GENERAL BANKING ACT

(R.A. 8791)

The General Banking Law applies PRIMARILY to Universal and Commercial Banks
and SUPPLETORILY to Thrift Banks, Rural Banks, Cooperative Banks and Islamic
Banks.

PURPOSE AND SCOPE OF APPLICATION

(Section 2)

Section 2. Declaration Of Policy. - The State recognizes the vital role of banks in
providing an environment conducive to the sustained development of the national
economy and the fiduciary nature of banking that requires high standards of
integrity and performance. In furtherance thereof, the State shall promote and
maintain a stable and efficient banking and financial system that is globally
competitive, dynamic and responsive to the demands of a developing economy.

1. The State recognizes the vital role of banks in providing an environment

conducive to the sustained development of the National Economy.
- The bank plays either a passive or an active role:
• Passive – as a depositary of your millions.
• Active – it conducts not only banking and lending activities but more
importantly it helps in the conduct of day to day transactions of several
businesses. Banks are considered as trusted partners of business
entities.
- Banks play a vital role in the economic life of the country and for the
sustained development of the country.
• Imagine if there are no banks, how would we facilitate our transactions
as individuals, as business entities and as a country in general?

2. The State also recognizes the fiduciary nature of banks.

- Banks are impressed with public interest.
- Because of the said fiduciary nature, banks are expected to exercise the
highest standards of integrity and performance as compared to other
entities.
- The bank must not only exercise “high standards of integrity and
performance,” it must also ensure that its employees do likewise, because
this is the only way to ensure that the bank will comply with its fiduciary
duty.

The standard of diligence required of banks (i.e. HIGHEST STANDARDS OF

INTEGRITY AND PERFORMANCE) is exemplified in the following cases:

BANKS COVERED
(Section 3)

“Banks” refer to entities engaged in the lending of funds obtained in the form of
deposits, and are classified as follows:

1. Universal Banks;
 2. Commercial Banks;
3. Thrift Banks (3):
- Savings and Mortgage Banks
- Stock Savings and Loan Associations
- Private Development Banks
4. Rural Banks (as defined in “Rural bank Act”);
- Basically, rural banks cater to those in the countryside, in the rural areas.
- Their primary function is to extend loans or credits to farmers, fisher folks
etc.
5. Cooperative Banks (as defined in “Cooperative Code”);
- These banks cater to cooperatives. They extend loans and assistance to
cooperatives.
6. Islamic Banks (as defined in “Charter of Al Amanah Islamic Investment Bank
of the Philippines”).
- These banks cater to our Muslim brothers and sisters.
7. Other classifications of banks as determined by the Monetary Board of the
BSP.

Under the General Banking Law, you are a bank if you lend funds and these funds
are obtained from the public by way of deposits. That definition under the law
describes what classical or core banking is: deposit taking and lending of funds. But
in reality, banks do more than deposit taking and lending of funds. As will be
discussed later under Section 29 on the operations of commercial banks and Section
53 on other banking services, it is more than just deposit taking and lending of funds.

Note that aside from deposit taking and lending of funds, universal banks and
commercial banks are also allowed to have investments in certain enterprises. In
case of universal banks, it is allowed to invest in allied and non-allied enterprises
but in case of commercial banks, only in allied enterprises. Also a universal bank
can also act as an investment house.

AUTHORITY OF BSP
(Sections 4-7)

Section 4. Supervisory Powers. The operations and activities of banks shall be

subject to supervision of the Bangko Sentral. "Supervision" shall include the
following:
4.1. The issuance of rules of, conduct or the establishment standards of
operation for uniform application to all institutions or functions covered, taking
into consideration the distinctive character of the operations of institutions and
the substantive similarities of specific functions to which such rules, modes or
standards are to be applied;
4.2 The conduct of examination to determine compliance with laws and
regulations if the circumstances so warrant as determined by the Monetary
Board;
4.3 Overseeing to ascertain that laws and regulations are complied with;
4.4 Regular investigation which shall not be oftener than once a year from the
last date of examination to determine whether an institution is conducting its
business on a safe or sound basis: Provided, That the deficiencies/irregularities
found by or discovered by an audit shall be immediately addressed;
4.5 Inquiring into the solvency and liquidity of the institution (2-D); or
4.6 Enforcing prompt corrective action. (n)
 The Bangko Sentral shall also have supervision over the operations of and exercise
regulatory powers over quasi-banks, trust entities and other financial institutions
which under special laws are subject to Bangko Sentral supervision. (2-Ca)

For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the
borrowing of funds through the issuance, endorsement or assignment with
recourse or acceptance of deposit substitutes as defined in Section 95 of Republic
Act No. 7653 (hereafter the "New Central Bank Act") for purposes of re-lending or
purchasing of receivables and other obligations. (2-Da)

 The authority and function of the BSP is laid down in the New Central Bank Act.
This authority of the BSP is also reiterated in the General Banking Law.

 BSP has supervisory and regulatory authority over banks.

- The BSP issues rules and regulations.
- It also conducts examinations and REGULAR INVESTIGATIONS over banks,
not more than once a year.
- By way of exception, the BSP can examine a bank more than once a year if by
vote of 5 of the members of the Monetary Board. Just like when there are cases
of reported irregularities, it can conduct SPECIAL EXAMINATIONS.

 BSP also has authority over quasi-banks, which are still considered financial
institutions.

- What are quasi-banks?

quasi-banks" shall refer to entities engaged in the borrowing of funds through
the issuance, endorsement or assignment with recourse or acceptance of
deposit substitutes as defined in Section 95 of Republic Act No. 7653
(hereafter the "New Central Bank Act")

What is quasi banking?

Elements of quasi-banking. The essential elements of quasi-banking are:

a. Borrowing funds for the borrower’s own account;

b. Twenty (20) or more lenders at any one (1) time;

c. Methods of borrowing are issuance, endorsement, or acceptance of debt

instruments of any kind, other than deposits, such as acceptances, promissory
notes, participations, certificates of assignments or similar instruments with
recourse, trust certificates, repurchase agreements, and such other instruments
as the Monetary Board may determine; and

d. The purpose of which is (1) relending, or (2) purchasing receivables or other

obligations.
 Section 5. Policy Direction; Ratios, Ceilings and Limitations. - The Bangko
Sentral shall provide policy direction in the areas of money, banking and credit.
(n)

For this purpose, the Monetary Board may prescribe ratios, ceilings, limitations,
or other forms of regulation on the different types of accounts and practices of
banks and quasi-banks which shall, to the extent feasible, conform to
internationally accepted standards, including of the Bank for International
Settlements (BIS). The Monetary Board may exempt particular categories of
transactions from such ratios, ceilings. and limitations, but not limited to
exceptional cases or to enable a bank or quasi-bank under rehabilitation or during
a merger or consolidation to continue in business, with safety to its creditors,
depositors and the general public. (2-Ca)

 Examples of those ratios, ceilings or limitations:

- Reserve requirement – Banks must maintain a certain reserve requirement
vis-à-vis its deposit liabilities. If you fall short of your reserve requirement,
you are subject to penalties.
A reserve requirement constrains a bank's ability to lend. For example, with
an 8% reserve requirement, a bank can lend only $92 for every $100 of
deposits.

For example, for universal banks and commercial banks the reserve
requirement is 9.5%. That means if I deposit Php100 to metrobank,
metrobank in turn cannot lend the entire amount to another person.
Metrobank can only lend Php90.50. The difference of Php9.50 that will be kept
by the bank as a reserve requirement.

