San Beda College of Law, Mendiola
BANKING LAWS AND JURISPRUDENCE
Topic
Chapter 1- Banks and Business of Banking
Chapter 2 - Organization, Management, Administration Of Banks
Chapter 3 - Deposit Functions Of Banks
Chapter 4 - Investments, Loans and Other Bank Functions
Chapter 5 - Prohibited Transactions and Cessation Of Banking Business
Chapter 6 - Foreign Banks and Trust Operations
Possible Questions
MIDTERM COVERAGE: Chapter 1 - 6
Chapter 7 - The Banko Sentral ng Pilipinas
Chapter 8- Currency, Monetary Stabilization and Functions of BSP
Chapter 9 - Unclaimed Balances and Trust Receipts
Chapter 10 - Deposit Insurance
Chapter 11 - Anti-Money Laundering
Chapter 12 – Special Purpose Vehicle
FINALS COVERAGE: Chapter 7 - 12
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CHAPTER 1 – Banks and Business of Banking
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Declaration of the state with regards to banking –
recognize vital role of the banks to provide
environment conducive to development of national
economy
o It also states that banks need high standards
of integrity and performance
Banks – entities engaged in the lending of funds
obtained in the form of deposits (borrowing, lending,
safe-keeping)
Banks may engage in other activities allowed by the
law other than lending
Nature of Banking Business
1. Debtor-Creditor Relationship
 It is a contract of loan and not deposit
 Contract between bank and depositor is
governed by the provisions of the NCC on
simple loan (Consolidated Bank and Trust
Corp vs. CA)
2. Fiduciary duty
 Fiduciary relationship – bank’s obligation to
observe high standard of integrity and
performance (Phil. Banking Corp. vs. CA)
3. Not a trust agreement
 It is not a trust agreement and failure to pay
a loan is not a breach of trust
 It is not a trust agreement because banks do
not accept deposits to enrich depositors but
to earn for themselves
4. Indispensable Institution
 Has a vital role in economic life
 Significance of banking institution to
commercial transactions (Metropolitan
Bank & Trust Co. vs. Cabilzo)
5. Impressed with public interest
 Has public interest because people depend
on the honesty and efficiency of banks
 Stability of banks largely depends on the
confidence of the people in the honesty and
efficiency of banks.
6. Degree of diligence
 Diligence higher than that of a good father.
It must be extraordinary diligence
 In Simex International vs. CA, the bank is
under obligation to treat the accounts of its
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depositors with meticulous care and always
have in mind the fiduciary nature of banks
 Not enough that he exerted reasonable
diligence to ascertain the safety of his clients
 Such diligence is only required in its
fiduciary relationship with its depositors
and not to other transactions such as sale of
foreign exchange demand draft
 Sec 2 of GBL prescribes the statutory
diligence required from banks – “high
standards of integrity and performance” in
serving its depositors.
 Diligence required of banks is more than
that of a good father (PBCom vs. CA)
 Diligence extends to financial institutions
(e.g. GSIS)
Treatment of accounts with meticulous care
 Must treat every account with utmost
fidelity regardless of amount
 There is no law mandating banks to call
up their clients whenever a significant
amount shall be withdrawn from their
account
Duty to keep records
Banks are not gratuitous bailees
Banks not expected to be infallible
 However, they must bear the loss for not
discovering mistakes if there are established
procedures not followed
Dealing with registered lands
 General Rule: mortgagee can rely on title
and does not need to investigate further
 Exception: mortgagee cannot close his eyes
to facts which should put a reasonable man
on his guard, and yet claim that he is in
good faith
 With banking institutions, mere reliance on
the title is not enough as they need to
investigate also
 Doctrine of the “mortgagee in good faith” –
all persons dealing with property covered
by the Torrens Certificates of Title are not
required to go beyond what appears on the
face of the title. (Cavite Development Bank
vs. Spouses Lim)
3
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The business o a bank is one affected with
public interest, for which reason the bank
should guard against loss due to negligence
or bad faith (Sps. Omengan vs. PNB)
 Where the mortgagee does not directly deal
with the registered owner of real property,
the law requires higher degree of prudence
be exercised by the mortgagee (Abad vs.
Guimba)
12. Banks may exclude persons in their premises
13. Charging interest for loans
 It is considered the very core of the
banking’s very existence
Liability for Acts of Officers and Employees
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A bank is liable for the wrongful acts of its
officers done in the interest of the bank or dealings
as bank representatives but not for acts outside the
scope of their authority.
1. Negligence of Manager – employer is liable to the
acts of the manager
2. Negligence of officer – general rule: tortuous acts of
officers within their scope of employment shall
make banks liable
3. Negligence of tellers – tellers must exercise high
degree of diligence
 Teller should not give passbook to wrong
person as a person in possession of passbook
is presumed the owner
 Appropriation of deposited money by the
teller is not estafa but considered as theft as
the client only had material possession of it.
Such deposit money are considered owned
by the bank
4. Right to recover from employees
5. Liability for damages
 Actual, exemplary, moral
 Actual and compensatory – the interest due
shall itself earn interest from the time it is
judicially demanded
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12% - legal interest when judgment
becomes final and executory
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6% - interest for obligations not
constituting a loan or forbearance of money
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Moral damages
Gen. Rule – a corporation is not entitled
to moral damages
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Exception – when its good reputation is
besmirched by breach of fiduciary duty.
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In culpa contractual – recoverable if there
is fraud or bad faith
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Depositor may recover even if bank’s
negligence not attended by bad faith if he
suffered mental anguish, serious anxiety,
etc.
6. Respondeat superior of employees
 Command responsibility
 A bank is bound by the negligence of its
employees
Classification of Banks (CUT-RICO-NQU)
1. Universal Banks – large commercial banks that
can do both commercial and investment banking
 They have the power of both commercial
bank and investment house
 Have the power to invest in non-allied
enterprises
2. Commercial banks – general powers incident of
corporation and can perform commercial banking
 Does not have the power to invest in nonallied enterprises
3. Rural banks – banks that promote rural development
 They can extend loan or advances to
primarily meet the normal credit needs of
farmers, fishermen and their families
 Can also deposit in private banks more than
the amount prescribed by Single Borrower’s
Limit in case there are no government banks
 Rural Banks Act (RA 7353)
4. Thrift banks – encourages the industry, frugality and
accumulation of savings of the public
 To make it within easy reach to the people
the credit facilities at reasonable cost
 Includes: (1) savings and mortgage bank,
(2) stock savings and loan associations
and (3) private development banks
 Thrift Banks Act (RA 7906)
4
5. Cooperative banks – organized by cooperatives to
provide financial and credit services to cooperatives
 Cooperative Code (RA 6938)
 Membership of a cooperative bank shall
include ONLY cooperative and federations
of cooperatives
6. Islamic Banks – promote socio-economic
development in autonomous region by performing
banking and investment function based on Islamic
concept of banking
 Islamic Bank – RA 6848
 Subject to the principles and rulings of
Islamic Shari’a
7. Others banks:
 Philippine Veterans Bank – created to
provide government depository to veterans
for appreciation of grateful nation (RA
3518)
 Land bank of the Philippines – finance
distribution of estate to resale to small
landholders (RA 3844)
 Development Bank of Philippines – provide
credit facilities for development in
agriculture, commerce and industry
 DBP was previously named as
Rehabilitation
Finance
Corporation (RFC)
8. Non-stock savings and loan associations – nonstock,
non-profit
corporation
engage
in
accumulation of savings of its members and loans to
meet its members’ needs
 Confines exclusive membership and cannot
transact business with the general public
9. Quasi-banks – engaged in borrowing of funds
through issuance of deposit substitute for purpose of
relending or purchasing receivables and other
obligations
10. Offshore Banks – deals with transaction with foreign
currencies in receiving funds from external sources
and utilization of such
 Governed by PD 1034
Authority to Engage in Banking and Quasi-Banking
Functions
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No person or entity shall engage in baking
operations without authority from Bangko Sentral
 Universal or commercials banks may engage in
quasi-banking functions
 Under Corporation Code:
o No articles of incorporation or amendment
of banks shall be given unless accompanied
by recommendation of appropriate
government agency (MB)
 The determination whether the person or entity is
performing banking or quasi-banking functions
without authority of BSP shall be determined by MB
o MB may examine the books and records
to achieve this purpose
 The department head and examiners can administer
oaths and compel presentation of books, documents
or records
 BSP can examine a bank or an enterprise that is
wholly or majority-owned by the bank
o This can only be done when BSP is
examining bank
 SEC shall not register articles of incorporation of
bank unless it is accompanied by authority of MB
 SEC shall not register by-laws of bank unless
accompanied by authority of BSP
Service of summons upon banks
o May be made on the president, managing partner,
general manager, corporate secretary, treasurer, inhouse counsel (domestic)
o Upon resident agent or BSP (foreign bank)
 As long as institute loans out money to its customers
and collect the interest and charges a commission to
lender and banker, it is a bank
 Investment company engages primarily in the
investing or trading of securities and is not a bank
Bank name
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Only universal and commercial banks may
represent itself to the public as such in connection
with its business name
Thrift banks can be allowed to have a business name
of its own provided that “A thrift bank, savings bank
or private development bank” shall be added
Above rule is also available to Rural/Coop
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CHAPTER
2
–
Organization,
Administration of Banks
Management,
Organization of Banks
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MB can authorize the organization of a bank based
on the following conditions:
1. Entity is a stock corporation (par value
stocks only)
2. Funds are obtained from the public which
shall mean twenty persons or more
3. Minimum capital requirement prescribed
by MB shall be satisfied
MB shall take into consideration the capabilities of
the entity in terms of their financial resources,
technical expertise and integrity
Bank licensing process shall incorporate assessment
of:
1. Banks’ ownership structure
2. Director management
3. Operating plan
4. Internal controls
5. Projected financial condition
Capital requirements:
Type of Bank
Amount (M)
Universal
4,950
Commercial
2,400
Thrift banks
1. Head office in Manila
325
2. Otherwise
52
Rural Banks
1. Within Manila
26
2. Cebu/Davao
13
3. 1st-3rd class city and 1st class 6.5
municipality
4. 4th-6th class city and 2-4th class 3.9
municipality
5. 5th-6th class municipality
2.6
 At least 25% of total authorized capital stock shall
be subscribed by subscribers of proposed bank
 25% of such subscription shall be paid-up. It shall
not be less than the minimum capital requirement
 Incorporators/subscribers and proposed directors
and officers must be (2) persons of integrity and
(1) good credit standing
 Such persons must (1) not be convicted of crime
involving moral turpitude and (2) not officers of
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government agency or department charged with
granting loans to banks
Bank is organized 5-15 people (incorporators)
Cooperatives may organized a rural bank upon
consultation with the rural banks in the area
Bank and its branches shall be treated as one unit
Universal and commercial banks may open branches
within or outside the Philippines upon prior approval
of BSP
Other banks shall be governed by their pertinent laws
Stockholdings
1. Treasury Stocks
 GBL provides that NO bank shall:
i. Purchase or acquire shares of its
own capital stock
ii. accept own shares as security for
loan
1. Except if it approved by
MB and will be returned in
6 months
 Reason: if banks were allowed to have a lien
in their own stocks for indebtedness of
stockholders, prohibition against granting
loans or discounts upon security would
become ineffective
2. Foreign stockholdings:
 Foreign individuals and non-banks can own
40% of voting stock of domestic
bank.(aggregate foreign voting stocks)
 A Filipino individual and domestic nonbank may each own up to 40% of the voting
stock (no aggregate ceiling)
 Citizenship of the corporation shall follow
the citizenship of the controlling
stockholders (>50%)
 The percentage of foreign-owned voting
stocks in a bank shall be determined by
the citizenship of individual stockholders
 At least 60% of voting stock in any
commercial bank shall be owned by Filipino
citizens
 In thrift banks, it shall be at least 40%
 Rural banks, 100% Filipinos
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In determining nationality of banks, control
test is applied
Family groups or related interest must be
fully disclosed in all transactions of the
individual
Board of Directors
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According to Corporation Code, there shall be at
least five and maximum of 15 board of directors of
bank
Two of such shall be independent directors.
Independent director – person other than officer or
employee of bank
All must be of legal age and majority of them are
residents of the Philippines
Non-Filipino citizens may become members of
board of directors of bank up to the extent of allowed
foreign participation
Directors of merged or consolidated banks shall not
exceed 21
Election: President, Treasurer (director or not),
Secretary (resident citizen). Not allowed position:
President/Secretary, President/Treasurer
Meetings may be conducted through modern
technologies
A foreigner may be a member of the Board of
directors of a rural bank at the time of their
assumption of office
To protect funds of depositors and creditors, MB
shall regulate payment of directors under certain
circumstances:
1. Comptrollership
2. Business in unsafe or unsound manner
3. Bank is found to be in an unsatisfactory
financial condition
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Banking Days and Hours
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Fit and Proper Rule
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Powers of MB against directors:
a. Review qualifications and DQs of directors
b. After due notice, may disqualify, suspend or
remove director
c. Fit and proper rule shall be determine by integrity, experience, education, training,
competence of the director
Disqualifications of directors:
a. Convicted of final judgment involving
dishonesty or breach of trust
b. Persons convicted of final judgment with a
maximum imprisonment term of more than
6 years
c. Convicts of banking laws
d. Persons judicially declared insolvent
e. Culpable of bank’s closure
f. Administratively liable for violation of
banking laws with penalty of removal from
office
g. Found unfit for position
There can be also temporary disqualifications and
shall exist until DQ is gone
Under CC (Corporation Code) disqualification is
only with (1) imprisonment more than 6 years or
(2) violation of code committed within 5 years
NCBA also provides DQ for members of MB that is
connected with bank under supervision or
examination of BSP
Public officials cannot also be an officer of any
private bank unless position is incidental to office
Rural Banks Act – public official may be director
(exception)
PDIC – conviction of any criminal offenses
involving breach of trust
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At least 6 hours a day on working days (Mon-Fri
except holidays)
May open in Saturdays, Sundays and holidays for 3
hours (to report to BSP)
For purposes of deposits and withdrawals, bank can
extend beyond or early of 8AM and 8PM
If it is for other purposes, they can exceed 6 hours
minimum but not extend beyond or early of 8AM
and 8PM
Banks in airports or major fish ports can open
24hours
Changes in banking days and hours can be made
once every 30 days except during emergencies
ATMs
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Classes: 1.) Offsite 2.) Mobile
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Banks may establish off-site ATMS provided that
there is report on BSP and adequate security
7
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measures. They are installed only in centers of
activity
Mobile ATMS are allowed to visit places with large
crowds of people provided it has adequate security
Independent Auditor
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MB may require bank to engage services of
independent auditor from list of CPA acceptable to
MB
Financial Statements
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Every bank, quasi-bank or trust entity shall submit to
the BSP its financial statements
Such statements must show the actual financial
condition of its institution, including its operations
Must publish such in an understandable knowledge
once every quarter in a newspaper of general
circulation
Consolidated financial statement – combined
statement of balance sheet and income expenses of
two or more corporate entity
Subsidiary – corporation where more 50% of its
voting stock is owned by a bank
Affiliate – linked directly/indirectly to the bank by
1.) 10% ownership or control 2.) interlocking
directorship 3.) common stockholders owning 10%
of each intermediary 4.) management contract 5.)
permanent proxy or voting trust of 10%
Publication of Capital Stocks
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Bank, quasi-bank or trust entity shall not publish the
amount of its subscribed capital stock without
indicating the amount of its capital actually paid- up
Settlement of Disputes
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BSP shall be consulted by (1) government agencies
in actions initiated or brought before them by banks
and (2) disputes between any of them which they are
directors, officers, or stockholders
Strike and Lockouts
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Any unsettled strike or lockouts involving banks
after 7 days shall be reported by BSP to DOLE who
will assume jurisdiction
Banks, through their president, shall inform BSP of
the cause of the strike and the operations affected
8
CHAPTER 3 – Deposit Functions of Banks
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I. Kinds of Deposits
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1. Demand deposits
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All those liabilities of BSP and of other banks which
are denominated in Philippine currency and are
subject to payment in legal tender upon demand by
presentation of checks
Only universal and commercial banks may accept or
create demand deposits without prior authority from
BSP
Other types of bank require such authority. This
considered as the current account in the bank
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1.a. Temporary over drawings and DAUD
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Temporary overdrawings are not allowed except
normal bank charges and other fees incidental to
handling such accounts
Violations of temporary overdrawings will cause
(1/10 of 1%) fine per day computed on the basis of
the amount of overdrawn but not to exceed
P30,000.00 per day
Drawings against uncollected deposits (DAUD) –
prohibited. Exception: made against uncollected
deposits representing manager’s, cashier’s, treasury
warrants, postal money order and on us check
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1.d. Set off Rule
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1.b. Current accounts of officers
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All officers, employees of bank in cash departments
and other employees who have direct responsibility
in handling deposit transactions are not allowed to
maintain demand deposits or current accounts
When bank sees that depositor’s account has
sufficient amount, then it shall honor such
If there is sufficient amount but bank dishonored,
then bank is liable. Otherwise if there is no sufficient
amount
Banks must ensure that the check is only paid to
its designated payee
Drawer must remember every time he issues a check
and a bank must know the former’s signature
A bank is under no obligation to make partial
payment on the check only upon the amount in the
drawer’s funds
The cannot also compensate the lack of money in the
deposit account to the savings account
Cross-check must be: (1) may not be encashed but
only deposited (2) check negotiated only once – to
one who has an account with a bank and (3) serves
as warning to holder (State Investment House vs.
IAC)
Cashier’s check – bank’s own check and is treated as
PN with the bank as maker
- deemed as cash (New Pacific Timber & Supply
Co. Inc. Cs. Señeris)
A bank can set off or compensate by debiting a
personal account of depositor for an amount
erroneously credits to the person’s proprietorship
account
1.e. Relationship of Payee or Holder and the Bank
 Principal and agent – relationship between payee or
holder of commercial paper and the bank to which it
is sent for collection (PCIB vs. CA)
1.c. Checks

A written order addressed to a bank or person
carrying banking business, by a party having money
in their hands, requesting them to pay on
presentment, to a person named therein or to
bearer or to order, a named sum of money (Moran
vs. CA)
2. Savings Deposits

Banks may be authorized by the BSP to solicit and
accept deposits outside their bank premises
2.a. Individual and Joint Accounts
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1.d. Duty of bank to honor checks
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If the joint account is “and”, both signatures of codepositors are required before withdrawals
If “and/or” either their signature is sufficient
9
2.b. Withdrawals
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There must always be a presentation of passbook and
accomplishing necessary withdrawal slips before
withdrawal except if authorized by BSP
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3. Negotiable Order of Withdrawal Accounts
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NOW accounts are interest bearing deposit accounts
that combine the payable on demand feature of
checks and investment feature of savings account
Universal and Commercial banks may offer NOW
accounts but other banks need prior approval of MB
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4. Time Deposits
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Time deposits – one the payment of which cannot be
legally required within such specified number of
days
Special time deposits from the Agrarian Reform
Fund Commission with lower interest shall be
exempt from legal reserve requirements
Certificated of Time Deposits can either be
negotiable or non-negotiable. Only Universal or
commercial banks can issue negotiable CTDs
without prior approval of BSP
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foreign currencies which are acceptable as part of
international reserve, except those which are
required by BSP to be surrendered
Such banks can accept deposits and accept foreign
currencies in trust
1. Numbered accounts for recording and
servicing of deposits are allowed
The depository bank shall
1. Maintain at all times a 100% foreign
currency cover for their liabilities
2. 15% of such must be in the form of
foreign currency deposit with BSP
3. The balance shall be in form of foreign
currency loans/securities which are shortterm maturities and readily marketable
4. Such loans can be extended to domestic
enterprises to cover the 100% foreign
currency cover
Depository banks under the expanded foreign
currency deposit system shall be exempt from the
15% requirement of deposit with BSP
There is no restriction on withdrawals by depositor
of his deposit of the same abroad except does arising
from contract of depositor and bank
7. Anonymous and Numbered accounts
5. Deposit Substitute (Quasi-Banking Function)

Essential Elements of quasi-banking are:
1. Borrowing funds for the borrower’s account
2. Twenty or more lenders at any one time
3. Methods of borrowing are issuance, endorsement
or acceptance of debt instruments
4. Purpose is for relending and purchasing
receivables
 Borrowing – all forms of obtaining or raising
funds
 For the borrower’s own account – assumption of
liability in one’s own capacity
 Relending – refer to the extension of loans by an
institution with antecedent borrowing transactions
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II. Administration of Deposits
1. Specimen signature, ID photos
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6. Foreign Currency Deposits
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Any person, natural or juridical may deposit with
such any bank in good standing designated by BSP,
Such accounts are not allowed. Numbered accounts
is only allowed in foreign currency deposits
However, banks/non-banks should ensure that the
client is identified in an official document
All banking institutions are required to set a
minimum of 3 specimen signature from their
depositors every 5 years or sooner
Banks may also require submission of ID photos
First time depositors require the presentation of at
least 2 valid photo-bearing Ids
Students who are beneficiaries of OFW are also
required to present 2 Ids
Submission is one-time basis only
2. Minors and Corporations as Depositors
10
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Minors can have savings and time deposit
accounts without assistance of parents
1. Must be at least 7 yrs old
2. Able to read and write
3. Sufficient discretion
4. Not otherwise DQed by law
Parents can still deposit money to minor
For deposits of minors in thrift banks, guardian may
make notice that payment (deposits, interest,
dividends) be made to him and not to the minor
Corporations may open bank accounts as follows:
(1) Incorporation stage and (2) Post incorporation
stage
may, at the option of the bank, be booked on the day
of receipt. Other non-cash deposits are treated as
contingent accounts on the day of receipt and shall
be booked as deposits the following day
8. Booking Deposits after regular banking hours
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9. Average Daily Balance
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3. Time of payment of interest in time deposits

Interest on time deposit may be paid upon maturity,
withdrawal or advance provided that the interest
paid in advance shall not exceed interest for one
year
4. Treatment of matured time deposits
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Time deposits not withdrawn or renewed on its due
date shall be treated as a savings deposit and shall
earn interest until actual withdrawal with rates of
savings deposit
Deposit substitute not withdrawn shall have a
maturity rate applicable to a deposit substitute
5. Clearing Cut-off Time
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General rule: all deposits and withdrawals during
regular banking hours shall be credited/debited to
accounts on date of receipt or payment
If there is BSP clearing arrangement, not earlier than
2 hours before BSP clearing time in head offices and
3.5 hours in branches
If there is no BSP clearing arrangement 2 hours
before local clearing time
6. Booking Cash Deposits

Cash deposits received after clearing cut-off time
shall be book as deposits on day of receipt
7. Booking Non-cash Deposits

“on us” checks, manager’s/cashier’s checks,
demand drafts received after clearing cut-off time
Deposits, whether cash or not, received after close
of regular banking hours shall be treated as
contingent accounts and booked the following day
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Banks may impose and collect service charge or
maintenance fee on savings and current accounts
that fall below minimum monthly average daily
balance (ADB)
must be properly disclosed in the terms of deposit
For dormant accounts: fall below 2 consecutive
months
III. Survivorship Agreement
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There is survivorship agreement when joint
owners of a deposit agree that either of them could
withdraw any part or whole of account during
lifetime of both and the balance upon death of either
belongs to the survivor
It is an aleatory contract
Survivorship agreement is per se not contrary to law
but may be violative
Agreement can be a mere cloak to hide in inofficious
donation to transfer property in fraud
IV. Nature of Bank Deposits
1. Deposits are considered simple loans and not
preferred credits
2. Bank deposits are in the nature of irregular deposits
as they are loans who earn interest (BPI vs. CA)
3. Relationship between depositor and Savings and
Loan Association is that of creditor and debtor
4. Contract between bank and its depositors are
governed by NCC
5. Bank ultimately acquires ownership of deposits
but has obligation to pay back equal amount
6. Banks can set-off or compensate
11
V. Duties of Banks
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Meticulous care with deposits of clients due to
fiduciary relationship
Banks must give payment to the proper party, thus
collecting bank has obligation to ascertain that the
drawer truly intended that the depositor is the payee
In case of death of depositor and the bank knew of
it, there shall be no further withdrawal
Administrators or heirs can withdraw up to 20k
without certification of CIR
VI. Secrecy of Bank Deposits






