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BANKING LAWS

CHAPTER I. GENERAL BANKINGLAW OF 2000 (RA 8791)I. General Concepts

A. DefinitionB. Nature of Business

II. Classification of BanksIII. Authority of the BSP over

Banks

A. Regulatory PowersB. Supervisory PowersC. Policy Direction

IV. Organization of BanksA. Conditions for OrganizationB. Ownership of BanksC. Directors and Officers

V. Operation of BanksA. Core BankingB. Operations of a KB and UBC. Prudential MeasuresD. Other FunctionsE. Prohibited Functions

F. Some Requirements for theOperation of BanksVI. Foreign Banks

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133133133134134134135137137139139142145

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CHAPTER II. THE NEW CENTRALBANK ACT (RA 7653)I. General ProvisionII. Organization of the BSP

A. Monetary BoardB. Governor/Deputy

GovernorIII. Operation of the BSP

A. Supervision and Examination

B. Handling of Banks in DistressC. Monetary AdministrationD. As Banker and Financial

Adviser of the GovernmentE. Other OperationsF. Prohibited Operations

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CHAPTER III. LAW ON SECRECY OF BANK DEPOSITS (RA 1405)I. PurposesII. CoverageIII. Prohibited ActsIV. ExceptionsV. Penalty

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CHAPTER IV. TRUTH IN LENDINGACT (RA 3765)I. PolicyII. Disclosure StatementIII. CoverageIV. Sanctions

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CHAPTER V. ANTI-MONEY LAUNDERING ACT (RA 9160 asamended by RA 9194)I. PoliciesII. CoverageIII. Obligations of Covered

InstitutionsA. Customer Identification

B. Record KeepingC. Reporting of Covered and

Suspicious TransactionsIV. Freeze OrderV. Forfeiture ProvisionsVI. Anti-Money Laundering

Council

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CHAPTER VI. FOREIGNCURRENCY DEPOSIT ACT (RA6426)I. ConfidentialityII. Privileges

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REVIEWER IN COMMERCIAL LAW Table of Contents


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Banking LawsFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE

Prof. Gwen Grecia-de VeraFACULTY EDITOR

ACADEMICS COMMITTEE

Samantha PoblacionD IRECTOR FOR ACADEMICS

EDITOR -IN-CHIEF

Rania JoyaDEPUTY DIRECTOR FOR ACADEMICS

LAYOUT HEAD

--------Kae Guerrero

PRINTING AND DISTRIBUTION

COMMERCIAL LAW

Krizelle PoblacionChristina Ortua

SUBJECT EDITORS

CORPORATION LAW

Rency CorrigeLEAD WRITER

Ben EvangelistaRaissa Villanueva

WRITERS

LECTURES

Edel CruzHEAD

Jason MendozaDEPUTY HEAD

Malds MenzonLOGISTICS , HR

--------Leo Zulueta

LOGO , C OVER AND TEMPLATE DESIGN

Chapter I. General Banking Lawof 2000 (RA 8791)

I. GENERAL CONCEPTSA. DEFINITIONB. NATURE OF BUSINESS

II. CLASSIFICATION OF BANKSIII. AUTHORITY OF THE BSP OVER BANKS

A. REGULATORY POWERSB. SUPERVISORY POWERSC. POLICY DIRECTION

IV. ORGANIZATION OF BANKSA. CONDITIONS FOR ORGANIZATIONB. OWNERSHIP OF BANKSC. DIRECTORS AND OFFICERS

V. OPERATION OF BANKSA. CORE BANKINGB. OPERATIONS OF A KB AND UB

C. PRUDENTIAL MEASURESD. OTHER FUNCTIONSE. PROHIBITED FUNCTIONSF. SOME REQUIREMENTS FOR THE

OPERATION OF BANKSVI. FOREIGN BANKS

Policy of the Law: To promote andmaintain a stable and efficient bankingand financial system that is globallycompetitive, dynamic and responsive tothe demands of a developing economy.(Sec. 2)

I. General Concepts

A. Definition

Banks shall refer to entities engaged inthe lending of funds obtained in the formof deposits. (Sec. 3.1)

As opposed to Quasi-banks:Quasi-banks (QB) refer to entities engagedin the borrowing of funds through theissuance, endorsement or assignment with

recourse or acceptance of depositsubstitutes for purposes of relending orpurchasing of receivables and otherobligations. (last paragraph of Sec. 4)

B. Nature of Business

Imbued with Public Interest: The banking industry is declared asindispensable to the national interest.(Sec. 22)

Fiduciary Nature of Banks Failure on the part of the bank to

satisfy the degree of diligencerequired of banks may warrant theaward of damages

Under Sec. 2, the degree of diligence is high standards of integrity and performance,however, SC decisions has notbeen uniform as to the type of diligence required

Highest degree of care (BPIvs. CA and Napiza 2000)

Higher than diligence of agood father of a family (CBTCvs. CA 2003)

Highest degree of care anddiligence (SamsungConstruction vs FEBTC 2004)

notwithstanding the amount of diligence required, a bank is notexpected to be infallible(Prudential Bank vs. CA 2000)

REVIEWER IN COMMERCIAL LAW Chapter I. General Banking Law of 2000


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Simex International vs. CA183 SCRA 360 (1990):

As a business affected with public interest andbecause of the nature of its functions, the bankis under obligation to treat the accounts of itsdeposits with meticulous care, always having inmind the fiduciary nature of their relationship.

II. Classification of Banks (Sec. 3.2)

Universal Banks . (UB) These are those that used to be calledexpanded commercial banks and whoseoperations are now primarily governed bythe GBL. They can exercise the powers of an investment house and invest in non-allied enterprises. They have the highestcapitalization requirement.

Commercial Banks. (KB) These are ordinary or regular commercial

banks, as distinguished from a universalbank. They have a lower capitalizationrequirement than a UB and cannotexercise the powers of an investmenthouse and invest in non-allied enterprises.

Thrift Banks. These are

a. savings and mortgage banks,b. stock savings and loanassociations, andc. private development banks

Cooperative Banks. These are banks organized primarily tomake financial and credit servicesavailable to cooperative banks.

Islamic Banks . These are banks whose business dealingsand activities are subject to the basicprinciples and rulings of Islamic Sharia,such as the Al Amanah Islamic InvestmentBank of the Philippines which was createdby RA 6848

Other classifications of banks as determined by the Monetary Board.

III. Authority of the BSP OverBanks

A. Supervision over operations andactivitiesa. Issuance of rules of conduct orstandards of operation for uniform

application to all institutions or functionscovered;b. Conduct of examination to determinecompliance with laws and regulations;c. Overseeing compliance with laws andregulations;d. Regular investigation (not oftener thanonce a year) to determine whether aninstitution is conducting its business onsafe or sound basis;

e. Inquiring into solvency and liquidity of the institutionf. Enforcing prompt corrective action. (Sec.4)

B. Examination by BSP-The BSB shall, when examining a bank,have the authority to examine anenterprise which is wholly or majority-owned or controlled bank (Sec. 7)

C. Authority over Quasi-Banks andTrust Entities

-BSP shall have supervision overoperations of and exercise regulatorypowers over quasi banks, trust entitiesand other financial institutions whichunder special laws are subject to BSPSupervision.

D. BSP Powers on Policy, Direction;Ratios, Ceilings and Limitations1. BSP shall provide policy direction in theareas of money, banking and credit-the MB may prescribe rations, ceilings,limitations, or other forms of regulation onthe different types of accounts andpractices of banks and quasi-banks-this should conform to internationallyaccepted standards2. MB may exempt particular categories of transactions from such ratios, ceilings andlimitations, but not limited to exceptionalcases, or to enable a bank or quasi-bankunder rehabilitation or during a merger orconsolidation, to continue in business withsafety to its creditors, depositors andgeneral public. (Sec. 5)

IV. Organization of Banks

A. Conditions for Organization

Conditions for organization:1. Entity must be a stock corporationand must only issue par value stocks;2. Its funds must be obtained fromthe public, (20 or more persons); and3. Minimum capital requirementsprescribed by the MB for each



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category of banks must be satisfied(Sec. 8, Sec. 9)

RULE: Prohibition on Treasury Stocks,unless:

1. Authorized by the MB2. The stock so purchased or acquiredshall within 6 months from the timethe of its purchase or acquisition, besold or disposed of at a public or

private sale. (Sec. 10)

Shares of the parent bank held by asubsidiary financial allied undertaking in aconsolidated statement of condition areconsidered treasury shares. (BSP CircularNo. 280 dated March 29, 2001, asamended)No BSP certificate of authority, no SECregistration of any bank (Sec. 14)

Requirements for issuance of certificate of authority:

1. All requirements of existing lawsand regulations have been compliedwith2. The public interest and economicconditions justify the authorization3. The amount of capital, thefinancing, organization, direction andadministration, as well as the integrityand responsibility of the organizersand administrators reasonably assurethe safety of deposits and the publicinterest (Sec. 14.1 to 14.3)

B. Ownership of Banks

Stockholdings restriction:a. Filipinos and domestic non-bankcorporation, individually, may own upto 40% of the voting stock of adomestic bankb. Foreign individuals and non-bankcorporations, aggregately, may own orcontrol up to 40% of the voting stockof a domestic bank. (Sec. 11; BSPCircular No. 256, dated August 15,

2000)

However, under Sec. 8 of RA 7721,Philippine corporations whose shares of stock are listed in the PSE or are of longstanding for at least 10 years shall havethe right to acquire, purchase or own up to60% of the voting stock of a domesticbank.

