Module 6.3 Banking Regulation

Banking and Financial
Institutions
Banking Regulation
ALLAN A. SANTIAGO
College of Business and Accountancy
Business Management Department
San Sebastian College Recoletos de Cavite Love and Knowledge: To educate the mind and the heart.
Reserves
Banks are required to maintain reserves against their deposit and
deposit-substitute liabilities. The reserve requirements are not static, as
they may be varied from time to time by the Monetary Board. The BSP
imposed a unified reserve (initially of 18 per cent) for the deposit and
deposit-substitute liabilities of universal and commercial banks. These
reserves, aside from being an instrument of monetary policy of the BSP,
have a prudential purpose, since they serve as a ready source of funds
that will respond to an unusually large number of withdrawals of
deposits taking the shape of a bank run. Under manageable
circumstances, the reserves and other funds at the bank's disposal
should stem the run.
Single Borrower’s Limit (SBL)
• a. Consistent with national interest, 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 twenty-five percent (25%) of the
net worth of such bank. The basis for determining compliance with the single borrower’s limit (SBL) is the total credit commitment
of the bank to or on behalf of the borrower.
• b. The total amount of loans, credit accommodations and guarantees prescribed in the first paragraph may be increased for each
of the following circumstances:
• (1) By an additional ten percent (10%) of the net worth of such bank: Provided, That the additional liabilities are adequately secured
by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily
marketable, non- perishable goods which must be fully covered by insurance;
• (2) By an additional twenty-five percent (25%) of the net worth of such bank: Provided, That the additional loans, credit
accommodations and guarantees are for the purpose of undertaking infrastructure and/ or development projects under the Public-
Private Partnership (PPP) Program of the government duly certified by the Secretary of Socio-Economic Planning: Provided,
further, That the total exposures of the bank to any borrower pertaining to such infrastructure and/or development projects under
the PPP Program shall not exceed twenty-five percent (25%) of the net worth of such bank: Provided, furthermore, That the
additional twenty-five percent (25%) shall only be allowed for a period of six (6) years from 28 December 2010: Provided,
finally, That the credit risk concentration arising from total exposures to all borrowers pertaining to such infrastructure and/or
development projects under the PPP Program shall be considered by the bank in its internal assessment of capital adequacy
relative to its overall risk profile and operating environment. Said loans, credit accommodations and guarantees based on the
contracted amount as of the end of the 6-year period shall not be increased but may be reduced and once reduced, said
exposures shall not be increased thereafter;
• (3) By an additional fifteen percent (15%) of the net worth of such bank: Provided, That the additional loans, credit accommodations
and guarantees are granted to finance oil importation of oil companies, which are not affiliates of the lending bank, engaged in
energy and power generation: Provided, further, That the oil companies qualify under the credit underwriting standards of the
lending bank and the lending bank shall comply with Sec. 361 (Large exposures and credit risk concentrations) on the guidelines in
managing large exposures and credit risk concentration: Provided, furthermore, That the credit risk concentration arising from total
exposures to all oil companies shall be considered by the bank in its internal assessment of capital adequacy relative to its overall
risk profile and operating environment and shall be incorporated in the Internal Capital Adequacy Assessment Process (ICAAP)
document required to be submitted under Sec. 130: Provided, finally, That the additional fifteen percent (15%) shall only be allowed
for a period of three (3) years from 03 March 2011 or, until 03 March 2014. Said additional loans, credit accommodations and
guarantees outstanding as of the end of the 3-year period and in excess of twenty five percent (25%) of the lending bank’s net
worth shall not be increased but shall be reduced and once reduced, said exposures shall not be increased thereafter; and
• (4) By an additional twenty-five percent (25%) of the net worth of such bank: Provided, That the additional loans,
credit accommodations and guarantees are granted to entities, which act as value chain aggregators of the
lending banks’ clients, and/or economically-linked entities that are also actors/players in the value chain: Provided,
further, That the additional twenty-five percent (25%) will apply only to non- DOSRI/RPT loans; Provided,
finally, That such additional twenty-five percent (25%) shall only be for a period of three (3) years, subject to
review after said period.