- Single borrowers limit – Banks cannot lend more than a certain percentage
of its net worth to a single borrower.
 PURPOSE: To ensure that the bank will conduct its operations in a safe and
sound manner


Section 6. Authority to Engage in Banking and Quasi-Banking Functions. - No

person or entity shall engage in banking operations or quasi-banking functions
without authority from the Bangko Sentral: .Provided, however, That an entity
authorized by the Bangko Sentral to perform universal or commercial banking
functions shall likewise have the authority to engage in quasi-banking functions.
The determination of whether a person or entity is performing banking or quasi-
banking functions without Bangko Sentral authority shall be decided by the
Monetary Board. To resolve such issue, the Monetary Board may; through the
appropriate supervising and examining department of the Bangko Sentral,
examine, inspect or investigate the books and records of such person or entity.
Upon issuance of this authority, such person or entity may commence to engage
in banking operations or quasi-banking function and shall continue to do so unless
such authority is sooner surrendered, revoked, suspended or annulled by the
Bangko Sentral in accordance with this Act or other special laws.

The department head and the examiners of the appropriate supervising and
examining department are hereby authorized to administer oaths to any such
person, employee, officer, or director of any such entity and to compel the
 presentation or production of such books, documents, papers or records that are
reasonably necessary to ascertain the facts relative to the true functions and
operations of such person or entity. Failure or refusal to comply with the required
presentation or production of such books, documents, papers or records within a
reasonable time shall subject the persons responsible therefore to the penal
sanctions provided under the New Central Bank Act.

Persons or entities found to be performing banking or quasi-banking functions

without authority from the Bangko Sentral shall be subject to appropriate
sanctions under the New Central Bank Act and other applicable laws. (4a)

 No person or entity can engage in banking operations or quasi-banking functions

without authority (banking franchise) from the BSP.

Who may engage in quasi banking activities?

ANSWER: BSP CIRCULAR NO. 459, November 11, 2004

Section 4102Q. Preconditions for the Exercise of Quasi-Banking Functions - No

person or entity shall engage in quasi-banking functions without authority from the
Bangko Sentral. Only a duly incorporated non-bank financial institution (NBFI)
organized as stock corporation may undertake or perform quasi-banking functions
as defined in Section 4101Q.

May bank engage in quasi banking activities?

ANSWER: yes but only universal and commercial banks

Section 7. Examination by the Bangko Sentral. - The Bangko Sentral shall,

when examining a bank, have the authority to examine an enterprise which is
wholly or majority-owned or controlled by the bank. (2-Ba)

 What is the extent of the authority?

1) The bank itself
2) enterprises wholly or majority owned or controlled by the bank

CAPITAL STRUCTURE OF BANKS AND QUASI-BANKS

(Sections 8-19)

Section 8. Organization. - The Monetary Board may authorize the organization of

a bank or quasi-bank subject to the following conditions:
8.1 That the entity is a stock corporation (7);
8.2 That its funds are obtained from the public, which shall mean twenty (20)
or more persons (2-Da); and
8.3 That the minimum capital requirements prescribed by the Monetary Board
for each category of banks are satisfied. (n)

No new commercial bank shall be established within three (3) years from the
effectivity of this Act. In the exercise of the authority granted herein, the Monetary
Board shall take into consideration their capability in terms of their financial
resources and technical expertise and integrity. The bank licensing process shall
incorporate an assessment of the bank's ownership structure, directors and senior
management, its operating plan and internal controls as well as its projected
financial condition and capital base.
 Can a partnership or sole proprietorship organize a bank?
- No, it cannot because of the conditions provided for under the law.

 What are those conditions? (3)

1. The entity is a stock corporation

- The bank cannot be a partnership or sole proprietorship. There reason is
the capital requirement for banks.
- The law requires that the bank must be a stock corporation. There is no
non-stock, non-profit bank.
-
2. Its funds are obtained from the public, which shall mean twenty (20) or more
persons
- The shares of stock must come from the public, meaning that the
subscribers to the shares of stock of the bank must be at least 20.

3. That the minimum capital requirements prescribed by the Monetary Board for
each category of banks are satisfied.
- It must comply with the minimum capital requirement, to be prescribed by
the Monetary Board.
- As a GENERAL RULE, if you put up a corporation (not a bank), there is no
minimum capital requirement which is required by the Corporation Code.
The only minimum is your paid-up capital stock or must be at least
P5,000. The SEC does not prescribe. But in case of banks, as the
EXCEPTION, there is a minimum capitalization requirement.
- Based on a circular (As of 2000. I think this has already been amended):
o universal banks, you need at least 4.9 billion
o commercial banks, 2.4 billion
o rural banks, 26 million
o thrift banks, 325 million
- The reason why the law provides for a minimum capital requirement for
banks for the protection of the public. It has the same principle with that
of the Trust Fund Doctrine. The funds held by the corporation are for the
protection of the creditors. So, they are saying that this requirement is to
reduce the moral hazards by exposing the money of the bank owners or
the stockholders at risk. If your capital is big, mismanagement would be
less likely. It’s like you have an insurable interest. If you have an insurable
interest, you are trying to make sure that you would take care of the
property. Or in this case, you would take care of the business because a
large amount of capital is at risk. You make sure that you do not
mismanage. Again this is the trust fund doctrine.
- Take note that the SEC will not register the corporation, intending to
operate as a bank, without the certificate of authority from the Central
Bank.

Section 9. Issuance of Stocks. - The Monetary Board may prescribe rules and
regulations on the types of stock a bank may issue, including the terms thereof
and rights appurtenant thereto to determine compliance with laws and regulations
governing capital and equity structure of banks; Provided, That banks shall issue
par value stocks only.
 Section 10. Treasury Stocks. - No bank shall purchase or acquire shares of its
own capital stock or accept its own shares as a security for a loan, except when
authorized by the Monetary Board: Provided, That in every case the stock so
purchased or acquired shall, within six (6) months from the time of its purchase
or acquisition, be sold or disposed of at a public or private sale. (24a)

Treasury stock, also known as treasury shares or reacquired stock, refers

to previously outstanding stock that has been bought back from stockholders by the
issuing company.

 Can a bank acquire its own shares or accept shares as security for a loan?
- NO.
- Again, this is different from ordinary corporations. As what we have learned
from ordinary corporations as far as treasury shares are concerned, an
ordinary corporation can acquire treasury shares. The only requirement is
that it must have unrestricted retained earnings.

GR: No bank shall purchase or acquire shares of its own capital stock or accept its
own shares as a security for a loan, even if there are unrestricted retained earnings.
EXCEPTION: when authorized by the Monetary Board

The reason is, if you have treasury shares, your capital structure (paid-in capital,

Section 11. Foreign Stockholdings. - Foreign individuals and non-bank

corporations may own or control up to forty percent (40%) of the voting stock of a
domestic bank. This rule shall apply to Filipinos and domestic non-bank
corporations.

The percentage of foreign-owned voting stocks in a bank shall be determined by

the citizenship of the individual stockholders in that bank. The citizenship of the
corporation which is a stockholder in a bank shall follow the citizenship of the
controlling stockholders of the corporation, irrespective of the place of
incorporation. (n)

FIRST PARAGRAPH

40% foreign individuals

40% Foreign non-bank corporations
40% Filipino individuals
40% domestic non-bank corp

100% Foreign banks (Ra 10641)

Section 1. Section 2 of Republic Act No. 7721 as amended by 10641

"SEC. 2. Modes of Entry. – The Monetary Board may authorize foreign banks to
operate in the Philippine banking system through any one of the following" modes
of entry: (i) by acquiring, purchasing or owning up to one hundred percent (100%)
of the voting stock of an existing bank; (ii) by investing in up to one hundred
percent (100%) of the voting stockof a new banking subsidiary incorporated under
the laws of the Philippines; or (iii) by establishing branches with full banking
authority.

 So, what
SECOND PARAGRAPH

The second paragraph talks about the grandfather rule. The SEC, however, has done
away with the strict application of the said rule and instead applied the more lenient
“control test” to determine corporate nationality.

Grandfather Rule
- Under the grandfather rule, if we look at the stockholdings of the company,
we look at the “grandfather”

So, under the grandfather rule, the effective ownership of foreigners in Bank A is
41%
→ 21% (ABC Foreign Corporation: 30% x 70%), plus 20% (Mr. A, Foreign
Individual) = 41%
→ So, you consider the citizenship of the controlling stockholders of ABC
Corporation.

