BANKING LAWS TABLE OF CONTENTS A. The New Central Bank Act

Republic Act No. 7653 B. The General Banking Act

Republic Act No. 337

In General Establishment of Domestic Banks Licensing of Foreign Banks Commercial Banking Corporations and Universal Banks Thrift Banks Act of 1996

Republic Act No. 7906 Building and Loans Associations Rural Banks Act of 1992

Republic Act No. 7353 C. An Act Liberalizing the Entry of Foreign Banks

Republic Act No. 7721 D. Offshore Banking System Law

Pres. Decree No. 1034 E. Foreign Currency Deposits Act

Republic Act No. 6426, as amended F. An Act Creating the PDIC

Republic Act No. 3531 G. The Truth in Lending Act

Republic Act No. 3765

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H. Law on Secrecy of Bank Deposits Republic Act No. 1405

Note: We have included several banking laws which are not in the bar

coverage. Likewise, we have incorporated several laws on non-bank financial intermediaries. Since they are not covered by the bar exam, the reviewee has the option of not reading them.

BANKING AND FINANCE IN GENERAL Two types of financing 1. equity 2. debt-financing A cross-breed of the two may also occur.

Intermediaries 1. Banks 2. Non-bank financial intermediaries 3. Exchanges 4. Others i.e. secondary markets Function of intermediaries 1. or matching investors with those in need of financing 2. Help in diminishing risks to investors 3. Provide liquidity

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NEW CENTRAL BANK ACT Republic Act No. 7653 Approved 14 June 1993 IN GENERAL Mandate central monetary

authority, mandated in the 1987 Constitution, which shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. [Section 1, RA 7653]

The Bangko Sentral shall enjoy fiscal and administrative autonomy.

[Section 1, RA 7653] Objectives 1. The primary objective of the Bangko Sentral is to maintain price stability

conducive to a balanced and sustainable growth of the economy. 2. It shall also promote and maintain monetary stability and the

convertibility of the peso. 3. It shall also provide policy directions in the areas of money, banking and

credit. 4. It has supervision over banks and has regulatory powers over the

operations of finance companies and non-bank financial intermediaries performing quasi-banking functions. [Section 3, RA 7653]

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Typical functions of the Bangko Sentral 1. Supervision over banks and regulation of non-bank financial

intermediaries engaged in quasi-banking functions 2. Bank of issue: as such, it has the sole power and authority to issue

currency 3.

As such, it ensures convertibility of the peso and backs up Philippine currency. 4. It has control of credit

a. regulating money supply i.e. reserve requirements for banks b. open market operations i.e. Tbills c. controlling interest rate

5. Lender of last resort It has a allowing banks to sell their promissory

notes to it. 6. Custodian of cash reserves of banks 7. Government banker, agent and advisor 8. Central clearance and settlement agency

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Fiscal policy v. monetary policy Fiscal policy is concerned with revenue generation and expenditure

while monetary policy involves regulating money supply and price stability.

The Bangko Sentral will now concentrate on monetary policy and shed

off fiscal responsibilities which in the past had distracted it from its primary function. [Section 129, RA 7653]

MONETARY BOARD AND GOVERNOR Monetary Board The powers and functions of the Bangko Sentral are exercised by the

Monetary Board. The Board is composed of seven (7) members appointed by the

President for a term of six (6) years. No member may be reappointed more than once.

The seven members are:

1. The Governor as Chairman; 2. A member of the Cabinet designated by the President; and 3. Five (5) members who shall come from the private sector, all of

whom shall serve full-time. Qualifications of the members of the Monetary Board 1. Must be natural born citizens of the Philippines 2. At least thirty five (35) years of age, with the exception of the Governor

who should at least be forty (40) years old

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3. Good moral character 4. Of unquestionable integrity 5. Of known probity and patriotism 6. With recognized competence in social and economic disciplines Disqualifications In addition to the disqualifications imposed by Republic Act No. 6713, a

member of the Monetary Board is disqualified from being a director, officer, employee, consultant, lawyer, agent or stockholder of any bank, quasi-bank or any other institution which is subject to supervision or examination by the Bangko Sentral, in which case such member shall resign from, and divest himself of any and all interests in such institution before assumption of office as member of the Monetary Board.

The member of the Monetary Board coming from the private sector shall

not hold any other public office or public employment during their tenure.

No person shall be a member of the Monetary Board if he has been

connected with any multilateral banking or financial institution or has a substantial interest in any private bank in the Philippines, within one (1) year prior to his appointment; likewise, no member of the Monetary Board shall be employed in any such institution within two (2) years after the expiration of his term except when he serves as an official representative of the Philippine Government to such institution.

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Quorum in the Monetary Board The presence of four (4) members shall constitute a quorum. However,

in all cases, the Governor or his duly designated alternate shall be among the four.

Withdrawal of persons having a personal interest In addition to the requirements of Republic Act No. 6713, any member

of the Monetary Board with personal or pecuniary interest in any matter in the agenda of the Monetary Board shall disclose his interest to the Board and shall retire from the meeting when the matter is taken up. The decision taken on the matter shall be made public. The minutes shall reflect the disclosure made and the retirement of the member concerned from the meeting.

Responsibility and liability of the members of the Monetary Board Members of the Monetary Board, officials, examiners, and employees of

the Bangko Sentral who willfully violate RA 7653 or who are guilty of negligence, abuses or acts of malfeasance or misfeasance or fail to exercise extraordinary diligence in the performance of his duties shall be held liable for any loss or injury suffered by the Bangko Sentral or other banking institutions as a result of such violation, negligence, abuse, malfeasance, misfeasance or failure to exercise extraordinary diligence.

