank. Within seven (7) years from the effectivity of this Act
and subject to guidelines issued pursuant to the Foreign Banks
Liberalization Act, he Monetary Board may authorize a foreign
bank to acquire up to one hundred percent (100%) of the voting
stock of only one (1) bank organized under the laws of the
Republic of the Philippines.

Within the same period, the Monetary Board may

authorize any foreign bank, which prior to the effectivity of
this Act availed itself of the privilege to acquire up to sixty
percent (60%) of the voting stock of a bank under the Foreign
Banks Liberalization Act and the Thrift Banks Act, to further
acquire voting shares of such bank to the extent necessary for
it to own one hundred percent (100%) of the voting stock
thereof.

In the exercise of this authority, the Monetary Board

shall adopt measures as may be necessary to ensure that at all
times the control of seventy percent (70%) of the resources or
assets of the entire banking system is held by banks which are
at least majority owned by Filipinos.

Any right, privilege or incentive granted to a foreign

bank under this Section shall be equally enjoyed by and

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extended under the same conditions to banks organized under

the laws of the Republic of the Philippines.

Section 74. Local Branches of Foreign Banks. In the case

of a foreign bank which has more than one (1) branch in the
Philippines, all such branches shall be treated as one (1) unit
for the purpose of this Act, and all references to the Philippine
branches of foreign banks shall be held to refer to such units.

Section 75. Head Office Guarantee. In order to provide

effective protection of the interests of the depositors and
other creditors of Philippine branches of a foreign bank, the
head office of such branches shall fully guarantee the prompt
payment of all liabilities of its Philippine branch.

Residents and citizens of the Philippines who are

creditors of a branch in the Philippines of a foreign bank shall
have preferential rights to the assets of such branch in
accordance with existing laws.

Section 76. Summons and Legal Process. Summons and

legal process served upon the Philippine agent or head of any
foreign bank designated to accept service thereof shall give
jurisdiction to the courts over such bank, and service of
notices on such agent or head shall be as binding upon the
bank which he represents as if made upon the bank itself.

Should the authority of such agent or head to accept

service of summons and legal processes for the bank or notice
to it be revoked, or should such agent or head become
mentally incompetent or otherwise unable to accept service
while exercising such authority, it shall be the duty of the bank
to name and designate promptly another agent or head upon
whom service of summons and processes in legal proceedings
against the bank and of notices affecting the bank may be
made, and to file with the Securities and Exchange Commission
a duly authenticated nomination of such agent.

In the absence of the agent or head or should there be

no person authorize by the bank upon whom service of
summons, processes and all legal notices may be made, service
of summons, processes and legal notices may be made upon
the Bangko Sentral Deputy Governor In Charge of the
supervising and examining departments and such service shall
be as effective as if made upon the bank or its duly authorized
agent or head.

In case of service for the bank upon the Bangko Sentral

Deputy Governor In-Charge of the supervising and examining

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departments, the said Deputy Governor shall register and

transmit by mail to the president or the secretary of the bank
at its head or principal office a copy, duly certified by him, of
the summons, process, or notice. The sending of such copy of
the summons, process, or notice shall be a necessary part of
the services and shall complete the service. The registry
receipt of mailing shall be prima facie evidence of the
transmission of the summons, process or notice. All costs
necessarily incurred by the said Deputy Governor for the
making and mailing and sending of a copy of the summons,
process, or notice to the president or the secretary of the bank
at its head or principal office shall be paid in advance by the
party at whose instance the service is made.

Section 77. Laws Applicable. In all matters not

specifically covered by special provisions applicable only to a
foreign bank or its branches and other offices in the
Philippines, any foreign bank licensed to do business in the
Philippines shall be bound by the provisions of this Act, all
other laws, rules and regulations applicable to banks organized
under the laws of the Philippines of the same class, except
those that provide for the creation, formation, organization or
dissolution of corporations or for the fixing of the relations,
liabilities, responsibilities, or duties of stockholders, members,
directors or officers of corporations to each other or to the
corporation.

Section 78. Revocation of License of a Foreign Bank. The

Monetary Board may revoke the license to transact business in
the Philippines of any foreign bank, if it finds that the foreign
bank is insolvent or in imminent danger thereof or that its
continuance in business will involve probable loss to those
transacting business with it. After the revocation of its license,
it shall be unlawful for any such foreign bank to transact
business in the Philippines unless its license is renewed or
reissued. After the revocation of such license, the Bangko
Sentral shall take the necessary action to protect the creditors
of such foreign bank and the public. The provisions of the New
Central Bank Act on sanctions and penalties shall likewise be
applicable.

Why Banks are Established as Corporations

Why is a bank formed as a corporate entity? To answer this,

one must be aware of the advantages of a corporation over that of a
single proprietorship or a partnership.

