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=========================== upon the order of the Philippine Treasurer

TOPICS UNDER THE SYLLABUS (Villanueva, 2009).
VIII. Banking Laws
A. The New Central Banking Act (R.A. 7653) Other Basic Functions of BSP:
=========================== 1. It shall have the sole power and authority to
A. The New Central Banking Act (R.A. 7653) issue currency within the territory of the
Republic of the Philippines;
1. State Policies and Creation of the Bangko Sentral 2. The power to issue regulations to prevent the
ng Pilipinas (BSP) circulation of foreign currencies, or currency
substitutes as well as the reproduction of
The Bangko Sentral ng Pilipinas (BSP) is the State’s facsimiles of BSP notes;
Central Monetary Authority mandated in the 1987 3. It has the power to investigate, make arrests,
Philippine Constitution, which shall function and conduct searches and seizure for the purpose
operate as an independent and accountable body of maintaining the integrity of the currency;
corporate in the discharge of its mandated 4. To engage in foreign engage transactions in
responsibilities concerning money, banking and order to maintain price stability;
credit 5. To make rediscounts, discounts, loans and
advances to banking and other financial
2. Responsibility and Primary Objective institutions to influence the volume of credit
consistent with the objectives of price stability;
Primary Objectives: 6. To engage in open market operations---
a. To maintain price stability conducive to a purchase and sale of securities ---exclusively in
balanced and sustainable growth of the accordance with its objectives of achieving
economy; price stability;
b. To promote and maintain the monetary 7. To engage in marketing and stabilization of
stability and convertibility of the peso; securities for the account of the government;
c. To provide policy directions in areas of 8. To act as the financial advisor of the
money, banking and credit, with government; (Sundiang, 2006)
supervision over operations of banks and
with regulatory powers over operations of 3. Monetary Board---Powers and Functions
finance companies, and non-bank
financial institutions performing quasi- Corporate Powers
banking functions. The BSP is a government owned and controlled
corporation that is invested by law with corporate
Roles of BSP: powers. The corporate powers specified in Section
a. Banker of Government 5 of the New Central Bank Act are as follows:
The Act as a banker of the Government, its a. The power to adopt, alter and use a corporate
political subdivisions and instrumentalities, seal which shall be judicially noticed;
and their cash balances should be deposited to b. To enter into contracts;
the BSP, with only minimum working balances c. To lease or own real and personal property;
to be held by government-owned banks, and d. To sell or otherwise dispose of its real and
such other banks incorporated in the personal property;
Philippines as the Monetary Board may e. To sue and be sued;
prescribe. f. To perform any and all things that may be
b. Representation with the International necessary or proper to carry out the purposes
Monetary Board of the New Central Bank Act;
To represent Government in all dealings, g. To compromise, condone or release, in whole
negotiations and transactions with the IMF, or in part, any claim of or settled liability
and shall carry such accounts as may result (Sundiang, 2006).
from the Philippine membership in or
operations with the said Fund. The BSP powers and functions are exercised by the
c. Representation with Other Financial Monetary Board.
Institutions
May represent the Government in dealings, Composition of the Monetary Board:
negotiations or transactions with the World There are 7 members who are appointed by the
Bank and with other foreign or international President of the Republic of the Philippines. They
financial institutions or agencies. are only appointed once.
d. Fiscal Operations a. Governor, as Chairman;
Shall open a general cash account for the b. A member of the Cabinet designated by the
Treasurer of the Philippines, in which the liquid President of the Philippines;
funds of the Government shall be deposited, c. Five (5) members who shall come from the
and with transfer of funds to be made only sector, all of whom shall serve full-time.
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3. appoints and fixes the remunerations and other

