BANKING LAWS

A. The New Central Bank Act (R.A. 7653)

1. State policies

Section 1The State shall maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. In line with this policy, and considering its unique functions and responsibilities, the central monetary authority established under this Act, while being a government-owned corporation, shall enjoy fiscal and administrative autonomy.

2. Creation of the Bangko Sentral ng Pilipinas (BSP)

Section 2There is hereby established an independent central monetary authority, which shall be a body corporate known as the Bangko Sentral ng Pilipinas, hereafter referred to as the Bangko Sentral.

The capital of the Bangko Sentral shall be Fifty billion pesos (P50,000,000,000), to be fully subscribed by the Government of the Republic, hereafter referred to as the Government, Ten billion pesos (P10,000,000,000) of which shall be fully paid for by the Government upon the effectivity of this Act and the balance to be paid for within a period of two (2) years from the effectivity of this Act in such manner and form as the Government, through the Secretary of Finance and the Secretary of Budget and Management, may thereafter determine.

3. Responsibility and primary objective

Responsibility:The Bangko Sentral shall provide policy directions in the areas of money, banking, and credit. It shall have supervision over the operations of banks and exercise such regulatory powers as provided in this Act and other pertinent laws over the operations of finance companies and non-bank financial institutions performing quasi-banking functions, hereafter referred to as quasi-banks, and institutions performing similar functions. (Sec.3, Par.1)

Primary Objective:The primary objective of the Bangko Sentral is to maintain price stability conducive to a balanced and sustainable growth of the economy. It shall also promote and maintain monetary stability and the convertibility of the peso. (Sec.3, Par.2)

4. Monetary board - powers and functions

Section 15. (a) Issue rules and regulations it considers necessary for the effective discharge of the

responsibilities and exercise of the powers (b) Direct the management, operations, and administration of the Bangko Sentral, reorganize

its personnel, and issue such rules and regulations as it may deem necessary or convenient for this purpose.

(c) Establish a human resource management system which shall govern the selection, hiring, appointment, transfer, promotion, or dismissal of all personnel.

(d) Adopt an annual budget for and authorize such expenditures by the Bangko Sentral as are in the interest of the effective administration and operations of the Bangko Sentral in accordance with applicable laws and regulations.

(e) Indemnify its members and other officials of the Bangko Sentral, including personnel of the departments performing supervision and examination functions against all costs and expenses reasonably incurred by such persons in connection with any civil or criminal action

In the event of a settlement or compromise, indemnification shall be provided only in connection with such matters covered by the settlement as to which the Bangko Sentral is advised by external counsel that the person to be indemnified did not commit any negligence or misconduct. The costs and expenses incurred in defending the aforementioned action, suit or proceeding may be paid by the Bangko Sentral in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the member, officer, or employee to repay the amount advanced should it ultimately be determined by the Monetary Board that he is not entitled to be indemnified as provided in this subsection.

5. How the BSP handles banks in distress a) Conservatorship (Section 29)Conservator is a person appointed if the bank is in the state of illiquidity or the bank fails or refuses to maintain a state of liquidity adequate to protect its depositors and creditors. The bank still has more assets than its liabilities but its assets are not liquid or not in cash thus it cannot pay its obligation when it falls due.

The conservator should be competent and knowledgeable in bank operations and management. The conservator shall:

To take charge of the assets, liabilities, and the management Report and be responsible to the Monetary Board and shall have the power to overrule or

revoke the actions of the previous management and board of directors of the bank or quasi-bank.

Collect all monies and debts due said institution Exercise all powers necessary to restore its viability

b) Closure (Section 30)The Monetary Board can close a bank or quasi bank in the following cases:

a. Is unable to pay its liabilities as they become due in the ordinary course of business.b. Insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities.c. It cannot continue in business without involving probable losses to its depositors or creditors.d. It violated a cease and desist order under Section 37 that has become final, involving acts or

transactions which amount to fraud or a dissipation of the assets of the institution.

c) Receivership (Section 30)Receiver is a person appointed if bank is already insolvent which means that its liabilities are greater than his assets. The receiver shall:

Immediately gather and take charge of all the assets and liabilities of the institution.