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A corporation is formed by a number of persons who pool in

their resources to enter a business for profit. The methods of
financing available to such type of organization such as the sale of
stocks and bonds can raise a greater amount of capital which is
needed to undertake a business with multifarious functions. Banks,
which by their nature, deal in large amounts of capital. Furthermore,
loans are given out for long durations in some instances and only an
entity with a long tenure could be beneficial in such a case. A
corporation then meets this because of its perpetual life.

The risk of an investor is also limited to the extent of his

contribution in the business. And above all, a corporation’s charter
represents a tripartite contract among the state, the stockholders,
and the bank. Hence the rights and duties of each party to the
contract assure the safe conduct of the business. The delegation of
management to a few who compose the board of directors, will allow
flexible management, expansion, as well as departmentalization. This
method of administration leads to a specialization and division of
labor which favors a bank’s functions.

Bank Location

Anyone imbued with business sense will perhaps know that the
poor location will be a deterrent to an otherwise profitable venture.
Customers always look for places which offer a wide variety of
conveniences in meeting their needs. Thus, a major importance to
any organizer is the suitable location of the proposed business. There
are many factors which will influence the choice of the bank’s
location. To fulfill the needs of strategies sites, the organizers must
have in mind the availability of transportation. Whether the location
is within the commercial district or not, the accessibility of the place
both to human and vehicular traffic should be considered. Also to
look for is the place’s of provision of facilities comprising consumers’
shopping needs. These will enhance the chances of the bank to
attract the greatest number of potential depositors and customers.

Role of Regulatory Government Bodies in Bank Organization

The role of the regulatory government bodies in the bank

organization is to facilitate the processing and approval of pertinent
documents to make the organization legal. Before the articles of
incorporation could be duly registered, a certificate of authority must
be secured from the Monetary Board of the Bangko Sentral ng
Pilipinas. The approval of the by-laws is also sought from this body
before filing the same with the Securities and Exchange Commission.
The particular department in the Bangko Sentral which processes the
applications and other pertinent papers for bank organization and

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passes judgment as to whether it merits certification is the

Supervising and Examining Department. This office makes
recommendation regarding the establishment of a bank to the
Monetary Board. The Monetary Board, based on the recommendation
of the Supervising and Examining Department, will take appropriate
action - either to issue or not to issue a certificate of authority.

The Securities and Exchange Commission, for its part, also duly
examines the papers to see to it that all requirements are met before
issuing the certificate of incorporation.

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 LEARNING ACTIVITY

Answer the following:

1. Why is a bank formed as a corporate entity?

2. Discuss the role of regulatory government bodies in bank

organization.

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Lesson 3

 The Board of Directors, Bank

Officers, Bank Operations and
Personal and Educational Qualities
of a Banker

A bank is formed as a corporate entity. Hence, the

stockholders who are part-owners of the business have to delegate
their power of management to a board of directors. By virtue of the
stockholders’ right to vote, they elect the members of the board in
general meeting set for this purpose. The board, in turn, will either
elect from among themselves the officers of the bank or appoint
them. Some powers of the board are also delegated to the officers.

Board of Directors

The board of directors will be composed of a number agreed

upon as contained in the by-laws, but in no case should it exceed the
number allowed by law. It is headed by a chairman whose duty is to
preside over the meetings of the board. In small banks, the chairman
of the board and the president may only be one person in order to
achieve harmony, efficiency, and economy. However, such situation
will be impractical for a larger bank. Thus, the offices are held by
two separate persons.

Qualifications. Board members must possess the following

qualifications.

1. Every director shall own at least one (1) share of the capital
stock of the corporation of which he is a director; the share
shall stand in his name in the books of the corporation.

The board may provide for additional qualifications of a

director such as, but not limited to the following:
a. Educational attainment
b. Adequate competency and understanding of
business,
c. Age requirement,
d. Integrity/probity, and
e. Assiduousness.

2. At least two-thirds of the members of the board of

directors of any commercial bank shall be Filipino citizens;
at least a majority of the members of the board of directors
of any thrift bank shall be Filipino citizens; and all members

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of the board of directors of a rural bank shall be Filipino

citizens.

3. The proposed directors of a bank shall be subject to

qualifications and other requirements of existing laws,
rules, and regulations of the Bangko Sentral.

Responsibilities. The responsibilities of the board of directors

are threefold.

Firstly, they are duty-bound to adopt measures

that shall safeguard the depositors’ interest.

Secondly, they must be sure to compensate the

stockholders fairly enough in exchange for the risk they
undertake and the capital they invest. They should,
therefore, bring lucrative business to the bank.

Thirdly, the boards of directors are responsible to

the regulatory and supervisory agencies who keep
surveillance over the management of the banks’ affairs
to allow maximum safety to depositors and also to give
the widest and best kind of service to the public.

In order to meet these responsibilities, the board possesses the

necessary authority for the implementation of its objectives. It is the
board that formulates the policies. It appoints or removes the
officers, fixes their salaries, and defines their duties and
responsibilities. The board has also the power to amend the by-laws
(except where the stockholders’ material interest is concerned). It
has the authority to declare or not to declare dividends. It also
determines the allocation of bank reserves, the amounts and
administration of loans and investments.