Similar responsibility shall apply to members, officers and employees of

the Bangko Sentral for;

1. The disclosure of any information of a confidential nature, or any information on the discussions or resolutions of the Monetary Board, or about the confidential operations of the Bangko Sentral, unless the disclosure is in connection with the performance of official functions with the Bangko Sentral, or is with prior authorizaytion of the Monetary Board or the Governor; or

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2. The use of such information for personal gain or to the detriment

of the Government, the Bangko Sentral or third parties. However, any data or information required to be submitted to the

President and/or Congress, or to be published under the provisions of RA 7653 shall not be considered confidential.

Authority of Governor to render opinions, decisions or rulings The Governor of the Bangko Sentral shall have the power to render

opinions, decisions, or rulings which shall be final and executory, until reversed or modified by the Monetary Board, on matters regarding application or enforcement of laws pertaining to institutions supervised by the Bangko Sentral and laws pertaining to quasi-banks, as well as regulations, policies or instructions issued by the Monetary Board, and the implementation thereof. [Section 17(e), RA 7653]

Authority of the Governor in emergencies In case of emergencies where time is insufficient to call a meeting of the

Monetary Board, the governor with the concurrence of two other members of the Board may decide any matter or take an action within the authority of the Board.

He shall thereafter submit a report to the President and Congress within

72 hours after the action has been taken. At the soonest possible time, the Governor shall call a meeting of the

Monetary board to submit his action for ratification. [Section 19, RA 7653]

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Outside interests of the Governor and the full -time members of the Board The Governor of the Bangko Sentral and the full-time members of the

Board shall limit their professional activities to those pertaining directly to their positions with the Bangko Sentral.

They may not accept any other employment, whether public or private,

remunerated or ad honorem. Exceptions:

1. Positions in eleemosynary, civic, cultural or religious

organizations 2. Whenever, by designation of the President, the Governor or the

full -time member is tasked to represent the interest of the Government or other government agencies in matters connected with or affecting the economy or the financial system of the country

CERTAIN OPERATIONS OF THE BANGKO SENTRAL Supervision and examination The Bangko Sentral shall have supervision over, and conduct periodic or

special examination of, banking institutions and quasi-banks, including their subsidiaries and affiliates engaged in allied activities.

This power however is subject to the provision of existing laws

protecting or safeguarding the secrecy or confidentiality of bank deposits as well as investments of persons, natural or juridical, in debt instruments issued by the Government. [Section 25, RA 7653]

Subsidiary and affiliate 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

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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.

No restraining order on power of examination 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. [Section 25, RA 7653]

Prohibitions on personnel of the Bangko Sentral In addition to the prohibitions found in RA 3019 and 6713, personnel of

the Bangko Sentral are hereby prohibited from:

1. Being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the Bangko Sentral, except non-stock savings and loan associations and provident funds organized exclusively for employees of the Bangko Sentral, and except as otherwise provided in RA 7653;

2. Directly or indirectly requesting or receiving any gift, present or

pecuniary or material benefit for himself or another, from any institution subject to supervision or examination by the Bangko Sentral;

3. Revealing in any manner, except upon orders of the court, the

Congress or any government office or agency authorized by law,

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or under such conditions as may be prescribed by the Monetary Board, information relating to the condition or business of any such institution. This prohibition shall not apply to the giving of information to the Monetary Boar or the Governor of the Bangko Sentral, or to any person authorized by either of them, in writing, to receive such information; and

4. Borrowing from any institution subject to supervision or

examination by the Bangko Sentral unless said borrowings are adequately secured, fully disclosed to the Monetary Boar, and shall be subject to such further rules and regulations as the Monetary Board may prescribe.

CONSERVATORSHIP V. RECEIVERSHIP CONSERVATOR Grounds for appointment of conservator The Monetary Board may appoint a conservator whenever it finds that a

bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors. [Section 29, RA 7653]

The conservator should be competent and knowledgeable in bank

operations and management. The conservatorship shall not exceed one (1) year.

Powers of conservator 1. Take charge of the assets, liabilities and management of the bank or

quasi-bank 2. Reorganize the management 3. Collect all monies and debts due said institution

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4. Exercise all powers necessary to restore its viability Extent of the power of the conservator The conservator has the power to overrule or revoke the actions of the

previous management and board of directors of the bank or quasi-bank. However, the power cannot extend to the post-facto repudiation of

perfected transactions, otherwise they would infringe against the non-impairment clause of the Constitution.

Section 28-A of RA No. 265 merely gives the conservator the power to

revoke contracts that are deemed to be defective under existing law (i.e., void, voidable, unenforceable, or rescissible); hence, the conservator

of directors. What the board of directors cannot do, such as repudiating a contract validly entered into under the doctrine of implied authority, the conservator cannot do either. [First Philippine International Bank v. CA , 252 SCRA 255 (1986)]

Terminati on of conservatorship The Monetary Board shall terminate the conservatorship when it is

satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary.