Administer the same for the benefit of its creditors, and exercise the general powers of a receiver under the Revised Rules of Court.

Shall not, with the exception of administrative expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution: Provided, that the receiver may deposit or place the funds of the institution in non-speculative investments.

Determine as soon as possible but not later than ninety (90) days, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public: Provided, That any determination for the resumption of business of the institution shall be subject to prior approval of the Monetary Board.

d) Liquidation Liquidation is an act of settling a debt by payment or other satisfaction. It is also the act or process of converting assets into cash especially to settle debts. (Black’s Law Dictionary)

A liquidator of a distressed bank can prosecute and defend suits against the bank and foreclosure mortgages in behalf of the bank because the Central Bank is vested with the authority to take charge and administer the monetary as well as the banking systems of the country. It also includes the power to determine and examine the financial conditions of the banks for the purpose of closure on the ground of insolvency. (Banco Filipino v. Central Bank, G.R. No. 70054, Dec. 11, 1991)

6. How the BSP handles exchange crisis

a) Legal tender power (Section 52)All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private: Provided, however, That, unless otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not exceeding Fifty pesos (P50.00) for denominations of Twenty-five centavos and above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos or less.

b) Rate of exchange

(Section 74)The Monetary Board shall determine the exchange rate policy of the country.• The Monetary Board shall determine the rates at which the Bangko Sentral shall buy and sell

spot exchange, and shall establish deviation limits from the effective exchange rate or rates as it may deem proper.

• The Monetary Board shall similarly determine the rates for other types of foreign exchange transactions by the Bangko Sentral, including purchases and sales of foreign notes and coins, but the margins between the effective exchange rates and the rates thus established may not exceed the corresponding margins for spot exchange transactions by more than the additional costs or expenses involved in each type of transactions.

(Section 67)The Bangko Sentral takes action when the international stability of peso is threatened:

• Whenever the international reserve of the Bangko Sentral falls to a level which the Monetary Board considers inadequate to meet prospective net demands on the Bangko Sentral for foreign currencies, or whenever the international reserve appears to be in imminent danger of falling to

such a level, or whenever the international reserve is falling as a result of payments or remittances abroad which, in the opinion of the Monetary Board, are contrary to the national welfare, the Monetary Board shall:

a. Take such remedial measures as are appropriate and within the powers granted to the Monetary Board and the Bangko Sentral.

b. Submit to the President of the Philippines and to Congress a detailed report which shall include, as a minimum, a description and analysis of:

1. The nature and causes of the existing or imminent decline.2. The remedial measures already taken or to be taken by the Monetary Board.3. The monetary, fiscal or administrative measures further proposed.4. The character and extent of the cooperation required from other government

agencies for the successful execution of the policies of the Monetary Board.

(Section 72)The emergency restrictions on foreign exchange operations are the following:

• Temporarily suspend or restrict sales of exchange by the Bangko Sentral;• Subjecting all transactions in gold and foreign exchange to license by the Bangko Sentral;• Requiring that any foreign exchange thereafter obtained by any person residing or entity

operating in the Philippines be delivered to the Bangko Sentral or to any bank or agent designated by the Bangko Sentral for the purpose, at the effective exchange rate or rates.

In order that the Bangko Sentral may at all times have foreign exchange resources sufficient to enable it to maintain the international stability and convertibility of the peso, or in order to promote the domestic investment of bank resources, the Monetary Board may require the banks to sell to the Bangko Sentral or to other banks all or part of their surplus holdings of foreign exchange. (Section 76)

B. Law on Secrecy of Bank Deposits (R.A. 1405, as amended)

1. Purpose(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.

2. Prohibited acts (Section 2)Examination, inquiry, or looking at 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.

(Section 3) Disclosure to any person other than those mentioned in Section two hereof any information concerning said deposits.

3. Deposits Covered(Section 2)

All deposits of whatever nature with banks or banking institutions in the Philippines.

Investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities.