To gain the greatest efficiency in management, the board also

creates standing or special committees to which it delegates some of
its functions. The most common of these and their functions are the
following:

1. The Executive Committee. This committee deals

with the administrative matters. It often meets to
prepare the groundwork for board meetings. It acts
as an advisory body to the board. Some of the
policies it prepares are eventually approved by the
board.

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2. The Loans and Discount Committee. All matters

pertaining to loans and discounts, to lines of credit,
and others related to the loaning function of a bank
are deliberated on by this committee.

3. The Investment Committee. This committee

concerns itself with the bank’s investment portfolio.
It passes judgment on what securities the bank
should purchase in what amounts, how to diversify
investments and related matters.

4. The Trust Committee. The fiduciary function of the

bank will be the main concern of this committee. It
will thresh out how the trust funds shall be invested,
how much to charge clients, how to administer trust
agreements, and others.

5. The Examination Committee. In order that the bank

will always be in shipshape condition regarding its
operations, the internal examination and audit of its
accounts is an essential feature of good
management. It is the duty of this committee to
improvise methods to conduct such internal
examination and supervision.

Liabilities. The liabilities of directors shall arise from their

incompetence and negligence in the discharge of their duties.
They may, therefore, have to face serious and expensive suits
brought against them for reasons of misconduct in doing their
duties, or they may be removed from their office by the
stockholders.

Limitations. Directors may be prohibited from doing some acts,

which will either impair or jeopardize the bank’s good relations with
the public. A director might be required to inhibit himself from
deliberating on a loan where he is directly or indirectly interested.
He may be required to refrain from acting as guarantor or co-maker
in the granting of loans and such other similar prohibitions. In these
matters, Section 55 of the New General Banking Act (Republic Act
8791) is cited hereunder:

Section 55. Prohibited Transactions.

55.1 No director, officer, employee, or agent of any

bank shall:

a) Make false entries in any bank report or

statement or participate in any fraudulent
transaction, thereby affecting the financial

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interest of, or causing damage to, the bank or

any person;

b) 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: Provided, that with respect to bank
deposits, the provisions of existing laws shall
prevail;

c) Accept gifts, fees, commissions, or any other

form of remunerations in connection with the
approval of a loan or other credit accommodation
from said bank;

d) Overvalue or aid in overvaluing any security for

the purpose of influencing in any way the actions
of the bank or any bank; or

e) Outsource inherent banking functions.

Bank Officers

The officers of a bank consist of a president, one or more vice-

presidents, a cashier, and some other officers as provided for in the
by-laws. Each of these officers has his/her own duties and
responsibilities.

The President. In case the positions of chairman of the board

and presidents are held by one person, the president also presides
the board meeting. If these positions are held by separate persons,
however, the chairman presides at the board meeting while the
president becomes the chief executive or the general manager of the
bank. He implements the policies formulated by the board. He is the
court of last resort when the board is in session. The president
represents the bank in cases of litigation. For this purpose, he is
given the right to retain a counsel, to file suits in the name of the
bank, as well as to defend the bank. Sometimes, he may also approve
loans, determine investments, and represent the bank in dealing with
the general public.

The Vice-President. The vice-president assists the president

when the latter is present. However, when the president is absent or
incapacitated the vice-president takes over his duties and
responsibilities.

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In case there are two or more vice-presidents, their duties will

be defined by the board. They are usually assigned to head the
different departments of a bank, in order to achieve a greater degree
of specialization and division of labor.

The Cashier. The cashier often doubles up as the chief clerk,

the secretary, and the treasurer of the bank. However, he may
delegate some of his duties to assistant cashiers. He takes care of all
the monetary transactions of the bank. He is also responsible for the
reports presented to the regulatory and supervisory agencies.

Other Officers. Other officers of the bank may be the

comptroller and the auditor. The former takes care of all the
accounting and statistical work of a bank while the latter verifies the
accounts resulting from banking operations. The auditor also conducts
bank examinations as often as possible.

The officers of the bank are also responsible for the efficient
and harmonious administration of their duties. It is evident that they
should, therefore, be made liable for any losses incurred by the bank
through their negligence, misconduct, or inefficiency. Hence, men
with moral integrity, intellectual and physical capacities, and wide
and diverse experience in the field of banking and other businesses
are chosen to become officers of a bank.

Bank Operations

In implementing the policies of the board, through the

president and other officers, the operational activities of
management involve three distinct functions. These are the executive
function, the teller function and the bookkeeping function. This holds
true whether the bank is managed by one or two persons or by a
greater number of persons.

The Executive Function. A banker must of necessity be faced

with policy-making, with establishing harmonious relations with
customers in order to get business, with gathering facts and figures
about the depositors and debtors, with recruiting personnel to do the
minor operations, and with similar duties involving the caliber of an
executive. In such a case, the banker must be a man of creative
managerial ability. He should possess a charming personality. He
should be prudent and patient and must possess an above average
intelligence, if possible.

