Banking and Allied Laws Reviewer

COMMERCIAL LAW REVIEW 2014
Banking Laws based on Catindig Syllabus

________________________________________________________________________

By: Sieramon A. Lacambra
Page | 1
General Banking Law of 2000
(RA 8791)
Policy
To promote and maintain a stable and efficient
banking and financial system that is globally
competitive, dynamic and responsive to the
demands of a developing economy. (Sec. 2)
CONCEPT OF INTERMEDIATION
The process performed by banks of taking in
funds from a depositor and then lending them
out to a borrower. The banking business
thrives on the financial intermediation abilities
of financial institutions that allow them to lend
out money at relatively high rates of interest
while receiving money on deposit at relatively
low rates of interest.(this is not the legal
definition).

DEMAND DEPOSITS AND DEPOSIT
SUBSTITUTES
DEMAND DEPOSITS deposits payable on
demand and transferable by check or otherwise
usable in making payments. (Bangko Sentral
ng Pilipinas)
DEPOSIT SUBSTITUTES instruments
used as an alternative form of obtaining funds
from the public other than deposits, through
the issuance, endorsement or acceptance of
debt instruments for the borrowers own
account. These represent all types of money
market borrowings by banks like promissory
notes, repurchase agreements, commercial
papers/securities and certificates of
assignment/participation with recourse.
(Bangko Sentral ng Pilipinas)

CLASSIFICATION OF BANKS
Classification of Banks (Sec. 3.2)

1) Universal Banks. (UB) These used to be
called expanded commercial banks and their
operations are primarily governed by the GBL.
They can exercise the powers of an investment
house and invest in non-allied enterprises.
They have the highest capitalization
requirement.

2) Commercial Banks. (KB) These are
ordinary or regular commercial banks, as
distinguished from a universal bank. They
have a lower capitalization requirement than a
UB and cannot exercise the powers of an
investment house and invest in non-allied
enterprises.

3) Thrift Banks. These are
a. savings and mortgage banks;
b. stock savings and loan associations; and
c. private development banks

4) Cooperative Banks.
These are banks organized primarily to make
financial and credit services available to
cooperative banks.

5) Islamic Banks
These are banks the business dealings and
activities of which are subject to the basic
principles and rulings of Islamic Sharia. The
Al Amanah Islamic Investment Bank of the
Philippines, which was created by RA 6848, is
the only Islamic bank in the country at this
time.

6) Rural Banks
Mandated to make needed credit available and
readily accessible in the rural areas on

________________________________________________________________________

Page | 2
reasonable terms and which are primarily
governed by the Rural Banks Act of 1992 (RA
7353)

7) Other classifications of banks
As determined by the Monetary Board, i.e.,
Philippine Veterans Bank (RA 3518),
Landbank of the Philippines (RA 3844),
Development Bank of the Philippines (RA 85)

Quasi-banks" (QB) refer to entities engaged
in the borrowing of funds through the
issuance, endorsement or assignment with
recourse or acceptance of deposit substitutes
(as defined inSec. 95 RA 7653, the New
Central Bank Act) for purposes of relending or
purchasing of receivables and other
obligations. (last par of Sec. 4)

rent power of UBs and KBs.
Thusthey do not require separate licensing or
authorization for this purpose.Thus, they can
take deposit substitutes for
relending.(Morales)

DISTINCTION BETWEEN UNIVERSAL
BANKS AND COMMERCIAL BANKS

UNIVERSAL
BANKS
COMMERCIAL
BANKS
exercise the powers
of an investment
house and invest in
non-allied
enterprises
These are
REGULAR
COMMERCIAL
BANKS; CANNOT
EXECISE POWERS
of an investment
house in non-allied
enterprises
Have the largest
CAPITALIZATION
requirement by the
BSP
LOWER
CAPITALIZATION
Can engage in
QUASI-BANKING
FUNCTIONS
Can also engage in
quasi-banking
functions

DISTINCTION BETWEEN UNIBANK or
COMMERCIAL BANK AND OTHER
BANKS

SECTION 33. Acceptance of Demand
Deposits. A bank other than a universal or
commercial bank cannot accept or create
demand deposits except upon prior approval
of, and subject to such conditions and rules as
may be prescribed by the Monetary Board

DISTINCTION BETWEEN ALLIED AND
NON-ALLIED ENTERPRISES

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

ALLIED UNDERTAKINGS: these banks may
invest in equities of allied undertakings as may
be approved by the MB, provided that the total
investment shall not exceed 25% of the net
worth of the bank,, and the equity investment
in any single enterprise shall not exceed 15%
of the net worth of the bank, which shall
remain a minority holding in that
enterprise.(Sec.31)

SECTION 31. Equity Investments of a
Commercial Bank in Financial Allied
Enterprises. A commercial bank may own
up to one hundred percent (100%) of the
equity of a thrift bank or a rural
bank.

Where the equity investment of a commercial
bank is in other financial allied enterprises,
including another commercial bank, such
investment shall remain a minority holding in
that enterprise.


________________________________________________________________________

Page | 3
INSTITUTIONS SUBJECT TO BSP
SUPERVISORY AND REGULATORY
POWERS

SECTION 4. Supervisory Powers. The
operations and activities of banks shall be
subject to supervision of the Bangko Sentral.
"Supervision" shall include the following:

4.2. The conduct of examination to determine
compliance with laws and regulations if the
circumstances so warrant as determined by the
Monetary Board;

4.3. Overseeing to ascertain that laws and
regulations are complied with;

4.4. Regular investigation which shall not be
oftener than once a year from the last date of
examination to determine whether an
institution is conducting its business on a safe
or sound basis: Provided, That the
deficiencies/irregularities found by or
discovered by an audit shall be immediately
addressed;

4.5. Inquiring into the solvency and liquidity
of the institution (2-D); or

4.6. Enforcing prompt corrective action. (n)

The Bangko Sentral shall also have
supervision over the operations of and exercise
regulatory powers over quasi-banks, trust
entities and other financial institutions which
under special laws are subject to Bangko
Sentral supervision. (2-Ca)

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

4.1. The issuance of rules of conduct or the
establishment of standards of operation for
uniform application to all institutions or
functions covered, taking into consideration
the distinctive character of the operations of
institutions and the substantive similarities of
specific functions to which such rules, modes
or standards are to be applied;

R.A. No. 7653(The NCBA)
Section 25. Supervision and Examination. -
The Bangko Sentral shall have supervision
over, and conduct periodic or special
examinations of, banking institutions and
quasi-banks, including their subsidiaries and
affiliates engaged in allied activities.
For purposes of this section, a
subsidiary means a corporation more than fifty
percent (50%) of the voting stock of which is
owned by a bank or quasi-bank and an affiliate
means a corporation the voting stock of which,
to the extent of fifty percent (50%) or less, is
owned by a bank or quasi-bank or which is
related or linked to such institution or
intermediary through common stockholders or
such other factors as may be determined by the
Monetary Board.
The department heads and the
examiners of the supervising and/or examining
departments are hereby authorized to
administer oaths to any director, officer, or
employee of any institution under their
respective supervision or subject to their
examination and to compel the presentation of
all books, documents, papers or records
necessary in their judgment to ascertain the
facts relative to the true condition of any
institution as well as the books and records of

________________________________________________________________________

Page | 4
persons and entities relative to or in connection
with the operations, activities or transactions
of the institution under examination, subject to
the provision of existing laws protecting or
safeguarding the secrecy or confidentiality of
bank deposits as well as investments of private
persons, natural or juridical, in debt
instruments issued by the Government.
No restraining order or injunction shall
be issued by the court enjoining the Bangko
Sentral from examining any institution subject
to supervision or examination by the Bangko
Sentral, unless there is convincing proof that
the action of the Bangko Sentral is plainly
arbitrary and made in bad faith and the
petitioner or plaintiff files with the clerk or
judge of the court in which the action is
pending a bond executed in favor of the
Bangko Sentral, in an amount to be fixed by
the court. The provisions of Rule 58 of the
New Rules of Court insofar as they are
applicable and not inconsistent with the
provisions of this section shall govern the
issuance and dissolution of the restraining
order or injunction contemplated in this
section

