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Notes ofhotjuristin foro conscientiae

BANKINGLAWS

GGOOVVEERRNNIINNGG LLAAWW

Banking Institution are governed by the followinglaws:

A. General banking laws General Banking Law (R.A. No. 8791) . New Central Bank Act (R.A. No.

7653)

B. Special banking laws New Rural Banks Act (R.A. No. 7353) Private Development Banks Act

(R.A. No. 4093) Savings and Loan Association Act

(R.A. No. 3779) . Thrift Banks Act (R.A. No. 7906)

C. Other laws affecting banks Secrecy of Bank Deposits Law

(R.A. No. 1405) Unclaimed Balances Law (Act No. 3936) Philippine Deposit Insurance Corporation Act

(R.A. No. 3591)

The general banking laws above mentioned areapplicable to government banks like DBP and PNB.The Al- Amanah Islamic Bank is subject to all bankingand pertinent laws.

(Bar Review Materials in Commercial Law, Jorge

Miravite, 2002 ed.)

THREE KINDS OF ENTITIES THAT INTRODUCE FUNDS

INTO THE ECONOMY:1. banks : entities that obtains funds from the public

in the form of deposits and re-lend it to the public;2. quasi-banks : those that obtain funds in the form of

deposit substitutes and re-lend the same and notfrom the public or depositors.

3. Finance companies and other financialintermediaries: those that lend funds from theirown assets.

FIVE PERSONS PRIMARILY INTERESTED IN THE

BUSINESS OF BANKING1. Government2. Depositors3. Investors4. Creditors5. Borrowers

BAR QUESTION:

JOINT ACCOUNT VS. PARTNERSHIP (2000)

Distinguish joint account from partnership. (3%)

SUGGESTED ANSWERThe following are the distinctions between jointaccount and partnership:

1) A partnership has a firm name while a jointaccount has none and is conducted in the name of theostensible partner.2) WHILE A PARTNERSHIP HAS JURIDICAL

PERSONALITY AND MAY SUE OR BE SUED

UNDER ITS FIRM NAME, A JOINT ACCOUNT

HAS NO JURIDICAL PERSONALITY AND CANSUE OR BE SUED ONLY IN THE NAME OF THE

OSTENSIBLE PARTNER.

3) While a partnership has a common fund, a jointaccount has none.4) While in a partnership, all general partners havethe right of management, in a joint account, theostensible partner manages its business operations.5) While liquidations of a partnership may, byagreement, be entrusted to a partner or partners, in

joint account liquidation thereof can only be done by

the ostensible partner.

BAR QUESTION:

Theory of Cognition vs. Theory of Manifestation

(1997)

The Civil Code adopts the theory of cognition, whilethe Code of Commerce generally recognizes thetheory of manifestation, in the perfection ofcontracts. How do these two theories differ?

SUGGESTED ANSWER:

Under the theory of cognition, the acceptance isconsidered to effectively bind the offeror only fromthe time it came to his knowledge. Under the theory

of manifestation, the contract is perfected at themoment when the acceptance is declared or made bythe offeree.

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GENERAL BANKING LAW OF 2000(GBL)

(RA No. 8791)

Purpose: To promote and maintain a stable and

efficient banking and financial system that is globallycompetitive, dynamic and responsive to the demands ofa developing economy (Sec. 2).

Scope of Application: The GBL primarily governsuniversal banks and commercial banks. It suppletorilygoverns thrift banks, rural banks and other bankinginstitutions.

GENERALCONCEPTS

BANKS

Entities engaged in the lending of funds obtained in

the form of deposits (S

ec. 2)

Entities duly authorized by the Monetary Board toengage in the business of regularly lending fundsobtained regularly from the public through thereceipt of deposits of any kind.

An investment company that performs function assuch is NOT a bank. Thus an investment companythat is engage solely in investing, reinvesting ortrading in securities is not engage in banking. (Banas vs. Asia Pacific Finance Corp., Oct. 18,2000).

However, an investment company which loans out

money of its customers, collects interest, andcharges a commission to both lender or borrower isengage in banking (Republic vs. Security Creditand Acceptance Corp.)

QUASI-BANKS

Entities engaged in the borrowing of funds throughthe issuance, endorsement or assignment withrecourse or acceptance of deposit substitutes (Sec.95)

Entities authorized to perform universal orcommercial banking functions may also engage inquasi-banking functions.

FINANCIAL INTERMEDIARIES

Persons or entities whose principal functionsinclude the lending, investing or placement of fundson evidences of indebtedness or equity depositedwith them, acquired by them or otherwise coursedthrough them, either for their own account or for theaccount of others.

ORGANIZATIONANDOPERATION

A. Authority to Register/Incorporate

The SEC shall not register the articles ofincorporation of any bank or any amendmentthereto unless accompanied by a certificate ofauthority issued by the Monetary Board under itsseal (Sec. 14).

The certificate of authority shall not be issuedunless the Monetary Board is satisfied:

1. That all requirements of existing laws andregulations to engage in the business for whichthe applicant is proposed to be incorporatedhave been complied with;

2. That the public interest and economicconditions, both general and local, justify theauthorization; and

3. That the amount of the capital, the financing,organization, direction and administration, aswell as the integrity and responsibility of theorganizers and administrators, reasonablyassure the safety of deposits and the publicinterest (Sec. 14).

Organization of a Bank orQuasi-BankRequirements:1. The entity is a stock corporation;2. Its funds are obtained from the public,

i.e. 20 or more persons; and3. The minimum capital requirements prescribed

by the Monetary Board are satisfied(Sec. 8).

Note:In Quasi banks, Deposit substitute arealternative forms of obtaining funds for thepublic, other than deposit, through theissuance, endorsement, or acceptance of debtinstrument for the borrowers own account, forthe purpose of relending or purchasing ofreceivables and other obligations.in banking orquasi-banking functions

A person or entity cannot engage in banking orquasi-banking functions without a certificate ofauthority from the BSP (Sec. 6).

The determination of whether a person or entity isperforming banking or quasi-banking functionswithout BSP authority shall be decided by theMonetary Board.

NATUREOFBANKINGBUSINESS

Impressed with public interest where the trust andconfidence of the public in general is of paramountimportance such that:

1. The appropriate standard of diligence must bevery high, if not the highest, degree ofdiligence; highest degree of care(PCI Bank vs.CA, 350SCRA 446, PBCom vs. CA, G.R. No.121413, 29 Jan. 2001) This applies only to cases where banks

are acting in their fiduciary capacity, thatis, as depository of the deposits of theirdepositors (Reyes vs. CA, G.R. No.118492, 15 Aug. 2001).

2. Subject to reasonable regulation under thepolice power of the state.

While an innocent mortgagee is not expected toconduct an exhaustive investigation on the historyof the mortgagors title, in case of a bankinginstitution, it must exercise due diligence before

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entering into said contract, and cannot rely upon onwhat is or is not annotated on the title. Reason:Before a loan is approved, representatives are sentto the premises offered as collaterals so as toinvestigate who the real owners are (DBP vs. CA,331 SCRA 267).

The business of a bank is one affected by publicinterest for which reason the bank should guard

against loss due to negligence and bad faith. It isexpected to ascertain and verify the identities of thepersons it transacts business with (UCPB vs.Ramos, G.R. No. 147800, November 11, 2003,Callejo, J.).

Due diligence required of banks extend even topersons, or institutions like the GSIS, regularlyengaged in the business of lending money securedby real estate mortgages (GSIS vs. EduardoSantiago, G.R. No. 155206. October 28, 2003).

CONSEQUENCES OF NATURE OF BUSINESS:

1. It is subject to heavy and close supervision and/or

regulation by the BSP (Central Bank of the Phils. v.CA, 208SCRA 652).

1. It is required to exercise utmost diligence in thehandling of deposits (Simex International ManilaInc., 183 SCRA 361).

2. Special rules on strikes and lockouts: any strike orlockout involving banks, if unsettled after 7calendar days shall be reported by the BSP to theSec. of Labor who has 2 options:

a. He may assume jurisdiction over and decidethe dispute; or

b. certify it to the NLRC for compulsoryarbitration

The President may also intervene at any time and

assume jurisdiction over such labor dispute in order to

settle or terminate the same.

CLASSIFICATIONOFBANKS(SEC.3)

1. Universal banks - Primarily governed by theGeneral Banking Law (GBL), can exercise thepowers of an investment house and invest in non-allied enterprises and have the highestcapitalization requirement.

2. Commercial banks - Ordinary banks governed bythe GBL which have a lower capitalizationrequirement than universal banks and can neitherexercise the powers of an investment house norinvest in non-allied enterprises.

3. Thrift banks These are a) Savings and mortgagebanks; b) Stock savings and loan associations; c)Private development banks, which are primarilygoverned by the Thrift Banks Act (R.A. 7906).

4. Rural banks Mandated to make needed creditavailable and readily accessible in the rural areason reasonable terms and which are primarily

governed by the Rural Banks Act of 1992 (RA7353).

5. Cooperative banks Those banks organizedwhose majority shares are owned and controlled bycooperatives primarily to provide financial and

credit services to cooperatives. It shall includecooperative rural banks. They are governedprimarily by the Cooperative Code (RA 6938).

6. Islamic banks Banks whose business dealingsand activities are subject to the basic principles andrulings of Islamic Shari a, such as the Al AmanahIslamic Investment Bank of the Philippines whichwas created by RA 6848.