Term: 6 years emoluments of personnel, as well as imposes
disciplinary measures upon personnel of the Bangko
Qualifications of the Members of the Board: Sentral;
a. Must be a natural-born citizens of the Philippines; 4. renders opinions, decisions, or rulings, which shall be
b. At least 35 years of age with the exception of the Governor, final and executory until reversed or modified by the
who should at least be 40 years of age; Monetary Board, on matters regarding application or
c. Of good moral character, of unquestionable integrity, of enforcement of laws pertaining to institutions
known probity and patriotism. supervised by the BSP and laws pertaining to quasi-
d. With recognized competence in social and economic banks, as well as regulations, policies or instructions
disciplines. issued by the Monetary Board, and the implementation
thereof; and
Grounds for Removal of a Member of the Board: 5. Exercises such other powers as may be vested in him by
The President may remove any member of the Board for any of the Monetary Board.
the following reasons: 6. Serves as the principal representative of the Monetary
a. Subsequent disqualification Board and of the BSP. As such, the Governor is
b. Physical or mental incapacity that he cannot properly empowered to:
discharge his duties and responsibilities and such incapacity a. Represent the Monetary Board and the BSP in all
has lasted for more than 6 months. dealings with other offices, agencies and
c. Guilty of acts or operations which are of fraudulent or illegal instrumentalities of the Government and all other
character or which are manifestly opposed to the aims and persons or entities, public or private, whether
interests of the BSP; domestic, foreign or international; and
d. No longer possessing qualifications specified in the Act. b. Sign contracts entered into by the BSP, notes and
securities issued by the BSP, all reports, balance
The major functions of the Monetary Board include the power sheets, profit and loss statements, correspondence
to: and other documents of the BSP.
1. Issue rules and regulations it considers necessary for the
effective discharge of the responsibilities and exercise of Disqualifications:
the powers vested in it; 1. In addition to the disqualifications imposed by Republic Act
2. Direct the management, operations, and administration No. 6713, a member of the Monetary Board is disqualified
of Bangko Sentral, organize its personnel and issue such from being a director, officer, employee, consultant, lawyer,
rules and regulations as it may deem necessary or agent or stockholder of any bank, quasi-bank or any other
desirable for this purpose; institution which is subject to supervision or examination by
3. Establish a human resource management system which the Bangko Sentral, in which case such member shall resign
governs the selection, hiring, appointment, transfer, from, and divest himself of any and all interests in such
promotion, or dismissal of all personnel; institution before assumption of office as member of the
4. Adopt an annual budget for and authorize such Monetary Board.
expenditures by Bangko Sentral as are in the interest of 2. The member of the Monetary Board coming from the private
the effective administration and operations of Bangko sector shall not hold any other public office or public
Sentral in accordance with applicable laws and employment during their tenure.
regulations; and 3. No person shall be a member of the Monetary Board if he has
5. Indemnify its members and other officials of Bangko been connected with any multilateral banking or financial
Sentral, including personnel of the departments institution or has a substantial interest in any private bank in
performing supervision and examination functions, the Philippines, within one (1) year prior to his appointment;
against all costs and expenses reasonably incurred by likewise, no member of the Monetary Board shall be
such persons in connection with any civil or criminal employed in any such institution within two (2) years after
action, suit or proceeding, to which any of them may be the expiration of his term except when he serves as an official
made a party by reason of the performance of his representative of the Philippine Government to such
functions or duties, unless such members or other institution.
officials is found to be liable for negligence or
misconduct.. Responsibility and liability of the members of the Monetary
Board
The Governor’s Powers and Duties as a Chief Executive Officer: a. Members of the Monetary Board, officials, examiners, and
The Governor is the chief executive officer of BSP and is required employees of the Bangko Sentral who willfully violate RA
to direct and supervise the operations and internal administration 7653 or who are guilty of negligence, abuses or acts of
of BSP. Specifically, the Governor: malfeasance or misfeasance or fail to exercise extraordinary
1. prepares the agenda for the meetings of the Monetary diligence in the performance of his duties shall be held liable
Board and submits policy recommendations for for any loss or injury suffered by the Bangko Sentral or other
consideration of the Board; banking institutions as a result of such violation, negligence,
2. executes and administers policies and measures abuse, malfeasance, misfeasance or failure to exercise
approved by the Monetary Board; extraordinary diligence.
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b. Similar responsibility shall apply to members, officers and borrowings are adequately secured, fully disclosed to
employees of the Bangko Sentral for; the Monetary Boar, and shall be subject to such further
1. The disclosure of any information of a confidential rules and regulations as the Monetary Board may
nature, or any information on the discussions or prescribe.
resolutions of the Monetary Board, or about the
confidential operations of the Bangko Sentral, unless the HOW BSP HANDLE BANKS IN DISTRESS
disclosure is in connection with the performance of
official functions with the Bangko Sentral, or is with prior A. CONSERVATORSHIP
authorizaytion of the Monetary Board or the Governor; -a bank or quasi-bank is
or 1. in a state of continuing inability or
2. The use of such information for personal gain or to the 2. unwillingness to maintain a condition of liquidity deemed
detriment of the Government, the Bangko Sentral or adequate to protect the interest of depositors and creditors
third parties. Action of the Monetary Board
The Monetary Board may appoint a conservator (who
c. However, any data or information required to be submitted shall be competent and knowledgeable in bank
to the President and/or Congress, or to be published under operations and management) for a period not exceeding
the provisions of RA 7653 shall not be considered 1 year
confidential. i. take charge of the assets, liabilities and management
of the bank or quasi-bank in question
Outside interests of the Governor and the full-time members of ii. reorganize the management thereof
the Board iii. collect all monies and debts due and
a. The Governor of the Bangko Sentral and the full-time iv. exercise all powers necessary to restore its viability,
members of the Board shall limit their professional activities including the power to overrule or revoke the actions