But under the more lenient control test, the ownership of foreigners in Bank A is
50%. (20% + 30%)

Section 12. Stockholdings of Family Groups of Related Interests. -

Stockholdings of individuals related to each other within the fourth degree of
consanguinity or affinity, legitimate or common-law, shall be considered family
groups or related interests and must be fully disclosed in all transactions by such
corporations or related groups of persons with the bank. (12-Ba)

Section 13. Corporate Stockholdings. - Two or more corporations owned or

controlled by the same family group or same group of persons shall be considered
related interests and must be fully disclosed in all transactions by such
corporations or related group of persons with the bank. (12-Ba)
 Sections 12 and 13 talk about stockholdings of family groups or related interests.
Take note that the law does not provide a limit that one family can only own 40%.
There is actually NO LIMIT. The only requirement by law is DISCLOSURE.

 So, it is possible that a family group can acquire 100% of a domestic bank for as
long as the INDIVIDUAL OWNERSHIP (of the members of the family group) DOES
NOT EXCEED 40% (Section 11)

Section 14. Certificate of Authority to Register. - The Securities and Exchange

Commission shall not register the articles of incorporation of any bank, or any
amendment thereto, unless accompanied by a certificate of authority issued by
the Monetary Board, under it seal. Such certificate shall not be issued unless the
Monetary Board is satisfied from the evidence submitted to it:
14.1 That all requirements of existing laws and regulations to engage in the
business for which the applicant is proposed to be incorporated have been
complied with;
14.2 That the public interest and economic conditions, both general and local,
justify the authorization; and
14.3 That the amount of capital, the financing, organization, direction and
administration, as well as the integrity and responsibility of the organizers and
administrators reasonably assure the safety of deposits and the public interest.
(9)
The Securities and Exchange Commission shall not register the by-laws of any
bank, or any amendment thereto, unless accompanied by a certificate of
authority from the Bangko Sentral. (10)

Section 15. Board of Directors. - The provisions of the Corporation Code to the
contrary notwithstanding, there shall be at least five (5), and a maximum of fifteen
(15) members of the board or directors of a bank, two (2) of whom shall be
independent directors. An "independent director" shall mean a person other than
an officer or employee of the bank, its subsidiaries or affiliates or related interests.
(n) Non-Filipino citizens may become members of the board of directors of a bank
to the extent of the foreign participation in the equity of said bank. (Sec. 7, RA
7721) The meetings of the board of directors may be conducted through modern
technologies such as, but not limited to, teleconferencing and video-conferencing.
(n)

NOTE: Sec cannot approve the AOI or any amendments thereto without a
certificate of authority from the Monetary Board

Number of directors in a bank?

- The number of directors must be at least 5 and a maximum of 15 and that at
least 2 of them must be independent directors. Definitely a bank cannot be
created through a one person corporation cannot

 Can a foreign individual be a director of a bank?

- Yes. Non-Filipino citizens may become members of the BOD of a bank to the
extent of the foreign participation in the equity of said bank.
- For example, 40% of the bank is owned by foreign individual. So, in the seat
of the BOD, they can only occupy up to the extent of 40%. If you have 5 seats,
40% of the 5 seats is 2. And of course if it is 100%, then 5 seats.
- Under the GBL, it is possible for a bank to be 100% foreign owned (see
discussion under Section 11).
 - Thus, the BOD may be 100% foreign nationals. But a majority of them have
to be residents of the Philippines.

Section 16. Fit and Proper Rule. - To maintain the quality of bank management
and afford better protection to depositors and the public in general the Monetary
Board shall prescribe, pass upon and review the qualifications and
disqualifications of individuals elected or appointed bank directors or officers and
disqualify those found unfit. After due notice to the board of directors of the bank,
the Monetary Board may disqualify, suspend or remove any bank director or officer
who commits or omits an act which render him unfit for the position. In
determining whether an individual is fit and proper to hold the position of a director
or officer of a bank, regard shall be given to his integrity, experience, education,
training, and competence. (9-Aa)

FIT AND PROPER RULE

The monetary board may provide for additional qualifications for BOD members in
the bank, which has something to do with integrity, experience, education, training,
and competence.
- These qualifications set by the Monetary Board are in addition to those
prescribed in the Corporation Code on qualifications of the directors.

Section 17. Directors of Merged or Consolidated Banks. - In the case of a bank

merger or consolidation, the number of directors shall not exceed twenty-one (21).
(l3a)

 The only exception where the Board of Directors can exceed 15 is when there is a
merger or consolidation. If a bank consolidates or merges, then it is possible that
its Board will reach the number of 21, but not exceeding 21.

Section 18. Compensation and Other Benefits of Directors and Officers. - To

protect the finds of depositors and creditors the Monetary Board may regulate the
payment by the bark to its directors and officers of compensation, allowance, fees,
bonuses, stock options, profit sharing and fringe benefits only in exceptional cases
and when the circumstances warrant, such as but not limited to the following:
18.1. When a bank is under comptrollership or conservatorship; or
18.2. When a bank is found by the Monetary Board to be conducting business
in an unsafe or unsound manner; or
18.3. When a bank is found by the Monetary Board to be in an unsatisfactory
financial condition. (n)

-Just read this in your spare time

Section 19. Prohibition on Public Officials. - Except as otherwise provided in

the Rural Banks Act, no appointive or elective public official whether full-time or
part-time shall at the same time serve as officer of any private bank, save in cases
where such service is incident to financial assistance provided by the government
or a government owned or controlled corporation to the bank or unless otherwise
provided under existing laws.

 GENERAL RULE: No appointive or elective official can serve as an officer of the

bank.
 EXCEPTION: When the government extends financial assistance to the Bank.
Example is when the BSP or DBP (GOCC) grants financial loans or assistance to
banks. That is the only time that a public official can sit in as an officer of the
bank. The purpose is to protect the interest of the government because in this
case the government extends financial assistance.

BANK OPERATIONS
(Sections 20 – 22)

Section 20. Bank Branches. - Universal or commercial banks may open branches
or other offices within or outside the Philippines upon prior approval of the Bangko
Sentral. Branching by all other banks shall be governed by pertinent laws.

A bank may, subject to prior approval of the Monetary Board, use any or all of its
branches as outlets for the presentation and/or sale of the financial products of
its allied undertaking or of its investment house units. A bank authorized to
establish branches or other offices shall be responsible for all business conducted
in such branches and offices to the same extent and in the same manner as though
such business had all been conducted in the head office. A bank and its branches
and offices shall be treated as one unit.

 Universal Banks and Commercial Banks are, as a rule, allowed to open

branches within and outside of the Philippines but this with prior approval of
BSP.

 The operations of the branch shall be subject to the control or supervision or

responsibility of the head office. So, meaning, the branches and the head office
shall be considered or treated as one entity or one unit.

 Additionally, the bank may use its branch or any of its branches as outlet for the
sale of financial products of its allied enterprises.

 Example: When you go to the bank, some banks would offer sale of insurance,
right? In case of Metrobank, there is a separate table selling AXA Insurance or
another table offering to sell you credit cards. That is allowed because banks are
allowed to use their branches as outlet for the sale of financial products of their
allied enterprises.

 Insurance Companies and Credit Card Companies are considered as allied

enterprises.