7. Other classification of banks as determined bythe Monetary Board of the Bangko Sentral ngPilipinas.

ORDINARY

CORPORATION

BANKING

CORPORATION

May be a stock ornon-stockcorporation

Must generally be astock corporation

May issue par valueor no par valuestocks.

Shall issue par valuestocks only (Sec. 9).

May be registeredwith the SECwithout anycertificate ofauthority issued bya governmentagency.

Must secure acertificate of authorityfrom the MonetaryBoard before it canregister with SEC.

Maypurchase/acquireits own shares for alegitimate corporatepurpose; providedthat, it hasunrestrictedretained earnings inits books to coverthe shares to bepurchased/acquired.

May not purchase/acquire its shares oraccept them assecurity for a loan.Except: whenauthorized by theMonetary Board. Insuch case, the bankmust sell or disposeof said shares within6 months from thetime of theiracquisition (Sec. 10).

Must be composedof 5 to 15 directors,

each of whom shallown at least one (1)share of the capitalstock of thecorporation.

Also composed of 5to 15 directors. In

case of merger orconsolidation, thenumber of directorsshall not exceed 21(Sec. 17).

May declaredividends out of itsunrestrictedretained earnings.

May not declaredividends, if any ofthe conditions setforth under Sec. 57are present.

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UNIVERSAL BANK COMMERCIAL BANK

Authority to exerciseadditional powersother than thoseauthorized forcommercial banks

No such additionalpowers

May invest in theequities of allied,whether financial ornon-financial, andnon-allied enterprises(Sec. 24)

May only invest inequities of alliedenterprises, whetherfinancial or non-financial

Powers

1. The powersauthorized for acommercial bank;

2. The powers of aninvestment house;and

3. The power to investin non-allied

enterprises (Sec.23).

1. General powersincident tocorporations

2. Such powers as maybe necessary to carryon the business ofcommercial banking:a. Accepting drafts

and issuing letter ofcredits;b. Discounting andnegotiatingpromissory notes,drafts, bills ofexchange and otherevidence of debt;c. Accepting orcreating demanddeposits; receivingother types ofdeposits and depositsubstitutes;d. Buying and sellingforeign exchangeand other debtsecurities;e. Extending credit.(Sec. 29)

UNIVERSAL &COMMERCIAL BANK

OTHER BANKS

Authorized to engage inquasi-banking functionswithout need forapproval

Not so authorized

May accept or createdemand depositswithout need forapproval

Demand deposits -Liabilities of the BSP

and of other bankswhich are denominatedin Philippine currencyand are subject topayment in legal tenderupon demand by the

Must seek approval ofMonetary Boardbefore accepting orcreating demanddeposits. (Sec. 33)

presentation of checks(Sec. 58, NCBA).

EQUITY INVESTMENTS

POINT OF

DISTINCTION

UNIVERSALBANK

(Sec. 24-28)

COMML BANK

(Sec. 30-32)

Total investment

in allied

enterprises

50%

of net worth

35%

of net worth

Total investment

in non-allied

enterprises

50%

of net worth

N/A

Equity

investment in any

one enterprise

25%

of net worth

25%

of net worth

(Allied only)

Equity

investment in

financial allied

enterprise: thrift

bank, rural bank

or any financial

allied enterprise

(Sec. 25)

A publicly-l isted

bank may own up

to 100% of the

voting stock ofonly one other

UB / CB (Sec.

25).

100%

of equity

100%

of equity

y In otherfinancial alliedenterprises,

investment shallremain a

minority holding(Sec. 31).

Equityinvestment innon-financialallied enterprises

100%

of equity

100%

of equity

Equity

investment in a

single non-allied

enterprise

Shall not exceed

35% of the total

equity in that

enterprise nor

shall it exceed

35% of the

voting stock in

that enterprise

N/A

Equity

investment in

Quasi-Banks 40% 40%

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Allied Enterprises those entities which enhance orcomplement banking

Non-Financial Allied Enterprises pertains toactivities that do not involve money matters (such aswarehousing, safety deposit boxes)

NET WORTHThe total of the unimpaired paid-in capital including

paid-in surplus, retained earnings and undivided profit,net valuation reserves and other adjustments as may berequired by the Bangko Sentral (Sec. 24).

RISKBASED CAPITAL

The minimum ratio prescribed by the MonetaryBoard which the net worth of a bank must bear toits total risk assets which may include contingentaccounts.

However, the Monetary Board may require orsuspend compliance with such ratio whenevernecessary for a maximum period of one year;

PROVIDED that, such ratio shall be applieduniformly to banks of the same category (Sec. 34).

Effect of non-compliance with the prescribedminimum ratio:

1. Distribution of net profits may be limited orprohibited and MB may require that part or allof the net profits be used to increase thecapital accounts of the bank until the minimumrequirement has been met; or

2. Acquisition of major assets and making of newinvestments may be restricted. EXCEPT:purchases of evidence of indebtednessguaranteed by the Government (Sec. 34).

3. In case of a bank merger or consolidation, orwhen a bank is under rehabilitation under aprogram approved by BSP, the MB maytemporarily relieve the surviving bank,consolidated bank, or constituent bank orcorporations under rehabilitation from fullcompliance with the required capital ratio.

Effects of non-compliance with the prescribedminimum ratio:1. Distribution of net profits may be limited or

prohibited and MB may require that part or all of thenet profits be used to increase the capital accountsof the bank until the minimum requirement hasbeen met; or

2. Acquisition of major assets and making of newinvestments may be restricted. EXCEPT:purchases of evidence of indebtedness guaranteedby the Government.

3. In case of a bank merger or consolidation, or whena bank is under rehabilitation under a programapproved by BSP, the MB may temporarily relievethe surviving bank, consolidated bank, orconstituent bank or corporations underrehabilitation from full compliance with the requiredcapital ratio.

FUNCTIONSOFBANKS

BASIC FUNCTIONS:1. Loan Function2. Deposit Function

OTHER FUNCTIONS

Universal banks and commercial banks may alsoexercise any of the following functions:

a. Receive in custody funds, documents andvaluable objects;

b. Act as financial agent and buy and sell, byorder of and for the account of their customer,shares, evidences of indebtedness and typesof securities;

c. Make collection and payments for the accountof others and perform such other services fortheir customer as are not incompatible withbanking business;

d. Upon prior approval of the Monetary Board, actas managing agent, adviser, consultant oradministrator of investment management/

advisory/consultancy accounts; ande. Rent out safety deposit boxes.

The depositary would be liable if in performing itsobligation it is found guilty of fraud, negligence; in theabsence of any stipulation prescribing the degree ofdiligence required, that of a good father of the family isto be observed. Any stipulation exempting thedepositary from any liability arising from loss on accountof fraud, negligence would be void for being contrary topublic policy (CA-Agro Devt vs. CA, 219 SCRA 426,March 5, 1993).

Note: The bank acting as depositary or as an agentshall keep the funds, securities and other effects whichit receives duly separated from its own assets andliabilities. (Sec. 53)

A. LOANFUNCTION

Requirement for Grant of Loans

Before granting a loan, a bank must ascertain thatthe debtor is capable of fulfilling his commitments to thebank.

Rules:

1. A bank may demand from its applicants astatement of their assets and liabilities and of theirincome and expenditures and other information.

2. Should such statements prove to be false orincorrect, the bank may terminate any loan grantedon the basis of said statements and shall have theright to demand immediate repayment or liquidationof obligation (Sec. 40).

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Classification of Loans

UNCLASSIFIEDLOANS

CLASSIFIED LOANS

Those that do nothave a greaterthannormal risk and theborrower haveapparent ability to

satisfy it in full and noloss in ultimatecollection isanticipated.

Those that haveextraordinary risks ofloss in collection due tosome defects such asbad debts or those

under litigation.

Limit on loans, credit accommodations and

guarantees (Sec. 35)

1. Single Borrowers Limit (SBL) Rules

b. The total amount of loans extended by a bank toany person, partnership, association, corporation orother entity shall at no time exceed 20% of the net

worth of such bank.

c. The total amount of loans may be increased by anadditional 10% of the net worth of such bankprovided the additional liabilities of any borrowerare adequately secured by trust receipts, shippingdocuments, warehouse receipts or other similardocuments transferring or securing title coveringreadily marketable, non-perishable goods whichmust be fully covered by insurance;

Exclusions (NON-RISK LOANS):1. Loans secured by obligations of the Bangko Sentral

or the Philippine Government;2. Loans fully guaranteed by the government;3. Loans covered by assignment of deposits

maintained in the lending bank and held in thePhilippines;

4. Loans, credit accommodations and acceptancesunder letters of credit to the extent covered bymargin deposits; and

5. Other loans or credit accommodations which theMB may specify as non-risk items.

Joint and Solidary Signature (JSS) Practice

A common banking practice requiring as an additional

security for a loan granted to a corporation the joint and

Solidary signature of a major stockholder or corporate

officer of the borrowing corporation (Security Bank vs.

Cuenca, 341 SCRA 781).

Reasons:

a. In case of default, creditors recourse is not limitedto corporate properties but extends to personalassets of the surety;

b. Surety would be compelled to ensure that the loanwould be used for the purpose intended.

Note: While R.A. 8791 provides for the rates of 20%and 10% respectively, the Bangko Sentral has not yetimplemented such rates. The prevailing rates are 25%

and 15% respectively.