AUTHORITY TO ENGAGE IN BANKING
FUNCTIONS

Section 6. Authority to Engage in Banking and
Quasi-Banking Functions. - No person or
entity shall engage in banking operations or
quasi-banking functions without authority
from the Bangko Sentral: .Provided, however,
That an entity authorized by the Bangko
Sentral to perform universal or commercial
banking functions shall likewise have the
authority to engage in quasi-banking functions.
The determination of whether a person or
entity is performing banking or quasi-banking
functions without Bangko Sentral authority
shall be decided by the Monetary Board. To
resolve such issue, the Monetary Board may;
through the appropriate supervising and
examining department of the Bangko Sentral,
examine, inspect or investigate the books and
records of such person or entity. Upon
issuance of this authority, such person or entity
may commence to engage in banking
operations or quasi-banking function and shall
continue to do so unless such authority is
sooner surrendered, revoked, suspended or
annulled by the Bangko Sentral in accordance
with this Act or other special laws.
The department head and the examiners of the
appropriate supervising and examining
department are hereby authorized to administer
oaths to any such person, employee, officer, or
director of any such entity and to compel the
presentation or production of such books,
documents, papers or records that are
reasonably necessary to ascertain the facts
relative to the true functions and operations of
such person or entity. Failure or refusal to
comply with the required presentation or
production of such books, documents, papers
or records within a reasonable time shall
subject the persons responsible therefore to the
penal sanctions provided under the New
Central Bank Act.
Persons or entities found to be performing
banking or quasi-banking functions without
authority from the Bangko Sentral shall be
subject to appropriate sanctions under the New
Central Bank Act and other applicable laws.
REQUISITES(Sec.8)
Section 8.
Organization. - The Monetary Board may
authorize the organization of a bank or quasi-
bank subject to the following conditions:

________________________________________________________________________

Page | 5
1. 8.1 That the entity is a stock corporation
(7);
2. not a close corporation: 8.2 That its funds
are obtained from the public, which shall mean
twenty (20) or more persons (2-Da); and
8.3 That the minimum capital requirements
prescribed by the Monetary Board for each
category of banks are satisfied. (n)
No new commercial bank shall be established
within three (3) years from the effectivity of
this Act. In the exercise of the authority
granted herein, the Monetary Board shall take
into consideration their capability in terms of
their financial resources and technical
expertise and integrity. The bank licensing
process shall incorporate an assessment of the
bank's ownership structure, directors and
senior management, its operating plan and
internal controls as well as its projected
financial condition and capital base.
3. par value stock(Sec. 9)
Section 9. Issuance of Stocks. - The Monetary
Board may prescribe rules and regulations on
the types of stock a bank may issue, including
the terms thereof and rights appurtenant
thereto to determine compliance with laws and
regulations governing capital and equity
structure of banks; Provided, That banks shall
issue par value stocks only.

3. ownership of shares(Sec. 11)
Section 11. Foreign Stockholdings. - Foreign
individuals and non-bank corporations may
own or control up to forty percent (40%) of the
voting stock of a domestic bank. This rule
shall apply to Filipinos and domestic non-bank
corporations. (12a; 12-Aa) The percentage of
foreign-owned voting stocks in a bank shall be
determined by the citizenship of the individual
stockholders in that bank. The citizenship of
the corporation which is a stockholder in a
bank shall follow the citizenship of the
controlling stockholders of the corporation,
irrespective of the place of incorporation. (n)
4. MB Certificate of Authority
POWERS OF A UNIVERSAL BANK
Section 23. Powers of a Universal Bank - A
universal bank shall have the authority to
exercise, in addition to the powers authorized
for a commercial bank in Section 29, the
powers of an investment house as provided in
existing laws and the power to invest in non-
allied enterprises as provided in this Act. (21-
B)
Section 24. Equity Investments of a Universal
Bank. - A universal bank may, subject to the
conditions stated in the succeeding paragraph,
invest in the equities of allied and non-allied
enterprises as may be determined by the
Monetary Board. Allied enterprises may either
be financial or non-financial. Except as the
Monetary Board may otherwise prescribe:
24.1. The total investment in equities of allied
and non-allied enterprises shall not exceed
fifty percent (50%) of the net worth of the
bank; and
24.2. The equity investment in any one
enterprise, whether allied or non-allied, shall
not exceed twenty-five percent (25%) of the
net worth of the bank.
As used in this Act, "net worth" shall mean the
total of the unimpaired paid-in capital
including paid-in surplus, retained earnings
and undivided profit, net of valuation reserves
and other adjustments as may be required by
the Bangko Sentral.

________________________________________________________________________

Page | 6
The acquisition of such equity or equities is
subject to the prior approval of the Monetary
Board which shall promulgate appropriate
guidelines to govern such investments. (21-Ba)
Bank in Financial Allied Enterprises. - A
universal bank can own up to one hundred
percent (100%) of the equity in a thrift bank, a
rural bank or a financial allied enterprise. A
publicly-listed universal or commercial bank
may own up to one hundred percent (100%) of
the voting stock of only one other universal or
commercial bank. (21-B; 21-Ca)
Bank in Non-Financial Allied Enterprises. - A
universal bank may own up to one hundred
percent (100%) of the equity in a non-financial
allied enterprise. (21-Ba)
Bank in Non-Allied Enterprises. - The equity
investment of a universal bank, or of its wholly
or majority-owned subsidiaries, in a single
non-allied enterprise shall not exceed thirty-
five percent (35%) of the total equity in that
enterprise nor shall it exceed thirty-five
percent (35%) of the voting stock in that
enterprise. (21-B)
Section 28. Equity Investments in Quasi-
Banks. - To promote competitive conditions in
financial markets, the Monetary Board may
further limit to forty percent (40%) equity
investments of universal banks in quasi-banks.
This rule shall also apply in the case of
commercial banks. (12-E) Article II.
Operations Of Commercial Banks
Section 29. Powers of a Commercial Bank. -
A commercial bank shall have, in addition to
the general powers incident to corporations, all
such powers as may be necessary to carry on
the business of commercial banking such as
accepting drafts and issuing letters of credit;
discounting and negotiating promissory notes,
drafts, bills of exchange, and other evidences
of debt; accepting or creating demand
deposits; receiving other types of deposits and
deposit substitutes; buying and selling foreign
exchange and gold or silver bullion; acquiring
marketable bonds and other debt securities;
and extending credit, subject to such rules as
the Monetary Board may promulgate. These
rules may include the determination of bonds
and other debt securities eligible for
investment, the maturities and aggregate
amount of such investment.
Section 53. Other Banking Services. - In
addition to the operations specifically
authorized in this Act, a bank may perform the
following services:
53.1. Receive in custody funds, documents and
valuable objects;
53.2. Act as financial agent and buy and sell,
by order of and for the account of their
customers, shares, evidences of indebtedness
and all types of securities;
53.3. Make collections and payments for the
account of others and perform such other
services for their customers as are not
incompatible with banking business;
53.4 Upon prior approval of the Monetary
Board, act as managing agent, adviser,
consultant or administrator of investment
management/advisory/consultancy accounts;
and
53.5. Rent out safety deposit boxes.
The bank shall perform the services permitted
under Subsections 53.1, 53.2,53.3 and 53.4 as
depositary or as an agent. Accordingly, it shall
keep the funds, securities and other effects
which it receives duly separate from the bank's
own assets and liabilities: The Monetary Board

________________________________________________________________________

Page | 7
may regulate the operations authorized by this
Section in order to ensure that such operations
do not endanger the interests of the depositors
and other creditors of the bank. In case a bank
or quasi-bark notifies the Bangko Sentral or
publicly announces a bank holiday, or in any
manner suspends the payment of its deposit
liabilities continuously for more than thirty
(30) days, the Monetary Board may summarily
and without need for prior hearing close such
banking institution and place it under
receivership of the Philippine Deposit
Insurance Corporation.
In sum, the powers include the following:
a. Exercise powers of an investment bank
b. Invest in equities of allied(financial or
non-financial) and or non-allied
enterprises
c. Can own up to 100% of the equity in a
thrift bank, rural bank or a financial
allied or non-allied enterprises
d. Powers as may be necessary to carry on
the business of commercial banking
such as:
1. Accepting drafts and negotiating
P/Ns
2. Discounting and negotiating P/Ns,
drafts, B/E, and other evidence of
debt
3. Accepting or creating demand
deposits
4. Receiving other types of deposits
and deposit substitutes
5. Buyong and selling foreign
echange and gold or silver bullion
6. Acquiring marketable bonds and
other debt securities
7. Extending credit
NB: 40% equity investment only in quasi-
banks
Powers under the expanded authority
granted by the MB:
1. Powers of an investment house
2. Invest in the equity of a non-allied
undertakings, or
3. Own majority or all of the equity in a
financial intermediary other than a
commercial or a bank authorized to
provide banking services
POWERS OF A COMMERCIAL BANK
Section 29. Powers of a Commercial Bank. -
A commercial bank shall have, in addition to
the general powers incident to corporations, all
such powers as may be necessary to carry on
the business of commercial banking such as
accepting drafts and issuing letters of credit;
discounting and negotiating promissory notes,
drafts, bills of exchange, and other evidences
of debt; accepting or creating demand
deposits; receiving other types of deposits and
deposit substitutes; buying and selling foreign
exchange and gold or silver bullion; acquiring
marketable bonds and other debt securities;
and extending credit, subject to such rules as
the Monetary Board may promulgate. These
rules may include the determination of bonds
and other debt securities eligible for
investment, the maturities and aggregate
amount of such investment.
Section 30. Equity Investments of a
Commercial Bank. - A commercial bank may,
subject to the conditions stated in the
succeeding paragraphs, invest only in the
equities of allied enterprises as may be
determined by the Monetary Board. Allied
enterprises may either be financial or non-
financial. Except as the Monetary Board may
otherwise prescribe:
30.1. The total investment in equities of allied
enterprises shall not exceed thirty-five percent
(35%) of the net worth of the bark; and