Grandfather rule:

The citizenship of the corporation which isa stockholder in a bank shall follow thecitizenship of the controlling stockholdersof the corporation, irrespective of theplace of incorporation. (Sec. 11)

Controlling stockholders mean individualsholding more than 50% of the voting stockof the corporate stockholder of the bank.(BSP Circular No. 256)

Full disclosure of stockholdings of family groups or related interests:Family group means individuals related toeach other within the fourth degree of consanguinity or affinity, legitimate orcommon-law (Sec. 12)Related interest means two or morecorporations owned or controlled by thesame family group or same group of persons. (Sec. 13)

Board of Directors: At least 5, and a

maximum of 15 members of the board of directors of bank, 2 of whom shall beindependent directors. (Sec. 15)

Independent Director: shall mean aperson other than an officer or employeeof the bank, its subsidiaries or affiliates orrelated interests. (Sec. 15)

In the case of a bank merger orconsolidation, the number of directorsshall not exceed 21. (Sec. 17)

C. Fit and Proper Rule To maintain the quality of bankmanagement and to afford betterprotection to depositors and the public ingeneral, the Monetary Board may

a. Prescribe, pass upon and reviewthe qualifications and disqualificationsof individuals elected or appointedbank directors or officersb. Disqualify, suspend or remove anybank director or officer who commitsor omits an act which render him unfitfor the position. (Sec. 16)

Prohibition on Public Officials asofficers of banks:RULE: No appointive or elective officialwhether full-time or part-time shall at thesame time serve as officer of any privatebank.

EXCEPTIONS:a. otherwise provided in the RuralBanks Act,



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b. in cases where such service isincident to financial assistanceprovided by the government or agovernment-owned or -controlledcorporation to the bankc. otherwise provided under existinglaws (Sec.19)

Responsibility of directors forcorporate governance:

The board of directors is primarilyresponsible for the corporate governanceof the bank/quasibank/trust entity. Toensure good governance of thebank/quasi-bank/trust entity, the board of directors should establish strategicobjectives, policies and procedures thatwill guide and direct the activities of thebank/quasi-bank/ trust entity and themeans to attain the same as well as themechanism for monitoring managementsperformance. (BSP Circular 283)

PCI Bank vs. CA, 2001As a general rule, a banking corporation isliable for the wrongful or tortuous acts anddeclarations of its officers or agents within thecourse and scope of their employment. A bankholding out its officers and agents as worthy of confidence will not be permitted to profit by thefrauds these officers or agents were enabled toperpetrate in the apparent course of theiremployment; nor will it be permitted to shirk itsresponsibility for such frauds, even though nobenefit may accrue to the bank therefrom.

When Monetary Board may regulatethe compensation and other benefitsof directors and officers:Only in exceptional cases and when thecircumstances warrant, such as but notlimited to:

1. when a bank is undercomptrollership or conservatorship2. when a bank is found by theMonetary Board to be conductingbusiness in an unsafe or unsoundmanner3. when a bank is found by theMonetary Board to be in anunsatisfactory financial condition. (Sec.18)

V. Operation of Banks

Banking Days and Hours:All banks including their branches andoffices shall transact business on allworking days (Mondays to Fridays, exceptholidays) for at least 6 hours a day. (Sec.21)

Banks or any of their branches or officesmay open for business on Saturdays,Sundays or holidays for at least 3 hours aday; Provided that banks which opt toopen on days other than working daysshall report to the BSP the additional daysduring which they or their branches oroffices shall transact business. (Sec. 21)

Bank Branches:UBs or KBs may open branches or otheroffices within or outside the Philippinesupon prior approval of the BSP. (Sec. 20)A bank and its branches and offices shallbe treated as one unit. (Sec. 20)

Strikes and Lockouts:Notwithstanding the provisions of any lawto the contrary, any strike or lockoutinvolving banks, if unsettled after 7calendar days shall be reported by theBSP to the Secretary of Labor who may

assume jurisdiction over the dispute ordecide it or certify the same to the NLRCfor compulsory arbitration. However, thePresident of the Philippines may at anytime intervene and assume jurisdictionover such labor dispute in order to settleor terminate the same. (Sec. 22)

A. Core Banking

1. Deposit Function

Only a UB or KB can accept demanddeposits

Exception: Banks other than a UB or KBwith prior approval of, and subject to suchconditions and rules as may be prescribedby the Monetary Board (Sec. 33)

Types of Deposits:1. Time Deposit - Interest ratestipulated depending on the number of days. During this period, the moneydeposited cannot be withdrawn. High

interest rates.2. Savings Deposit - Bank pays aninterest rate, but not as high as timedeposits.3. Demand Deposits/CurrentAccounts - No interest is paid by thebank because the depositor can takeout his funds any time. It is calleddemand deposit because the depositorcan withdraw the money he depositedon the very same day when he



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deposited it. (Villanueva, CommercialLaw Review, opinion )

Presumption of ownership of deposits:It is presumed that money deposited in abank account belongs to the person inwhose name the deposit account isopened.

BPI v. CA (1994)A bank is under no duty or obligation to makean application or set-off against the depositaccounts of a borrower. To apply the deposit tothe payment of a loan is a privilege, a right of set-off which the bank has the option toexercise, but not the obligation.

CA Agro-industrial Dev. Corp. v. CA (1983 ) The rent of safety deposit boxes is a specialkind of deposit and cannot be characterized asan ordinary contract of lease because the fulland absolute possession and control of thedeposit box is not given to the renters. Theprevailing rule is that the relation between thebank renting out and the renter is that of bailerand bailee the bailment being for hire andmutual benefit.

2. Loan Function

Know your customer rule:Before granting a loan or other creditaccommodation, a bank must ascertainthat the debtor is capable of fulfilling itscommitments to the bank. (Sec. 40)

The bank may demand from its creditapplicants a statement of their assets andliabilities and of their income andexpenditure and such information as maybe prescribed by law or by rules andregulations of MB to enable the bank toproperly evaluate the credit applicationwhich includes the corresponding financialstatements submitted for taxationpurposes to the BIR. (Sec. 40)

Credit enhancementIf the borrower is less than creditworthy,

third persons may enhance his credit byproviding guarantees and other securitydevices in favor of the bank. (Morales, ThePhilippine General Banking Law, opinion )

If there is materialmisrepresentation, the bank may:

a. Terminate any loan or other creditaccommodation granted on the basisof said statements; and

b. Shall have the right to demandimmediate repayment or liquidation of the obligation (Sec. 40)

Limit on Loans, CreditAccommodations and Guarantees:Real Estate Shall not exceed 75% of the

appraised value of therespective reas estate security,plus 60% of the appraisedvalue of the insuredimprovements, and such loansmay be made to the owner of the real estate or to hisassigneesEXC: the Monetary Boardotherwise prescribes (Sec. 37)

Security of chattels andintagibleproperties(patents,trademarks,tade names,and

copyrights)

Shall not exceed 75% of theappraised value of the security,and such loans and other creditaccommodations may be madeto the title-holder of thechattels and intangibleproperties or his assigneesEXC: the Monetary Board

otherwise prescribes (Sec. 38)

Grant of Loans:a. Only in amounts and for theperiods of time essential for theeffective completion of the operationsto be financed (Sec. 39)b. Consistent with safe and soundbanking practices (Sec. 39)

Purpose of Loans:Purpose must be stated in the applicationand in the contract between the bank and

the borrower. (Sec. 39)Effect of lack of banks priorapproval:

The bank shall have the right to terminatethe loan or other credit accommodationand demand immediate repayment of theobligation. (Sec. 39)

Amortization on Loans and OtherCredit Accommodations:a. In case of loans and other credit

accommodations with maturities of more than 5 years , provisions must be

made for periodic amortizationpayments, but such payments must bemade at least annually:

Provided, however, That when theborrowed funds are to be used forpurposes which do not initially producerevenues adequate for regularamortization payments therefrom, thebank may permit the initialamortization payment to be deferreduntil such time as said revenues aresufficient for such purpose, but in no



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case shall the initial amortization datebe later than 5 years from the date onwhich the loan or other creditaccommodation is granted.

b. In case of loans and other credit accommodations to microfinancesectors, the schedule of loanamortization shall take intoconsideration the projected cash flowof the borrower and adopt this into the

terms and conditions formulated bybanks.(Sec. 44)

Prepayment of Loans by Borrower:A borrower may prepay the unpaidbalance of any bank loan and other creditaccommodation:

a. At any time prior to the agreedmaturity dateb. In whole or in partc. Subject to such reasonable termsand conditions as may be agreed uponbetween the bank and its borrower.