to those pertaining directly to their positions with the Bangko of the previous management and board of directors
Sentral. While admittedly, the Central Bank gives vast and far-
b. They may not accept any other employment, whether public reaching powers to the conservator, such powers must
or private, remunerated or ad honorem. be related to “preservation of the assets of the bank, the
c. Exceptions: reorganization of the management thereof, and the
1. Positions in eleemosynary, civic, cultural or restoration of its viability. Such powers, enormous and
religious organizations extensive as they are, cannot extend to post-facto
2. Whenever, by designation of the President, repudiation of perfected transactions, otherwise they
the Governor or the full-time member is would infringe against the non-impairment clause of the
tasked to represent the interest of the Constitution.
Government or other government agencies in It merely gives the conservator the power to revoke
matters connected with or affecting the contracts that are under existing law, deemed to be
economy or the financial system of the country defective – i.e. void, voidable, unenforceable or
rescissible. Hence, the conservator merely takes the
Prohibitions on personnel of the Bangko Sentral place of a Bank’s BOD. What the said Board cannot do –
In addition to the prohibitions found in RA 3019 and 6713, such as repudiating a contract validly entered into under
personnel of the Bangko Sentral are hereby prohibited from: the doctrine of implied authority, the conservator
1. Being an officer, director, lawyer or agent, employee, cannot do either. Ineluctably, his power is not unilateral,
consultant or stockholder, directly or indirectly, of any and he cannot simply repudiate valid obligations of the
institution subject to supervision or examination by the Bank. His authority would be only to bring court actions
Bangko Sentral, except non-stock savings and loan to assail such contract – as he has already done so in the
associations and provident funds organized exclusively instant case. (First Phil. Int’l Bank v. CA, 252 SCRA 259)
for employees of the Bangko Sentral, and except as
otherwise provided in RA 7653;
2. Directly or indirectly requesting or receiving any gift,
present or pecuniary or material benefit for himself or
another, from any institution subject to supervision or Termination of Conservatorship
examination by the Bangko Sentral; (a) When MB is satisfied that the institution can
3. Revealing in any manner, except upon orders of the continue to operate on its own and the
court, the Congress or any government office or agency conservatorship is no longer necessary; or
authorized by law, or under such conditions as may be (b) When MB determines that the continuance in
prescribed by the Monetary Board, information relating business of the institution would involve probable
to the condition or business of any such institution. This loss to its depositors or creditors, in which case
prohibition shall not apply to the giving of information to proceedings for receivership and liquidation shall
the Monetary Boar or the Governor of the Bangko be pursued.
Sentral, or to any person authorized by either of them, in B. CLOSURE
writing, to receive such information; and -prohibit a bank or quasi-bank from doing business in
4. Borrowing from any institution subject to supervision or the Philippines
examination by the Bangko Sentral unless said Grounds for Closure
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(a) Unable to pay its liabilities as they become due in the from intermeddling with the property of the bank in any
ordinary course of business (cash flow test) way.
BUT: shall not include inability to pay caused by extraordinary The receiver only has the authority to administer the
demands induced by financial panic in the banking community. properties of the bank for the benefit of the creditors.
(b) Insufficient realizable assets to meet its liabilities Consequently, the receiver has no authority to approve
(balance sheet test) the acts of ownership, such as the grant of “exclusive
(c) Cannot continue in business without involving probable option to purchase” a particular property of the bank.
losses to its depositors and creditors (Abacus Real Estate Dev. Center vs. Manila Banking
(d) Willfully violated a cease and desist order under Sec. 37 Corp., 452 SCRA 97)
(administrative sanctions) that has become final and
involves acts or transactions which amount to fraud or D. LIQUIDATION
dissipation of assets -from the determination of receiver if institution cannot
(e) Notifies the BSP or publicly announces a bank holiday be rehabilitated or permitted to resume business
(f) Suspends the payment of its deposit liabilities Duties of the Receiver/Liquidator
continuously for more than 30 days (1) File ex parted with the RTC a petition for assistance in
(g) Persists in conducting its business in an unsafe or the liquidation of the institution pursuant to a
unsound manner liquidation plan adopted by the PDIC for banks, and by
MB for quasi-banks
 This may be done summarily and without need of prior (2) Upon motion by receiver, upon RTC’s acquisition of
hearing. jurisdiction, RTC shall assist enforcement of the
 Note that during conservatorship, no claims can be paid. individual liabilities of the stockholders, directors, and
officers and decide on other issues as may be material to
Sec. 29 of the Central Bank Act does not contemplate the liquidation plan adopted
prior notice and hearing before a bank is placed under (3) Receiver shall convert the assets to money and proceeds
receivership. It is enough that such action is made the shall be applied in paying the debts of the institution in
subject of a subsequent judicial review. The “Close now accordance with rules on concurrence and preference of
and hear later” scheme under the Act is for the purpose credit
of protecting the depositors, creditors, stockholders and (4) Receiver shall institute such actions as may be necessary
the general public. (Central Bank vs. CA, 220 SCRA 536)
 The assets under receivership or liquidation deemed in
C. RECEIVERSHIP custodia legis, in the hands of the receiver and shall be
Who are Receivers? exempt from any order of garnishment, levy, attachment
(a) For Banks –PDIC or execution
(b) For Quasi-Banks – Any person of recognized competence Phases of Liquidation Proceeding (Pacific Banking vs.
in banking or finance CA, GR 109373, March 20, 1995)
Functions of Receiver First: Approval and disapproval of claims
(a) Immediately gather and take charge of all the assets and (a) all money claims against the bank are required to be
liabilities of the institution, administer the same for the filed with the liquidation court
benefit of its creditors e.g.
 Collect pre-existing debts (b) phase may end with the declaration by the court
 Foreclose mortgages security whether claim is with basis or not; if with basis, classified
(b) Exercise the general powers of a receiver whether ordinary or preferred
(c) Determine as soon as possible, but not late than 90 days
from takeover, whether the institution can be (c) order by court is final and may be appealed by the party
rehabilitated or otherwise placed in such a condition so aggrieved