2. DOSRI Accounts (Directors, Officers,Stockholders, and Related Interests)

Requisites (BSP Circular No. 170):

a. The borrower is director, officer, or anystockholder of a bank and related interest.b. He contracts a loan or any form of financialaccommodationc. The loan or financial accommodation is from(1) his bank or (2) a bank that is a subsidiary of abank holding company of which both his bank and

lending bank are subsidiaries, (3) a bank inwhich a controlling proportion of the shares isowned by the same interest that owns acontrolling proportion of the shares of his bank;

andd. The loan or financial accommodation ofthe DOS, singly or with that of his relatedinterest, is in excess of 5% of the capital andsurplus of the lending bank or in the maximumamount permitted by law, whichever is lower.

Who are covered (BSP Circular No. 170):1. Directors Directors of the lending bank

2. Officers Either identified in the by-laws or are

generally known as such

3. Stockholders those whose stockholdings,individually and/or together with any of the followingpersons, amount to 2% or more of the totalsubscribed capital stock of the bank:a. His spouse or relative within the first degree of

affinity/consanguinity or relative by legaladoption, partnership wherein any of theforegoing is a general partner; and

b. A co-owner, with the stockholder or thestockholders spouse, or relative mentionedabove, of property/right/interest (mortgaged,pledged or assigned to secure the loan orcredit accommodations, except when themortgage, pledge or assignment covers onlysaid co-owners undivided interest.

4. Related Interest a. Spouse, relatives within first degree of

consanguinity or affinity, or relative by legaladoption of a DOS, partnerships of which aDOS or any of the foregoing is a generalpartner.

b. Co-owner, with the DOS or his spouse orrelative within the first degree of consanguinityor affinity, or relative by legal adoption, of theproperty/interest/ right mortgaged, pledged,

assigned to secure the loans or creditaccommodations, except when the mortgage,pledge or assignment covers only said co-owners undivided interest.

c. Corporation with inter-locking directors orwhere 20% of the capital stock is owned by theDOS and/or their spouses or relativesmentioned above, or wholly or majority ownedor controlled by any related entity or a group ofrelated entities in items (b), (d), and (e).

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Restrictions under the GBL and NCBA:a. No director or officer of any bank shall, directly or

indirectly, borrow from such bank nor shall beguarantor, endorser or surety for loans from suchbank to others, or in any manner be an obligor orincur any contractual liability to the bank, exceptwith the written approval of the majority of all thedirectors of the bank, excluding the directorconcerned. The written approval shall not be

required for loans granted to officers under a fringebenefit plan approved by the Bangko Sentral.

b. Dealings of a bank with any of its DOSRI shall beupon terms not less favorable to the bank thanthose offered to others (ARMS LENGTH RULE).

c. Loans extended to DOSRI shall be limited to anamount equivalent to their respectiveunencumbered deposits and book value of theirpaid-in capital contribution in the bank.Except:i. Loans, credit accommodations, and

guarantees secured by assets considered asnon-risk by the Monetary Board.

ii. Loans, credit accommodations, and advancesto officers in the form of fringe benefits.

iii. Cooperative banks with regard to theircooperative shareholders.

d. The resolution approving the loan shall be entered inthe records of the bank and transmitted to the BSP.

e. Waiver of secrecy of deposits of whatever nature inall banks in the Philippines by the borrower. Nowaiver is required if the related interests are theborrower.

f. Information obtained from examination is strictly

confidential.

3. Rules on amount of secured loans

a. Those secured by real estate shall not exceed 75%

of the appraised value of the real estate security,

plus 60% of the appraised value of the insured

improvements (Sec. 37).

b. Those secured by chattels and intangible properties

(such as patents, trademarks, trade names and

copyrights) shall not exceed 75% of the appraised

value of the security (Sec. 38).

BAR QUESTION:

BANKS; RESTRICTIONS ON LOAN

ACCOMMODATIONS (2006)

Pio is the president of Western Bank. His wifeapplied for a loan with the said bank to finance aninternet cafe. The loan officer told her that her

application will not be approved because the grant ofloans to related interests of bank directors,officers, and stockholders is prohibited by theGeneral Banking Law. Explain whether the loanofficer is correct. (5%)

SUGGESTED ANSWER:Section 36 of the General Banking Law of 2000 doesnot entirely prohibit directors or officers of the

bank, directly or indirectly, from borrowing from thebank. In this case, Pio is the president of Western

Bank, which makes him an officer, director andstockholder of the said bank. The General Banking

Law provides for additional restrictions to the bankbefore it can lend to its directors or officers. Awritten approval of the majority vote of all thedirectors of the bank, excluding the director

concerned, is required. Furthermore, such dealings

must be upon terms not less favorable to the bankthan those offered to others (Section 1326, CentralBank's "Manual of Regulations for Banks and OtherFinancial Intermediaries, cited in Ranioso v. CA, G.R.No. 117416, December 8, 2000). A violation of thisprovision will cause his or her position to be declaredvacant and the erring director or officer subjected

to the penal provisions of the New Central Bank Act.

COLLATERALS

1. Value of collaterals

The loan shall not exceed 75% of the appraised

value of the real property plus 60% of the appraised

value of the improvements or 75% of the appraised

value of the chattel (Secs. 37 & 38, GBL )

B. DEPOSITFUNCTION

Kinds of Deposits between a Bank and its Depositor

1. As debtor-creditora. Savingsb. Timec. DemandCharacteristics:

i. In the nature of irregular deposits (Serranovs. Central Bank, 96SCRA 96)

ii. Contract of loan/mutuum with thedepositor as creditor

iii. Bank acquires ownership of the thingdeposited and the right to use and dispose

iv. Money deposited is commingled with theother money, constituting a common fund.

v. Not preferred credits (Central Bank vs.Morfe, 20SCRA 507).

2. As lessor-lesseea. Safety deposit boxes the relation between a

bank renting out safety deposit boxes and itscustomer with respect to the contents of thebox is that of a bailor and bailee the bailmentfor hire and mutual benefit has been adopted inthis jurisdiction. It cannot be considered as acontract of lease because the full possessionand control of the safety deposit box is notgiven to the renters (Sia vs. CA, 222SCRA 24[1993]).

3. As trustee-trustora. Trust account

4. As bailee-bailora. Deposit strictly for safekeeping and for specific

purposes

5. As agent-principal:a. Deposit of check for collectionb. Deposit for specific purposec. Deposit for safekeeping

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Depositors:

1. Minors :a. at least seven years of ageb. able to read and writec. not disqualified by any incapacityd. it should only be savings or time deposits

Note: Parents may deposit for their minor children

or wards (Sec.1 PD No.734)

If the guardian shall give notice inwriting to any thrift bank not to make paymentsof deposits, dividends, or interest to the minorof whom he is the guardian, then suchpayment shall be made to the guardian. (Sec.22, Thrift Banks Act of1995)

Married Women are allowed to openbank accounts without assistance of theirhusbands (RA No. 7192

Kinds of Deposits

DEMAND DEPOSITS SAVINGS ACCOUNT

Only a universal or

commercial bank can

accept or create demand

deposits.

Evidenced by a

passbook.

A bank other than a

universal bank or

commercial bankCANNOT accept

demand deposit

Banks are prohibited

from issuing / accepting

withdrawal slips orother similar

instruments to effect

withdrawals without the

passbooks except for

bank authorized by the

BSP to adopt the no

passbook withdrawal

system.

Temporary overdrawing

against current accounts

shall not be allowed

unless caused by normal

bank charges and other

fees incidental to

handling such accounts.

A bank is negligent i f it

allows the withdrawal

without requiring the

presentation of a

passbook. (BPI v. CA)

Drawings against

uncollected deposits

(uncleared checks) are

generally prohibited.

NOW ACCOUNTS

(Negotiable Order of

Withdrawal)

TIME DEPOSITS

Interest bearing deposit

accounts that combine

the payable on demand

feature of checks and

investment feature of

savings account.

An account with fixed

term

Note:

Demand, savings, NOW accounts, time deposits

and deposit substitutes shall not be subject to

interest ceilings.

A bank other than a universal or commercial bankmust seek approval of Monetary Board beforeaccepting or creating demand deposits. (Sec. 33)

Anonymous accounts are prohibited. ( R.A. No

9160 as amended by RA 9194; BS

P Circular No. 251,July 21, 2000) exception: Foreign currency depositsmay be a numbered account. However, the lawrequires that the necessary measures are undertakenby the bank to record and establish the true identity ofthe depositor.

Joint account may be the subject of a survivorshipagreement whereby the co-depositor agree to permiteither of them to withdraw the whole deposit during theirlifetime and transferring the balance to the survivor uponthe death of one of them ( Vitug vs, CA., March 29,1990)

Types of deposit accounts(Handbook on Bank Deposits, A. Viray, 1998 ed.)

1. Individual

2. Jointa. And account

Co-ownership The signatures of both co-depositors arerequired for withdrawals.

b. And/or account Either one of the co-depositors may

deposit and withdraw from the account

without the knowledge, consent andsignature of the other. And upon the deathof one, the survivor may withdraw theentire balance on deposit.

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The account may be deemed asurvivorship agreement depending on theintention of the parties; aleatory contractsupported by a lawful consideration whichis valid unless when made as a merecloak to hide an inofficious donation, totransfer property in fraud of creditors, or todefeat the legitime of a forced heir (Riveravs. Peoples Bank and Trust Co., 73 Phil.