• c. The above prescribed ceilings shall include: (1) the direct liability of the maker or acceptor of paper discounted
with or sold to such bank and the liability of a general endorser, drawer or guarantor who obtains a loan or other
credit accommodation from or discounts paper with or sells papers to such bank; (2) in the case of an individual
who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities
of said entities to such bank; (3) in the case of a corporation, all liabilities to such bank of all subsidiaries in which
such corporation owns or controls a majority interest; and (4) in the case of a partnership, association or other
entity, the liabilities of the members thereof to such bank.
• d. Even if a parent corporation, partnership, association, entity or an individual who owns or controls a majority
interest in such entities has no liability to the bank, the liabilities of subsidiary corporations or members of the
partnership, association, entity or such individual shall be combined under certain circumstances, including but
not limited to any of the following situations: (1) the parent corporation, partnership, association, entity or
individual guarantees the repayment of the liabilities; (2) the liabilities were incurred for the accommodation of the
parent corporation or another subsidiary or of the partnership or association or entity or such individual; or (3) the
subsidiaries though separate entities operate merely as departments or divisions of a single entity.
• e. Loans, credit accommodations, and guarantees granted by a bank to an entity (often a special purpose entity
or SPE) for the purpose of project finance as defined under Sec. 344 (
Exclusion from the thirty percent (30%) unsecured individual ceiling for project finance) shall be subject to a separate
individual limit of twenty-five percent (25%) of the net worth of the lending bank: Provided, That such project
finance loans are for the purpose of undertaking initiatives that are in line with the priority programs and projects
of the government: Provided, further, That the lending bank shall ensure that the standard prudential controls in
project finance loans designed to safeguard creditors’ interests are in place, which may include pledge of a
borrower’s shares, assignments of the borrower’s assets, assignment of all revenues and cash waterfall
accounts, and assignment of project documents: Provided, finally, That the lending bank shall consider its total
project finance exposures in complying with Sec. 361 and Sec. 143 (
Credit limits, large exposures and credit risk concentrations) on the guidelines in managing large exposures and credit
risk concentrations.
• f. The wholesale lending activities of government banks to participating financial institutions (PFIs) for relending to end-user borrowers
shall at no time exceed a separate limit of thirty-five percent (35%) of net worth, subject to the following guidelines: (1) it shall apply
only to loans granted to PFIs on a wholesale basis for on-lending to end-user borrowers; (2) it shall apply only to loan programs
funded by multilateral, international or local development agencies, organizations or institutions especially designed for wholesale
lending activities of government banks; (3) the end-user borrowers of the PFIs shall be subject to the twenty-five percent (25%) SBL,
not the increased ceiling of thirty-five percent (35%); and (4) government banks shall observe appropriate criteria for accrediting PFIs
and for the grant/renewal of credit lines to accredited PFIs.
• g. Loans and other credit accommodations and usual guarantees by a bank to any non-bank entity, whether locally or abroad, shall be
subject to the limits as herein prescribed.
•Loans and other credit accommodations as well as deposits and usual guarantees by a bank to any other bank, whether locally or
abroad, shall be subject to the limits as herein prescribed or P100.0 million, whichever is higher: Provided, That the lending bank shall
exercise proper due diligence in selecting a depository bank and shall formulate appropriate policies to address the corresponding
risks involved in the transactions.
•Deposits of RBs/Coop Banks with government-owned or controlled financial institutions like the LBP and the DBP shall not be
covered by the SBL imposed under R.A. No. 8791.
•In municipalities and cities where there are no government banks, the deposits of RBs/Coop Banks in private banks in said areas
shall not be subject to the SBL imposed under R.A. No. 8791. Deposits in private banks located in municipalities/cities where there are
government banks shall be subject to the limits as prescribed in the second paragraph above.
•The outstanding balance of the demand deposit account in a private depository bank being used by the TBs/RBs/Coop Banks with
authority to accept/create demand or current deposits, to fund checks cleared through the said private depository bank shall also be
exempt from the SBL imposed under R.A. No. 8791 even if there is a government- owned or controlled financial institution in the area.
• h. Loans, credit accommodations and guarantees to any person, partnership, association, corporation or other entity or group of
companies in excess of the applicable SBL arising from acquisition, merger or consolidation of borrower- corporations, which loans,
credit accommodations and guarantees were granted prior to and are outstanding as of date of acquisition, merger or consolidation of
borrower-corporations shall not be increased, but shall be reduced and once reduced, shall not be increased beyond the applicable
SBL.