that it may be permitted to resume business with safety Second: Approval by the court of the distribution plan
to its depositors and creditors, and the general public. prepared by the duly appointed liquidator
BUT: any determination for resumption of business shall be (a) order disposes of the issue of how much property is
subject to the prior approval of the Monetary Board. available for disposal
(b) payment of all allowed claims
If the receiver determines that the institution cannot be
rehabilitated or permitted to resume business, then the MB shall DISTINGUISH BETWEEN LIQUIDATION AND
notify in writing the board of directors of the institution of its REHABILITATION
findings and direct the receiver to proceed with the liquidation of LIQUIDATION REHABILITATION
the institution. Is a winding up of Connotes a reopening
settling with creditors or reorganization. It
 Appointment of a receiver operates to suspend the and debtors. It is the contemplates a
authority of a bank and its directors and officers over its winding up of a continuance of
properties and effects, such authority being reposed in corporation so that corporate life and
the receiver, and in this respect, the receivership is assets are distributed activities in an effort
equivalent to an injunction to restrain the bank officers to those entitled to to restore and
receive them. It is the reinstate the
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process of reducing corporation to its However: unless otherwise fixed by the Monetary
assets to cash, former position of Board, coins shall be legal tender in amounts
discharging liabilities successful operation  not exceeding Fifty pesos P50 for denominations of 25
and dividing surplus and solvency. centavos and above, and
or loss.  in amounts not exceeding P20 for denominations of 10
centavos or less. (Sec. 52)
 Philippine currency notes have no limit to their legal
Effects of Liquidation of a Bank or a Quasi-Bank tender power. Pursuant to BSP Circular No. 537, Series
of 2006, coins in denomination of
(a) After payment of the cost of the proceedings, including  1-, 5- and 10-piso shall be legal tender in amounts not
reasonable expenses and fees of the receiver to be exceeding P1,000 while
allowed by the court, the receiver shall pay the debts of  1-, 5- and 10- and 25-sentimo shall be legal tender in
such institution, under order of the court, in accordance amounts not exceeding P100
with the rules on concurrence and preference of credit B. RATE OF EXCHANGE – The MB shall determine the
as provided in the Civil Code. (Sec. 31) exchange rate policy of the country to ensure orderly
(b) All revenues and earnings realized by the receiver in conditions in the market
winding up the affairs and administering the assets of BSP maintains a floating exchange rate system. Exchange
any bank or quasi-bank within the purview of this Act rates are determined on the basis of supply and demand
shall be used to pay the costs, fees and expenses in the foreign exchange market.
mentioned in the preceding section, salaries of such C. EMERGENCY RESTRICTIONS ON EXCHANGE
personnel whose employment is rendered necessary in OPERATIONS: To give MB and the Government time in
the discharge of the liquidation together with the other which to forestall, combat or overcome such crisis or
additional expenses caused thereby. (Sec.32) emergency, MB with concurrence of at least 5 of its
members and with the approval of the President may:
The balance of revenues and earnings, after the (a) temporarily suspend or restrict sales of exchange by BSP
payment of all said expenses, shall form part of the (b) subject all transactions in gold and foreign exchange to
assets available for payment of creditors. license by the BSP; and
(c) may require that any foreign exchange obtained by any
 A liquidation proceeding is a single proceeding person residing or entity operating in the Philippines be
 Although the claims are litigated in the same proceeding, delivered to the BSP or to any bank or agent designated
the treatment is individual. And the Order issued relative by the BSP
to a particular claim applies only to said claim, leaving HOWEVER: foreign currency deposit made under FCDU
the other claims unaffected, as each claim is considered Law shall be exempt from these requirements
separate and distinct from the others. D. SECTION 105. The Monetary Board may at any time
 The exclusive jurisdiction of the liquidation courts prescribe minimum cash margins for the opening of
pertains only to the adjudication of claims against the letters of credit, and may relate the size of required
bank, and does not cover the reverse situation where it margin to the nature of the transaction to be financed.
is the bank which files a claim against another person.
(Manalo vs. CA, 366 SCRA 752) E. SECTION 106. In order to promote the liquidity and
 The actions of the MB under Sec. 29 (appointing a solvency of the banking system, the Monetary Board
conservator) and Sec. 30 (closing a bank) are final and may issue such regulations as it may deem necessary
executory and may not be restrained or set aside by a with respect to the maximum permissible maturities of
court the loans and investments which the banks may make,
EXCEPT:on petition for certiorari on the ground of excess of and the kind and amount of security to be required
jurisdiction or with grave abuse of discretion filed by stockholders against various types of credit operations of the banks.
of record representing the majority of the capital stock within 10  DEMAND DEPOSITS – this term refers to all those
days from receipt by the BOD of the institution of the order liabilities of the BSP and of other banks, which are
directing conservatorship, receivership or liquidation denominated in Philippine currency, and are subject to
 Note that the twin requirement of majority of payment in legal tender upon demand by the
stockholders and filing within 10 days should be presentation of checks (Sec. 58). Only banks duly
observed or else action will be dismissed. authorized may accept funds, or create liabilities payable
 A bank ordered closed by the MB retains its juridical in pesos upon demand by presentation of checks, and
personality which can sue or be sued through its such operations shall be subject to the control of the
liquidator Monetary Board.
HOW THE BSP HANDLES EXCHANGE CRISIS  LEGAL CHARACTER OF CHECKS – the checks
A.LEGAL TENDER POWER – when the currency is offered representing demand deposits do not have legal tender
in payment of a debt, public or private, the same must power, and their acceptance in the payment of debts;
be accepted. both public and private, is at the option of the creditor.
All notes and coins issued by the Bangko Sentral shall be However, a check which has been cleared and credited
fully guaranteed by the Government of the Republic of to the account of the creditor, shall be equivalent to a
the Philippines and shall be legal tender in the delivery to the creditor of cash in an amount equal to
Philippines for all debts, both public and private. the amount credited to his account. (Sec.60)
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C. GENERAL BANKING LAW OF 2000 (R.A. NO. 8791) b. TRUST ENTITIES