________________________________________________________________________

Page | 8
30.2. The equity investment in any one
enterprise shall not exceed twenty-five percent
(25%) of tile net worth of the bank. The
acquisition of such equity or equities is subject
to the prior approval of the Monetary Board
which shall promulgate appropriate guidelines
to govern such investment.(2lA-a; 21-Ca)
Commercial Bank in Financial Allied
Enterprises. - A commercial bank may own up
to one hundred percent (100%) of the equity of
a thrift bank or a rural bank. Where the equity
investment of a commercial bank is in other
financial allied enterprises, including another
commercial bank, such investment shall
remain a minority holding in that enterprise.
(21-Aa; 21-Ca)
Commercial Bank in Non-Financial Allied
Enterprises. A commercial bank may own up
to one hundred percent (100%) of the equity in
a non-financial allied enterprise. (21-Aa)
Article III. Provisions Applicable To All
Banks, Quasi-Banks, And Trust Entities
Section 53. Other Banking Services. - In
addition to the operations specifically
authorized in this Act, a bank may perform the
following services:
53.1. Receive in custody funds, documents and
valuable objects;
53.2. Act as financial agent and buy and sell,
by order of and for the account of their
customers, shares, evidences of indebtedness
and all types of securities;
53.3. Make collections and payments for the
account of others and perform such other
services for their customers as are not
incompatible with banking business;
53.4 Upon prior approval of the Monetary
Board, act as managing agent, adviser,
consultant or administrator of investment
management/advisory/consultancy accounts;
and
53.5. Rent out safety deposit boxes.
The bank shall perform the services permitted
under Subsections 53.1, 53.2,53.3 and 53.4 as
depositary or as an agent. Accordingly, it shall
keep the funds, securities and other effects
which it receives duly separate from the bank's
own assets and liabilities: The Monetary Board
may regulate the operations authorized by this
Section in order to ensure that such operations
do not endanger the interests of the depositors
and other creditors of the bank. In case a bank
or quasi-bark notifies the Bangko Sentral or
publicly announces a bank holiday, or in any
manner suspends the payment of its deposit
liabilities continuously for more than thirty
(30) days, the Monetary Board may summarily
and without need for prior hearing close such
banking institution and place it under
receivership of the Philippine Deposit
Insurance Corporation.
AREAS OF SUPERVISION AND
REGULATION OF BANKS

Examination and investigation of
banks
Section 4. Supervisory Powers. The operations
and activities of banks shall be subject to
supervision of the Bangko Sentral.
"Supervision" shall include the following:
4.1. The issuance of rules of, conduct or the
establishment standards of operation for
uniform application to all institutions or
functions covered, taking into consideration
the distinctive character of the operations of
institutions and the substantive similarities of
specific functions to which such rules, modes
or standards are to be applied;

________________________________________________________________________

Page | 9
4.2 The conduct of examination to determine
compliance with laws and regulations if the
circumstances so warrant as determined by the
Monetary Board;
4.3 Overseeing to ascertain that laws and
regulations are complied with;
4.4 Regular investigation which shall not be
oftener than once a year from the last date of
examination to determine whether an
institution is conducting its business on a safe
or sound basis: Provided, That the
deficiencies/irregularities found by or
discovered by an audit shall be immediately
addressed;
4.5 Inquiring into the solvency and liquidity of
the institution (2-D); or
4.6 Enforcing prompt corrective action. (n)
The Bangko Sentral shall also have
supervision over the operations of and exercise
regulatory powers over quasi-banks, trust
entities and other financial institutions which
under special laws are subject to Bangko
Sentral supervision. (2-Ca)
For the purposes of this Act, "quasi-banks"
shall refer to entities engaged in the borrowing
of funds through the issuance, endorsement or
assignment with recourse or acceptance of
deposit substitutes as defined in Section 95 of
Republic Act No. 7653 (hereafter the "New
Central Bank Act") for purposes of re-lending
or purchasing of receivables and other
obligations.

Section 28. Examination and Fees. - The
supervising and examining department head,
personally or by deputy, shall examine the
books of every banking institution once in
every twelve (12) months, and at such other
times as the Monetary Board by an affirmative
vote of five (5) members, may deem expedient
and to make a report on the same to the
Monetary Board: Provided, That there shall be
an interval of at least twelve (12) months
between annual examinations.
The bank concerned shall afford to the
head of the appropriate supervising and
examining departments and to his authorized
deputies full opportunity to examine its books,
cash and available assets and general condition
at any time during banking hours when
requested to do so by the Bangko Sentral:
Provided, however, That none of the reports
and other papers relative to such examinations
shall be open to inspection by the public
except insofar as such publicity is incidental to
the proceedings hereinafter authorized or is
necessary for the prosecution of violations in
connection with the business of such
institutions.
Banking and quasi-banking institutions
which are subject to examination by the
Bangko Sentral shall pay to the Bangko
Sentral, within the first thirty (30) days of each
year, an annual fee in an amount equal to a
percentage as may be prescribed by the
Monetary Board of its average total assets
during the preceding year as shown on its end-
of-month balance sheets, after deducting cash
on hand and amounts due from banks,
including the Bangko Sentral and banks
abroad.

Acquisition by bank of own shares
Section 10. Treasury Stocks. - No bank shall
purchase or acquire shares of its own capital
stock or accept its own shares as a security for
a loan, except when authorized by the
Monetary Board: Provided, That in every case
the stock so purchased or acquired shall,
within six (6) months from the time of its
purchase or acquisition, be sold or disposed of
at a public or private sale.

Independent directors
Section 15. Board of Directors. - The
provisions of the Corporation Code to the
contrary notwithstanding, there shall be at least
five (5), and a maximum of fifteen (15)
members of the board or directors of a bank,
two (2) of whom shall be independent
directors. An "independent director" shall

________________________________________________________________________

Page | 10
mean a person other than an officer or
employee of the bank, its subsidiaries or
affiliates or related interests. (n) Non-Filipino
citizens may become members of the board of
directors of a bank to the extent of the foreign
participation in the equity of said bank. (Sec.
7, RA 7721) The meetings of the board of
directors may be conducted through modern
technologies such as, but not limited to,
teleconferencing and video-conferencing

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

Prohibition on public officials
Section 19. Prohibition on Public Officials. -
Except as otherwise provided in the Rural
Banks Act, no appointive or elective public
official whether full-time or part-time shall at
the same time serve as officer of any private
bank, save in cases where such service is
incident to financial assistance provided by the
government or a government owned or
controlled corporation to the bank or unless
otherwise provided under existing laws.

Compensation and other benefits of
directors and officers
Section 18. Compensation and Other Benefits
of Directors and Officers. To protect the finds
of depositors and creditors the Monetary
Board may regulate the payment by the bark to
its directors and officers of compensation,
allowance, fees, bonuses, stock options, profit
sharing and fringe benefits only in exceptional
cases and when the circumstances warrant,
such as but not limited to the following:
18.1. When a bank is under comptrollership or
conservatorship; or
18.2. When a bank is found by the Monetary
Board to be conducting business in an unsafe
or unsound manner; or
18.3. When a bank is found by the Monetary
Board to be in an unsatisfactory financial
condition.