The conservatorship shall likewise be terminated should the Monetary

Board determine that the continuance in business of the institution would involve probable loss to its depositors or creditors, in which case proceedings for receivership and liquidation shall be pursued. [Section 29, RA 7653]

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PROCEEDINGS IN RECEIVERSHIP AND LIQUIDATION Grounds for proceedings in receivership and liquidation The Monetary Board shall institute proceedings for receivership

whenever it finds that a bank or quasi-bank:

1. Is unable to pay its liabilities as they become due in the ordinary course of business; provided that this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community;

2. Has insufficient realizable assets to meet its liabilities; 3. Cannot continue in business without involving probable loss to its

depositors or creditors; or 4. Has willfully violated a cease and desist order that has become

final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution.

No need of prior notice and hearing In such cases, the Monetary Board may summarily and without need for

prior hearing, forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution. [Section 30, RA 7653]

Who acts as receiver For a bank, the Philippine Deposit Insurance Corporation shall serve as

receiver; for a quasi-bank, any person of recognized competence in banking or finance may be designated as receiver.

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Tasks of the receiver The receiver shall immediately (1) gather and take charge of all assets

and liabilities of the institution, (2) administer the same for the benefit of its creditors, and (3) exercise the general powers of a receiver. (4) The receiver shall determine as soon as possible, but not later than ninety (90) days from takeover, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public.

Resumption Any determination for the resumption of business of the institution shall

be subject to prior approval of the Monetary Board. Liguidation If the receiver determines that the institution cannot be rehabilitated or

permitted to resume business, the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with the liquidation of the institution.

Procedure for liquidation The receiver shall then:

1. File ex parte with the proper regional trial court, and without the

requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the Philippine Deposit Insurance Corporation in the case of a bank or by the Monetary Board in the case of a quasi-bank;

2. Upon acquiring jurisdiction, the court shall, upon motion by the

institution, assist the enforcement of individual liabilities of the

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stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted; and

3. Convert the assets of the institution to money, dispose of the same

to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines and he may, in the name of the institution, institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution.

Custodia legis and exemption from levy, attachment or execution The assets of an institution under receivership or liquidation shall be

deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution. [Section 30, RA 7653]

Actions of Monetary Board final and may be questioned only through certiorari The actions of the Monetary Board taken regarding the designation of a

conservator and appointment of a receiver shall be final and executory and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction.

The petition for certiorari may only be filed by the stockholders of

record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship.

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Designation of conservator not precondition to designation of receiver The designation of a conservator or the appointment of a receiver shall

be vested exclusively with the Monetary Board. The designation of a conservator is not a precondition to the designation

of a receiver. THE BANGKO SENTRAL AND THE MEANS OF PAYMENT Unit of monetary value The unit of monetary value in the Philippines is the peso.

Currency The word "currency" is hereby defined as meaning all Philippine notes

and coins issued or circulating in accordance with the provisions of RA 7653.

Bank of issue The Bangko Sentral has the sole power and authority to issue currency

within the territory of the Philippines [Section 50, RA 7653] Notes and coins issued by the BSP shall be liabilities of the BSP and may

be issued only against and in amounts not exceeding, the assets of the BSP. Said notes and coins shall be a first and paramount lien on all assets of the BSP [Section 51, RA 7653]

All notes and coins issued by the BSP are fully guaranteed by the RP and

shall be legal tender in the Philippines for all debts, both public and private. [Section 52, RA 7653]

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Demand deposits "Demand deposits" means all those liabilities of the Bangko Sentral and

of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of checks.

Issue of demand deposits Only banks duly authorized to do so may accept funds or create

liabilities payable in pesos upon demand by the presentation of checks, and such operations shall be subject to the control of the Monetary Board in accordance with the powers granted it with respect thereto under RA 7653.

Legal character of checks Checks representing demand deposits do not have legal tender power

and their acceptance in the payment of debts, both public and private, is at the option of the creditor. [Section 60, RA 7653]

However, a check which has been cleared and credited to the account of

the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. [Section 60, RA 7653]

DOMESTIC MONETARY STABILIZATION Guiding principle The Monetary Board shall endeavor to control any expansion or

contraction in monetary aggregates which is prejudicial to the attainment or maintenance of price stability.

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Action when abnormal movements occur in the monetary a ggregates, credit, or price level Whenever abnormal movements in the monetary aggregates, in credit,

or in prices endanger the stability of the Philippine economy or important sectors thereof, the Monetary Board shall:

1. Take such remedial measures as are appropriate and within the

powers granted to the Monetary Board and the Bangko Sentral; 2. Submit to the President of the Philippines and the Congress, and

make public, a detailed report which shall includes, as a minimum, a description and analysis of:

a. The causes of the rise or fall of the monetary aggregates, of

credit or of prices; b. The extent to which the changes in the monetary

aggregates, in credit, or in prices have been reflected in changes in the level of domestic output, employment, wages, and economic activity in general and the nature and significance of any such changes; and

c. The measures which the Monetary Board has taken and the

other monetary, fiscal or administrative measures which it recommends to be adopted.