•It is expected that FIs would generally observe a lower internal single borrower’s limit than the prescribed limit of twenty-five
percent (25%) as a matter of sound practice.
DOSRI limit
The general policy behind the DOSRI limit is to level the lending field
between insiders (namely, directors, officers, stockholders and their
related interests) and outsiders. The rules require that loans and other
credit accommodations to DOSRI are to be in the regular course of
business and upon terms no less favorable to the bank than those
offered to those outside the DOSRI circle. The aim is to prevent banks
from becoming a captive source of finance of the DOSRI.
The existing DOSRI rules have three ceilings: an individual ceiling, an
aggregate ceiling and a ceiling on unsecured loans.
The individual ceiling relates to the total allowable outstanding direct
credit accommodation to a DOSRI, which is an amount equivalent to the
individual's unencumbered deposits in the lending bank plus the book
value of the paid-capital contribution therein. It is also required that the
unsecured credit accommodations must not exceed 30 per cent of the
total DOSRI credit accommodations.
On the other hand, the aggregate ceiling refers to the total credit
accommodations to DOSRI: this is 15 per cent of the total loan portfolio
of the bank or 100 per cent of its net worth, whichever is lower.
Before a bank can extend a DOSRI loan, a specific resolution must be
passed by the board of directors, without the participation of the
interested director. The resolution must be entered into the records of
the bank, and a copy of the entry must be transmitted to the BSP within
20 banking days of board approval.
Loan-Loss Provisioning
Appendix 15 to the Manual of Regulations for Banks contains the basic
minimum guidelines for setting up allowances for credit losses (ACL) in
respect of banks 'with operations that may not economically justify a
more sophisticated loan loss estimation methodology or where practices
fell short of expected standards'. Loans and other credit
accommodations with unpaid principal or interest are to be classified (as
pass, especially mentioned, substandard, doubtful or loss, as the case
may be) and provided with ACL based on the number of days of missed
payments.
Equity Investment Limit
There are limits as to how much universal and commercial banks can
invest in equities of enterprises. Under Section 24 of the GBL, the total
investment by a universal bank in equities of allied and non-allied
enterprises must not exceed 50 per cent of its net worth, while its equity
investment in any one enterprise is not to exceed 25 per cent of its net
worth.
On the other hand, the total investment by a commercial bank in
equities of allied enterprises must not exceed 35 per cent of its net
worth, while the individual limit is 25 per cent of its net worth. It must
be stressed that only universal banks can invest in non-allied enterprises.
In all cases, the approval of the Monetary Board is required.
A breach of any of the foregoing prudential measures would constitute a
violation of the GBL or the Manual of Regulations for Banks. Under
Section 36 of the New Central Bank Act, any person responsible for a
breach or violation may be criminally prosecuted, and if convicted may
be punished with a fine ranging from 50,000 to 2 million Philippine
pesos, with imprisonment for a period ranging between two and 10
years, or with a combination of a fine and imprisonment, at the
discretion of the court.
Further, whenever a bank persists in carrying on its business in an
unlawful or unsafe manner, the Monetary Board may take action under
Section 30 of the New Central Bank Act for its receivership and
liquidation, without prejudice to the penalties provided above and the
administrative sanctions provided in Section 37 of the New Central Bank
Act, namely:
a. fines in amounts determined by the Monetary Board, but in no case
to exceed 1 million Philippine pesos for each transactional violation
or 100,000 Philippine pesos per calendar day for violations of a
continuing nature;
b. suspension of rediscounting privileges or access to BSP credit
facilities;
c. suspension of lending or foreign exchange operations or authority to
accept new deposits or make new investments;
d. suspension of interbank clearing privileges; and
e. suspension or revocation of quasi-banking or other special licenses.
The bank is subject to certain confidentiality obligations. Any information
relating to the funds or properties of clients of a bank are to be kept
confidential by that bank and its directors, officers, employees or agents.
Under Subsection 55.1(b) of the GBL, this information cannot be
disclosed to any unauthorized person without a court order. However,
under Section 11 of the Anti-Money Laundering Act of 2001, no court
order is required if:
a. the funds or property involved consist of investments (other than
those in bonds issued by the government or its political subdivisions
and instrumentalities, as those are governed by the Secrecy of Bank
Deposits Law mentioned below); and
b. the said investments are related to:
• kidnapping for ransom;
• unlawful activities under Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15 and 16 of the
Comprehensive Dangerous Act of 2002;
• hijacking and other violations under Republic Act No. 6235; and
• destructive arson and murder, including that perpetrated by terrorists against
non-combatants and similar targets.