1. DEFINITION AND CLASSIFICATION OF BANKS i. Any bank, investment house or a stock corporation duly
authorized by the Monetary Board to engage in trust,
a. UNIVERSAL BANKS – these used to be called expanded investment management and fiduciary business
commercial banks and their operations are primarily governed by methodology.
the General Banking laws. They can exercise the powers of an
investment house and invest in non-allied enterprises. They have A trust business is any activity resulting from trusteeship
the highest capitalization requirement. involving the appointment of a trustee by a trustor for the
administration, holding, management of funds and/or
b. COMMERCIAL BANKS – these are ordinary or regular properties of the trustor by the trustee for the use, benefit
commercial banks, as distinguished from a universal bank. They or advantage of the trustor or of beneficiaries.
have a lower capitalization requirement than a universal bank and
cannot exercise the powers of an investment house and invest in 3. BANK POWERS AND LIABILITIES
non-allied enterprises.
a. CORPORATE POWERS – these are the powers enumerated
c. THRIFT BANKS – shall include savings and mortgage banks, under the Corporation Code. Section 36 of the Corporation Code
private development banks, and stock savings and loans provides that every corporation incorporated under this Code has
association organized under existing laws. the power and capacity:

d. RURAL BANKS - banks which are designed to make needed i. To sue and be sued in its corporate name;
credit available and readily accessible in the rural areas on ii. Of succession by its corporate name for the period of
reasonable terms. time stated in the articles of incorporation and the
certificate of incorporation;
e. COOPERATIVE BANKS – one organized, the majority share of iii. To adopt and use a corporate seal;
which is owned and controlled by cooperatives, primarily to iv. To amend its articles of incorporation in accordance with
provide financial and credit services to cooperatives. the provisions of this Code;
v. To adopt by-laws, not contrary to law, morals, or public
f. ISLAMIC BANKS – these are banks the business dealings and
policy, and to amend or repeal the same in accordance
activities of which are subject to the basic principles and rulings of
with this Code;
Islamic Shari’a. The Al Amanah Islamic Investment Bank of the
vi. In case of stock corporations, to issue or sell stocks to
Philippines, which was created by RA 6848, is the only Islamic bank
subscribers and to sell treasury stocks in accordance
in the country at this time.
with the provisions of this Code; and to admit members
to the corporation if it be a non-stock corporation;
Created by Congress to promote and accelerate socio-economic
vii. To purchase, receive, take or grant, hold, convey, sell,
development of the Autonomous Region by performing banking,
lease, pledge, mortgage and otherwise deal with such
financing and investment operations and to establish and
real and personal property, including securities and
participate in agricultural, commercial and industrial ventures
bonds of other corporations, as the transaction of the
based on the Islamic concept of banking. (Sec. 3 RA. 6848).
lawful business of the corporation may reasonably and
g. Other Classification of banks as determined by the Monetary necessarily require, subject to the limitations prescribed
Board. by law and the Constitution;
viii. To enter into merger or consolidation as provided in this
2. DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST Code;
ENTITIES ix. To make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural,
a. QUASI-BANKS scientific, civic, or similar purposes: Provided, that no
corporation, domestic or foreign, shall give donations in
i. “Quasi-Banks” shall refer to entities engaged in the
aid of any political party or candidate or for purposes of
borrowing of funds through the issuance, endorsement or
partisan political activity;
assignment with recourse or acceptance of deposit
x. To establish pension, retirement, and other plans for the
substitutes as defined in Section 95 of R.A. 7653 for
benefit of its directors, trustees, officers and employees;
purposes of relending or purchasing of receivables and
and
other obligations (Sec. 4 par. 3 GBL).
xi. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated
in the articles of incorporation.
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b. BANKING AND INCIDENTAL POWERS employees may be the ones negligent, a bank’s liability
as obligor is not merely vicarious, but primary, as banks
All such powers as may be necessary to carry on the business of are expected to exercise the highest degree of diligence
commercial banking (Sec. 29). in the selection and supervision of their employees.

