Banking Laws -Dizon CHAPTER 1 I. DECLARED Policy of the State (Sec. 2, GBL) -The State recognizes the vital ro le of banks providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and pe rformance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the dem ands of a developing economy. II. Definition of Banks (Sec. 3.1, GBL) -"Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits. Note: Banks may engage in other activiti es allowed by law. III. Nature of Banking Business A. The relationship existing between a depositor and Debtor-Creditor Relationship bank is that of a creditor and debtor. B. Fiduciary Duty 1. Simex Intl., Inc. vs. CA: The State recognizes the fiduciary nature of banking that requires high standards of integrity and performance. Banks are required to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. 2. This bank s obligation is deemed written into every deposit agreement between a bank and its depositor. C. Not A Trust Agreement 1. The fiduciary nature of bank-depositor relationship does NOT convert the contract between the bank and its depositors FROM a SIMPLE LOAN TO a TRUST AGREEMENT. This is because Banks do not accept deposits to enrich depositors but to earn money for themselves. 2. Failure by the bank to pay to pay the depositor is failure to pay a simple loan, and NOT a breach of trust. D. Indispensable Institution 1. Banks is an indispensable institution in the modern world and plays vital role in the economic life of every citizen. People have come to regard them with respect, gratitude, and confidence. 2. Even a humble wage-earner does not hesitate to entrust his life savings 3. An ordinary person usually maintains an account for security and convenience in settling his bills 4. As for business entities, the bank is trusted to help them in running their affairs, not only in the form of loans, but in their day-to-day transactions lik eencashing a check. E. Impressed with Public Interest (Simex vs. CA) a depositor expects a bank to trea t his account with utmost fidelity, whether such account consists only of a few hu ndred pesos or millions. F. Degree of Diligence (Simex vs. CA) Art. 1172 of NCC states that the degree of diligence required of an obligor is t hat prescribed by law or contract, and in the absence of such, that of a good father to a family NOTE: Due diligence is required of banks extend even to persons or institutions, regularly engaged in the business of lending money secured by real estate mortgage. G. Treatment of Accounts with Meticulous Care There is NO LAW mandating banks to call up their clients whenever their representatives withdraw significant amount s from their accounts. H. Duty to Keep Records 1. Banks shall have a true and accurate account, record, statement of their daily transactions especially those of deposit liabilities. 2. The making of a false entry or willful omission of entries is a ground for the imposition of administrative sanctions and disqualification from office. I. Banks are NOT Gratuitous Bailees Banks solicit deposits in order that they can u se the money to gain. J. Banks are NOT Expected to be Infallible, but must bear the blame for NOT discovering mistakes despite established procedures. Q: Sps. A and V opened a joint current account in C Bank with an initial deposit of P2,250. Prior thereto, A had a personal account with the same bank. When the spouse open ed their joint current account, the New Accounts teller pulled out the old signature card o f A and placed the old personal account number of A in the deposit slip. V issued two ch ecks and one of these was dishonored for IF. They were deducted P20 from their account. T he bank tried to call the spouses, but they were in Pampanga. Is the bank liable for dam ages? A: Yes. -a depositor expects a bank to treat his account with utmost fidelity, whether s uch account consists only of a few hundred pesos or millions. Bank must record every transaction accurately-A blunder on the part of the bank such as dishonor of check without good reason can cause the depositor embarrassment, financial loss, and perhaps civil and crimina l litigation Note: Exemplary damages are awarded if there is malice and bad faith. K. Dealing with Registered Lands The rule that persons dealing with registered land s can rely solely on the certificate of title does NOT APPLY to banks. Banks shoul d exercise more care and prudence in dealing with registered lands that private individuals, for their business is one affected by public interest. Q: A sold is unregistered parcel of land to B. Subsequently, an Orig. Cert.Title (OCT) was issued. A surrendered it to X bank as a consequence of a mortgage. B died w/o kn owing that an OCT has been issued. Upon learning of his right, C (B s heir) confronted A and went to X bank. C asked to photocopy the owner s duplicate certificate outside the bank s premises. C then brought it to the Register of Deeds with the Deed of Sale and h e was issued a Transfer Cert of Title. Is the bank liable for damages to A? A: Yes. -Bank failed to foresee the risk of its act of entrusting C with the OCT without notifying A and verifying the veracity of C s claim and character. This acts runs afoul of the bank s mandate to observe the highest diligence -A has also the right to due process. Notice and hearing are indispensable eleme nts of this right which the bank ignored Q: A bank accepted a property as mortgage despite existence of structures and oc cupants other than the mortgagor. Is the bank negligent? A: Yes. Banks, being in the business of extending loans, are familiar with the r ules on land registration. They are expected to exercise more care and prudence in dealing wi th registered lands that private individuals, for their business is one affected by public interest. 1 | PageThe bank should have conducted investigation since there occupants other than th e owner of the land mortgaged. This constitutes gross negligence amounting to bad faith. L. Banks may Exclude Persons in their Premises No employees must be spared by banks and their officers and employees to ensure and preserve the trust and confidence of the general public. IV. Liability For Acts and Employees Bank is LIABLE for the wrongful acts of its officers done WITHIN the scope of their authority. A. Negligence of Manager Bank is liable for the negligence or misdeed of the branch manager since confide nce in the banking system necessarily includes reliance on bank managers. (BPI vs. First Me tro Investment Corp.) B. Negligence of Officers if within the scope of authority, bank is liable C. Negligence of Tellers returning the passbook ONLY to the depositor or his authorized representative. If given to the wrong person, bank is liable since th ey would be clothing that person presumptive ownership of the passbook. Note: Appropriation of money by a bank teller is NOT ESTAFA. Such is only MATERI AL POSSESSION. The bank still has JURIDICAL POSSESSION. If for personal gain, THEFT . If the teller has possession of the money since he occupies a position of confid ence, QUALIFIED THEFT. D. Right to Recover from Employees Banks may recover from their employees. (Art. 2181 of NCC) E. Liabilities other than Actual 1. Exemplary by way of example. Malice and bad faith must be attendant 2. Moral when the good reputation of the client was besmirched or his financial credit Note: Banks are NOT responsible for such damages in the ABSENCE of fraud, bad fa ith, malice, or wanton attitude. F. Respondeat superior, Diligence in the Selection, and Supervision of Employees -A bank is bound by negligence of its employees under the principle of Respondea t superior or command responsibility. V. Classification of Banks (CUT RICO) Sec. 3.2. Banks shall be classified into: (a) (b) (c) (i) Universal banks; Commercial banks; Thrift banks, composed of: Savings and mortgage banks;(ii) Stock savings and loan associations; and (iii) Private development banks, as defined in the Republic Act No. 7906 (hereaf ter the Thrift Banks Act ); (d) Rural banks, as defined in Republic Act No. 73S3 (hereafter the "Rural Banks Act "); (e) Cooperative banks, as defined in Republic Act No 6938 (hereafter the "Cooper ative Code"); (f) Islamic banks as defined in Republic Act No. 6848, otherwise known as the Cha rter of Al Amanah Islamic Investment Bank of the Philippines ; and (g) Other classifications of banks as determined by the Monetary Board of the Ba ngko Sentral ng Pilipinas. A. Business Name -Only a bank that is granted universal/ commercial banking authority may represe nt itself to the public as such in connection with its business name -Thrift Banks: allowed to use and adopt any name, provide the ff words are affix ed: A thrift bank, Saving bank, A Private Development Bank, or A stick Savings and Loa n Association -Rural or Commercial Banks: allowed to use and adopt any name, provide the ff wo rds are affixed: Rural or Coop, A Cooperative Bank, or A Rural Bank. o The size of the letters of such phrase shall be at least of the size of the business name when shown on letterheads, billboards, and other advertising materials. B. Universal Banks 1. powers authorized for a commercial bank 2. powers of an investment house 3. power to invest in non-allied enterprises C. Commercial Banks 1. general powers incident to corporations 2. powers of commercial banks: (A BREAD) D. Rural Banks -designed to make needed credit available and readily accessible in the rural ar eas on reasonable terms primary purpose is to meet the normal credit needs of farmers, fishermen, or far m familiesE. Thrift Banks include savings and mortgage banks, private devt. banks, and stock savings and loans associations. -Providing short-term working capital, medium and long term financing to busines s engaged in agriculture, services, industry, and housing Powers of a Thrift Bank: F. Cooperative Banks -one organized by, the majority shares of which is owned and controlled by, cooperatives primarily to provide financial and credit services to cooperatives - cooperative bank shall include cooperative rural banks -Membership shall include ONLY cooperatives and federations of cooperatives -Functions of a Cooperative Bank G. Islamic Banks (Al-Amanh Islamic Investment Bank of the Philippines) -in Zamboanga City -primary purpose shall be to promote and accelerate the socio-economic devt of t he Autonomous Region by performing banking and financing operations and to establis h and participate in the agricultural, commercial, and industrial ventures based o n the Islamic concept of banking. 