(Sec. 45)Development Assistance Incentives:

The BSP shall provide incentives to bankswhich, without government guarantee,extend loans to finance educationalinstitutions, cooperatives, hospitals andother medical services, socialized or lowcost housing, local government units andother activities with social content. (Sec.46)

B. Operations of a KB and UB

KB UBPowers a. gen. powersincident tocorporations

b. all suchpowers asmay benecessary tocarry on thebusiness of commercialbanking(Sec. 29)

a. gen. powersincident tocorporations

b. all suchpowers asmay benecessary tocarry on thebusiness of commercialbanking

c. powers of aninvestmenthouse

d. power toinvest innon-alliedenterprises(Sec. 23)

Equityinvestments

alliedenterprises financial ornon-financial(Sec. 30)

Allied and non-alliedenterprises financial ornon-financial(Sec. 24)

Necessary powers of a KB:a. Accepting draftsb. Issuing letters of creditc. Discounting and negotiatingpromissory notes, drafts, bills of exchange, and other evidence of debtd. Accepting or creating demanddepositse. Receiving other types of depositsand deposit substitutesf. Buying and selling foreignexchange and gold or silver bulliong. Acquiring marketable bonds andother debt securitiesh. Extending credit

All are subject to such rules as theMonetary Board may promulgate. (Sec.29)

Equity investments of KB:1. The total investment in equities of allied enterprises shall not exceed 35%of the net worth of the bank2. The equity investment in any oneenterprise shall not exceed 25% of thenet worth of the bank

Equity investments of a KB infinancial allied enterprises:

1. A KB may own up to 100% of theequity of a thrift bank or a rural bank2. For other financial alliedenterprises, including another bank,such investment shall remain aminority holding in that enterprise.(Sec. 31)

Equity investments of a KB in non-financial allied enterprises:A KB may own up to 100% of the equity ina non-financial allied enterprise. (Sec. 32)

Equity investments of UB:1. The total investment in equities of allied and non-allied enterprises shallnot exceed 50% of the net worth of thebank2. The equity investment in any oneenterprise, whether allied or non-allied, shall not exceed 25% of the networth of the bank

EXCEPTTION: the Monetary Boardotherwise prescribes (Sec. 30)Equity investments of a UB infinancial allied enterprises:

1. A UB may own up to 100% of theequity of a thrift bank, a rural bank, ora financial allied enterprise.



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2. A publicly-listed UB or KB may ownup to 100% of the voting stock of onlyone other UB or KB (S EC. 25)

Equity investments of a UB in non-financial allied enterprises:A UB may own up to 100% of the equity

in a non-financial allied enterprise. (Sec.26)Equity investments of a UB in non-

allied enterprises: The equity investment of a UB, or

of its wholly or majority-ownedsubsidiaries, in a single non-alliedenterprise shall not exceed 35% of thetotal equity in that enterprise nor shallit exceed 35% of the voting stock inthat enterprise. (Sec. 27)

Equity investments in quasi-banks:40% equity investment for both UB

and KB (Sec. 28)

UB KB Allied Enterprises-Total equity investment

-investment in 1enterprise

-max 50%of networth-max 25%of networth(Sec.24)

-max 35%of networth-max 25%of networth(Sec. 30)

Financial Allied- Thrift/rural banks

-other financial allied

-publicly listed KB/UB

-100%equity-100%equity-100%votingstock of only 1otherKB/UB(Sec. 25)

-100%equity-minorityholding(Sec. 31)

Quasi-Banks May be limited by MB to40% to promotecompetitive conditions infinancial markets(Sec.28)

NonFinancial Allied 100%equity(Sec. 26)

100%equity(Sec.32)

Non-Allied Enterprises Max 35%of totalequity in asingleenterprise,max 35%of votingstock inthatenterprise(Sec. 27)

Notallowed toinvest innon-alliedenterprise

C. Prudential Measures

1. Capital Adequacy

A bank must conform to the risk-basedcapital ratio prescribed by the MBEXCEPT:a. In case of a bank merger or

consolidation,b. When a bank is under rehabilitation

under a program approved by the BSP(Sec. 34)

c. The MB may alter or suspendcompliance with such ratio whenevernecessary for a maximum period of 1year

Risk-based capital ratio: The minimum ratio which the net worth of a bank must bear to its total risk assetswhich may include contingent accounts[i.e. net worth : total risk assets] (Sec. 34)

Purpose:A bank must not be allowed to expand the

volume of its loans and investments in amanner that is disproportionate to its networth. (Morales, The Philippine GeneralBanking Law, opinion )

Effect of non-compliance:1. The MB may limit or prohibit thedistribution of net profits by such bankand may require that part or all of thenet profits be used to increase thecapital accounts of the bank until theminimum requirement has been met.2. The MB may restrict or prohibit the

acquisition of major assets and themaking of new investments by thebank, with the exception of purchasesof readily marketable evidences of indebtedness of the RP and the BSPand any other evidences of indebtedness or obligations theservicing and repayment of which arefully guaranteed by the RP, until theminimum required capital ratio hasbeen restored. (Sec. 33)

2. Single Borrowers Limit The total loans, credit accommodationsand guarantees that may be extended bya bank to any person, partnership,association, or corporation or other entityshall at no time exceed 20% of the networth of such bank. (Sec. 35.1)EXCEPTIONS:

1. The Monetary Board otherwiseprescribes for reasons of nationalinterest (Sec. 35.1)



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2. Wholesale lending activities of government banks to particiaptinginstitutions for relending to end-userborrowers: separate limit of 35% networth. (BSP Circular No. 425 datedMach 25, 2004)

Increase of limit: The Monetary Board may increase thelimit prescribed by an additional 10% of

the net worth, when:a. The additional liabilities of anyborrower are adequately secured bytrust receipts, shipping documents,warehouse receipts or other similardocuments transferring or securingtitleb. Covering readily marketable, non-perishable goodsc. Which must be fully covered byinsurance (Sec. 35.2)

Purpose:

To prevent the bank from makingexcessive loans and other creditaccommodations to a single borrower orcorporate group, including guarantees forthe account of such borrower or group.

Tha bank is prohibited from placingmany eggs in the basket of one client. [It]is a damage-control mechanism [and] adevice for risk amelioration. (Morales, ThePhilippine General Banking Law, opinion )

Basis for determining compliance: The basis for determining compliance withthe SBL is the total credit commitment of the bank to the borrower. (Sec. 35.1)

Inclusions in the ceiling:a. the direct liability of the maker oracceptor of paper discounted with orsold to such bank and the liability of ageneral indorser, drawer or guarantorwho obtains a loan or other creditaccommodation from or discountspaper with or sells papers to suchbank;b. in the case of an individual whoowns or controls a majority interest ina corporation, partnership, associationor any other entity, the liabilities of said entities to such bank;c. in the case of a corporation, allliabilities to such bank of allsubsidiaries in which such corporationowns or controls a majority interest;andd. in the case of a partnership,association or other entity, the

liabilities of the members thereof tosuch bank. (35.3)

Guidelines on the wholesale lendingof government banks:

a. it shall apply only to loans grantedby participating financial institutions(PFIs) on a wholesale bases for onlending to end-user borrowersb. it shall apply only to loan programs

funded by multilateral, international, orlocal development agencies,organizations, or institutions,especially designed for wholesalelending activities of government banksc. the end-user borrowers of the PFIsshall be subject to the 25% SBL, notthe increased ceiling of 35%; andd. government banks shall observeappropriate criteria for accrediting PFIsand for the grant/renewal of creditlines to accredited PFIs BSP CircularNo. 425 dated Mach 25, 2004)

Exclusions from the ceiling:Loans and other credit accommodations

a. secured by obligations of the BSPor of the Philippine Governmentb. fully guaranteed by thegovernment as to the payment of principal and interestc. covered by assignment of depositsmaintained in the lending bank andheld in the Philippinesd. under letters of credits to theextent covered by margin depositse. specified by the Monetary Board asnon-risk items (Sec. 35.5)

Combination of liabilities: The MB may prescribe the combination of the liabilities of subsidiary corporations ormembers of the partnership, association,entity or such individual under certaincircumstances, including but not limited toany of the following situations:a. the parent corporation, partnership,

association, entity or individualguarantees the repayment of theliabilities;

b. the liabilities were incurred for theaccommodation of the parentcorporation or another subsidiary or of the partnership or association or entityor such individual; or

c. the subsidiaries though separateentities operate merely asdepartments or divisions of a singleentity. (35.4)



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Loans and other creditaccommodations, deposits maintainedwith, and usual guaranteed by a bankto any other bank or non-bank entity,whether locally or abroad, shall besubject to the limits as hereinprescribed. (35.6)

3. DOSRI (Directors, Officers,

Stockholders and their RelatedInterests)

No director or officer of any banka. shall, directly or indirectly, forhimself or as the representative oragent of others, borrow from suchbank norb. shall he become a guarantor,endorser or surety for loans from suchbank to others, or in any manner be anobligor or incur any contractual liabilityto the bank

EXCEPTIONS:1. valid insider lending (Sec. 36)2. loans, credit accommodations andguarantees extended by a cooperativebank to its cooperative shareholders(Sec. 36)

Requirements for valid insiderlending:a. in the regular course of businessb. upon terms not less favorable to the

bank than those offered to others (Sec.36)

c. there is a written approval of themajority of all the directors of thebank, excluding the directorconcerned.(Except: granted to officers under afringe benefit plan approved by theBSP (Sec. 36))

d. the required approval shall be enteredupon the record of the bank and acopy of such entry shall be transmittedforthwith to the appropriatesupervising and examining departmentof the BSP (Sec. 36)

e. limited to an amount equivalent to theDOSRI borrowers respectiveunencumbered deposits and bookvalue of their paid-in capitalcontribution in the bankEXC:

1. non-risk items2. loans in the form of fringe

benefits (Sec. 36)

A DOSRI borrower is required towaive the secrecy of his deposits of whatever nature in all banks in thePhilippines. (Sec. 26, New Central BankAct)