INTERNATIONAL MONETARY STABILIZATION International monetary stabilization The Bangko Sentral shall exercise its powers to preserve the

international value of the pesos and to maintain its convertibility into other freely convertible currencies primarily for, although not necessarily limited to, current payments for foreign trade and invisibles. [Section 64, RA 7653]

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International reserves In order to maintain the international stability and convertibility of the

Philippine peso, the Bangko Sentral shall maintain international reserves adequate to meet any foreseeable net demands on the Bangko Sentral for foreign currencies. [Section 65, RA 7653]

Composition of the international reserves 1. Gold 2. Assets in foreign currencies Action when international stability of the pesos is threatened Whenever the international reserve of the Bangko Sentral falls to a level

which the Monetary Board considers inadequate to meet the prospective net demands on the Bangko for foreign currencies, or whenever the international reserve appears to be in imminent danger of falling to such a level, or whenever the international reserve is falling as a result of payments or remittances abroad which, in the opinion of the Monetary Board, are contrary to the national welfare, the Monetary Board shall:

1. Take such remedial measures as are appropriate and within the

powers granted to the Monetary Board and the Bangko Sentral; 2. Submit to the President of the Philippines and the Congress, and

make public, a detailed report which shall includes, as a minimum, a description and analysis of:

a. The nature and causes of the existing or imminent decline;

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b. The remedial measures already taken or to be taken by the Monetary Board;

c. The monetary, fiscal or administrative measures further

proposed; and d. The character and extent of the cooperation required from

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

INSTRUMENTS OF BANGKO SENTRAL ACTION Means of action In order to achieve the primary objective of price stability, the Monetary

Board shall rely on its moral influence and the powers granted to it under RA 7653 for the management of monetary aggregates.

Purchases and sales of gold The Bangko Sentral may buy and sell gold in any form.

Purchases and sales of foreign exchange The Bangko sentral may buy and sell foreign notes and coins, and

documents and instruments of types customarily employed for the international transfe rof funds.

The Bangko Sentral may engage in future exchange operations.

To whom can engage The Bangko Sentral may engage in foreign transactions with the

following entities or persons only:

1. Banking institutions operating in the Philippines;

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2. The Government, its political subdivisions and instrumentalities; 3. Foreign or international financial institutions; 4. Foreign governments and their instrumentalities; and 5. Other entities or persons which the Monetary Board is hereby

empowered to authorize as foreign exchange dealers. Foreign asset position of the Bangko Sentral The Bangko Sentral shall endeavor to maintain at all times a net positive

foreign asset position so that its gross foreign exchange assets will always exceed its gross foreign liabilities.

Emergency restrictions on foreign exchange operations Emergency restrictions on foreign exchange operations include:

1. Temporarily suspending or restricting sales of foreign exchange

by the Bangko Sentral; 2. Subjecting all transactions in gold and foreign exchange to license

by the Bangko Sentral; and 3. Requiring that any foreign exchange thereafter obtained by any

person residing or entity operating in the Philippines be delivered to the Bangko Sentral or to any bank or agent designated by the Bangko Sentral for the purpose, at the effective exchange rate or rates. [Section 72, RA 7653]

Emergency restrictions may be imposed for the following purposes:

1. In order to achieve the primary objective of the Bangko Sentral;

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2. To protect the international reserves of the Bangko Sentral in the imminence of, or during an exchange crisis, or in time of national emergency; and

3. To give the Monetary Board and the Government time in which to

take constructive measures to forestall, combat, or overcome such a crisis or emergency. [Section 72, RA 7653]

Such measures may be adopted with the concurrence of at least five (5)

members of the Monetary Board and with the approval of the President of the Philippines. [Section 72, RA 7653]

Exchange rates The Bangko Sentral shall determine the exchange rate policy of the

country. Foreign exchange holdings of the banks In order that the Bangko Sentral may at all times have foreign exchange

resources sufficient to enable it to maintain the international stability and convertibility of the peso, or in order to promote the domestic investment of bank resources, the Monetary Board may require the banks to sell to the Bangko Sentral or to other banks all or part of their surplus holdings of foreign exchange. [Section 76, RA 7653]

LOANS TO BANKING AND OTHER FINANCIAL INSTITUTIONS Guiding principles The rediscounts, discounts, loans and advances, which the Bangko

Sentral is authorized to extend to banking institutions, shall be used to influence the volume of credit consistent with the objective of price stability.

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Types of credit operations 1. Normal credit operations 2. Special credit operations 3. Emergency credit operations Normal credit operations 1. Commercial credits 2. Production credits 3. Other credits Commercial credits The Bangko Sentral may rediscount, discount, buy and sell bills,

acceptances, promissory notes and other credit instruments with maturities of not more than one hundred eighty (180) days from the date of their rediscount, discount or acquisition by the Bangko Sentral and resulting from transactions related to:

1. The importation, exportation, purchase or sale of readily saleable

goods and products, or their transportation within the Philippines; or

2. The storing of non-perishable goods and products which are duly

insured and deposited, under conditions assuring their preservation in authorized bonded warehouses or in other places approved by the Monetary Board.

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Production credits The Bangko Sentral may rediscount, discount, buy and sell bills,

acceptances, promissory notes and other credit instruments having maturities of not more than three hundred sixty (360) days from the date of their rediscount, discount or acquisition by the Bangko Sentral and resulting from transactions related to the production or processing of agricultural, animal, mineral, or industrial products.

Other credits Special credit instruments not otherwise rediscountable under

commercial and production credits may be eligible for rediscounting in accordance with the rules and regulations which the Bangko Sentral shall prescribe.