2 | PageH. Other Banks -Philippine Veterans Bank private commercial bank owned by veterans -Land Bank of the Philippines finance the acquisition and distribution of agricu ltural estates fro division and resale to small landholders as well as the purchase of the landholding by the agricultural lessee -Development Bank of the Philippines was created as Rehabilitation Finance Corp. (RFC); took over the functions of Agricultural Industrial Bank I. Non-Stock Saving And Loan Associations mean a non-stock, non-profit corp engaged in the business of accumulating the savings of its members and using suc h accumulations for loans to members for home building or personal finance J. Quasi-banks refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of receivables and other obligations "deposit substitutes" is defined as an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of relending or purc hasing of receivables and other obligations. VI. Authority to Engage in Banking and Quasi-Banking (QB) Functions A. Authority from Bangko Sentral -No person shall engage in banking operations or QB functions WITHOUT authority from the Bangko Sentral -No articles of incorporation or amendment to articles of incorporation of banks , banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilit ies, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorablerecommen dation of the appropriate government agency to the effect that sucharticles or a mendment is in accordance with law. (Sec. 17 of BP 68) -The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational insti tution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (Sec. 46 of BP 68) B. Whether a person or entity is performing banking or quasi-banking functions W/O the BS authority shall be decided by the Monetary Board by examining and investigati ngthe books and records of such person or entity. Upon issuance of authority, may commence to engage in functions until authority is suspended, revoked or annulle d by BS. C. The dept head and the examiners of the supervising and examining dept shall: 1. administer oath to any such person or entity 2. compel presentation of books, records, and documents a. failure to do so would subject such to appropriate sanctions D. BS shall, when examining a bank, have the authority to examine an enterprise whi ch is wholly or majority-owned by the bank. E. Certificate of Authority to Register -The SEC shall not register the articles of corp or any amendment unless accompanied by a certificate of authority issued by the MB, under its seal. The MB shall be satisfied from the evidence submitted to it: (RPC) o All requirements of law have been complied with o Public interest and economic conditions justify the authorization o The amount of capital as well as the integrity of the organizers reasonable assure the safety of deposits and the public interest -The SEC shall not register the by-laws of any bank or any amendment unless accompanied by a certificate of authority issued by the MB, under its seal. CHAPTER 2: ORGANIZATION, MANAGEMENT & ADMINISTRATION OF BANKS, QUASIBANKS AND TRUST ENTITIES I. Organization of Banks A. Conditions The MB may authorize the organization of a bank and quasi-bank: 1. Entity is a stock corporation 2. Funds are obtained from the public, 20 o more persons 3. Minimum capital requirements by MB are satisfied B. Capabilities The MB shall take into consideration their apability in terms of their financial resources and technical expertise and integrity. 1. Bank s ownership structure 2. Director s and senior management 3. Its operating plan 4.Internal control 5. Its projected financial condition and capital base C. Capital Requirements 1. Banks shall comply with the required minimum capital by MB: Universal Bank-4,950M Commercial Bank-2,400M Thrift Banks w/n MM-325.0M Outside MM-52.0M Rural Banks w/n MM-26.0M Cities of Cebu and Davao-13.0M In 1st, 2nd & 3rd class cities and 1st class minicipalities-6.5M In 4th, 5th & 6th classcities and in the 2nd, 3rd & 4th class municipalities3.9M In 5th & 6th class municipalities-2.6M 2. At least 25% of the total authorized capital stock shall be subscribed by the subscribers of the propsed bank, and at least 25% of such subscription shall be paid-up that it must not be less than the minimum required capital. 3 | PageD. Incorporators/ Subscribers 1. Must be persons of integrity and of good credit standing in the business community. Subscribers must have adequate fonancial strength to pay for their propsed subscriptions in the bank. 2. Must not have been convicted of any crime involving moral turpitude unless otherwise allowed. 3. A bank may be organized with not less than 5 or more than 15 persons in organizing or investing in the proposed bank. *if there is excess, may be listed among the original subscribers in the Article s of Corp. QUERY: MAY COOPERATIVES ORGANIZE A BANK? Yes, established cooperatives and corporations may organize a bank and/or subscribe to the shares of stock oa any rural bank. Provided, that it shall be s ubject to special examination and to such rules and regulations prescribed by the MB. E. Bank Branches 1. UB & CB may open branches or other offices within or outside the Philppines upon prior approval of the BS. 2. A bank authorized to branch out shall be responsible for all business conducted in such branches because a bank and its offices shall be treated as one unit. II. Stockholdings A. Treasury Stocks 1. No bank shall . Purchase/ acquire shares of its own capital stock or . Accept its own shares as a security for a loan EXCEPT: when authorized by the MB. -stocks purchased shall be sold or disposed of at a public or private sale. 2. At common law, a coprpration has no lien upon the shares of stockholders for any indebtedness of the corporation. 3. Sec.35 of the US National Banking At of 1864, if banking corporations were given a lien on their own stock for the indebtedness of the stockholders, the prohibit ion against granting loans or discounts upon the security of the stock would become laregly ineffective. B. Foreign Stockholdings 1.Foreign inividuals an non-bank corporations may own or control up to 40% of the voting stock of a domestic bank. It shall apply t Filipinos and domestic non-ban k cprporations. QUERY: PROVISION IS AMBIGUOUS. IF IT APPEARS THAT FPREIGN INDIVIDUALS AND NON-BANK COPORATINS MAY ONLY CONTROL UP TO 40% OF THE VOTING STOCK. ON THE OTHER HAND, FILIPINOS AND DOMESTIC NON-BANK CORPORATIONS MAY ALSO CONTROL ONLY UP TO 40% OF THE VOTING STOCK. WHAT HAPPENS THEN TO THE 20%? -Foreign inividuals an non-bank corporations may own or control up to 40% of the voting stock of a domestic bank Provided, that the aggregate foreign-voting stoks owned by th em shall not exceed 40% of the outstanding voting stock of the bank. The percentage of foreig n-owned voting stock shall be determined by the citizenship of the individual stockholde rs in the bank. -Filipino individual and domestic non-bank corporation may each own up to 40% o the voting stock of a domestic bank. There shall be no aggregate ceiling on the ownership b y such individuals and corporations in a domestic bank. 2. The percentage of foreign-owned voting stock shall be determined by the citizenship of the individual stockholders in the bank shall follow the citizens hip of the controlling stockholders of the corporation, irrespective of the place of incorporation. *CONTROLLING STOCKHOLDER-refer to individuals holding more than 50% of the voting stock of the corporate stockholders of the bank. 3. At least 60% of voting stock of any commercial bank shall be owned by Filipino citizens. For thrift banks, at least 40% of its voting stock shall be owned by Filipinos. In rural banks,all of the capital stock. NOTE: In determining the nationality of banks, the CONTROL TEST is applied. The following tests do not: 1. War-time test 2. Investment test 3. Place of incorporation test 4. Grandfather rule 5. Principal place of usiness test C. Acquisition of Voting Stock in a Domestic Bank 1. Within 7years from the effectivity of the GBL and subject to guidelines issued pursuant to the Foreign Banks Libearlization Act, the MB may authorize a foreignbank to acquire up to 100% of the voting stock of only one bank organized under the laws of the Republic of the Philippines. 2. Within the same period, MB may authorize any foreign bank, which prior to the effectivity of the GBL availed itself of the privilege to acquire upto 60% of th e voting stock of a bank under the Foreign Banks Libearlization Act and the Thrift Banks Act, to further acquire voting shares of such bank to the extent necessary for it to own 100% of the voting stock thereof. 3. MB shall adopt measures necessary to ensure that at all times the control of 70% of the resources or assets of teh entire banking system is held by banks which are at keast majority-owned by Filipinos. D. Family Grous or Related Interests 1. Stockholdingsn of individuals related to each other within the fourth degree of consanguinity or affinity, legitimater or common-law shall be considered family groups or related interests and must be fullt disclosed in all transactions by such an individual with the bank. 2. Two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests and must be fullly disclosed in all transactions by such corporations or related groups of persons with the bank. III. Board of Directors 4 | PageA. Number of Directors 1. Shall be at least 5, an a maximum of 15 members of the board of directors of bank, 2 shall be independent directors. (except) -all be of legal age -majority are residents of the Phil. -form a private corporation for any lawful purpose 2. INDEPENDENT DIRECTOR-mean a person other tha an officer or employee of the bank, its subsidiaries or ffiliates or related interests. *Non-Filipino citizens may become members of the bord of directors of a bank to the extent of the foreign participation in the equity of said bank. a. not or has not been an officer or employee of the bank/quasibank/trust entity , its subsidiaries and affiliates or related interests during the past 3 years conted from the date of his election b. not a director of officer of related companies of the institution s majority st okholder c. not a majority shareholder of the institutions, any of its related ompanies o r of its majority shareholder d. not a relative w/n 4th degree of consanguinity or affinity, legitimate or com mon law of any director,oficer or majority shareholder of the bank/quasibank/trust entit y, its subsidiaries and affiliates or related companies e. not acting as a nominee or representatve of any director or substantial holde r f. free from any business or other relationship which could materially interfere with the exerise of his judgment B. Directors of Merged or Consolidated Banks -The number of directors shall not excedd 21. C. Meetings 1. May be conducted throuh modern technologies such as teleconferencing and video-conferencing *Banks shall include in theor bylaws a provision taht meetings of their board of directors shall be held only within the Philippines. 