Purpose: To prevent the bank from becoming acaptive source of finance for DOSRI.(Morales, The Philippine General Banking

Law, opinion )

4. Loan-Loss Provisioning

The following are subject to regulation bythe Monetary Board

a. the amount of reserves for baddebts or doubtful accounts or othercontingencies.b. the writing off of loans, other creditaccommodations, advances and otherassets (Sec. 49)

Purpose:

For effective banking supervision. There isa problem of mismatch when a loanbecomes non-performing. The bank ispaying interest on the money it borrowedfrom the depositors or other placers of funds, but is not recouping that interestfrom the loan it made. Eventually, thebank may have to write off loan lossesagainst profits. To cushion thiseventuality, the bank is required to setaside reserved for bad debts and otherdoubtful accounts or contingencies.(Morales, The Philippine General Banking

Law, opinion )

5. Reserves

Purposes:a. To control the volume of moneycreated by the credit operations of thebanking system, the BSP requires allbanks to maintain reserves againsttheir deposit and deposit-substituteliabilities.b. As a ready source of funds that willrespond to unusually large number of

withdrawals or preterminations of deposits or deposit-substitutes, takingin the shape of a bank run. (Morales,

The Philippine General Banking Law,opinion )

Two types of reserves:a. Statutory legal reserveNow at 11% (BSP Circular No. 491dated July 12, 2005)



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For deposit-substitutes: 2% (BSPCircular No. 444 dated August 18,2004)For foreign currency deposit units:100% (BSP Circular No. 1389 datedApril 13, 1993, as amended); 30% of this cover must be in the form of liquidassets (BSP Circular-Letter dated June6, 1997, as cited in Morales)b. Liquidity reserve

Now deposits should be placed in theReserve Deposit Account of the BSP forat least 3 months (BSP Circular No.539 dated August 9, 2006)

The BSP shall not pay interest on thereserves maintained with it unless theMonetary Board decides otherwise aswarranted by circumstances. (Sec. 94,New Central Bank Act)

6. PDIC Insurance

Banks are required to insure their depositliabilities with the PDIC.

Partial Insurance:Each depositor is a beneficiary of theinsurance for a maximum amount of P500,000, or its foreign currencyequivalent in the case of an FCDU deposit.(RA 9576, 2009)

Note: PDIC only insures deposit liabilitiesof a bank or banking institution which is

engaged in the business of receivingdeposits, or in the business of receivingdeposits (Sec.5, RA 3591, as amended)

Purpose:Full insurance might encourage riskybanking activities = to limit moral hazard

D. Other Functions

1. Ownership of Real Propertyand Foreclosure of Real Estate

MortgageA bank may acquire real estate as shall benecessary for its own use in the conduct of its business

Conditions:a. The total investment in such realestate and improvements thereof including bank equipment shall not

exceed 50% of combined capitalaccountsb. The equity investment of a bank inanother corporation engaged primarilyin real estate shall be considered aspart of the banks total investment inreal estate, unless otherwise providedby the Monetary Board (Sec. 51)

Exception:

1. Such as shall be mortgaged to it ingood faith by way of security for debts;2. Such as shall be conveyed to it insatisfaction of debts previouslycontracted in the course of itsdealings; or3. Such as it shall purchase at salesunder judgments, decrees, mortgages,or trust deeds held by it and such as itshall purchase to secure debts due it.(Sec. 52)

Any real property acquired or held under

these circumstances shall be disposed of by the bank within a period of 5 years oras may be prescribed by the MB. (Sec. 52)Foreclosure of REM:A bank may foreclose, whether judiciallyor extrajudicially, any mortgage on realestate which is security for any loan orother credit accommodation granted (Sec.47)

Right of redemption of mortgagor: The mortgagor or debtor whose realproperty has been sold for the full orpartial payment of his obligation shallhave the right to redeem the property:

within 1 year after the sale of the realestateby paying the amount due under themortgage deed, with interest thereonat the rate specified in the mortgage,and all the costs and expensesincurred by the bank or institutionfrom the sale and custody of saidproperty less the income derivedtherefrom. (Sec. 47)

Right of redemption of mortgagorwho is a juridical person in anextrajudicial foreclosure:Redeem the property not after, theregistration of the certificate of foreclosure sale with the applicableRegister of Deeds which in no case shallbe more than 3 months after foreclosure,whichever is earlier. (Sec. 47)

Owners of property that has been sold in aforeclosure sale prior to the effectivity of



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the GBL shall retain their redemptionrights until their expiration. (Sec. 47)

The purchaser shall have the right to enterupon and take possession of such propertyimmediately after the date of theconfirmation of the auction sale andadminister the same in accordance withlaw. (Sec. 47)

Any petition in court to enjoin orrestrain the conduct of foreclosureproceedings shall be given due courseonly upon the filing by the petitioner of a bond in an amount fixed by the courtconditioned that he will pay all thedamages which the bank may sufferby the enjoining or the restraint of theforeclosure proceeding.

2. Trust Operations

Only a trust entity shall act as a trustee oradminister any trust or hold property intrust or on deposit for the use, benefit, oron behoof of others. (Sec. 79)Trust Entity:A stock corporation or a person dulyauthorized by the Monetary Board toengage in trust business. (Sec. 79)

Prudent Man Rule:A trust entity shall administer the funds orproperty under its custody with thediligence that a prudent man would

exercise in the conduct of an enteprise of a like character and with similar aims.(Sec. 80)

Rule on Self-Dealing:No trust entity shall engage in self-dealingexcept when:

a. The transaction is specificallyauthorized by the trustor, andb. The relationship of the trustee andthe other party involved is fullydisclosed to the trustor or beneficiaryof the trust prior to the transaction

(Sec. 80)Self Dealing:

Purchase or acquire property fromSell, transfer, assign, or lend money orproperty toPurchase debt instruments of,

any of the departments, directors, officers,stockholders, or employees of the trustentity, relatives within the 1 st degree of consanguinity or affinity, or the related

interests, of such directors, officers andstockholders. (Sec. 80)

Trust Business Requirements:1. Registration of AOI and By-Laws of a Trust Entity:

The SEC shall not register the AOI and By-Laws or any amendment thereto, of anytrust entity, unless accompanied by acertificate of authority issued by the BSP.

(Sec. 81)

2. Minimum Capitalization: (Sec.82)

Min. paid-in capital:a. if non-bank: combined capitalaccounts of not less thanP250,000,000 (Subsec. 440Q.1 of theManual of Regulations for Non-BankFinancial Institutions)b. if domestic bank: combined capitalaccounts must not be less than themin. capital prescribed by the

Monetary Board for such bank but inno case be less than P250,000,000(Subsec. 404.1.a of the Manual of Regulations for Banks)c. if stand-alone trust company (not affiliated to a bank): P300,000(Morales, The Philippine GeneralBanking Law)

Combined capital accounts: the total of capital stock, retained earnings and profitand loss summary, net of (a) suchunbooked valuation reserves and othercapital adjustments as may be required by

the BSP, and (b) total outstandingunsecured credit accommodations, bothdirect and indirect, to DOSRI

Powers of a Trust Entity:a. Trust Business any activityresulting from trusteeship involvingthe appointment of a trustee by atrustor for the administration, holding,management of funds and/orproperties of the trustor by the trusteefor the use, benefit or advantage of the trustor or of beneficiaries

b. Other fiduciary business anyactivity of a licensed trust bankresulting from a contract or agreementwhereby the bank binds itself to renderservices or to act in a representativecapacity such as in agency,guardianship, administratorship of wills, properties and estates,executorship, receivership, and othersimilar services which do not create orresult in a trusteeship.



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c. Investment managementactivity any activity resulting from acontract or agreement primarily forfinancial return whereby the bank (theinvestment manager) binds itself tohandle or manage investible funds orany investment portfolio in arepresentative capacity as financial ormanaging agent, adviser, consultant oradministrator of financial or

investment management, advisory,consultancy or any similararrangement which does not create orresult in a trusteeship. (Morales, ThePhilippine General Banking Law,opinion )

Deposit requirement:Before transacting trust business, everytrust entity shall deposit with the BSP, assecurity for the faithful performance of itstrust duties, cash or securities

cash or securities approved by the

Monetary Boardin an amount equal to or not less thanP500,000 or such higher amount asmay be fixed by the Monetary Board(Sec. 84)

A trust entity so long as it shall continueto be solvent and comply with laws orregulations shall have the right:a. to collect the interest earned on such

securities deposited with the BSPb. to exchange the securities for others,

from time to time, with the approval of

the BSP (Sec. 84)

If the trust entity fails to complywith any law or regulation, the BSPshall retain such interest on thesecurities deposited with it for thebenefit of rightful claimants. (Sec. 84)

All claims rising out of the trust businessof a trust entity shall have priority over allother claims as regards the deposit. (Sec.84)

Bond requirement:No bond or other security shall be requiredby the court from a trust entry for thefaithful performance of its duties as court-appointed trustee, executor,administrator, guardian, receiver, ordepositary.