The Teller Function. After the banker shall have built up a

clientele, he must then act as teller in manifold ways. He accepts
deposits, he changes checks for cash, he changes big bills with
smaller denominations, he releases the checks or cash representing

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loans, he receives payments for loans, and such other teller

functions. To be an efficient teller, the person must be patient,
understanding, accurate and careful, if not cautious. For a mistake in
paying or receiving money may make or unmake a teller.

The Bookkeeping Function. To keep faithful record of the

events and accounts passing through his hands, the banker must
record the figures and sometimes the facts. This requires
bookkeeping knowledge. He may also be called upon to summarize
and interpret the facts and figures. This latter position requires
accounting ability.

Due to the training one gets from the bottom of the ladder by
actually doing the abovementioned functions, the person involved
would, upon his ascent on the ladder of success, indeed become a
very valuable asset as far as upper bank management is concerned.

Personal and Educational Qualities of a Banker

It may thus be summed up, in accordance with the functions of

the upper and lower management levels that a banker’s place in the
business world could be assured if he possesses a certain noteworthy
qualification.

A potentially efficient banker must possess a character

above suspicion and integrity of the highest order. He should be
patient, understanding, cordial, and respectful. He should be
well-versed in the banking principles and practices. In addition,
he should have a good command of the medium of communication;
he should have a working knowledge of law, economics,
accounting, management, public relations, and business
psychology.

In a nutshell, besides the personal qualities, a banker must be

“jack of all trades; master of all.’ Significantly enough, many a
quizzical eyebrow will be raised at such a sweeping statement. But
that is exactly what a real banker should be.

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 LEARNING ACTIVITY

Read the following and identify the word or group of words that is being
referred to in the sentence:

1. This committee deals with the administrative

matters. It often meets to prepare the groundwork for board meetings. It acts
as an advisory body to the board. Some of the policies it prepares are
eventually approved by the board.

2. All matters pertaining to loans and discounts, to

lines of credit, and others related to the loaning function of a bank are
deliberated on by this committee.

3. This committee concerns itself with the bank’s

investment portfolio. It passes judgment on what securities the bank should
purchase in what amounts, how to diversify investments and related matters.

4. The fiduciary function of the bank will be the

main concern of this committee. It will thresh out how the trust funds shall be
invested, how much to charge clients, how to administer trust agreements,
and others.

5. In order that the bank will always be in

shipshape condition regarding its operations, the internal examination and
audit of its accounts is an essential feature of good management. It is the duty
of this committee to improvise methods to conduct such internal examination
and supervision.

Answer the following:

1. Why are men with moral integrity, intellectual and physical capacities,
and wide and diverse experience in the field of banking and other
businesses are chosen to become officers of a bank.

2. In implementing the policies of the board, through the president and

other officers of a bank, the operational activities of management
involve three distinct functions. Explain these three distinct functions.

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Lesson 4

 The Purpose of Examination

and Supervision, External
Supervision, Mechanics of
Supervision, Internal Controls
and Programming Controls

Bank Supervision and Examination

The bank examination and supervision is done internally and

externally. This is undertaken in order to ensure the safe and
efficient operations of any bank. The external supervision comes from
agencies of the government and is not in any way connected with the
bank management. On the other hand, internal controls are
performed by persons within the bank’s management. The constant
surveillance and surprise visits keep the bank officers and personnel
on their toes, and see to it that their banks are in order.

Purpose of Examination and Supervision

The first purpose of examination is to find out whether banks

are doing their business in conformity with the banking laws and that
of the rules and regulations of the central bank and other
governmental agencies. Any violation on the part of the banks would
lead to their eventual closure or at least a reprimand from the
supervisory agencies.

Another purpose is to determine how sound the bank is

financially. The examiners should establish the fact that the bank
examined owns the assets, that the titles to property are good, that
the assets are properly valuated in the books, and that they are
acceptable quality. Such examination, however, does not imply a
complete auditing and for this reason the examiners cannot be made
responsible for the accuracy of the books and records nor the
published statement of banks.

The examination is more for discovering the unsound and

unsafe practices and to offer remedies or solutions for such practices.
Some of such practices are the granting of loans based on inadequate
credit information, granting of big loans to a single interest, receiving
collaterals of inferior quality, laxity in collection of loans, payment of
excessive salaries or dividends, keeping of incomplete or inaccurate

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records and payment of unreasonably high rates of interest on time

deposits. These practices serve to jeopardize not only the
stockholders’ but also the depositors’ interest.

Examination, therefore, achieves the purpose of maintaining

discipline on the part of the banks. However, it does not go down into
the more serious problems of fraud and embezzlement. An audit,
both by the external and internal sources, would bring to the fore
such malpractices of a more severe nature and great magnitude.