Ratio of net worth to total risk
assets; Basle Accord
Section 34. Risk-Based Capital. - The
Monetary Board shall prescribe the minimum
ratio which the net worth of a bank must bear
to its total risk assets which may include
contingent accounts. For purposes of this
Section, the Monetary Board may require such
ratio be determined on the basis of the net
worth and risk assets of a bank and its
subsidiaries, financial or otherwise, as well as
prescribe the composition and the manner of
determining the net worth and total risk assets
of banks and their subsidiaries: Provided, That
in the exercise of this authority, the Monetary
Board shall, to the extent feasible conform to
internationally accepted standards, including
those of the Bank for International
Settlements(BIS), relating to risk-based capital
requirements: Provided further, That it may
alter or suspend compliance with such ratio
whenever necessary for a maximum period of
one (1) year: Provided, finally, That such ratio
shall be applied uniformly to banks of the
same category. In case a bank does not comply
with the prescribed minimum ratio, the
Monetary Board may limit or prohibit the

________________________________________________________________________

Page | 11
distribution of net profits by such bank and
may require that part or all of the net profits be
used to increase the capital accounts of the
bank until the minimum requirement has been
met The Monetary Board may, furthermore,
restrict or prohibit the acquisition of major
assets and the making of new investments by
the bank, with the exception of purchases of
readily marketable evidences of indebtedness
of the Republic of the Philippines and of the
Bangko Sentral and any other evidences of
indebtedness or obligations the servicing and
repayment of which are fully guaranteed by
the Republic of the Philippines, until the
minimum required capital ratio has been
restored. In case of a bank merger or
consolidation, or when a bank is under
rehabilitation under a program approved by the
Bangko Sentral, Monetary Board may
temporarily relieve the surviving bank,
consolidated bank, or constituent bank or
corporations under rehabilitation from full
compliance with the required capital ratio
under such conditions as it may prescribe.
Before the effectivity of rules which the
Monetary Board is authorized to prescribe
under this provision, Section 22 of the General
Banking Act, as amended, Section 9 of the
Thrift Banks Act, and all pertinent rules issued
pursuant thereto, shall continue to be in force.
Limits on loans: the SBL Rules
Section 35. Limit on Loans, Credit
Accommodations and Guarantees
35.1 Except as the Monetary Board may
otherwise prescribe for reasons of national
interest, the total amount of loans, credit
accommodations and guarantees as may be
defined by the Monetary Board that may be
extended by a bank to any person, partnership,
association, corporation or other entity shall at
no time exceed twenty percent (20%) of the
net worth of such bank. The basis for
determining compliance with single borrower
limit is the total credit commitment of the bank
to the borrower.
35.2. Unless the Monetary Board prescribes
otherwise, the total amount of loans, credit
accommodations and guarantees prescribed in
the preceding paragraph may be increased by
an additional ten percent (10%) of the net
worth of such bank provided the additional
liabilities of any borrower are adequately
secured by trust receipts, shipping documents,
warehouse receipts or other similar documents
transferring or securing title covering readily
marketable, non-perishable goods which must
be fully covered by insurance.
35.3 The above prescribed ceilings shall
include (a) the direct liability of the maker or
acceptor of paper discounted with or sold to
such bank and the liability of a general
endorser, drawer or guarantor who obtains a
loan or other credit accommodation from or
discounts paper with or sells papers to such
bank; (b) in the case of an individual who
owns or controls a majority interest in a
corporation, partnership, association or any
other entity, the liabilities of said entities to
such bank; (c) in the case of a corporation, all
liabilities to such bank of all subsidiaries in
which such corporation owns or controls a
majority interest; and (d) in the case of a
partnership, association or other entity, the
liabilities of the members thereof to such bank.
35.4. Even if a parent corporation, partnership,
association, entity or an individual who owns
or controls a majority interest in such entities
has no liability to the bank, the Monetary
Board may prescribe the combination of the
liabilities of subsidiary corporations or
members of the partnership, association, entity
or such individual under certain circumstances,
including but not limited to any of the
following situations: (a) the parent
corporation, partnership, association, entity or
individual guarantees the repayment of the
liabilities; (b) the liabilities were incurred for
the accommodation of the parent corporation
or another subsidiary or of the partnership or
association or entity or such individual; or (c)
the subsidiaries though separate entities

________________________________________________________________________

Page | 12
operate merely as departments or divisions of a
single entity.
35.5. For purposes of this Section, loans, other
credit accommodations and guarantees shall
exclude: (a) loans and other credit
accommodations secured by obligations of the
Bangko Sentral or of the Philippine
Government: (b) loans and other credit
accommodations fully guaranteed by the
government as to the payment of principal and
interest; (c) loans and other credit
accommodations covered by assignment of
deposits maintained in the lending bank and
held in the Philippines; (d) loans, credit
accommodations and acceptances under letters
of credit to the extent covered by margin
deposits; and (e) other loans or credit
accommodations which the Monetary Board
may from time to time, specify as non-risk
items.
35.6. Loans and other credit accommodations,
deposits maintained with, and usual guarantees
by a bank to any other bank or non-bank
entity, whether locally or abroad, shall be
subject to the limits as herein prescribed.
35.7. Certain types of contingent accounts of
borrowers may be included among those
subject to these prescribed limits as may be
determined by the Monetary Board.

Restrictions on Bank exposure: the
DOSRI Rules
Section 36. Restriction on Bank Exposure to
Directors, Officers, Stockholders and Their
Related Interests. - No director or officer of
any bank shall, directly or indirectly, for
himself or as the representative or agent of
others, borrow from such bank nor shall he
become a guarantor, endorser or surety for
loans from such bank to others, or in any
manner be an obligor or incur any contractual
liability to the bank except with the written
approval of the majority of all the directors of
the bank, excluding the director concerned:
Provided, That such written approval shall not
be required for loans, other credit
accommodations and advances granted to
officers under a fringe benefit plan approved
by the Bangko Sentral. The required approval
shall be entered upon the records of the bank
and a copy of such entry shall be transmitted
forthwith to the appropriate supervising and
examining department of the Bangko Sentral.
Dealings of a bank with any of its directors,
officers or stockholders and their related
interests shall be upon terms not less favorable
to the bank than those offered to others. After
due notice to the board of directors of the
bank, the office of any bank director or officer
who violates the provisions of this Section
may be declared vacant and the director or
officer shall be subject to the penal provisions
of the New Central Bank Act. The Monetary
Board may regulate the amount of loans, credit
accommodations and guarantees that may be
extended, directly or indirectly, by a bank to
its directors, officers, stockholders and their
related interests, as well as investments of such
bank in enterprises owned or controlled by
said directors, officers, stockholders and their
related interests. However, the outstanding
loans, credit accommodations and guarantees
which a bank may extend to each of its
stockholders, directors, or officers and their
related interests, shall be limited to an amount
equivalent to their respective unencumbered
deposits and book value of their paid-in capital
contribution in the bank: Provided, however,
That loans, credit accommodations and
guarantees secured by assets considered as
non-risk by the Monetary Board shall be
excluded from such limit: Provided, further,
That loans, credit accommodations and
advances to officers in the form of fringe
benefits granted in accordance with rules as
may be prescribed by the Monetary Board
shall not be subject to the individual limit. The
Monetary Board shall define the term "related
interests." The limit on loans, credit
accommodations and guarantees prescribed
herein shall not apply to loans, credit

________________________________________________________________________

Page | 13
accommodations and guarantees extended by a
cooperative bank to its cooperative
shareholders.

Microfinancing
Section 40. Requirement for Grant Of Loans
or 0ther Credit Accommodations. - Before
granting a loan or other credit accommodation,
a bank must ascertain that the debtor is capable
of fulfilling his commitments to the bank.
Toward this end, a bank may demand from its
credit applicants a statement of their assets and
liabilities and of their income and expenditures
and such information as may be prescribed by
law or by rules and regulations of the
Monetary Board to enable the bank to properly
evaluate the credit application which includes
the corresponding financial statements
submitted for taxation purposes to the Bureau
of Internal Revenue. Should such statements
prove to be false or incorrect in any material
detail, the bank may terminate any loan or
other credit accommodation granted on the
basis of said statements and shall have the
right to demand immediate repayment or
liquidation of the obligation. In formulating
rules and regulations under this Section, the
Monetary Board shall recognize the peculiar
characteristics of micro financing, such as cash
flow-based lending to the basic sectors that are
not covered by traditional collateral.
Section 43. Authority to Prescribe Terms and
Conditions of Loans and Other Credit
Accommodations. - The Monetary Board, may,
similarly in accordance with the authority
granted to it in Section 106 of the New Central
Bank Act, and taking into account the
requirements of the economy for the effective
utilization of long-term funds, prescribe the
maturities, as well as related terms and
conditions for various types of bank loans and
other credit accommodations. Any change by
the Board in the maximum maturities, as well
as related terms and conditions for various
types of bank loans and other credit
accommodations. Any change by the Board in
the maximum maturities shall apply only to
loans and other credit accommodations made
after the date of such action. The Monetary
Board shall regulate the interest imposed on
micro finance borrowers by lending investors
and similar lenders such as, but not limited to,
the unconscionable rates of interest collected
on salary loans and similar credit
accommodations. (78a)
Section 44. Amortization on Loans and Other
Credit Accommodations. - The amortization
schedule of bank loans and other credit
accommodations shall be adapted to the nature
of the operations to be financed. In case of
loans and other credit accommodations with
maturities of more than five (5) years,
provisions must be made for periodic
amortization payments, but such payments
must be made at least annually: Provided,
however, That when the borrowed funds are to
be used for purposes which do not initially
produce revenues adequate for regular
amortization payments therefrom, the bank
may permit the initial amortization payment to
be deferred until such time as said revenues are
sufficient for such purpose, but in no case shall
the initial amortization date be later than five
(5) years from the date on which the loan or
other credit accommodation is granted. (79a)
In case of loans and other credit
accommodations to micro finance sectors, the
schedule of loan amortization shall take into
consideration the projected cash flow of the
borrower and adopt this into the terms and
conditions formulated by banks.