546 [1942]).

Deposit substitutes

An alternative form of obtaining funds from the public,other than deposits, through the issuance,endorsement, or acceptance of debt instruments for theborrowers own account, for the purpose of re-lending orpurchasing of receivables and other obligations (Sec.95, RA 7653).

DEPOSITDEPOSIT

SUBSTITUTE

No security given toguaranteerepayment; thedepositor relies onthe stability andreputation of thebank.

Guaranteed bycertificates and otherinstruments.(Handbook on BankDeposits, A. Viray,1998 ed.)

A bank has the right to set-off the deposits in itshands for the payment of any outstandingindebtedness to it on the part of the depositor(Gullas vs. PNB, 62 Phil. 519; PNB vs. CA, 272S

CRA 291).

The fiduciary nature of a bank-depositorrelationship does not convert the contract betweenthe bank and its depositors from a simple loan to atrust agreement, whether express or implied.Failure by the bank to pay the depositor is failure topay a simple loan and not a breach of trust. The lawsimply imposes on the bank a higher standard ofintegrity and performance in complying with itsobligations under the contract of simple loan,beyond those required of non-bank debtors, undera similar contract of simple loan (CBTC vs. CA,G.R. No. 138569, September 11, 2003).

This fiduciary relationship means that the banksobligation to observe high standards of integrityand performance is deemed written into everydeposit agreement between a bank and itsdepositor. The fiduciary nature of banking requiresbanks to assume a degree of diligence higher thanthat of a good father of a family (CBTC vs. CA,Ibid.).

Suspension of Payment on its DepositLiabilitiesIn case a bank or quasi-bank notifies the BangkoSentral or publicly announces a bank holiday, or in anymanner suspends the payment of its deposit liabilities

continuously for more than 30 days, the Monetary Boardmay summarily and without need for prior hearing closesuch banking institution and place it under receivershipof the Philippine Deposit Insurance Corporation (Sec.53).

The depositary would be liable if in performingits obligation it is found guilty of fraud,negligence; in the absence of any stipulationprescribing the degree of diligence required,that of a good father of the family is to beobserved. Any stipulation exempting thedepositary from any liability arising from losson account of fraud, negligence would be voidfor being contrary to public policy (CA-Agro

Devt vs. CA, 219 SCRA 426, March 5, 1993).

Note: The bank shall act as depositary or as an agentshall keep the funds, securities and other effects whichit receives duly separated from its own assets andliabilities (Sec. 53)

PROHIBITIONS

A. ON BANKS:

1. To directly act as insurer(Sec. 54)

2. For banks or quasi-banks to declare dividends, if atthe time of declaration:a. its clearing account with the Bangko Sentral is

overdrawn;

b. it is deficient in the required liquidity floor forgovernment deposits for 5 or more consecutivedays;

c. it does not comply with the liquiditystandards/ratios prescribed by the BangkoSentral for purposes of determining fundsavailable for dividend declaration; or

d. It has committed a major violation as may bedetermined by the Bangko Sentral (Sec. 57).

3. To conduct business in an unsafe or unsoundmanner(Sec. 56);

4. Publication of capital stock (Sec. 62);

5. Unauthorized advertisement or businessrepresentation (Sec. 64); or

6. To employ casual or non-regular personnel or too

lengthy probationary personnel in the conduct of itsbusiness involving bank deposits(Sec. 55).

Rationale: To prevent violation of Bank SecrecyLaw.

B. ON DIRECTORS, OFFICERS, EMPLOYEES,OR AGENTS OF BANKS:

1. Make false entries in any bank report or statementor participate in any fraudulent transaction;

2. Without order of a court of componentjurisdiction, disclose to any unauthorized

person any information relative to the funds orproperties in the custody of the bank belonging toprivate individuals, corporations, or any otherentity;

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3. Accept gifts or any other form of remuneration inconnection with the approval of a loan or othercredit accommodation from said bank;

4. Overvalue or aid in overvaluing any security forthe purpose of influencing in any way the actionsof the bank or any bank; or

5. Outsource inherent banking functions a

bank cannot engage the services of anotherentity to receive deposits on its behalf; the bankhas to do it by itself.

Rationale: To prevent violation of Bank SecrecyLaw (Handbook on Bank Deposits, A. Viray, 1998ed.).

However, a bank may outsource, upon priorapproval of the Monetary Board the followingfunctions:

a. All information technology systems andprocesses, except for certain functionsaffecting the ability of the bank to ensure the fit

of technology services deployed to meet itsstrategic and business objectives and complywith pertinent laws and regulations;

b. Data imaging, storage, and other relatedsystems;

c. Clearing and processing of checks not includedin the Philippine Clearing House System;

d. Printing of bank statements;e. Credit card services;f. Printing of bank loan statements and other

non-deposit records, bank forms andpromotional materials;

g. Credit investigation and collection;h. Processing of export, import and other trading

transactions;.i. Transfer agent services for debt and equity

services;j. Property appraisal;k. Property management services;l. Messenger, courier and postal services;m. Security guard services;n. Vehicle service contractso. Janitorial services;p. Other services as determined by the Monetary

Board.

C. ON BORROWERS:

1. Fraudulently overvalue property offered as securityfor a loan from the bank;

2. Furnish false or make misrepresentations orsuppression of material facts for the purpose ofobtaining, renewing, or increasing a loan orextending the period thereof;

3. Attempt to defraud the said bank in the event of acourt action to recover a loan or other creditaccommodation; or

4. Offer any director, officer, employee or agent of abank any gift, fee, commission, or any other form of

compensation in order to influence such personsinto approving a loan or other creditaccommodation application.

D. ON EXAMINERS, BSP OR GOVERNMENTOFFICERS AND EMPLOYEES ASSIGNED TO

SUPERVISE, EXAMINE, ASSIST OR RENDERTECHNICAL ASSISTANCE TO ANY BANK:

Commit any of the acts enumerated in Sec. 55 or aid inthe commission of the same.

The making of false reports ormisrepresentations or suppression of materialfacts by personnel of the BSP shall constitutefraud and shall be subject to administrative andcriminal sanctions.

CONDUCTING BUSINESS IN AN UNSAFE OR UNSOUNDMANNER (SEC.56)

In determining whether a particular act or omission,which is not otherwise prohibited by law, rule orregulation affecting banks, quasi-banks, or trust entities,

may be deemed as conducting business in an unsafe orunsound manner, the MB shall consider any of thefollowing circumstances:1. The act or omission has resulted or may result in

material loss or damage, or abnormal risk or dangerto the safety, stability, liquidity or solvency of theinstitution;

2. The act or omission has resulted or may result inmaterial loss or damage, or abnormal risk to theinstitutions depositors, creditors, investors, andstockholders or to the BSP or to the public ingeneral;

3. The act or omission has caused any undue injury,or has given any unwarranted benefits, advantageor preference to the bank or any party in thedischarge by the director or officer of his duties andresponsibilities through manifest partiality, evidentbad faith or gross inexcusable negligence;

4. The act or omission involves entering into anycontract or transaction manifestly and grosslydisadvantageous to the bank, quasi-bank or trustentity, whether or not the director or officer profitedor will profit thereby.

OWNERSHIPOFSTOCKSOFADOMESTIC

BANK1. Filipino In case of a Filipino individual or a domestic non-

bank corporation, each may own up to 40% of theoutstanding voting stock of a local bank.

2. Foreign Foreign individuals and non-bank corporations may

own or control up to an aggregate of 40% of thevoting stock of a domestic bank.

The percentage of foreign-owned voting stocks in abank shall be determined: (GRANDFATHERRULE)

a. If individuals: by the citizenship of theindividuals

b. If corporations: by the citizenship of thecontrolling stockholders of the corporation,irrespective of the place of incorporation (Sec.11).

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ACTLIBERALIZINGENTRYOFFOREIGNBANKS

(R.A.NO.7721)

The Monetary Board authorizes foreign banks tooperate through any of the following modes ofentry:

1. By acquiring, purchasing or owning up to

60% of the voting stock of an existing bank;

2. By investingin up to 60% of the voting stock of anew banking subsidiary incorporated underlaws of Philippines;

3. By establishing branches with full bankingauthority, provided:

a. foreign bank may avail itself of only onemode of entry; and

b. Foreign bank or Philippine corporationmay own up to 60% of the voting stockof only one domestic bank or newbanking subsidiary (Sec. 2).

Entries under the second and third modes arerestricted to banks which are among the top 150foreign banks in the world or top 5 banks in theircountry of origin.

MINIMUM CAPITALIZATION:

1. For locally incorporated subsidiaries equal to thatof domestic banks of the same category

2. For foreign bank branches not less than the US$equivalent of P210M

Amendments introduced by GBL 20001. Within seven years from effectivity of the GBL

(June 13, 2000), foreign banks may be allowedto own up to 100% equity of only one domesticbank as a mode of entry if authorized by theMonetary Board (Sec. 73, GBL).

2. Other foreign individuals and non-bankcorporations may own up to 40% of the votingstock of a domestic bank; the nationality of the

controlling shareholders of the non-bankcorporations will be traced to determine theforeign ownership of the domestic bank (Sec.11, GBL).