i. Accepting drafts Duty on Bank Accounts of Clients

ii. Issuing letters of credit
iii. Discounting and negotiating promissory notes, drafts, BPI Family Bank v. Franco 538 SCRA 184, 2007
bills of exchange and other evidence of debt
iv. Accepting or creating demand deposits In every case, the depositor expects the bank to treat his
v. Receiving other types of deposits and deposit substitutes account with utmost fidelity, whether such account
vi. Buying and selling foreign exchange and gold or silver consists only of a few hundreds of pesos or of millions.
bullion The bank must record every single transaction
vii. Acquiring marketable bonds and other debt securities accurately, down to the last centavo, and as promptly as
viii. Extending credit possible. This has to be done if the account is to reflect
at any given time the amount of money the depositor
can dispose of as he sees fit, confident that the bank will
deliver it as and to whomever directed. A blunder on
4. DILIGENCE REQUIRED OF BANKS – RELEVANT JURISPRUDENCE
the part of the bank, such as the dishonor of the check
(Sec. 2) The State recognizes the vital role of banks in without good reason, can cause the depositor not a little
providing an environment conducive to the sustained embarrassment if not also financial loss and perhaps
development of the national economy and the fiduciary even civil and criminal litigation. The point is that as
nature of banking that requires high standards of integrity business affected with public interest and because of the
and performance. In furtherance thereof, the State shall nature of its functions, the bank is under obligation to
promote and maintain a stable and efficient banking and treat the accounts of its depositors with meticulous care,
financial system that is globally competitive, dynamic and always having in mind the fiduciary nature of their
responsive to the demands of a developing economy. relationship.

Banks are required to exercise the highest degree of Dealings with Registered Land
diligence.
Ursal v. CA 473 SCRA 52, 2005
Fiduciary Nature of Banks
Banks cannot merely rely on certificates of title in
 Failure on the part of the bank to satisfy the degree of ascertaining the status of mortgaged properties. As
diligence required of banks may warrant the award of their business is impressed with public interest, they are
damages. expected to exercise more care and prudence in their
 Under Sec. 2, the degree of diligence is “high dealings than private individuals. Indeed, the rule that
standards of integrity and performance”. persons dealing with registered land can rely solely on
the certificate of tile does not apply to banks.
Fiduciary Obligation of Banks
Degree of Diligence Required of Banks as Lenders-
BPI v. Lifetime Marketing Corp. 555 SCRA 373, 2008 Mortgagees

The degree of diligence required of banks is more than Consolidated Rural Bank (Cagayan Valley) v. CA 448
that of a reasonable man or a good father of a family. In SCRA 347, 2005
view of the fiduciary nature of their relationship with
Banks, their business being impressed with public
their depositors, banks are duty-bound to treat the
interest [in this case taking-up real estate mortgages to
accounts of their clients with the highest degree of care.
secure the loans given], are expected to exercise more
Fiduciary Obligation of Bank Employees care and prudence than private individual in their
dealings, even those involving registered lands. Hence,
PNB v. Pike 470 SCRA 328 for merely relying on the certificates of title and for its
failure to ascertain the status of the mortgaged
It bears emphasizing that the negligence of banking properties as is the standard procedure in its operations,
institutions should never be countenance. Although its the bank is a mortgagee in bad faith.
 8

