1 FINMA-3 BANKING AND FINANCIAL INSTITUTIONS

Module 1 – Bank Finance and Regulation in the Philippines

2 FINMA-3 BANKING AND FINANCIAL INSTITUTIONS
Module 1 – Bank Finance and Regulation in the Philippines

Lesson 2: Banks and Financial Institutions Supervision

SPECIFIC LEARNING OUTCOMES

In this lesson you should be able to:

1. list different types of licenses;
2. classify local banks as to their type; and
3. explain procedures a bank should take to be BSP-authorized.

PRE-ASSESSMENT

Instruction: Identify the bank type described in each of the following statements.

_______________1. Defined as a commercial bank with the additional authority to exercise the powers of
an investment house and invest in non-allied enterprises.
_______________2. Which mobilize financial resources and control and extend credits to farmers,
cottage industrialists.
_______________3. Refer to entities engaged in the borrowing of funds through the issuance,
endorsement or assignment with recourse or acceptance of deposit substitutes.
_______________4. These are also called expanded commercial banks
_______________5. Authorized to conduct banking transactions only with other OBUs, FCDUs, and non-
residents, and only in foreign currency.
_______________6. Include savings and mortgage banks, stock savings and loan associations, private
development banks
_______________7. Entities engaged in the borrowing of funds from the public through deposit
substitutes
_______________8. Entitled to carry on the business of commercial banking, by accepting drafts and
issuing letters of credit
_______________9. Mandated to make needed credit available in the rural areas on reasonable terms
_______________10. Entities granted a trust license may validly engage in the trust and fiduciary
business, as well as in investment management activities.
3 FINMA-3 BANKING AND FINANCIAL INSTITUTIONS
Module 1 – Bank Finance and Regulation in the Philippines

LESSON MAP

Commercial

Universal

Thrift

Classification of Banks Rural

Offshore

Quasi-banks

Trust Entity

The map above shows the seven classification of banks.

CORE CONTENTS

ENGAGE: KNOW YOUR LOCAL BANKS

Activity 1: List down all banks and other financial institutions in our local community.
4 FINMA-3 BANKING AND FINANCIAL INSTITUTIONS
Module 1 – Bank Finance and Regulation in the Philippines

EXPLORE: READING CONCEPTS

Activity 2
INSTRUCTIONS: Read each concept closely. Spaces are provided for note-taking and reflection.

CLASSIFICATION OF BANKS
There are generally two categories of licenses granted by the BSP:
 Banking licenses
 Non-Bank Financial Institutions.

There are likewise different types of licenses available under each of the two categories mentioned. In
this regard, a banking license generally authorizes entities to engage in the lending of funds obtained in the
form of deposits for the purpose of re-lending or purchasing receivables. Under the General Banking Law
(GBL), banks in the Philippines are classified as follows:

Commercial Banks
 Commercial banks are entitled to carry on the business of commercial banking, by
accepting drafts and issuing letters of credit, by discounting and negotiating promissory
notes, drafts, bills of exchange, and other evidences of indebtedness, by receiving
deposits, by buying and selling and selling foreign exchange and gold and silver bullion, and by
lending money against security, by accepting or creating demand deposits subject to withdrawal
by check, by offering negotiable order of withdrawal accounts, by investing in allied undertakings,
and by acquiring readily marketable bonds and other debt securities.
 However, unlike universal banks, commercial banks cannot:
o underwrite securities
o invest in the equity of insurance companies
o hold more than a 40% equity stake in financial allied undertakings other than publicly-listed
universal and commercial banks (100%), privately-owned universal and commercial banks
(49%), and venture capital companies (60%), nor
5 FINMA-3 BANKING AND FINANCIAL INSTITUTIONS
Module 1 – Bank Finance and Regulation in the Philippines

o hold an equity stake in non-allied enterprises.

Universal Banks
 Universal banks or expanded commercial banks are ranted, in addition to commercial banking
powers enumerated in the preceding paragraph, the authority to:
o exercise the powers of investment houses,
o invest in up to 100% of the equity of an insurance company
o invest in up to 100% of the equity of most financial allied undertakings, including
publicly-listed universal and commercial banks (100%) but excluding privately-
owned universal and commercial banks (49%) and venture capital companies (60%),
and
o invest in non-allied undertakings.

Thrift Banks
 Thrift banks include savings and mortgage banks, stock savings and loan associations,
private development banks.
 Thrift Banks may exercise similar powers with those of a commercial bank, but with prior approval
of the Monetary Board for particular activities, such as:
o opening of current accounts
o engaging in trust, quasi-banking, and money market operations
o acting as collection agent for government entities
o acting as official depository of national agencies where the thrift bank is located,
and
o issuing mortgage and chattel mortgage certificates.
 Thrift banks may own up to 100% of the equity of non-financial allied undertakings, and hold a
minority equity stake in financial allied undertakings including banks (although they may hold up to
60% of venture capital companies).

Rural Banks
 Rural banks are mandated to make needed credit available in the rural areas on reasonable
terms and which are governed primarily by the Rural Banks Act (Rep. Act No. 6938).
 Unlike commercial banks, universal banks, and thrift banks, rural banks are required to be entirely
owned by Philippine citizens.