2. Corporate officers, quorum: -Immediately after election, directors must formally organize the election of th e a. president who shall be thedirector b. treasurer, who may or may not be a director c. secretary who shall be a resident nd citizen of the Philippines d. other officers provided for in the by-laws *Any 2 or more positions may be held concurrently by the same person EXCEPT that no one shall act as a president and secretary or as president and treasurer at the same time. *Directors or trustees cannot attend ot vote by proy at board meetings. D. Compensation and other Benefits of Directors and Officers 1. MB may regulate the payment by the bank to its deirectors and officers of compensation, allowance, fees, bonuses, stock options, proit sharing and fringe benefits only in the exceptional cases and when the circumstances warrant, such as but not limited to the following: a. When a bank is under comptrollership or conservatorship b. When found by the MB to be conucting business in an unsafe or unsound manner c. When found to be an unsatisfactory financial condition. 2. REMEDY: Sec.30 of the Corporation Code Directors shall not receive any compensation except for reasonable per diems. Provided, taht any such compensation other than per diems maybe granted to directors by the vote of the stockholers representing at least a majority of the outstanding capitl stock at a regular or special stockholder s meeting. It shall not exceed 10& of the net income before income tax of the corporation durng the preceeding year. IV. Fit and Proper Rule A. Powers of the MB 1. To maintain the quality of bank management and afford better protection to depositors and the public in general. -MB shall prescribe,pass upon and review the qualifications and disqualification s of individuals elected or appointed bank directors or officers and disqualify th ose found unfit. 2. After due notice to the board of directors of the bank, the MB may disqualify, suspend or remove any bank director or officer who commits or omits an act which render himunfit for the position. 3. If found fit and proper, shall be given to his integrity, experience, education, training and competence. B. Disqualification a. Permanently Disqualified Directors 1. Have been convicted by final judgment of a court for offenses involving dishonesty or breach of trust (ex. Estafa, extortion, forgery, malversation, swindling, BP22) 2. Have been convicted by final judgment of a court sentecing them to serve a maximum term of imprisonment of more than 6 years. 3. Have been convicted by final judgment of a court for violation of bankinglaws, rules and regulations 4. Those who have been judicially declared insolvent, spendthrit or incapacitated to contract 5. Those directors, officers or emplyees of banks, quasi anks or trust entities who were found to be culpable for such institution s closure 6. Those directors, officers or emplyees of banks, quasi anks or trust entities who were found by the MB as administratively liable for violation of banking law, rules an regulaitons 7. Those directors, officers or emplyees of banks, quasi anks or trust entities who were found to be unfit for the position of directors nad officers b. Temporarily Disqualified Directors: 1. Person who refuses to fully disclose the extent of their business interests to the appropriate suoervising and examining department. 2. Directors who have been absent or who have not participated in more than 50% of all meetings, both regular and special, and those who failed to 5 | Pagephysically attend at east 25% of all meetings in an year except those with notarized certification executed by the corporate secretary. 3. Persons who are deinquent in the payment of their obligations: a. DELINQUENT IN THE PAYMENT OF OBLIGATIONS-an obligation of a person with a bank/quasibank/trust entity where he is a director or officer, or at least 2 obligations with other banks/financial institutions, underdifferent credit lines or loan contracts, ar past due. b. Obligations shall include all borrowings from a bank/quasibank obtained by: 1. Director or officer for his own account or acts as guarantor, indorser or surety of loans 2. The spouse or child under the parental authority of the director or officer 3. Any person whose loan proceeds were credited to an acount for the benefit of a director or officer. 4. His spouse is the managing partner or a general partner owning a controlling interest in the partnership 5. A corporation, association or firm whollyowned by any group of persons 4. Have been convicted by final judgment of a court for offenses involving dishonesty or breach of trust (ex. Estafa, extortion, forgery, malversation, swindling, BP22) 5. Directors of officers of closed banks/quasibanks/trust entities pending their clearance by the MB 6. Directors disqualified for failure to observe/discharge their duties & responsibilities 7. Directors who failed to attend the special seminar for board of directors 8. Persons dismissed/terminated from employment for cause. 9. Those under preventive suspension 10. Persons with derogatory records as certified by, or on the official files of, th e judiciary, National Bureau of Investigation, Philippine National Police, quasi judicial bodies. 11. Those are administratively liable for violation of banking laws, rules and regulations. 12. Any person found by MB to be unfit for th position of directors or officers. 13. When penalty is suspension from office or fine is imposed, such is found to be administratively liable. C. Disqualification/ Prohibitions under the Corporation CodeSec.27. No person convited by fianl judgment of an offense puishable by imprionm ent for a perios exceeding 6years or a violation of this Code within 5years prior to date of is electiom or appointment shall qualify as a director, trustee or officer of an y corporation. D. Disqualification? Prohibitions under NCBA V. Banking Days and Hours A. Number of Days and Hour 1. Shall transact business on all working days for at least 6 hours a day, even before 8am or after 8pm. May open for business on Sat, Sun or holidays for at least 3 hours a day. 2. If so, must repot to the Bangko Sentrl the additional days 3. Working days mean Mon-Fri excpet holidays. 4. Branches at international airport or major fish port are allowed to operate on flexible banking hours provided hat wil inform BSP of the schedule of the banking hours that is not less than 6 hrs a day. VI. Automated Teller Machines A. Off-ite Automated Teller Machines (ATMs) 1. Must submit a report to the appropriate department of the BSP on ATMs which they establish 2. Shall be installed only in the centers of activity like shopping, supermarkets, hospitals, university campuses. Provided, that adequate internal control and security measures shall be adopted nd submitted to BSP. 3. Must comply with these, to all to open off site ATMS. B. Mobile ATMs 1. Should allowed to visit only centers of activity and should confine their itinerary to Metro Manila until futher notice. 2. Shall secure insurance coverage or adopt a self-insurance scheme to protect itself against losses of whatever nature in ita mobile ATM oprations 3. Banks hall notify the supervising and examining department of the BSP of the tual date a mobile ATM become oprational and when terminated. VII. Independent Auditor 1. MB shall require a bank etc. To engage the services of an independent auditor to be chosen by a bank etc. From a list of certified public accountants acceptable to the MB 2. Term of engagement hall be prescribed by MB, whenther as continuing basis or special engagements.3. Board of Directors shall also conduct an annual balance sheet audit of the bank etc. To review the internal audit and control system of teh bank etc, and to submit a report of such audit. VIII. Financial Statements -Every bank etc. Shall submit to the appropriate supervising and examining dept. Of the BSP fianncial statements. -It shall be of a specific date designated by BSP and shall show actual financia l conditions of the institution submitting the statements, and of its branhes, off ices, subsidiaries and affiliates, -and shall contain such informations as required in the BSP regualtions. PUBLICATION: -In English or Filipino -At least once every quarter in a newspaper of general circulation in the city o r province -BSP msy prescibe where it shall be published -Shall make available to the public an shall prescribe the complete set of its audited financial statements 6 | Page-If there is local emergency or imminent panic, the MB by vote of at least 5 of its members may allow to defer for a stated period of time the publication of the statement of financial condition. NOTES: page 54-55 (IMPORTANT) IX. Publication of Capital Stock -It shll not publish the amount of its authorized or subscribed capital stock wi thout indicating at the same tme and with equal prominence, the amount o its capital actually paid-up. -No branch of any foreign bank doing business in the Phil shall in any way announce the amount of the capital and surplus of its had office. X. Settlement of Disputes -BSP shall be consulted by other gov. Agencies in actions and proceedings brought before them involving controversies in banks etc. , as well as disputes between any all or all of them which theya re the directors, officers or stockholders. XI. Strikes and Lockouts A. Unsettles Labor Disputes -The banking industry is indispensable to the national interest. -If unsettled afer 7 days shall be reported by the BSP to the Sec. Of Labor who may assume jurisdiction over the dispute and decide it or certify the same. -The President, may intervene and assume juridiction over suh labor dispute in order to settle and terminate the same. B. Reports of Strikes and lockouts The bank shal disclose pertinent info: 1. Cause of the strike/lockout and bank management s position on its legality 2. Bank oprations affected XII. Laws Governing other Types of Banks -Thrift Banks Act, Rural Banks Act, Cooperative Code -For Islamic banks-special laws -For purposes of prescribing the minimum ration which the net worth of a thrift bank must bear to its total risk assets, the provisions of the Gbl shall govern. CHAPTER 3. DEPOSIT FUNCTIONS OF BANKS Demand deposits are all those liabilities of the BSP and other banks which are d enominated in Phil. Currency and are subject to payment in legal tender upon demand by pres entation of checks. The followings are prohibited from maintaining demand deposits or current accoun ts withthe bank office in which they are assigned; a. All officers; b. Employees of the bank s cash department/cash units c. Others employees who have direct and immediate responsibility in the handling of transactions/records pertaining to demand deposits or current accounts. Includes also; The spouse, relatives within 2nd degree of consanguinity and affinity of the off icers and employee covered by the prohibition. DUTY OF BANK TO HONOR CHECKS Where the bank possesses funds of a depositor it is bound to honor his checks to the extent of the amount of his deposits. Failure of the bank to pay the check, enti