Relevant Jurisprudence enforce those exceptions and inquire into bank deposits.
If there are doubts in upholding the absolutely
Simex International v. CA, 1990 confidential nature of bank deposits against the
affirming authority to inquire into such accounts, then
As a business affected with public interest and because such doubts must be resolved in favor of the former.
of the nature of its functions, the bank is under Such a stance would persist unless Congress passes a law
obligation to treat the accounts of its depositors with reversing the general state policy of preserving the
meticulous care, always having in mind the fiduciary absolutely confidential nature of Philippine bank
nature of their relationship. deposits.
BSP Group, Inc. v. Go, 2010
PCI Bank v. CA, 2001
It is conceded that while the fundamental law has not
Banks are expected to exercise the highest degree of bothered with the triviality of specifically addressing
diligence in the selection and supervision of their privacy rights relative to banking accounts, there,
employees. nevertheless, exists in our jurisdiction a legitimate
expectation of privacy governing such accounts. The
PS Bank v. Chowking Food Corp., 2008 source of this right of expectation is statutory, and is
found in R.A.No. 1405, otherwise known as the Bank
It cannot be overemphasized that the banking business Secrecy Act of 1955.
is impressed with public interest. Of paramount Subsequent statutory enactments have expanded the
importance is the trust and confidence of the public in list of exceptions to this policy yet the secrecy of bank
general in the banking industry. Consequently, the deposits still lies as the general rule, falling as it does
diligence required of banks is more than that of the within the legally recognized zones of privacy. There is,
Roman pater familias or a good father of a family. The in fact, much disfavor to construing these primary and
highest degree of diligence is expected. supplemental exceptions in a manner that would
authorize unbridled discretion, whether governmental
Bank of America NT&SA v. Philippine Racing Club, 2009 or otherwise, in utilizing these exceptions as authority to
unwarranted inquiry into bank accounts. It is then
The banking business is so impressed with public interest
perceivable that the present legal order is obliged to
where the trust and confidence of the public in general
conserve the absolutely confidential nature of bank
is of paramount importance such that the appropriate
deposits.
standard of diligence must be high degree of diligence, if
not the utmost diligence.
Bank as a Debtor
 Deposit is a voluntary agreement, “Know Your
Customer” standards
5. NATURE OF BANK FUNDS AND BANK DEPOSITS  Bank acquires ownership of money deposited; obligation
to pay amount, but not obligation to return the same
The bank can make use as its own the money deposited money (Guingona, Jr. v. City Fiscal of Manila 128 SCRA
577, 1984)
(Tan Tiong Tick v. American Apothecaries 65 Phil 414,
 Payment to proper party-depositor (Fulton Iron Works
1938). Said amount is not being held in trust for the
Co. V. China Banking Corp. 58 Phil. 206, 1930)
depositor nor is it being kept for safekeeping.  Deposits are not preferred credits (Central Bank v.
Art. 1990 (Civil Code). Fixed, savings, and current Morfe 63 SCRA 114, 1975
deposits of money in banks and similar institutions shall  Bank has right to compensation (Gullas v. PNB 62 Phil.
be governed by the provisions concerning simple loan. 519, 1935)
 No breach of trust - mandamus not a remedy (Lucman
v. Malawi 511 SCRA 268, 2006).
Confidentiality of Bank Deposits
The prevailing policy of the matter is to preserve the
6. STIPULATION ON INTEREST
absolute confidentiality enjoyed by bank deposits.
Interests on Deposits
Republic v. Eugenio, 2008
The Monetary Board has declared that the interest on
Indeed, by force of statute, all bank deposits are
deposits are not subject to ceilings (Section 242, MORB).
absolutely confidential, and that nature is unaltered
Interest or yield on time deposit/deposit substitute may
even by the legislated exceptions referred to above.
be paid at maturity or upon withdrawal or in advance.
There is disfavor towards construing these exceptions in
However, interest or yield paid in advance shall not
such a manner that would authorize unlimited discretion
exceed the interest for one year (Section 242.1, MORB)
on the part of the government or of any party seeking to
 9