Prepayment of loans
Section 45. Prepayment of Loans and Other
Credit Accommodations. - A borrower may at
any time prior to the agreed maturity date
prepay, in whole or in part, the unpaid balance
of any bank loan and other credit
accommodation, subject to such reasonable

________________________________________________________________________

Page | 14
terms and conditions as may be agreed upon
between the bank and its borrower.
Real estate investments and
acquisitions
Section 51. Ceiling on Investments in Certain
Assets. - Any bank may acquire real estate as
shall be necessary for its own use in the
conduct of its business: Provided, however,
That the total investment in such real estate
and improvements thereof including bank
equipment, shall not exceed fifty percent
(50%) of combined capital accounts: Provided,
further, That the equity investment of a bank in
another corporation engaged primarily in real
estate shall be considered as part of the bank's
total investment in real estate, unless otherwise
provided by the Monetary Board. (25a)
Section 52. Acquisition of Real Estate by Way
of Satisfaction of Claims. - Notwithstanding
the limitations of the preceding Section, a bank
may acquire, hold or convey real property
under the following circumstances:
52.1. Such as shall be mortgaged to it in good
faith by way of security for debts;
52.2. Such as shall be conveyed to it in
satisfaction of debts previously contracted in
the course of its dealings, or
52.3. Such as it shall purchase at sales under
judgments, decrees, mortgages, or trust deeds
held by it and such as it shall purchase to
secure debts due it.
Any real property acquired or held under the
circumstances enumerated in the above
paragraph shall be disposed of by the bank
within a period of five (5) years or as may be
prescribed by the Monetary Board: Provided,
however, That the bank may, after said period,
continue to hold the property for its own use,
subject to the limitations of the preceding
Section.

Outsourcing of bank functions
55.1. No director, officer, employee, or agent
of any bank shall -
(a) Make false entries in any bank
report or statement or participate in any
fraudulent transaction, thereby
affecting the financial interest of, or
causing damage to, the bank or any
person;
(b) Without order of a court of
competent jurisdiction, disclose to any
unauthorized person any information
relative to the funds or properties in the
custody of the bank belonging to
private individuals, corporations, or
any other entity: Provided, That with
respect to bank deposits, the provisions
of existing laws shall prevail;
(c) Accept gifts, fees, or commissions
or any other form of remuneration in
connection with the approval of a loan
or other credit accommodation from
said bank;
(d) Overvalue or aid in overvaluing any
security for the purpose of influencing
in any way the actions of the bank or
any bank; or
(e) Outsource inherent banking
functions.

Employment of casual and
probationary personnel
55.4. Consistent with the provisions of
Republic Act No. 1405, otherwise known as
the Banks Secrecy Law, no bank shall employ
casual or non regular personnel or too lengthy

________________________________________________________________________

Page | 15
probationary personnel in the conduct of its
business involving bank deposits.
Declaration of dividends
Section 57. Prohibition on Dividend
Declaration. - No bank or quasi-bank shall
declare dividends, if at the time of declaration:
57.1 Its clearing account with the Bangko
Sentral is overdrawn; or
57.2 It is deficient in the required liquidity
floor for government deposits for five (5) or
more consecutive days, or
57.3 It does not comply with the liquidity
standards/ratios prescribed by the Bangko
Sentral for purposes of determining funds
available for dividend declaration; or
57.4 It has committed a major violation as may
be determined by the Bangko Sentral

AUTHORITY TO ENGAGE IN TRUST
BUSINESS

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

o Diligence required( Utmost Diligence:
highest form of diligence)
Section 80. Conduct of Trust Business. - A
trust entity shall administer the funds or
property under its custody with the diligence
that a prudent man would exercise in the
conduct of an enterprise of a like character
and with similar aims. No trust entity shall, for
the account of the trustor or the beneficiary of
the trust, purchase or acquire property from, or
sell, transfer, assign, or lend money or
property to, or purchase debt instruments of,
any of the departments, directors, officers,
stockholders, or employees of the trust entity,
relatives within the first degree of
consanguinity or affinity, or the related
interests, of such directors, officers and
stockholders, unless the transaction is
specifically authorized by the trustor and the
relationship of the trustee and the other party
involved in the transaction is fully disclosed to
the trustor of beneficiary of the trust prior to
the transaction. The Monetary Board shall
promulgate such rules and regulations as may
be necessary to prevent circumvention of this
prohibition or the evasion of the responsibility
herein imposed on a trust entity.

COMMENT(UP REVIEWER):
Banks should observe the highest degree of
diligence. Notwithstanding the degree of
diligence required, a bank is not expected to
be infallible (Prudential Bank vs. CA, 2000)
Fiduciary Nature of Banks
Failure on the part of the bank to satisfy the
degree of diligence required of banks may
warrant the award of damages.
high standards of integrity and
performance. In numerous cases, the Supreme
Court has held that the highest degree of
diligence and care is expected from banks
(Simex International v. CA [1990]; Philippine
Bank of Commerce v. CA [1997]; Westmont
Bank v. Ong [2002]; Solidbank v. Spouses Tan
[2003]; Samsung Construction v. FEBTC
[2004]; Citibank, N.A. v. Spouses
Cabamongan [2006]; Philippine Savings Bank

________________________________________________________________________

Page | 16
v. Chowking Food Corporation [2008]; Bank
of America NT &SA v. Philippine Racing
Club [2009].

PCI Bank v. CA, 2001: Banks are expected to
exercise the highest degree of diligence in the
selection and supervision of their employees.
Philippine Savings Bank v. Chowking Food
Corporation, 2008: It cannot be
overemphasized that the banking business is
impressed with public interest. Of paramount
importance is the trust and confidence of the
public in general in the banking industry.
Consequently, the diligence required of banks
is more than that of a Roman pater familias or
a good father of a family. The highest degree
of diligence is expected
Bank of America NT&SA v. Philippine
Racing Club, 2009: The banking business is
so impressed with public interest where the
trust and confidence of the public in general is
of paramount importance such that the
appropriate standard of diligence must be a
high degree of diligence, if not the utmost
diligence.

Under the doctrine of last clear chance, a bank
may be held liable for loss despite the
negligence of a depositor. Examples of these
cases are the following:
employee despite the employees failure to
strictly abide with the banks internal
procedure. (PBC v. CA, 1997)
parcels of land as security for a loan not owned
by the prospective borrower. (Canlas v. Court
of Appeals, 2000)
Crediting the deposit in favor of another
depositor, a check where the signature of the
drawer was forged. (Westmont Bank v. Ong,
2002)
-signed checks of the
depositor which were stolen by its employee.
(Bank of America NT & SA v. Philippine
Racing Club, 2009)

A bank is liable to a depositor when it honored
and paid on a forged check against the
depositors account even if the bank followed
its internal procedure in preventing a faulty
discharge. (Samsung
Construction v. FEBTC, 2004)
bank was held liable for damages for failing to
follow its internal procedures in paying on a
forged check despite the gross negligence on
the part of the depositor.

o Deposit required as security for faithful
performance of trust duties
Section 84. Deposit for the Faithful
Performance of Trust Duties. - Before
transacting trust business, every trust entity
shall deposit with the Bangko Sentral, as
security for the faithful performance of its trust
duties, cash or securities approved by the
Monetary Board in an amount equal to or not
less than Five hundred thousand pesos
(P500,000.00) or such higher amount as may
fixed by the Monetary Board: Provided,
however, That the Monetary Board shall
require every trust entity to increase the
amount of its cash or securities on deposit with
the Bangko Sentral in accordance with the
provisions of this paragraph. Should the capital
and surplus fall below said amount, the
Monetary Board shall have the same authority

________________________________________________________________________

Page | 17
as that granted to it under the provisions of the
fifth paragraph of Section 34 of this Act. A
trust entity so long as it shall continue to be
solvent and comply with laws or regulations
shall have the right to collect the interest
earned on such securities deposited with the
Bangko Sentral and, from time to time, with
the approval of the Bangko Sentral, to
exchange the securities for others. If the trust
entity fails to comply with any law or
regulation, the Bangko Sentral shall retain
such interest on the securities deposited with it
for the benefit of rightful claimants. Al claims
rising out of the trust business of a trust entity
shall have priority over all other claims as
regards the cash or securities deposited as
above provided. The Monetary Board may not
permit the cash or securities deposited in
accordance with the provisions of this Section
to be reduced below the prescribed minimum
amount until the depositing entity shall
discontinue its trust business and shall satisfy
the Monetary Board that it has complied with
all its obligations in connection with such
business.

o Separation of trust business from
general business
Section 87. Separation of Trust Business from
General Business. - The trust business and all
funds, properties or securities received by any
trust entity as executor, administrator,
guardian, trustee, receiver, or depositary shall
be kept separate and distinct from the general
business including all other funds, properties,
and assets of such trust entity. The accounts of
all such funds, properties, or securities shall
likewise be kept separate and distinct from the
accounts of the general business of the trust
entity.
o Exemption of trust assets from claims
Section 92. Exemption of Trust Assets from
Claims. - No assets held by a trust entity in its
capacity as trustee shall be subject to any
claims other than those of the parties interested
in the specific trusts.