tles the drawer to substantial damage without any proof of actual damages. RESPONSIBILITY OF THE DRAWER He must personally keep track of his available balance in the bank and not rely on the bank to notify him of the necessity to fund certain checks he previously issued. DUTY OF BANKS TO KNOW SIGNATURES A bank is bound to know the signatures of its customers. NO OBLI. TO PAY PARTIAL PAYMENT A bank is under no obligation to make part payment on the check up to only the amount of the drawer s fund where the check is drawn for an amount larger than wha t the drawer has on deposit. WITHDRAWALS BAKS ARE PROHIBITED FROM ISSUING/ACCEPTING Withdrawals slips without requiring the depositors to present their passbooks and accomplishing necessary withdrawal slips except for banks authorized by BSP to adopt the no passbook withdrawal sys tem. Negotiable order of withdrawal (NOW) are interest bearing deposits of accounts that combine the payable on demand feature of the checks and investment feature of a savings acct. Time deposits one the payment of which cannot legally be required within such a specified number of days. NEGOTIABLE CERTIFICATES OF TIME DEPOSITS (NCTD s) a.Universal banks / commercial banks may issue NCTDs without approval of BSP b. Thrift banks/Rural banks/Cooperative banks need approval of BSP NON NEGOTIABLE CTD -Banks may issue long-term negotiable tax exempt certificates of time deposit without approval of the BSP. QUASI BANKING FUNCTIONS: Essential elements of quasi-banking are: A. borrowing of funds for the borrower s own account; B. 20 or more lenders at any one time; C. Methods of borrowing are issuance, endorsement, or acceptance of debt instrument s of any kind, other than deposits D. The purpose of which is (1) relending, or (2) purchasing receivables or other obligations Any person, natural or juridical may deposit with such Phil. Bank in good standi ng foreign currencies which are acceptable as part of the international reserve except thos e which are required by the central bank to be surrendered. 7 | PageAnonymous accounts or accounts under fictitious name should not be kept allowed. II. Administration of deposits All banking institutions are required to set a minimum of 3 specimens of their d epositors and to update the specimen of signatures every 5 years or sooner, at the discret ion of the bank. Minors are vested with special capacity and power to make savings, and withdraw the same without the assistance of their parents or guardians, provided the f requir ements are met; 1. at least 7 years of age; 2. able to read and write; 3. have sufficient discretion; 4. not otherwise disqualified by any other incapacity; Parents may nevertheless deposit for their minor children and guardians for thei r wards. Corporations a. Incorporation Stage payment of subscription is in cash, the SEC requires a bank certificate of deposit of paid-up capital notarized in place where signed. b. Post Incorporation in opening a bank account, the board of directors issues a resolution authorizing the signatories and specifying the depository bank. Clearing cut off time General rule: all deposits and withdrawals during regular banking hours shall be credited or debited to deposit liability accounts on the date of receipt or payment thereof; provided, however, that a bank may set a clearing cut off time for its head office not earl ier than 2 hours before the start of clearing at the BSP and not earlier than 3-1/2 hours b efore the start of clearing for all its branches, agencies, and extension office doing bus iness in the Philippines. Provided, further that banks are located in areas where there are n o BSP regional/clearing arrangement may set a clearing cut-off time not earlier than 2 hours before the start of their local clearing after which time, deposits received sha ll be booked likewise. III. Survivorship Agreement Definition: Joint owners of a deposit agree that either of them could withdraw any part or t he whole ofsaid account during the lifetime of both, and the balance, if any, upon the deat h of either, belonged to the survivor. Although survivorship agreement is per se not contrary to law, its operation or effect may be violative of the law. IV. Duties of Banks A. METICULOUS CARE A bank is required to take meticulous care of the deposits of its clients, who h ave the right to expect high standards of integrity and performance from it. In every case the depositor expects the bank to treat his account with the utmos t fidelity, whether such account consists only of a few hundred pesos or of millio ns. B. PAYMENT TO PROPER PARTY C. IN CASE OF DEATH OF DEPOSITOR National revenue code provides: If a bank has knowledge of the death of the depositor, it shall not allow any wi thdrawal from said deposit account unless the commissioner has certified that the taxes i mposed thereon by this title have been paid. Provided, however, that the administrator of the estate or any 1 of the heirs of the decent may upon authorization of the commissioner w ithdraw an amount not exceeding 20,000 without the said certification. V. Secrecy of bank Deposits Purposes a. to give encouragement to the people to deposit their money in banking institutions; b. to discourage private hoarding so that the same may be properly utilized by banks in authorized loans to assist in the economic development of the country. R.A. 8367 Absolute Confidentiality All deposits of whatever nature with an Association in the Philippines are herby considered as of an absolutely confidential nature and may not be examined, inqu ired or looked into by any person, government official, bureau or office except upon; 1. written permission of the depositor; 2. in case of impeachment; 3. upon order of a competent court in cases of bribery or dereliction of duty of pu blic officials; 4.in cases, where the money deposited or invested is the subject matter of the litigation. Authority to inquire into bank deposits under the ANTI MONEY LAUNDERING ACT The AMLC may inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation, when it has been established that; a. there is probable cause that the deposits or investments are related to an unlawful activity; b. a money laundering offense. Authority of the Commissioner of Internal Revenue to inquire into deposits In cases; a. a decedent to determine his gross estate; b. any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability. CHAPTER 4 Operations of a Universal Bank a. Powers of a commercial bank b. Powers of an inverstment house c. Power to invest in non-allied enterprises II. Equity Investments of a Universal Bank a. Allied or non-allied i. Allied enterprises: financial or non-financial ii. Total investment shall not exceed 50% of the net worth of the bank 8 | Pageiii. Total investment in one enterprise shall not exceed 25% of the net worth of the bank iv. Net worth-total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation, reserves and other adjustments b. Acquisition is subject to prior approval of the Monetary Board III. Equity investments of a Universal Bank in Financial Allied Enterprises a. Can own up to 100% of the equity in a thrift bank, a rural bank or others within this category b. A publicly-listed universal or commercial bank can own only one other universal or commercial bank c. Financial Allied: leasing companies, banks, investment houses, financing companies, credit card companies, insurance companies, holding company, etc. IV. Equity Investments of a Universal Bank in Non-financial allied enterprises a. May own up to 100% b. Warehousing, storage, safe deposit box, management of mutual funds, providing computer services, insurance agencies, home building and home development c. Rural/Cooperative Banks may invest, as a non-financial allied undertaking in the ff: i. Warehousing and postharvest facilities ii. Farm equipment distribution iii. Transportation of agricultural products iv. Marketing of agri products v. Leasing V. Investments in Non-Allied Enterprises a. Shall not exceed 35% of the total equity in that enterprise nor shall it exceed 35% of the voting stock b. Only universal banks can investment in non-allied enterprises: i. Industrial park projects, financial and commercial complex projects, activities in agri, mining, manufacturing,etc. VI. Investments in Quasi-Banks a. Shall not exceed 40% equity Operations of Commercial Banks I. Powers a. Powers incident to corporations b.Such powers necessary to carry on the business of commercial banking: i. Accepting drafts and issuance of letters of credit ii. Accepting or creating demand deposits iii. Receiving deposit substitutes iv. Extending credit v. Buying and selling foreign exchange and gold or silver vi. Discounting negotiating promissory notes, etc. II. Letters of Credit a. 3 relationships created: bank and buyer, bank and seller, buyer and seller b. Independence Principle-assures the seller of prompt payment even if buyer has not yet reimbursed as long as the seller presents the necessary documents III. Investments of a Commercial Bank a. Only equities in allied enterprises: either financial or non-financial b. Total investments in allied enterprises shall not exceed 35% of the net worth of the bank c. Total investment in any one enterprise shall not exceed 25% of the net worth of the bank. IV. Investments in Financial Allied a. 100% of the equity of a thrift bank or a rural bank b. In other financial allied enterprises, investment shall only be a minority holding V. Investments in non-financial allied a. May own up to 100% Risk-Based Capital I. Minimum Ratio-monetary board shall prescribe; ration of bank to its total risk assets which may include contingent a. May be altered or suspended for a maximum of one year when b. Uniformly applied for banks in the same category II. Effect of Non-Compliance a. Limit or prohibit the distribution of net profits b. Restrict or prohibit acquisition of major assets Limits on Loans, Credit Accommodations and Guarantees I. Single Borrower s Limit-shall not exceed 20% of the net a. Except: i. the net worth of the accounts necessaryworth of the bankAs provided by the monetary board for reasons of national interest ii. Deposits of rural banks with GOC financial institutions b. The limit maybe increased by 10% provided the additional loans are secured II. SBL should include: a. Direct liability of the maker of paper sold or discounted with the bank b. If the borrower owns ac majority interest in a corporation, the liabilities of said corporation is included c. Liabilities of subsidiaries of a corporation who is borrowing from the bank d. In case of partnership or association, the liabilities of the members thereof III. SBL should exclude: a. Loans secured by the BSP or government b. Loans covered by assignment of deposits maintained in the bank c. Loans under letters of credit covered by margin deposits d. Loans specified as non-risk items