However, the court may, upon properapplication with it showing special causetherefore, require the trust entity to post a

bond or other security for the protection of funds or property confided to such entity.(Sec. 86)

Separation of Trust Business fromGeneral Business:

The following must be kept separate anddistinct:

a. the trust business and all funds,properties or securities received by

any trust entity as executor,administrator, guardian, trustee,receiver, or depositary from thegeneral business including all otherfunds, properties, and assets of suchtrust entityb. the accounts of all such funds,properties, or securities from theaccounts of the general business of the trust entity (Sec. 87)

The separation of assets is warrantedbecause the trust department is not the

beneficial owner of the assets held intrust. (Morales, The Philippine GeneralBanking Law, opinion )

Investments of a Trust Entity Limitations:

The lending and investment of funds andother assets acquired by a trust entity asexecutor, administrator, guardian, trustee,receiver or depositary of the estate of anyminor or other incompetent person shallbe limited to loans or investments as maybe prescribed by law, the Monetary Boardor any court of competent jurisdiction,EXCEPT :Otherwise directed by the instrumentcreating the trust (Sec. 88)

Investments of a Trust Entity RealEstate Acquisition:Governed by Sec. 52. (Sec. 89) mayacquire real estate which are:

1. mortgage to in good faith by way of security for debts2. conveyed to it in satisfaction of debts previously contracted in thecourse of its dealings3. purchased at sales under

judgments, decrees, mortgages, ortrust deeds held by it and purchased tosecure debts due to it

But such real property shall be disposed of within 5 years

Investments of a Trust Entity Investment of Non-Trust Funds:

The investment of funds other than trustfunds of a trust entity which is a bank,



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financing company or an investmenthouse shall be governed by the relevantprovisions of the GBL and other applicablelaws. (Sec. 90)

Sanctions and Penalties:A trust entity or any of its officers anddirectors found to have willfully violatedany pertinent provisions of the GBL shallbe subject to the sanction and penalties

provided under Sec. 66 of the GBL andSec. 36 and 37 of the New Central BankAct. (Sec.91)

under the GBL: suspension for theofficers and directors and dissolutionfor the corporation

under the NCBA: fines of P50,000to P200,000, or imprisonment of 2 10years, or both; and administrativesanctions, which include fines,suspension of certain privileges,revocation of license, etc.

Exemption of Trust Assets fromClaims:No assets held by a trust entity in itscapacity as trustee shall be subject to anyclaims other than those of the partiesinterested in the specific trust. (Sec. 92)

3. Other Banking Services

Other Banking Services1. Receive in custody funds,documents and valuable objects;

2. Act as financial agent and buy andsell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities;3. Make collections and payments forthe account of others and performsuch other services for their customersas are not incompatible with bankingbusiness;4. Upon prior approval of MB, act asmanaging agent, adviser, consultant oradministrator of investment

management/advisory/consultancyaccounts; and5. Rent out safety deposit boxes.(Sec. 53)

E. Prohibited Functions

Prohibition to act as insurer:A bank shall not directly engage ininsurance business as the insurer. (Sec.54)

NOTE: But a bank may be said to beallowed to act as a guarantor, as may beimplied from the following provisions of the General Banking Law:

a. Guarantees are now included in thecomputation of SBL

b. No restatement of Sec.74 of GBAprohibiting the issuance of guarantees

c.The recognition of the validity of guarantees by a bank to anotherbank.

(Morales, The Philippine General BankingLaw, opinion )

Prohibited Transactions of Directors,Officers, Employees, or Agents of AnyBank:

1. Making false entries in any bankreport or statement or participating inany fraudulent transaction, therebyaffecting the financial interest of, or

causing damage to, the bank or anyperson;2. Without order of a court of competent jurisdiction, disclosing toany unauthorized person anyinformation relative to the funds orproperties in the custody of the bankbelonging to private individuals,corporations, or any other entity:Provided, That with respect to bankdeposits, the provisions of existinglaws shall prevail;3. Accepting gifts, fees orcommissions or any other form of remuneration in connection with theapproval of a loan or other creditaccommodation from said bank;4. Overvaluing or aiding theovervaluing of any security for thepurpose of influencing in any way theactions of the bank or any bank; or5. Outsourcing inherent bankingfunctions. (SubSec. 55.1)

Prohibited transactions of borrowersof bank

1. Fraudulently overvaluing propertyoffered as security for a loan or othercredit accommodation from the bank;2. Furnishing false or misrepresentingor suppressing material facts for thepurpose of obtaining, renewing, orincreasing a loan or other creditaccommodation or extending theperiod thereof;3. Attempting to defraud the saidbank in the event of a court action to



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recover a loan or other creditaccommodation; or4. Offering any director, officer,employee or agent of a bank any gift,fee, commission, or any other form of compensation in order to influencesuch persons into approving a loan orother credit accommodationapplication.(SubSec. 55.2)

Prohibition on conduct of business inan unsafe or unsound manner:A bank must not conduct business in anunsafe or unsound manner. (Sec. 56)EFFECT OF VIOLATION:

The MB may, without prejudice to theadministrative sanctions provided in Sec.37 of the NCBA,

a. take action under Sec. 30 of thesame Actb. and/or immediately exclude theerring bank from clearing, the

provisions of law to the contrarynotwithstanding. (Sec. 56)

Prohibition on Dividend Declaration:No bank or QB shall declare dividends, if at the time of declaration:

1. Its clearing account with the BSP isoverdrawn; or2. It is deficient in the requiredliquidity floor for government depositsfor 5 or more consecutive days; or3. It does not comply with theliquidity standards/ratios prescribed bythe BSP for purposes of determiningfunds available for dividenddeclaration; or4. It has committed a major violationas may be determined by the BSP.(Sec. 57)

F. Some Requirements for the

Operation of BanksIndependent Auditor:

The MB may require a bank, QB or trustentity to engage the services of anindependent auditor to be chosen by thebank, QB or trust entity concerned from alist of CPAs acceptable to the MB.

The MB may also direct the board of directors of a bank, QB, trusty entityand/or the individual members thereof, to

conduct, either personally or by acommittee created by the board, anannual balance sheet audit of the bank,QB or trust entity to review the internalaudit and control system of the bank, QBor trust entity and to submit a report of such audit. (Sec. 58)

Financial Statements:Every bank, QB or trust entity shall submit

to the appropriate supervising andexamining department of the BSP financialstatements in such form and frequency asmay be prescribed by the BSP. (Sec. 60)

Publication of Capital Stock:A bank, QB or trust entity incorporatedunder the laws of the Phils. shall notpublish the amount of its authorized orsubscribed capital stock without indicatingat the same time and with equalprominence, the amount of its capitalactually paid up. (Sec. 62)

Electronic Transactions: The BSP shall have full authority toregulate the use of electronic devices,such as computers, and processes forrecording, storing and transmittinginformation or data in connection with theoperations of a bank, QB or trust entity,including the delivery of services andproducts to customers by such entity.(Sec. 59)

Advertisement or BusinessRepresentation:No person, association, or corporationunless duly authorized to engage in thebusiness of a bank, quasi-bank, trustentity, or savings and loan associationshall advertise or hold itself out as beingengaged in the business of such bank,quasi-bank, trust entity, or association, oruse in connection with its business title,the word or words bank, banking,banker, quasi-bank, quasi-banking,quasi-banker, savings and loanassociation, trust corporation, trustcompany, or words of similar import ortransact in any manner the business of any such bank, corporation or association.(Sec. 64)

Penalties for Violation:Unless otherwise provided, the violation of any of the provisions of this Act shall besubject to Secs 34, 35, 36 and 37 of theNCBA. If the offender is a director orofficer of a bank, quasi-bank or trustentity, the MB may also suspend or



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remove such director or officer. If theviolation is committed by a corporation,such corporation may be dissolved by quowarranto proceedings instituted by theSol.Gen.. (Sec. 66)

Settlement of Disputes: The provisions of any law to the contrarynotwithstanding, the BSP shall beconsulted by other government agencies

or instrumentalities in actions orproceedings initiated by or brought beforethem involving controversies in banks,QBs or trust entities arising out of andinvolving relations between and amongtheir directors, officers or stockholders, aswell as disputes between any or all of them and the bank, QBs or trust entity of which they are directors, officers orstockholders. (Sec. 63)

Conservatorship: The grounds and procedure for placing abank and quasi-bank underconservatorship as well as, the powersand duties of the conservator appointedfor the bank shall be governed by theprovisions of the New Central Bank Act.(Sec. 67)

Voluntary Liquidation:In case of voluntary liquidation of anybank organized under the laws of thePhilippines, or of any branch or office inthe Philippines of a foreign bank, writtennotice of such liquidation shall be sent tothe Monetary Board before such

liquidation is undertaken (Sec. 68)Receivership and InvoluntaryLiquidation:

The grounds and procedures for placing abank and quasi-bank under receivership orliquidation, as well as the powers andduties of the receiver or liquidatorappointed for the bank shall be governedby the New Central Bank Act. Provided,that the petitioner or plaintiff files with theclerk or judge of the court in which theaction is pending a bond, executed infavor of the BSP, in an amount to be fixedby the court. (Sec. 69)

VI.Foreign Banks

Transacting Business in thePhilippines - Ways:

1. through the establishment of localbranches2. through the conduct of offshorebanking

3. through the acquisition of votingstock in a domestic bank

If there are more than 1 local branches, allsuch branches shall be treated as 1 unitfor the purpose of the GBL and allreferences to the Philippine branches of foreign banks shall be held to refer to suchunits (Sec. 74)

The head office of such local branchesshall fully guarantee the prompt paymentof all liabilities of its Philippine branch inorder to provide effective protection of theinterests of the depositors and othercreditors of the local branches. (Sec. 75)