Section 21. Banking Days and Hours. - Unless otherwise authorized by the
Bangko Sentral in the interest of the banking public, all banks including their
branches and offices shall transact business on all working days for at least six
(6) hours a day. In addition, banks or any of their branches or offices may open
for business on Saturdays, Sundays or holidays for at least three (3) hours a
day: Provided, That banks which opt to open on days other than working days
shall report to the Bangko Sentral the additional days during which they or their
branches or offices shall transact business. For purposes of this Section, working
days shall mean Mondays to Fridays, except if such days are holidays.

 all working days for at least six (6) hours a day

 Saturdays, Sundays or holidays for at leas
 t three (3) hours a day but this must be reported to the Bangko Sentral

Section 22. Strikes and Lockouts. - The banking industry is hereby declared as
indispensable to the national interest and, notwithstanding the provisions of any
law to the contrary, any strike or lockout involving banks, if unsettled after seven
(7) calendar days shall be reported by the Bangko Sentral to the secretary of Labor
who may assume jurisdiction over the dispute or decide it or certify the sane to the
National Labor Relations Commission for compulsory arbitration. However, the
President of the Philippines may at any time intervene and assume jurisdiction
over such labor dispute in order to settle or terminate the same.

-Just read this in your spare time since this is related to labor laws

UNIVERSAL BANKS

Section 23. Powers of a Universal Bank - A universal bank shall have the
authority to exercise, in addition to the powers authorized for a commercial bank
in Section 29, the powers of an investment house as provided in existing laws and
the power to invest in non-allied enterprises as provided in this Act.

POWERS OF A UNIVERSAL BANK

1. Powers authorized of a commercial bank (Section 29) – meaning, all powers

of commercial banks can be performed or can be done by universal banks

2. Powers of an investment house – dealing, underwriting, or selling of

securities.

If I am not mistaken there are 36 Universal Banks in the Philippines engaged

in dealing securities. Among these banks are Metrobank, BDO, BPI,
Chinabank.

3. Power to invest in non-allied enterprises

No problem with respect to universal banks because it can invest to both,

whether allied or non-allied.
But, you have to distinguish later on when we go to commercial banks because
a commercial bank can only invest in allied enterprises.

ALLIED ENTERPRISES:

1. Financial Allied
- Credit Card Companies
- Insurance Companies (like Metrobank with AXA as subsidiary)
- Investment House
- Financing Companies (car financing)
- Another Bank as Subsidiary
- Companies engaged in stock brokerage, foreign exchange
 2. Non-Financial Allied
- Safety deposit box Companies
- Warehousing Companies – Under the BSP Regulation, it is considered as
allied but only non-financial.

NON-ALLIED ENTERPRISES:

- Those which are not allied. Just memorize what are allied. Those which do not
fall under allied are non-allied.
- Ex. Culturing, mining, manufacturing (of any kind), public utilities, wholesale
trade, hospitals, hotels, restaurants, transportation, etc.

EQUITY INVESTMENTS OF A UNIVERSAL BANK

Section 24. Equity Investments of a Universal Bank. - A universal bank may,

subject to the conditions stated in the succeeding paragraph, invest in the equities
of allied and non-allied enterprises as may be determined by the Monetary Board.
Allied enterprises may either be financial or non-financial. Except as the Monetary
Board may otherwise prescribe:
24.1. The total investment in equities of allied and non-allied enterprises shall
not exceed fifty percent (50%) of the net worth of the bank; and
24.2. The equity investment in any one enterprise, whether allied or non-allied,
shall not exceed twenty-five percent (25%) of the net worth of the bank.
As used in this Act, "net worth" shall mean the total of the unimpaired paid-in
capital including paid-in surplus, retained earnings and undivided profit, net of
valuation reserves and other adjustments as may be required by the Bangko
Sentral.

The acquisition of such equity or equities is subject to the prior approval of the
Monetary Board which shall promulgate appropriate guidelines to govern such
investments. (21-Ba)

LIMIT AS TO INVESTMENT

 TOTAL INVESTMENT: A bank may invest whether it’s allied or non-allied or both
only up to 50% of its net worth. So, if the net worth of the bank is 100M, it can
invest only to the extent 50M. This is the aggregate limit.

 SINGLE ENTERPRISE: In no case, shall the investment of universal bank in one

enterprise whether it’s allied or non-allied exceed 25%.
- .

Section 25. Equity Investments of a Universal Bank in Financial Allied

Enterprises. - A universal bank can own up to one hundred percent (100%) of the
equity in a thrift bank, a rural bank or a financial allied enterprise. A publicly-
listed universal or commercial bank may own up to one hundred percent (100%)
of the voting stock of only one other universal or commercial bank. (21-B; 21-Ca)

 To what extent can a universal bank invest in a FINANCIAL ALLIED

ENTERPRISE?
- 100% of equity.

 Don’t be confused the 100% in section 25 with the 50 of section 24%.

 - 50% refers to the NET WORTH of the bank but the 100% refers to the EQUITY
(ownership in a company).

- Meaning it’s possible for a universal bank to acquire 100% ownership of a

financial allied enterprise like, for example, insurance. So, long as the value
of the investment (in a single enterprise) does not exceed 25% of its net worth,
and the total investment does not exceed 50% of its net worth.

Section 26. Equity Investments of a Universal Bank in Non-Financial Allied

Enterprises. - A universal bank may own up to one hundred percent (100%) of the
equity in a non-financial allied enterprise. (21-Ba)

Section 27. Equity Investments of a Universal Bank in Non-Allied Enterprises.

- The equity investment of a universal bank, or of its wholly or majority-owned
subsidiaries, in a single non-allied enterprise shall not exceed thirty-five percent
(35%) of the total equity in that enterprise nor shall it exceed thirty-five percent
(35%) of the voting stock in that enterprise. (21-B)

 What about investment in NON-FINANCIAL ALLIED ENTERPRISES, to what

extent can a universal bank invest?
- Still, 100%.

 But in case of a NON-ALLIED ENTERPRISES, what is the extent?

- It shall not exceed 35% in the total equity nor shall it exceed 35% of the voting
stock.

Section 28. Equity Investments in Quasi-Banks. - To promote competitive

conditions in financial markets, the Monetary Board may further limit to forty
percent (40%) equity investments of universal banks in quasi-banks. This rule
shall also apply in the case of commercial banks.

o What about equity investment in a quasi-bank?

- Up to 40%

COMMERCIAL BANKS

Section 29. Powers of a Commercial Bank. - A commercial bank shall have, in

addition to the general powers incident to corporations, all such powers as may be
necessary to carry on the business of commercial banking such as accepting drafts
and issuing letters of credit; discounting and negotiating promissory notes, drafts,
bills of exchange, and other evidences of debt; accepting or creating demand
deposits; receiving other types of deposits and deposit substitutes; buying and
selling foreign exchange and gold or silver bullion; acquiring marketable bonds and
other debt securities; and extending credit, subject to such rules as the Monetary
Board may promulgate. These rules may include the determination of bonds and
other debt securities eligible for investment, the maturities and aggregate amount
of such investment.

General Powers: those incident to a corporation (to sue and be sued, adopt a
corporation seal, etc.)

Specific Powers: All powers necessary to carry on the business of commercial banking
 1. accepting drafts and issuing letters of credit;
2. discounting and negotiating promissory notes, drafts, bills of exchange, and
other evidences of debt;
3. accepting or creating demand deposits;
4. receiving other types of deposits and deposit substitutes;
5. buying and selling foreign exchange and gold or silver bullion;
6. acquiring marketable bonds and other debt securities; and
7. extending credit, subject to such rules as the Monetary Board may promulgate

These are the same powers that are also exercised by Universal Banks. We mentioned
earlier that the Universal Bank has the same powers as that of a Commercial Bank.


Section 30. Equity Investments of a Commercial Bank. - A commercial bank
may, subject to the conditions stated in the succeeding paragraphs, invest only in
the equities of allied enterprises as may be determined by the Monetary Board.
Allied enterprises may either be financial or non-financial. Except as the Monetary
Board may otherwise prescribe:
30.1. The total investment in equities of allied enterprises shall not exceed
thirty-five percent (35%) of the net worth of the bark; and
30.2. The equity investment in any one enterprise shall not exceed twenty-five
percent (25%) of tile net worth of the bank. The acquisition of such equity or
equities is subject to the prior approval of the Monetary Board which shall
promulgate appropriate guidelines to govern such investment.(2lA-a; 21-Ca)

 If it’s a commercial bank, what is the extent of the total equity investment?
- Not to exceed 35% of its net worth but only for ALLIED ENTERPRISES.