IV. Bank Guarantee-irrevocable commitment of bank binding itself to pay in the vent of non-performance by a third party; it shall also be subject to the limits herein prescribed V. Contingent Accounts of borrowers may be included among those subject to the limits VI. Assignment of Credit-agreement by virtue of which the owner of a credit, by a legal cause, such as sales, dation in payment, donation, and without the need of the consent of the debtor, transfers his credit to another who acquires the powe r to enforce it to the same extent as the creditor could have. VII. Pacto Commissorio-automatic appropriation of the pledged or mortgaged property by the creditor in payment of the loan upon its maturity. It is not all owed in assignment of deposits. DOSRI I. Prohibits the ff: a. Direct or indirectly borrow from the bank b. Become a guarantor or indorses or surety for loans from such bank to others c. Be an obligor to the bank except with the written approval of the majority of all the directors of the bankII. The approval shall entered on the records of the bank 9 | PageIII. Arms Length Rule-Dealings with DOSRI shall be upon terms not less favorable to the bank IV. Directors: a. Names in the articles of incorporation b. Elected in meetings of the stockholders c. Elected to fill vacancies V. Officers: a. Pres, VP, EVP, Sr. VP, GM, Secretary, Treasurer, Trust Officer b. Chairman, vice-chairman or any other position who performs functions of management VI. Stockholder-stockholder or record in the books of the bank a. Includes: i. Spouse and/or relative within the 1st degree or consanguinity or affinity ii. Corporation owned by the stockholder or his wife VII. Related Interests a. Spouse and/or relative within the 1st degree or consanguinity or affinity b. partnership where DOSRI of those in a) above are general partners c. co-owner with a DOSRI or those in a) of a property used as a security d. Corporation or association where the DOSRI or those in a) are is also a director e. Corporation wholly or majority owned or owned by at least 20% by the DOSRI or those in a) VIII. Effect of Violation-after due notice, the office of the person violating s hall be declared vacant and shal be subject to the penal provisions of NCBA Securities on Loans I. Secured by Real Estate a. Shall not exceed 75% of the appraised value plus 60% of the insured improvements II. Secured by Chattels and Intangible Properties a. Shall not exceed to 75% Grant and Purpose of Loans I. Amount and Purpose a. Only in the amount and for the period of time essential for the completion ofthe operations to be financed. This shall be done consistent with safe and sound banking practice b. The purpose shall be stated in the application c. If the purpose stated was not followed, the bank may terminate the loan and demand immediate repayment II. Requirements: a. Statement of assets and liabilities b. Statement of their income and expenditure c. Other information prescribed by law or by the Monetary Board d. Even in the absence of this provision, the bank may still demand immediate repayment because the borrower has lost the benefit of the period under Art. 1198 of the Civil Code III. Reason for Stringent Rules in Granting Loans-The bank invests the money it holds in trust for the depositors. For this reason, a bank is expected to ascert ain the identities of the persons transacting with them to protect both the interest of the bank and the depositors. IV. Unsecured Loans or Other Credit Accommodations-The MB is authorized to issue regulations with respect to unsecured loans V. Other Security Requirements-The MB may prescribe further security requirements shall be subject to. VI. Authority to Prescribe Terms and Conditions of Loans VII. Amortization on Loans a. Shall be adapted to the nature o the operations to be financed b. With those whose maturities are more than 5 years-periodic amortization but must be made annually c. Loans are used for purposes not initially producing revenue-amortization may be deferred until such time as said revenues are sufficient but in no case shall it be later than 5 years d. Microfinance-take into consideration the projected cash flow of the borrower e. Escalation clause-raising of interest i. Only allowed when the monetary board has increased the rate of interest provided that there is also a stipulation that interest will be lowered if MB has lowered the rate of interest ii. Both instances should be present before escalation clause is allowed iii. Exception: if the creditor unilaterally decreased the interest even if it was not stipulated, esacalation will be allowedf. Unconscionable and exorbitant interests-SC: 5.5% per month or 66% per annum. Will be considered as void. Hence, the court may reduce the interest rate VIII. Prepayment of Loans-prior to the maturity date, borrower may pay subject to such reasonable terms agreed upon with the bank IX. Development Assistance Incentive-BSP shall give incentives to banks who extend loans to education, cooperatives, hospitals, low-cost housing, and LGUs X. Renewal of Exntension of Loans-maybe regulated by the MB and prescribe conditions and limitations XI. Banks cannot extend peso loans to non-residents XII. Provisions for losses and write-off a. Bad debts-debts due to on which interest is past due and unpaid b. MB shall fix the amount of reserves for bad debts Truth In Lending (RA 3765-Disclosure of Finance Charges) I. Policy-protect the citizens from a lack of awareness of the true cost of credit by assuring a full disclosure of such cost II. Disclosure shall include: a. The cash price of the property or service to be acquired b. Amounts for downpayment c. Charges which are paid in connection with the transaction d. Amount to be financed e. Finance charge III. Definitions: a. Crediti. any loan, mortgage, deed of trust, advance or discount ii. Any conditional sales contract iii. Rental-purchase contract b. Finance Charge-interest and fees incident to the extension of credit c. Creditor: any person engaged in the business of extending credit who requires as an incident to the extension of credit, the payment of a finance charge IV. Penalty-either civil or criminal (1k-5k fine or imprisonment for 6-12 months, or both) V. Government is exempted from the punishment or penaltyForeclosure of Real Estate 10 | P a g eI. The mortgagor or debtor has the right within one year after the sale of the real estate, to redeem the property by paying the amount due in the mortgage w/ interest and all the cost and expenses II. However, the purchaser at the auction shall have the right to take possession immediately after the date of the confirmation of the auction sale III. Any petition in court to restrain the auction shall only be given due course upo n the filing of a bond in an amount fixed by the court IV. Juridical Persons shall have the right to redeem the property until, but not aft er, the registration of the certificate of foreclosure with the Register of Deeds wi thin 3 months V. Equity of Redemption v. Right of Redemption a. Right of Redemption exists only in extrajudicial foreclosure sale i. In a judicial foreclosure sale where the mortgagee is the PNB or a banking institution, right of redemption exits ii. Equity of Redemption-right of the mortgagor to extinguish the mortgage and retain ownership by paying the secured debt within a period not less than 90 days nor more than 120 days after the judgment becomes final. (Rule 68, Rules of Court) iii. Right of Redemption may be extended Major Investments I. The MB shall establish a criteria for reviewing major acquisitions by a bank II. Ceiling on Investments a. Acquire real estate necessary for its own use in the conduct of its business i. Bank premises-land, buildings, construction, leasehold rights, improvement, fixtures, furniture ii. Real property, quipmet, chattel purchased by the bank in its name b. Total investment in real estate including improvements shall not exceed 50% of combined capital accounts c. Investments by a bank in a real estate corporation shall be considered as part of the total investment in real estate by the bank III. Acquisition of Real Estate by way of satisfaction of claims a. Notwithstanding the limitations given above, a bank may acquire real estate under the ff circumstances: i. Shall be mortgaged to it in good faith by way of security of debts ii. Conveyed to it in satisfaction of debts previously contracted iii. Purchased at sales under judgments, decrees, mortgages, ortrust deeds held by it b. Real Property acquired under this provision shall be disposed by the bank within a period of 5 years c. However, it may continue to hold such property beyond the period given if the limitations given in the previous provision are not yet reached. Other Banking Services I. Receive in custody funds, documents and other objects II. Act as financial agent and buy and sell for their customers III. Make collection and payments for the account of others IV. Act as managing agent, adviser, consultant or administrator of an investment management with the approval of the MB V. Rent out safety deposit boxes VI. Safety Deposit Box-Special Kind of Deposit because it cannot be characterized as a contract of lease since the guard key of the box remains with the bank. VII. If a box is rented by two persons, the agreement between them shall govern VIII. The SC said that the rent of a safety deposit box is that of a bailor an b ailee Electronic Transactions I. BSP shall have full authority to regulate the use of electronic devices used in connection with the operations of a bank including the delivery of services and products to customers II. Outsourcing of IT systems-can be done with prior approval of the MB except: a. Strategic planning for the use of IT b. Determination of system functionalities c. Change management inclusive of quality assurance and testing d. Service level and contract management e. Security policy and administration Outsourcing of other functions I. With approval of the MB, banks may outsource the ff: a. Data imaging b. Clearing and processing of checks not in the Philippine Clearing House system c. Printing of bank deposit statement, bank loan statements, bank forms and promotional materials d. Credit card services e. Credit investigation f. Janitorial servicesg. Procurement services h. Legal services Questions: Whether or not an alien-owned bank can acquire ownership of a residential lot by virtue of a deed of transfer as settlement of a debt No. for the purpose of the constitution is to place and keep in the hands of the people the ownership of private lands in order not to endanger the integrity of the nat ion Chapter 5 Sec. 54. Prohibition to Act as Insurer. -A bank shall not directly engage in ins urance business as the insurer. *Includes: a) making or proposing to make, as insurer, any insurance contract b) making or proposing to make, as surety, any contract of suretyship as a vocat ion and not as merely incidental to any other legitimate business or activity of the sur ety c) doing any kind of business, including a reinsurance business, specifically recog nized as constituting the doing of an insurance business within the meaning of the Ins urance Code d) doing or proposing to do any business in substance equivalent to any of the fore going in a manner designed to evade the provisions of the Insurance Code Sec. 55. Prohibited Transactions. 