Residents and citizens of the Philippineswho are creditors of the local branch shallhave preferential rights to the assets of such branch in accordance with existinglaws. (Sec. 75)

The MB shall adopt measures as may benecessary to ensure that at all times thecontrol of 70% of the resources or assetsof the entire banking system is held bybanks which are at least majority-ownedby Filipinos. (Sec. 73)

Any right, privilege or incentivegranted to a foreign bank shall beequally enjoyed by and extendedunder the same conditions to banksorganized under the Philippine laws.(Sec. 73)

Summons and Legal Process:

Service may be made upon:a. the Philippine agent or head of anyforeign bank designated to accept suchserviceb. the Philippine agent or headauthorized by the bank to accept suchservicec. the BSP Deputy Governor In-Chargeof the supervising and examiningdepartments

Laws Applicable:In all matters not specifically covered byspecial provisions applicable only to a

foreign bank or its branches and otheroffices in the Philippines any foreign banklicensed to do business in the Philippinesshall be bound by the provisions of theGBL, all other laws, rules and regulationsapplicable to banks organized under thelaws of the Philippines of the same class,except those that provide for the creation,formation, organization or dissolution of corporations or for the fixing of therelations, liabilities, responsibilities, or



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duties of stockholders, members, directorsor officers of corporations to each other orto the corporation. (Sec. 77)

Revocation of License of a ForeignBank:

The Monetary Board may revoke thelicense to transact business in thePhilippines of any foreign bank, if it findsthat the foreign bank

a. is insolventb. is in imminent danger of beinginsolventc. if it continues to do business, willinvolve probable loss to thosetransacting business in the Philippines.(Sec. 78)

After the revocation of its license,a. It shall be unlawful for any suchforeign banks to transact business in thePhilippines unless its license is renewedor reissuedb. The BSP shall take the necessary

action to protect the creditors of suchforeign bank and the public (Sec. 78)



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Chapter II. The New CentralBank Act (RA 7653)

I. CHANGES BROUGHT BY THE NEWCENTRAL BANK ACT

II. GENERAL PROVISIONIII. ORGANIZATION OF THE BSP

A. MONETARY BOARDB. GOVERNOR/DEPUTY

GOVERNORIV. OPERATION OF THE BSP

A. SUPERVISIONANDEXAMINATION

B. HANDLING OFBANKS INDISTRESS

C. MONETARYADMINISTRATION

D. AS BANKER ANDFINANCIALADVISER OF THEGOVERNMENT

E. OTHEROPERATIONS

F. PROHIBITEDOPERATIONS

I. Changes Brought by the NewCentral Bank Act

Salient features1. Assurance of BSP independence byproviding for the majority of themembers of the Monetary Board tocome from the private sector (Sec. 6)2. The BSP may now concentrate onmonetary policy, and will shed itself of

fiscal responsibilities which in the past,had distacted it from its primaryfunction (Sec. 3, 129, 130)3. Provides safeguards to ensure thatunlike the old Central Bank whichsustained huge losses, the BSP wouldhave a positive net income position bythe following provisions:

a. Capitalization of P50B of whichP10B will be paid upon effectivity of the Act (Sec.2)b.Maintenance of positive net foreign

asset position (Sec.71)c.charging interests on all loans andadvances to banks (Sec. 85)d. authority to collect interests onloans and advances to closedfinancial institutions; ande. BSP cant acquire any shares inbanking enterprise, in developmentbanking and financing (Sec. 128)

4.MB will alsoII. General Provision

BSP Nature:A. A central monetary authorityB. An independent and accountablebodyC. A government-owned corporationbut enjoys fiscal and administrativeautonomy. (Sec. 1 and Sec. 2)

BSP Objectives:

A. To maintain price stabilityconducive to a balanced andsustainable growth of the economy(primary objective)B. To promote and maintain monetarystability and the convertibility of thepeso (Sec. 3)

BSP Responsibilities:A. To provide policy directions in theareas of money, banking, and creditB. To supervise operations of banks(Sec. 3)

All powers, duties and functionsvested by law int eh Central Bank of the Philippines not inconsistent withthe NCBA shall be deemed transferredto the BSP. All references to theCentral Bank of the Philippines in anylaw or special charters shall bedeemed to refer to the BSP. (Sec. 136)

III. Organization of the BSP

A. Monetary BoardComposition: 7 members with 6-yearterms (Sec. 6)

Members:1. The BSP Governor or hisdesignated alternate (a deputygovernor)2. A Cabinet member to bedesignated by the President or hisdesignated alternate (anUndersecretary in his department)

3. 5 members from the private sector(Sec. 6)No member of the MB may be

reappointed more than once. (Sec. 6)

Qualifications:1. Natural-born citizens of thePhilippines2. At least 35 years old (the Governormust be at least 40 years old)3. Of good moral character

REVIEWER IN COMMERCIAL LAW Chapter II. The New Central Bank Act (RA 7653)


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4. Of unquestionable integrity5. Of known probity and patriotism6. With recognized competence insocial and economic disciplines (Sec.8)

Disqualifications:1. Direct connection with anymultilateral banking or financialinstitution

2. Substantial interest in any privatebank in the Philippines, within 1 yearprior to his appointment (Sec. 9)

Prohibitions on the members:1. To be a director, officer, employee,consultant, lawyer, agent orstockholder of any bank, quasi-bank,or any other institution which issubject to supervision or examinationby the BSP2. To hold any other public office orpublic employment during their tenure

3. To be employed in any multilateralbanking or financial institution within 2years after the expiration of his termEXCEPTION : when he serves as anofficial representative of thegovernment to such institution (Sec. 9)

Removal of any member of the MB:1. If the member is subsequently

disqualified under Sec. 82. If he is physically or mentally

incapacitated that he cannot properlydischarge his duties andresponsibilities and such incapacityhas lasted for more than 6 months

3. If he is guilty of acts or operationswhich are of fraudulent or illegalcharacter or which are manifestlyopposed to the aims and interests of the BSP

4. If he no longer possesses thequalifications under Sec. 8 (Sec. 10)

Vacancies:Cause: death, resignation, or removal of any memberEffect: a new member will be appointed tocomplete the unexpired period of the termof the member concerned (Sec. 7)

Salaries: Fixed by the Phil. President at asum commensurate to the importance andresponsibility attached (Sec. 13)

Meetings:1. held at least once a week2. called by the Governor or by 2 MBmembers

3. the complete records of theproeedings and deliberations of the MBincluding the tapes and transcripts of stenographic notes are to bemaintained and preserved (Sec. 11)4. deputy governors may attend (Sec.12)5. any member with personal orpecuniary interest in any matter in theagenda shall disclose his interest and

shall retire from the meeting when thematter is taken up (Sec. 14)

Quorum: Presence of 4 membersconstitute a quorum (Sec. 11)

Decisions: Concurrence of at least 4members, except as otherwise provided inthe NCBA (Sec. 11)

B. Governor/Deputy Governor

Governor: The Governor shall be the chief executiveofficer of the BSP

Deputy Governor(s):1. to be appointed by the Governor,with the approval of the MB2. not more than 3 (Sec. 21)

IV. Operation of the BSP

A. Supervision and

ExaminationCoverage:

Banking institutions and quasi-banks, including their subsidiaries andaffiliates engaged in allied activities.(Sec. 25)

The supervising and examiningdepartment head, personally or bydeputy, shall examine the books of every banking institution once in every12 months, and at such other times asthe MB by an affirmative vote of 5

members, may deem expedient (theremust be an interval of at least 12months between annual examinations)(Sec. 28)

The bank concerned shall afford the headof the appropriate supervising andexamining departments and hisauthorized deputies full opportunity toexamine its books, cash and availableassets and general condition at any time



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during banking hours when requested todo so by the BSP. (Sec. 28)

Non-disclosure of papers:RULE: None of the reports and otherpapers relative to such examinations shallbe open to inspection by the publicEXCEPTION: if the publicity is incidental tothe proceedings authorized or isnecessary for the prosecution of violations

in connection with the business of suchinstitutions. (Sec. 28)

No Restraining Order or Injunction onthe BSP:RULE: No restraining order or injunctionshall be issued by the court enjoining theBSP from examining any institutionsubject to supervision or examination bythe BSPEXCEPTION: existence of a convincingproof that the action of the BSP is plainlyarbitrary and made in bad faith and the

petitioner or plaintiff files with the clerk or judge of the court in which the action ispending a bond executed in favor of theBSP (Sec. 25)

B. Handling of Banks inDistress

1. Conservatorship

Applicability:when a bank or a quasi-bank is in a

state of continuing inability orunwillingness to maintain a conditionof liquidity deemed adequate toprotect the interest of depositors andcreditors (Sec. 29)

determination is to be made by theMonetary on the basis of a reportsubmitted by the appropriatesupervising or examining department(Sec. 29)

Period and Termination:Period: shall not exceed 1 year

(Sec. 29) The expenses attendant to the

conservatorship shall be borne by thebank or quasi-bank concerned (Sec.29)

Grounds for termination of conservatorship by MB:a. When it is satisfied that the

institution can continue to operateon its own and the conservatorshipis no longer necessary

b. When, on the basis of the report of the conservator or of its ownfindings, the MB determines thatthe continuance in business of theinstitution would involve probableloss to its depositors or creditors(the bank or quasi-bank would thenbe placed under receivership) (Sec.29)

Qualifications of a Conservator: The conservator should be competent andknowledgeable in bank operations andmanagement. (Sec. 29)

The appointment of a conservatorshall be vested exclusively with theMB. (Sec. 30)

Powers and Duties of a Conservator:a. To take charge of the assets,liabilities, and the managementthereof b. To reorganize the management

c. To collect all monies and debts duesaid institution, andd. To exercise all powers necessary torestore its viabilitye. To report and be responsible to theMBf. To overrule or revoke the actions of the previous management and boardof directors of the bank or quasi-bank.(Sec. 29)

First Philippine International Bank vs CA(1996)

While the Central Bank law gives vast and farreaching powers to the conservator of a bank,such powers must be related to thepreservation of the assets of the bank, thereorganization of the management and therestoration of viability. Such powers cannotextend to the post-facto repudiation of perfected transactions, otherwise they wouldinfringe against the non-impairment clause of the Constitution.