External Supervision

In the Philippines, the Supervision and Examination Sector of

the Bangko Sentral ng Pilipinas is in charge with the responsibility of
conducting spot and regular checks on all banking institutions. It is,
therefore, a vital arm of the Bangko Sentral ng Pilipinas. It is headed
by a Deputy Governor and staffed by examiners and other
administrative personnel.

The major functions of this sector are the chartering of banks,

supervision, and examination of banking and other non-bank financial
institutions. For a more authentic description of its functions and
scope of supervision and control over banks, the provisions of the
New Central Bank Act under Chapter I, Article IV-B are quoted
hereunder:

Section. 25. Supervision and Examination. - The Bangko

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

For purposes of this section, a subsidiary means a

corporation more than fifty percent (50%) of the voting stock
of which is owned by a bank or quasi-bank and an affiliate
means a corporation the voting stock of which, to the extent of
fifty percent (50%) or less, is owned by a bank or quasi-bank or
which is related or linked to such institution or intermediary
through common stockholders or such other factors as may be
determined by the Monetary Board.

The department heads and the examiners of the

supervising and/or examining departments are hereby
authorized to administer oaths to any director, officer, or
employee of an institution under their respective supervision
or subject to their examination and to compel the presentation
of all books, documents, papers or records necessary in their
judgment to ascertain the facts relative to the true condition

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of any institution as well as the books and records of persons

and entities relative to or in connection with the operations,
activities or transactions of the institution under examination,
subject to the provision of existing laws protecting or
safeguarding the secrecy or confidentiality of bank deposits as
well as investments of private persons, natural or juridical, in
debt instruments issued by the Government.

No restraining order or injunction shall be issued by the

court enjoining the Bangko Sentral from examining any
institution subject to supervision or examination by the Bangko
Sentral, unless there is convincing proof that the action of the
Bangko Sentral is plainly arbitrary and made in bad faith and
the petitioner or plaintiff files with the clerk or judge of the
court in which the action is pending a bond executed in favor
of the Bangko Sentral, in an amount to be fixed by the court.
The provisions of Rule 58 of the New Rules of Court insofar as
they are applicable and not inconsistent with the provisions of
this section shall govern the issuance and dissolution of the
restraining order or injunction contemplated in this section.

Section. 26. Bank Deposits and Investments. - Any

director, officer or stockholder who, together with his related
interest, contracts a loan or any form of financial
accommodation from: (1) his bank; or (2) from a bank (a)
which is a subsidiary of a bank holding company of which both
his bank and the lending bank are subsidiaries or (b) in which a
controlling proportion of the shares is owned by the same
interest that owns a controlling proportion of the shares of his
bank, in excess of five percent (5%) of the capital and surplus
of the bank, or in the maximum amount permitted by law,
whichever is lower, shall be required by the lending bank to
waive the secrecy of his deposits of whatever nature in all
banks in the Philippines. Any information obtained from an
examination of his deposits shall be held strictly confidential
and may be used by the examiners only in connection with
their supervisory and examination responsibility or by the
Bangko Sentral in an appropriate legal action it has initiated
involving the deposit account.

Section 27. Prohibitions. - In addition to the prohibitions

found in Republic Act Nos. 3019 and 6713, personnel of the
Bangko Sentral are hereby prohibited from:

(a) being an officer, director, lawyer or agent,

employee, consultant or stockholder, directly or
indirectly, of any institution subject to supervision or
examination by the Bangko Sentral, except non-stock
savings and loan associations and provident funds

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organized exclusively for employees of the Bangko

Sentral, and except as otherwise provided in this Act;

(b) directly or indirectly requesting or receiving

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

(c) revealing in any manner, except under orders

of the court, the Congress or any government office or
agency authorized by law, or under such conditions as
may be prescribed by the Monetary Board, information
relating to the condition or business of any such
institution. This prohibition shall not be held to apply to
the giving of information to the Monetary Board or the
Governor of the Bangko Sentral, or to any person
authorized by either of them, in writing, to receive such
information; and

(d) borrowing from any institution subject to

supervision or examination by the Bangko Sentral shall
be prohibited unless said borrowings are adequately
secured, fully disclosed to the Monetary Board, and shall
be subject to such further rules and regulations as the
Monetary Board may prescribe: Provided, however, that
personnel of the supervising and examining departments
are prohibited from borrowing from a bank under their
supervision or examination.

Section. 28. Examination and Fees. - The supervising

and examining department head, personally or by deputy, shall
examine the books of every banking institution once in every
twelve (12) months, and at such other times as the Monetary
Board by an affirmative vote of five (5) members, may deem
expedient and to make a report on the same to the Monetary
Board: Provided, that there shall be an interval of at least
twelve (12) months between annual examinations.