The term 'unauthorized person' in Subsection 55.1(b) of the GBL does
not include BSP officials involved in the periodic or special examination
of a bank, or other persons authorized by the bank to undertake certain
activities on its behalf (e.g., a service provider under an outsourcing
arrangement allowed under Subsection 55.1(e) of the GBL). It must also
be noted that the persons entitled to protection under Subsection
55.1(b) are 'private individuals, corporations, or any other entity'. Thus,
the protection would not extend to non-private persons, such as public
officials.
a. With regard to bank deposits in Philippine pesos (as well as investments in bonds
issued by the government or its political subdivisions and instrumentalities), the
Secrecy of Bank Deposits Law applies. Under this Law, those deposits and
investments may not be examined, enquired about or looked into by any person,
government official, bureau or office, except:
• upon written permission of the depositor or investor;
• in cases of impeachment;
• upon an order of a competent court regarding bribery;
• for dereliction of duty by public officials; or
• where the money deposited or invested is the subject of the litigation
• The following cases are additional exceptions to the Secrecy of Bank Deposits Law:
• prosecution for unexplained wealth under Republic Act No. 3019, as amended, otherwise
known as the Anti-Graft and Corrupt Practices Act;
• upon order of a competent court in cases of violation of the Anti-Money Laundering Act of
2001 when it has been established that there is probable cause that the deposits or
investments involved are in any way related to an unlawful activity or a money laundering
offence under the said Act, except that no court order is required in cases of:
• unlawful activities under Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15 and 16 of the
Comprehensive Dangerous Drugs Act of 2002;
• destructive arson and murder, including that perpetrated by terrorists against non-
combatants and similar targets (Section 11 of the Anti-Money Laundering Act of 2001);
• the BSP's enquiry into or examination of deposits or investments with any bank
when the enquiry or examination is made during the course of the BSP's periodic
or special examination of a bank (Section 11 of the Anti-Money Laundering Act of
2001);
• an enquiry by the Commissioner of Internal Revenue into the deposits of a
decedent for the purpose of determining the gross estate of the decedent (Section
6(F) of the National Internal Revenue Code of 1997); and
• disclosure of certain information about bank deposits, which have been dormant
for at least 10 years, to the Treasurer of the Philippines in a sworn statement, a
copy of which is posted in the bank premises (Section 2, Unclaimed Balances Law
(Act No. 3936, as amended)).
• On the other hand, deposits in foreign currency deposit units of banks may be examined in any of
the following instances:
• upon the written permission of the depositor (Section 8 of the Foreign Currency Deposit Act);
• upon an order of a competent court in cases of violation of the Anti-Money Laundering Act of 2001,
when it has been established that there is probable cause that the deposits involved are in any way
related to an unlawful activity or a money laundering offence under the said Act, except that no
court order is required in cases of:
• unlawful activities under Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15 and 16 of the Comprehensive
Dangerous Drugs Act of 2002;
• destructive arson and murder, including that perpetrated by terrorists against non-combatants
and similar targets (Section 11 of the Anti-Money Laundering Act of 2001);
• an enquiry by the Commissioner of Internal Revenue into the deposits
of a decedent for the purpose of determining the gross estate of the
decedent (Section 6(F) of the National Internal Revenue Code of 1977);
and
• the BSP's enquiry into or examination of deposits with any bank when
the enquiry or examination is made during the course of the BSP's
periodic or special examination of the bank (Section 11 of the Anti-
Money Laundering Law of 2001).
• Notwithstanding the provisions of the Secrecy of Bank Deposits Law,
the Foreign Currency Deposit Act and Subsection 55.1(b) of the GBL,
the BSP and the PDIC may enquire into or examine deposit accounts
and all information related thereto in cases where there is a finding of
unsafe or unsound banking practices.
• Further, under the Terrorism Financing Prevention and Suppression Act
2012, the Anti-Money Laundering Council is authorized, in connection
with an investigation of financing of terrorism, to enquire into or
examine deposits and investments with any bank and any of its
subsidiaries or affiliates without a court order.

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