Remunerations: The conservator shall receiveremuneration in an amount not to exceed2/3 of the salary of the president of theinstitution in 1 year, payable in 12 equalmonthly paymentsEXC: a conservator connected with theBSP, in which case said conservator shallnot be entitled to receive anyremuneration or emolument. (Sec. 29)

2. Receivership

Grounds:



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Whenever the MB finds that a bank orquasi-bank:

a. Is unable to pay its liabilities asthey become due in the ordinarycourse of business: Provided, That thisshall not include inability to paycaused by extraordinary demandsinduced by financial panic in thebanking community;b. Has insufficient realizable assets,

as determined by the BSP, to meet itsliabilities; orc. Cannot continue in businesswithout involving probable losses to itsdepositors or creditors; ord. Has willfully violated a cease anddesist order under Sec. 37 that hasbecome final, involving acts ortransactions which amount to fraud ora dissipation of the assets of theinstitution

Receiver:

a. if a banking institution: the PDICb. if a quasi-bank: any person of recognized competence in banking orfinance (Sec. 30)

The appointment of a receiver shall bevested exclusively with the MB. And thedesignation of a conservator is not aprecondition to the designation of areceiver. (Sec. 30)

Powers and Duties of a Receiver:a. Immediately gather and takecharge of all the assets and liabilities

of the institutionb. Administer the assets for thebenefit of the creditorsc. Exercise the general powers of areceiver under the Revised Rules of Courtd. Not to pay or commit any act thatwill involve the transfer or dispositionof any asset of the institution, except:

1. administrative expenditures2. receiver may deposit or place

funds in non-speculativeinvestments

e. Subject to prior approval of the MB,determine, as soon as possible, but notlater than 90 days from take over,whether the institution may berehabilitated or otherwise placed insuch a condition so that it may bepermitted to resume business withsafety to its depositors and creditorsand the general public

The assets of the institution under receivership and liquidation shall be

deemed in custodia legis and shall beexempt from any order of garnishment,levy, attachment, or execution. (Sec. 30)

3. Liquidation

Should the determination be that theinstitution cannot be rehabilitated orpermitted to resume business, the MB

shall notify in writing the board of directors of the institution of its findingsand direct the receiver to proceed with theliquidation of the institution. (Sec. 30)

Procedure:1. The receiver shall file ex parte withthe proper RTC, and withoutrequirement of prior notice or anyother action, a petition for assistancein the liquidation of the institutionpursuant to the liquidation planadopted by the PDIC (if quasi-bank,

liquidation plan adopted by the MB)2. Upon acquiring jurisdiction, thecourt shall, upon motion by thereceiver after due notice,

a. adjudicate disputed claims against theinstitution,

b. assist the enforcement of individualliabilities of the stockholders,directors, and officers, and

c. decide on other issues as may bematerial to implement the liquidationplan3. The receiver shall convert the

assets of the institutions to money,dispose of the same to creditors andother parties, for the purpose of paying the debts of such institution inaccordance with the rules onconcurrence and preference of creditunder the Civil Code

The assets of the institution underreceivership and liquidation shall bedeemed in custodia legis and shall beexempt from any order of garnishment,levy, attachment, or execution. (Sec. 30)

Dispositions:In case of a liquidation of a bank or quasi-bank, after payment of the cost of proceedings, including reasonableexpenses and fees of the receiver to beallowed by the court, the receiver shallpay the debts of such institution, underorder of the court, in accordance with therules on concurrence and preference of credit in the Civil Code. (Sec. 31)



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All revenues and earnings realized by thereceiver in winding up the affairs andadministering the assets of any bank orquasi-bank shall be used to pay the costsof proceedings, salaries of such personnelwhose employment is rendered necessaryin the discharge of the liquidation togetherwith other additional expenses causedthereby. The balance of revenues andearnings, after the payment of all said

expenses, shall form part of the assetsavailable to creditors. (Sec. 32)

No restraining order: The actions of the MB shall be final andexecutory and may not be restrained orset aside by the court (for bothreceivership and liquidation)EXCEPTION: petition for certiorari on thefollowing grounds:

a. the action was taken in excess of jurisdictionb. the action was taken with grave

abuse of discretion as to amount tolack or excess of jurisdictionCONDITIONS:

a. may only be filed by thestockholders of record representingthe majority of the capital stockb. may only be filed within 10 daysfrom receipt by the board of directorsof the institution of the order directingreceivership, liquidation orconservatorship. (Sec. 30)

C. Monetary AdministrationPeso

The unit of monetary value in thePhilippines is the "peso," which isrepresented by the sign "P." The peso isdivided into 100 equal parts called"centavos," which are represented by thesign "c." (Sec. 48)

Means of Payment Currency:Currency: all Philippine notes and coinsissued or circulating in accordance withthe provisions of this Act. (Sec. 49)

Issuance: The BSP shall have the solepower and authority to issue currency,within the territory of the Philippines. (Sec.50)

Liability for Notes and Coins:Notes and coins issued by the BSP

shall be liabilities of the BSP and maybe issued only against, and in amountsnot exceeding, the assets of the BSP.

Said notes and coins shall be a firstand paramount lien on all assets of theBSP.

The BSP's holdings of its own notesand coins shall not be considered aspart of its currency issue and,accordingly, shall not form part of theassets or liabilities of the BSP. (Sec.51)

Legal Tender Power (Asked in 2000 BarExams)All notes and coins issued by the BSP shallbe fully guaranteed by the Government of the Republic of the Philippines and shallbe legal tender in the Philippines for alldebts, both public and private: Provided,however, That, unless otherwise fixed bythe MB, coins shall be legal tender inamounts not exceeding P50 fordenominations of 25 centavos and above,and in amounts not exceeding P20 fordenominations of 10 centavos or less.

(Sec. 52)Monetary Administration DomesticMonetary Stabilization:

The MB shall endeavor to control anyexpansion or contraction in monetaryaggregates which is prejudicial to theattainment or maintenance of pricestability. (Sec. 61)

Monetary Administration International Monetary Stabilization:

The BSP shall exercise its powers to

preserve the international value of thepeso and to maintain its convertibility intoother freely convertible currencies,primarily for, although not necessarilylimited to, current payments for foreigntrade and invisibles. (Sec. 64)

In order to maintain the internationalstability and convertibility of the Philippinepeso, the BSP shall maintain internationalreserves adequate to meet anyforeseeable net demands on the BSP forforeign currencies.

Purchases in Gold: The BSP may buy and sell gold in anyform, subject to such regulations as theMB may issue. The purchases and sales of gold authorized by this section shall bemade in the national currency at theprevailing international market price asdetermined by the MB. (Sec. 69)

Purchases in Gold and ForeignExchange:



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The BSP may buy and sell foreign notesand coins, and documents andinstruments of types customarilyemployed for the international transfer of funds. The BSP may engage in futureexchange operations. The BSP mayengage in foreign exchange transactionswith the following entities or persons only:

1. Banking institutions operating inthe Philippines;

2. The Government, its politicalsubdivisions and instrumentalities;3. Foreign or international financialinstitutions;4. Foreign governments and theirinstrumentalities; and5. Other entities or persons which theMB is hereby empowered to authorizeas foreign exchange dealers, subject tosuch rules and regulations as the MBshall prescribe. (Sec. 70)

Operations with Foreign Entities:

The MB may authorize the BSP to grantloans to and receive loans from foreignbanks and other foreign or internationalentities, both public and private, and mayengage in such other operations withthese entities as are in the nationalinterest and are appropriate to itscharacter as a central bank. The BSP mayalso act as agent or correspondent forsuch entities. Upon authority of the MB,the BSP may pledge any gold or otherassets which it possesses as securityagainst loans which it receives fromforeign or international entities. (Sec. 75)

Loans to Banking And Other FinancialInstitutions:Credit Policy: The rediscounts, discounts,loans and advances which the BSP isauthorized to extend to bankinginstitutions shall be used to influence thevolume of credit consistent with theobjective of price stability. (Sec. 81)

Normal Credit Operations: The BSP may normally and regularly carryon the following credit operations withbanking institutions operating in thePhilippines:

1. Commercial credits . The BSPmay rediscount, discount, buy and sellbills, acceptances, promissory notesand other credit instruments withmaturities of not more than 180 daysfrom the date of their rediscount,discount or acquisition by the BSP andresulting from transactions related to:

a. the importation, exportation,purchase or sale of readily saleablegoods and products, or theirtransportation within the Philippines;

b. the storing of non-perishable goodsand products which are duly insuredand deposited, under conditionsassuring their preservation, inauthorized bonded warehouses or inother places approved by the MB.