Special credit operation 1. Loans for liquidity purposes Loans for liquidity purposes The Bangko Sentral may extend loans and advances to banking

institutions for a period of not more than seven (7) days without any collateral for the purpose of providing liquidity to the banking system in times of need. [Section 83, RA 7653]

Emergency loans and advances In periods of national and/or local emergency or of imminent financial

panic which directly threaten monetary and banking stability, the Monetary Board may, by a vote of at least five (5) of its members, authorize the Bangko Sentral to grant extraordinary loans or advances to banking institutions secured by assets. [Section 84, RA 7653]

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The Monetary Board may, at its discretion, likewise authorize the Bangko Sentral to grant emergency loans or advances to banking institutions, even during normal periods, for the purpose of assisting a bank in a precarious financial condition or under serious financial pressures brought by unforeseen events, or events which, though foreseeable, could not be prevented by the bank concerned. This requires that the Monetary Board has ascertained that the bank is not insolvent and has the assets to secure the advances and that the concurrent vote of at least five (5) members of the Monetary Board is obtained. [Section 84, RA 7653]

OPEN MARKET OPERATIONS FOR THE ACCOUNT OF THE BANGKO SENTRAL Principle of open market operations The open market purchases and sales of securities by the Bangko

Sentral shall be made exclusively in accordance with its primary objective of achieving price stability.

In pursuit of this principle, the Bangko Sentral may engage in the

purchase and sale of government securities as well as issue and negotiate obligations of the Bangko Sentral.

BANK RESERVES Reserve requirements In order to control the volume of money created by the credit operations

of the banking system, all banks operating in the Philippines shall be required to maintain reserves against their deposit liabilities.

The required reserves of each bank shall be proportional to the volume

of its deposit liabilities and shall ordinarily take the form of a deposit in the Bangko Sentral. [Section 94, RA 7653]

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No interest on bank reserves Since the requirement to maintain bank reserves is imposed primarily to

control the volume of money, the Bangko Sentral shall not pay interest on the reserves maintained with it unless the Monetary Board decides otherwise as warranted by circumstances. [Section 94, RA 7653]

Deposit substitutes The term "deposit substitutes" is defined as an alternative form of

obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of re-lending or purchasing of receivables and other obligations.

Required reserves against foreign currency The Monetary Board is similarly authorized to prescribe and modify the

minimum reserve ratios authorized applicable to deposits denominated in foreign currencies.

Increase in reserve requirements Whenever in the opinion of the Monetary Board it becomes necessary to

increase reserve requirements against existing liabilities, the increase shall be made in a gradual manner and shall not exceed four percentage points in any thirty -day period.

Banks and other affected financial institutions shall be notified

reasonably in advance of the date on which such increase is to become effective.

Exemption from attachment and other purposes of reserves Deposits maintained by banks with the Bangko Sentral as part of their

reserve requirements shall be exempt from attachment, garnishment, or

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any other order or process of any court, government agency or any other administrative body issued to satisfy the claim of a party other than the Government, or its political subdivision or instrumentalities.

SELECTIVE REGULATION OF BANK OPERATIONS Guiding principle The Monetary Board shall use the powers granted to it under RA 7653

to ensure that the supply, availability and cost of money are in accord with the needs of the Philippine economy and that bank credit is not granted for speculative purposes prejudicial to the national interests.

Regulations on bank operations shall be applied to all banks of the same

category uniformly and without discrimination. Margin requirements against letters of credit The Monetary Board may at any time prescribe minimum cash margins

for the opening of letters of credit, and may related the size of the required margin to the nature of the transaction to be financed.

FUNCTIONS AS BANKER AND FINANCIAL ADVISOR OF THE GOVERNMENT Designation of Bangko Sentral as banker of the government The Bangko Sentral shall act as a banker of the Government, its political

subdivisions and instrumentalities. The Bangko Sentral shall represent the government with the

International Monetary Fund and other financial institutions.

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Official deposits The Bangko Sentral shall be the official depository of the Government,

its political subdivisions and instrumentalities as well as of government-owned or controlled corporations.

THE MARKETING AND STABILIZATION OF SECURITIES FOR THE ACCOUNT OF THE GOVERNMENT Issue of government obligations The issue of securities representing obligations of the Government, its

political subdivisions or instrumentalities may be made through the Bangko Sentral, which may act as agent of, and for the account of, the Government or its respective subdivisions or instrumentality, as the case may be.

The Bangko Sentral shall not be a member of any stock exchange or

syndicate, but may intervene therein for the sole purpose of regulating their operations in the placing of government securities. [Section 118, RA 7653]

Servicing and redemption of public debt The servicing and redemption of the public debt shall also be effected

through the Bangko Sentral. Financial advice on official credit operations Before undertaking any credit operation abroad, the Government,

through the Secretary of Finance, shall request the opinion, in writing, of the Monetary Board on the monetary implications of the contemplated action. Such opinion must similarly be requested by all political subdivisions and instrumentalities of the Government before any credit operation abroad is undertaken by them.

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Whenever the Government, or any of its political subdivisions or instrumentalities, contemplates borrowing within the Philippines, the prior opinion of the Monetary Board shall likewise be requested in order that the Board may render an opinion on the probable effects of the proposed operation on monetary aggregates, the price level, and the balance of payments.

In order to assure effective coordination between the economic,

financial and fiscal policies of the government and the monetary, credit and exchange policies of the Bangko Sentral, the Deputy Governor designated by the Governor of the Bangko Sentral shall be an ex officio member of the National Economic and Development Authority Board.

PROHIBITIONS Prohibitions The Bangko Sentral shall not acquire shares of any kind or accept them

as coolateral, and shall not participate in the ownership or management of any enterprise, either directly or indirectly.