Purpose is to (1) give encouragement to the people
to deposit their money in banking institution and
(2) discourage private hoarding of depositors so that
could be used in economic development
All deposits of whatever nature with bas including
investment bonds are considered absolutely
confidential and may not be examined, inquired or
looked into even by government officials
RA 8367 prohibits inquire or disclosure of deposits
Exception: (1) written permission of depositor, (2)
impeachment, (3) order of court in case of bribery or
dereliction or (4) subject matter of litigation
It shall also apply to foreign currency deposits
with the only exception of written permission
In Islamic banks that only exceptions are: (1)
inspection of bank auditor, (2) written permission by
depositor (3) subject matter of litigation
VII. Exceptions to Secrecy of Deposits






They are already stated above
Accounts can be garnished to insure satisfaction of
judgment as there is no real inquiry and some
disclosure are merely incidental
Congress not intended for debtors to escape
General exemption against garnishment shall not
apply to foreign transients
Foreign currency deposits of a foreigner who was
convicted of crime of rape may be garnished to
satisfy judgment
Under RA 1405 and Anti-Money Laundering Act,
the secrecy of deposits do not apply



BSP can also inquire in deposits for periodic and
special examinations
Ombudsman has the In-Camera Inspection power to
look into deposits provided that there is a pending
case is court and 1.) the account must be properly
identified 2.) inspection limited to the subject matter
CIR can also look into deposits to determine gross
estate of a decedent or he has applied for
compromise tax liability
12
CHAPTER 4 – Investments, Loans and Other Bank
Functions
Equity investments of universal bank in non-financial
allied enterprise
I. Universal Operation of Universal banks

Powers of Universal bank

1. Commercial bank
2. Investment house
3. Invest in non-allied enterprises
Equity Investments of Universal bank





Allied enterprises are those which enhance or
complement banking
If it is a financial allied enterprise, then it involves
money matters. Otherwise it shall be non-financial
Total investments in equities of allied and non- allied
enterprises shall not exceed 50% of the net worth of
the bank
Equity investment in any one enterprise, whether
allied or non, shall not exceed 25%
Net worth – total of the unimpaired paid in capital
including paid-in surplus, retained earnings and
undivided profit
Equity investments of Universal bank in Financial Allied
enterprise




Universal bank can own 100% of the equity in a
thrift, rural bank or financial allied enterprise
Publicly-listed universal or commercial bank may
own 100% of voting stock of another universal or
commercial bank
If not publicly-list then only 49% own
Following are financial allied enterprises:
1. Leasing companies
2. Banks
3. Investment houses
4. Financing companies
5. Credit card companies
6. Financial institutions
7. Companies in stock brokerage and foreign
exchange dealership
8. Insurance companies
9. Holding company provided that the equities
of the entity is confined under universal
bank BSP regulation

Universal bank may own up to 100% of equity in
non-financial allied
Examples are:
1. Warehousing companies
2. Storage
3. Safe deposit box
4. Companies engaged in management of
mutual funds and not funds itself
5. Computer services
6. Home building and development
7. Service bureaus
8. PCHC
Rural and cooperative banks can invest in nonfinancial allied enterprises such as:
1. Warehousing
2. Fertilize and agricultural chemical
3. Farm equipments
4. Trucking and transportation
5. Marketing agricultural products
6. Leasing
Equity investment of Universal Bank in Non-allied
enterprise

Equity investment in a single non-allied enterprise
shall not exceed 35% in total equity or voting
stock
Investments in non-allied enterprises


Universal bank may invest in equity of enterprise
of eligibles:
1. Enterprises engaged in agriculture, mining,
quarrying, manufacturing, public utilities
2. Industrial parks
3. Commercial project with government
privatization program
Equity investment in Quasi-banks – universal bank
can only invest up to 40% in equity of quasi-banks
II. Operations of Commercial Banks
Powers of Commercial banks
1. General powers incident to corporations
2. All power necessary to carry business of
commercial banking such as:
13
a. Accepting draft and issuing letters of
credit
b. Discounting
c. Creating demand deposits
d. Buy and selling Forex
Equity investment of commercial bank on financial allied
enterprises


Issuance of Letters of Credit










Letter of credit – financial device developed by
merchants as convenient mode of dealing with sales
of goods
The buyer will apply for a letter of credit in the
issuing bank
The seller will then send the goods to the carrier and
he will make a draft, called bill of exchange
Seller will present the draft and the necessary
documents, such as bill of lading to issuing bank
to receive the payment
While the goods are in transit, it shall be owned by
issuing bank
When the goods arrived at the port of the buyer, the
buyer will pay the corresponding payment and also
gain the documents
Since the buyer gain the documents, he can now
acquire the delivered goods
Independence principle – bank determines
compliance with letter of credit only by examining
shipping documents presented and need not examine
the goods
There are three contracts:
1. buyer-seller
2. buyer-bank
3. seller-bank
There can be other parties such as notifying bank
(inform seller), confirming bank (lend credence to
letter of credit), paying bank and negotiating bank
(discounter)
Equity investments on commercial bank



Commercial bank may invest only in equities of
allied enterprises
Total investment in equities of allied enterprises
shall not exceed 35%
Equity investment in one enterprise shall not
exceed 25%
Can own up to 100% in equity of thrift and rural
bank
However cannot own 100% of equity of financial
allied enterprise other than above banks
Equity investment in commercial bank on non-financial
allied enterprises

Can own 100% of said enterprises
III. Risk-Based Capital
Minimum Ratio




MB shall prescribe minimum ratio
It will be based on the net worth and risk assets of
a banks well as its compositions
It may alter compliance with ratio for a max
period of 1 year
Ratio shall be uniformly applied to banks of same
category
Effect of Non-compliance


If a bank does not comply then the MB can:
1. Limit distribution of net profits and be used
to increase capital accounts until minimum
requirement is met
2. Restrict acquisition of major assets and new
investments except with purchase of readily
marketable evidence of indebtedness of RP
BSP
In case of merger, rehabilitation, MB may
temporarily relieve such bank with compliance with
capital ratio
IV. Limit on loans, credit accommodation and guarantees
Single Borrowers Limit



Total amount of loans, credits accommodation and
guarantees extended to any person, partnership or
corporation shall not exceed 20% of net worth of
bank
In Circular 425 of 2004 of BSP, the SBL was
increased to 25%
Exceptions to SBL:
14















1. MB may otherwise prescribe for reasons of
national interest
2. Deposit of rural banks with GOC financial
institutions such as LB, DBP and PNB
Basis for determining SBL is the total credit
commitment of bank to borrower
Loans - to all accounts under loan portfolio
Credit accommodations - to credit and market risk
exposure of banks arising from accommodation
other than the loan
Total credit commitment - include loans, credit
accommodation, deferred letters of credit less
margin deposits and guarantees
Total credit commitment can be increased by 10%
provided additional liabilities are secured by trust
receipts, shipping documents or readily marketable
goods
Readily marketable goods – articles of commerce,
agriculture or industry as constant dealings in ready
market and price is easily ascertainable and
disposable
Parent corporation’s total credit commitment shall
also include its subsidiaries’ if it guarantees,
accommodate or subsidiary is merely a department
of it
Wholesale lending of government banks shall not
exceed 35% of net worth to participating financial
institutions
PFI – institutions for relending to end-user borrowers
The end-user borrower shall be subject to the 25%
SBL
In municipalities where there are no government
banks, deposits of rural and coop banks in private
banks shall not be subject to SBL
Deposit in private depository bank used by thrift,
rural and coop banks, with authority to accept
demand deposits, after being cleared, shall be
exempted from SBL
Bank guarantee – irrevocable commitment of a bank
binding to pay a sum of money in event of nonperformance of third party
Credit Risk Transfer – arrangement that allows the
bank to transfer the credit risk associated with its
loan or other credit accommodation to a third party
Control of majority interest or controlling interest
– parent owns, directly or indirectly through its





subsidiaries, more than half of voting power of
enterprise
Even if less than half of said voting power, it shall
still have controlling interest if:
1. Agreement with investors
2. Govern financial and operations
3. Can appoint majority of directors
4. Cast majority vote on meetings
Subsidiary – corporation where more than 50% of
the voting stock is owned by a parent corporation
Bill of exchange drawn in good faith against
actually existing values – drawn by a seller on the
purchase for the price of commodity sold
Commercial paper owned by person negotiating the
same – paper arising from business transaction
Exclusion from SBL:
1. Discount bills of exchange and discount
commercial paper
2. Credit
accommodation
to
finance
importation of rice or corn up to 100% net
worth of bank
• Must be approved by NEDA
3. Loans
and
credit
accommodation
guaranteed by Industrial Guarantee and
Loan Fund
4. Liabilities of commercial paper issued for
commercial paper held by UB as firm
underwriter. Only 180 days and not
exceed 5% from normal SBL
5. Loans and credit accommodations covered
by international or regional institutions
where Philippines is shareholder such as
ADB
6. Loans and credit accommodations with
valuation reserves provided that bank has no
unbooked valuation reserves
7. Loans and credit accommodations as a
result of underwriting agreement of debt
securities not exceeding 30 days
Violations



Monetary penalties – 1/10 of 1% of excess over
the ceiling but not exceed 30k per day
If bank resource is less than 50M, then only a max
penalty of P500 shall be imposed
There will also be reprimand to directors/officers
15


In subsequent offense, a 1k fine shall be imposed on
the directors who approved it
There can also be suspension of bank’s branching
privilege and rediscounting facility of BSP
Inclusion to Limit


The following shall be included
1. Maker, acceptor of paper discounted and
general indorser, drawer or guarantor
2. Individual who controls majority interest in
corporation
3. In case of corporation, all liabilities to such
bank of all subsidiaries it has majority
interest
4. Partnership, liabilities of members
Also includes parent corporations with majority
interest


V. Restriction on Bank Exposure to Directors, Officers,
Stockholder and related interests (DOSRI)





Exclusion to limit
1. Loans and credit accommodations secured by
BSP or RP. State is always solvent
2. Loans and credit accommodations guaranteed by
government
3. Loans and credit accommodations covered by
assigned of deposits by lending bank
4. Loans and credit accommodations under letters of
credit covered by margin deposits
5. Loans and credit accommodations determined by
MB as non-risk items
Assignment of Credits





It is the agreement where the owner of credit, know
as assignor, by legal cause, transfer his credit to
another, known as assignee without need of consent
of debtor
Assignee acquires powers of assignor
There is no new obligation in assignment
However, there must be a notice given to debtor so
that he will know whom to pay
Consent is not necessary in order that assignment
may fully produce legal effects (Sison & Sison vs.
Yap Tico and Avanceña)
Pacto commisorio

Appropriating a thing given by pledge or
mortgage
It is not allowed. Encashment of deposit certificates
is not pacto commissorio
It is intended to protect the obligor against being
overreached by creditor




No DOSRI can directly or indirectly borrow from
such bank or become a guarantor, indorser or surety
for loan
Exception is when there is a written approval of the
majority of all directors of the bank excluding the
DOSRI concerned
Such approval is not required if it is under a fringe
benefit plan approved by BSP
Directors include those named in incorporations,
elected or filled
Officers shall include any person who performs
function of management
Stockholder – stockholder of record in the books
of the bank
Related interest includes souse or relative within 1st
degree or by legal adoption. This includes
partnership, co-ownership of DOSRIs
Corporations where the above mentioned owns 20%
of subscribed capital, then the prohibition shall
apply
Can also be less than 50% if the DOS sits as
representative of the bank in the board of such
corporation
Effect of violation

The director or officer who violates may be declared
vacant and subject to penal provisions of NCBA
Limit on loans

MB can limit the valid loan given to DOSRI
provided that it shall be based on their
unencumbered deposits and book value of their paid
in capital contribution
Exclusion to the Limit

Loans and credit accommodations considered as
non-risk
16


Loans and credit accommodations to officers in for
of fringe benefits
Limit on loans and credit accommodations shall not
apply on those extended by coop bank to its coop
shareholders
Applicability of DOSRI
government borrowing


rules
and
regulation



to
Circular 547 of 2006 provides that DOSRI rules
shall also apply to loans and credit accommodations
granted to RP, subdivisions, instrumentalities and
GOCCs
Exceptions would be:
1. Loans and credit accommodations that are
non-risk and not subject to ceiling
2. Those made by BSP
3. LGU due to full autonomy in their propriety
function
4. Director who acts as government
representative
VI. Securities on Loans and credit accommodations

VII. Grant and
accommodations
Shall not exceed 75% of appraised value of
respective real estate security plus 60% of the
appraised value of the insure improvements





Shall also not exceed 75% of the appraised value of
the security
Join and Solidary agreement


JSA is surety and not guarantee. It is an agreement
where parties consent to be solidarily liable
As a contract of adhesion, JSA should be taken
contra proferentum against the party who may have
caused any ambiguity therein.
Effect of Surety Agreement


Agreement is onerous and construed against creditor
Requires that creditor obtain consent of the surety
before there can be material alteration to the loan
of
loans
and
credit
Bank must grant loans and credit accommodations
only in amounts and for period of time essential
for effective completion
Must be consistent with safe and sound banking
practice
Purpose of loan shall be stated in application
If bank finds that proceeds have been employed
without its approval, the bank shall have the right to
terminate the loan and demand immediate repayment
Requirement for grant of loan
Loans and credit accommodations on security of chattels
and intangible properties

purposes
Amount and purpose of loan
Loans and credit accommodations against real estate

If surety director is not anymore party of the board
then he cannot be held liable
Surety cannot extend to more than what is stipulated
Joint and solidary signature of major stockholder or
officer constitutes as an additional security for loans
granted to corporations (Security Bank & Trust
Company vs. Cuenca)
Joint and solidary agreement – agreement where the
contracting parties consent to be jointly and
severally liable in a loan obligation



Bank must first ascertain if debtor is capable of
fulfilling his commitments to the bank. It must
consists of:
1. Statement of assets and liabilities
2. Statement of income and expenditure
3. Prescribed by law and MB to evaluate credit
application
Even in the absence of such provision in GBL, Art
1198 of the NCC allows the creditor to demand full
payment when debtor is insolvent, fails to give
guarantee, impaired guarantee, lost thing through
fortuitous event, violate undertaking or attempts to
abscond
MB shall recognize peculiar characteristic of
micro financing such as cash flow-based lending
Microfinancing loans – small loans granted to basic
sectors usually unsecured and given to small
businesses
17
Reason for stringent rule in granting loans

Banking corporation holds the money of the
depositors. Due to the nature that it is affected public
interest, the bank must ensure that the loan shall be
repaid



Unsecured loans and other credit accommodation

MB shall authorize regulations with respect to
such


Other security requirements for bank credits

MB may prescribe security requirements to which
bank credits shall be subject and reduce or
increase maximum ratio
Authority to prescribe terms and condition of loans and
other credit accommodations


MB may prescribe maturities as well as related
conditions of various bank loans and credit
accommodations
Any change in maximum maturity shall only apply
to those made after such action
Amortization on loans and other credit accommodations




Amortization schedule of bank loans and other credit
accommodations shall be adopted based on nature of
operation
If loans and other credit accommodations has
maturity of more than 5 years, must have periodic
amortization payments and must be made annually
If borrowed funds are to be used for purposes which
do not initially produce revenues for payment of
regular amortization, bank may defer such time until
revenues are sufficient. In no case shall initial
amortization date be later than 5 years
In case of loans and other credit accommodations to
microfinance sectors, schedule shall consider cash
flow of borrowers
Escalation Clause

Parties to an agreement pertaining to loan of may
agree upon an increase in the event that the
applicable maximum interest is increased by MB


PROVIDED: such stipulation shall only be valid if
there is also a stipulation that the interest rate agreed
upon shall be reduced in the even maximum
interest rate is also reduced by MB
Escalation clause are not void per se
It is void when it grants creditor unbridled right to
adjust interest independently, completely depriving
debtor of right to assent
Such clause violate the mutuality of contracts
In escalation clause there should be:
1. Increase in interest if increased by law or
MB (escalation clause)
2. Include provision for reduction of stipulated
interest in the event maximum interest is
also reduced by law or MB (de- escalation
clause)
Purpose of including de-escalation clause –
prevent one-sidedness in favour of lender an
repugnant to mutuality of contracts
Absence of de-escalation clause will render
escalation clause void
Effect of annulment of escalation clause
 In case the escalation clause is annulled, principal
amount of loan is subject to original interest rate
Exception

If there is no de-escalation clause, the escalation
clause is still valid if the creditor unilaterally and
actually decreased the interest charges whenever the
interest rate is reduced by law or MB (Llorin vs.
CA)
Unilateral increase of rates




Such violates the principle of mutuality of contracts
in Art 1308 of NCC
Any contract which appears to be heavily weighed
in favour of any one party that will lead to
unconscionable result is void
Escalation clause are valid to maintain fiscal stability
and retain the value of money on long- term
contracts
However, other party there must be right to assent to
an important modification of contract
18

Contract of adhesion – parties do not bargain on
equal footing, the weaker party’s participation being
reduced to a take or leave it
Iniquitous, unconscionable and exorbitant interests






Though usury law is not inexistent, interest may
be agreed upon by lender and borrower
However, the same must be equitable reduced for
being iniquitous, unconscionable and exorbitant
In Medel vs. CA, SC found that 66% interest rate per
anum is unconscionable
In Cuaton vs. Salud, interest rate was 120% per
annum interest rate is unconscionable and should be
lowered to 12% per annum interest rate
Dio vs. Virgilio, interest rate was 120% per annum
also, reduction of interest must be made
Bacolor vs. Banco Filipino, a 24% interest rate per
annum is not unconscionable or excessive
financial educational institutions, cooperatives,
hospitals
Banks cannot extend peso loans to non-resident


Provisions for losses and write-offs

If interest rate is void, it is as if no express contract
thereon and court may reduce


Prepayment of loans and other credit accommodations

A borrower may at any time prior to agreed maturity
date, prepay in whole or in part the unpaid balance
subject to reasonable terms
Legal compensation




Under Art. 1278, compensation can take place where
the parties are creditors and debtors of each other
A person who secures a loan of money acquires
ownership and is bond to pay the creditor an equal
amount
Deposits in bank can be set-off against obligation of
depositor
Subsidiary has an independent and separate juridical
personality from parent company and any claim
against the subsidiary is not a claim against the
parent


BSP shall provide incentives to banks, without
government guarantee, which extend loans to
Under Art 1250 of NCC, in case of extraordinary
inflation or deflation of currency stipulated, value of
currency at time of establishment of contract shall be
the basis of payment
For extraordinary inflation or deflation to affect
obligation, the following must be proven:
1. There must first be official declaration from
BSP
2. Obligation is contractual
3. Parties expressly agreed to considered
effects of extraordinary inflation or deflation
Extraordinary Inflation exist when there is an
unusual decrease in the purchasing power of the
currency and such decrease could not be reasonably
foreseen or was manifest beyond the contemplation
of the parties at the time of the obligation
Purpose of Attorney’s Fees

Attorney’s fees are not integral part of cost of borrow
but arise when collecting upon the Notes becomes
necessary
VIII. Truth in Lending
Policy
Development assistance incentives
Bad debts - all debts due to any bank on which
interest is past due and unpaid
Extraordinary inflation or deflation
Effect of void interest rate

Reason for this:
1. To curb undue speculation in foreign
exchange market
2. Further reinforce memorandum that peso
deposits should be funded inward foreign
exchange remittances
OFWs are residents and can avail peso loans
19

Protect citizen from lack of awareness of trust cost
of credit to the user by assuring full disclosure of
such cost and prevent uninformed use of credit


Disclosure


The creditor shall furnish the debtor a clear
statement in writing setting forth the following:
1. Cash price or delivered price to be
acquired
2. Amount to be credited as DP
3. Difference between 1 and 2
4. Charges individually itemized
5. Total amount to be financed
6. Finance charge
7. Percentage that finance bears to the total
amount to the financed
Rationale: protect users of credit from lack of
awareness of true cost
Definition



Credit – any loan, mortgage, deed of trust, advance,
conditional sale contract, rental
Finance charge – interest, fees, service charges,
discounts and other charges incident to extension of
credit
Creditor – any person engaged in business of
extending credit who requires finance charge
Penalties
1. Civil – any creditor who fails to disclose shall be
liable for P100 or amount equal to twice of finance
charge required
a. Whichever is higher
b. Liability shall not exceed 2k
c. Must be brought within 1 year from date of
occurrence
2. Criminal – fine not less than 1k or not more than 5k
or imprisonment for not less than 6 mos nor more
than 1 year or both
 Both actions can be instituted independently of each
other
 But there can also be a joinder of cause

Exemption of government

TILA shall not apply to Philippine Government
Required disclosure on consumer loans not under openend credit plan

Any creditor extending consumer loan or transaction
which neither consumer credit sale nor open-end
consumer credit plan shall also need to disclose
information
Exempted transactions

Disclosure requirement on consumer credit
transactions shall not apply to those extension of
credits for business or commercial purpose or to
government
IX. Foreclosure of real estate mortgage
Procedure






Effect of violation
Violation shall not affect the validity or
enforceability of any contract
In Consolidated Bank vs. CA, SC said that lender
cannot charge interests not stipulated in
promissory note
In UCP vs. Beluso, interest rate provisions are illegal
due to violation of mutuality of contracts and also
violate TILA
In the event of foreclosure of any mortgage, the
mortgagor has the right to redeem the property
within one year after sale of real estate
Purchaser at auction sale shall have the right to enter
upon and take possession of such after date of
confirmation of auction sale
In GBL, if purchased y banks, they are not required
to set up bond before they can enter the property
immediately during redemption period
Writ of possession may also be issued after
consolidation of ownership of property in name of
buyer
Buyer becomes absolute owner of property if not
redeemed during the 1 year after registration of
sale
If the property extrajudicially foreclosed belong to a
juridical persons, right to redeem property shall
20
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







be counted until, not after, the registration of the
certificate of foreclosure
It shall be no more than 3 months after foreclosure
whichever is earlier
Accessory contract of real mortgage is used as
security for fulfilment of principal obligation
A loan value is only 70 percent of the appraised
value so that a low bid price will be made and will
be easier to redeem
Real property may be mortgaged to aliens
Redemption period is counted from date of
registration of the certificate of sale with register
of deeds
An action for annulment of mortgage does not stop
the running of the period of redemption
Otherwise there shall be frivolous suits instigated to
give mortgagor more time to redeem
The amount redeemable is the amount under the
mortgage deed or the outstanding obligation plus
interest and expense in Sec 47 of GBL
No personal notice in required in extrajudicial
foreclosure of sale since it is action in rem







Offer to repurchase not waiver to question sale


Demand before foreclosure essential

There must first be demand before there can be
foreclosure as where demand was not made, the loan
shall not become due and demandable


In case of rehabilitation of corporation debtor, the
right of a creditor bank is merely suspended
Writ of possession
Where foreclosure is judicially made, no right of
redemption exist in case the mortgagee is not a PNB
or bank
In such a case, the mortgagor is given the right to
extinguish the mortgage and retain ownership of
property by paying debt within 90 days after
judgment
Right of redemption may be extended by agreement
Estoppel

If there was an offer to repurchase, it shall not be
construed as waiver of right to question
foreclosure sale
Mortgagee has no right to recover the deficiency
from the mortgagor of value of loan if foreclosure is
invalid
Preferred status of banks not impaired in case borrower
under rehabilitation
Equity of redemption vs. Right of redemption

Right to redeem becomes functus officio on the date
of its expiry
Redemption is by force of law, the buyer is bound to
accept redemption
However, there can be right to repurchase depending
on the will of buyer
The buyer is not bound to accept repurchase unlike
in redemption
The buyer shall also not be bound by the bid price as
it now belongs to him
An alien-owned bank cannot acquire ownership of
residential lot by virtue of deed of transfer as
settlement of debt
Transfer of ownership, even for a limited period or
in foreclosure, cannot be made to alien
Bank or any purchaser is deemed consented to
extension of redemption if it had time to object but it
did not
Redemption after prescriptive period




After consolidation of title in buyer’s name due to
failure of mortgage to redeem, the writ of possession
becomes a matter of right and its issuance in a extrajudicial foreclosure is merely ministerial
Injunction to prohibit issuance of writ of possession
is utterly out of place
Proceeding in petition for writ of possession is exparte and summary in nature
However, mortgagor still have right of recourse to
petition to set aside foreclosure sale and cancel writ
of possession in same proceeding
X. Major investments
21

MB shall establish criteria for reviewing major
acquisitions or investments of bank
Ceiling on investments in certain assets







Bank may acquire real estate as necessary for its
conduct of business
Total investment on such real estate shall not exceed
50% of capital accounts
Equity investment of a bank in another corporation
engaged in real estate shall be considered part of
investment in real estate
In determining compliance with the ceiling, the
following shall apply
o Investment shall include real estate and
equipment necessary for bank use such as
bank premises and real property of bank
under its name
o The cost of real estate leased by bank from
corporation and amount of equity in lessor
shall also be included
In case of Tala vs. Banco Filipino, BF reached its
maximum 50% capacity in real estate and Tala
was created by major stockholders to buy back sites
of BF and leases it back to them. However, BF
defaulted and Tala wants the payment of rents
The court rules that Tala cannot be allowed to collect
rent as it clearly shows that the tried to circumvent
the real estate investment limit in GBL