 What about in a single enterprise?

- 25% of net worth but still allied.

Section 31. Equity Investments of a Commercial Bank in Financial Allied

Enterprises. - A commercial bank may own up to one hundred percent (100%) of
the equity of a thrift bank or a rural bank. Where the equity investment of a
commercial bank is in other financial allied enterprises, including another
commercial bank, such investment shall remain a minority holding in that
enterprise. (21-Aa; 21-Ca)

FIRST SENTENCE: A commercial bank may own up to 100% equity in a THRIFT

BANK or RURAL BANK. That’s a financial allied enterprise. It’s the same as with
universal bank.

Section 32. Equity Investments of a Commercial Bank in Non-Financial Allied

Enterprises. A commercial bank may own up to one hundred percent (100%) of
the equity in a non-financial allied enterprise. (21-Aa) Article III. Provisions
Applicable To All Banks, Quasi-Banks, And Trust Entities

 Equity investment of a commercial bank in a non-financial allied is also 100%.

 Equity investment in quasi-banks?
- Only 40% (Section 28)
RECAP:

Powers of a UNIVERSAL BANK: Powers of a COMMERCIAL BANK:

1. Powers authorized of a commercial 1. Same
bank (Section 29)
2. Powers of an investment house 2. Not available to a commercial bank
3. Power to invest in non-allied 3. Not available to a commercial bank.
enterprises Commercial Banks can only invest in
ALLIED ENTERPRISES (Financial or
Non-Financial Allied)

LIMITATIONS ON INVESTMENTS
UNIVERSAL BANK COMMERCIAL BANK
Total Investments in ALLIED ENTERPRISES (24, 30)
50% of net worth 35% of net worth
Equity Investment in a SINGLE ENTERPRISE (24, 30)
25% of net worth 25% of net worth
Equity Investments in FINANCIAL ALLIED ENTERPRISES (25, 31)
100% of equity. A publicly-listed bank 100% of equity of a thrift or rural bank.
may own up to 100% of the voting stock In other financial allied enterprises
of only one other UB/CB. including another commercial bank,
investment shall remain a minority
holding.
Equity Investments in NON-FINANCIAL ALLIED ENTERPRISES (26, 32)
100% of equity 100% of equity
Equity Investments of a Universal Bank in NON-ALLIED ENTERPRISES (24,
27)
TOTAL = 50% of net worth N/A
SINGLE ENTERPRISE = shall not
exceed thirty-five percent (35%) of the
total equity in that enterprise nor shall
it exceed thirty-five percent (35%) of the
voting stock in that enterprise
Equity Investments in Quasi-banks (28)
40% 40%

DEPOSITS, LOANS AND OTHER OPERATIONS

(Sections 33 – 66)

Section 33. Acceptance of Demand Deposits. - A bank other than a universal or

commercial bank cannot accept or create demand deposits except upon prior
approval of, and subject to such conditions and rules as may be prescribed by the
Monetary Board.
This section talks about authority of the bank to accept demand deposits.

Basically there are 3 Types of Deposits:

1. Time Deposit – interest rates stipulated depend on the number of days, which
may be 30, 60, 90, 180, 360, or 540 days. During this period, money deposited
cannot be withdrawn. The banks use this money to lend to others. That is why
in such accounts, depositors are paid high interest rates as compensation for
the use of the money by the bank.

2. Interest bearing Savings Deposits (this is not the same as your regular savings
account) – interest at say 3%. Under the fine prints, if you deposit today, you
cannot withdraw the amount not until 60 days later. The bank can lend out
such funds; that is why it pays interests on such deposits.

3. Demand Deposits or Current Accounts – no interest is paid by the bank

(unlike in time and interest bearing savings deposit), because the depositor
can take out his funds any time. It is called demand deposit because the
depositor can withdraw the money he deposited on the very same day he
deposited it. This involves checking or current accounts.

NOTE-Banks other than universal and commercial banks cannot create demand
deposits or current accounts without prior approval from the Monetary Board.

Section 34. Risk-Based Capital. - The Monetary Board shall prescribe the
minimum ratio which the net worth of a bank must bear to its total risk assets
which may include contingent accounts. For purposes of this Section, the
Monetary Board may require such ratio be determined on the basis of the net worth
and risk assets of a bank and its subsidiaries, financial or otherwise, as well as
prescribe the composition and the manner of determining the net worth and total
risk assets of banks and their subsidiaries: Provided, That in the exercise of this
authority, the Monetary Board shall, to the extent feasible conform to
internationally accepted standards, including those of the Bank for International
Settlements(BIS), relating to risk-based capital requirements: Provided further,
That it may alter or suspend compliance with such ratio whenever necessary for a
maximum period of one (1) year: Provided, finally, That such ratio shall be applied
uniformly to banks of the same category. In case a bank does not comply with the
prescribed minimum ratio, the Monetary Board may limit or prohibit the
distribution of net profits by such bank and may require that part or all of the net
profits be used to increase the capital accounts of the bank until the minimum
requirement has been met The Monetary Board may, furthermore, restrict or
prohibit the acquisition of major assets and the making of new investments by the
bank, with the exception of purchases of readily marketable evidences of
indebtedness of the Republic of the Philippines and of the Bangko Sentral and any
other evidences of indebtedness or obligations the servicing and repayment of
which are fully guaranteed by the Republic of the Philippines, until the minimum
required capital ratio has been restored. In case of a bank merger or consolidation,
or when a bank is under rehabilitation under a program approved by the Bangko
Sentral, Monetary Board may temporarily relieve the surviving bank, consolidated
bank, or constituent bank or corporations under rehabilitation from full
compliance with the required capital ratio under such conditions as it may
prescribe. Before the effectivity of rules which the Monetary Board is authorized to
prescribe under this provision, Section 22 of the General Banking Act, as amended,
Section 9 of the Thrift Banks Act, and all pertinent rules issued pursuant thereto,
shall continue to be in force. (22a)

NOTE: Risk based capital basically means the BSP sets the minimum ratio which
the net worth of a bank must bear to its total risk assets.

 What are risk assets?

- Loans extended to private individuals or corporations
- Investments in the form of stocks owned in private corporations

 What are non-risk assets? (0% risk)

- Cash because it is certain (0% risk)
- Loans or receivables but secured by Government issued securities like
treasury bonds because the Government cannot become insolvent because of
its inherent power of taxation.

Section 35. Limit on Loans, Credit Accommodations and Guarantees

35.1 Except as the Monetary Board may otherwise prescribe for reasons of national
interest, the total amount of loans, credit accommodations and guarantees as may
be defined by the Monetary Board that may be extended by a bank to any person,
partnership, association, corporation or other entity shall at no time exceed twenty
percent (20%) of the net worth of such bank. The basis for determining compliance
with single borrower limit is the total credit commitment of the bank to the
borrower.

35.2. Unless the Monetary Board prescribes otherwise, the total amount of loans,
credit accommodations and guarantees prescribed in the preceding paragraph may
be increased by an additional ten percent (10%) of the net worth of such bank
provided the additional liabilities of any borrower are adequately secured by trust
receipts, shipping documents, warehouse receipts or other similar documents
transferring or securing title covering readily marketable, non-perishable goods
which must be fully covered by insurance.

35.3 The above prescribed ceilings shall include (a) the direct liability of the maker
or acceptor of paper discounted with or sold to such bank and the liability of a
general endorser, drawer or guarantor who obtains a loan or other credit
accommodation from or discounts paper with or sells papers to such bank; (b) in
the case of an individual who owns or controls a majority interest in a corporation,
partnership, association or any other entity, the liabilities of said entities to such
bank; (c) in the case of a corporation, all liabilities to such bank of all subsidiaries
in which such corporation owns or controls a majority interest; and (d) in the case
of a partnership, association or other entity, the liabilities of the members thereof
to such bank.