The Bangko Sentral shall not engage in development banking or

financing. TRANSITORY PROVISIONS Phaseout of fiscal agency functions Unless circumstances warrant otherwise and approved by the Congress

Oversight Committee, the Bangko Sentral shall within a period of three (3) years but in no case longer than five (5) years from the approval of RA 7653, phase out all fiscal agency functions, and transfer the same to the Department of Finance. [Section 129, RA 7653]

Phaseout of regulatory powers over the operations of finance corporations and other institutions performing similar functions

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The Bangko Sentral shall within a period of five (5) years from the

effectivity of RA 7653 phase out its regulatory powers over finance companies without quasi-banking functions and other institutions performing similar functions, the same to be assumed by the Securities and Exchange Commission. [Section 130, RA 7653]

GENERAL BANKING ACT Republic Act No. 337, as amended An act regulating banks and banking institutions and for other purposes Approved 23 February 1995 IN GENERAL Rule on bank operations Only entities duly authorized by the Monetary Board of the Bangko

Sentral may engage in the lending of funds obtained from the public through the receipt of deposits of any kind and all entities regularly conducting such operations shall be considered as banking institutions.

Banks or banking institutions Entities engaged in the lending of funds obtained from the public

through the receipt of deposits of any kind, and all entities regularly conducting such operation.

Banks or banking institutions must be duly authorized by the Monetary

Board of the Central Bank. Public shall mean twenty or more lenders.

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Quasi-banking functions - shall mean borrowing funds, for the

acceptance of debt instruments of any kind other than deposits, or through the issuance of participations, certificates of assignment, or similar instruments with recourse, trust certificates, or of repurchase agreements, from twenty or more lenders at any one time, for purposes of re-lending or purchasing of receivables and other obligations.

However, commercial, industrial, and other non-financial companies,

which borrow funds through any of these means for the limited purposes of financing their own needs or the needs of their agents or dealers, shall not be considered as performing quasi-banking functions.

Financial intermediaries shall mean persons or entities whose

principal functions include the lending, investing or placement of funds or evidence of indebtedness or equity deposited with them, acquired by them or otherwise coursed through them, either for their own account or for the account of others.

Non-banking financial institutions performing quasi -banking functions The following entities shall not be considered as banking institutions

but shall be subject to regulation by the Monetary Board:

1. Entities regularly engaged in the lending of funds or purchasing of receivables or other obligations with funds obtained from the public through the issuance, endorsement or acceptance of debt instruments of any kind for their own account, or through the issuance of certificates of assignment or similar instruments with recourse, trust certificates, or of repurchase agreements, whether any of these means of obtaining funds from the public is done on a regular basis or occasionally.

32 BANKING LAWS

2. Entities regularly engaged in the lending of funds which receive

deposits occasionally. 3. Trust companies, building and loan associations, and non-stock

savings and loan associations. These entities will be subject to regulation by the Monetary Board which

may include, but need not be limited to:

1. the imposition of net worth to risk assets ratios; 2. reserve requirements; 3. interest rate ceilings; 4. methods of computation thereof; 5. prescribing charges which may be collected; 6. minimum capitalization; and 7. submission of statistical reports.

Non-bank financial intermediaries The operations and activities of non-bank financial intermediaries,

except insurance companies, shall be subject to regulation by the Monetary Board which may include, but need not be limited to, the imposition of constraints covering the:

1. minimum size of funds received; 2. methods of marketing and distribution; 3. terms and maturities of funds received; and

33 BANKING LAWS

4. uses of funds.

If such entities are authorized by the Central Bank to perform quasi-

banking functions, they may be further subject to regulation as discussed below. Note: Sec. 130 of the CB Act phasing out the regulation of MB over NBFCs not engaged in quasi-banking functions.

Determination of functions The determination of whether a person or an entity is a) performing

banking or quasi-banking functions; or b) engaged in other types of financial intermediation shall be decided by the Monetary Board, subject to judicial review.

Regulation shall mean the issuance of rules of conduct or the

establishment of modes or standards of operation for uniform application to all institutions or functions covered, taking into consideration in determining such coverage 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. In some instances, these entities may be subject to special examination.

Supervision shall include not only the issuance of rules but also the

overseeing to ascertain that regulations are complied with, investigating or examining to determine whether an institution is conducting its business on a sound financial basis, and inquiring into the solvency and liquidity of the institution.

34 BANKING LAWS

Relationship between bank and depositor Fixed savings and current deposits of money in banks and similar

institutions shall be governed by the provisions concerning simple loan. In other words, the relationship between the bank and the depositor is that of a debtor and creditor.

In the case of rent of safety deposit box. The contract is a special kind of

deposit and cannot be characterized as an ordinary contract of lease because the full and absolute possession and control of the deposit box is not given to the renters. The prevailing rule is that the relation between the bank renting out and the renter is that of bailer and bailee the bailment being for hire and mutual benefiit. [CA Agro-industrial Dev. Corp. v. CA, 219 SCRA 426 (1983)]

Types of deposits 1. Time Deposit-Interest rate stipulated depending on the number of days.

During this period, the money deposited cannot be withdrawn. The bank uses this money to lend to others. That is why in these accounts, the depositor is paid higher rates of interest for the use of the money.

2. Savings deposit-Interest fixed under the fine prints, if one deposits

today, he cannot withdraw the amount not until 60 days later. The bank can lend out such funds; that is why it pays interests on such deposits.

3. Demand deposit or current accounts- No interest is fixed by the bank

because the depositor can take out his funds any time. It is called demand deposit because the depositor can withdraw the money deposited on the very same day when he deposited it. Note: As a general rule, only commercial banks can accept demand deposits on checking accounts. By way of exception, savings banks and even rural banks, are allowed by the CB to accept checking accounts because their capitalizaition may be large.