3. Make collection for accounts of other
4. Act as managing agent of investment
management accounts
5. Rent out safety deposit boxes
Bank shall perform 1-4 as a depositary or as an
agent
It shall be duly separated from bank’s own assets
and liabilities
Safety deposit box








It is considered as a special kind of deposit
It cannot be an ordinary contract of lease because the
absolute control and possession of safety deposit
box is not given to renters
The guard key remains with bank and renters key
remain in customer
Where the renter keys are duplicated, the bank is not
liable to either renters in case of loss attributable to
them
The SC said that it can be considered as a bailor and
bailee relationship
Duties of the parties may be defined by them
The company renting safe-deposit boxed cannot
exempt itself from liability due to fault of its own
agents
In Sia vs. CA, a bank was held liable for not
immediately informing the customer that his safety
deposit box was flooded which caused damage to the
items of the customer
Acquisition of real estate by way of satisfaction of claims



XII. Electronic transactions
Notwithstanding the limitations, bank may still
acquire the following property:
1. Mortgage to it in good faith for security
2. Conveyed for satisfaction of debt
3. Purchase under judgement or mortgage
Any real property held in such circumstance must
be disposed within 5 years
After said period, those properties shall now be
included in the 50% limitation
XI. Other Banking Services

A bank may also perform the following services:
1. Receive custody of funds, documents and
other valuable objects
2. Act as financial agent to buy and sell for
their customers

BSP shall have full authority to regulate use of
electronic devices in connection with bank
operations
XIII. Outsourcing of information technology


Bank may outsource information technology
systems and processes except inherent banking
functions
Functions that are not outsourced:
1. Strategic planning for use of IT
2. Determination of system functionalities
3. Change management inclusive of quality
assurance
4. Service level and contract management
5. Security policy and administration
22
XIV. Outsourcing of other functions


Subject to prior approval of MB, banks may
outsource data imaging, storage, retrieval and other
related systems
Banks may outsource credit card services
XV. Credit Card Transactions

Finance charges – interest charged to cardholder
Deferral charges

General policy

BSP shall develop consumer credit through
innovative products
Definition of terms





Credit card – any card, plate, coupon book or
other credit device for the purpose of obtaining
money, property, labor or credit
Credit card receivables – total outstanding balance
of cardholders
Minimum amount due - minimum amount that
cardholder needs to pay on due date
Default – non-payment of minimum amount due
within two cycle dates
Acceleration clause – gives bank the right to demand
obligation in full in case of default
Risk management system

System that shall safeguard interests, banks and
subsidiary credit card companies
Minimum requirements


Before issuing credit cards, banks must exercise
proper diligence by ascertaining applicant possess
good credit standing and are financially capable to
fulfil payments
All applications must go under strict credit risk
assessment process
Information to be disclosed

Banks shall disclose to each prospective
cardholder non-financial charges, percentage of
interests, interest rate per annum, instalment details,
default fees, etc.
Accrual of interest earned
Interest accrued shall be reserved and no accrual
shall be allowed 90 days after credit card receivable
has become past due
Parties can agree to a deferral of all or partly of
unpaid instalments and will subsequently collect
deferral charge
Late payment and penalty fees

No late payment or penalty fee shall be collected
unless it is fully disclosed in the contract
Confidentiality if information

Banks shall keep strictly confidential data on
cardholder except when there is consent, exchange
of information with other credit card companies,
disclosure to collecting agent
Suspension, termination of effectivity and reactivation

banks shall formulate parameters for such
Inspection of records covering credit card truncations

banks shall make available for inspection credit
card information to BSP
Offset

Banks can offset their obligations with cardholder
with the latter’s debts provided there is notice
Handling of complaints

bank shall give cardholder 20 days to examine
charges and after 2 billing cycles, bank can correct
error
Unfair collection practices


banks shall resort to legally permissible means to
collect amount due under credit card agreement
There shall be no use of threat or violence to
coerce payment and no false representation
Additional deposit does not increase credit limit
23
Contract of adhesion

Contract between cardholders and credit card
companies are contract of adhesion becomes they are
prepared only by one party and the other party only
signifies
Blanket freedom from liability is invalid

The credit card company cannot excuse itself from
liability completely as with blanket of freedom
XVI. Rules of Price tags
One price tag requirement


Every retailer is required to display price tag to
indicate price of good or service
Price tag must be written clearly indicating the price
including VAT. Service charge shall not be included
in price tag
Mode of payment






It is necessary to consider business practices relative
to mode of payment under Price Tag Law
When consumer pays in cash, he shall only pay the
price indicated
When consumer pays through credit/ATM/debit
card, he shall only pay price indicated in tag
When retailer offers consumer option to pay in cash
or card, the same is allowed provided that options are
disclosed by separate information but not on the
price tag
Price that indicates separate cash price and regular
cash price is not allowed
Price tag that indicates separate price tag and card
price is also not allowed
Prohibition against surcharging

Retailers who honor credit/ATM/debit cards for
payment shall not require payment of surcharge over
and above the price tag
24

CHAPTER 5 – Prohibited Transactions and Cessation
of Banking Business
I. Prohibited Transactions
Prohibited to act as insurer



Bank shall not directly engage in insurance business
as insurer
Insurance act shall include making insurance
contract, surety contract, doing business of
reinsurance
Fact that no profit is derived shall not be deemed
conclusive to show that there is no insurance
business
II. Conducting business in an unsafe or unsound manner

Prohibited acts




No director shall:
1. Make false entries in any bank report
2. Without order of court, disclose to an
unauthorized persons an information
relative to funds or properties in custody of
customers
3. Accept gifts, fees or commission in
connection for approval of loan
4. Overvalue a security for purpose of
influencing actions of bank
5. Outsource inherent banking functions
• This is to ensure secrecy of bank
deposits
No borrow shall
1. Fraudulently overvalue security for loan
2. Furnish false material facts to obtain or
increase loan
3. Attempt to defraud bank in event of court
action to recover loan
4. Offer any DOE any gift, fee, commission
to influence person to approve loan
No examiner, officer or employee of BSP assigned
to supervise, examiner rendering technical
assistance to bank shall commit the foregoing acts
No bank shall employ causal or non-regular
personnel or too lengthy probationary personnel in
business involving bank deposits
Outsourcing inherent banking function shall
refer to any contract between the bank and
service provider for the latter to supply, or any
act whereby the latter supplies, the manpower to
service the deposit transaction of the former.

To determine whether act or omission is considered
unsafe or unsound for banking, the following shall
be considered:
1. Resulted in material damage or abnormal
risk to stability, solvency of bank
2. Resulted damage in depositors, creditors,
investor or public
3. Cause undue injury or unwarranted benefits
to any party
4. Involves entering contract manifestly
disadvantageous to bank regardless if DO
will profit
MB can take action and exclude erring bank from
clearing
III. Prohibition on dividend declaration



No bank shall declare dividends greater than its
accumulated net profits on hand, deducting its losses
and bad debts
The bank shall also not declare dividends if at time
there is:
o Clearing account in BSP is overdrawn
o Deficient in require liquidity floor for 5 or
more consecutive days
o Does not comply with liquidity standards
o Committed major violation
Banks are entities exempted from improperly
accumulated earnings tax (10% of said income) by
NIRC
IV. Unauthorized advertisement or business representation

No persons or corporation shall engage in banking
business shall advertise that it has a business of a
bank, quasi-bank or trust entity
V. Placement
Prohibition against Outsourcing Certain Banking
Functions
under
conservatorship
Grounds for appointment of conservator
25









Whenever the MB finds the bank in a state of:
1. Continuing inability or
2. Unwillingness to maintain a condition of
liquidity deemed adequate to protect
depositors and creditors
MB may appoint conservator with following powers:
1. Take charge of assets, liabilities and
management thereof
2. Reorganize management
3. Collect monies and debs due
4. Exercise all powers necessary to restore
viability
Conservator shall report to MB and shall have the
power to overrule or revoke actions of previous
management
Rehabilitation proceedings provide for equitable
distribution of insolvent debtor’s remaining assets to
its creditors and give debtor a fresh start by relieving
them of the weight of their debts
Liquidity – ability of an asset to be converted in cash
quickly and without discount
Solvency – liabilities amount to less than total assets
providing ability to pay debts
Test of insolvency – determining realizable assets of
bank is less than its liabilities
Insolvency of bank occurs when actual cash market
value of its asset is insufficient to pay its liabilities
BSP is vested with exclusive authority to assess,
evaluate and determine condition of a bank whether
it is insolvent or not. If insolvent, receivership
proceedings
Qualification of conservator


Conservator must be competent and knowledgeable
in bank operations and management
Period of conservatorship shall not exceed 1 year
Remuneration

Conservator shall receive remuneration to be fixed
by MB in an amount not to exceed 2/3 the salary
of president of bank in 1 year, payable in 12 equal
instalments



If within one year the conservatorship is terminated
on ground that institution can operate on its own,
conservator shall receive balance
But if it is terminated on some other ground,
conservator shall not be entitled to remaining
balance
MB can appoint conservator connected to BSP in
which case he shall not receive remuneration from
BSP
Expenses of conservatorship

It shall be borne by bank concerned
Terminations of conservatorship



MB shall terminate the conservatorship is it is
satisfied that bank can continue operations
Conservatorship can also be terminated on basis of
report of conservator or its own findings would
involve loss
In such as case, there shall be receivership or
liquidation
Final and executory


Action of MB shall be final except on petition for
certiorari in case of grave abuse of discretion
It shall be filed within 10 days from receipt of notice
of board of directors of conservatorship,
receivership or liquidation
Exclusive power to appoint conservator shall lie in MB
Designation of conservator is not
designation of receiver
precondition to
Power of conservator cannot impair obligations of
contracts



Conservator power to revoke contracts cannot postfacto affect perfected transaction as it would infringe
non-impairment clause
Conservator is given power to revoke contracts only
those that are defect (void, voidable, unenforceable,
rescissible)
Conservator merely takes place of board of directors
26



Conservator cannot simply repudiate valid
obligations of the bank and must bring them to court
actions
In FPIB vs. CA the court ruled that the conservator
cannot revoke a previously valid contract entered by
the bank even though the object of the contract has a
higher price
In conservatorship, the banking functions continue
unlike in receivership and liquidation


2. Procedure

VI. Cessation of banking business
Voluntary liquidation


In voluntary liquidation, bank sends to MB notice of
liquidation
No voluntary dissolution shall be undertaken by a
bank without prior approval of MB. Request of
voluntary dissolution shall be accompanied by
liquidation plan
Receivership and liquidation



The MB can summarily and without need of prior
hearing forbid the institution from doing business
and designate PDIC as receiver
Grounds for receivership and liquidation:
1. Unable to pay liabilities that are due. This
shall not include inability to pay cause by
extraordinarily demands by financial panic
2. Insufficient realizable assets
3. Cannot continue business without involving
probable loss to depositors or creditors
4. Wilfully violated cease and desist order
involving transactions of fraud
5. In case a bank notifies BSP or public
announces bank holiday where it suspends
payment of its deposit liabilities
continuously for more than 30 days
For quasi-banks any persons recognize in
competence in banking may be designated as
receiver





In Rural Bank of San Miguel vs. MB, the SC ruled
that there is no need for complete examination
because it only needs a report
Receiver shall immediately:
1. Take charge of all assets and liabilities
2. Administer the same for benefit of
creditors
3. Exercise general power of receiver under
ROC
4. Shall not pay or any act that involves
transfer of asset of bank
Receiver may deposit or place funds of bank in nonspeculative investments
Receiver shall determine within 90 days from
takeover, whether institution may be rehabilitated or
otherwise
Determination of resumption of business is subject
to approval of MB
In Teal Motor vs. CFI, receiver was defined as a
indifferent person appoint by the court to preserve
the funds of the in litigation pendent lite
He is not an agent or representative of any party
3. Prohibited acts

Any director or officer declared insolvent or under
receivership shall not commit:
1. Refuse to turn over bank records and
assets to receiver
2. Tamper with bank records
3. Appropriate for himself or other party
assets of bank
4. Receive bank deposits or collect loans
5. Paying funds of bank
6. Transferring security of bank
4. When institution cannot be rehabilitated

1. Current and complete examination not necessary

A report is something that gives information while
examination is a search, investigation or scrutiny
Absence of examination before closure of bank does
not mean that there is no basis for closure

If receiver determines that bank cannot be
rehabilitated, MB shall notify the board of directors
that it shall proceed with liquidation
The receiver shall file ex parte with RTC a petition
for assistance in the liquidation of the bank pursuant
to liquidation plan of PDIC
27



Court shall adjudicate disputed claims, assist the
enforcement of liabilities
Receiver shall pay cost of proceedings from assets of
institution
Receiver shall convert assets of institution to money
and dispose the same to creditors and other parties to
pay bank debts
5. Final and executory



Just like in the case of conservatorship, the action of
MB shall be final and executor unless there has been
certiorari
In Rural Bank of San Miguel vs. MB, closure of a
bank is an exercise of police power
In only stockholders of bank can file action for
annulment of MB resolution of placing bank in
receivership
2. It is the government responsibility to see that
financial interest of depositors and others are
protected. Done through BSP
3. Public faith in banking system may deteriorate if
depositors, creditors are not protected. BSP shall
step in and salvage remaining resources of bank
4. Absence of notice and hearing is not a ground to
annul MB resolution
Effects of receivership
1. Retention of juridical personality


2. Not liable to pay interest

Close Now Hear Later Scheme






The law does not contemplate prior notice and
hearing before bank may be directed to stop
operations and placed under receivership
Previous hearing before closure is not required in the
law and does not infringe due process
However, bank can question the receivership within
10 days after receivership
Close now hear later – practical consideration to
prevent unwarranted dissipation of bank’s assets and
valid exercise of police power to protect depositors,
creditors and public
If otherwise, there mere filing of receivership by
BSP can trigger bank run and drain its assets in days
or hour leading to insolvency




Pendency of case questioning receivership does not
diminish of receiver to administer bank’s
transactions pertaining to normal operations of the
bank

Reasons behind receivership and involuntary liquidation
1. Banking business is subject to regulation under
police power and are affected with public interest
Banks declared insolvent and ordered closed by BSP
cannot be held liable to pay interest
When bank is closed, it cannot lend money,
engage in transactions or any banking activities
where it can derive income from
Thus there is no way the bank can pay the interest
the accrues in favour of its depositors
However, there are two types of deposits that earn
interest. The first one, deposit that earn from the
existence until the bank cease to operate. This one
must be paid. The second interest earned from the
time the bank closed until payment of deposits. The
interest here must not be paid
3. Assets deemed under Custodia Legis
Effect of filing petition for review

There shall be retention of judicial personality even
though it is ordered closed by MB
The suing must be done through the liquidator
Assets if the bank becomes beyond its control.
Receiver operates to suspend the authority of the
bank to its properties
Assets of bank shall be custodia legis in hands of
receiver and exempted from garnishment, levy,
attachment
Liquidator – task is to dispose all assets of the
bank and effect partial payments of banks
obligations
4. Stay of execution

Stay of execution is warrant if bank is placed
under receivership
28

To execute a judgment against a bank under
receivership would unduly deplete its assets to the
prejudice of depositors and creditors


All revenues and earning realized by receiver during
receivership shall be used to pay costs of proceedings
The balance of revenues shall form part of assets
available to payment of creditors
5. Restriction of bank’s capacity to Act
Disposition of banking franchise







Insolvency of bank restricts its capacity to act
Bank cannot make new business such as accept new
deposits or grant loans. But receiver must collect
debts in favour of the bank that will form part on
bank asset
Foreclosure falls within board definition of “doing
business”
Doing business - continuity of commercial dealings
and arrangements incident to object of organization
However, it shall not be included in those act
prohibited from doing business
Thus even if there is receivership or liquidation, the
period of prescription to foreclose continues to run
In BF vs. Ybanez, the court ruled that receiver ca still
collect interest on loans during period of closure
6. Exercise of jurisdiction of liquidation court





All claims of bank must be filed in BSP
It is to prevent multiplicity of against bank
Exclusive jurisdiction of liquidation court pertains
only to adjudication claims against bank and does
not cover reverse situation
Not necessary that claim is initially disputed
before it is filed
In Ong vs. CA, if buyer bought a property from
the bank who is already declared insolvent, sale is
void
VII. Disposition and distribution of assets


In case of liquidation, after payment of cost of
proceedings, receiver shall pay debts of institution in
accordance with preference of credit in NCC
Current accounts and savings accounts are not
preferred credits in cases involving insolvency
where there are various creditors
Disposition of revenues and earnings


BSP, if public interest requires, award to another
institution the banking franchise under liquidation
Whatever proceeds may be realized from award shall
be subject to exclusive disposition of MB
Liabilities


Bank is bound by the acts or failure to act of receiver
Receiver is liable to bank for culpable and negligent
failure to collect and safeguard assets of such banks
29
CHAPTER 6 – Foreign Banks and Trust Operations

I. Foreign Banks
Transacting business in the Philippines







RA 7721 – Foreign Banks Liberalization Act
PD 1034 – Conduct of offshore banking business
Offshore banking – conduct of banking transaction
in foreign currencies
Offshore banking unit – branch of a foreign baking
corporation authorized by BSP to transact offshore
banking
Foreign corporation doing business in the
Philippines are required to obtain a license
However, even if foreign corporations do not have a
license, they can still be sued or be sued
License is only necessary if it is for transacting or
doing business in the country
Acquisition of voting stock in domestic bank

Foreign banks are allowed entry in the Philippines
subject to the following rules
1. Within 7 years from effectivity of GBL, MB
shall authorize foreign banks to acquire
100% voting stock of 1 domestic bank
2. Within same period, MB may allow foreign
bank which prior to GBL has already
acquired 60% voting stock can now acquire
100%
3. MB must ensure that 70% of resources of
banking system are held by majority- owned
Filipinos
Local branches of foreign banks

Foreign banks which has more than 1 branch in
the Philippines, all such branches shall be treated as
1 unit





Summons and legal process






Head office shall fully guarantee prompt payment of
all liabilities of its Philippines branch
Residents and citizens of the Philippines that are
creditors of foreign banks shall have preferential
right to assets of such banks
Summons must be given to the Philippine agent or
head of foreign bank to have jurisdiction
If there is no agent, summons may be made upon
BSP deputy governor in-charge
Once given, it shall be effect as if made upon bank
or agent
BSP deputy governor in-charge shall mail it to the
bank and sending copy is a necessary part to
complete service.
In the corporation code, the service, in case of
absence of agent, shall be given to SEC
Laws applicable

Head office guarantee

Under RA 7721, foreign banks have three modes of
entry in the country:
1. Acquiring 60 of voting stock of existing
bank
2. Investing 60% of voting stock of new
banking subsidiary incorporated in
Philippines
3. Establishing branches with full baking
authority
A foreign bank may only avail only 1 mode of entry
GBL only stated that branches of foreign banks will
be treated as one and shall have the head office
guarantee to creditor Filipino citizens
However, there is nothing in the law that states
that citizens that are debtors to foreign bank local
branches shall also be debtors to the head office
There is also nothing in the law that the head
office and its local foreign branches shall be treated
as one
Thus, compensation with Philippine branches with
foreign branches cannot be effected as they cannot
be considered creditors and debtors of each other
Foreign banks shall be governed by GBL and
other applicable laws such as Corporation Code
Revocation of license of foreign banks

MB may revoke license if it find foreign bank
insolvent or imminent danger of insolvency and will
involve probable loss
30

After revocation, it shall be unlawful for foreign
bank to transact business in the Philippines
II. Entry of Foreign Banks











State shall devote self-reliant and independent
national economy
Guidelines for approval:
1. Ensure geographic representation
2. Consider strategic trade relationships
3. Study demonstrated capacity
4. See reciprocity of right
5. Consider willingness to fully share
technology
Only those belonging to top 150 in the world or
top 5 banks in their country of origin shall be allowed
entry
To establish a branch or subsidiary, foreign bank
must be widely-owned and publicly listed in its
country origin unless government owned
Capital requirement:
1. For locally incorporated subsidiaries – same
minimum capital with domestic banks
2. Foreign bank branches – US dollar
equivalent of P219M at exchange rate
during effectivity of Act. The foreign bank
shall be entitle to 3
3. Foreign banks may open 3 additional
branches designated by MB – P35M per
additional branches
Foreign banks within 5 year from effectivity of
this act is only allowed 6 foreign bank to enter the
country
An additional 4 foreign banks may be allowed entry
by recommendation of MB
Non-Filipino citizens can be members of board of
directors up to the extent of the allowed foreign
participation
Philippine corporations who have listed share of
stock in PSE or long standing for 10 year shall have
right to own 60% voting stock of a domestic bank
Existing local branches of foreign banks shall be
given 1.5 years to comply with minimum capital
requirement
RA 7721 was approved on May 18, 1994
III. Trust Operations
Authority to engage in trust business



Trust business – any activity resulting in trustortrustee relationship involving appointment of a
trustee by a trustor for the administration, holding,
management of funds or properties of trustor by the
trustee
It is for the use, benefit or advantage of the trustor or
other beneficiaries
Cardinal principle of trust and other fiduciary
relationship is fidelity
Conduct of trust business



Trust entity shall administer the funds or property
under its custody with diligence that a prudent
man would exercise
Trust entity – stock corporation or person authorized
by MB to engage in trust business shall act as trustee
or administer any trust or hold property in trust
No trust entity shall for the account of the trustor or
beneficiary,
1. purchase, acquire, sell, property
2. transfer or purchase money or debt
instruments from/to DORSI of trust entity
and relatives of first civil degree
3. unless authorized by the trustor after prior
full disclosure of transaction
Registration of articles of incorporation and by-laws of
trust entity


SEC shall not register such unless accompanied by
certificate of authority from BSP
A trust business shall start from the moment their
articles of incorporations are registered
Minimum capitalization

A trust entity, before engage in trust business,
shall comply with minimum paid-in capital
requirement by MB
Powers of trust entity
31
1. Act as trustee on any mortgage or bond and accept
and execute any trust consistent with law
2. Act under order of any court as guardian, receiver,
trustee or depositary of estate of minor or
incompetent person
3. Act as executor of any will
4. Act as executor of estate of any deceased person with
a will or administrator without a will
5. Accept and execute trust for holding, management,
administration of estate and rents, issues, profits
thereof
6. Establish and manage common trust funds
Transactions requiring prior authority

Trustee or trust entity shall not undertake any of the
following transactions for the account of the client
unless there is prior full disclosure and authorization
by client
1. Lend, sell, transfer or assign money or
property to DOSRI of trustee, relatives of
trustee or related interest of such DOSRI
where trustee owns at least 50% of voting
stock
2. Purchase and acquire property or debt
instrument in the same manner
3. Invest in equities or in securities
underwritten by trustee in which trustee has
interest
4. Sell, transfer, assign or lend money or
property from one trust account to another
account



Trust entity, as long as solvent and comply with
laws, shall have the right to collect interest earned on
security deposited to BSP
If trust entity fails to comply with law, BSP shall
retain interest of securities for benefit of rightful
claimants
All claims arising from trust business shall have
priority over all claims as regard to the security
deposited
IV. Bond of Certain Persons for the Faithful Performance
of Duties
Bond requirement
1. Before executor, administrator, guardian, trustee,
receiver or depositary appointed by the court enter
upon execution of dues, court may order bond
2. Upon application of such persons, after notice and
hearing, court shall order that subject matter of trust
be deposited with trust entity
3. Upon presentation of proof that subject matter have
been deposited to trust entity, court may order that
bond be given by such persons for faithful
performance
4. Reduce bond shall be sufficient to secure adequately
the proper administration of any property
Exemption of trust entity from bond requirement


No bond shall be required by court from trust entity
for faithful performance
However court may order bond for the protection of
funds or property confided
Deposit for the faithful performance of trust duties




V. Operations of Trust Entity
Before transacting trust business, they must
deposit to BSP for faithful performance of trust
duties an amount not less than 500k or higher as may
be fixed by BSP
MB shall require trust entity to increase the
amount whenever the increase is necessary by reason
of trust business
Paid-in capital and surplus of each entity must be
equal to the amount required to be deposited in BSP
In case it shall not meet the required paid-in capital,
the MB shall limit or prohibit distribution of
profits by trust entity until minimum
requirement is met
Separation of trust business from general business