The bank concerned shall afford to the head of the

appropriate supervising and examining departments and to his
authorized deputies full opportunity to examine its books, cash
and available assets and general condition at any time during
banking hours when requested to do so by the Bangko Sentral:
Provided, however, That none of the reports and other papers
relative to such examinations shall be open to inspection by
the public except insofar as such publicity is incidental to the
proceedings hereinafter authorized or is necessary for the
prosecution of violations in connection with the business of
such institutions.

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Banking and quasi-banking institutions which are subject

to examination by the Bangko Sentral shall pay to the Bangko
Sentral, within the first thirty (30) days of each year, an
annual fee in an amount equal to a percentage as may be
prescribed by the Monetary Board of its average total assets
during the preceding year as shown on its end-of-month
balance sheets, after deducting cash on hand and amounts due
from banks, including the Bangko Sentral and banks abroad.

Section. 29. Appointment of Conservator. - Whenever, on the

basis of a report submitted by the appropriate supervising or
examining department, the Monetary Board finds that a bank
or a quasi-bank is in a state of continuing inability or
unwillingness to maintain a condition of liquidity deemed
adequate to protect the interest of depositors and creditors,
the Monetary Board may appoint a conservator with such
powers as the Monetary Board shall deem necessary to take
charge of the assets, liabilities, and the management thereof,
reorganize the management, collect all monies and debts due
said institution, and exercise all powers necessary to restore
its viability. The conservator shall report and be responsible to
the Monetary Board and shall have the power to overrule or
revoke the actions of the previous management and board of
directors of the bank or quasi-bank.

The conservator should be competent and

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

The conservator shall receive remuneration to be fixed

by the Monetary Board in an amount not to exceed two-thirds
(2/3) of the salary of the president of the institution in one (1)
year, payable in twelve (12) equal monthly payments:
Provided, That, if at any time within the one-year period, the
conservatorship is terminated on the ground that the
institution can operate on its own, the conservator shall
receive the balance of the remuneration which he would have
received up to the end of the year; but if the conservatorship
is terminated on other grounds, the conservator shall not be
entitled to such remaining balance. The Monetary Board may
appoint a conservator connected with the Bangko Sentral, in
which case he shall not be entitled to receive any
remuneration or emolument from the Bangko Sentral during
the conservatorship. The expenses attendant to the
conservatorship shall be borne by the bank or quasi-bank
concerned.

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The Monetary Board shall terminate the conservatorship

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

Section. 30. Proceedings in Receivership and

Liquidation. - Whenever, upon report of the head of the
supervising or examining department, the Monetary Board finds
that a bank or quasi-bank:

(a) is unable to pay its liabilities as they become due in

the ordinary course of business: Provided, that this
shall not include inability to pay caused by extraordinary
demands induced by financial panic in the banking
community;

(b) has insufficient realizable assets, as determined by

the Bangko Sentral, to meet its liabilities; or

(c) cannot continue in business without involving

probable losses to its depositors or creditors; or
(d) has willfully violated a cease and desist order under
Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation of
the assets of the institution; in which cases, the
Monetary Board may summarily and without need for
prior hearing forbid the institution from doing business
in the Philippines and designate the Philippine Deposit
Insurance Corporation as receiver of the banking
institution.

For a quasi-bank, any person of recognized competence

in banking or finance may be designated as receiver.

The receiver shall immediately gather and take charge

of all the assets and liabilities of the institution, administer
the same for the benefit of its creditors, and exercise the
general powers of a receiver under the Revised Rules of Court
but shall not, with the exception of administrative
expenditures, pay or commit any act that will involve the
transfer or disposition of any asset of the institution:
Provided, That the receiver may deposit or place the funds of
the institution in non-speculative investments. The receiver
shall determine as soon as possible, but not later than ninety

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(90) days from take-over, whether the institution may be

rehabilitated or otherwise placed in such a condition so that it
may be permitted to resume business with safety to its
depositors and creditors and of the institution shall be subject
to prior approval of the Monetary Board.

If the receiver determines that the institution cannot be

rehabilitated or permitted to resume business in accordance
with the next preceding paragraph, the Monetary Board shall
notify in writing the board of directors of its findings and
direct the receiver to proceed with the liquidation of the
institution. The receiver shall:

(1) file ex parte with the proper regional trial court, and
without requirement of prior notice or any other
action, a petition for assistance in the liquidation of
the institution pursuant to a liquidation plan adopted
by the Philippine Deposit Insurance Corporation for
general application to all closed banks. In case of
quasi-banks, the liquidation plan shall be adopted by
the Monetary Board. Upon acquiring jurisdiction, the
court shall, upon motion by the receiver after due
notice, adjudicate disputed claims against the
institution, assist the enforcement of individual
liabilities of the stockholders, directors and officers,
and decide on other issues as may be material to
implement the liquidation plan adopted. The
receiver shall pay the cost of the proceedings from
the assets of the institution.