55.1. No director, officer, employee, or agent of any bank shall 11 | P a g e(a) Make false entries in any bank report or statement or participate in any fra udulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or a ny person; (b) Without order of a court of competent jurisdiction, disclose to any unauthor ized person any information relative to the funds or properties in the custody of the bank belon ging to private individuals, corporations, or any other entity: Provided, That with resp ect to bank deposits, the provisions of existing laws shall prevail; (c) Accept gifts, fees, or commissions or any other form of remuneration in conn ection with the approval of a loan or other credit accommodation from said bank; (d) Overvalue or aid in overvaluing any security for the purpose of influencing in a ny way the actions of the bank or any bank; or (e) Outsource inherent banking functions. . refers to any contract between the bank and a service provider for the latter to supply, or any act whereby the latter supplies, the manpower to service the depo sit transactions of the former . intended to ensure secrecy of bank deposits 55.2. No borrower of a bank shall ( a) Fraudulently overvalue property offered as security for a loan or other credi t accommodation from the bank; (b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or exten ding the period thereof; (c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or (d) Offer any director, officer, employee or agent of a bank any gift, fee, comm ission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application. 55.3. No examiner, officer or employee of the Bangko Sentral or of any department, bur eau, office, branch or agency of the Government that is assigned to supervise, examine, assis t or render technical assistance to any bank shall commit any of the acts enumerated in this Section or aid in the commission of the same. The making of false reports or misrepresentation or suppression of material fact s by personnel of the Bangko Sental ng Pilipinas shall be subject to the administrative and cri minal sanctions provided under the New Central Bank Act. 55.4. Consistent with the provisions of Republic Act No. 1405, otherwise known as the Banks Secrecy Law, no bank shall employ casual or non regular personnel or too lengthy probati onary personnel in the conduct of its business involving bank deposits. Sec. 56. Conducting Business in an Unsafe or Unsound Manner -In determining whet her a particular act or omission, which is not otherwise prohibited by any law, rule o r regulation affecting banks, quasi-banks or trust entities, may be deemed as conducting busi ness in an unsafe or unsound manner for purposes of this Section, the Monetary Board shall consider any of the following circumstances: 56.1. The act or omission has resulted or may result in material loss or damage, or ab normal risk or danger to the safety, stability, liquidity or solvency of the institutio n; . 56.2. The act or omission has resulted or may result in material loss or damage or abn ormal risk to the institution's depositors, creditors, investors, stockholders or to t he Bangko Sentral or to the public in general; 56.3. The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or preference to the bank or any party in the discharge by t he director or officer of his duties and responsibilities through manifest partiali ty, evident bad faith or gross inexcusable negligence; or 56.4.The act or omission involves entering into any contract or transaction mani festly and grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby. Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe or unsound manner, the Monetary Board may, without prejudice to the administrative sanctions provided in Section 37 of the New Central Bank Act, take action under Section 30 of the same Act and/or immediately exclude the erring bank from clearing, the provisions of law to the contrary notwithstanding. Sec. 57. Prohibition on Dividend Declaration. e dividends, if at the time of declaration: No bank or quasi-bank shall declar57.1. Its clearing account with the Bangko Sentral is overdrawn; or 57.2. It is deficient in the required liquidity floor for government deposits for five (5) or more consecutive days, or . 57.3. It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentralfor purposes of determining funds available for dividend declaration; or 57.4. It has committed a major violation as may be determined by the Bangko Sent ral. Sec. 64. Unauthorized Advertisement or Business Representation. No person, assoc iation, or corporation unless duly authorized to engage in the business of a bank, quasi-ba nk, trust entity, or savings and loan association as defined in this Act, or other banking laws, s hall advertise or hold itself out as being engaged in the business of such bank, quasi-bank, trust entity, or association, or use in connection with its business title, the word or words bank , banking, banker, quasi-bank, quasi-banking, quasi-banker, savings and loan association, corporation, trust company or words of similar import or transact in any manner the business of any such bank, corporation or association. Sec. 67. Conservatorship. The grounds and procedures for placing a bank under conservatorship, as well as, the powers and duties of the conservator appointed for the bank shall be governed by the provisions of Section 29 and the last two paragraphs of Section 30 of the New Central Bank Act: Provided, That this Section shall also apply to conser vatorship proceedings of quasi-banks. *Grounds for appointment of conservator Whenever, on the basis of a report submitted by the appropriate supervising or e xamining department, the Monetary Board finds that a bank or quasi-bank is in a state of: 12 | P a g etru1. continuing inability, or 2. unwillingness to maintain a condition of liquidity deemed adequate to protect th e interests of depositors and creditors, the Monetary Board may appoint a conservator with such powers as the Monetary Bo ard shall deem necessary to: 1. take charge of the assets, liabilities, and the management thereof, 2. reorganize the management, 3. collect all monies and debts due said institutions, and 4. exercise all powers necessary to restore its viability. The conservator shall report and be responsible to the Monetary Board and shall have the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank. *Liquidity any price discount the ability of an asset to be converted into cash quickly and without*Solvency the condition that exists when liabilities amount to less than total a ssets, thus providing the ability to pay debts *Qualifications of conservator: 1. competent 2. knowledgeable in bank operations and management *Period of conservatorship shall not exceed 1 year *Termination of conservatorship: 1. The Monetary Board shall terminate the conservatorship when it is satisfied that the institution can continue to operate on its own and the conservatorship is no lon ger necessary. 2. It should likewise be terminated should the Monetary Board, on the basis of the report of the conservator or of its own findings, determine that the continuance in bus iness of the institution would involve probable loss to its depositors or creditors, in w hich case the provisions on receivership and liquidation shall apply. *Powers of conservator cannot impair the obligations of contracts the law merely gives him the power to revoke contracts that are, under existing law, deemed to be defective. Sec. 68. Voluntary Liquidation. In case of voluntary liquidation of any bank organized under the laws of the Philippines, or of any branch or office in the Philippines of a foreign bank, written notice of such liquidation shall be sent to the Monetary Board before such liqui dation shall be sent to the Monetary Board before such liquidation is undertaken, and the Moneta ry Board shall have the right to intervene and take such steps as may be necessary to protect t he interests of creditors. . may be undertaken by the bank itself through its board of directors, by a truste e appointed by the bank, or by a receiver appointed by the bank . no voluntary dissolution shall be undertaken by a bank without prior approval of the Monetary Board, provided further, that it shall be accompanied by a liquidation plan and written notice *Grounds for receivership and liquidation: The bank or quasi-bank: 1. is unable to pay its liabilities as they become due in the ordinary course of bu siness 2. has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities 3. cannot continue in business without involving probable losses to its depositors or creditors 4. has willfully violated a cease-and-desist order that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institu tion *Powers of a receiver: a. to bring and defend, in such capacity, actions in his own name b. to take and keep possession of the property in controversy c. to receive rents d. to collect debts due to himself as receiver or to the fund, property, estate, pe rson, or corporation of which he is the receiver e. to compound for and compromise the same f. to make transfers g. to pay outstanding debts h.to divide the money and other property that shall remain among the persons legal ly entitled to receive the same i. generally to do such acts respecting the property as the court may authorize *Prohibited acts: Any director or officer of a bank declared insolvent or placed under receivershi p by the Monetary Board shall not commit any of the ff: a. refusing to turn over the bank s records and assets to the designated receiver b. tampering with bank records c. appropriating for himself or another party, or destroying or causing misappropri ation and destruction of the bank s assets d. receiving or permitting or causing to be received in said bank any deposit, coll ection of loans, and/or receivables e. paying out or permitting or causing to be paid out any funds of said bank f. transferring or permitting or causing to be transferred any securities or proper ty of said bank * Close now hear later scheme the law does not contemplate prior notice and hearing before a bank may be directed to stop operations and placed under receivership. This is to prevent unwarranted dissipation of the bank s assets and is a valid exercise of police pow er to protect the creditors, depositors, stockholders, and the general public. A hearing may b e subsequent