The trust business shall be kept separate and distinct
from the general business
They shall be physically separated from assets of its
other business
They shall be under the joint custody of at least two
persons who are officers of the trust department
Investment limitation of a trust entity
32




Unless otherwise directed by instrument creating the
trust, the lending or investment of funds by trust
entity shall be limited to loans and investment as
prescribed by law, MB or court
Assets received in trust shall be administered with
terms of the instrument creating the trust
If trust entity is given discretionary powers to invest,
loans and investments shall be limited to:
1. Evidence of indebtedness of RP and BSP
2. Loans guarantee by government
3. Loans fully secured by hold-out on,
assignment or pledge of deposits that are
maintained
4. Loans fully secured by real estate or chattels
The following shall be required to be given as
information
1. Transaction to be entered
2. Borrower’s name
3. Amount involved
4. Collateral security
Real estate acquire by trust entity



Trust entity may acquire real property under
following circumstances:
1. Mortgage to it in good faith by way of
security to debts
2. Conveyed to it for satisfaction of debts
previously contracted
3. Purchase at sales under judgment, decrees,
mortgages or trust deeds
Any property acquire under circumstances shall be
disposed within 5 years
After said period, bank can still continue to hold
property subject to limitations:
1. Total investment in real estate shall not
exceed 50% of combined capital accounts
2. Equity investment of bank in another
corporation engage in real estate shall be
considered a part of 50%
Exemption of trust assets from claims

No assets held by trust entity shall be subject to
claims other than those parties interested in specific
trusts

Property held in trust by insolvent debtor shall be
excluded from insolvency proceedings
 Trust entity and its branches shall be treated as
one unit
 Trust entities shall advertise services in a
dignified manner
Money of government

Banks may not receive as trustee the funds of the
government except GOCC banks
33
QUIZZES:
True or False:
Fill in the blanks
1. The fiduciary nature of the relationship of a
depositor with the depositary bank imposes on the
latter the obligation to discharge the highest standard
of trust and integrity and a violation thereof is
considered a breach of trust. False
1. The law governing the creation, organization and
operation of rural banks is Rural Banks Act.
2. The humble wage-earner has not hesitated to entrust
his life’s savings to the bank knowing that they will
be safe in the custody of the banks. True
3. Subsidiary shall refer to a corporation or firm
more than 50% of the outstanding voting stock of
which is directly or indirectly owned.
3. Banks are gratuitous bailees of the funds deposited
with them by their clients. False
4. The public relies on the banks’ fiduciary duty to
observe the highest degree of diligence but any
violation of this duty by the bank is not a valid
ground for the grant of exemplary damages to the
depositor. False
5. Thrift banks may not act as correspondent for
other financial institutions. False
6. A non-stock corporation may act as a trustee or
administer any trust or hold property in trust or on
deposit for the benefit of others. False
7. A bank cannot use any of its branches as outlets
for the sale of the financial products of its allied
undertaking or its investment house units. True
8. A bank may declare dividends greater than its
accumulated net profits then on hand, deducting
there from its losses and bad debts. False
9. The appointment of a receiver is
exclusively with the Monetary Board. True
vested
10. The MB cannot appoint a conservator connected
with BSP. False
11. In a judicial foreclosure of mortgage, there is an
equivalent right of redemption. False
12. No late payment of penalty fee shall be collected
from cardholders unless the collection thereof is
fully disclosed in the contract between the issuer and
the cardholder. True
13. A bank which had been ordered closed by the
monetary board does not retain its juridical
personality which can sue and be sued through its
liquidator. False
2. The total investment in equities of allied enterprise
shall not exceed 35 % of the net worth of the bank.
4. The rule that the total amount of loans that may be
extended by a bank to any person or entity shall at
no time exceed 20% of the net worth of such bank is
called Single Borrower’s Limit.
5. Credit Risk Transfer shall refer to any agreement
that allows the bank to transfer the credit risk
associated with its loan or other credit
accommodation to a third party.
6. The term Legal Compensation refers to that situation
when two persons, in their own right, are creditors
and debtors of each other.
7. The contracts between cardholders and credit card
companies are called contracts of adhesion
because their terms are prepared by only one party
while the other merely affixes his signature
signifying his conformity thereto.
8. Net worth means the total unimpaired paid-in capital
including paid-in surplus, retained earnings and
undivided profit, net of valuation reserves and other
adjustments as maybe required by BSP.
9. Letter of Credit refers to a financial device availed
of by businessmen as a convenient mode of
dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller who refuses to part
with his goods before he is paid.
10. Survivorship agreement is the agreement that allows
joint depositors to withdraw the whole deposit
during their lifetime and transferring the balance to
the survivor upon the death of one of them.
34
11. In the case of Consolidated Bank and Trust Co., the
SC ruled that the contract between the bank and its
depositor is governed by the provisions of the Civil
Code on simple loan/mutuum.
12. In the case of Serrano vs. Central Bank of the Phil.,
the SC held that bank deposits are in the nature of
irregular deposits.
13. In Simex International Case, the SC said that the
banking system is an indispensable institution that
plays a vital role in the economic life of the nation.
14. It is basic that after consolidation of title in the
buyer’s name for failure of the mortgagor to redeem,
the writ of possession becomes a matter of right
and its issuance to a purchaser is merely a ministerial
function.
15. Acceleration Clause means any provision in the
contract between the bank and the cardholder that
gives the bank the right to demand the obligation in
full in case of default or non-payment for whatever
reason.
16. The law that protects its citizens from a lack of
awareness of the true cost of credit to the user by
assuring full disclosure of such cost is Truth in
Lending Act.
17. The agreement between the parties in a loan
transaction which stipulate that the rate of interest
agreed upon may be increased in the event that the
applicable maximum rate of interest is increased by
the MB is called escalation clause.
18. Joint and Solidary Agreement is an agreement where
the contracting parties consent to be jointly and
severally liable in a loan obligation.
21. All foreign currency deposit are of absolute
confidential nature as a general rule and said deposit
shall be exempt from attachment pursuant to RA No.
6426 otherwise known as Foreign Currency Deposit
Act of the Philippines.
22. Negotiable Order of Withdrawal Accounts are
interest bearing deposit accounts that combine the
payable on demand feature of checks and investment
feature of savings account.
23. Independent Auditor means a person other than an
officer or employee of the bank, its subsidiaries or
affiliates or related companies, or its majority
shareholders.
24. Interest Rate Differential refers to the difference or
margin between interest rates such as the difference
between domestic and foreign interest rates.
25. Secrecy of Bank Deposit Act is the law that was
passed to give encouragement to people to deposit
their money in banking institutions.
26. The Securities and Exchange Commission shall
not register the articles of incorporation of any bank
unless accompanied by certificate of authority
issued by the monetary board.
27. The equity investment of a universal bank or its
wholly or majority owned subsidiaries, in a single
non-allied enterprise shall not exceed 20% of the
total equity.
28. Demand deposit are all those liabilities of the Banko
Sentral and of the other banks which are
denominated in the Philippine currency and are
subject to payment in legal tender upon demand by
presentation of depositor’s check.
19. A bank guarantee is an irrevocable commitment of a
bank binding itself to pay sum of money in the event
of non-performance of a contract by a third party.
29. The rule intended to maintain the quality of bank
management and afford better protection to
depositors and the public in general is called fit and
proper rule
20. Assignment of credit is an agreement by virtue of
which the owner of credit, known as the assignor, by
a legal cause, such as sale or dation in payment
transfers his credit to another known as the assignee
who acquires the power to enforce it.
30. Off shore banking units refer to a branch, subsidiary
or affiliate of a foreign banking corporation which is
duly authorized by the Banko
35
Sentral to transact offshore banking business in the
Philippines
31. A bank is bound by the negligence of its employees
under the principle of Respondeat Superior
32. Quasi banks refer to entities engaged in the
barrowing of funds through the issuance,
endorsement or assignment with recourse or
acceptance of deposit substitutes for the purpose
of relending or purchasing receivables and other
obligation
33. The business of banking is imbued with public
interest in order to assure the stability of banks which
largely depends on the confidence of the people in
the honesty and efficiency of banks.
RA 1405 Secrecy of bank Deposit Act
RA 8367 an act providing for the organization and
operation of non stock savings and loan association
RA 9160 an act defining the crime money laundering
RA 6770 the ombudsman act of 1989
Chapter 4
RA 7394 Consumer Act
Act No 3135 an act to regulate the sale of property under
special powers inserted in or annexed to real estate mortgages
Chapter 6
Summary of Laws
PD 1034 Offshore Banking System Decree
Chapter 1
RA 7721 Foreign Bank liberalization Act
RA 8791 General Banking Law of 2000
RA 7353 an act providing for the creation, organization
and operation of rural banks
------------GOD BLESS IN THE MIDTERMS!!!---------RA 7906 an act providing for the regulation of the
organization and operations of the thrift banks
RA 6938 an act to ordain a cooperative code of the
Philippines
RA 6848 an act providing for the 1989 charter of the AlAmanah Islamic bank of the Phil
RA 6426 an act instituting a foreign currency deposit
system in the Philippines
BP 68 Corporation code
Chapter 2
RA 7653 The New Central Bank Act
Chapter 3
36
CHAPTER 7 – The Banko Sentral ng Pilipinas
I. Creation, Responsibility and Corporate powers of BSP
Declared policy of the state


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 responsibility Concerning money,
banking and credit
BSP is a GOCC but enjoys fiscal and
administrative autonomy
Creation of the BSP







BSP – independent central monetary authority
Capital of BSP – P50B which shall be fully
subscribed by the government
P10B shall be paid by the government upon
effectivity of act
The balance shall be paid within 2 years
Place of business – principal place of business in
Metro Manila or maintain other branches
Creation of central monetary authority is cited in
Sec 20 Art XII of Constitution
The authority shall prove policy direction in areas
of money, banking and credit and regulatory
powers of such operations
Responsibility and primary objective of BSP
1. Responsibility of BSP – provide policy direction
in areas of money, banking and credit
2. Shall have supervision over operation of banks
3. Exercise regulatory powers over operations of
finance companies and non-bank finance
institutions performing quasi-banking
4. Primary objective of BSP – maintain price
stability conducive to a balance and sustainable
growth of the economy
5. It shall promote and maintain monetary stability
and convertibility of the peso
 In Busuego vs. CA, the court ruled that the BSP
has responsibility of administering the monetary,
banking and credit system of the country and is
granted power supervision and examination over
banks
Corporate powers of BSP (SCP-SPAL)
1. Use corporate seal
2. Enter contracts
3. Lease or own personal and real property and may
dispose the same
4. Sue and be sued
5. Perform any thing that may be necessary to carry
out purpose of NCBA
6. Acquire and hold assets and incur liabilities in
connection with NCBA
7. Comprise or release claim or settled liability to
BSP regardless of amount involved
Power to prosecute








BSP can cause prosecution of those who violate
banking law
However, nothing in the law gives the BSPN the
specific duty to do the actual prosecution
Thus, BSP is not a prosecution agency unlike the
fiscal office
In Perez vs. Monetary Board, it was ruled that
being an artificial person, BSP is limited to its
statutory powers
It nearest power to prosecute is its power to sue
and be sued which refers to civil case only
BSP can only cause prosecution which is a public
offense and anyone can denounce such
Mandamus for the purpose of causing the BSP to
charge violation of bank laws is improper
BSP and members of MB should not be impleaded
as parties to a case under Sec 6, Rule 43 of RoC
Estoppel




BSP is committed to maintain the stability of the
country foreign exchange reserve position
Must adhere to principles of fairness and decency
under Bill of Rights
BSP circulars must be implemented to promote
country’s production and at the same time avoid
irreparable prejudice to participants
In CB vs. IAC, the court ruled that in case banks
already faithfully complied with BSP directives,
BSP is estopped from enforcing circulars which
deny banks of their rights
II. Authority of BSP
Supervisory powers of BSP
37


Operations and activities of banks shall be subject
to supervision of BSP. Supervision shall include
the following: (REO-ISC)
1. Issuance of rules of conduct or SOP for
uniform application to al institutions
covered
2. Conduct examination to determine
compliance with laws and regulation
3. Overseeing to ascertain law and
regulation are complied with
4. Regular investigation. Not oftener than
once a year to determine whether there is
business is conducted on a safe or sound
basis. Deficiencies immediately addressed
5. Inquiring into solvency and liquidity
6. Enforcing prompt corrective action
BSP shall have supervisions over operations of:
1. Quasi-banks
2. Trust entities
3. Other financial institutions
Composition


Phase out of BSP powers over building and loan
associations

Within period of 3 years, BSP shall phase out and
transfer supervising and regulatory power over
building and loan associations to Home Insurance
and Guaranty Corporation
Policy direction; rations, ceiling and limitations



BSP shall provide policy direction in areas of
money, banking and credit
MB shall prescribe ratios, ceilings, limitations in
different accounts of banks to confirm to
internationally accept standards including Bank
for International Settlement
MB may exempt particular categories of
transactions from such rations, ceilings to:
o Exceptional cases
o Enable a bank under rehabilitation or
during merger or consolidation to continue
business with safety
III. Monetary Board

Powers and functions of BSP shall be exercised
by Banko Sentral Monetary Board
MB shall be composed of 7 members appointed
by President with term of 6 years
The seven members are:
1. The governor who shall be the chairman
of MB. Governor shall be head of a
department and his appointment
confirmation of COApp
• Whenever unable to attend board
meeting, deputy governor shall
act as alternate
• MB shall designate one of its
members as acting chair
2. Member of cabinet designated by
President
• Whenever cabinet member unable
to attend meeting, Usec shall be
alternate
3. 5 members who shall come from private
sector serving full-time
• In the first appointments from
effectivity of act, 3 serve 6 yrs
while the other 2 - 3 years
Vacancies

Any vacancy created by death, resignation or
removal shall be filled by new appointment to
complete unexpired term
Qualification of members of MB
1. Natural born citizens
2. At least 35 years of age, Governor must be 40
years old
3. Good moral character
4. Integrity
5. Probity and patriotism
6. Recognized competence in social and economic
disciplines
Disqualification of MB members
1. Disqualification under RA 6713 (Code of Conduct
and ethical standards of public officer and
employees)
2. Disqualified from being a DOSRI of any bank
subject to the supervision or examination of BSP
38
a. In which case, such member shall resign
before assumption of office
3. Member of MB coming from private sector shall
not hold public office in tenure
4. No person shall be member if he has been
connected directly with any multilateral banking
institution or has substantial interest on any private
bank 1 year prior appointment
5. No member shall be employed in any such
institution within 2 year after expiration of term
except when serving as representative of
government (sec 9)
Grounds for removal MB members
1. Subsequently disqualified under Sec 9 during
tenure
2. Physically or mentally incapacitated and cannot
discharge duties and incapacity lasted more than 6
months
3. Guilty of acts or operation of fraudulent or illegal
character opposed to aim of BSP
4. Member no longer possess qualification under sec
8
Meetings, quorum, decisions and proceedings MB
1. MB shall meet at least once a week. MB may be
called to meeting by governor or 2 other members
of board
2. Presence of 4 members constitute quorum
provided that governor or his alternate is among
the 4
3. BSP shall maintain and preserve complete records
of proceedings in their original form or in
microfilm
4. General Rule: All decisions of MB shall require
concurrence of at least 4 members
Exception to general rule where at least 5 votes is required:
1. Sec 61 GBL – publication of financial statements
is required once at least every quarter. In national
or local emergency or of imminent panic, MB by
vote of 5, upon application of bank, may allow
such bank to defer publication of financial
statement
2. Sec 28 NCBA – supervision and examining
department head shall examine books of every
banking institution once every 12 months and at
such other time at the vote of 5 members of MB
3. Sec 72 NCBA – During exchange crisis or
national emergency, with concurrence of 5
members of MB and approval of president, MB
may temporarily suspend sales of exchange by
BSP and may subject all transactions in gold and
foreign exchange to license by BSP
4. Sec 84 NCBA – in nation or local emergency or
imminent financial panic, MB may, with 5 vote of
members, authorize BSP to grant extraordinary
loans or advances to banks secured by assets
Deputy Governors may attend meetings of MB

They may attend meetings and have the right to be
heard
Salaries of governor and members of MB

Salary shall be fixed y President at a sum
commensurate to the importance and
responsibility attached to their position
Personal or Pecuniary interests


Members of MB with personal or pecuniary
interest in any matter in the agenda of MB shall
disclose his interest and shall retire from the
meeting when matter is taken
The decision made on matter shall be made public
and the minutes shall reflect disclosure made and
retirement of member
Scope of authority of MB
1. Issue rules and regulations it considers necessary
for the discharge of its responsibilities and
exercise of its powers
a. Rules and regulation issued shall be
reported to President and Congress within
15 days from date of issuance
2. Direct the management, operation and
administration of BPS, reorganize its personal and
issue rules and regulations
a. Legal units of BSP shall be under
exclusive control and supervision of MB
3. Establish human resource management system
which shall govern selection, hiring, appointment
or dismissal of personnel.
39
a. Compensation structure based on job
evaluation studies and wage surveys shall
be the integral component of the HR
program
b. MB shall make its own system which
conform closely to RA 6758
(Compensation and Position Classification
Act of 1989)
c. Those under salary grade 19 shall have
rates under RA 6758
d. Upon recommendation of governor,
appoint, fix remunerations and removal
personnel subject to civil service law
 In CB Employees Association vs. BSP, the
court ruled that the establishment of unfair
human resource management is
unconstitutional. It shown that higher grades
receive greater benefits withheld from lower
grades.
 Rank and file employees are limited to SSL
while employees in higher rank are given
higher compensation to entice them to stay. It
is the rank and file employees that are of need
for greater benefits
4. Adopt annual budget for and authorize expenditure
by BSP
5. Indemnify its members against all costs and
expenses incurred in connection with civil or
criminal suit by reason of performance of duty
unless liable for negligence or misconduct
a. In event of settlement or compromise,
indemnification are covered provided that
there is no negligence
b. Costs and expenses incurred in defending
may be paid in advance and repay the
amount advanced should it be determined
that personnel is not entitled to indemnity
a. Disclosure of information of a confidential
nature unless disclosure is in connection
with performance of official function
b. Use of such information for personal gain
or detriment of the government, BSP or
third parties. any data required to be
submitted to President or Congress is not
confidential
3. Legal obligation and good faith that BSP officer
owe to public start with official acts of MB which
are the cause of loss and injury and not any
preparatory report or recommendation
IV The Governor and Deputy Governors
Powers and Duties of the Governor (CEO:PEDARE)
1. Shall be the CEO of BSP
2. Prepare the agenda for meetings and submit, for
consideration, policies and measures necessary
3. Execute and administer policy and measures
approved by MB
4. Direct and supervise operation and internal
administration of BSP. Governor may delegate
certain administrative responsibilities to other
officers
5. Appoint and fix remuneration of personal below of
a department head. Removal of personal is with
approval of MB
6. Render opinions, decisions or rulings which is
final and executor until reversed or modified by
MB
7. Exercise other powers vested by MB
Powers of Governor as representative of MB and BSP

Responsibility of Members of MB
1. If anyone wilfully violate NCBA or guilty of
negligence, abuses or malfeasance or
misfeasance or fails to exercise extraordinary
diligence in performance of duty, he shall be held
liable for loss or injury suffered by BSP or
banking institution (VNAMMFe)
2. Similar responsibility shall apply to officer or
employees of BSP

Governor shall be the principal representative of
MB and BSP with following powers:
1. Represent MB and BSP in all dealings
with other offices
2. Sign contracts entered into by BSP, notes
and securities issued by BSP Signature
may be facsimile
3. Represent BSP in any legal proceeding
4. Delegate his power to represent to other
officers
In order to preserve integrity of office, governor
may choose not to participate in preliminary
40

discussions of multilateral banking institutions on
negotiations for the government
During such, he may be represented by permanent
negotiator
Emergencies (CRM)
1. In case of emergency, governor with concurrence
of 2 other members, may decide matter or take
action within authority of the board
2. Governor shall submit report to President and
Congress within 72 hours
3. At soonest possible time, governor shall call
meeting of MB for ratification
Limitation on outside interest of governor and members of
board


They shall limit their professional activities
directly to their position in BSP
Shall not accept any other employment except
when position in eleemosynary, civic, cultural or
religious organization or by designation of
President to represent government
Number and functions of deputy governors
1. Governor shall appoint not more than 3 deputy
Governors who shall perform duties as may be
assigned to them
2. In absence of governor, deputy governors
designated to act as CEO of BSP shall exercise
duties
3. Whenever governor is unable to attend
government board or councils where he is ex
officio member, deputy governor may be
designated vested with power to participate and
vote
V. Operations of BSP
2. BSP, through governor or representative shall
have the power to issue subpoena for production
of books. Contempt if refused
3. Data on individual firms other than banks gathered
by BSP Department of Economic Research shall
not be available outside BSP. Collective data can
be released to interested
4. Personnel of BSP shall be prohibited from
revealing in any manner, except under orders of
court, Congress or government office
Training of Technical personnel

Scope of supervision and examination by BSP
1. BSP shall have supervision over, and conduct
periodic or special examinations of bank, quasi
banks including subsidiaries and affiliated
engaged in allied activities
a. Subsidiary – more than 50% voting stock
is owned by bank or quasi-bank
b. Affiliate –50% or less is owned by bank or
related or linked to institution through
common stock holders
2. Department heads and examiners are authorized to
a. Administer oaths to any directors, office
or employee of any institution
b. Compel presentation of books, document
and records relative to true condition of
institution
Restraining order or injunction


Research and Statistics of BSP

BSP shall prepare data and conduct economic
research for guidance of MB
Scope of Authority of BSP to obtain data
1. BSP shall have authority to require government
office any data it may require
BSP shall sponsor training of technical personnel
in field of money and banking

No restraining order or injunction shall be issued
enjoining (preventing) BSP from examining
institution under its supervision
Exception: there is convincing proof that action of
BSP is plainly arbitrary and in bad faith and
petitioner files bond in favor of BSP
Provisions of Rule 58 – Preliminary Injunction
shall apply not inconsistent
VI. Director, Officer or Stockholder and Related Interests
Contracting Loans
41



Any DOSRI contract loans or any financial
accommodation from his bank or a from a bank
(lending bank) that is:
1. Subsidiary of bank holding company of
which both his bank and lending bank is
subsidiaries
2. Controlling proportion of share is owned
by the same interest that owns a
controlling proportion of share of his bank
in excess of 5% if capital and surplus of
bank
Such shall be required by lending bank to waive
the secrecy of his deposits in all banks
Any information obtained from examination shall
be strictly confidential. Used only by examiner
only in connection with supervisory responsibility
or by BSP in legal action
Prohibition against Personnel of BSP

In additional to prohibition from RA 3019 and RA
7613, the BSP personnel prohibited from:
1. Being DOSRI of institution under
supervision of BSP except non-stock
savings and loan associations
2. Require or receive any gift from any
institution subject to supervision
3. Reveal in any manner, except under court
order, Congress or government officer.
Shall not apply to giving of information to
MB or governor of BSP
4. Borrowing from any institution subject to
supervision and examination unless
borrowings are adequately secured
VII. Examination of Banking Institutions
Frequency of examination

Department head shall examine books of every
banking institution once every 12 months and at
such other time at the vote of 5 members of MB.
Interval shall be at least 12 months
Afford opportunity to examine

Bank concerned shall afford the head full
opportunity to examine its books, cash and assets
during banking hours

None of the reports shall be open to inspections of
the public except when such is incidental in
proceedings for violations
Service Fees


Banking which are subject to examination of BSP
shall pay BSP within first 30 days of each year an
annual fee as may be prescribed by MB
Sec 65 of GBL states that BSP may charge
equitable rates, commissions and fees fir
supervision or examinations
VIII. Administration
Operating departments of BSP

MB shall determine operating departments
including public information office
Required reports and publication of BSP
1. General balance sheet showing volume and
composition of its assets and liabilities – 60 days
after end of each month except December, 90 days
if such
2. MB shall publish and submit to Congress and
President the following reports:
a. Analysis of economic and financial
development – not later than 90 days after
end of each quarter
b. Preceding year’s budget and profit and
loss statement – within 90 days after end
of year
c. Review of the state of financial system –
120 days after each semester
d. Abnormal movements in monetary
aggregate and general price movements –
72 hours after remedial measures was
taken
Annual Report of BSP
1. Annual report on the condition of BSP – before
end of March each year. Submit to President and
Congress and include review of policies and
economic analysis circumstances:
2. Will also include statement of financial condition
of BSP and statistical appendix include: (1)
movement monetary aggregates, (2) movements of
42
foreign exchange, (3) balance of payments, (4)
consumer prices, (5) exports/imports, (6) accounts
of BSP, (7) data
3. BSP shall publish another version of the annual
report understandable in layman
4. Failure to comply without justifiable reason shall
cause withholding of salary of personnel
Signature of statements