35 BANKING LAWS

Money market transactions Money market is a market dealing in standardized short-term credit

instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a mediator or dealer in the open market.

It involves which are instruments

transferred or in any manner conveyed to another person or entity, with

The fundamental function of the money market devise in its operation is

to match and bring together in a most impersonal manner both the and the

considerations. The market mechanism is intended to provide quick mobility of money and securities.

The General Banking Act discriminates against banks in two aspects 1. Period- Under the Civil Code, a period is presumed to be for the benefit

of both parties. Insofar as banks are concerned, the period is always for the benefit of the debtor if the bank is the creditor. The debtor can compel the creditor bank to accept payment of a debt before it is due, and recover interest deducted in advance.

2. Foreclosure of mortgage-

The general rule is that there is no right of redemption in judicial foreclosure of mortgage. There is only 90 day equity redemption period.

36 BANKING LAWS

The exception is with the banks aside from the 90-day equity redemption period, banks are required to give a one-year redemption period.

Alien bank mortgage An alien bank can bid in a public auction of mortgaged property if such

property was mortgage to it in the course of an ordinary banking transaction. If the mortgage was not within the normal banking transaction, it must be prohibited from bidding.

Mortgag e loans Loans against real estate security shall not exceed 70% of the appraised

value of the real estate security, plus 70 %of the appraised value of the improvements with title to the property being with the mortgagor.

Loans on the security of chattels shall not exceed 50% of the appraised

value of the security. Classification of banks 1. Commercial banks 2. Thrift banks

a. Savings and mortgage banks b. Stock savings and loan associations c. Private development banks

3. Rural banks

37 BANKING LAWS

Indispensable to the national interest The banking industry is hereby declared as indispensable to the national

interest and, notwithstanding the provisions of any law to the contrary, any strike or lockout involving banks, if unsettled after seven (7) calendar days, shall be reported by the Central Bank to the Preside who shall immediately certify the same to the appropriate court, government agency or commission for resolution.

ESTABLISHMENT OF DOMESTIC BANKS Form of organization Domestic banking institutions, except building and loan associations,

shall be organized in the form of stock corporations. No banking institution shall issue no-par value stock.

The Securities and Exchange Commission shall not register the articles

of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its official seal.

At least two thirds of the members of the board of directors of any bank

or banking institution which may be established after the approval of this Act shall be Filipino citizens.

Requisites for issuance of certificate of authority Such certificate shall not issue unless the Monetary Board is satisfied

from the evidence submitted to it:

1. That all the requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with;

38 BANKING LAWS

2. That the public interest and economic conditions, both general and local, justify the authorization; and

3. That the amount of capital, the financing organization, direction

and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of the interests which the public may entrust to them.

Receipt and disposition of deposits No bank which may be established and licensed to do business in the

Philippines shall receive deposits, unless incorporated under the laws of the Republic of the Philippines.

This prohibition, however, shall not apply to branches and agencies of

foreign banks which, at the time of approval of the General Banking Act, are actually receiving deposits.

After approval of the Act, all deposits so received by such branches and

agencies of foreign bank shall not be invested in any manner outside the territorial limits of the Republic of the Philippines.

Voting stock requirements At least seventy percent (70%) of the voting stock of any banking

institution which may be established after the approval of the Act shall be owned by citizens of the Philippines, except where a new bank is established as a result of: a) the local incorporation of any of the existing branches or agencies of foreign banks in the Philippines; or b) the consolidation of existing banks in any of which there are foreign owned voting stocks at the time of consolidation.

The Monetary Board may, with the approval of the President, increase

the percentage of foreign-owned voting stocks in any domestic bank from thirty percent (30%) to forty percent (40%).

39 BANKING LAWS

The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. In the case of corporations owning bank shares, the citizenship of each stockholder in that corporation shall be the basis of computing the percentage.

Ownership of stocks in banks by corporations The total voting stocks which any corporation, including its wholly or

majority owned subsidiaries, may own in any bank shall not exceed thirty percent (30%) of the voting stock of that bank.

In the case of a corporation which is wholly owned, or the majority of

the voting stock of which is owned, by any one person or by persons related to each other within the third degree of consanguinity or affinity, that corporation may own not more than twenty percent (20%) of the voting stock of any bank.

LICENSING OF FOREIGN BANKS License to conduct business No foreign bank or banking corporation formed, organized or existing

under any law other than those of the Philippines shall be permitted to transact business in the Philippines, or maintain by itself or assignee any suit for the recovery of any debt, claims, or demand whatsoever, until after it shall have obtained, upon order of the Monetary Board, a license for that purpose from the Securities and Exchange Commission.

No foreign building and loan association or building and loan association

not formed, organized, or existing under the laws of the Philippines shall be permitted to transact business in the Philippines.

40 BANKING LAWS

Requisites for issuance of license 1. Public and economic conditions, both general and local, justify the

issuance of such order. 2. The foreign bank or banking corporation is solvent and in sound

financial condition. 3. A duly appointed agent in the Philippines has been authorized to accept

summons and legal processes. Investment rights 1. Foreign banking institutions without branches in the Philippines,

including their wholly or majority owned subsidiaries and their holding companies having majority holding in such foreign banking institutions, may invest, with prior approval of the Monetary Board, in equities of local companies engaged in financial allied undertakings. However, they shall maintain minority participation in such enterprise.