PENALTIES FOR VIOLATIONS
o Fine, imprisonment, etc.(Sections 34-37
R.A. No. 7653
Section 34. Refusal to Make Reports
or Permit Examination. - Any officer,
owner, agent, manager, director or
officer-in-charge of any institution
subject to the supervision or
examination by the Bangko Sentral
within the purview of this Act who,
being required in writing by the
Monetary Board or by the head of the
supervising and examining department
willfully refuses to file the required
report or permit any lawful
examination into the affairs of such
institution shall be punished by a fine
of not less than Fifty thousand pesos
(P50,000) nor more than One hundred
thousand pesos (P100,000) or by
imprisonment of not less than one (1)
year nor more than five (5) years, or
both, in the discretion of the court.
Section 35. False Statement. -
The willful making of a false or
misleading statement on a material fact
to the Monetary Board or to the
examiners of the Bangko Sentral shall
be punished by a fine of not less than
One hundred thousand pesos
(P100,000) nor more than Two
hundred thousand pesos (P200,000), or
by imprisonment of not more than (5)
years, or both, at the discretion of the
court.
Section 36. Proceedings Upon
Violation of This Act and Other
Banking Laws, Rules, Regulations,
Orders or Instructions. - Whenever a
bank or quasi-bank, or whenever any
person or entity willfully violates this
Act or other pertinent banking laws
being enforced or implemented by the
Bangko Sentral or any order,
instruction, rule or regulation issued by

________________________________________________________________________

Page | 18
the Monetary Board, the person or
persons responsible for such violation
shall unless otherwise provided in this
Act be punished by a fine of not less
than Fifty thousand pesos (P50,000)
nor more than Two hundred thousand
pesos (P200,000) or by imprisonment
of not less than two (2) years nor more
than ten (10) years, or both, at the
discretion of the court.
Whenever a bank or quasi-bank
persists in carrying on its business in an
unlawful or unsafe manner, the Board
may, without prejudice to the penalties
provided in the preceding paragraph of
this section and the administrative
sanctions provided in Section 37 of this
Act, take action under Section 30 of
this Act.
Section 37. Administrative
Sanctions on Banks and Quasi-banks. -
Without prejudice to the criminal
sanctions against the culpable persons
provided in Sections 34, 35, and 36 of
this Act, the Monetary Board may, at
its discretion, impose upon any bank or
quasi-bank, their directors and/or
officers, for any willful violation of its
charter or by-laws, willful delay in the
submission of reports or publications
thereof as required by law, rules and
regulations; any refusal to permit
examination into the affairs of the
institution; any willful making of a
false or misleading statement to the
Board or the appropriate supervising
and examining department or its
examiners; any willful failure or refusal
to comply with, or violation of, any
banking law or any order, instruction or
regulation issued by the Monetary
Board, or any order, instruction or
ruling by the Governor; or any
commission of irregularities, and/or
conducting business in an unsafe or
unsound manner as may be determined
by the Monetary Board, the following
administrative sanctions, whenever
applicable:
(a) fines in amounts as may be
determined by the Monetary Board to
be appropriate, but in no case to exceed
Thirty thousand pesos (P30,000) a day
for each violation, taking into
consideration the attendant
circumstances, such as the nature and
gravity of the violation or irregularity
and the size of the bank or quasi-bank;
(b) suspension of rediscounting
privileges or access to Bangko Sentral
credit facilities;
(c) suspension of lending or foreign
exchange operations or authority to
accept new deposits or make new
investments;
(d) suspension of interbank clearing
privileges; and/or
(e) revocation of quasi-banking license.
Resignation or termination from
office shall not exempt such director or
officer from administrative or criminal
sanctions.
The Monetary Board may,
whenever warranted by circumstances,
preventively suspend any director or
officer of a bank or quasi-bank pending
an investigation: Provided, That should
the case be not finally decided by the
Bangko Sentral within a period of one
hundred twenty (120) days after the
date of suspension, said director or
officer shall be reinstated in his
position: Provided, further, That when
the delay in the disposition of the case
is due to the fault, negligence or
petition of the director or officer, the
period of delay shall not be counted in
computing the period of suspension
herein provided.

________________________________________________________________________

Page | 19
The above administrative
sanctions need not be applied in the
order of their severity.
Whether or not there is an
administrative proceeding, if the
institution and/or the directors and/or
officers concerned continue with or
otherwise persist in the commission of
the indicated practice or violation, the
Monetary Board may issue an order
requiring the institution and/or the
directors and/or officers concerned to
cease and desist from the indicated
practice or violation, and may further
order that immediate action be taken to
correct the conditions resulting from
such practice or violation. The cease
and desist order shall be immediately
effective upon service on the
respondents.
The respondents shall be
afforded an opportunity to defend their
action in a hearing before the Monetary
Board or any committee chaired by any
Monetary Board member created for
the purpose, upon request made by the
respondents within five (5) days from
their receipt of the order. If no such
hearing is requested within said period,
the order shall be final. If a hearing is
conducted, all issues shall be
determined on the basis of records,
after which the Monetary Board may
either reconsider or make final its
order.
The Governor is hereby
authorized, at his discretion, to impose
upon banking institutions, for any
failure to comply with the requirements
of law, Monetary Board regulations
and policies, and/or instructions issued
by the Monetary Board or by the
Governor, fines not in excess of Ten
thousand pesos (P10,000) a day for
each violation, the imposition of which
shall be final and executory until
reversed, modified or lifted by the
Monetary Board on appeal.

o Suspension or removal of director or
officer
o Dissolution of bank
Section 66. Penalty for Violation of this Act. -
Unless otherwise herein provided, the
violation of any of the provisions of this Act
shall be subject to Sections 34, 35, 36 and 37
of the New Central Bank Act. If the offender is
a director or officer of a bank, quasi-bank or
trust entity, the Monetary Board may also
suspend or remove such director or officer. If
the violation is committed by a corporation,
such corporation may be dissolved by quo
warranto proceedings instituted by the
Solicitor General.

CASES:
1. FIDUCIARY nature of banking
requires high standards of integrity and
performance
G.R. No. 127469 January 15, 2004
PHILIPPINE BANKING
CORPORATION, petitioner,
vs.
COURT OF APPEALS and LEONILO
MARCOS, respondents.

The BANKs Fiduciary Duty to its Depositor
The BANK is liable to Marcos for offsetting
his time deposits with a fictitious promissory
note. The existence of Promissory Note No.
20-979-83 could have been easily proven had
the BANK presented the original copies of the
promissory note and its supporting evidence.
In lieu of the original copies, the BANK

________________________________________________________________________

Page | 20
presented the "machine copies of the
duplicate" of the documents. These substitute
documents have no evidentiary value. The
BANKs failure to explain the absence of the
original documents and to maintain a record of
the offsetting of this loan with the time
deposits bring to fore the BANKs dismal
failure to fulfill its fiduciary duty to Marcos.
Section 2 of Republic Act No. 8791 (General
Banking Law of 2000) expressly imposes this
fiduciary duty on banks when it declares that
the State recognizes the "fiduciary nature of
banking that requires high standards of
integrity and performance." This statutory
declaration merely echoes the earlier
pronouncement of the Supreme Court in Simex
International (Manila) Inc. v. Court of
Appeals
31
requiring banks to "treat the
accounts of its depositors with meticulous
care, always having in mind the fiduciary
nature of their relationship."
32
The Court
reiterated this fiduciary duty of banks in
subsequent cases.
33