FOREIGNBANKS(SECS.7278)

1. Entry: Governed by the provisions of the ForeignBank Liberalization Act and the Offshore BankingSystem Decree (Sec. 72)

2. Revocation of license to do business in thePhilippines: The Monetary Board may revoke suchlicense on the grounds that the foreign bank isinsolvent or in imminent danger thereof or that itscontinuance in business will involve probable lossto those transacting business with it (Sec. 78).

STOCKHOLDINGS OF FAMILY GROUPS OR RELATED

INTEREST

The law does not prohibit ownership of the stock bymembers of the same family or related interest.However, the law provides that stockholdings ofindividuals related to each other within the 4th degree ofconsanguinity or affinity, legitimate or common law, shallbe considered family groups or related interest and mustbe fully disclosed in all transaction by such individualwith the bank. (Sec 12, GBL)

Two or more corporations owned and controlled bythe same family group or same group of person shall beconsidered related interest and must be fully disclosedin all transaction by such corporations or related groupof person with the bank. (Sec 13, GBL)

Unlike the former law, the GBL does NOT impose a

limit on the number of shares that can be owned by thesame family or related interest. However this should notbe without prejudice to the 40% restriction imposed bySec 11of the GBL.

OWNERSHIPOFREALPROPERTY

GENERAL RULE:A bank cannot acquire and own realproperty.

Rationale: Banks are not engaged in the business ofacquiring and possessing real property. Also, banks

must maintain liquidity at all times to enable it to performits functions. Thus, banks must as much as possibleretain only assets that are easily marketable.

EXCEPTIONS:1. As shall be necessary for its own use in the conduct

of its business, provided:a. The total investment in such real estate and

improvements shall not exceed 50% of thecombined capital accounts; and

b. the equity investment of a bank in anothercorporation engaged primarily in real estateshall be considered as part of the bank's totalinvestment in real estate, unless otherwise

provided by the Monetary Board (Sec. 51).

2. As mortgaged to it in good faith by way of securityfor debts, conveyed to it in satisfaction of a debtpreviously contracted in the course of its dealings,and such as it shall purchase at forced sales or tosecure debts; provided, however, that propertyacquired under such circumstances shall bedisposed of by the bank within a period of 5 years;provided that the bank may after said periodcontinue to hold the property for its own use,subject to (1) (Sec. 52).

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RULES ONFORECLOSUREOFAREALESTATE

MORTGAGEBYAMORTGAGEE-BANK

Application: Judicial or extrajudicial foreclosure

JUDICIAL EXTRAJUDICIAL

Right of redemption

Within 1 year from

registration of the

foreclosure sale

(exception to Rule 68)

1. Mortgagor is a

natural person

Within one year after

the registration of

sale with the

Register of Deeds

(Sec. 1(3) SC Cir.

AM No. 99-10-05)

2. Mortgagor is a

juridical person At

any time before the

registration of thecertificate of

foreclosure sale

which in no case

shall be more than 3

months after

foreclosure,

whichever is earlier.

Redemption price:

Amount due under the mortgage deed+ interest

+ all the cost and expenses incurred by the

bank or institution from the sale and custody of

the property less the derived income (Sec 78;

Union Bank vs. CA, GR 134068, June 25,

2001)

Right of purchaser to possess property:

Immediately after the date of the confirmation of

the auction sale.

To enjoin or restrain the conduct of foreclosureproceedings, the petitioner must file a bondconditioned that he will pay all the damages whichthe bank may suffer by the injunction(Sec. 47).

A bank may be bound by an agreement providingfor a longer redemption period (Ibaan Rural Bankvs. CA, 321 SCRA 83); thus, converting it toconventional redemption or by estoppel if theextension was unilaterally made.

DIRECTORS &OFFICERS

Fit and Proper Rule

To maintain the quality of bank management and affordbetter protection to depositors and the public, in general,the Monetary Board shall prescribe, pass upon and

review the qualifications and disqualifications ofindividuals elected or appointed as bank directors orofficers and disqualify those found unfit (Sec. 16)

Independent DirectorA person other than an officer or employee of the bank,its subsidiaries or affiliates or related interests.

Prohibition on Public OfficialsGENERAL RULE: No appointive or elective official,whether full-time or part-time, shall, at the same time,serve as an officerof any private bank (Sec. 19).

EXCEPTIONS:1. As otherwise provided under Sec. 5 of the Rural

Bank Act2. Where such service is incidental to financial

assistance provided by the government-owned or -controlled corporation to the bank

3. As otherwise provided under existing laws.

A bank holding out its officers and agents asworthy of confidence will not be permitted toprofit by the frauds they may thus be enabledto perpetrate in the apparent scope of theiremployment; nor will it be permitted to shirkfrom its responsibility for such frauds, eventhough no benefit may accrue to the bank

therefrom (10 Am Jur 2d, p. 114). Accordingly,a banking corporation is liable to innocent thirdpersons where the representation is made inthe course of its business by an agent actingwithin the general scope of his authority eventhough, in the particular case, the agent issecretly abusing his authority and attempting toperpetrate a fraud upon his principal or someother person, for his own ultimate benefit(Philippine Banking Corp. vs. CA and Marcos,G.R. No. 127469. January 15, 2004).

TRUSTOPERATIONS(SECS.79-93)

Only a stock corporation or a person dulyauthorized by the Monetary Board shall act as a trusteeor administer any trust or hold property in trust or ondeposit for the use, benefit, or behalf of others (Sec. 79)

Trust Business- any activity resulting from a trustor-trustee relationship involving the appointment of atrustee by a trustor for the administration, holding,management of funds and/or properties of the trustor bythe trustee for the use, benefit, advantage of trustor orothers called beneficiaries.

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Powers of trust entities:1. Act as trustee on any mortgage or bond issued by

any municipality, corporation or body politic and toaccept and execute any trust consistent with law

2. Act under the order or appointment of any court asguardian, receiver, trustee, or depositary of theestate of any minor or incompetent person, and asreceiver and depositary of any money paid into

court by parties to any legal proceedings

3. Act as the executor of any will when it is named theexecutor thereof

4. Act as administrator of the estate of any deceasedperson, with the will annexed, or when there is nowill

5. Accept and execute any trust for the holding,management and administration of any estate, realor personal, and the rents, issues, and profitsthereof

6. Establish and manage common trust funds (Sec.83)

Prohibitions:1. No trust entity shall, for account of the trustor or the

beneficiary of the trust, purchase or acquireproperty from, or sell, transfer, assign or lendmoney or property to, purchase debt frominstruments of, any of the departments, directors,officers, stockholders or employees of the trustentity, including relatives within the 1

stdegree of

consanguinity or affinity, or the related interests, ofsuch directors, officers and stockholders, unless thetransaction is specifically authorized by the trustorand the relationship of the trustee and the otherparty involved in the transaction is fully disclosed tothe trustor or beneficiary of the trust prior to thetransaction (Sec. 80, GBL).

2. The trust business and all funds, properties orsecurities received by any trust entity as executor,administrator, guardian, trustee, receiver ordepositary shall be kept separate and distinct fromthe general business, including all other funds,properties, and assets, of such trust entity (Sec. 87,GBL).

PENALTIESFORVIOLATIONOFTHEGBL(SEC.

66)

1. As provided by specific provisions2. Sections 34-37 of RA 7653 (by excluding the bank

from clearing)3. Suspension or removal of the director or officer4. Dissolution of the corporation by quo warranto

proceedings

THE NEW CENTRAL BANK ACT

(NCBA)

(R.A. No. 7653)

Purpose: To maintain a central monetary authority that

shall function and operate as an independent andaccountable body in the discharge of its responsibilities

concerning money, banking and credit.

BANGKOSENTRALNGPILIPINAS(BSP)

The states central monetary authority; it is the

government agency charged with the responsibility of

administering the monetary, banking and credit system

of the country and is granted the power of supervision

and examination over bank and non-bank financial

institutions performing quasi-banking functions,including savings and loan associations (Busuego vs.

CA, 151 SCRA 376 [1987]).

PRIMARY OBJECTIVES:1. To maintain price stability conducive to a balanced

and sustainable growth of the economy.

2. To promote and maintain monetary stability and the

convertibility of the peso.

RESPONSIBILITIES:1. To provide policy directions in the areas of money,

banking, and credit

2. To supervise bank operations

3. To regulate the operations of finance companies

and non-bank financial institutions performing

quasi-banking functions, and similar institutions

(Sec. 3)

POWERS/FUNCTIONS:1. Issuer of currency (Sec. 49-60)

2. Custodian of reserves (Secs. 64-66, 94, 103)

3. Clearing channel or house; especially where the

PCHC does not operate (Sec. 102)

4. Banker of the government the BSP shall be the

official depository of the Government and shall

represent it in all monetary fund dealings (Secs.

110- 116)

5. Financial advisor of the government (S

ecs. 123-124) Under Article VII, Sec. 20 of the 1987Constitution, the President may contract orguarantee foreign loans but with the priorconcurrence of the Monetary Board.

6. Source of credit (Secs. 61-63, 81-89, 109)

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7. Supervisor of the banking system (Sec. 25) shallinclude the power to:a. Examine, extending to enterprises wholly or

majority-owned or controlled by the bank (Sec.7, RA 8791); this power may not be restrainedby a writ of injunction unless there isconvincing proof that the action of the BSP isplainly arbitrary (Sec. 25)

b. Place a bank under receivership or liquidation

(Sec. 30)c. Initiate criminal prosecution of erring officers of

banks8. Government agent (Secs. 117-122)

MONETARYBOARD(MB)

The body by which the powers and functions of theBangko Sentral are exercised (Sec.6).