(2) convert the assets of the institution to money,

dispose of the same to creditors and other parties, for
the purpose of paying the debts of such institution in
accordance with the rules on concurrence and
preference of credit under the Civil Code of the
Philippines and he may, in the name of the institution,
and with the assistance of counsel as he may retain,
institute such actions as may be necessary to collect and
recover accounts and assets of, or defend any action
against, the institution. The assets of an institution
under receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver and shall,
from the moment the institution was placed under such
receivership or liquidation, be exempt from any order of
garnishment, levy, attachment, or execution.

The actions of the Monetary Board taken under this

section or under Section 29 of this Act shall be final and
executory, and may not be restrained or set aside by the court

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except on petition for certiorari on the ground that the action

taken was in excess of jurisdiction or with such grave abuse of
discretion as to amount to lack or excess of jurisdiction. The
petition for certiorari may only be filed by the stockholders of
record representing the majority of the capital stock within
ten (10) days from receipt by the board of directors of the
institution of the order directing receivership, liquidation or
conservatorship.

The designation of a conservator under Section 29 of

this Act or the appointment of a receiver under this section
shall be vested exclusively with the Monetary Board.
Furthermore, the designation of a conservator is not a
precondition to the designation of a receiver.

Mechanics of Examination

Bank examiners examine bank’s book at any time during

banking hours. The examiner takes possession of the bank’s books and
all documents of title which are either owned by the bank or pledge
by the debtors as collaterals. The vaults are sealed and so are the
tellers’ cage where there are cash and cash items. With the least
possible delay, the examiners make it a point to turn over the books
and documents to the bank employees soon after verification so that
the latter could proceed with the banking functions for the day.

It is rather impractical, if not impossible; to make an

immediate analysis of the assets as listed on the examiners’ working
paper as this phase of work requires a more leisurely pace in order to
arrive at reasonable judgment. When the routine check is finished,
however, it would be easier to proceed to the analysis and review of
the results. Such analysis involves the classification of assets as to
quality, valuation, and assurance that everything is in order. This
would also lead to the conclusion on the part of the examiners on
whether or not the bank follows the rules and regulations, on how
efficient its management is, and on how effective the policies are.

The significance of the examiner’s report will be gauged from

its quality. Hence, a more careful and exhaustive deliberation on the
final report is rendered. During and after examinations, a conference
is usually held with the board members or officers or both to discuss
the results of the examination. If there are violations, immediate
steps are suggested and are taken up to correct the bank’s position.
In some instances, the directors are given the privilege to refute the
examiner’s position and to convince the supervisory agency that they
acted in good faith and with reasonable judgment in certain matters.

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Internal Controls

A committee on examination and supervision is usually created

to effect internal controls. Hence, the members of such committee
become quiet intimate with the goings-on in the bank and are ready
to offer suggestions or institute measures to correct any
misdemeanor.

The embezzlements, defalcations, and frauds cannot be

entirely eradicated since the business of banks is in the hands of
human beings of diverse natures. But they can be certainly minimized
by proper safeguards and it is the purpose of internal audit and
controls to shield the weak from being tempted, to prevent the
strong from opportunism, and to protect the innocent from being
involved. The more knowledge on the part of the bank officers and
personnel of the presence of “eyes and ears” within the organization
would make them cautious and prudent in their actuations.

The responsibility of audit and controls falls squarely on the

shoulder of the directors. It is, therefore, incumbent upon them to
appoint the committee to undertake such internal controls. It is
because not all directors possess the capacity to act as auditors due
to lack of know-how, it is possible then to delegate such
responsibility to competent persons to perform the job.

Some directors take a “hands off” policy in connection with

audit and controls for one reason or another. It is either that they say
the bank is small and does not need watching all the time or that
there is adequate protection through fidelity insurance or even
perhaps that they are too trusting because the bank is manned by
person known to each other. This seems to be an erroneous position
since although the directors do escape financial obligations through
adequate insurance, for instance, they cannot be totally free of the
moral responsibility they owe their employees.

The discovery and subsequent disclosure of any “peculation”

on the part of the bank officers or employees has indeed far reaching
adverse consequences. As stated by Marshall C. Corns in The Practical
Operations and Management of a Bank, such disclosure is “frightening
and of concern to all conscientious bank directors, alert bank
officers, trusted bank employees, and dedicated auditors because no
single circumstance retards the growth and development of a bank,
engenders lack of confidence in management, results in financial loss
to stockholders, creates fears and distrust on the part of the public
and often brings economic stress and ruin to a community, more than
an embezzlement or defalcation occurring in a local bank.”

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Programming of Controls

In the development of an effective audit and control system,

all operations and all bank personnel should be covered. To know the
cure, one must know the cause. Hence, a definition of terms comes in
handy for this purpose.

➢ Embezzlement means the taking of funds that belongs to

depositors and customers.

➢ Defalcation refers to misappropriation of funds which belong

to stockholders such as interest income, fees and commissions
or through the use of fictitious notes, or fraudulent expense
vouchers.

➢ Peculation would mean all kinds of embezzlement,

defalcation, or misappropriation of funds. Hence, a person
committing anyone of these is dubbed a “peculator.”