35.4. Even if a parent corporation, partnership, association, entity or an individual

who owns or controls a majority interest in such entities has no liability to the
bank, the 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: (a) the parent corporation, partnership, association, entity or
individual guarantees the repayment of the liabilities; (b) the liabilities were
incurred for the accommodation of the parent corporation or another subsidiary
or of the partnership or association or entity or such individual; or (c) the
subsidiaries though separate entities operate merely as departments or divisions
of a single entity.

35.5. For purposes of this Section, loans, other credit accommodations and
guarantees shall exclude: (a) loans and other credit accommodations secured by
obligations of the Bangko Sentral or of the Philippine Government: (b) loans and
other credit accommodations fully guaranteed by the government as to the
payment of principal and interest; (c) loans and other credit accommodations
covered by assignment of deposits maintained in the lending bank and held in the
Philippines; (d) loans, credit accommodations and acceptances under letters of
credit to the extent covered by margin deposits; and (e) other loans or credit
accommodations which the Monetary Board may from time to time, specify as non-
risk items.

35.6. Loans and other credit accommodations, deposits maintained with, and
usual guarantees by a bank to any other bank or non-bank entity, whether locally
or abroad, shall be subject to the limits as herein prescribed.

35.7. Certain types of contingent accounts of borrowers may be included among

those subject to these prescribed limits as may be determined by the Monetary
Board.(23a)

Section 35 talks about single borrowers limit or how much you and I can borrow
from the bank. While section 35 states that the limit is 20%, however, the same
section also provides that except as the Monetary Board provides otherwise. At
present, the limit set forth by the Monetary Board is not to exceed 25% of the net
worth of the bank.

For single borrowers the limit is not to exceed 25% of the net worth of the bank. The
borrower could either be a person, partnership or corporation or any other juridical
entities.

Unless the monetary Board prescribes otherwise, the 25% limit may be extended for
an additional 10% provided the additional liabilities of any borrower are adequately
secured by trust receipts, shipping documents, warehouse receipts or other similar
documents transferring or securing title covering readily marketable, non-perishable
goods which must be fully covered by insurance. In short the 10% must be secured
by a financial instrument and covered by insurance.

Section 36. Restriction on Bank Exposure to Directors, Officers, Stockholders

and Their Related Interests. - No director or officer of any bank shall, directly or
indirectly, for himself or as the representative or agent of others, borrow from such
bank nor shall he become a guarantor, endorser or surety for loans from such
bank to others, or 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: Provided, That 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 Bangko Sentral. The required
 approval shall be entered upon the records of the bank and a copy of such entry
shall be transmitted forthwith to the appropriate supervising and examining
department of the Bangko Sentral. Dealings of a bank with any of its directors,
officers or stockholders and their related interests shall be upon terms not less
favorable to the bank than those offered to others. After due notice to the board of
directors of the bank, the office of any bank director or officer who violates the
provisions of this Section may be declared vacant and the director or officer shall
be subject to the penal provisions of the New Central Bank Act. The Monetary
Board may regulate the amount of loans, credit accommodations and guarantees
that may be extended, directly or indirectly, by a bank to its directors, officers,
stockholders and their related interests, as well as investments of such bank in
enterprises owned or controlled by said directors, officers, stockholders and their
related interests. However, the outstanding loans, credit accommodations and
guarantees which a bank may extend to each of its stockholders, directors, or
officers and their related interests, shall be limited to an amount equivalent to their
respective unencumbered deposits and book value of their paid-in capital
contribution in the bank: Provided, however, That loans, credit accommodations
and guarantees secured by assets considered as non-risk by the Monetary Board
shall be excluded from such limit: Provided, further, That loans, credit
accommodations and advances to officers in the form of fringe benefits granted in
accordance with rules as may be prescribed by the Monetary Board shall not be
subject to the individual limit. The Monetary Board shall define the term "related
interests." The limit on loans, credit accommodations and guarantees prescribed
herein shall not apply to loans, credit accommodations and guarantees extended
by a cooperative bank to its cooperative shareholders. (83a)

Restriction on bank exposure to DOSRI (Directors, Officers, Stockholders, Related

Interest)

 What is the rule?

- No direct or officer of a bank shall borrow from such bank, nor shall he become
a guarantor or surety for loans from such bank to others
- UNLESS there is a written approval of majority of the directors of the bank
but excluding the director concerned.

 What is the limit which you can lend to a DOSRI?

- It shall be equivalent to their respective unencumbered deposits and book
value of their paid-in capital contribution in the bank.
- So, if I am a director, I can borrow from the bank where I am a director
provided there is a written approval, etc. but it shall not exceed the
unencumbered deposit. So, if my deposit in that bank is 100K, I can borrow
only up to the extent of 100K. In short, it is secured. If I don’t have a deposit,
I cannot borrow.

 and (2) the individual limit.

Section 37. Loans and Other Credit Accommodations Against Real Estate. -
Except as the Monetary Board may otherwise prescribe, loans and other credit
accommodations against real estate shall not exceed seventy-five percent (75%) of
the appraised value of the respective real estate security, plus sixty percent (60%)
of the appraised value of the insured improvements, and such loans may be made
to the owner of the real estate or to his assignees. (78a)
 Section 38. Loans And Other Credit Accommodations on Security of Chattels
and Intangible Properties. - Except as the Monetary Board may otherwise
prescribe, loans and other credit accommodations on security of chattels and
intangible properties such as, but not limited to, patents, trademarks, trade
names, and copyrights shall not exceed seventy-five percent (75%) of the appraised
value of the security, an such loans and other credit accommodation may be made
to the title-holder of the chattels and intangible properties or his assignees.

Section 37 provides for a limitation on the amount of the loan that the bank may
extend if the collateral is a real property.

 For how much or to what extent can the bank grant the loan?
- In case of a real estate – it shall not exceed 75% of the FMV or appraised value
of the property. Ex. land.
- In case of improvements (ex. Building) – shall not exceed 60%.
- It could be lower but it could not be higher than those amounts.

That’s why if we have a collateral and it was appraised, not 100% of that will be the

Section 38. Loan secured by intangible properties

 What if secured by intangible properties?

- Now in case of intangibles, like patents, trademarks, trade names,
copyright…it shall not exceed 75% of the appraised value of the security.
-

SECTION 39. Grant and Purpose of Loans and Other Credit Accommodations.
— A bank shall grant loans and other credit accommodations only in amounts and
for the periods of time essential for the effective completion of the operations to be
financed. Such grant of loans and other credit accommodations shall be consistent
with safe and sound banking practices. (75a)

The purpose of all loans and other credit accommodations shall be stated in the
application and in the contract between the bank and the borrower. If the bank
finds that the proceeds of the loan or other credit accommodation have been
employed, without its approval, for purposes other than those agreed upon with
the bank, it shall have the right to terminate the loan or other credit
accommodation and demand immediate repayment of the obligation.

Every time you apply for a loan, the purpose of the loan or any credit
accommodation should be stated in the application form.

 Why?
- The purpose shall be considered by the bank in determining the terms or the
conditions of loan, whether they would be consistent with the purpose for
obtaining the loan.

- Is the amount to be loaned reasonable…the terms…conditions…maturity…are

they reasonable…etc.
 If the borrower uses the proceeds of the loan different from the intended
purpose, then the bank has the right to TERMINATE the loan and require
immediate repayment. So the payment will now be accelerated.

- Why? Because that is a breach of your contract. The purpose is stated in the
loan application form and the application form forms part of the terms and
conditions of the contract.

SECTION 40. Requirement for Grant of Loans or Other Credit

Accommodations. — Before granting a loan or other credit accommodation, a
bank must ascertain that the debtor is capable of fulfilling his commitments to the
bank.