COMPOSITION:Seven members consisting of:

1. Chairman: Governor of the BSP2. A member of the cabinet to be designated by the

President of the Philippines3. Five (5) members who shall come from the private

sector, all of whom shall serve full-time.

Note: The degree of diligence required of the membersof the MB, officials and employees of the BSP in theperformance of their functions is extraordinary diligence(Sec.16, NCBA).

QUALIFICATIONS OF MEMBERS OF THE MONETARY

BOARD:1. must be natural-born citizens of the Philippines,

2. at least 35 years of age, with the exception of the

Governor who should at least be 40 years of age,

3. of good moral character, of unquestionable

integrity, of known probity and patriotism, and

4. with recognized competence in social and

economic disciplines.

DISQUALIFICATIONS AND INHIBITION ON GOVERNOR

AND BOARD MEMBERS:

1. disqualified from being a director, officer, employee,

consultant, lawyer, agent or stockholder of any

bank, quasi-bank or any other institution which is

subject to supervision or examination by the

Bangko Sentral, in which case such member shall

resign from, and divest himself of any and all

interests in such institution before assumption of

office (Sec. 9);

2. those coming from the private sector shall not hold

any other public office or public employment during

their tenure (Sec. 9);

3. cannot be connected directly with any multilateral

banking or financial institution or has a substantial

interest in any private bank in the Philippines, within

one (1) year prior to his appointment (Sec. 9);

4. cannot be employed in any such institution within

two (2) years after the expiration of his term except

when he serves as an official representative of the

Philippine Government to such institution (Sec. 9);

5. the Governor of the Bangko Sentral and the full-

time members of the Board shall limit their

professional activities to those pertaining directly to

their positions with the Bangko Sentral.

Accordingly, they may not accept any other

employment, whether public or private,

remunerated or ad honorem, with the exception of

positions in eleemosynary, civic, cultural or religious

organizations or whenever, by designation of the

President, the Governor or the full-time member is

tasked to represent the interest of the Government

or other government agencies in matters connectedwith or affecting the economy or the financial

system of the country (Sec. 20);

6. in case any member of the Monetary Board with

personal or pecuniary interest in any matter in the

agenda of the Monetary Board shall disclose his

interest to the Board and shall retire from the

meeting when the matter is taken up (Sec. 14).

SUPERVISION AND EXAMINATION OF BANKS The BSP shall have supervision over, and conduct

periodic or special examinations of, bankinginstitutions and quasi-banks, including theirsubsidiaries and affiliates engaged in alliedactivities.

Subsidiary a corporation more than 50% of the

voting stock of which is owned by a bank or quasi-bank

Affiliate a corporation the voting stock of which, to the

extent of 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 other

factors determined by the Monetary Board.

NO RESTRAINING ORDER AGAINSTBSP

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.

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REFUSAL TO MAKE REPORTS OR PERMIT

EXAMINATION.

- Any officer, owner, agent, manager, director or officer-in-charge of any institution subject to the supervision or

examination by the Bangko Sentral who, being required

in writing by the Monetary Board or by the head of the

supervising and examining department willfully refusesto file the required report or permit any lawful

examination into the affairs of such institution shall be

punished under the Act. (Sec. 34)

False Statement. - The willful making of a false or

misleading statement on a material fact to the Monetary

Board or to the examiners of the Bangko Sentral shall

be punished. (Sec. 35)

PROHIBITIONS ON BANK OFFICERS,DIRECTORS,LAWYERS,AGENTS

Personnel of the Bangko Sentral are hereby

prohibited from:

1. being an officer, director, lawyer or agent,employee, consultant or stockholder, directly orindirectly, of any institution subject to supervision orexamination by the Bangko Sentral;

Exception: non-stock savings and loan

associations and provident funds organized

exclusively for employees of the Bangko Sentral,

and except as otherwise provided in this Act;

2. directly or indirectly requesting or receiving any gift,present or pecuniary or material benefit for himselfor another, from any institution subject tosupervision or examination by the Bangko Sentral;

3. revealing in any manner, except under orders of thecourt, the Congress or any government office oragency authorized by law, information relating tothe condition or business of any institution;

4. borrowing from any institution subject to supervisionor examination by the Bangko Sentral shall be

prohibited unless said borrowings are adequatelysecured, fully disclosed to the Monetary Board.(Sec. 27)

CORPORATE POWERS OF THE BSP

1. To adopt, alter and use a corporate seal which shallbe judicially noticed

2. To enter into contracts3. To lease, own, and sell property4. To sue and be sued5. To acquire and hold such assets and incur such

liabilities in connection with its operations or as areessential to the proper conduct of operation

6. To compromise, condone, or release any claim of,or settled liability to the BSP

7. To do and perform such other necessary powers

CONSERVATORSHIPOFABANKORQUASI-BANK

Ground: State of continuing inability or unwillingness tomaintain a condition of liquidity deemed adequate toprotect the interest of depositors and creditors. A conservator appointed by the BSP may take over

without the need of first declaring the bank

insolvent.

Duration: Not to exceed 1 year

Effects:1. Bank/quasi-bank retains juridical personality2. Not a precondition to the designation of a receiver

Powers of conservator:1. To take charge of the assets, liabilities, and the

management thereof;

2. Reorganize the management;

3. Collect all monies and debts due said bank; and

4. Exercise all powers necessary to restore its

viability, with the power to overrule or rebuke the

actions of the previous management and board of

directors of the bank or quasi-bank.

The powers must be related to preservation ofassets, reorganization of management and therestoration of viability. Such power to revoke cannotextend to post-facto repudiation of perfectedtransactions, otherwise they would infringe the non-impairment clause of the Constitution. The powerto revoke contracts only covers those that aredeemed defective i.e., void, voidable,unenforceable or rescissible (First Phil. Intl Bankvs. CA, 252SCRA 259). The conservators poweris not unilateral and he cannot simply repudiatevalid obligations of the bank. His authority would beonly to bring actions to assail the same.

Termination:

1. When the MB is satisfied that the institution can

continue to operate on its own and the

conservatorship is no longer necessary;

2. But if the continuance in business of the bank

would involve probable loss to its depositors or

creditors, proceedings for receivership and

liquidation shall be pursued (Sec. 29).

RECEIVERSHIPOFABANKOR

QUASI-BANK/CLOSURE

Receivership is equivalent to an injunction to restrainthe bank in any way. Thus, the appointment of areceiver operates to suspend the authority of the bankand of its directors and officers over its property andeffects (Villanueva vs. CA, 244 SCRA 395 [1995]).

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Grounds:

Under NCBA Under GBL

1. Inability to payliabilities as they becomedue in the ordinarycourse of business, butnot including inability to

pay those caused byextraordinary demandsinduced by financialpanic in the bankingcommunity;

1. Notification to theBSP or publicannouncement of abank holiday (Sec.53, GBL)

2. Insufficiency ofrealizable assets to meetits liabilities;

2. Suspension ofpayment of depositliabilitiescontinuously for morethan 30 days (Sec.53, GBL)

3. Inability to continue

business withoutinvolving probable lossesto its depositors orcreditors; or

3. Persistence in

conducting businessin an unsafe orunsound manner.(Sec. 56, GBL)

4. Willful violation of acease and desist orderthat has become final,involving acts ortransactions whichamount to fraud or adissipation of the assetsof the institution (Sec.30)

Receiver:1. Banks PDIC2. Quasi-banks Any person of recognized

competence in banking or finance

Functions:1. Immediate gathering and taking charge of all the

assets and liabilities of the institution andadministering them for the benefit of creditors

2. General powers of a receiver3. Determination ASAP but not later than 90 days,

whether the institution should undergorehabilitation orliquidation.

Note the distinctions between rehabilitation andliquidation.

CLOSENOW,HEARLATER

SCHEME

Sec. 29 of the Central Bank Act does notcontemplate prior notice and hearing before a bankis placed under receivership. It is enough that suchaction is made the subject of a subsequent judicialreview. The purpose of the scheme is to protectthe depositors, creditors, stockholders and generalpublic (Central Bank vs. CA, 220SCRA 536).

Only stockholders representing the majority of the

capital stock of a bank have the personality to file apetition for certiorari to be filed within 10 days fromreceipt by the board of directors of the institution ofthe order directing receivership, liquidation orconservatorship.

Reason: Stockholders owning a majority of theshares are expected to be more objective indetermining whether the resolution is plainlyarbitrary and issued in bad faith (Sec. 30, NCBA;Central Bank vs. CA, G.R. No. 76118, March 30,1993).

CASE DIGEST

Central Bank of the Philippines vs. Court ofAppeals, 220 SCRA 536

Facts:

Based on the financial reports submitted to theCentral Bank, which states that the Financial conditionof The Triumph Savings Bank (TSB) is one ofinsolvency and its continuance in the business worldinvolve probable loss to its depositors and creditors, theMonetary Board issued a Resolution ordering theclosure of TSB, forbidding it from doing business in thePhilippines, placing it under receivership and appointing

Ramon V. Taiaoqi as receiver. The TSB filed acomplaint assailing the resolution on the ground of lackof prior notice and hearing

Issue:

Whether or not a Monetary Board Resolutionbe annulled on the ground of lack of prior notice andhearing.