Fiscal Year
Within 30 days following end of each year, BSP
shall determine net profits and losses
Distribution of net profits

Within 60 days following end of each fiscal year,
MB shall determine distribution of net profits
according to the following:
1. 50% of net profits carried to surplus
2. Remaining 50% shall revert back to
National Treasury
Revaluation profits and losses
1. Profits or losses from revaluation of gold or
foreign currency shall not be included in
computation of annual profits or losses
2. Any profit or losses from revaluation shall be
offset by amounts owed by Philippines to
international financial institutions
3. Any remaining profit or loss shall be placed in the
Revaluation of International Reserve and net
balance shall appear as either liability or asset
depending whether profit or loss
The Auditor
Chairman of COA act as ex official auditor of BSP
and authorized to appoint representative auditor to
BSP. Can only be removed by COA
Representative shall be (1) CPA, (2) 10 years
experience, (3) not relative to member of MB or
COA to 6th civil degree
X. Penalty for Violation

Sec 66 of GBL provides that if offender is director
or officer, shall be suspended or removed from
office. If offender is corporation, shall be
dissolved by quo warranto instituted by SG
Penalty for refusal to make reports or permit examination

Starts on January first and ends on December 31st
of each year
Computation of Profits and Losses


Balance sheet and other financial statements shall
be signed by (1) officer responsible for preparation,
(2) governor, (3) BSP auditor
IX. Profits, losses and special accounts


Person was required in writing by MB or
supervising department but refused to file or
permit examination. Penalty 50k-100k
Penalty for wilful making of a false or misleading
statement of material fact

Penalty 100k-200k
Proceedings upon and penalty for violations of NCBA and
banking laws
1. Bank, quasi bank or any person violates NCBA,
penalty is 50-200k
2. Bank or quasi bank persists in carrying business in
unlawful or unsafe manner same penalty
Administrative violations on banks


MB shall impose administrative penalty to bank,
quasi-bank, director or officer for:
1. Willful violation of charter
2. Willful delay in submitting report
3. Refusal to permit examination
4. Willful making of false or misleading
5. Willful failure to comply with bank laws
6. Any commission of irregularity
7. Conduct business in unsafe manner
Following are the sanctions:
1. Fines not exceed 30k per day per violation
2. Suspension of rediscounting privileges
3. Suspension of lending or FOREX
operations
43



4. Suspension of interbank clearing
privileges
5. Revocation of quasi-banking license
Resignation shall not exempt criminal or
administrative sanctions
MB may preventively suspend office under
investigation not exceed 120 days except when
delay is caused by him
Administrative sanctions need not be applied in
order of severity
Administrative Proceedings on banks
1. WON there is administrative proceedings, if
officer continue to persist in practice or violation,
MB shall release cease and desist order effective
upon service to respondents
2. Respondents have opportunity to defend their
action in a hearing upon a request made within 5
days from receipt of order. If no hearing is
requested, order is final
3. Governor is authorized to impose to banks fines
not exceeding 10k per day per violation which can
be appealed to MB
44
CHAPTER 8 – Currency, Monetary Stabilization and
Functions of BSP
I. The Unit of Monetary Value
The Peso




Peso - unit of monetary value in the Philippines (P
sign)
Peso divided into 100 equal parts called centavo (c
sign)
All monetary obligation shall be settled in
Philippine currency in legal tender
Parties may agree that obligation shall be settled in
other currency
2. Art. 164 – Mutilation of coins
3. Art. 165 – Selling of false or mutilated coins
without connivance
4. Art. 166 – Forging treasure notes or other
documents payable to bearer
5. Art. 167 counterfeiting, importing or uttering
instruments not payable to bearer
6. Art. 168 - Illegal possession and use of false
treasury notes
7. Art. 169 – How forgery is committed
Exception to territoriality of penal laws

Definition of Currency

Currency – all Philippine notes and coins issued
in accordance with NCBA
Value of Currency




Currency has value because people are willing to
accept it in exchange for goods or services or
payment of debt
Money has no value as a commodity but has value
as means of medium of exchange
Value of goods and services are measured by
terms of medium
Not applicable if no confidence in currency and
people would use foreign currency
Liability for notes and coins




II. Issue of means of payment
Exclusive issue power
1. BSP shall have the sole power to issue currency
within the Philippines
2. MB may issue regulations to prevent circulation of
foreign currency , currency substitute or facsimiles
of BSP notes
3. BSP shall have authority to investigate, arrest and
conduct searches to maintain integrity of currency
4. Violation shall have imprisonment of 5-10 years
unless RPC gives greater penalty
Related Crimes under RPC
1. Art. 163 – Making and importing and uttering
false coins
Art. 2 of RPC provides that the territoriality rule
does not apply :
1. Should forge or counterfeit any coin or
currency note the Philippines or
obligations or securities of the
Government
2. Liable for acts connected with
introduction of such into islands
Notes and coins issued by the BSP shall be
liability of BSP
It shall be issued in amounts not exceeding assets
of BSP
Notes and coins shall be a first and paramount lien
on all assets of BSP
BSP’s holding of its own notes and coins shall not
be considered a part of its currency issue and not
part of assets and liabilities
Legal tender power




All notes and coins issued by BSP shall be fully
guaranteed by the Government and shall be legal
tender in Philippines for all debts, public or private
Checks representing demand deposits do not have
legal tender and acceptance is at the option of the
creditor
Check cleared and credited to account of creditor
shall be equivalent to delivery
BSP Circ. 537 of 2006 – maximum amount of
coins to be considered as legal tender
o 1,5,10 peso coins – 1k
o 1,5,10,25 centavos – 100
45



Art 1249 of NCC states that all payments of debts
shall be in currency stipulated and if not possible
currency in legal tender
It also states that when there is payment by PN, it
shall produce only effect when encashed or
impaired through fault of creditor. Action derived
from obligation is held in abeyance
Art. 1250 of NCC, where there is extraordinary
inflation or deflation, value of currency at time of
establishment of obligation shall be basis of
payment
Characteristics of the currency





MB with approval of President shall prescribe
denominations, dimensions, designs of notes.
Notes shall state that they are liabilities of BSP
and fully guaranteed by government
Notes shall bear signature, in facsimile, of
President and BSP Governor
MB with approval of President shall prescribe
weight, fitness, design and denomination of coins
In minting of coins, availability of metals and its
price shall be considered
Printing of notes and mining of coins


MB shall prescribe amounts of notes and coins to
be printed and minted. MB has authority to
contract institutions for such
All expenses incurred shall be for the accounts of
BSP

Retirement of old notes and coins





BSP shall exchange on demand and without
charge Philippine currency in any other
denomination requested
If BSP is temporarily unable to provide such, it
shall deliver denomination nearest
Replacement of currency unfit for circulation


BSP shall withdraw from circulation and
demonetize all notes and coins unfit for circulation
and shall replace them
BSP shall not replace notes under mutilated
condition and without compensation to bearer
BSP may call for replacement of notes (more than
5 yrs old) and coins (more than 10 yrs old)
Notes and coins replaced shall remain legal tender
for 1 year from date of call
After period, such shall cease to be to be legal
tender but can be exchanged at par and without
charge in BSP during following year
After said period, notes and coins not exchanged
shall cease to be a liability of BSP and shall be
demonetize
III. Domestic monetary stabilization
Guiding principle on monetary stabilization
1. MB shall endeavour to control any expansion or
contract of monetary aggregates prejudicial to
price stability
Power to define terms
2. MB shall define monetary aggregates, credit and
prices and made public such definitions
Action when abnormal movements occur in monetary
aggregates, credit and prices

Interconvertibility of currency

Mutilated condition: (1) identification is
impossible, (2) signs of filing, clipping, (3) notes
lost more than 2/5 of surface or all signatures

When such occurs that endanger stability of
economy, MB shall:
1. Take remedial measures
2. Submit to President and Congress of
report containing the (1) cause, (2) extend
of change and (3) measures taken by MB
Whenever the following happen:
1. Monetary aggregates or level of credit
increases or decreases by more than 15%
2. Cost of living index increases by more
than 10% in relation to level of month
existing of preceding year
3. Other circumstances so warrant
 The monetary board shall submit reports
and shall state whether these changes is a
threat to stability
46

MB shall continue to submit periodic report to
President and Congress until monetary aggregates,
credit and prices disturbances disappeared or
controlled

IV. International Monetary Stabilization
International Monetary Stabilization

BSP shall exercise its powers under the NCBA to
preserve the international value of peso and
maintain its convertibility
International Reserves



International reserves – must be maintained
adequately to meet foreseeable net demands for
foreign currencies
Adequacy of international reserves – MB shall be
guided by prospective receipts and payments of
foreign exchange
MB shall give special attention to volume and
maturity of the following:
o Liability of BSP in foreign currency
o Foreign exchange assets and liabilities of
other banks and all other persons
Means of Action

Composition of International Reserves





International reserve shall include but not limited
to:
 Gold
 Assets in foreign currencies
Assets in foreign currencies include (1) documents
of international transfer of funds, (2) demand and
time deposits of banks abroad and (3) foreign
government securities and notes
MB shall hold the FOREX resource of BSP in
freely convertible currencies
MB shall issue regulations that FOREX assets
must meet
BSP shall be free to convert any asset in
international reserves into other assets
Action when International Stability of Peso is Threatened

Whenever:
1. International reserve falls to a level
inadequate to meet prospective net
demands for foreign currencies
2. International reserve appears to be
imminent to fall on such level
3. International reserve is falling as a result
of remittance abroad
The MB shall:
1. Take remedial actions
2. Submit to the President and Congress a
report including:
• Nature and cause
• Remedial measures taken
• Monetary, fiscal and
administrative measures
• Character and extend of
cooperation required
3. If resultant actions fails, the MB shall
propose to the President with notice to
Congress of additional action to restore
equilibrium
4. MB shall submit periodic reports to
President and Congress until threat has
disappeared
In order to achieve the primary objective of price
stability, MB shall rely on moral influence and
powers granted by NCBA
V. Operations in Gold and FOREX
Purchases and sales of gold


BSP may buy and sell gold
It shall be made in national currency at prevailing
international market price
Purchase and sales of FOREX


BSP may buy and sell foreign notes, coins and
documents. They can also engage in future
exchange operations
BSP shall engaged with FOREX transactions with
the following: (BIG-FO)
1. Baking institutions operating in the
Philippines
2. International financial institutions
3. Government
4. Foreign governments
5. Other entities authorized by MB
47



In order to maintain convertibility of peso, BSP
may buy those offered and sell any quantity
demanded provided that FOREX is freely
convertible into gold or US dollars
This requirement shall not apply to demand for
foreign notes and coins
BSP shall effect its exchange transactions at the
rates determined by Sec. 74




Foreign Asset Position of BSP


BSP shall maintain a net positive foreign asset
position so that gross FOREX assets will always
exceed gross foreign liabilities
If FOREX liabilities exceed twice the FOREX
assets, BSP shall within 60 days, submit report to
Congress stating origin of liabilities and manner
which it will be paid

Operations with Foreign Entities

Emergency Restriction on Exchange Operations


In order to:
1. Achieve primary objective (price stability)
2. Protect international reserves
3. And in time of national emergency, give
MB time to takes constructive measures to
forestall or combat crisis
The MB with concurrency of 5 members and with
approval of President may:
1. Temporary suspend or restrict sale of
exchange
2. Subject all transactions in gold and
FOREX to license
3. Require FOREX obtained by anyone be
delivered to BSP at effective exchange
rate. Foreign currency deposits RA 6426
(Foreign Currency Deposit System) shall
be exempted


BSP shall avoid acquisition of such currencies
It may require such currencies in an amount
exceeding the minimum balance to cover current
demands for said currency only when acquisition
of such is considered of national interest
Exchange Rates (Sec. 73)
MB may authorize BSP to grant and receive loans
from foreign banks and may engage in operations
with such entities for national interest
BSP may also act as agent of such entities
BSP may pledge gold or other assets as security
against loans it received
VI. Regulations of FOREX Operations
FOREX Holdings of Banks




Acquisition of Inconvertible Currencies


MB shall determine exchange rate policy of the
country
MB shall determine rates at which BSP shall buy
and sell spot exchange and establish deviation
limits for effective exchange rates
BSP shall not collect any additional commissions
other than actual telegraphic costs
MB shall similarly determine rates for other types
of FOREX transactions including sales of foreign
notes and coins
The margins between effective exchange rates and
rates established may not exceed the
corresponding margins for spot exchange
transactions more than additional costs involved in
each type of transactions

BSP may at all times have FOREX resources
sufficient to enable it to maintain international
stability and covert ability
MB may require banks to sell to BSP part of their
surplus holdings of FOREX to achieve this. Such
transfers may be required to all foreign currencies
MB may determine the net assets and liabilities of
banks
To determine such, the following shall be taken
into consideration: (1) bank’s networth,
outstanding liabilities or other financial or
performance ratios
Such determination shall be applied to all banks
uniformly and without discrimination
Requirement of Balanced Currency Position

MB may require the banks to maintain balance
position of assets and liabilities in peso or other
48

currency. Banks shall be granted reasonable time
for such
Power above shall be exercised only under special
circumstance and applied to all banks uniformly
and without discrimination
Regulation of Non-Spot Exchange Transactions

To restrain banks from taking speculative
positions with respect to future fluctuation in
FOREX rates, MB shall issue regulations for sales
in non-spot exchange
Other exchange profits and losses


Banks shall bear risks of non-compliance with
terms of FOREX documents they buy and sell
They shall also bear other risks including
exchange risk not assumed by BSP
Information on Exchange Operations


Banks shall report to BSP the volume and
composition of the purchases and sales of gold and
FOREX each day
MB may also require other persons to report such
purchases and sales of gold and FOREX.
Accuracy of declaration may be verified by BSP
VII. Loans to Banking and Other Financial Institutions

Guiding Principles

The rediscount, discount, loans and advances shall
be used to influence volume credit consistent with
object price stability

2. Production credits – credit where
maturities are not more than 360 days and
resulting from production of agricultural,
animal, mineral or industrial products
1. Such must be secured by a pledge
of respective product except if
loan is secured by lien on 70%
value of real estate property
3. Other credits – credits not under 1 and 2.
BSP can provide funds from
non0inflationary sources
4. Advances – grant advances against the
following kinds of collateral for fixed
periods which shall not exceed 180 days,
except #4: (GSC-CUNN)
1. Gold
2. Securities representing obligations
of BSP
3. Credit instruments in no. 1
4. Credit instrument in no. 2 for
period not exceed 360 days
5. Utilized portions of advances in
current amount covered by regular
overdraft
6. Negotiable treasury bills maturity
within 3 years
7. Negotiable bonds by government
maturity not more than 10 years
Rediscounting, discounts, loans and advances in
above provision may not be renewed or extended
unless extraordinary circumstance justify it
Advances in No. 6 and 7 may not exceed 80% of
current market value of collateral
Loans for Liquidity Purposes
Authorized Types of Credit Operations


BSP may perform the following credit operations
in the Philippines: (CPOA)
1. Commercial credits – credits where
maturities are not more than 180 days and
resulting from:
1. Purchase and sale of readily
saleable goods, exportation,
importation and their
transportation (PESTI)
2. Storing non-perishable goods with
are duly insured
BSP may extend loans and advances for a period
not more than 7 days without collateral for
purpose of providing liquidity in the bank in times
of need
VIII. Emergency Loans and Advances
Nature of Emergency Loans and Advances

Emergency loan or advance – credit facility
intended to assist a bank experiencing serious
liquidity problems from causes beyond its control
49

1. Furnish an undertaking to indemnify and
hold harmless from suit a conservator
appointed by MB
2. Provide acceptable security adequate to
supplement the collateral assets
Grant of such is discretionary on MB and is a
temporary remedial measure. It must also be fullysecured
When Granted
1. In period of national or local emergency or
financial panic, MB may at 5 members vote,
authorize grant of extraordinary loans to banks
secured by assets
o Such loans shall not expand the bank’s
total volume of loans or investments
2. MB, at 5 members vote, grant emergency loans to
banks even during normal period to assist bank in
precarious financial condition brought by
unforeseen events or foreseeable events though
inevitable
o Bank should not be insolvent and has
assets to secure advances
 No.1 contemplates emergency affects whole
banking community in financial crisis giving rise
to widespread confusion in public
 No. 2 provides situation where BSP grants loan to
a bank with uncertain financial condition but not
insolvent
Amount of emergency loan or advance shall not
exceed 50% total deposits and deposit substitutes
of bank and is given in 2 tranches


Amount of 1st tranche shall be limited to 25% of
total deposit and deposit substitute of bank and
secured by government securities
Amount of first tranche may exceed 25% if it is
adequately secured by government securities and
unencumbered first class collaterals
Prior to release of first tranche, bank shall submit
resolution of its board of directors authorizing
BSP to evaluate their assets to determine that it is
good for collateral
Second Tranche




Prohibition in 128 shall not apply if it refers to
acceptance as collateral of share and their
acquisition due to foreclosure proceeding
BSP shall dispose of such share by public bidding
within 1 year
Sec 128 – BSP shall not acquire or accept shares
as collateral and shall not participate in ownership
of enterprise.
BSP shall not engage in development banking or
financing except for outstanding loans obtained or
extended for development financing
Overdraft

Overdraft shall be eliminated within a period of 5
consecutive banking days
IX. Credit Terms


First Tranche


Interest and Rediscount
Limits

Shares Collateral

Endorsement

MB by vote of 5 members may release
tranche
on the following conditions that the principal
stockholders shall:
Documents rediscounted, discounted, bought or
accepted as collateral by BSP must bear
endorsement of bank
Repayment of Credits

2nd
BSP shall collect interest on all loans and
advances it extends notwithstanding closure,
receivership or liquidations
MB shall fix interest and rediscount rates after due
consideration has been given to credit needs of the
market, composition of BSP portfolio and national
monetary policy
Interest rates shall be applied to all banks
uniformly and without discrimination
Documents rediscounted, discounted, bought or
accepted as collateral by BSP must be withdrawn
50

on dates of maturity or upon liquidation of
obligation
Banks shall have the right at any time to withdraw
documents presented as collateral upon payment
of full debt including interests
Other Requirements

MB shall provide additional conditions which
borrowing institutions must satisfy
Issue and Negotiation of BSP Obligations




Provisional Advances to the National Government

BSP may make direct provisional advances with
or without interest to national government to
finance expenditures in annual appropriations
provided that:
o It is repaid before end of 3 months,
extendible for another 3 months
o Shall not exceed 20% of average annual
income of borrower for the last 3
preceding fiscal year
Prohibitions


BSP shall not acquire or accept shares as collateral
and shall not participate in ownership of enterprise.
BSP shall not engage in development banking or
financing except for outstanding loans obtained or
extended for development financing


BSP may issue, place, buy and sell freely
negotiable evidence of indebtedness of BSP
The issuance of such shall only be made in cases
of extraordinary movements in price levels
It may be issued directly against the international
reserves of BSP or issued without any relation to
asset of BSP
MB shall determine interest rates, maturities and
may denominate the obligation in gold and foreign
currencies
BSP may acquire the said evidence of
indebtedness before their maturity by:
o Purchase in open market
o Or redemption if the BSP has reserved its
right to make such redemption
Such shall not be included among BSP assets and
shall be immediately retired and cancelled
(because there was discharge, maker acquired the
note he issued)
XI. Composition and Review of BSP Portfolio


At least once every month, MB shall review
portfolio of BSP for future credit policy
MB shall consider if portfolio has a sufficiently
large part consists of assets with early maturities in
order to promptly contract BSP credit whenever
national monetary policy so requires
X. Open market Operations for the Account of BSP
XII. Bank Reserves
Principles of Open Market Operations
Reserve Requirement

Open market purchases and sales of security shall
be made in accordance to primary objective of
price stability
Purchases and Sales of Government Securities


BSP may buy and sell in open market for its
account the following:
1. Evidence of indebtedness issued directly
by Government
2. Evidence of indebtedness issued by
government instrumentality fully
guaranteed by Government
The above must be freely negotiable and available
to the general public in denomination of thousands
of pesos or more





In order to control volume of money created by
credit operations, banks shall be require to
maintain reserves against their deposit liabilities
MB may at its discretion require banks to maintain
reserves against funds held in trust and liabilities
for deposit substitutes
Required reserves shall be proportional to volume
of deposit liabilities and shall ordinarily take a
form of a deposit in BSP
Reserve requirement shall be applied to all banks
uniformly and without discrimination
Reserves against deposit substitutes shall be
determined like reserve requirement against
regular bank deposits
51


MB may exempt from reserve requirement such
deposits with remaining maturities of 2 years or
more and interbank borrowings
Requirement to maintain bank reserves is imposed
primarily to control volume of money and shall
not pay interest on reserves maintained



Definition of Deposit Substitutes




Deposit substitutes – alternative form of obtaining
funds from the public through the issuance,
endorsement or acceptance of debt instruments for
borrower’s own accounts for the purpose of
relending receivables
The following are some deposit substitutes:
1. Banker’s acceptance
2. Promissory notes
3. Participations
4. Certification of assignment
5. Repurchase agreements
MB shall determine what instruments are
considered as deposit substitutes
Deposit substitutes of commercial, industrial and
non-financial companies for the limited purpose of
financing their own needs shall not be considered
deposit substitutes
Required Reserves against Peso Deposits and foreign
currency deposits

Reserves against Unused Balances of Overdraft Lines

MB may establish minimum reserve requirements
for unused balance of overdraft
Increase in Reserve Requirement

Reserve Deficiencies







MB may fix minimum reserve ratios to peso and
foreign currency deposits that each bank shall
maintain and shall be applied to all banks
uniformly and without discrimination
When reserve position is below the required
minimum, the bank shall pay:
o 1/10 of 1% amount of deficiency or
o The prevailing 91-day treasury bill rate
plus 3% points whichever is higher
Banks shall permitted to offset bank deficiency
with any excess reserves which may have held
during other days of the week
Banks shall be required to pay penalty only on the
average daily deficiency in the week
In case of abuse, MB may deny any bank the
privilege of offsetting reserve deficiencies
If bank chronically has reserve deficiency, MB
may limit or prohibit the bank from making new
loans or investments
It may also require that part or all net profits be
assigned as surplus
MB may modify or set aside the reserve deficiency
penalty in a period of a strike or lockout of the
bank or national emergency
Interbank Settlement



MB may increase reserve requirements against
existing liabilities in a gradual manner and shall
not exceed 4% in any 30 day period. Banks shall
be notified reasonably in advance

Computation of Reserves
Reserve position shall be calculated daily on the
basis of the amount at the close of business for the
day
In holiday or non-banking days, the reserve
position is calculated at the close of the business
day immediately preceding such holiday
For purpose of computing reserve position,
principal office of the bank in the Philippines and
all branches are considered as single unit
BSP shall establish interbank clearing facilities.
BSP may charge fees for such
Deposit reserves maintained by banks in the BSP
shall serve as basis for the clearing of checks and
settlement of interbank balances
Any bank that incurs an overdrawing in its deposit
account in BSP shall fully cover such overdraft
and pay interest (1) at 1/10 of 1% per pay or (2)
prevailing 91-day treasury bill rate plus 3% point
whichever is higher
Settlement of clearing balances shall not be effect
for accounts which continues to be overdrawn for
52

5 consecutive days until overdrawn is paid or has
emergency loan
Banks with existing overdrafts with BSP at
effectivity of NCBA may either convert such to
emergency loan or settle such immediately
Exemption from Attachment

Deposits in BSP as reserve requirement shall e
exempt from attachment, garnishment of court or
government agency to satisfy claim of a party
other than the government

Coordination of Credit Policies


MB shall ensure supply, availability and cost of
money are in accord with needs of Philippine
economy and that bank credit is not granted for
speculative purposes. Regulation on bank
operations shall be applied to all banks uniformly
and without discrimination
Designation of BSP as Banker of Government

MB may prescribe minimum cash margins for
opening of letters of credit

MB shall issue regulation with respect to
maximum permissible maturities of loans and
investments and amount of security
Portfolio Ceilings


Whenever MB considers it advisable to prevent or
check an expansion of bank credit, MB may place
upper limit on amount on loans and investment of
bank and its rate of increase
In no case shall MB establish limits below the
value of loans or investments of banks on the date
on which they are notified by the restriction.
Restrictions shall be applied to all banks uniformly
and without discrimination
Minimum Capital Ratios
BSO shall represent government in IMF and shall
carry accounts as may result from Philippine
membership with such Fund
Representation to other Financial Institutions