Although RA No. 8791 took effect only in the
year 2000,
34
at the time that the BANK
transacted with Marcos, jurisprudence had
already imposed on banks the same high
standard of diligence required under RA No.
8791.
35
This fiduciary relationship means that
the banks obligation to observe "high
standards of integrity and performance" is
deemed written into every deposit agreement
between a bank and its depositor.
The fiduciary nature of banking requires banks
to assume a degree of diligence higher than
that of a good father of a family. Thus, the
BANKs fiduciary duty imposes upon it a
higher level of accountability than that
expected of Marcos, a businessman, who
negligently signed blank forms and entrusted
his certificates of time deposits to Pagsaligan
without retaining copies of the certificates.
The business of banking is imbued with public
interest. The stability of banks largely depends
on the confidence of the people in the honesty
and efficiency of banks. In Simex International
(Manila) Inc. v. Court of Appeals
36
we pointed
out the depositors reasonable expectations
from a bank and the banks corresponding duty
to its depositor, as follows:
In every case, the depositor expects the bank to
treat his account with the utmost fidelity,
whether such account consists only of a few
hundred pesos or of millions. The bank must
record every single transaction accurately,
down to the last centavo, and as promptly as
possible. This has to be done if the account is
to reflect at any given time the amount of
money the depositor can dispose of as he sees
fit, confident that the bank will deliver it as
and to whomever he directs.
As the BANKs depositor, Marcos had the
right to expect that the BANK was accurately
recording his transactions with it. Upon the
maturity of his time deposits, Marcos also had
the right to withdraw the amount due him after
the BANK had correctly debited his
outstanding obligations from his time deposits.
By the very nature of its business, the BANK
should have had in its possession the original
copies of the disputed promissory note and the
records and ledgers evidencing the offsetting
of the loan with the time deposits of Marcos.
The BANK inexplicably failed to produce the
original copies of these documents. Clearly,
the BANK failed to treat the account of
Marcos with meticulous care.
The BANK claims that it is a reputable
banking institution and that it has no reason to
forge Promissory Note No. 20-979-83. The
trial court and appellate court did not rule that
it was the bank that forged the promissory
note. It was Pagsaligan, the BANKs branch
manager and a close friend of Marcos, whom

________________________________________________________________________

Page | 21
the trial court categorically blamed for the
fictitious loan agreements. The trial court held
that Pagsaligan made up the loan agreement to
cover up his inability to account for the time
deposits of Marcos.
Whether it was the BANKs negligence and
inefficiency or Pagsaligans misdeed that
deprived Marcos of the amount due him will
not excuse the BANK from its obligation to
return to Marcos the correct amount of his
time deposits with interest. The duty to
observe "high standards of integrity and
performance" imposes on the BANK that
obligation. The BANK cannot also unjustly
enrich itself by keeping Marcos money.
Assuming Pagsaligan was behind the spurious
promissory note, the BANK would still be
accountable to Marcos. We have held that a
bank is liable for the wrongful acts of its
officers done in the interest of the bank or in
their dealings as bank representatives but not
for acts outside the scope of their
authority.
37
Thus, we held:
A bank holding out its officers and agents as
worthy of confidence will not be permitted to
profit by the frauds they may thus be enabled
to perpetrate in the apparent scope of their
employment; nor will it be permitted to shirk
its responsibility for such frauds, even though
no benefit may accrue to the bank therefrom
(10 Am Jur 2d, p. 114). Accordingly, a
banking corporation is liable to innocent third
persons where the representation is made in
the course of its business by an agent acting
within the general scope of his authority even
though, in the particular case, the agent is
secretly abusing his authority and attempting
to perpetrate a fraud upon his principal or
some other person, for his own ultimate
benefit.

Banks have the duty to exercise the highest
degree of diligence when transacting with the
public (FULL TEXT)
G.R. No. 167346 April 2, 2007
SOLIDBANK CORPORATION/ METROPOLITAN
BANK AND TRUST COMPANY,
*
Petitioner,
vs.
SPOUSES PETER and SUSAN
TAN, Respondents

CORONA, J .:
Assailed in this petition for review by
certiorari under Rule 45 of the Rules of Court
are the decision
1
and resolution
2
of the Court
of Appeals (CA) dated November 26, 2004
and March 1, 2005, respectively, in CA-G.R.
CV No. 58618,
3
affirming the decision of the
Regional Trial Court (RTC) of Manila, Branch
31.
4

On December 2, 1991, respondents
representative, Remigia Frias, deposited with
petitioner ten checks worthP455,962. Grace
Neri, petitioners teller no. 8 in its Juan Luna,
Manila Branch, received two deposit slips for
the checks, an original and a duplicate. Neri
verified the checks and their amounts in the
deposit slips then returned the duplicate copy
to Frias and kept the original copy for
petitioner.
In accordance with the usual practice between
petitioner and respondents, the latters
passbook was left with petitioner for the
recording of the deposits on the banks ledger.
Later, respondents retrieved the passbook and
discovered that one of the checks,
Metropolitan Bank and Trust Company
(Metrobank) check no. 403954, payable to
cash in the sum of P250,000 was not posted
therein.
Immediately, respondents notified petitioner of
the problem. Petitioner showed respondent
Peter Tan a duplicate
copy of a deposit slip indicating the list of
checks deposited by Frias. But it did not
include the missing check. The deposit slip
bore the stamp mark "teller no. 7" instead of

________________________________________________________________________

Page | 22
"teller no. 8" who previously received the
checks.
Still later, respondent Peter Tan learned from
Metrobank (where he maintained an account)
that Metrobank check no. 403954 had cleared
after it was inexplicably deposited by a certain
Dolores Lagsac in Premier Bank in San Pedro,
Laguna. Respondents demanded that petitioner
pay the amount of the check but it refused,
hence, they filed a case for collection of a sum
of money in the RTC of Manila, Branch 31.
In its answer, petitioner averred that the
deposit slips Frias used when she deposited the
checks were spurious. Petitioner accused
respondents of engaging in a scheme to
illegally exact money from it. It added that,
contrary to the claim of respondents, it was
"teller no. 7" who received the deposit slips
and, although respondents insisted that Frias
deposited ten checks, only nine checks were
actually received by said teller. By way of
counterclaim, it sought payment of P1,000,000
as actual and moral damages and P500,000 as
exemplary damages.
After trial, the RTC found petitioner liable to
respondents:
Upon examination of the oral, as well as of the
documentary evidence which the parties
presented at the trial in support of their
respective contentions, and after taking into
consideration all the circumstances of the case,
this Court believes that the loss of Metrobank
Check No. 403954 in the sum of P250,000.00
was due to the fault of [petitioner][It]
retained the original copy of the [deposit slip
marked by "Teller No. 7"]. There is a
presumption in law that evidence willfully
suppressed would be adverse if produced.
Art. 1173 of the Civil Code states that "the
fault or negligence of the obligor consists in
the omission of that diligence which is
required by the nature of the obligation and
corresponds with the circumstances of the
person of the time and of the place"; and that
"if the law or contract does not state the
diligence which is to be observed in the
performance, the same as expected of a good
father of a family shall be required."
For failure to comply with its obligation,
[petitioner] is presumed to have been at fault
or to have acted negligently unless they prove
that they observe extraordinary diligence as
prescribed in Arts. 1733 and 1735 of the Civil
Code (Art. 1756)
xxx xxx xxx
WHEREFORE, premises considered,
judgment is hereby rendered in favor of
[respondents], ordering [petitioner] to pay the
sum of P250,000, with legal interest from the
time the complaint [for collection of a sum of
money] was filed until satisfied; P25,000.00
moral damages; P25,000.00 exemplary
damages plus 20% of the amount due
[respondents] as and for attorneys fees. With
costs.
SO ORDERED.
5

Petitioner appealed to the CA which
affirmed in toto the RTCs assailed decision:
Serious doubt [was] engendered by the fact
that [petitioner] did not present the original of
the deposit slip marked with "Teller No. 7"
and on which the entry as to Metrobank Check
No. 403954 did not appear. Even the most
cursory look at the handwriting thereon
reveal[ed] a very marked difference with that
in the other deposit slips filled up [by Frias] on
December 2, 1991. Said circumstances
spawn[ed] the belief thus, the said deposit slip
was prepared by [petitioner] itself to cover up
for the lost check.
6

Petitioner filed a motion for reconsideration
but the CA dismissed it. Hence, this
appeal.1a\^/phi1.net
Before us, petitioner faults the CA for
upholding the RTC decision. Petitioner argues
that: (1) the findings of the RTC and the CA
were not supported by the evidence and
records of the case; (2) the award of damages
in favor of respondents was unwarranted and
(3) the application by the RTC, as affirmed by
the CA, of the provisions of the Civil Code on