4. Exceptions(Section 2)Here are the instances where examination or disclosure of information about deposits can be allowed:

Written permission of the depositor. In cases of impeachment. Upon order of a competent court in cases of bribery or dereliction of duty of public officials. In cases where the money deposited or invested is the subject matter of the litigation.

5. Garnishment of deposits, including foreign deposits

Garnishment is a warning to a person in whose hands the effects of another are attached not to pay the money or deliver the property of the defendant in his hands to him, but to appear and answer the plaintiff’s suit. (Black's Law Dictionary)

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. (Section 8, RA 6426)

Procedure for Garnishment (Section 208, RA 8424) Bank accounts shall be garnished by serving a warrant of garnishment upon the taxpayer and

upon the president, manager, treasurer or other responsible officer of the bank. Upon receipt of the warrant of garnishment, the bank shall turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the Government.

6. Penalties for violation (Section 5)Any violation of this law will subject offender upon conviction, to an imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court.

General Banking Act (R.A. 8791)

1. Definition and classification of banks "Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits. (Sec.3, Par.1)

Classification of Banks(Section 3, Par.2) Banks shall be classified into:

a. Universal banks - Primarily governed by the General Banking Law (GBL), can exercise the powers of an investment house and invest in non-allied enterprises and have the highest capitalization requirement.

b. Commercial banks - Ordinary banks governed by the GBL which have a lower capitalization requirement than universal banks and can neither exercise the powers of an investment house nor invest in non- allied enterprises.

c. Thrift banks – These are (i) Savings and mortgage banks, (ii) Stock savings and loan associations, and (iii) Private development banks, as defined in Republic Act No. 7906 (hereafter the "Thrift Banks Act");

d. Rural banks – Mandated to make needed credit available and readily accessible in the rural areas on reasonable terms and which are primarily governed by the Rural Banks Act of 1992 (RA 7353).

e. Cooperative banks - Those banks organized whose majority shares are owned and controlled by cooperatives primarily to provide financial and credit services to cooperatives. It shall include cooperative rural banks. It is governed by Republic Act No. 6938 (hereafter the "Cooperative Code");

f. Islamic banks – are banks whose business dealings and activities are subject to the basic principles and rulings of Islamic Shari’a, such as the Al Amanah Islamic Investment Bank of the Philippines which was created by RA 6848, otherwise known as the "Charter of Al Amanah Islamic Investment Bank of the Philippines"; and

g. Other classifications of banks as determined by the Monetary Board of the Bangko Sentralng Pilipinas. (6-Aa)

2. Distinction of banks from quasi-banks and trust entities

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. (Section 4)

TRUST ENTITIESOnly a stock corporation or a person duly authorized by the Monetary Board to engage in trust business shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or behoof of others. For purposes of this Act, such a corporation shall be referred to as a trust entity. (Section 79)

3. Bank powers and liabilities a) Corporate powers All powers provided by the corporation code like issuance of stocks and entering into merger or consolidation with other corporation or banks. b) Banking and incidental powers Not expressly stated but are deemed to be within the capacity of corporate entities.

4. Diligence required of banks - relevant jurisprudence Extraordinary Diligence is the degree of diligence required of banks in handling deposits. It is that extreme measure of care and caution which persons of unusual prudence and circumspection use for securing and preserving their own property or rights. The law requires common carriers to render service with the greatest skill and utmost foresight.

Jurisprudence:

(PCI Bank vs. CA, 350 SCRA 446, PBCom vs. CA, G.R. No. 121413, 29 Jan. 2001)The appropriate standard of diligence must be very high, if not the highest, degree of diligence; highest degree of care.

(Reyes v. CA, G.R. No. 118492, Aug. 15, 2001)This applies only to cases where banks are acting in their fiduciary capacity, that is, as depository of the deposits of their depositors.

(Reyes v. CA, G.R. No. 118492, Aug. 15, 2001)The degree of diligence required of banks, is more than that of a good father of the family where the fiduciary nature of their relationship with their depositors is concerned, that is, depositary of deposits. But the same higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors, such as sale and issuance of foreign exchange demand draft.