➢ Examination refers to the review and analysis of the asset and

liabilities of a bank to determine their existence, values and
true ownership, and to ascertain that everything in regard to
said assets and liabilities is in order. Audit confirms that the
assets and liabilities are results of normal business
transactions, aside from the fact, they exist as recorded.

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 LEARNING ACTIVITY

Read the following and identify the word or group of words that is being
referred to in the sentence:

1. This shall have supervision over, and conduct

periodic or special examinations of, banking institutions and quasi-banks,
including their subsidiaries and affiliates engaged in allied activities.

2. It means the taking of funds that belong to

depositors and customers.

3. It refers to misappropriation of funds which

belong to stockholders such as interest income, fees and commissions or
through the use of fictitious notes, or fraudulent expense vouchers.

4. It would mean all kinds of embezzlement,

defalcation, or misappropriation of funds.

5. It refers to the review and analysis of the asset

and liabilities of a bank to determine its existence, values and true ownership,
and to ascertain that everything in regard to said assets and liabilities is in
order.

Answer the following:

1. Differentiate bank supervision from bank examination. Cite an

example.

2. The first purpose of examination is to find out whether banks are doing
their business in conformity with the banking laws and that of the rules
and regulations of the Bangko Sentral ng Pilipinas and other
governmental agencies. Explain.

3. Discuss why bank examination is more for discovering the unsound

and unsafe practices and to offer remedies or solutions for such
practices.

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 MODULE SUMMARY

In module II, you have learned the general aspects in establishing

banks, organization, management and administration; licensing of foreign
banks, banks are established as corporations, bank location and role of
regulatory government bodies in bank organization; the board of directors,
bank officers, bank operations and personal and educational qualities of a
banker; and the purpose of examination and supervision, external
supervision, mechanics of supervision, internal controls and programming
controls.

There are four lessons in Module II.

Lesson 1 consists of the general aspects in establishing banks,

organization, management and administration.

Lesson 2 deals with licensing of foreign banks, banks are established

as corporations, bank location and role of regulatory government bodies in
bank organization.

Lesson 3 is deals with the board of directors, bank officers, bank

operations and personal and educational qualities of a banker.

Lesson 4 consists of the purpose of examination and supervision,

external supervision, mechanics of supervision, internal controls and
programming controls.

Congratulations! You have just studied Module II. Now you are ready
to evaluate how much you have benefited from your reading by answering
the summative test. Good Luck!!!

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 SUMMATIVE TEST

When the preliminary steps have been tackled, then the organizers
can proceed to the most exacting part of the job – the formal establishment
of the bank itself. In this regard, the Philippine banking laws and the
Corporation Code shall serve as guide to the organizers. To start with, the
New General Banking Act (Republic Act 879) requires that all banks shall be
established as corporations.

Identify the section that is being referred to on the following:

1. Stockholdings of Family Groups or Related Interests

2. Prohibition on Public Official
3. Treasury Stocks
4. Banking Days and Hours
5. Organization
6. Foreign Stockholdings
7. Certificate of Authority to Register
8. Issuance of Stocks
9. Board of Directors
10. Directors of Merged or Consolidated Banks
11. Fit and Proper Rule
12. Bank Branches
13. Strikes and Lockouts
14. Corporate Stockholdings
15. Compensation and Other Benefits of Directors and
Officers

Read the following and identify the word or group of words that is being
referred to in the sentence:

1. This committee deals with the administrative

matters. It often meets to prepare the groundwork for board meetings. It acts
as an advisory body to the board. Some of the policies it prepares are
eventually approved by the board.

2. All matters pertaining to loans and discounts, to

lines of credit, and others related to the loaning function of a bank are
deliberated on by this committee.

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3. This committee concerns itself with the bank’s

investment portfolio. It passes judgment on what securities the bank should
purchase in what amounts, how to diversify investments and related matters.

4. The fiduciary function of the bank will be the

main concern of this committee. It will thresh out how the trust funds shall be
invested, how much to charge clients, how to administer trust agreements,
and others.

5. In order that the bank will always be in

shipshape condition regarding its operations, the internal examination and
audit of its accounts is an essential feature of good management. It is the duty
of this committee to improvise methods to conduct such internal examination
and supervision.
6. This shall have supervision over, and conduct
periodic or special examinations of, banking institutions and quasi-banks,
including their subsidiaries and affiliates engaged in allied activities.

7. It means the taking of funds that belong to

depositors and customers.

8. It refers to misappropriation of funds which

belong to stockholders such as interest income, fees and commissions or
through the use of fictitious notes, or fraudulent expense vouchers.

9. It would mean all kinds of embezzlement,

defalcation, or misappropriation of funds.

10. It refers to the review and analysis of the asset

and liabilities of a bank to determine its existence, values and true ownership,
and to ascertain that everything in regard to said assets and liabilities is in
order.

Module II