to the closure. *Effects of receivership and liquidation: 1. retention of juridical personality 2. not liable to pay interest 3. assets are deemed under custodia legis 4. stay of execution of judgment 5. restriction of bank s capacity to act 6. exclusive jurisdiction of liquidation court 13 | P a g eSec. 70. Penalty for Transactions After a Bank Becomes Insolvent. Any director o r officer of any bank declared insolvent or placed under receivership by the Monetary Board w ho refuses to turn over the bank s records and assets to the designated receivers, or who tamper s with banks records, or who appropriates for himself for another party or destroys or causes the misappropriation and destruction of the bank s assets, or who receives or permits or causes to be received in said bank any deposit, collection of loans and/or receivables, or who pays out or permits or causes to be transferred any securities or property of said bank shal l be subject to the penal provisions of the New Central Bank Act. **Problems** The conservator of B bank revoked a contract previously entered into by the bank on the ground that the lands subject of said contract presently commanded a much hi gher price than when it was sold. Is the revocation valid? . No. Power of conservator cannot impair the obligations of contracts. A contract of sale entered into by a bank cannot be revoked if at the time of the transaction, the price agreed upon was reasonable. A buyer offered to buy the property of a bank which the latter accepted. However , the bank became insolvent before the buyer learned of the acceptance. Was there a pe rfected contract? . None. The accepted offer became ineffective when the bank became insolvent befor e the bank s acceptance of said offer came to the offeror s knowledge. C deposited money with O bank. Before said deposits could be withdrawn, the BSP passed a resolution suspending the bank s operations. The SC, howver, annulled sai d resolution, for which reason O bank is ready to accept its liability for the pay ment to C of the balance of the principal amount deposited with it. Is O bank liable for interest thereon during the period it was closed? . No. What enables a bank to pay stipulated interest on money deposited with it is that thru the other aspects of its operation, it is able to generate funds to cover the paymen t of such interest. If it is closed, it cannot generate such funds, hence it cannot pay the interest .Chapter 6: Foreign Banks and Trust Operations I. Foreign Banks entry to Phils. thru establishments of branches governed by For eign Bank Liberazation Act. Offshore Banking governed by Offshore Banking System Decree -conduct of banking transactions in foreign currency involving receipt of funds from external sources and its utilization. Offshore banking unit branch, subsidiary, affiliate of a foreign banking corpora tion authorized to transact offshore banking business in Phil. Notes: Corporation Code Sec. 133. Doing business without a license foreign corporation transacting busin ess in Phil. may maintain or intervene in any action, suit or proceeding in any court or adm. Agency n Phil but cannot sue before Phil. courts though on any valid cause. If without license ,no access to our courts and cannot transact business in Phil. -By securing a license, a foreign entity would be giving assurance that it wll a bide by the decisions of our courts, even if adverse to it. -Primary purpose of Statute: to compel foreign corp. if it desires to do busines s here, to submit itself to the jurisdiction of courts of the Phils. Consistent with Corporation Code .. Sec. 128. Resident agent; service of process: -SEC shall require foreign bank to file with SEC a written power of atty. designating a resident of the Phil. whom summons must be served, before it issues a license for it to transact business in Phil. -Foreign bank shall execute and file with SEC an agreement. -If summons be made with SEC, latter shall transmit it by mail to the head offic e of such bank, within 10 days. -In case of change of address of resident agent, shall notify SEC in writing. Acquisition of Voting Stock in a Domestic Bank: 1. Wthin 7 yrs from effectivitiy of GBL, MB may authorize foreign bank to acquire u p to 100% of voting stock of ONLY one bank organized under laws of RP. 2. Within same period, MB may authorize those foreign bank which prior to effectivi ty of GBL availed itself of 60% of voting stock of a bank under FBLA and Thrift Banks Act, to further acquire voting shares to extent necessary for it to own up to 100%. 3. MB shall adopt measures to the control of 70% of resources and assets of entire banking system is held by banks which are majority owned by Filipinos. 4.Any right or incentive granted to foreign bank shall be equally enjoyed by banks organized under laws of RP. NOTES: -all branches of foreign bank shall be treated as one unit for purpose of GBL; a nd all reference to Phil. branches of foreign banks shall be held to refer to such unit. -To protect interests of depositors and creditors of Phil. branches of FB, their head office shall fully guarantee prompt payment of all liabilities of its Phil. branch. -Residents and citizens of the Phil. who are creditors shall have preferential r ights to assets of such branch. Summons and Legal Process: If served on agent or head of foreign bank, -our courts acquires jurisdiction over such bank. -binds the bank which it represents. If authority of agent or head revoked; or he became mentally incompetent, -bank shall designate a new one. -File with SEC a duly authenticated nomination of such agent. In absence of agent or head; or no person authorized , -summons and legal process and notices be made upon Bangko Sentral Deputy Governor In-Charge of the supervising and examining departments. The latter upon receipt, shall transmit by mail to president or secretary of bank at its he ad or principal office a duly certified copy. -Sending of copy is necessary part of services and shall complete service. -Registry receipt is prima facie evidence of transmission. 14 | P a g e-All costs incurred in transmission shall be paid in advance by the party whose instance the service is made. Revocation of license of Foreign Bank: -By Monetay Board. -If insolvent, in imminent danger, or its continuance will involve probable loss to those it transacts business with. -After revocation, it cannot transact business unless license is renewed or reissued. -After revocation. BSP shall take action to protect creditors and public. -New Central Bank Act provides the sanction and penalties. II. Liberalized Entry of Foreign Banks: Purpose: 1. to create more competitive environment. 2. to encourage greater foreign participation Policies: 1. develop self-reliant economy controlled by Filipinos. 2. promote a competitive and stable banking system 3. provide a wider variety of financial services 4. enhance competitiveness in international market to promote industrialization. Modes of Entry: a. acquiring up b. investing up r Phil. laws. c. Establishing FB may avail to 60% of voting stocks of an existing bank to 60% of voting stocks of new banking subsidiary incorporated undebranches with full banking authority. only 1 mode-Only those included in top 150 FB in the world or top 5 banks in their country of origin allowed to mode (b) and (c). -To establish a branch or subsidiary, it must be widely-owned and publicly liste d in its country of origin, unless owned by govt. of its country. -FB shall be allowed entry under 3rd mode within 5 yrs. From effectivity of RA 7721. 6 FB may be allowed by MB. -Additional 4 may be allowed on recommendation by MB and approval of President. -FB may open 3 branches in location of their choice, 3 branches in locations designated by MB to insure balanced economic development in all regions.Guidance for Approval: MB shall 1. ensure geographic representation. 2. consider strategic trade and investment relationship between Phil. and country o f FB. 3. study capacity, global reputation and stability in competitive environment of ap plicant. 4. ensure reciprocity rights are enjoyed by Phil banks in applicant s country. 5. consider willingness to fully share their technology. Adoption of measures: MB adopt those which 1. ensures that 70% of resources and assets is held by domestic bank majority owned by Filipinos 2. prevents dominant market position by one bank 3. secures the listing in SEC of shares of stocks Capital Requirements: 1. Locally Incorporated Subsidiaries -minimum capital equal to that prescribed by MB for domestic banks of same category. 2. Foreign Bank Branches (entry under the 3rd mode) -not less than US dollar equal to P210,000,000 and shall be entitled to 3 branch es o capital shall include those permanently assigned plus net due to head office outside the Philippines, 15% of which shall be inwardly remitted and converted into Philippine currency, provided that amounts invested in productive or export activities shall not be subject to conversion. Establishment of Additional Branches 1. FB can open three additional branches by inwardly remitting and converting into Philippine currency as permanently assigned capital, P35 Million per additional branch. Head Office Guarantee-shall guarantee prompt payment of all liabilities of its P hilippine branches Board of Directors-aliens may become members of the Board of a bank to the exten t of the foreign participation in the equity of said bank. Equal treatment-foreign banks shall also be subject to limitations imposed upon a Philippine bank such as the SBL, capital to risk asset ratio, development loans incentives etc. Trust Operations I. Authority to engageonly a stock corporation or a person duly authorized by the MB shall act as a trustee -the cardinal principle is fidelity -Trust business-refers to any activity resulting from a trustor-trustee relation ship involving the appointment of a trustee for the administration of funds and/or properties of the trustor for the benefit of the latter. II. Conduct of Trust business -Administer with diligence that a prudent man would exercise in the conduct of a n enterprise -No transaction within the same trust entity will be allowed except when the transaction is authorized by the trustor and the relationship of the trustee and the other party involved is fully disclosed III. Registration of Articles of incorporation and by-laws -The SEC shall not register the same or any amendment thereto, unless accompanied by a certificate of authority issued by the BSP IV. Minimum Capital-trust entity shall comply with the minimum paid-in capital r equirements which will be determined by the MB. V. Powers of a trust entity: -Powers incident to a corporation -Act as trustee on any mortgage or bond issued by any body politic and to accept and execute ant trust consistent with law -Act as an administrator of a minor or incompetent upon the order of a court -Act as the executor of any will if named as the executor -Act as the administrator of any deceased person -Accept and execute and trust for the holding and administration of any estate including the rents and profits thereof -Establish and manage common trust funds 15 | P a g eVI. Transactions requiring prior authority -Lend, sell, transfer or assign money or property to those related to the truste e -Purchase or acquire property or debt instruments to those related to the truste e -Invest in equities I which the trustee owns 50% of the capital -Sell transfer assign or lend from one trust account to another VII. Deposit for faithful performance of trust duties Before transacting any business, there shall be a deposit made with the BSP cash or securities approved by the MB an amount not less that P500,000 -This deposit can be increased by the MB whenever it is necessary -The paid-in capital and surplus of the entity should be at least equal to the amount required to be deposited -A trust entity has the right to collect the interest earned on such deposit -All claims arising out of the trust business shall have priority over all other claims as regards the deposits. Bond of certain person required for the faithful performance of duties I. Requirements a. Those appointed by the court shall file a bond in such sum as the court may require b. Upon application in the court, the subject matter of the trust or any part thereof be deposited with a trust entity c. Upon presentation of a proof that the subject matter has been deposited with a trust entity, the court may order reduction in the amount of the bond given d. The reduced bond shall be adequate to secure the proper administration of the property II. Exemption from Bond Requirement a. Trust entities required by the court to be an administrator, etc are not required to give a bond Operations of Trust Entity I. Separation of Trust Business from General Business -Shall be kept physically separated and distinct from the accounts of the genera l business of the trust entity II. Investment limitations of a trust entity -Limited to those loans or investments prescribed by law, MB or any court of competent jurisdiction, unless directed by the instrument creating the trust III. Real Estate acquired by a trust entity -Unless otherwise directed by the trustor or the nature of the trust, real estat eacquired by the trust entity shall be acquired, hold, or conveyed under the ff circumstances: o Mortgaged to it in good faith by way of security for debts o Conveyed to it in satisfaction of debts previously contracted o Purchased at sales under judgments, decrees, mortgages, or trust deeds -These properties shall be conveyed within 5 years -However, it may continue to hold it beyond the period when: o It shall not exceed 50% of the combined capital accounts of the entity o The investment of a bank in another corporation engaged in real estate shall be considered as part of the total investment IV. Investment in non-trust funds b. Shall be governed by the GBL an other applicable laws V. Sanctions and Penalties-those who violate the pertinent provisions of the GBL shall be subject to sanctions and penalties VI. Exemption of Trust Assets from claims Those assets held by a trust entity shall not be subject to any claims other tho se of the parties interested in the trusts VI. Establishment of Branches Shall be in the place of business stated in the articles of incorporation Additional branches can be established with the approval of the MB The trust entity and its branches should be considered as one unit VII. Advertisement of Services In a dignified manner Ready and willing to give full disclosure of services being offered Conduct its dealings with transparency VIII. Money of Government Banks may not receive or hold as trustee any money from the government o Except: government-owned banks with respect to the ff: . Funds of LGUs for long term investments in securities and other evidences guaranteed by the national government. . Funds of the government which are authorized by special laws to be placed in trust Chapter 7 The Bangko Sentral ng Pilipinas I. Creation, Responsibilities and corporate Powers of the Banko Sentral A.Declared Policy of the state The State shall maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. In line with this policy, and considering its unique functions and responsibilities, the central monetary authority established under the NCBA, while being a government owned corporation, shall enjoy fiscal and administrative autonomy. (Section 1, NCBA) B. Creation of the bangko Sentral ng Pilipinas Section 2 & 4 of NCBA: SECTION 2 Creation of the Bangko Sentral. There is hereby established an independent central monetary authority, which shall be a body corporate known as the Bangko SEntral ng Pilipinas. 16 | P a g eThe capital of the Bangko Sentral shall be Fifty Billion Pesos, to be fully subscribed by the Government of the Republic, Ten Billion of which shall be fully paid for by the government upon effectivity of this act In such manner and form as the Government, through the Secretary of Finance and the Secretary of Budget and Management, may thereafter determine. SECTION 4 Place of Business. The Bangko SEntral shall have its principal place of business in Metro Manila, but may maintain branches, agencies and correspondents in such other places as the proper conduct of its business may require. Mandate by the Constitution: The Congress shall establish an independent central monetary authority, the members of whose governing board must be natural-born Filipino citizens, of known probity, integrity, and patriotism, the majority of whom shall come from the private sector. They shall also be subject to such other qualifications and disabilities as may be prescribed by law. The authority shall provide policy direction in the areas of money, banking, and credit. It shall have supervision over the operations of banks and exercise such regulatory powers as may be provided by law over the operations of finance companies and other institutions performing similar functions. Until the congress otherwise provides, the Central bank of the Philippines operating under existing laws, shall function as the central monetary authority. C. Responsibility and Primary Objectives of the bangko Sentral 1. Responsibility of BSP -provide policy directions in the areas of money, banking, and credit. 2. It shall have supervision over operations of banks. 3. It shall also exercise regulatory powers over the operations of finance companies and non-bank financial institutions performing quasi-banking functions, and institutions performing similar functions. 4. Primary objective of BSP maintain price stability conducive to a balanced and sustainable growth in the economy. 5. It shall also promote and maintain monetary stability and the convertibility of the peso. D. Corporate Powers of the Bngko Sentral 1. Adopt, alter and use a corporate seal 2. Enter into contracts 3. Lease or own real and personal property, and to dispose of the same 4. Sue and be sued 5.Perform all things necessary to carry out the purposes of the NCBA 6. Acquire and hold assets and incur liabilities in connection with its as authorized by the NCBA, or a s essential to the proper conduct of operations 7. Compromise, condone, or release any claim of or settled liability to Bangko Sentral , regardless of the amount involved, under such terms conditions as maybe prescribed by the monetary board. E. Power to Prosecuteoperation such the andBSP has no power to prosecute; it is a government corporation created principally to administer the monetary and banking System of the Philippines and not a prosecution authority like the fiscal s office. But BSP and its officials have the duty to cause the prosecution of those who violate the banking laws. BSP is an artificial person limited to its statutory powers. The closest it can get to prosecuting is its power to sue and be sued (civil cases only). Prosecution of violation of banking laws is not exclusive to BSP, anyone can denounce this to any prosecuting authority because said violations constitute a public offense and is a matter of public interest. F. Estoppel 17 | P a g eBSP is committed to maintain the stability of the country s foreign exchange reserve position. Underlying this commitment however is the government s strict and faithful adherence to basic principles of fairness and decency under the Bill of Rights. Hence BSP circulars/ memoranda must be implemented in a manner that would not only safeguard or harmonize them with government programs designed to uplift or promote the country s level of production and employment, but at the same time avoid irreparable or grave prejudice to participants of said program. Thus in case banks or banking institutions already faithfully complied with BASP s directives, BSP is stopped from enforcing circulars that would deny banks or banking institutions of their rights. II. Authority of the Bangko Sentral A. Supervisory Powers of the bangko Sentral Supervisory powers include the following: I. Issuance of rules of conduct or the establishment of standards of operation for uniform application to all institutions and functions covered. II. Conduct of examination to determine compliance with the laws and regulations if the circumstances so warrant and determined by the monetary board. III. Overseeing to ascertain that laws are complied with. IV. Regular investigation which shall not be oftener than once a year V. Inquiry into the solvency and liquidity of the institution VI. Enforcing prompt corrective action. B. Phase out of Bangko Sentral Powers Over Building Loan and Association Within 3 years form effectivity of GBl, the BSP shall phase out and transfer its supervising and regulatory powers over building and loan associations to the Home Insurance and Guarantee Corporation. C. Policy Direction; Ratios, Ceilings and Limitations BSP shall provide policy direction in the areas of Money, Banking and Credit Monetary Board may prescribe ratios, ceilings, and limitations or other forms of regulation on the different types of accounts and practices of banks and quasi-banks which shall conform to internationally accepted standards, including those of the Bank of International Settlements. Monetary Board may exempt particular categories of transactions from such ratios, ceilings and limitations, but not limited to exceptional cases or to enable a bank or quasi-bank under rehabilitation or during a merger or consolidation to continue business with safety to its creditors, depositors and the general public. III. The Monetary Board The powers and functions of the bangko Sentral may be exercised by the BAngko SEntral Monetary Board. A. CompositionComposed of 7 members appointed by the president of the Philippines for a term of 6 years. The members are: Governor o Chairman of the monetary board o A