2. Production credits . The BSPmay rediscount, discount, buy and sellbills, acceptances, promissory notesand other credit instruments havingmaturities of not more than 360 daysfrom the date of their rediscount,discount or acquisition by the BSP andresulting from transactions related tothe production or processing of agricultural, animal, mineral, orindustrial products. Documents orinstruments acquired in accordancewith this subsection shall be secured

by a pledge of the respective crops orproducts: Provided, however, That thecrops or products need not be pledgedto secure the documents if the originalloan granted by the BSP is secured bya lien or mortgage on real estateproperty 70% of the appraised value of which equals or exceeds the amount of the loan granted.3. Other credits . Special creditinstruments not otherwiserediscountable under 1 and 2 may beeligible for rediscounting in accordance

with rules and regulations which theBSP shall prescribe. Whenevernecessary, the BSP shall provide fundsfrom non-inflationary sources:Provided, however, That the MB shallprescribe additional safeguards fordisbursing these funds.4. Advances . The BSP may grantadvances against the following kinds of collaterals for fixed periods which, withthe exception of advances againstcollateral named in clause (4) of thepresent subsection, shall not exceed

180 days:i. gold coins or bullion;ii. securities representing

obligations of the BSP or of other domestic institutions of recognized solvency;

iii. the credit instruments to whichreference is made in 1;

iv. the credit instruments to whichreference is made 2, for periodswhich shall not exceed 360days;



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v. utilized portions of advances incurrent amount covered byregular overdraft agreementsrelated to operations includedunder 1 and 2, and certified asto amount and liquidity by theinstitution soliciting theadvance;

vi. negotiable treasury bills,certificates of indebtedness,

notes and other negotiableobligations of the Governmentmaturing within 3 years fromthe date of the advance; and

vii. negotiable bonds issued by theGovernment of the Philippines,by Philippine provincial, city ormunicipal governments, or byany Philippine Governmentinstrumentality, and havingmaturities of not more than 10years from the date of advance.

Advances made against the collateral

named in clauses (f) and (g) may notexceed 80% of the current marketvalue of the collateral.

Special Credit Operation: The BSP may extend loans and advancesto banking institutions

for a period of not more than 7 dayswithout any collateralfor the purpose of providing liquidity tothe banking system in times of need.(Sec. 83)

Emergency Credit Operation: The MB may, by a vote of at least 5 of itsmembers, authorize the BSP to grantextraordinary loans or advances tobanking institutions secured by assets asdefined hereunder

a. Periods of national and/or localemergencyb. Periods of imminent financial panicwhich directly threaten monetary andbanking stability,c. Normal periods for the purpose of assisting a bank in a precarious

financial condition or under seriousfinancial pressures brought byunforeseen events, or events which,though foreseeable, could not beprevented by the bank concerned(Sec. 84)

Condition for a and b: while such loans oradvances are outstanding, the debtorinstitution shall not, except upon priorauthorization by the MB, expand the total

volume of its loans or investments. (Sec.84)

Conditions for c: the MB has ascertainedthat the bank is not insolvent and has theassets defined hereunder to secure theadvances (Sec. 84)

Credit TermsRULE: The BSP shall collect interest and

other appropriate charges on all loans andadvances it extends, the closure,receivership or liquidations of the debtor-institution notwithstanding. (Sec. 85)

Open Market Operations for the BSPsAccount:

The open market purchases and sales of securities by the BSP shall be madeexclusively in accordance with its primaryobjective of achieving price stability. (Sec.90)How:

1. Purchase and sales in the openmarket government securities (Sec.91)2. Issuance and negotiation of freelynegotiable evidences of indebtednessof the BSP

Only in cases of extraordinarymovement in price levels (Sec.92) and may be acquired by theBSP before their maturity (Sec.92)

BSP Portfolio:

At least once every month the MB shallreview the portfolio of the BSP in relationto its future credit policy. In reviewing theBSP's portfolio, the MB shall especiallyconsider whether a sufficiently large partof the portfolio consists of assets withearly maturities, in order that acontraction in BSP credit may be effectedpromptly whenever the national monetarypolicy so requires. (Sec. 93)

Bank ReservesAll banks operating in the Philippines shall

be required to maintain reserves againsttheir deposit liabilities (uniformapplication)

The MB may, at its discretion, also requireall banks and/or quasibanks to maintainreserves against funds held in trust andliabilities for deposit substitutesEXC: deposits and deposit substituteswith remaining maturities of 2 years ormore, as well as interbank borrowings(Sec. 94)



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Deposits maintained by banks withthe BSP as part of their reserverequirements shall be exempt fromattachment, garnishments, or anyother order or process of any court,government agency or any otheradministrative body issued to satisfythe claim of a party other than theGovernment, or its political

subdivisions or instrumentalities. (Sec.103)

Required Reserves:1. Against Peso Deposits . The MBmay fix and, when it deems necessary,alter the minimum reserve ratios topeso deposits, as well as to depositsubstitutes, which each bank and/orquasi-bank may maintain, and suchratio shall be applied uniformly to allbanks of the same category as well asto quasi-banks. (Sec. 96)

2. Against Foreign CurrencyDeposits . The MB is similarlyauthorized to prescribe and modify theminimum reserve ratios applicable todeposits denominated in foreigncurrencies. (Sec. 97)3. Against Unused Balances of Overdraft Lines . In order to facilitateBSP control over the volume of bankcredit, the MB may establish minimumreserve requirements for unusedbalances of overdraft lines. The powersof the MB to prescribe and modify

reserve requirements against unusedbalances of overdraft lines shall be thesame as its powers with respect toreserve requirements against demanddeposits. (Sec. 98)

Selective Regulation Of Bank Operations:Guiding Principle: The MB shall use thepowers granted to it to ensure that thesupply, availability and cost of money arein accord with the needs of the Philippineeconomy and that bank credit is not

granted for speculative purposesprejudicial to the national interests. (Sec.104)

Regulations :1. Margin Requirements AgainstLetters of Credit the MB may atany time prescribe minimum cashmargins for the opening of letters of credit, and may relate the size of the

required margin to the nature of thetransaction to be financed. (Sec. 105)2. Required Security Against Bank Loans in order to promote liquidityand solvency of the banking system,the MB may issue such regulations asit may deem necessary with respect tothe maximum permissible maturities of the loans and investments which thebanks may make, and the kind and

amount of security to be requiredagainst the various types of creditoperations of the banks. (Sec. 106)3. Portfolio Ceilings whenever theMB considers it advisable to prevent orcheck an expansion of bank credit, itmay place an upper limit on theamount of loans and investmentswhich the banks may hold, or mayplace a limit on the rate of increase of such assets within specified periods of time. The MB may apply such limits tothe loans and investments of each

bank or to specific categories thereof.In no case shall the MB establish limitswhich are below the value of the loansor investments of the banks on thedate on which they are notified of suchrestrictions. The restrictions shall beapplied to all banks uniformly andwithout discrimination. (Sec. 107)4. Minimum Capital Ratios theMB may prescribe minimum ratioswhich the capital and surplus of thebanks must bear to the volume of theirassets, or to specific categories

thereof, and may alter said ratioswhenever it deems necessary. (Sec.108)

Coordination of Credit Policies ByGovernment Institutions:GOCCs which perform banking or creditfunctions shall coordinate their generalcredit policies with those of the MB.

The MB may, whenever it deems itexpedient, make suggestions orrecommendations to such corporations for

the more effective coordination of theirpolicies with those of the BSP. (Sec. 109)

D. As Banker and FinancialAdviser of the Government

BSP as Banker of the Government: The BSP shall act as a banker of thegovernment, its political subdivisions andinstrumentalities. (Sec. 110)



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Remuneration : The BSP may charge equitable rates,commissions or fees for services which itrenders to the government, its politicalsubdivisions and instrumentalities. (Sec.116)

BSP as Financial Advisor of theGovernment:

1. Render opinion, as shall berequested by the Government, in thefollowinga. credit operation of the government

abroad based on the gold andforeign exchange resources andobligations of the antion and on theeffects of the proposed operationon the balance of payments and onmonetary aggregates

b. borrowing within the Philipines onthe probable effects of theproposed operation on monetary

aggregates, the price level, and thebalance of payments (Sec. 123)2. The Deputy Governor designatedby the Governor shall be an ex-officiomember of the NEDA in order toassure effective communicationbetweent eh economic, financial andfiscal policies of the government andthe monetary, credit and exchangepolicies of the BSP (Sec. 124)

BSP Support of the GovernmentSecurities Market:Securities Stabilization Fund

1. shall be administered by the BSPfor the account of the Government2. the operations of the SSF shallconsist of purchases and sales, in theopen market, of bonds and otherevidences of indebtedness issued orfully guaranteed by the Government.

The purpose of these operations shallbe to increase the liquidity andstabilize the value of said securities inorder thereby to promote investmentin government obligations. The MBshall use the resources of the SSF toprevent, or moderate, sharpfluctuations in the quotations of saidgovernment obligations, but shall notendeavor to alter movements of themarket resulting from basic changes inthe pattern or level of interest rates.(Sec. 120)3. The SSF shall retain net profitswhich it may make on its operations,regardless of whether said profits arisefrom capital gains or from interest

earnings. The SSF shallcorrespondingly bear any net losseswhich it may incur. (Sec. 122)

E. Other Operations

1. Conduct of Research and

Sta

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