Toward this end, a bank may demand from its credit applicants a statement of
their assets and liabilities and of their income and expenditures and such
information as may be prescribed by law or by rules and regulations of Monetary
Board to enable the bank to properly evaluate the credit application which includes
the corresponding financial statements submitted for taxation purposes to the
Bureau of Internal Revenue. Should such statements prove to be false or incorrect
in any material detail, the bank may terminate any loan or other credit
accommodation granted on the basis of said statements and shall have the right
to demand immediate repayment or liquidation of the obligation.

In formulating rules and regulations under this Section, the Monetary Board shall
recognize the peculiar characteristics of microfinancing, such as cash flow-based
lending to the basic sectors that are not covered by traditional collateral. (76a)

DOCUMENTARY REQUIREMENTS WHEN YOU APPLY FOR A LOAN FROM THE

BANK.

This section basically talks about the documentary requirements that the
banks will require each prospective borrowers will have to submit to the bank
for the latter’s evaluation
.

SECTION 43. Authority to Prescribe Terms and Conditions of Loans and Other
Credit Accommodations. — The Monetary Board may, similarly, in accordance
with the authority granted to it in Section 106 of the New Central Bank Act, and
taking into account the requirements of the economy for the effective utilization of
long-term funds, prescribe the maturities, as well as related terms and conditions
for various types of bank loans and other credit accommodations. Any change by
the Board in the maximum maturities shall apply only to loans and other credit
accommodations made after the date of such action.

The Monetary Board shall regulate the interest imposed on microfinance borrowers
by lending investors and similar lenders, such as, but not limited to, the
unconscionable rates of interest collected on salary loans and similar credit
accommodations. (78a)

INTEREST RATES

 As a rule, no interest is due unless it is stipulated in writing.

 -

SECTION 44. Amortization on Loans and Other Credit Accommodations. —

The amortization schedule of bank loans and other credit accommodations shall
be adapted to the nature of the operations to be financed.

In case of loans and other credit accommodations with maturities of more than five
(5) years, provisions must be made for periodic amortization payments, but such
payments must be made at least annually: Provided, however, That when the
borrowed funds are to be used for purposes which do not initially produce revenues
adequate for regular amortization payments therefrom, the bank may permit the
initial amortization payment to be deferred until such time as said revenues are
sufficient for such purpose, but in no case shall the initial amortization date be
later than five (5) years from the date on which the loan or other credit
accommodation is granted.

In case of loans and other credit accommodations to microfinance sectors, the

schedule of loan amortization shall take into consideration the projected cash flow
of the borrower and adopt this into the terms and conditions formulated by banks.

-Just read this in your free time.

SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure,

whether judicially or extrajudicially, of any mortgage on real estate which is
security for any loan or other credit accommodation granted, the mortgagor or
debtor whose real property has been sold for the full or partial payment of his
obligation shall have the right within one year after the sale of the real estate, to
redeem the property by paying the amount due under the mortgage deed, with
interest thereon at the rate specified in the mortgage, and all the costs and
expenses incurred by the bank or institution from the sale and custody of said
property less the income derived therefrom.

However, the purchaser at the auction sale concerned whether in a judicial or

extrajudicial foreclosure shall have the right to enter upon and take possession of
such property immediately after the date of the confirmation of the auction sale
and administer the same in accordance with law. Any petition in court to enjoin or
restrain the conduct of foreclosure proceedings instituted pursuant to this
provision shall be given due course only upon the filing by the petitioner of a bond
in an amount fixed by the court conditioned that he will pay all the damages which
the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant
to an extrajudicial foreclosure, shall have the right to redeem the property in
accordance with this provision until, but not after, the registration of the certificate
of foreclosure sale with the applicable Register of Deeds which in no case shall be
more than three (3) months after foreclosure, whichever is earlier. Owners of
property that has been sold in a foreclosure sale prior to the effectivity of this Act
shall retain their redemption rights until their expiration. (78a)

FORECLOSURE OF ESTATE MORTGAGE

- Just read this in your free tim.

 SECTION 51. Ceiling on Investments in Certain Assets. — Any bank may
acquire real estate as shall be necessary for its own use in the conduct of its
business: Provided, however, That the total investment in such real estate and
improvements thereof, including bank equipment, shall not exceed fifty percent
(50%) of combined capital accounts: Provided, further, That the equity
investment of a bank in another corporation engaged primarily in real estate shall
be considered as part of the bank's total investment in real estate, unless otherwise
provided by the Monetary Board.

CEILING ON INVESTMENTS IN CERTAIN ASSETS

 RULE: the bank can acquire real property which is necessary for the conduct of
its business. BUT in no case shall the total investment in a bank in real estate
exceed 50% of the combined capital accounts.

- Combined capital accounts refer to your net worth: capital, equity, retained
earnings, etc.

SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. —

Notwithstanding the limitations of the preceding Section, a bank may acquire, hold
or convey real property under the following circumstances:
52.1. Such as shall be mortgaged to it in good faith by way of security for debts;
52.2. Such as shall be conveyed to it in satisfaction of debts previously
contracted in the course of its dealings; or
52.3. Such as it shall purchase at sales under judgments, decrees, mortgages,
or trust deeds held by it and such as it shall purchase to secure debts due it.
Any real property acquired or held under the circumstances enumerated in the
above paragraph shall be disposed of by the bank within a period of five (5)
years or as may be prescribed by the Monetary Board: Provided, however, That
the bank may, after said period, continue to hold the property for its own use,
subject to the limitations of the preceding Section.

Under Section 52, these are the instances wherein the bank can acquire real property
or real estate although this is not used in the conduct of its business. These real
properties class acquired in accordance with Section 52 is not subject to the
limitations set forth in section 51.

There are 3 ways in which the bank can acquire these real properties
a. When the property is mortgaged as a security of debts; or
b. When the property is conveyed in satisfaction of debts; or
c. In case of purchases at sales under judgment, decrees, mortgages or trust
deeds held by it.

SECTION 53. Other Banking Services. — In addition to the operations

specifically authorized in this Act, a bank may perform the following services:
53.1. Receive in custody funds, documents and valuable objects;
53.2. Act as financial agent and buy and sell, by order of and for the account
of their customers, shares, evidences of indebtedness and all types of securities;
 53.3. Make collections and payments for the account of others and perform
such other services for their customers as are not incompatible with banking
business;
53.4. Upon prior approval of the Monetary Board, act as managing agent,
adviser, consultant or administrator of investment
management/advisory/consultancy accounts; and
53.5. Rent out safety deposit boxes. The bank shall perform the services
permitted under Subsections 53.1, 53.2, 53.3 and 53.4 as depositary or as an
agent. Accordingly, it shall keep the funds, securities and other effects which it
receives duly separate from the bank's own assets and liabilities.
The Monetary Board may regulate the operations authorized by this Section in
order to ensure that such operations do not endanger the interests of the
depositors and other creditors of the bank.
In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a
bank holiday, or in any manner suspends the payment of its deposit liabilities
continuously for more than thirty (30) days, the Monetary Board may summarily
and without need for prior hearing close such banking institution and place it
under receivership of the Philippine Deposit Insurance Corporation.

These are the other income generating activities of banks aside from the usual
deposit taking and lending activities. Just read this section in your free time.

NOTE: The rest of the sections class, I’ll leave it to you to read in your free
time……..

SECRECY OF BANK DEPOSITS

In our jurisdiction there is only a handful of laws which primarily deals with
secrecy of bank deposits. We have R A 1045 or the Bank Secrecy law and RA 6426
or the foreign currency deposit act.

Despite of the fact that R.A. 1405 is a very old law. This law was enacted in 1955.
This law is still very much relevant up to the present and this law has been involved
in various high profile controversies in Philippine politics.

During the time of President Estrada, a senior vice president of Equitable PCI Bank,
said she watched Estrada sign the name "Jose Velarde" to documents authorizing a
$10 million investment agreement using money in the bank.