________________________________________________________________________

Page | 23
common carriers to the instant case was
erroneous.
7

The petition must fail.
On the first issue, petitioner contends that the
lower courts erred in finding it negligent for
the loss of the subject check. According to
petitioner, the fact that the check was
deposited in Premier Bank affirmed its claim
that it did not receive the check.
At the outset, the Court stresses that it accords
respect to the factual findings of the trial court
and, unless it overlooked substantial matters
that would alter the outcome of the case, this
Court will not disturb such findings.
8
We
meticulously reviewed the records of the case
and found no reason to deviate from the rule.
Moreover, since the CA affirmed these
findings on appeal, they are final and
conclusive on us.
9
We therefore sustain the
RTCs and CAs findings that petitioner was
indeed negligent and responsible for
respondents lost check.
On the issue of damages, petitioner argues that
the moral and exemplary damages awarded by
the lower courts had no legal basis. For the
award of moral damages to stand, petitioner
avers that respondents should have proven the
existence of bad faith by clear and convincing
evidence. According to petitioner, simple
negligence cannot be a basis for its award. It
insists that the award of exemplary damages is
justified only when the act complained of was
done in a wanton, fraudulent and oppressive
manner.
10

We disagree.
While petitioner may argue that simple
negligence does not warrant the award of
moral damages, it nonetheless cannot insist
that that was all it was guilty of. It refused to
produce the original copy of the deposit slip
which could have proven its claim that it did
not receive respondents missing check. Thus,
in suppressing the best evidence that could
have bolstered its claim and confirmed its
innocence, the presumption now arises that it
withheld the same for fraudulent purposes.
11

Moreover, in presenting a false deposit slip in
its attempt to feign innocence, petitioners bad
faith was apparent and unmistakable. Bad faith
imports a dishonest purpose or some moral
obliquity or conscious doing of a wrong that
partakes of the nature of fraud.
12

As to the award of exemplary damages, the
law allows it by way of example for the public
good. The business of banking is impressed
with public interest and great reliance is made
on the banks sworn profession of diligence
and meticulousness in giving irreproachable
service.
13
For petitioners failure to carry out
its responsibility and to account for
respondents lost check, we hold that the lower
courts did not err in awarding exemplary
damages to the latter.
On the last issue, we hold that the trial court
did not commit any error.1awphi1.nt A
cursory reading of its decision reveals that it
anchored its conclusion that petitioner was
negligent on Article 1173 of the Civil Code.
14

In citing the different provisions of the Civil
Code on common carriers,
15
the trial court
merely made reference to the kind of diligence
that petitioner should have performed under
the circumstances. In other words, like a
common carrier whose business is also imbued
with public interest, petitioner should have
exercised extraordinary diligence to negate its
liability to respondents.
Assuming arguendo that the trial court indeed
used the provisions on common carriers to pin
down liability on petitioner, still we see no
reason to strike down the RTC and CA rulings
on this ground alone.
In one case,
16
the Court did not hesitate to
apply the doctrine of last clear chance
(commonly used in transportation laws
involving common carriers) to a banking
transaction where it adjudged the bank
responsible for the encashment of a forged
check. There, we enunciated that the degree of
diligence required of banks is more than that
of a good father of a family in keeping with
their responsibility to exercise the necessary

________________________________________________________________________

Page | 24
care and prudence in handling their clients
money.
We find no compelling reason to disallow the
application of the provisions on common
carriers to this case if only to emphasize the
fact that banking institutions (like petitioner)
have the duty to exercise the highest degree of
diligence when transacting with the public. By
the nature of their business, they are required
to observe the highest standards of integrity
and performance, and utmost assiduousness as
well.
17

WHEREFORE, the assailed decision and
resolution of the Court of Appeals dated
November 26, 2004 and March 1, 2005,
respectively, in CA-G.R. CV No. 58618 are
hereby AFFIRMED. Accordingly, the petition
is DENIED.
Costs against petitioner.

Interpretation of section 83 of R.A. No.
337(now Sec.36 of R.A. No. 8791)

GO V. BANGKO SENTRAL, Oct. 23, 2009.

HELD: Elements of Violation of
Section 83 of RA 337

Under Section 83, RA 337, the
following elements must be present to
constitute a violation of its first paragraph:

1. the offender is a director or officer of any
banking institution;
2. the offender, either directly or indirectly,
for himself or as representative or agent of
another, performs any of the following acts:
a. he borrows any of the deposits or funds of
such bank; or
b. he becomes a guarantor, indorser, or
surety for loans from such bank to others, or
c. he becomes in any manner an obligor
for money borrowed from bank or loaned
by it;
3. the offender has performed any of such
acts without the written approval of the
majority of the directors of the bank, excluding
the offender, as the director concerned.

A simple reading of the above elements easily
rejects Gos contention that the law penalizes a
bank director or officer only either for
borrowing the banks deposits or funds or for
guarantying loans by the bank, but not for
acting in both capacities. The essence of the
crime is becoming an obligor of the bank
without securing the necessary written
approval of the majority of the banks
directors.

The second element merely lists down the
various modes of committing the offense. The
third mode, by declaring that [no director or
officer of any banking institution shall xxx] in
any manner be an obligor for money
borrowed from the bank or loaned by it, in
fact serves a catch-all phrase that covers any
situation when a director or officer of the bank
becomes its obligor. The prohibition is
directed against a bank director or officer
who becomes in any manner an obligor for
money borrowed from or loaned by the
bank without the written approval of the
majority of the banks board of
directors. To make a distinction between the
act of borrowing and guarantying is therefore
unnecessary because in either situation, the
director or officer concerned becomes an
obligor of the bank against whom the
obligation is juridically demandable.

The language of the law is broad enough to
encompass either act of borrowing or
guaranteeing, or both. While the first
paragraph of Section 83 is penal in nature, and
by principle should be strictly construed in
favor of the accused, the Court is unwilling to

________________________________________________________________________

Page | 25
adopt a liberal construction that would defeat
the legislatures intent in enacting the
statute. The objective of the law should allow
for a reasonable flexibility in its
construction. Section 83 of RA 337, as well as
other banking laws adopting the same
prohibition,
[17]
was enacted to ensure that loans
by banks and similar financial institutions to
their own directors, officers, and stockholders
are above board.
[18]
Banks were not created
for the benefit of their directors and officers;
they cannot use the assets of the bank for their
own benefit, except as may be permitted by
law. Congress has thus deemed it essential to
impose restrictions on borrowings by bank
directors and officers in order to protect the
public, especially the depositors.
[19]
Hence,
when the law prohibits directors and officers
of banking institutions from becoming in any
manner an obligor of the bank (unless with the
approval of the board), the terms of the
prohibition shall be the standards to be applied
to directors transactions such as those
involved in the present case.

Credit accommodation limit is not an
exception nor is it an element of the
offense

Contrary to Gos claims, the second paragraph
of Section 83, RA 337 does not provide for an
exception to a violation of the first paragraph
thereof, nor does it constitute as an element of
the offense charged. Section 83 of RA 337
actually imposes three restrictions:approval,
reportorial, and ceiling requirements.

The approval requirement (found in the first
sentence of the first paragraph of the law)
refers to the written approval of the majority of
the banks board of directors required before
bank directors and officers can in any manner
be an obligor for money borrowed from or
loaned by the bank. Failure to secure the
approval renders the bank director or officer
concerned liable for prosecution and, upon
conviction, subjects him to the penalty
provided in the third sentence of first
paragraph of Section 83.

The reportorial requirement, on the other
hand, mandates that any such approval should
be entered upon the records of the corporation,
and a copy of the entry be transmitted to the
appropriate supervising department. The
reportorial requirement is addressed to the
bank itself, which, upon its failure to do so,
subjects it to quo warranto proceedings under
Section 87 of RA 337.
[20]

The ceiling requirement under the second
paragraph of Section 83 regulates the amount
of credit accommodations that banks may
extend to their directors or officers by limiting
these to an amount equivalent to the respective
outstanding deposits and book value of the
paid-in capital contribution in the
bank. Again, this is a requirement directed at
the bank. In this light, a prosecution for
violation of the first paragraph of Section 83,
such as the one involved here, does not require
an allegation that the loan exceeded the legal
limit. Even if the loan involved is below the
legal limit, a written approval by the majority
of the banks directors is still required;
otherwise, the bank director or officer who
becomes an obligor of the bank is
liable. Compliance with the ceiling
requirement does not dispense with the
approval requirement.

Evidently, the failure to observe the three
requirements under Section 83 paves the way
for the prosecution of three different offenses,
each with its own set of elements. A
successful indictment for failing to comply
with the approval requirement will not
necessitate proof that the other two were
likewise not observed.

Banking and Allied Laws Reviewer

Uploaded by

Copyright:

Available Formats

Banking and Allied Laws Reviewer

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Banking and Allied Laws Reviewer

Uploaded by

Copyright:

Available Formats

What are the different classifications of banks in the Philippines?

What is the distinction between a universal bank and a commercial bank?

COMMERCIAL LAW REVIEW 2014

Banking Laws based on Catindig Syllabus

You might also like