5. Nature of bank funds and bank deposits

The function of the bank is to receive money from depositors with the obligation of safely keeping it and returning the same.

All kinds of bank deposits are loan. The bank can make use as its own the money deposited. Said amount is not being held in trust for the depositor nor is it being kept for safekeeping. (Tang Tiong Tick v. American Apothecaries, G.R. No. 43682, Mar. 31, 1938)

6. Stipulation on interests

Central Bank Circular 416 12% per annum in cases of loans, forbearance of money, goods and credits, and judgment involving such loan or forbearance, in the absence of express agreement as to such rate of interest.

Interest accruing from unpaid interest

7. Grant of loans and security requirements

a) Ratio of net worth to total risk assets 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. Provided, that such ratio shall be applied uniformly to banks of the same category. (Section 34)

b) Single borrower’s limit The basis for determining compliance with single-borrower limit is the total credit commitment of the bank to the borrower. (Section 35)

c) Restrictions on bank exposure to DOSRI (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, indorser 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. (Section 36)

8. Penalties for violations (Section 91)A trust entity or any of its officers and directors found to have willfully violated any pertinent provisions of this Act, shall be subject to the sanctions and penalties provided under Section 66 of this Act as well as Sections 36 and 37 of the New Central Bank Act.

a) Fine, imprisonment Fines in amounts as may be determined by the Monetary Board to be appropriate, but in no case to exceed P30,000 a day for each violation, taking into consideration the attendant circumstances, such as the nature and gravity of the violation or irregularity and the size of the bank or quasi bank.‐

b) Suspension or removal of director or officer If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary Board

may also suspend or remove such director or officer. (Section 66)c) Dissolution of bank

If the violation is committed by a corporation, such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General. (Section 66)

C. Philippine Deposit Insurance Corporation Act

1. Basic policy The Corporation shall, as a basic policy, promote and safeguard the interests of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits. (Section 1, as amended RA 9302)

2. Concept of insured deposits The term’ ‘insured deposit’ means the amount due to any bona fide depositor for legitimate deposits in an insured bank net of any obligation of the depositor to the insured bank as of the date of closure, but not to exceed Five hundred thousand pesos (P500,000.00). Such net amount shall be determined according to such regulations as the Board of Directors may prescribe. (Section 3, RA 9576)

3. Liability to depositors

a) Deposit liabilities required to be insured with PDIC

Any obligation of a bank which is payable at the office of the bank located outside of the Philippines shall not be a deposit for any of the purposes of this Act or included as part of the total deposits or of insured deposit. (Section 2, RA 9576)

Subject to the approval of the Board of Directors, any insured bank which is incorporated under the laws of the Philippines which maintains a branch outside the Philippines may elect to include for insurance its deposit obligations payable only at such branch. (Section 2, RA 9576)

b) Commencement of liability

Whenever an insured bank shall have been closed by the Monetary Board pursuant to Section 30 of R.A. 7653, payment of the insured deposits on such closed bank shall be made by the Corporation as soon as possible either (1) by cash or (2) by making available to each depositor a transferred deposit in another insured bank in an amount equal to insured deposit of such depositor. (Section 14, RA 3591, as amended)

c) Deposit accounts not entitled to payment

(Section 2, RA 9576)The Corporation shall not pay deposit insurance for the following accounts or transactions, whether denominated, documented, recorded or booked as deposit by the bank:

1. Investment products such as bonds and securities, trust accounts, and other similar instruments;2. Deposit accounts or transactions which are unfunded, or that are fictitious or fraudulent;3. Deposit accounts or transactions constituting, and/or emanating from, unsafe and unsound

banking practice/s, as determined by the Corporation4. Deposits that are determined to be the proceeds of an unlawful activity as defined under

Republic Act No. 9160, as amended.

d) Extent of liability

The amount due to any depositor for deposits in an insured bank net of any obligation of the depositor to the insured bank as of the date of closure but not to exceed P500,00.00 per depositor.

e) Determination of insured deposits

The Corporation shall commence the determination of insured deposits due the depositors of a closed bank upon its actual takeover of the closed bank. The Corporation shall give notice to the depositors of the closed bank of the insured deposits due them by whatever means deemed appropriate by the Board of Directors: Provided, That the Corporation shall publish the notice once a week for at least three (3) consecutive weeks in a newspaper of general circulation or, when appropriate, in a newspaper circulated in the community or communities where the closed bank or its branches are located. (Section 16, RA 3591 as added by R.A. 9302)

f) Calculation of liability

(i) Per depositor, per capacity rule The deposits in the bank shall be added together to maintain the same right and capacity of the depositor’s benefit either in his own name and the name of the others.