During the time of President Gloria Arroyo, his husband Mike Arroyo was embroiled
in the controversy surrounding a fictitious bank account under the name Jose Pidal.
It was alleged that the said bank account which held enormous sums of money is
owned by Mike Arroyo.

The very recent one is the one involving former president Duterte and now VP sara
Duterte. Remember during the 2016 presidential race, Senator Trillanes accused
that From 2006 to 2015, Duterte held seven joint accounts with his daughter Sara at
the Bank of the Philippine Islands (BPI) branch on Julia Vargas Avenue in Pasig City,
nine joint accounts at the BPI Edsa Greenhills branch and one joint account at Banco
de Oro Unibank-1 in Davao City.

At BPI Julia Vargas alone, the two of them received total deposits and transfers of
P1.74 billion. Apparently, Senator Trillanes’ source of this information from somebody
who worked with the AMLA. Now mind you guys, the AMLA has been amended several
times but it was only during the time of Pres. Duterte, that an amendment was
introduced basically punishing any employee or officer of AMLA who divulges any
information they will acquire while still in the said office. In addition, any information
that they acquire cannot be used as evidence in any proceeding.

LAW ON SECRECY OF BANK DEPOSITS

(R.A. 1405, as amended)

Section 1. It is hereby declared to be the policy of the Government to give

encouragement to the people to deposit their money in banking institutions and to
discourage private hoarding so that the same may be properly utilized by banks in
authorized loans to assist in the economic development of the country.

 What’s the purpose of the law?

- To encourage people to deposit and to discourage hoarding

 What’s the effect if the people will hoard their money instead of depositing it in
the bank?
- The money will not circulate.
- By encouraging people to deposit, the bank would be able to acquire more
funds which it could lend to the public.
- Bottom line, the effect is that it could affect the economy. It could spur
economic activity.

Section 2. All deposits of whatever nature with banks or banking institutions in

the Philippines including investments in bonds issued by the Government of the
Philippines, its political subdivisions and its instrumentalities, are hereby
considered as of an absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official, bureau or office, except
upon written permission of the depositor, or in cases of impeachment, or upon
order of a competent court in cases of bribery or dereliction of duty of public
officials, or in cases where the money deposited or invested is the subject matter
of the litigation.

 What are covered under RA 1405?

- It covers all kinds of deposits, whatever the nature of these deposits, whether
these are savings, time, current deposits, with banks or banking institutions
and not only deposits but it also includes investments in bonds issued by the
government of the Philippines or its political subdivisions.

 What about trust funds, are they covered?

 - Yes. It covers deposits of whatever nature. Those deposits are covered by the
law on secrecy.

 What about if a bank rents out a safety deposit box and you placed something
there?

- YES, because it’s still considered as deposits with the banks so long as it is
placed, or it is made in the bank or banking institutions.
- But if you make investment in investment house, not in a bank, then, that is
not covered.

 The deposit must be made with a BANK or BANKING INSTITUTION for it to be

covered by the bank secrecy law.

Section 3. It shall be unlawful for any official or employee of a banking institution

to disclose to any person other than those mentioned in Section two hereof any
information concerning said deposits.

GENERAL RULE: bank deposits shall be kept absolutely confidential.

Prohibitions:
1. Bank employees and officers are prohibited from disclosing, sabotage
information concerning all deposits of whatever nature to any unauthorized
person

- Take note that the prohibition applies only to a bank officer or employee.
- If you are not a bank officer or employee and you made a disclosure, you
would not be held liable under the bank secrecy law but probably under
another law.

2. Bank deposits shall not be subject to an examination or inquiry of whatever

nature. It cannot be looked into by any person, individual, government office,
bureau, etc.

EXCEPTIONS:

Four Exceptions under RA 1405:

1. Written consent of the depositor

- EXAMPLE: This would apply in a case of a corporation during annual audit
wherein the auditor would check the bank deposits of the corporation.
Normally, they would require the corporation to sign a request for a bank
to confirm their deposits. The bank is allowed to disclose because there is
a written permission from the depositor.

2. In cases of impeachment
- If it talks about impeachment, this will apply to public officers or public
officials.
 3. Upon order of a competent court in cases of bribery or dereliction of duty
by public officials

4. Upon order of a competent court in case when the money deposited is the
subject matter of litigation.

- If there’s a pending case in court and there’s an order of a competent court,

and the subject matter of the case is the money deposited.
- Ex. Plaintiff was swindled, and the proceeds were deposited with BDO.
Plaintiff now files a case to recover the amount that was swindled. So, the
court issued an order to subpoena the bank officer and to bring with him
the records of the swindler’s bank deposits. That is allowed since the
subject matter is the money deposited.

Other exceptions provided under other special laws:

1. RA 3019 or the Anti-Graft and Corrupt Practices Act (unexplained wealth +

public official)

- It must be a case for unexplained wealth as held in the case of PNB VS

GANCAYCO and BANCO FILIPINO VS PURISIMA (G.R. No. L-
18343 September 30, 1965).

- So take note, the violation under RA 3019 must be for unexplained

wealth.

- The person subject of the examination must be a public official.

- There must also be a pending case in court per RA 3019 (Provision under
RA 3019 in conflict with SC ruling in PNB v. GANCAYCO. SC in that case
allowed disclosure even if there was no pending case in court.)

2. NIRC (National Internal Revenue Code)– authorizes the CIR (Commissioner of

Internal Revenue) to inquire into bank deposits of:
a. A decedent to determine his gross estate; and
b. If the Taxpayer has filed for a compromise on his tax liability on the ground
of financial capacity
- In this case, normally, the Taxpayer would be required to sign a waiver
of his privilege under RA 1405.

3. Authority of AMLA to in quire into bank deposits under the Anti-Money

Laundering Act (AMLA)

- Under the AMLA, the AMLC may inquire into or examine any particular
deposit or investment, including related accounts, with any banking
institution or non-bank financial institution upon order of any competent
court based on an ex parte application in cases of violations of this Act,
when it has been established that there is probable cause that the deposits
or investments, including related accounts involved, are related to an
unlawful activity as defined in Section 3(i) hereof or a money laundering
offense under Section 4 hereof.
 - The power of AMLC to inquire or examine deposits or investments is not
automatic. The AMLC is still required to file an ex parte application to
inquire into or examine any deposit or investment with any banking
institution or non-bank financial institution before the Court of Appeals.
The Court of Appeals in turn is mandated to act on the application within
24 hours from the filing of the application. However there is no need for a
court order when deposits are related to kidnapping for ransom, violation
of dangerous drugs law, hijacking, destructive arson, murder.

4. Unclaimed Balances Act

- This pertains to dormant accounts for a period of 10 years wherein the
bank is required to make a disclosure to the treasurer of the Philippines.
- The proceeds of the deposits will be escheated in favor of the government.

5. Human Security Act

- If you are suspected of committing terrorism then your bank accounts may
be inquired into.

6. RA 3591 or the PDIC Charter

-The BSP and the Philippine Deposit Insurance Corp. are authorized to look
into deposits in cases involving unsound or unsafe banking

RA 6426

Unlike R.A. 1405, Section 8 of RA 6426 makes it clear that there is only one
exception to the secrecy of foreign currency deposit and that is upon the written
permission of the depositor.

Section 8. Secrecy of foreign currency deposits. – All foreign currency deposits

authorized under this Act, as amended by PD No. 1035, as well as foreign currency
deposits authorized under PD No. 1034, are hereby declared as and considered of an
absolutely confidential nature and, except upon the written permission of the
depositor, in no instance shall foreign currency deposits be examined, inquired or
looked into by any person, government official, bureau or office whether judicial or
administrative or legislative, or any other entity whether public or private; Provided,
however, That said foreign currency deposits shall be exempt from attachment,
garnishment, or any other order or process of any court, legislative body, government
agency or any administrative body whatsoever. (As amended by PD No. 1035, and
further amended by PD No. 1246, prom. Nov. 21, 1977.)