Required Security against Bank Loans

BSP shall act as baker of government, its political
subdivisions and instrumentalities
Representation with IMF
Margin Requirement against Letters of Credit

GOCCs which perform banking functions shall
coordinate their banking policy with MB
XIV. Functions as Banker of the Government
XIII. Selective Regulation of Banking Operations
Guiding Principle
MB may prescribe minimum ratios which capital
and surplus of banks must bear to the volume of
their assets
BSP may be authorized by the Government to
represent it in dealings with International Bank for
Reconstruction and Development and other
international financial agencies
The president may designate any of his financial
advisers to jointly represent the government with
BSP
Official Deposits




BSP shall be the official depository of the
government
As a general policy, government cash balance
should be deposited with BSP and only minimum
working balances is to be held by government
banks
Government bank may hold deposits of political
subdivisions beyond minimum working balances
when such subdivision have outstanding loans
with former
BSP may pay interest n deposits of the
government as well on deposits of banks
Fiscal operations
53


BSP shall open a general cash account for the
Treasurer of the Philippines in which liquid funds
shall be deposited
Transfers of funds from such account shall be
made only upon order of Treasurer
Other Banks as Agent of BSP


In performance as fiscal agent, BSP may engage
services of other government and domestic banks
for operations in localities or abroad where BSP
does not have office
Fiscal operations in foreign countries, BSP may
engage in services of foreign banks
Remuneration for Services

BSP may charge equitable rates for services it
renders to the government



Purpose of operations – increase liquidity and
stabilize value of said security in order to promote
investment in government obligation
MB shall use the resources of the Fund to prevent
or moderate sharp fluctuations in the quotations of
government obligation
However, it shall not endeavour to alter
movements of the market resulting from basic
changes in interest rates
Resources of Securities Stabilization Fund

It shall come from balance of the fund held by the
Central Bank (RA 265)
Profits and Losses of the Funds

XV. Marketing and Stabilization of Securities for the
Account of the Government
Securities Stabilization Fund shall retain net
profits it may make on operations regardless if
said profits arisen from capital gains or interest
earning. It shall also bear net loss.
XVI. Functions as Financial Adviser
Issue of Government Obligations
Financial Adviser on Official Credit Operations


Issue of securities representing obligations of
government may be made through BSP which may
act as agent of government
BSP shall not guarantee the place of said securities
and shall not subscribe to their issue except to
replace its maturity holdings


Method of Placing Government Securities


BSP may place securities in the such through
direct sale to financial institutions and public
BSP shall not be a member of any stock exchange
or syndicate but may interfere for the purpose of
placing government securities
Servicing and Redemption of Public Debt shall be effected
through BSP
Securities Stabilization Fund

Securities Stabilization Fund –made for the
account of the government and its operation shall
consists of purchases and sales, in the open market,
of bonds fully guaranteed by the Government




Before undertaking credit operation abroad,
government, through Secretary of Finance, shall
request the opinion of MB
Opinion of MB shall be based on (1) gold and
foreign exchange resources of the nation and (2)
effects of such operation in balance of payments
and on monetary aggregates
Whenever government contemplates borrowing
within the Philippines, the prior opinion of MB
should also be requested
The constitution provides that foreign loans may
only be incurred in accordance with the law and
regulation of monetary authority
Information on foreign loans by the government
shall be made public
The President may contract foreign loans with
prior concurrence of MB and subject to limitation
of the law. MB shall, within 30 days at end of
quarter, submit to Congress a report of loans made
by government that would increase foreign debt
Representation on the National Economic and
Development Authority (NEDA)
54

The deputy governor shall be an ex officio
member of NEDA in order to – assure effective
coordination between economic, financial and
fiscal policies of government
Phase out of Regulatory Powers over Finance
Corporations

XVII. Privileges
Tax Exemptions




BSP shall be exempt for a 5 year from approval of
NCBA from all national, provincial, municipal and
city taxes
Exemption shall apply to all property of the BSP
as well as to contracts and deed related to conduct
of business
It shall not apply to those payable by persons
merely doing business to BSP
Foreign loans shall be exempt from any taxes and
payment is assumed by BSP
Implementing Details



The following are exempted from custom duties
notwithstanding special laws:
1. Importation and exportation of BSP of
notes, coins and other metals
2. Importation of all equipment needed for
bank notes and coin production
Applicability of Civil Service Law




Appointment BSP, except policy determining,
primarily confidential or highly technical in
nature, shall be in accordance with CSL
No qualification requirement for position shall be
imposed other than those set by MB
MB or Governor may, without need of further
obtaining approval of government agency, appoint
personnel in BSP
Officers of BSP shall not engage directly or
indirectly in partisan political activities
XVIII. Transitory Provisions of NCBA
Phase-out of Fiscal Agency Functions

BSP shall within 3 years but no longer than 5
years, phase out all fiscal agency functions and
shall transfer it to DOF
BSP shall be made operational by these acts: (1)
President appoint members of MB within 60 days
and (2) transfer of assets and liabilities of CB to
BSP within 90 days
All incumbent personnel of CB shall continue to
exercise duties in BSP if they are necessary
Transfer of Asset and Liabilities
Exemption from Customs Duties

BSP shall within 5 years phase out its regulatory
powers over finance companies without quasibanking and transfer it to SEC

Upon effectivity of Act, (1) 3 members of MB
including Governor, (2) Sec. of Finance, (3) Sec.
of DBM and (4) Chairmen of Committee on Banks
of Congress shall determine assets and liabilities
of CB to be transferred to BSP:
o MB and Sec. of Finance shall work out
creative monetary solution to retire CB of
its liabilities at least cost
o BSP shall remit 75% of net profits to a
special deposit account (sinking fund)
until net liabilities of CB is liquidated
o Assets and liabilities shall be limited to an
amount that will enable BSP to perform
on viable basis. Assets shall exceed
liability, by COA, by P10B
o Liabilities by BSP shall include liabilities
circulating notes and coins
o Asset or liability of CB not transferred
shall be retained and liquidated by CB
Board of Liquidators for a period not
exceeding 25 years
All actions shall be reported to Congress and the
President within 30 days
Mandate to Organize


BSP shall be organized irrespective of RA 7430
(Optimum Utilization of Personnel Act)
There shall be no preferential or priority right to
be given to any personnel for appointment in new
staffing pattern
55
Separation Benefits

MB shall authorize separation benefits in addition
to all gratuities under the law to those separated in
service due to reorganization
Repealing Clause: RA 265 and PD 1792 are repealed
Transfer of Powers

All powers vested in CB not inconsistent with
NCBA is deemed transferred to BSP
Suspense Accounts

Sec 46 - Monetary Adjustment Account and
Exchange Stabilization Adjustment Account are
repealed. Revaluation of International Reserve
Account shall continue for the account of the same
entity
56
CHAPTER 9 – Unclaimed Balances and Trust Receipts
I. Unclaimed Balances
5.
Definitions




Unclaimed balances – includes credits or deposits
of money, bullions, security and any evidence of
indebtedness with banks, loan associations and
trust corporations in favor of any person (1)
known to be dead or (2) who has not made further
deposits or withdrawal during the preceding 10
years or more
Governed by Act No. 3936 – Requiring Banks to
Transfer Unclaimed Balances to Insular Treasury
Such unclaimed balances, together with crease and
proceeds shall be deposited to the Treasurer to the
credit of the government
Demand drafts cannot be escheated but telegraphic
notes can (Republic vs. FNCB)
6.
7.
8.
Procedure
1. Within month of January of every odd year, all
banks shall forward to Treasurer a statement under
oath of all credits and deposits held by them of
persons (1) known to be dead or (2) who has not
made further deposits or withdrawal showing:
a. Name and last known residence
b. Amount and date of outstanding
unclaimed balance
c. Date when person died or made his last
deposit or withdrawal
d. Interest due on unclaimed balance
2. Copy of sword statement shall be posted n
conspicuous place in premises of the bank at least
60 days from date of filing
3. Immediately before filing, bank shall
communicate with person whose favor the
unclaimed balance stand of such
a. It is the duty of the Treasurer to inform the
SG the existence of unclaimed balances
4. When SG is informed of such, he shall commence
an action in the name of the People of the
Republic in the CFI (RTC) of the province or city
where the bank is located
a. It shall be joined as parties the bank and
all such creditors and depositors
9.
b. All creditors or depositors or bank may be
included in one action
Service of process in such action or actions shall
be made by delivery of copy to defendant bank
and by public in a newspaper of general
circulation
At time of issuance of summons, clerk of cert shall
also issue notice:
a. Signed by him
b. Directed to all persons other than
defendants named therein
c. Requiring them to appear within 60 days
after first publication
d. Show cause why unclaimed balance
should not be deposited to Treasurer
e. Notify them that if they do not appear, the
court will grant relief to RP
Copy of notice shall be attached to summons
required
Any person interested may appear to become a
party. Upon completion of publication, court shall
have complete jurisdiction
Court must hear all parties. If the such are
unclaimed, they shall be escheated to government
and court will order their deposit to the Treasurer
Penalties

If president, cashier or managing office of the
bank neglects or refuses to file sworn statement,
bank shall pay to the government 500Php per
month for each infraction
Immunity from suit

Any bank which has made a deposit to the
Treasurer shall not thereafter be liable to persons
who brought an action against the bank for such
unclaimed balances. The bank shall be defended
by SG without costs
Disclosure of Service and Maintenance Fees on Dormant
Accounts


Banks may impose service or maintenance fees on
dormant or inactive accounts
Provided that before such fees are imposed, the
period for dormancy and minimum balance is
properly disclosed
57
Reclassification

All unclaimed balances already reported to
Treasurer shall be transferred/reclassified from
deposit liability/other credit accounts to liability
account, “Due to the Treasurer of the Philippines”
until deposited to Treasurer
Escheats under Rules of Court






Rule 91 of ROC applied in case a person died
intestate and left properties in the Philippines
Sec 1 – when person died intestate, left properties
and has no heir, SG may file petition in CFI of
province where deceased last resided or where he
had estate
Sec 2 – court shall release order of hearing that
shall fix date and place of hearing not more than 6
months after entry of order and shall direct
publication in newspaper once a week for 6
consecutive weeks
Sec 3 – upon arrival of date fixed and no sufficient
cause shown to the contrary, court shall adjudge
estate, after payment of just debts and charges,
escheated
o Personal estate assigned to city or
municipality deceased last resided
o Real estate assigned to city or
municipality property is situated
o If deceased never resided here, whole
estate shall be assigned to city or
municipality where it is situated
o Such estate shall be for benefit of public
schools and charity
Sec 4 – if devisee, legatee, heir, widow, widower
or other person entitled to estate claim such within
5 years from date of judgment, he shall have title
of such
o If already sold, municipality or city shall
be accountable to proceeds
o If claim not made within said time, he
shall forever be barred
Sec 5 – actions for reversion or escheat of
properties in violation of constitution, shall be
governed by this Rule
The State as the Heir of a Decedent





State has right over property of decedent under Art.
1101-1014 of NCC where state shall inherit
decedent estate
Bank can be a defendant in an Unclaimed Balance
petitioner in Act. 3986 because it is a real party as
the judgment of the case would injure the bank
since it shall be deprived of its use of deposits
(Republic vs. CFI)
All defendant banks are not to be included in one
action alone if they are in different jurisdictions
because the law state “actions”
There will only be one action filed for all banks if
they are under one jurisdiction (Republic vs. CFI)
Sec 2b of Rule 4 of ROC cannot govern escheat
proceedings because Act. 3986 is an action in rem
while former is in persona
II. Trust Receipts Law (PD 115)
Policy of the State
1. Encourage and promote use of trust receipts as aid
to commerce
2. Provide regulation of trust receipts to assure
protection of rights of parties
3. Declare the misuse and/or misappropriation of
goods or proceeds as a criminal offense punished
under Estafa
Definition of Terms
1. Document – written or printed evidence of title to
goods
2. Entrustee – person taking possession of goods,
documents or instruments under trust receipt and
any successor in interest
3. Entruster – person holding title over the goods,
documents or instruments and any successor in
interest (title here is security interest and not
absolute ownership)
4. Goods – includes chattels and personal property
other than money, things in action or things
affixed in lands
5. Instrument – negotiable instruments under NIL;
certificate of stock, certificate of deposit, credit or
investment instrument where entrustee appears to
be the owner in its face. Instrument does not
include document
58
6. Purchase – taking by sale, conditional sale, lease,
mortgage or pledge
7. Purchaser – person taking by purchase
8. Security interest – property interest in goods,
documents or instruments to secure performance
of some obligation by entrustee. It includes title
whenever such title is in substance taken or
retained for security only.
9. Person – an individual, trustee, receiver or two
more persons having joint interest
10. Trust receipt – written of printed document signed
by entrustee in favor of entruster comply with
condition of TRL. No formality for execution is
necessary for validity
11. Value – any consideration sufficient to support a
simple contract
Trust Receipt Transaction





Trust receipt transaction – any transaction by and
between entruster and entrustee where entruster
hold absolute title or security interest over goods,
documents or instruments, releases the same to the
entrustee
The entrustee signs a trust receipt and binds
himself to hols the goods for the entruster and to
sell such with obligation to return the proceeds or
return such in case of non-sale
In case of goods or documents:
1. To sell the goods
2. To manufacture the goods with the
purpose of ultimate sale or
3. To load, unload, ship or tranship them in
manner necessary for their sale
In case of instruments:
1. To sell or procure exchange
2. Deliver them to principal
3. Effect consummation involving delivery
to depository
4. Effect their presentation, collection or
renewal
Sale of goods, documents or instruments by person
in business of selling such for profit who (1) has
general property rights in such goods over the
buyer or (2) who sells the same to the buyer on
credit, retaining title or interest as security for
payment does not constitute trust receipt
transaction




There are two possible situation in trust receipt
transaction:
1. Refers to money received under the
obligation involving the duty to deliver it
(entregarla) to owner of merchandise –
this happens when entrustee sold the
goods and must return the proceeds to
entruster
2. Refers to merchandize received under
obligation to return in (devolvera) to
owner – this happens when entrustee
failed to sell the goods and must return
goods to entruster
Trust receipt is a separate and independent
security transaction intended to aid in financing
importers whereby goods are held as security by
lending institution for loan
In Sps. Vintola vs. Insular Bank of Asia and
America, it stated the following:
1. Letter of credit-trust receipt is where a
bank extends a loan with a trust receipt for
the loan. Transaction involved a loan
feature in the letter of credit and security
feature for the trust receipt
2. Trust receipt is a security agreement
which a bank acquires a security interest
in the goods.
3. It secures indebtedness and there can be
no such thing as security interest that
secures no obligation
4. Trust receipt is a security transaction to
aid financing importers who do not have
sufficient funds to finance importation and
who may not be able to acquire credit
except utilization, as collateral of their
merchandise
It is a document where the lender (entruster),
having no prior title or possession to the goods
lends money to the borrower (entrustee) on
security of the goods
Form of Trust Receipts

Trust receipt need not be in any particular form
but every trust receipt must contain:
1. Description of goods, documents or
instruments
2. Total invoice value
59

3. Undertaking of entrustee
4. To hold in trust, sell or return for the
entruster the goods, documents or
instruments
May contain other terms not contrary to TRL or
laws
Currencies in which Trust Receipt may be denominated


Trust receipt may be denominated in Philippine or
foreign currency
If it is denominate in foreign currency, payment
shall be made in its equivalent Philippine currency
at FOREX in turn over



Entruster not Responsible on sale by Entrustee

Rights of Entruster
1. Entitled to proceeds to the extent of the amount
owing to the entruster or in case of non-sale return
of goods
2. Entruster may cancel trust and take possession of
goods, documents or instruments at any time upon
default or failure of entrustee to comply with
obligation
a. Entruster now in possession may give
notice to entrustee of intention to sell
b. May, not less than 5 days after serving
notice, sell such in public or private sale
c. Entruster in public sale can become a
purchaser
3. Proceeds of sale shall be applied to:
a. Payment of expenses thereof
b. Payment of expenses of retaking, keeping
and storing goods, documents or
instruments
c. Satisfaction entrustee’s indebtedness
4. The entrustee shall receive any surplus but shall be
liable t the entruster for deficiency
 Trust receipts partake nature of conditional sale
where importer becomes absolute owner of
merchandise as soon as he paid purchase price or
loan (PNB vs. Vda de Hijos de Angel Jose and
Colinares vs. CA)
 The law uses the word “may” in granting entruster
the right to cancel the trust and take possession of
the goods
 Entruster has discretion to avail of such right or
seek alternative action such as third party claim of
ICA upon default of entrustee
In Philippine Blooming Mills vs. CA, it was stated
that if the entruster took possession of the goods,
the entrustee is still liable for the whole amount
The entrustee shall only be released from his
liability if he pays the entruster his obligation or
the entruster sells the goods at a private or public
sale and appropriate the proceeds
Even if the thing is taken as a right of the entruster
but is not sold to a public/private sale yet, the debt
of the entrustee still exists
Entruster shall not, merely by giving entrustee
liberty of sale, be responsible as principal/vendor
of sale made by entrustee
Obligations of Entrustee
1. Hold the goods and shall dispose them in
accordance with conditions of trust receipts
2. Receive proceeds in trust and turn over to entruster
3. Insure the goods against loss
4. Keep said goods or proceeds separate and capable
of identification
5. Return goods in event of non-sale or demand of
entruster
6. Observe all other terms provided
Liability of Entrustee for Loss


Risk of loss shall be borne by entrustee.
Loss of goods, documents or instruments
irrespective of WON it was due to the fault or
negligence of entrustee shall not extinguish his
obligation
Rights of Purchaser for Value and in Good faith

Any purchaser in good faith and for value of the
goods from entrustee acquires the goods free from
entruster’s security interest
Validity of Entruster’s Security Interest against Creditors

Entruster’s security interest in goods, documents
or instruments shall be valid against all creditors
of entrustee for the duration of the trust receipt
agreement
Violation of TRL
60













TRL is violated whenever entrustee fails to:
1. Turn over proceeds
2. Return goods in non-sale
Mere failure to account or return gives rise to the
crime which is malum prohibitum
There is no requirement to prove intent to defraud
(Ong vs. CA and Colinares vs. CA)
What the law punishes is the dishonest and abuse
of confidence in handling money
Intent to misuse or misappropriate goods should
be proved (Metrobank vs. Go)
Failure to account upon demand of funds or
property is evidence of conversion or
misappropriation
Mere failure to account for goods constitute Par
1(b) of Estafa (Ong vs. CA)
Failure to deliver proceeds cause prejudice not
only to the creditor but also to the public interest
In Sps. Vintola vs. Insular Bank of Asia and
America, it is stated that the return of merchandize
does not amount to recover by the lending bank
This is because the lending bank (entruster) only
acquires a security interest over the goods and not
the absolute ownership
If the lending bank acquires absolute ownership, it
shall defeat the loan feature of a trust receipt and
shall become a contract of sale where bank gained
ownership of goods upon giving a loan
The title of the entruster is a mere artificial
expedient, more of a legal fiction than fact
It was also stated that there was no double
recovery because when shells were deposited in
the court, IBAA did not yet accept it. Thus, they
have not appropriate the shells and can recover the
obligation from the petitioners
Application

In Allied vs. Ordonez, TRL applies to items:
o Destined for sale
o Processed as component of product
ultimately sold
o Used to repair equipment of business
Penalty

Failure of entrustee to turn over the proceeds or









In Colinares vs. CA, failure of entrustee to turn
over the proceeds or non-return constitute crime of
estafa under Art. 315(1) of RPC without need of
proving intent to defraud
If violation is committed by a corporation, its
directors, officers or employees responsible for the
offense shall have criminal liability
Rationale for making such officers responsible:
they are vested with authority and responsibility to
devise means to ensure compliance with the law
and if they fail to do so, they shall be accountable
Corporations cannot be put in jail. However, these
entities are made liable for civil liabilities arising
from criminal offense
Violation of trust receipt constitutes fraud under
Art. 33 of NCC an ICA to enforce civil liability
arising from criminal liability
In Sarmiento Jr. vs. CA, complaint based on
failure to comply with obligation in Trust Receipt
is separate from criminal liability under PD 115. It
is an obligation ex contractu and may proceed
independently regardless of result of criminal
action
In People vs. Cuervo, TRL with its penal sanction
is in reality, merely confirmatory of situation
covered under Art. 315(1)(b) RPC
In Colinares vs. CA, if the person who executed
the trust receipt did not pass title to the bank,
where there is security interest of the property, and
person is not an importer, there is no trust receipt
created
It is unjust and inequitable for banks of making
borrowers sign trust receipt to facilitate collection
of loans under threat of criminal prosecution in
case of non-payment
61
non-return constitute crime of estafa
62
CHAPTER 10 – Deposit Insurance
I. Roles of PDIC
1. Insure the deposits of all banks which are entitled
to benefits of insurance
2. As a basic policy, promote and safeguard interest
of depositing public by way of providing
insurance coverage
 RA 3591 – Act establishing PDIC
 PDIC is entitled to free use of Philippine mail
II. Powers of PDIC as Corporate Body
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Use corporate seal
Have succession until dissolved
Make contracts
Sue and be sued
a. All suits of civil nature is deemed to arise
from Philippine law
b. No attachment or execution against PDIC
before final judgment
c. BOD designate agent of insured bank
Appoint its Board of Directors (BOD)
Prescribe by-laws not inconsistent with law
Exercise all powers granted by law and incidental
thereto
Conduct examination of bank with prior approval
of MB
a. No examination conducted within 12 days
from last examination
b. To avoid overlap examinations, maximize
use of reports
Act as receiver
Prescribe rules deemed necessary to implement
PDIC law
Establish provident fund for payment of benefits
of employees
Compromise, condone or release any claim to
PDIC
III. Board of Directors

BOD shall administer the affairs of PDIC fairly
and impartially without discrimination
Composition
1. Secretary of Finance – ex-officio chairman
2. Governor of BSP – ex-officio member
3. President of PDIC – vice chairman
a. appointed by the President with term of
6years
4. Two members from the private sector
a. Term of 6 years without reappointment
b. Qualifications:
i. Good moral character
ii. Unquestionable integrity and
responsibility
iii. Recognized competence
iv. 35 years old
Disqualification of appointive members

For duration of tenure and 1 year after, appointive
members of the board are disqualified from
holding office in any insured bank
Quorum



3 members shall constitute a quorum
Secretary of Finance and BSP Governor can
designate a representative with no lower rank than
U.Sec and Deputy Governor
If Secretary of Finance fails to attend, President of
PDIC shall be chairman
Per Diem

Secretary of Finance shall fix per diem
Authority of the Board
1. Prepare rules and regulations for effective
discharge of responsibilities
2. Direct management of PDIC
3. Establish human resource management system
a. Compensation structure shall be based on
job evaluation studies
b. All positions shall be governed by
compensation position classification
system
c. Compensation plan comparable with
prevailing compensation
d. Exempted from existing laws on
compensation
4. Appoint, establish rank and fix remuneration
5. Adopt annual budget
6. Approve methodology in insurance and finance
assistance
63
IV. Officers

President





Shall be Chief Executive of PDIC
Salary fixed by President of Philippines
Total salary shall be ceiling of all other personnel
Powers and duties:
1. Prepare agenda for meeting
2. Execute and administer policies
3. Direct and supervise operations
4. Represent PDIC
5. Authorize, with his signature and prior
approval of board, contracts, notes and
securities issued
6. Represent PDIC in legal action
7. Delegate power to represent
8. Exercise other powers vested in him
Vice President


Shall assist President
During absence or temporary incapacity of
President, VP shall act as president pending the
appointment of new President
Bank Examiners



BOD shall appoint examiners to examine insured
bank
Each examiner has the power to make thorough
examinations
They have the power to:
o Administer oaths
o Examine and take testimony of officers
o Compel presentation of books



Statutory Liability of PDIC



Claim agents – power to investigate and examine
all claims for insured deposits
Investigators

Investigators – power to conduct investigations on
fraud, irregularities and anomalies committed in
banks
V. Deposit Insurance Coverage
Deposit Liabilities
PDIC primarily governed by special law
Liability of PDIC is statutory and rests upon
existence of a deposit with an insured bank and
not the negotiability of the certificate evidencing
the deposit
Fourth National Bank of Wichita vs. Wilson:
negotiability of instrument has no dependence of
existence of guaranty or insurance
Deposit must be in fact made