Other licenses:
Offshore Banking Units (OBU)
6 FINMA-3 BANKING AND FINANCIAL INSTITUTIONS
Module 1 – Bank Finance and Regulation in the Philippines

 An OBU is basically a foreign bank’s counterpart of a local bank’s Foreign Currency Deposit Unit
(FCDU).
 Unlike the full-fledged branch of a foreign bank, an OBU does not have full banking authority.
 OBUs are authorized to conduct banking transactions only with other OBUs, FCDUs, and non-
residents, and only in foreign currency.

Quasi-Banks
 Quasi-Banks are entities engaged in the borrowing of funds from the public through the
issuance, endorsement, or assignment with recourse or acceptance of deposit substitutes
for purposes of re-lending or the purchase of receivables.
 Universal and commercial banks are automatically granted quasi-banking license.

Trust Entity
 Entities granted a trust license may validly engage in the trust and fiduciary business, as
well as in investment management activities.
 The trust business of a bank must keep separate from its general business all funds, properties,
securities, and books in relation to its trust functions. In order to protect the general public, self-
dealing transactions by a trust entity are prohibited, subject to certain exceptions.

Procedures to be followed and requirements to be met to obtain each of the different licenses.
Formalities to be fulfilled, documentation to be submitted, guaranties requested, time estimation, etc.
Generally, the minimum conditions that a prospective bank must comply with before it may be
authorized by the BSP to be organized as a bank are:
a) it must be organized as a stock corporation,
b) its funds must be obtained from 20 or more persons, and
c) that the minimum capital requirements prescribed by the Monetary Board for each category of
banks are satisfied (capital requirements to be discussed further in the next lesson

Appendix No. 37 of the Manual of Regulations for Banks sets forth in detail the requirements to be met
to obtain each of the different licenses. In connection with the foregoing, it should be noted that the SEC will
not approve the articles of incorporation or the application for a primary license without the applicant showing
an approval in writing granted by the BSP through the Monetary Board.

At present, pending the completion of a study, there is an indefinite moratorium on the establishment
of new banks, except in cities and municipalities where there are no existing bank offices and except for
banks primarily engaged in micro-financing.

The period within which the BSP will issue each of the different licenses will depend on the
completeness of the papers required. There is no prescribed period within which a license must be issued.

EXPLAIN: DEEPENING YOUR UNDERSTANDING

7 FINMA-3 BANKING AND FINANCIAL INSTITUTIONS
Module 1 – Bank Finance and Regulation in the Philippines

INSTRUCTIONS: Answer the following questions below.

1. Differentiate commercial banks and universal banks.
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________

2. Differentiate thrift banks and rural banks.

____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________

EXTEND: CLASSIFYING BANKS

INSTRUCTIONS: Answer the following questions below.
1. Go back to the list you’ve made in ENGAGE. This time, classify each financial institution based on its
bank type.

Financial Institution Name Type (commercial, universal, etc.)

Add more rows if necessary.

8 FINMA-3 BANKING AND FINANCIAL INSTITUTIONS
Module 1 – Bank Finance and Regulation in the Philippines

EVALUATE: BECOMING A BANKER

INSTRUCTIONS: Answer the following questions below.

1. Suppose you want to establish a bank of your own and register it to be BSP-authorized. List down the
steps you would take to make this a possibility. Start with your bank name and what type of bank will
it be!

TOPIC SUMMARY

In this lesson, you learned that:

 Classification of banks in the Philippines are as follows: commercial, universal, thrift, rural, offshore
banking units (OBU), quasi-banks, trust entity.
 A banking license generally authorizes entities to engage in the lending of funds obtained in the form
of deposits for the purpose of re-lending or purchasing receivables.

POST-ASSESSMENT

INSTRUCTIONS: Identify that bank type described in each of the following statements.
_______________1. These are also called expanded commercial banks UNIVERSAL BANK
_______________2. Authorized to conduct banking transactions only with other OBUs, FCDUs, and non-
residents, and only in foreign currency. OFFSHORE BANKING UNITS
_______________3. Include savings and mortgage banks, stock savings and loan associations, private
development banks THRIFT BANKS
_______________4. Entities engaged in the borrowing of funds from the public through deposit
substitutes QUASI-BANKS
_______________5. Entitled to carry on the business of commercial banking, by accepting drafts and
issuing letters of credit COMMERCIAL BANKS
_______________6. Mandated to make needed credit available in the rural areas on reasonable terms
RURAL BANKS
_______________7. Entities granted a trust license may validly engage in the trust and fiduciary
business, as well as in investment management activities. TRUST ENTITY

REFERENCES
9 FINMA-3 BANKING AND FINANCIAL INSTITUTIONS
Module 1 – Bank Finance and Regulation in the Philippines

 Gup, B. (2011), Banking and Finanacial Institutions: A guide for directors, investors and
counterparties, John Wiley & Sons, Inc., Hoboken, New Jersey.
 Romulo, et al, Bank Finance and Regulation, Bank Finance and Regulation Practice Group,
 http://www.lexmundi.com/images/lexmundi/PDF/PG/BankFinance/Phillipines.pdf, retrieved on
September 7, 2020.