(ii) The ratio applied uniformly to banks of same

Interest on Loans category.
While the Usury Law ceiling on interest rates was lifted
by Central Bank Circular 905, nothing in the said circular a. SINGLE BORROWER’S LIMIT (SBL)
grants lenders carte blanche authority to raise interest
Except as the Monetary Board ay otherwise prescribe for
rate to levels which will either enslave their borrowers
reason of national interest, total amount of loans, credit,
or lead to a hemorrhaging of their assets (Solangon v. accommodations and guarantees that may be extended
Salazar 360 SCRA 379). by a bank to any person, partnership, association or
other entity shall at no time exceed 20% of the net
Effect of Excessive interest Rates: worth of such bank. However, in 2010, the SBL was
increased to 25% for a period of 3 Years. Further, in
Art. 1229. The judge shall equitably reduce the penalty 2013, the Bankong Sentral ng Pilipinas issued Circular
when the principal has been partly or irregularly or No. 779 which extended the 25% SBL for another 3
partly complied with by the debtor. Even if there has years.
been no performance, the penalty may also be reduced
Also, unless the Monetary Board prescribes otherwise,
by the courts if it is iniquitous or unconscionable.
the SBL may be increased by an additional 10% of Net
Worth, provided that the additional is supported
Escalation Clause
adequately by trust receipts, shipping documents,
Agreement by the Bank and the borrower that the warehouse receipts or other similar documents
obligation shall become due and demandable upon transferring or securing title covering readily
default of the latter. marketable, non-perishable goods which must be fully
While such a agreement is valid, the bank cannot be recovered by insurance, which shall include:
given unbridled right to adjust the interest rate a. Direct liability of the maker or acceptor of paper
discounted with or sold to such bank, and liability of
independently and upwardly. Such would negate the
general indorser, drawer or guarantor who obtains
mutuality of contracts Floirendo v. Metropolitan Bank, a loan or other credit accommodation from, or
G.R. No. 148325 September 3, 2007). discounts paper with, or sells papers to such bank;
b. In the case of an individual who owns or controls a
Floating Rate of Interest majority interest in a corporation, partnership,
association or any other entity, the liabilities to
While it may be acceptable, for practical reasons given
such bank;
the fluctuating economic conditions, for banks to c. In case of the corporation, all liabilities to such bank
stipulate that interest rate on a loan not be fixed and of all subsidies in which such corporation owns or
instead be made dependent upon prevailing market controls a majority interest; and
conditions, there should always be a reference rate upon d. In case of a partnership, association or other entity,
which to peg such variable interest rates (Consolidated the liabilities of the members thereof to such bank.
Bank and Trust Corporation (Solid Bank) v. CA 356 SCRA
671). Coverage – For purposes of the SBL coverage, loans and
other credit, accommodations and guarantees shall
exclude those which are:
 Secured by obligations of the BSP or Philippine
7. GRANT OF LOAN AND SECURITY REQUIREMENTS
Government;
 Fully guaranteed by the Government as to the
a. RATIO OF NETWORTH TO TOTAL RISK ASSETS payment of principal and interest;
The Monetary Board shall prescribe the minimum ratio  Covered by assignment of deposits maintained in
which the net worth of a bank must bear to its total risk the lending bank and held in the Philippines;
assets wh.ich may include contingent accounts, and  Under letters of credit, to the extent covered by
may: margin deposits;
- Require that such ratio be determined on the basis  Those which the Monetary Board may, from time to
of the Net Worth and Risk Assets of a bank and is time, specify as non-risk items
subsidiaries, financial or otherwise;  Loans and other credit accommodations, deposits
- Prescribe composition and manner of determining maintained with, and usual guarantees by a bank to
Net Worth and Total Risk Assets of the banks and any other banks or non-bank entity, whether locally
their subsidiaries. or abroad.

Provided: Inclusion of Parent Corporation

(i) The Monetary Board may require or suspend Even if a parent corporation, partnership, association,
compliance with such ratio whenever entity or an individual who owns or controls a majority
necessary for a maximum period of one year;
 10

interest in such entities has no liability to the bank, the

Monetary Board may prescribe the combination of the
liabilities of subsidiary corporations or members of the
partnership, association, entity or such individual under
certain circumstances, including but not limited to any of
the following situations:
 Parent corporation, partnership, association, entity
or individual guarantees the repayment of the
liabilities;
 Liabilities were incurred for the accommodation of
the parent corporation or another subsidiary or the
partnership or association or entity or such
individual; or
 Subsidiaries through separate entities operate
merely as departments or divisions of a single
entity. (Villanueva, 2009)

b. RESTRICTIONS ON BANK EXPOSURE TO DOSRI

(Directors, Officers, Stockholders and their Related
Interest)

No director or officer of any bank shall, directly or

indirectly, for himself or as the representative or agent
of others:
(1) Borrow from such bank; nor
(2) Shall he become a guarantor, endorser, or surety
for loans from such bank to others; nor
(3) In any manner be an obligor, or incur any
contractual liability to the bank.

EXCEPT with the written approval of the majority of all

the directors of the bank, excluding the director
concerned.

However, such written approval shall not be required for

loans, other credit accommodations and advances
granted to officers under a fringe benefit plan approved
by the Banko Sentral.

After due notice to the board of directors of the bank,

the office of any bank director or officer who violates the
provisions of the DOSRI restriction may be declared
vacant and the director or officer shall be subject to the
penal provisions of the New Central Bank Act.

DOSRI accounts shall be limited to an amount equivalent

to their respective encumbered deposits and book value
of their paid-in capital contribution in the bank.
Provided:
(i) Loans, credit accommodations and guarantees
secured by assets considered as non-risk by
the Monetary Board shall be excluded from
such limits;
(ii) Loans, credit accommodations and advances
to officers in the form of fringe benefits
granted shall not apply to loans, credit
accommodations, and guarantees extended by
a cooperative bank to its cooperative
shareholders.