Claim Agents

Deposit liabilities of any bank engaged in business
of receiving deposit shall be insured with PDIC
Factors considered by BOD
1. Financial history and condition of bank
2. Adequacy of capital structure
3. Future earnings prospects
4. General character of management
5. Convenience and needs of community
Deposit – unpaid balance of money received by a
bank and for which it has given credit to a:
1. Commercial
2. Checking
3. Savings
4. Time
5. Thrift accounts
6. Those evidenced by passbooks
Any obligation of a bank payable outside of
Philippines shall not be a deposit under PDIC Law
Insured bank that has branch outside the
Philippines may avail insurance for its deposit
payable only in such branch



Fact that certificates stated that they are insured by
PDIC does not ipso facto make the certificate
insured
Deposit liability is determined by RA 3519
To claim deposit insurance, law requires that a
deposit is placed in the insured bank
Deposit may be constituted only if money or its
equivalent have been received by a bank
Holder in due course not applicable


Even if depositor is HDC, it does not mean that he
already has a claim against the insurance fund
The fund protects deposits only
64
Liability under negotiable instrument vs. Guarantee fund


Liability of the make is different from liability of
the guarantee fund. The latter is purely statutory
PDIC may:
o Refund to an insured bank any payment of
assessment that is excess of amount due
o Credit such expense toward payment of
assessment of next following period
Deposit insurance of Foreign Currency Deposits



Termination
Foreign currency deposits – insured with PDIC
Insurance payment shall be in same currency in
which deposit is denominated
PDIC Law is not applicable to Offshore Banking
Units


PDIC shall not terminate insured status of any
bank which continues to receive deposits
Should insured bank fails to pay assessment dues
required, PDIC may file collection case and
administrative charges against bank officials
Duty to indicate insurance on Deposit

Trust Fund
All banks must indicate that it is under the PDIC
and maximum insurance

VI. Assessment

Assessment Rule

1. Assessment rate – not exceed 1/5 of 1% per
annum
2. Semi-annual assessment rate – ½ of assessment
rate. Not less than P250
3. Assessment base – amount of liability of bank for
deposits
4. Semi-assessment base for semi-annual period –
average of assessment base in close of business
Certified Statement of Assessment Base and Assessment
Due
1. On or before July 31, each bank shall file in PDIC
certified statement showing amount of assessment
based and semi-annual assessment due. On such
date, the bank shall pay the semi-annual
assessment due
2. On or before January 31, each bank shall file
similar statement as above
3. If insured bank assumed liabilities for deposits of
another bank, it shall be included in assessment
base
4. Certified statements required shall be in such form
as BOD shall prescribe
5. Any insured bank that fails to file certified
statement shall be compelled to file by mandatory
injunction
Refund and Credit

Trust fund – funds held by insured bank in
fiduciary capacity
Trust fund shall be insured in an amount not to
exceed 10k for each trust estate
Such insurance shall be separate from other
deposits of owners of trust funds
When fiduciary bank deposits any trust fund with
other insured bank, such amount shall not be
considered as a deposit liability
Payment of Dividends and/or Interests


No insured bank shall pay dividends on capital
stock or interest or distribute capital assets while
it remains in default in payment of assessment
dues
If default in payment is due to dispute between
bank and PDIC over amount of assessment, this
rule shall not apply
Civil Penalties



Any assessment payable by insured bank shall be
subject to payment of interest computed at legal
rate for loan
There shall be an added penalty equivalent to
twice the amount of interest payable for each day
Penalty shall not be applicable if there is dispute
over amount of assessment
VII. Deposit Insurance Fund

Permanent insurance fund – P3B
65







Deposit insurance fund shall be capital account of
PDIC and shall consist of:
1. Permanent insurance fund
2. Assessment collections
3. Reserves for insurance
4. Retained earnings
Reserves for insurance shall be maintained at a
reasonable level to ensure capital adequacy
PDIC may, within 2 years from passage, conduct
study to adjust amount of Permanent Insurance
Fund
Assessment collections and incomes shall be
added to Deposit Insurance Fund after deduction
from expenses and charges. Such expenses and
charges consists of:
1. Operating costs
2. Additions to reserve
3. Net insurance and financial assistance
losses
PDIC may recover from any insured bank any
unpaid assessment
No action shall be brought to recover assessment
unless such action shall have been brought within
5 years after right accrued
If insured bank filed a false certified statement
with intent to evade, such claim is not deemed to
accrue until PDIC discovers
IX. Reports by Insured Bank





X. Prohibitions on PDIC Personnel
1. Being an officer, director, consultant, employee or
stockholder directly or indirectly of any bank
2. Receiving gifts from any officer, director or
employee of any bank
3. Revealing in any manner, information relating to
business of any bank except when required by
Congress or the President
XI. Legal Assistance

VIII. Unsound Practice



Upon examination by PDIC, it shall be disclosed
whether insured bank is committing unsound
practices
The BOD in such a case shall:
1. Submit report of examination to MB
2. If no corrective action by MB, BOD shall
motu proprio institute such
• BOD can issue cease and desist
order to the bank
3. If violation cause insolvency or
dissipation of assets the period to take
corrective action shall be done within 15
days and impose fines
Actions and proceedings may be undertaken by
PDIC if insured bank have violated:
1. Any provision of PDIC Law
2. Any order or rule of PDIC
3. Any written condition imposed by PDIC
Each insured bank shall make reports to PDIC of
conditions required
If bank fails to make such report within given time,
BOD may provide 100php penalty for each day of
violation
PDIC shall have access to reports made to the BSP
to the insured bank and BSP shall also have access
to reports of BSP
Each insured bank shall keep true and accurate
record of its daily deposit transactions.
Compliance with such shall be duly certified by
bank president
Refusal to issue such shall be a violation


PDIC shall advance litigation costs to its directors,
officers or employees in connection with any
criminal, civil or administrative case where such
person acted within the performance of his duty
Even if they resign, they shall still receive legal
assistance in connection with the act done during
tenure
The amount advance shall be repaid by the officer
if it is determined by the board that such officer
need not be indemnified
XII. Dealings by PDIC Personnel with Banks

Members of Board and personnel of PDIC may
become directors or officers of any bank if the
position is in connection with the financial
assistance extended by the PDIC
Borrowing from Banks
66


Borrowing from banks by examiners or other
personnel shall be prohibited with respect to
particular bank to which they are assigned
Borrowing by personnel from any bank not
included in the prohibition shall be secured and
disclosed to the BOD
XIII. Receivership
Appointment



MB shall appoint the PDIC as receiver
Receiver – includes receiver, commission or other
agency charged by law with the duty to take
charge of assets and liabilities of a bank prohibited
from doing business
It has the duty to gather preserve and administer
assets and liabilities of such banks for the benefit
of its depositors
Effect of receivership
1. PDIC shall control, manage and administer affairs
of closed bank
2. Powers, functions and duties of directors, officers
and stockholders are suspended
3. Assets of closed bank is in custodia legis
4. Assets of closed bank shall not be subject to
attachment, execution or levy
Powers of PDIC in receivership
1. Bring suit to enforce liabilities of bank
2. Appoint persons to perform functions of PDIC as
receiver or liquidator
3. Suspend or terminate employees of closed bank
a. Payment of separation pay shall be made
after closed bank is in liquidation
4. Pay accrued utilities, rentals and salaries of closed
bank
5. Collect loans and other claims
6. Hire private counsels if necessary
7. Borrow loan when necessary to preserve assets of
closed bank to minimize loss
8. If stipulated interest on deposits is unusually high,
reduce interest rate
9. Exercise other powers inherent in receiver


Distribution of Assets


Before distribution of assets, PDIC shall charge
against the bank the receivership expenses
After payment of all liabilities, PDIC shall pay
surplus dividends to creditors and claimants of
bank
XIV. Payment of Insured Deposits
Manner of Payment








Payment of insured deposits shall be made in:
1. Cash
2. By making available a transferred deposit
in another insured bank
Transfer deposit – deposit in an insured bank made
available to a depositor as payment of insured
deposit from closed bank assumed by another
insured bank
Insured deposit – amount due to any deposit for
deposits in an insured bank
1. In PDIC Law, 250k. Now it’s 500k
Joint account shall be insured separately from any
individually-owned deposit account
If account s held jointly, maximum insured deposit
shall be divided into as many equal shares as to
individuals
If account is held by juridical person, maximum
insured deposit shall be presumed to belong
entirely to such entity
Aggregate interests of each co-owner over several
joint accounts shall be subject also to maximum
insured deposit
No owner of an negotiable certificate of deposit
shall be recognized as depositor unless his name is
registered as owner in issuing bank
Proof of Claims


Suits Filed by PDIC
Actions filed by PDIC as receiver, payment of all
docket and court fees shall be suspended until
action is terminated
Such fees shall constitute first lien on judgment
PDIC may required proof of claims before paying
insured deposit
Final determination if person is entitled to
insurance is the court
67
Settlement Period and Penalties in case of failure to settle





Failure to settle claim within 6 months from date
of filing claim, where such failure by the officer
was due to GAOD, officer shall be imprisoned
from 6 months – 1 year
Period shall not apply if validity of claim is under
resolution
Upon payment to any depositor, PDIC shall be
subrogated to all the rights of the depositor against
the closed bank
Subrogation shall include right to receive same
dividends from proceeds of assets
Depositor shall retain claim for any uninsured
portion of his deposit

All right of depositor against closed bank which
PDIC may have been subrogated shall revert to
depositor again
XV. Investment by PDIC


Money of PDIC not employed shall be invested in
obligation of the Republic of the Philippines or
guaranteed obligations
o Not sell or purchase such obligations for
its owner account in excess of 100k
o Insurance commissioner may waive
requirement of approval in above
Banking and checking accounts of PDIC shall be
kept in BSP, PNB or fiscal agent
XVI. Extension of Loans
Notice



PDIC shall commence determination of insured
deposit upon actual takeover of closed bank
PDIC shall public a notice once a week for 3
consecutive weeks in newspaper of general
circulation such closing of the bank
Discharge

Payment of insured deposit shall discharge


Recognition of Owner

Neither PDIC or insured bank shall be required to
recognize owner of a deposit appearing on the
records under a name other than claimant
Withholding of Payment

PDIC may withhold payment of insured deposit if
payment of liability by such depositor as
stockholder of closed bank not yet offset is
pending determination
Prescription

All rights of depositor shall be bared if:
o Depositor in closed bank fail to claim
insured deposit within 2 years from actual
take over
o Depositor does not enforce his claim
within 2 years after th2 year period to file
a claim





When insured bank is determined as in danger of
closing, in order to prevent such, PDIC is
authorize to:
1. Make loans to such bank
2. Purchase assets of such bank
3. Assume liabilities of such bank
4. Make deposits in insured bank
The grant shall be made if bank is essential in
community and for financial stability
Such authority to extend financial assistance may
also be exercised if PDIC finds that the resumption
of operations of the closed bank is vital to
community
Reopening of such close bank is subject to prior
approval of MB
PDIC may provide any corporation acquiring
assets of insured bank in danger of closing with
financial assistance
Prior to exercise of these above powers, PDIC
shall determine whether actual payoff will be more
expensive than exercise of such
When MB has determined systematic consequence
of closure of bank, PDIC may grant financial
assistance in amount necessary to prevent its
failure
Systematic risk – possibility that failure of one
bank to settle the transactions with other banks
will trigger chain reaction and general shutdown
of clearing activity
68



Systematic risk also means the likelihood of a
sudden unexpected collapse in confidence with the
banking system
PDIC may not use such powers to purchase stocks
of insured bank
Financial assistance may take form of equity or
quasi-entity
1. Merge and consolidate with non-insured
bank or convert into non- insured bank
2. Assume liabilities of deposits by any noninsured bank
3. Transfer assets to non-insured bank
Protection against losses

XVII. Borrowings




PDIC is authorized to borrow from BSP
Any loan granted by BSP shall be consistent with
monetary policy and interest rate shall not exceed
treasury bill rate
If funds of PDIC are not sufficient, it can borrow
money from any bank designated as fiscal agent of
RP
Such loans shall be short-term durations


XXI. Criminal Penalties

XVIII. Issuance of Bonds



With approval of President of Philippines, PDIC is
authorized to issue bonds, debentured and other
obligations to settle insured deposits in closed
banks
The BOD shall determine interest rate
PDIC shall provide reserves for redemption
Reports and Audit



PDIC shall annual make report of its operations in
Congress
Its financial transactions shall be audited by COA
COA shall have access to all books, accounts,
records and reports
XX. Miscellaneous
Signs


Merger or Consolidations of Insured Bank


Without prior written consent from PDIC, no
insured bank shall:
Prison mayor or fine 50k-2M
o Willful refusal to submit report
o Refusal to permit examination
o Making false statement
o Submission of false materials
o Refusal to allow PDIC to takeover
o Refusal to turn-over records
o Fraudulent disposal of assets
o Violation of exemption from garnishment
o Willful failure to comply with PDIC and
conducting unsound business
o Splitting deposits
Splitting deposits - deposit account with
outstanding balance of more than maximum
insured amount is broken down to two or more
accounts within 30 days preceding closure of bank
for purposes of availing maximum deposit
XXII. Fines

Every insured bank shall display at each place of
business signs that deposits are insured by PDIC
Those which do not relate to deposits or are
impractical shall be exempted from this
requirement
PDIC may require insured bank to provide
protection against burglary, defalcation and losses
from discharge of duties
BOD shall determine bonding requirement as to its
directors, officer and employers
If insured bank refused to comply with such
requirement, PDIC may contract such protection
for them payable to such bank
BOD is authorized to impose administrative fines
but no more than 3 times amount of damages
caused
XXIII. TRO and Injunction


Only CA can issue TRO, Preliminary Injunction
against PDIC. Prohibition shall apply to all cases
SC can issue restraining order if of extreme
urgency
69

Restraining order in violation of this shall be void
and judge who issued is suspended
Reorganization



PDIC may be reorganized in new staffing pattern.
No preferential right shall be enjoyed
Reorganization must be completed within 6
months from effectivity of PDIC law
BOD shall provide separation incentives
PDIC vs. CA



Even if the bank has knowledge that it shall be
under receivership, it does not ipso facto mean that
the depositors also has knowledge of such
Thus, they can still engage in business transactions
in course of business as long as they acted in GF
and did not know such closure
Thus, such deposits made in the period shall be
covered by deposit insurance
70
CHAPTER 11 – Anti-Money Laundering

RA 9160 – Act defining Crime of Money
Laundering and Providing Penalties and AMLL
I. Concepts



Money laundering – any act to conceal or disguise
the indemnity of illegally obtained proceeds so
that they appear to have originated from legitimate
sources
Even before AMLA, BSP issued various circulars
to avoid money laundering
Under AMLA, money laundering is a crime
whereby the proceeds of an unlawful activity are
transacted and making them appear to have
originated from legitimate sources
Three steps in Money Laundering (ML)
1. Placement – launderer inserts dirty money into a
legitimate financial institution
a. Often in bank deposits
b. Riskiest stage as there is large amounts
and banks are required to report highvalue transactions
2. Layering – sending money through various
financial transactions to change its form and make
it difficult to follow
a. Consists of bank-to-bank transfers
b. Change form of money
c. Most complex step as it makes dirty
money hard to trace
3. Integration – money re-enters in mainstream
economy in legitimate looking form
a. It appears to come from legal transaction
b. Involve final bank transfer into the
account of the launderer
Policies
1. Protect and preserve integrity and confidentiality
of bank accounts
2. Ensure that Philippines is not used as ML site
3. Consistent with foreign policy, extend
cooperation in transnational investigations
involving ML
Covered Institutions
1. Banks, non-banks, quasi-banks, trust entities and
subsidiaries and those regulated by BSP
2. Insurance companies
3. Securities dealers, brokers, salesmen and
investment houses
4. Mutual funds, closed-end-investment companies
5. Foreign exchange corporations, money chargers
6. Other entities dealing in currency, commodities or
financial derivatives
Covered and Suspicious transaction
1. Covered transactions: Any transaction in cash or
other monetary instrument involving amount of
500k within 1 banking day
2. Suspicious transactions:
a. No underlying legal or trade obligation or
economic justification
b. Client not properly indentified
c. Amount involved not commensurate to
financial capacity of client
d. Client’s transaction is structured to avoid
reporting requirements in AMLA
e. Circumstances relating to transaction
deviate from profile of client
f. Transaction is relate to any unlawful
activity
g. Transaction is analogous to above
Monetary Instrument
1. Coins or currency of legal tender whether in
Philippines or other country
2. Drafts, checks, notes
3. Securities or NI, bonds, commercial papers or
substitute instruments
4. Other similar instrument where title passes
through indorsement, assignment or delivery
Unlawful Activity
1.
2.
3.
4.
5.
6.
7.
8.
Kidnapping for ransom
CDDA
RA 3019
Plunder
Robbery and extortion
Jueteng and masio
Piracy in the high seas
Qualified theft
71
9.
10.
11.
12.
Swindling/estafa
Smuggling
Violation of Electronic Commerce
High-jacking and destructive arson perpetrated by
terrorists
13. Fraudulent practise of Securities Regulation Code
14. Felonies of similar nature in other countries
5.
6.
7.
8.
9.
10.
11.
How is ML committed
1. Any person knowing any monetary instrument
involves proceeds of unlawful activity and
attempts or actually transacts such instrument
2. Any person knowing that monetary instrument
involves proceeds of unlawful activity and
performs or fails to perform any act as a result of
which he facilitates ML
3. Any person knowing monetary instrument is
required to be disclosed and filed with AMLC but
fails to do so
II. Jurisdiction and Prosecution
12.
13.
IV. Prevention of Money Laundering
Customer Identification




Jurisdiction of ML Cases


RTC shall have jurisdiction of all ML
Those committed by public officers are under
jurisdiction of SB
Prosecution of ML


Any person can be convicted with both offense of
ML and the unlawful activity
Any proceeding relating to unlawful activity is
given precedence without prejudice to freeze order
III. Anti-Money laundering Council (AMLC)
Composition
1. Governor of BSP
2. Commissioner of Insurance Commission
3. Chairman of Securities and Exchange Commission
Functions
1. Must act unanimously in discharge of function
2. Require and received covered and suspicious
transactions
3. Issue orders to determine true indemnity of owner
4. Institute civil forfeiture proceedings
Cause filing of complaint in DOJ or OMB
Investigate suspicious and covered transactions
Apply freeze order in CA ex parte
Implement measures necessary to counteract ML
Receive and request from foreign states assistance
in AML operations
Develop education programs against ML
Enlist assistance of any branch of government to
promote AML operations
Impose administrative sanctions
Establish secretariat head for term of 5 years
Covered institutions shall establish true indemnity
of clients based on official documents
Maintain a system of verifying true identity of
clients
Anonymous accounts, those under fictitious names
and similar accounts are prohibited
Peso and foreign currency non-checking numbered
accounts are allowed
o BSP may conduct annual testing of such
accounts to determine identity
Record Keeping

Another way of preventing ML is this:
1. All records of all transactions of covered
institution must be safely stored for 5
years from date
2. In closed accounts, records on customer
identification and correspondence shall be
preserved for 5 years from date of closing
Reporting Covered and Suspicious Transactions
1. Covered institutions shall report to AMLC all
covered and suspicious transactions within 5 days
from occurrence therefore
a. There can be extension but not exceed 10
working days
2. Transaction be determined to be both covered and
suspicious, report such as suspicious
3. When reporting, covered institution is deemed not
to have violated:
a. RA 1405 – Act Prohibiting Disclosure of
Deposits,
72
b. RA 6426 - Foreign Currency Deposits,
c. RA 8791 – GBL
4. In case of violation, officer shall be criminally
liable except if in GF
5. When reporting covered or suspicious transactions,
covered institution is prohibited from
communicating to any person or media such fact
6. There can be no publication or airing of such
report by mass media, e-mail or other device
a. In violation, covered institution and media
shall be criminally liable
Republic vs. Eugenio
1. Whether or not the phrase “in cases of” requires
that there must be a pending trial in another court
for an unlawful activity
2. Whether or not the power to inquire in the bank
deposit can be done ex parte
First Issue

Freezing Monetary Instrument






One way to prevent ML
CA can issue freeze order which shall be effective
immediately
Requisites of freeze order:
1. Filed in CA
2. Upon application ex parte by AMLC
3. After determination that probable cause
exists where money instrument is related
to unlawful activity
Freeze order shall be effective for a period of 20
days unless extended by court
In all instances of unlawful activity, there can be
an ex parte freeze order
There is no need for full-blown trial


Second Issue





Authority to Inquire into Bank Deposits




To complete legal measure to prevent ML, AMLC
may examine deposits in any banking institution
upon order of court
It must be established that there is probable cause
that deposits relate to:
1. Unlawful activity or
2. Money laundering offense
No court order shall be required in unlawful
activities of:
1. Kidnapping with ransom
2. Violation of CDDA
3. High-jacking (RA 6235)
4. Destructive arson in connection with
terrorism
BSP may make emanation of deposits when
examination is made n course of period or special
examinations
No. The court ruled that there is no need that there
must be a pending trial for an unlawful activity in
another court before there can be a petition to
inquire to bank deposits
Otherwise, it would render it a limited too in aid of
litigation and wholly inutile
In such situation, it will not anymore as a
discovery tool





No. As a general rule, ex parte bank inquiry order
is not allowed
The proviso does not have the same word “ex
parte” unlike in the freeze order
Silence of the law does not automatically construe
it to have such ex parte
Also, in IRR of AMLA, there is no ex parte bank
inquiry order
However, bank inquiry order does not necessitate
any physical seizure
The reason of court is that, even if the accused is
notified that there will be inquiry due to the fullblown trial, the accused cannot hide his fraudulent
records as it is maintained in the bank and cannot
be erased
Thus, in such interpretation, bank inquiry order
have no ex parte orders, it does not weaken the
law
Also Bank Inquiry Order (BIO) not analogous to
search warrant
Moreover, the right to privacy must be upheld
under Bank Deposit Secrecy Act
Thus, there shall be no ex parte orders. But if the
exceptional unlawful activity is present, there can
be BIO without need of court order
V. Ex Post Facto Clause
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



Under AMLA no person can be prosecuted under
AMLA for acts committed prior to October 17,
2001
Also, BIO prior to October 17, 2001 is prohibited
as it is an ex post facto
o It deprives a persons of some lawful
protection to which he has become entitled
However, those accounts created prior to October
17, 2001 are still under the coverage of AMLA
Otherwise, the offenders can mere circumvent by
laundering into an account created prior to
October 17, 2001
VI. Forfeiture
Civil Forfeiture

Where there is a covered transaction report made
and court ordered seizure or monetary instrument,
rules of civil forfeiture applies
Claim on Forfeiture Assets
1. When court issued order of forfeiture, offender
may apply for a declaration that the same
legitimately belongs to him
2. Verified petition filed in court which rendered
judgment of conviction within 15 days from order


Powers of AMLC to act on request of foreign state
1. AMLC may execute request for assistance by:
a. Tracking down, freezing proceeds of
unlawful activity
b. Giving information
c. Apply order of forfeiture
2. Court will issue such order only if application is
accompanied by:
a. Authenticated copy of order of court of
requesting state
b. Certification by competent court of
requesting state that conviction or order is
final
Obtaining assistance from foreign states

Payment in Lieu of Forfeiture

Instead of order of forfeiture, court may order
offender to pay amount equal to value of monetary
instrument when said order cannot be imposed
because:
1. Monetary instrument cannot be located
with due diligence
2. It was substantially altered or destroyed
3. It has been concealed, removed or
converted from being found
4. Located outside the Philippines or outside
jurisdiction of court
5. It has been commingled with other
monetary instruments
VII. Mutual Assistance among States
Request from Foreign State
When foreign state makes a request for
investigation or prosecution of ML, the AMLC
may accept or refuse the same for valid reasons
Principles of mutuality and reciprocity shall at all
times recognized
AMLC may request assistance in:
a. Tracking down, freezing, proceeds of
unlawful activity
b. Obtain information
c. Apply with proper foreign court an order
to enter premises or seize documents and
objects in request
d. Applying for order of forfeiture of any
monetary instrument
• Must be accompanied by
authenticated copy of forfeiture by
RTC and affidavit of clerk of
court
Limitation on Request for Mutual Assistance

AMLC may refuse to comply with request for
assistance if it contravenes the Constitution or
execution of require prejudicial to national interest
unless there is a treaty specifically provided
Requirement for Request for Mutual Assistance from
Foreign state
1. Confirm investigation or prosecution being
conducted
2. State grounds which person is investigated
74
3. Give sufficient particulars to identity of person
and covered institution
4. Ask from covered institution any information
necessary
5. Specify manner and to whom information is to be
produced
6. Give all particulars necessary for issuance by the
court of requesting State certain order
7. Contain other information that may assist
execution of request
1. AMLA shall not be used for political persecution
or to hamper competition in trade
2. No case of ML may be filed against any candidate
during election period
X. Implementing Rules and Regulations (IRR)