Ruling:

Section 29 of the Central Bank Act does not

contemplate prior notice and hearing before a bank maybe declared to stop operations and placed underreceivership. When it provides for the filing of the casewithin 10 days after the receiver takes charge of theassets of the bank, it is unmistakable that the assailedactions should precede the filing of the case. Plainly, thelegislature could not have intended or authorize noprior notice and hearing in the closure of the bank andat the same time allow the suit to annul it on the basis ofthe absence thereof.

This close now and hear later scheme isgrounded on practical and legal consideration to preventthe unwarranted dissipation of the banks asset and as avalid exercise of the police power to protect thedepositors, creditors, stockholders and the generalpublic.

MANDATORY REQUIREMENTS FOR BANKCLOSURE

1. Examination by the appropriate BSP department asto the condition of the bank

2. Examination shows that the condition of the bank isone of insolvency

3. Director shall inform the MB in writing of such fact4. If the MB shall find the statement of the department

to be true, it shallappoint a receiver of the assetsand liabilities of the bank (Banco Filipino vs. MB,

204S

CRA 519 [1991]).5. Within 60 days, the MB shall determine and confirmif the bank is insolvent, and if public interestrequires, shall order the liquidation of the bank.

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LIQUIDATION

Grounds:1. The condition of the bank is one of insolvency or

that its continuance would involve probable loss toits depositors and creditors.

2. A determination by the MB that the bank cannot berehabilitated.

Procedure:1. Receiver shall file ex parte, with the proper RTC, a

petition for assistance in the liquidation of theinstitution pursuant to a liquidation plan adopted bythe PDIC for general application to all closed banks.In case of quasi-banks, the liquidation plan shall beadopted by the Monetary Board.

2. He shall convert the assets of the institution tomoney for the purpose of paying the debts of theinstitution(Sec. 30).

3. Payment shall be in accordance with the rules onconcurrence and preference of credits.

Regular courts have no jurisdiction over actionsfiled by claimants against an insolvent bank (Ongvs CA, 253 SCRA 105).

EFFECTS OF APPOINTMENT OF RECEIVER/LIQUIDATION1. Suspension of operation2. The assets under receivership or liquidation shall

be deemed in custodia legis in the hands of thereceiver and shall be exempt from garnishment,

levy, attachment or execution (Sec. 30).

3. Bank is not liable to pay interest on deposits duringthe period of suspension of operation (OverseasBank vs. CA, 113 SCRA 778 [1982])

4. The corporation retains its legal personality (TealMotor Co. vs. CFI, 51 Phil. 549 [1928])

5. Deposits do not become preferred credits (CB vs.Morfe, 20SCRA 507 [1967])

LEGALTENDER

All notes and coins issued by the Bangko Sentral arefully guaranteed by the Republic and shall be legaltender in the Philippines for all debts, both public andprivate (Sec. 52)

Legal tender power of coins

1. 1-Peso, 5-Peso and 10-Peso coins: In amounts notexceeding P1,000.00

2. 25 centavo coin or less: In amounts not exceedingP100.00 (Circular No. 537, 2006)

BSP Authority to Replace

1. Notes for any series or denomination More than 5years old

2. Coins More than 10 years old

Rules:

1. Notes and coins called in for replacement shallremain legal tender for a period of one year fromthe date of call.

2. After that period, they shall cease to be legal tenderduring the following year or for such longer period

as MB may determine.

3. After the expiration of this latter period, the notesand coins which have not been exchanged shallcease to be a liability of BSP and shall bedemonetized (Sec. 57).

Checks representing demand deposits do nothave legal tender power and their acceptancein the payment of debts, both public andprivate, is at the option of the creditor.

However, a check which has been cleared and

credited to the account of the creditor shall beequivalent to a delivery to the creditor of cashin an amount equal to the amount credited tohis account (Sec. 60).

MONETARYSTABILIZATION

3IMPORTANTTOOLS TOACHIEVEPRICESTABILITY

1. Loans to Banks (Sec. 83)(Rediscounting)a. If BSP wants to increase money supply, it

opens the rediscount window by reducinginterest on loans

b. If BSP wants to decrease money supply, itcloses the rediscount window or charges veryhigh interest rates for rediscounted notes

2. Open Market Operations (Sec. 90)a. If BSP wants to increase money supply, it buys

government securitiesb. If BSP wants to decrease money supply, it

sells government securities

3. Reserve Requirements (Sec. 94) - where a certainpercentage of the deposit is set aside and cannotbe lent outa. if the volume of money is high, BSP will raise

reserve requirementb. if the volume of money is low, reserve

requirement is reduced.

Rules:

1. The required reserves of each bank shall beproportional to the volume of its depositliabilities.

2. Since the required reserves are imposedprimarily to control the volume of money, theBangko Sentral shall not pay interests thereon(Sec. 94).

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3. Deposits maintained with the Bangko Sentralas part of the reserve requirements shall beexempt from attachment, garnishment, or anyother order or process of any court or agency(Sec. 103).

4. No increase of more than 4% point within 30-day period.

PROHIBITIONSONTHEBSP

1. It shall not acquire shares of any kind or acceptthem as collateral, and shall not participate in theownership or management of any enterprise, eitherdirectly or indirectly; and

2. It shall not engage in development banking andfinancing (Sec. 128).

SECRECY OF BANK DEPOSITS LAW(R.A. No. 1405)

Purposes:1. To encourage people to deposit in banks2. To discourage private hoarding so that banks may

lend such funds and assist in the economicdevelopment

Coverage:All deposits of whatever nature with banks or bankinginstitutions in the Philippines, including investments inbonds issued by the Government of the Philippines, itspolitical subdivisions and i ts instrumentalities.

PROHIBITED ACTS:

1. Examination and inquiry or looking into all deposits,of whatever nature, with the banks in thePhilippines including investments in bonds issuedby the Government.

2. Any disclosure by any official or employee of anybank to any unauthorized person of any informationconcerning the said deposits.

GENERAL RULE: The deposits covered by law areconsidered as of an absolutely confidential nature andmay not be examined, inquired or looked into by anyperson, governmental bureau, or office.

EXCEPTIONS:

A. FROM R.A.NO.14051. Upon written permission of the depositor;

2. In cases of impeachment;

3. Upon order of a competent court in cases of bribery

or dereliction of duty of public officials;

4. In cases where the money deposited or invested is

the subject matter of the litigation; (Sec. 2)

BAR QUESTION:

Banks: Secrecy of Bank Deposits; Garnishment

(2004)

CDC maintained a savings account with CBank. Onorders of the MM Regional Trial Court, the Sheriff

garnished P50,000 of his account, to satisfy the

judgment in favor of his creditor, MO. CDCcomplained that the garnishment violated the Law onthe Secrecy of Bank Deposits because the existenceof his savings account was disclosed to the public.(5%) Is CDC's complaint meritorious or not? Reasonbriefly.

SUGGESTED ANSWER

No. CDC's complaint is not meritorious. It was held in

China Banking Corporation v. Ortega, 49 SCRA

355 (1973) that peso deposits may be garnished and

the depositary bank can comply with the order ofgarnishment without violating the Law on the

Secrecy of Bank Deposits. Execution is the goal of

litigation as it is its fruit. Garnishment is part of the

execution process. Upon service of the notice of

garnishment on the bank where the defendant

deposited funds, such funds become part of the

subject matter of litigation.

B. From other laws

1. Anti-Graft andC

orrupt Practices Act cases(R.A.No. 3019; added by analogy in PNB vs. Gancayco,

15SCRA 91 [1965]);

2. NIRC - Inquiry by the Commissioner of Internal

Revenue into bank deposits of:

a. A decedent to determine his gross estate;b. A taxpayer who has filed an application for

compromise of his tax liability by reason offinancial incapacity to pay his tax liability. Hemust file a written waiver of his privilege underRA 1405 or other general or special laws (Sec.6[f], NIRC).

3. Inquiry or examination by the Anti-MoneyLaundering Council (AMLC) of any particulardeposit or investment with any banking institution ornon-bank financial institution upon order of anycompetent court in cases of violation of the Anti-Money Laundering Law, when it has beenestablished that there is probable cause that thedeposits or investments are related to an unlawfulactivity or a money laundering offense, except thatno court order shall be required in the followingunlawful activities:a. Kidnapping for ransom under Art. 267 RPC;b. Comprehensive Dangerous Drugs Act of 2002

(RA No. 9165);

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c. Hijacking and other violations under RA 6235;

destructive arson and murder under RPC.

Including those perpetrated by terrorists against

non-combatant persons and similar targets

(Sec. 11, R.A. No. 9160 as amended bySec. 8

of RA 9194)

4. Disclosure to the Treasurer of the Philippines of

dormant deposits for at least 10 years under theUnclaimed Balances Act (Act No. 3936).

OTHERLAWSRELATINGTOSECRECYOFBANKDEPOSITS

A. Foreign Currency Deposit Act(R.A. No. 6426):B. Extends confidentiality to foreign currency deposits,

but the law contains only one ground authorizingexamination: upon written permission of thedepositor.

C. General Banking Law of 2000 (R.A. No. 8791):

1. No bank shall employ casual or non-regularpersonnel or too lengthy probationary personnel inthe conduct of its business involving bank deposits (Sec. 55.4).