(ii) Joint accounts (Section 4 (g), RA 3591) A joint account regardless of whether the conjunction "and," "or," "and/or" is used, shall be insured separately from any individually-owned deposit account. Provided, that

(1) If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the maximum insured deposit shall be divided into as many equal shares as there are individuals, juridical persons or entities, unless a different sharing is stipulated in the document of deposit, and

(2) if the account is held by a juridical person or entity jointly with one or more natural persons, the maximum insured deposit shall be presumed to belong entirely to such juridical person or entity

(iii) Mode of payment (Section 14, RA 3591)Payment of the insured deposits on such closed bank shall be made by the Corporation as soon as possible either (1) by cash or (2) by making available to each depositor a transferred deposit in another insured bank in an amount equal to insured deposit of such depositor. (iv) Effect of payment of insured deposit (Section 16, RA 3591)

The PDIC shall be subrogated to all rights of the depositor against the closed bank to the extent of such payment.

The PDIC is discharged from any further liability to the depositor.

(v) Payments of insured deposits as preferred credit under Art. 2244, Civil C o d e All payments by the Corporation of insured deposits in closed banks partake of the nature of public funds, and as such, must be considered a preferred credit similar to taxes due to the National Government in the order of preference under Article 2244 of the New Civil Code. (Section 15, RA 3591)

(vi) Failure to settle claim of insured depositor Failure to settle the claim, within six (6) months from the date of filing of claim for insured deposit, where such failure was due to grave abuse of discretion, gross negligence, bad faith, or malice, shall, upon conviction, subject the directors, officers or employees of the Corporation responsible for the delay, to imprisonment from six (6) months to one (1) year: Provided, furthermore, That the period shall not apply if the validity of the claim requires the resolution of issues of facts and or law by another office, body or agency including the case mentioned in the first proviso or by the Corporation together with such other office, body or agency. (Section 14, RA 3591)

(vii) Failure of depositor to claim insured deposits

(a) Examination of banks and deposit accounts PDIC may conduct examination of banks with prior approval of the Monetary Board: Provided, that no examination can be conducted within twelve (12) months from the last examination date.

(b) Prohibition against splitting of deposits (Section 21, RA 3591)Splitting of deposits occurs whenever a deposit account with an outstanding balance of more than the statutory maximum amount of insured deposit maintained under the name of natural or juridical persons is broken down and transferred into two (2) or more accounts in the name/s of natural or juridical persons or entities who have no beneficial ownership on transferred deposits in their names within one hundred twenty (120) days immediately preceding or during a bank declared bank holiday, or immediately preceding a closure order issued by the Monetary Board of the Bangko Sentral ng Pilipinas for the purpose of availing of the maximum deposit insurance coverage.

The penalty of prision mayor or a fine of not less than Fifty thousand pesos (P50,000.00) but not more than Two million pesos (P2,000,000.00), or both, at the discretion of the court, shall be imposed upon any director, officer, employee or agent of a bank.

(c) Prohibition against issuances of TROs, etc. (Section 22, RA 3591)No court, except the Court of Appeals, shall issue any temporary restraining order, preliminary injunction or preliminary mandatory injunction against the Corporation for any action under this Act. This prohibition shall apply in all cases, disputes or controversies instituted by a private party, the insured bank, or any shareholder of the insured bank.

The Supreme Court may issue a restraining order or injunction when the matter is of extreme urgency involving a constitutional issue, such that unless a temporary restraining order is issued, grave injustice and irreparable injury will arise.