Authentication of Documents


A document is authenticated if:
a. Signed or certified by judge of requesting
state
b. Authenticated by oath of witness or sealed
with official seal of state
Certificate of authentication may also be made by
secretary of embassy
Extradition

Philippines shall negotiate inclusion of ML
offenses among extraditable offenses in future
treaties
VIII. Penalties
1. In ML: 7 - 14 years imprisonment and 3M
2. In Failure to Keep Records: 6 months – 1 year
imprisonment and 100k-500k
3. In Malicious reporting: 6 months - 4 years
imprisonment and 100k-500k
a. If juridical person, officers shall be
punished and revoke such license
b. If an alien, deported after service
c. In public official, shall have PAD or TAD
d. If such public officials refuse to testify,
same penalties
Breach of Confidentiality


For breach under AMLA, penalty is 3-8 years with
fine of 500k-1M
Responsible reporter, writer, president or publisher
shall be liable
IX. Prohibition against Political Harassment
BSP, Insurance Commission and SEC shall
promulgate IRR of AMLA subject to approval of
Congressional Oversight Committee
Covered institutions shall formulate their
respective ML prevention programs
XI. Congressional Oversight Committee (COC)
Composition



7 members from Senate and 7 members from HR
Members of Senate shall be appointed by Senate
president in proportional representation
This shall also be done in HR
Powers of COC

COC shall have power to promulgate own rules, to
oversee implementation of AMLA and review IRR
XII. Rules and Regulations for Banks
1. When establishing business relations in opening
deposits accounts, banks should take reasonable
measure to establish identity of client. In corporate
entities, following shall be made:
a. Verification of legal existence of client
b. Verification of authority of person
purporting to act on behalf of client
2. In case of doubt as whether purported clients are
acting for themselves, reasonable measures shall
be taken
3. Anonymous or accounts under fictitious names are
not allowed. In case such is allowed, banks must
still ensure identity of client in some other
document
4. Identity of existing clients should be renewed at
least every other year
5. All necessary records should be maintained for at
least 5 years
6. Special attention shall be given to complex,
unusual large and all unusual patterned
transactions with no lawful purpose
75
7. Other suspicious transactions not involving
deposits should still be reported to proper
authorities
8. Banks should not or avoid transact with criminals
9. Programs against ML should be developed:
a. Development of internal policies and
hiring high standard employees
b. Ongoing employee training
c. Audit function to test system
76
CHAPTER 12 - Special Purpose Vehicle
A. Policies of the State
 Develop and maintain a sound financial sector for
the country
 Address the non-performing asset problems of the
financial sector
 Encourage private sector investments in nonperforming assets
 Eliminate existing barriers in the acquisition of
non-performing assets
 Help in the rehabilitation of distressed business
with the end in view of contributing to economic
value added
 Improve the liquidity of the financial system
which can be harnessed to propel economic
growth
B. Definitions
 Act - Special Purpose Vehicle Act of 2002
 Appropriate Regulatory Authority agency/authority having jurisdiction over the FI's
operations, which shall be the following
 Department of Finance (DOF) - in case of the
PDIC and GOCCs, in consultation with other
agencies that have primary jurisdiction over the
said FIs whenever deemed appropriate by the DOF
 Bangko Sentral ng Pilipinas (BSP) - in the case of
banks which include LBP and DBP, and trust and
QB functions of financing companies and
investment houses licensed by the BSP
 Commission - in case of financing companies and
investment houses, except their trust and QB
functions or any qualified entity not under the
DOF or BSP
 Audited Financial Statements - a set of financial
reports consisting of balance sheet, income
statement, statement of changes in equity and cash
flow statement, audited by a Commissionaccredited independent CPA
 Certificate of Eligibility or COE - certificate
issued by the Appropriate Regulatory Authority as
to the eligibility of the NPL or ROPOA for
purposes of availing of the tax exemptions and
privileges
 Code - BP 68 aka the Corporation Code of the
Philippines
 Commission - Securities and Exchange
Commission
 Dation in Payment (dacion en pago) - a payment
whereby property, whether real or personal,
tangible or intangible, is alienated in favor of the

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




creditor, which could either be an FI or an SPV in
satisfaction of an NPL
FIA - Foreign Investment Act, RA 7042
FI or Financial Institutions - credit granting
institutions which shall be limited to the following
1. the BSP
2. a bank as defined under RA 8791, aka
“The General Banking Law”
3. a financing company as defined under RA
8556 aka “The Financing Company Act of
1998”
4. an IH as defined in PD 129 aka “The
Investment Houses Law”
5. Government Financial Institutions or GFIs,
shall be limited to the PDIC, LBP and
DBP
6. GOCCs
7. other institutions licensed by the BSP to
perform QB
Investment Unit Instruments or IUIs - participation
certificates, debt instruments or similar
instruments issued by the SPV and subscribed by
the Permitted Investors
o It shall not include the instruments to be
issued by the SPV to the selling FIs
o SPV shall not be considered as deposit
substitutes and shall not form part of the
capital stock of SPV
Non-Bank Financial Institutions performing QB
functions or NBQBs - financing companies, IH,
and other institutions licensed by the BSP to
perform QB functions
Non-Performing Assets or NPA - consists of NPLs
and ROPOAs by the F.I.s, certified to be eligible
as such ARA
Non-Performing Loans or NPLs - loans and
receivables such as mortgage loans, unsecured
loans, etc, whose principal and/or interest has
remained unpaid for at least 180 days after they
have become past due or any of the events of
default under the loan agreement has occurred as
of June 30, 2002
ROPOA - Real and other properties owned or
acquitted by an FI in settlement of loans an
receivables which have been acquired by way of
Dacion en pago or judicial or extra judicial
foreclosure or execution of judgment as of June 30
2002 PROVIDED, the property is deemed
acquired
1. on the date of notarization of the Deed of
Dacion
77
2. on the date of the entry of judgment in
case of judicial foreclosure
3. on the date of notarization of the Sheriffs
Cert in case of extra judicial foreclosure
 True Sale - a sale wherein the selling FI transfers
or sells its NPAs without recourse for cash or
property to an SPV with the ff results
o The transferor relinquishes effective
control over the transferred NPAs
o The transferred NPAs are legally isolated
and put beyond the reach of the transferor
and its creditors
C. Organization
 An SPV shall be organized as a stock corporation
in accordance with the Corporation Code and with
these Rules
o Provided that if the SPV will acquire land,
at least sixty percent (60%) of its
outstanding capital stock shall be owned
by the Philippine Nationals pursuant to the
FIA
D. Powers of an SPV
 An SPV shall be incorporated primarily to invest
in, or acquire NPAs of F.I.s.
Secondary powers
1. Engage in 3rd parties to manage, operate, collect
and dispose of NPAs acquired from an FI
2. Rent lease, hire, pledge, mortgage, transfer, sell,
exchange, usufruct, secure, securitize, collect rents
and profits and other similar acts concerning its
NPAs acquired from FIs
3. In case of NPLs, to restructure debt, condone debt
and undertake other restructuring related activities
4. Take, transfer shares or buy shares issued by the
borrower for the purpose of business
reorganization or rehabilitation of the borrower
5. Enter into dation in payment, foreclose judicially
or extrajudicially and other forms of debt
settlement involving NPLs
6. Spend funds to renovate, improve, complete or
alter its NPAs acquired from an FI
7. Issue equity or participation certificates
8. Borrow money and issue other instruments or
paying operational and administrative costs
9. Guarantee credit, accept or intervene for honor the
bills of the borrowers
10. Advance funds to borrowers where required by an
acquired asset or any debt
11. Entrust to 3rd parties asset servicing company, the
collection and receipt of debt payments for debts
under restructuring or business reorganization
E. Period for Filing Applications
 18 months from date of approval of the IRR by the
Congressional Oversight Committee created in
Sec 23 of the Act
Registration Requirements
 An SPV shall submit to the SEC the ff docs for
incorporation:
1. Name verification slip
2. Articles of Incorporation and By laws
3. Treasurer's affidavit/ authority to verify
bank account
4. Bank Certificates or Deposits
5. Written undertaking to change corporate
name by any incorporator or director
6. Registration Data Sheet
F. Authorized, Subscribed and Paid-Up Capital of the SPV
 An SPV shall have:
1. Minimum authorized capital stock of
500Mphp
2. Minimum subscribed capital stock of
125Mphp
3. Minimum paid-up capital of 31.25M
 This shall be in form of cash
 If an SPV issue IUIs or offers other securities to
the public, it shall maintain a net worth based on
its Audited Financial Statements in an amount
equivalent to not less than its minimum paid-up
capital
G. Submission of SPV Plan – Contents
1. Investment policies
2. Contribution plan
3. Features of the IUIs
4. Timetable of Issuance
5. Rights of the holders of IUIs
6. Draft agreements for the appointment of trustees
and agents
7. Appointment or engagement of external auditor
8. Roles and Responsibilities of the trustee, advisors,
loan servicers and property managers
9. Draft form of financial reports of the SPV
10. Details of the distribution policies
11. Methods for the increase and decrease of future
fund contributions
12. Methods for the alteration or modification of the
approved SPV plan
13. Methods for the liquidation and distribution of
assets to the holders of IUIs
14. Details of credit enhancements
78
15. such other documents or information as may be
required by the SEC
H. Approval
 Upon approval of the SPV Plan, the Commission
shall issue an Approval Certificate stating that the
application has been approved and the IUIs may
be issued
I. Issuance of IUIs
 Registration Requirements
1. All IUIs proposed to be sold or distributed
within the Philippines shall be duly
registered with the SEC
2. Registration statement including:
1. business of the issuer
2. use of proceeds
3. risk factors
4. legal proceedings
5. market of securities
6. management's discussion of
financial condition and results of
operations
7. directors and officers
8. securities ownership
9. certain related party transactions
10. audited and interim financial
statements in accordance with
SRC rule 68
3. In addition, the ff information shall be
disclosed in the registration statements of
an SPV
a. details of the SPV plan
b. details of credit enhancements
c. detailed description of the assets
or loan constituting the pools of
assets
d. rights and obligations of the
selling FI assumed by the SPV
e. description of any relationship or
interest of the selling FI parent
f. Incentives and exemption
privileges
4. The SPV shall also submit a certification
from the FI that the affected borrowers of
the NPLs and all persons holding prior
encumbrances upon the assets
5. SPV shall pay a registration fee of 1/10 of
1% of the aggregate offering price of the
IUIs subject to the diminishing fee set by
the Commission
6. SPV shall cause the publication of a notice
of filing of registration statement its
expense
7. The Commission may audit the financial
statements, assets and other information of
an SPV applying for registration
8. Upon the registration statement being
declared effective by the Commission, the
sale of the securities subject thereto shall
be commence within 2 business days and
be counted until the end of the offering
period or until the sale has been
terminated by the action of the issuer
9. The SPV shall ensure wide dissemination
of preliminary and final prospectuses
10. Written notification shall be given to the
SEC within 3 business days from
completion or termination of the offering
by the issuer, including therein the number
of securities sold
Amendments or Rejection
 Within 45 days after the date of filing of the
registration statement, or at such later date to
which the issuer has consented, the SEC shall
declare the registration statement effective or
rejected
 UNLESS the applicant is allowed to amend the
registration statement
 After which, the SEC shall determine if it should
be effective or rejected
 The SEC may reject an RS and refuse registration
thereunder or revoke the effectivity of an RS and
the registration of the security thereunder after due
notice and hearing by issuing an order to such
effect, setting forth its findings in respect thereto if
its finds that:
 The issuer:
1. has been judicially declared insolvent
2. violated any provision of the Corporation
Code as well as orders of the SEC
3. has been or engaged or is about to engage
in fraudulent transactions
4. he has made any false or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities
5. has failed to comply with any requirement
that the SEC ma impose as a condition for
registration of the security for which the
registration statement has been filed
79



The RS is on its face incomplete or inaccurate in
any material aspect or include any untrue
statement or other misleading statements
The issuer, or any D, O, or controlling person of
the issuer or a person performing a simple function
has been convicted by a competent judicial or
administrative body, upon plea of guilty, or
otherwise, of an offense involving moral turpitude
and/or fraud or is enjoined or restrained by the
SEC for violation of such
If the SEC deems it necessary, it may issue an
order suspending the offer and sale of the
securities pending any investigation
Issuance of Securities of the Public without prior
registration
 Any SPV that offers to sell or distribute its IUIs to
the public within the Phils without prior
registration shall be subject to the penalties
provided of the SRC
 The imposition of the foregoing administrative
sanctions shall be without prejudice to the filing
criminal charges against the individuals
responsible for the violation


Tax Treatment of IUIs
 Since IUIs are not considered as deposit
substitutes under the Act, the interest or other
monetary benefit derived from IUIs is not subject
to the 20% final withholding tax under the NIRC
 However, the IUI and any income arising from the
IUIs shall be subject to the normal tax and/or such
other applicable taxes, including but not limited to,
documentary stamp tax, imposed under the NIRC
and its implementing regulations
J. Permitted Investors
 May acquire or hold IUIs of an SPV in the
minimum amount of 10Mphp provided:
1. that an SPV shall not be authorized to
acquire the IUIs of another SPV
2. that the Parent, Subsidiaries, Affiliates or
DOSRI shall not acquire, hold, directly or
indirectly, the IUIs of the SPV that
acquired the NPAs of the FI
 Affiliate - a juridical person, directly or indirectly,
thru one or more intermediaries, is controlled by
or is under common control with selling FI or its
affiliates
 Control - exists when the Parent owns directly or
indirectly thru subsidiaries more than one half of

the voting power of an enterprise it may also exist
when there is:
1. power over more than ½ of the voting
rights by virtue of an agreement with other
investors
2. power to govern the financial and
operating policies of the enterprise under a
statute or an agreement
3. power to appoint or remove the majority
of the members of the BoD or equivalent
governing body
4. power to cast the majority of votes at
meetings of the BoD or equivalent
governing body
5. any other arrangement similar to any of
the above
Parent - a juridical person who has control over
another juridical person directly or indirectly thru
one or more intermediaries
Related Interest:
1. entities in which the amount of investment
of the selling FI is more than 20% but less
than 50% of the outstanding capital stock
thereof
2. trusts for the benefit of employees such as
pension and profit sharing trusts that are
managed by or under the trusteeship of the
selling FI
3. provident and other employees/officers'
benefit funds of the selling FI
4. principal owners of the selling FI
5. management of the selling FI
6. members of the immediate families of the
principal owners and management of the
selling FI
7. other parties with which the selling FI
may deal with if one party controls or can
significantly influence the management or
operating policies of the other to an extent
that one of the transacting parties might be
prevented from fully pursuing its own
separate interests
Subsidiary of a specified person is an affiliate
controlled by such person D/I thru one or more
intermediaries
K. Notice and Manner of Transfer of Assets
Prior Notice
 No transfer of NPLs to an SOV shall take effect
unless the FI concerned shall give prior notice to
the borrowers of the NPLs and all persons holding
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prior encumbrances upon the assets mortgaged or
pledged
1. must be in writing by registered mail
2. the borrower and the FI shall be given a
period of at most 90 days upon receipt of
notice to restructure or renegotiate the
loan under such terms and conditions as
may be agreed upon by the borrower and
the FI concerned
Procedures on the Transfer of Assets to the SPV
 An FI who wants to apply must file an application
shall be filed for each transfer of assets with the
Appropriate Regulatory Authority having
jurisdiction. It must be accompanied with a
certification of the FI that:
1. the assets to be sold/transferred are NPAs
as defined under the SPV Act of 2002
2. the proposed sale/transfer of said NPAs is
under a True Sale
3. the notification requirement to the
borrowers has been complied with
4. the maximum 90 days period for
renegotiation and restructuring has been
complied with
 This must be signed by a senior officer with a rank
of at least Senior VP or equivalent provided such
officer is duly authorized by the FI BoD or the
Country Head, in case of foreign banks
 the 3rd and 4th items shall not apply if the NPL
has become a ROPOA after June 30, 2002
Issuance of the COE
 The ARA shall issue to the borrower a COE
within 45 days from the date of application
 said COA shall always be required by the BIR for
purposes of availing the tax exemptions and other
privileges under the Activities
 The ARA shall furnish the SEC and the BIR a
duplicate copy of said COE. The ARA and BIR
shall coordinate to ensure the integrity of the COE
Subsequent Notice
 after the sale/transfer of the NPLs, the transferring
FI shall inform the borrower in writing at the last
known address of the fact of the sale/transfer of
the NPLs
Subsequent Transfers
 Each COE shall be valid for only one transfer. All
subsequent transfers shall require a separate COA
from the ARA
Nature of Transfer
 in the nature of True Sale
 any transfer of NPAs not in the nature of True Sale
shall not qualify for tax exemptions and fee
privileges granted under the Act
 The transfer by an FI of its NPAs to an SPV shall
be considered NOT A TRUE SALE if the FI:
1. invests in or acquires, D/I, the IUIs issued
by the SPV that acquired its NPAs
2. has d/i management of the transferee SPV
3. has any of its directors, officers,
employees on the board of the transferee
SPV
4. has obligated to repurchase or
substitute/exchange the NPA or any part
of the pool of NPAs at any time, except in
cases of a breach of representation or
warranty of the FI
5. Has RI with the transferee SPV
6. Possesses a claim of beneficial ownership
of more than 5% of the transferee SPV
 Following shall NOT presumed to be a true sale if
the FI:
1. Purchases/invests in the IUIs of the SPV
that acquired its NPAs thru its trust
department including the trust department
of its Subsidiaries/Affiliates, Parent bank
and the trust department of the Parent
bank's subsidiaries/affiliates
2. Is made the beneficiary of a trust used as a
vehicle for purchasing and securitizing the
NPAs
3. Pays further expenses in relation to the
NPAs after said NPAs have been
sold/transferred to the transferee SPV
4. Extends any credit facility, guaranty, or
any similar financial transaction to the
transferee SPV
5. Extends any credit facility, guaranty or
any similar financial transaction to any
party for the purpose of investing in the
equity or IUIs of the SPV, or for acquiring
the NPAs from the SPV
6. Extends any CF, F, AST to any party for
the purpose of acquiring the NPAs from
the transferring FI
7. Acts as trustee (FIs trust dept) or if the
Trust dept of any of the FIs
subsidiaries/affiliates, parent bank or
parent banks, subsidiaries/affiliates acting
as trustee in the securitization of NPAs
that it has transferred to the SPV
81

8. Accepts as collateral for a loan extended
by said FI the equity shares and IUIs of
the SPV that acquired its NPAs
9. Enters into buy-back and other similar
arrangements, or financial derivative
transactions with similar effect, involving
the NPAs or the securities backed by such
NPAs
10. Enters into any other transaction where the
FI retains effective control over the
transferred NPAs or shares in the losses of
the SPV
“Any party” includes proxies, nominees, and
voting trustees. The extension of credit to an
individual for the purpose of acquiring a single
family residential unit ROPOA or NPL secured by
real estate mortgage on a residential unit shall be
allowed.
Penalties
 prescribed under Sec 25 of the Act without
prejudice to other penalties that may be imposed
by the ARA of the transferring FI under applicable
laws
 The SPV shall assume all Rights and Obligations
of the FI over the transferred NPA
N. Tax Exemptions and Fee Privileges
 Transactions covered
1. the transfer of the NPL by the FI to an
SPV
2. transfer of the ROPOA by the FI to an
SPV
3. Dacion en pago (DEP) of the NPL by the
borrower to the FI
4. DEP of the NPL by a 3rd party, on behalf
of the borrower, to the FI
5. transfer of NPL by the FI to an individual
6. transfer of the ROPOA by the FI to an
individual
7. transfer of the NPL by the SPV to a
3rd party
8. transfer of the ROPOA by the SPV to a
3rd party
9. DEP of the NP by the borrower to the
SPV
10. DEP of the NPL by a 3rd party on behalf
of the borrower to the SPV
11. transfer of the NPL by the individual to a
3rd party
12. transfer of ROPOA by the individual to a
3rd party




Provided that these tax exemptions and reduction
of fees shall apply only upon compliance with the
following requirements
1. NPA has been certified by the ARA as an
NPL or ROPOA as of 06/30/02 provided
that for tax purposes, a property shall be
deemed acquired after the lapse of the
redemption period in cases where such
period still exists
2. all transfer taxes and registration fees have
been paid or subsequently paid upon
assessment on ROPOAs who redemption
period has lapsed as of 063002 where
legal title has not been transferred in the
name of the FI
3. The properties acquired by an SPV from
the GFIs or GOCCs which are devoted to
socialized or low-cost housing shall not be
converted to other uses
Tax exemption privileges
1. Documentary stamp tax
2. Capital gains tax imposed on the transfer
of lands and other assets treated as capital
assets
3. Credible withholding income taxes
imposed on the transfer of land and or
buildings treated as ordinary assets
4. the VAT or gross receipts
Reduction of Fees
1. 50% of the applicable mortgage
registration and transfer fees on the
transfer or real estate mortgage and chattel
mortgage registration to and the
SPV/individual, imposed in accordance
with the existing circular of LRA
2. 50% of the filing fees for any foreclosure
initiated by the SPV/individual in relation
to any NPA acquired from an FI
3. 50% of the registration fees prescribed
Manner of Claiming Tax Exemptions
o shall provide the BIR with the appropriate
certificate of eligibility
o In case of the transfer of real property or
shares, the CIR or his duly authorized
representative shall issue a Certificate
(Cert Authorizing Registration/ Tax
Clearance Cert) that such transfer has been
reported and is tax-exempt
Q. Abuse of Tax Exemptions and Privileges
82


•
Any person, natural or juridical, who shall benefit
from the said exemptions and privileges without
being entitled thereto, shall be liable.
In addition, he shall refund the Government
double the amount of he was exempted from
plus12% interest per annum
R. Redemption Periods
 provided by the following: Sec 47 of RA 897 or
the GBL of 2000 and Rules of Court
S. Books of Accounts and Records
 Internal Record Keeping and Accounting Controls
1. An SPV must make and keep books,
records and accounts which reflect the
transactions and dispositions of its assets,
it minutes of meetings and other business
transactions
2. It shall advise and maintain a system of
internal accounting controls sufficient to
provide reasonable assurances that
a. The transactions and access are
pursuant to management
authorization
b. Financial statements are prepared
in conformity with the generally
accepted accounting principles
c. Recorded assets are compared
with existing assets at reasonable
intervals and differences
reconciled
 External Auditor - shall be appointed by SPV
accredited by the Commission
 Inspection of Books and Records – those who has
a right to inspect:
1. Stockholder of SPV or Holder of an IUI at
a reasonable hour of business
2. Authorized representatives of the
Commission, BIR or the BSP any time
3. Failure to comply with this right will be a
ground for the suspension order on the
offering of the IUIs
T. Reports
 Reports to be submitted by SPV to the
Commission
1. As Stock Corporation
• General Information Sheet (GIS)
within 30 days from stockholder's
meeting date


Audited Financial Statements
within 120 days from the end of
the fiscal year
2. As Issuer of Securities to the Public
a. Annual Report on SEC Form 17A
b. Quarterly Report on SEC Form
17Q
c. A current report on SEC Form
17C
d. Monthly Reports on total
issuances and amounts of IUIs
3. Audited Financial Statements - The filing
of SEC Form 17A shall suffice
4. Violations - any violation of the above
due to the failure of the SPV, it shall be
subject to penalty provided by SRC, this
Code, and their IRR
Reports to be submitted to the BIR by an SPV for purposes of implementing the tax provisions of
the Act
Reports filed to the BSP
o By SPV
1. Report on any sale/transfer to any
party of NPLs and ROPOAs
acquired from banks and NQBQs
quarterly
2. Report on the latest appraised/ fair
market value of ROPOAs and real
estate properties/ chattels used as
collateral and NQBQs semiannually
o By Selling Financial Institution - monthly
report regarding the actual sale/ transfer to
an SPV
U. Penalty in case of violation of the provisions of the Act
 Fine: Not less than 50k not more than 1M, or
 Imprisonment: not less than 6 years 1 day not
more than 12 years
 OR BOTH
 If the penalty was committed by a corporation,
association, partnership etc., the one responsible
would be those officers who participated in the
commission of the crime or who shall have
knowingly permitted or failed to prevent the
commission
 If the offender is an alien, he shall, in addition to
the prescribed penalties, be deported without
further proceedings after serving the sentence
 If the offender if a public official, or employee, in
addition to the penalties above, the penalty of
absolute/temporary DQ shall apply