2. No director, officer, employee, or agent of any bankshall, without court order, disclose to anyunauthorized person any information relative to thefunds or properties in the custody of the bankbelonging to private individuals, corporations, orany other entity, provided that with respect to bankdeposits, the provisions of existing laws shall

prevail (S

ec. 55[b]).3. Outsourcing of inherent bank functions

D. New Central Bank Act (R.A. No. 7653):1. DOSRI loans2. Periodic and special examinations by the BSP

(Sec. 25)

E. Anti-Money Laundering Act (R.A. No. 9160)

Provides for another exception toconfidentiality, which is applicable to both pesoand foreign currency deposits.

Garnishment of bank deposit of judgment

debtor does not violate RA 1405. Itwas not theintention of the legislature to place bankdeposits beyond the reach of execution tosatisfy a final judgment. Its purpose is merelyto secure information as to the name of thedepositor and whether or not the defendanthad a deposit in said bank, only for purposes ofgarnishment. Any disclosure is purelyincidental to the execution process (ChinaBanking Corporation vs. Ortega, 49 SCRA355).

Illegally acquired property extends to caseswhere property is concealed by being held byor recorded in the name of respondents

spouse, ascendants, descendants, relatives, orany other persons (Banco Filipino Savings andMortgage Bank vs. Purisima, 161 SCRA 576).

Money-market placement is not covered by RA1405 because it is not deposited in the bank.

BAR QUESTION:

BANKS: APPLICABILITY: FOREIGN CURRENCY

DEPOSIT ACT & SECRECY OF BANK DEPOSITS

(2005)

Hi Yielding Corporation filed a complaint against fiveof its officers for violation of Section 31 of the

Corporation Code. The corporation claimed that the

said officers were guilty of advancing their personalinterests to the prejudice of the corporation, andthat they were grossly negligent in handling itsaffairs. Aside from documents and contracts, thecorporation also submitted in evidence records ofthe officers U.S. Dollar deposits in several banksoverseas - Boston Bank, Bank of Switzerland, and

Bank of New York. For their part, the officers fileda criminal complaint against the directors of HiYielding Corporation for violation of Republic Act No.6426, otherwise known as the Foreign Currency

Deposit Act of the Philippines. The officers allegedthat their bank deposits were illegally disclosed forwant of a court order, and that such deposits werenot even the subject of the case against them.a) Will the complaint filed against the directors of

Hi Yielding Corporation prosper? Explain

SUGGESTED ANSWER:

No, because the Foreign Currency Deposit Act (R.A.No. 6426), including its punitive provisions, refers toforeign currency deposits accounts constitutedwithin the Philippines. It has no application at all to

accounts, even though they are banks, opened andconstituted abroad

b) Was there a violation of the Secrecy of Bank

Deposits Law (Republic Act No. 1405)? Explain.

SUGGESTED ANSWER:

No, because the punitive provisions of the Secrecyof Bank Deposits Law (R.A. No. 1405), including thestatutory exemptions provided therein, are notapplicable to FCDU accounts, even when constituted

locally. (Intengan v. Court of Appeals, G.R. No.128996, February 15, 2002)

REQUISITESFORIN-CAMERAINSPECTIONOFBANKDEPOSITS

Marquez vs. Desierto, G.R. No. 135882,

June 27, 2001

1. Pending case before a court of competentjurisdiction

2. Account must be clearly identified3. The inspection is limited to the subject of the

pending litigation.

4. The bank personnel and account holder must bepresent during the inspection.5. The inspection must cover only the account

identified in the pending case.

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R.A.NO.1405 VIS--VIS POWEROFTHEBSPTOCONDUCTPERIODICAND/ORSPECIAL

EXAMINATIONS(SEC.4,GBL&SEC.25,NCBA)

Prof. Aquino and Prof. Viray believe that thegeneral rule still applies. Hence, the depositremains confidential.

PenaltiesImprisonment of not more than 5 years or a fine notmore than P20,000 or both, in the discretion of thecourt.

Impeachment

In impeachment proceedings, the impeachmentcourt may inquire into bank deposits. Thus, during theimpeachment proceedings against former PresidentEstrada, Chief Justice Davide ruled that ClarissaOcampo could testify on the Jose Estrada/JaimeDichaves accounts maintained with Equitable PCIB

Bank, over the objections of the defense that this wouldviolate the Bank Secrecy Law. Basis for this ruling wasthat the inquiry would be made in the course of animpeachment proceeding.

WRITTEN PERMISSION OF DEPOSITORA bank may allow an inquiry into a deposit with the

written consent of the depositor. An oral or implied

authorization does not suffice. This consent may be

given voluntarily. In some cases, however, the consent

is involuntary because the law requires it.

Thus, Section 26 of the New Central Bank Act as

implemented by BSP Circular No. 170, series of1998,requires a director, officer or stockholder of a bank or

their related interests to submit a written waiver of the

secrecy of all his deposits of whatever nature in all

banks of the Philippines in favor of the Bangko Sentral,

if he applies for a DOSRI loan. However, the

information obtained from the examination remains

confidential and may be used by BSP examiners only in

legal action it may initiate involving the said deposits.

A waiver of the Bank Secrecy Law is also requiredin case of loans secured by a hold-out or an assignmentof certificates of time deposits. (Section X315, Manual of

Regulations for Banks).

WHERE FUNDS DEPOSITED ARE SUBJECT OF

LITIGATION

Case DigestOnate v Hon Zeus Abrogar, 230 SCRA 181

Facts:Sun Life brought a collection case to recover

the proceeds of a check it had issued, the insurancecompany wanted to determine how the defendant had

applied the proceeds of the check. The trial courtallowed Sun Life to examine pertinent records of thebank in which the check was deposited.

Ruling:

The Supreme Court held that the examinationwas authorized by Section 10 of Rule 57, on theexamination of a person whose property has beenattached and person indebted to him or controlling hisproperty. The Court struck down the argument that theexamination would violate the Bank Secrecy Law,explaining that the examination fell within the exceptionin cases where the money deposited or invested is thesubject matter of litigation. The Court added that theexamination of bank records was not a fishingexpedition, but rather a method by which Sun Life couldtrace the proceeds of the check that it paid to thepetitioners.

In another case, Mellon Bank remitted $1million rather that an intended $1,000 to the recipient,who deposited part of the remittance in a local bank.When personnel of the depositary bank testified on thebank deposits, the defense moved to strike out thetestimonies of the depositary banks witnesses. TheSupreme Court allowed their testimonies to remain on

the record, stating Section 2 of said law allows thedisclosure of bank deposits in cases where the moneydeposited is the subject matter of the litigation. (MellonBank v. Magsino, 190SCRA 633.

UNEXPLAINED WEALTH (RA3019)

Although the Bank Secrecy Law did not includecases covered by the Anti-Graft Law among theexceptions, the Supreme Court held that they should beincluded. The only conclusion possible is that Section 8of the Anti-Graft Law is intended to amend Section 2 ofRepublic Act No. 1405 by providing an additionalexception to the rule against disclosure of banddeposits. (PNB v. Gancayco, 15SCRA 91 (1965).

This overturned an earlier case decided by the HighCourt where it held that a prosecution under the Anti-Graft Law was not embraced within any of theexceptions to the Bank Secrecy Law that would allowdisclosure by a bank of information concerning adeposit. (Tatalon Bario Council v. Bank of PI, 7SCRA10 (1963).

In another case, the Supreme Court expanded theexception under the Anti-Graft Law, when it allowed anexamination not only of the accuseds deposits, but alsothose of his spouse, ascendant, descendants andrelatives, and other persons as well. (Banco Filipino v.Hon. Fidel Purisima, 161 SCRA 576 (1988). Here, the

Court declared as proper the production by subpoenaduces tecum of bank records of transactions by or in thenames of the wife, children and friends of a specialagent of the Bureau of customs accused of havingallegedly acquired property manifestly out of proportionto his salary and lawful income. The Court explained:

To sustain the petitioners theory, and restrict theinquiry only to property held by or in the name of thegovernment official or employee, or his spouse andunmarried children, is unwarranted in the light of theprovisions of the statutes in question, and would makeavailable to persons in government who illegally acquireproperty an easy and fool-proof means of evadinginvestigation and prosecution; all they would have to do

would be to simply place the property in the possessionor name of persons other than their spouse andunmarried children. This is an absurdity that we will notascribe to the lawmakers.

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Upon Order of the OmbudsmanAlthough Section 8 of the law that created the

Office of the Ombudsman expressly granted theOmbudsman the power to administer oaths, issuesubpoena and subpoena duces tecum and taketestimony in any investigation or inquiry, including thepower to examine and have access to bank accountsand records, the Supreme court held that theOmbudsman could not inquire into bank deposits until

there was a pending case in court involving thedeposits.(Marquez v. Desierto, 359 SCRA 772 (2001)

Unclaimed Balances LawThe Unclaimed Balances Law (Republic Act No.

3936) requires each bank to file a sworn statement withthe Treasurer of the Philippines stating the deposits thatthe bank holds in the names of persons known to bedead or who have not made deposits or withdrawalsduring the preceding ten years or more. It is alsorequires the bank to post a copy of the sworn statementin the bank premises. However, this is done only afterthe bank shall have first communicated with thedepositor at his last known residence or post officeaddress. Such a disclosure of the deposits and the

depositors, does not violate the Bank Secrecy Law.

Garnishment of Bank Deposit

In China Banking Corporation v. Court of Appeals,(193 SCRA 452 (1991) the Supreme Court held that thegarnishment of a bank deposit does not violate the BankSecrecy Law. Said the court:

It is

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33986521 Banking Laws