2. With prior approval of the Central Bank, these foreign entities may also

purchase equities in domestic banks, subject to restrictions. Revocation of license 1. The foreign bank is in imminent danger of insolvency. 2. Its continuance in business will involve probable loss to those

transacting business with it.

41 BANKING LAWS

CLASSIFICATION OF PRIVATE BANKS COMMERCIAL BANKING CORPORATIONS AND UNIVERSAL BANKS Commercial bank A commercial banking corporation, in addition to the general powers

incident to corporations, shall have all such powers as shall be necessary to carry on the business of commercial banking:

1. By accepting drafts and issuing letters of credit, by discounting

and negotiating promissory notes, drafts, bills of exchange, and other evidences of debts;

2. By receiving deposits; 3. By buying and selling foreign exchange and gold or silver bullion;

and 4. By lending money against personal security or against securities

consisting of personal property of mortgages on improved real estate and the insured improvements thereon.

A commercial bank may also accept or create demand deposits subject

to withdrawal by check. A commercial bank may offer NOW accounts (special types of savings

deposit which can be withdrawn by means of a Negotiable Order of Withdrawal and is offered only to natural persons).

A commercial bank may likewise acquire readily marketable bonds and

other debt securities subject to such rules as the Monetary Board may promulgate.

42 BANKING LAWS

A commercial bank, finally, may invest to the extent allowed under applicable law and regulations in equities of allied undertaking, whether financial or non-financial.

Investment in allied u ndertakings

Commercial banks, including Government banks and foreign banks with

existing local branches, may invest in equities of allied undertakings. Equity investments shall not be permitted in non-related activities.

Limitations on investments in allied undertakings:

1. The total investment in equities shall not exceed twenty five

percent (25%) of the net worth of the bank. 2. The equity investment in any one enterprise shall not exceed

fifteen percent (15%) of the net worth of the bank; 3. The total equity investment of the bank in any single enterprise

shall remain a minority holding in that enterprise; and 4. The equity investment in other banks shall be deducted from the

prescribed ratio of net worth to risk assets. Financial allied undertakings

1. Leasing companies 2. Banks 3. Investment houses 4. Financing companies

43 BANKING LAWS

5. Credit card operations 6. Financial institutions catering to small and medium scale enterprises

Non-financial allied undertakings

1. Warehousing companies 2. Storage companies 3. Safe deposit box companies 4. Companies engaged in the management of mutual funds but not in

the mutual funds themselves 5. Management corporations engaged or to be engaged in activity

similar to the engagement of mutual funds 6. Companies engaged in the provision of computer services 7. Insurance agencies 8. Companies engaged in home building and home development 9. Companies providing drying and/or milling facilities for

agricultural crops Universal bank or expanded commercial banking authority The Monetary Board may authorize -- to further national development

objectives or support national priority projects -- a commercial bank, a bank authorized to provide commercial banking services, as well as a government owned and controlled bank, to operate under an expanded commercial banking authority.

44 BANKING LAWS

By virtue of such expanded power, the universal bank may, in addition to powers authorized for commercial banks:

1. Exercise the power of an Investment House as provided in PD 129; 2. Invest in the equity of a non-allied undertaking; or 3. Own a majority or all of the equity in a financial intermediary

other than a commercial bank or a bank authorized to provide commercial banking services.

Limitations on exercise of power as investment house Universal bank may perform the functions of an investment house either

directly OR indirectly through a subsidiary investment house (it cannot perform such functions both directly and indirectly).

If performed directly, such functions shall be undertaken by a separate

and distinct department in the bank. If performed indirectly through an investment house, universal bank

may not directly exercise such powers as are exclusively reserved to investment houses.

Limitations on equity investment of a universal bank 1. The total investment in equities shall not exceed fifty percent (50%) of

the net worth of the bank. 2. The equity investment in any one enterprise whether allied or non-

allied shall not exceed fifteen percent (15%) of the net worth of the bank.

3. The equity investment of the bank, or of its wholly- or majority -owned

subsidiary, in a single non-allied undertaking shall not exceed thirty five

45 BANKING LAWS

percent (35%) of the total equity in the enterprise nor shall it exceed thirty five percent (35%) of the voting stock in that enterprise.

4. The equity investment in other banks shall be deducted from the

ratio of net worth to risk assets. Capitalization Commercial bank - P 2 billion Universal bank - P 4.5 billion Ownership in a thrift bank or rural bank A commercial bank or any bank authorized to provide commercial

banking services, or to operate under an expanded commercial banking authority may own more than thirty percent (30%) of the voting stock of a thrift bank or a rural bank up to a majority or all of the equity thereof.

Subject to the prior approval of the Monetary Board.

Combined capital accounts The combined capital accounts of each commercial bank shall not be less

than an amount equal to ten percent (10%) of its risk assets Risk assets is defined as its total assets minus the following assets:

1. Cash on hand; 2. Amounts due from the Central Bank;

46 BANKING LAWS

3. Evidence of indebtedness of the Philippine Government or Central Bank or any other evidence of indebtedness fully guaranteed by the Philippine Government;

4. Loans to the extend covered by hold-out on, or assignment of,

deposits maintained in the lending bank and held in the Philippines;

5. Loans or acceptances under letters of credit to the extend covered

by marginal deposits; and 6. Other non-risk items which the Monetary Board may, from time to

time, authorize to be deducted from total assets. Purchase, holding or conveyance of real estate Any commercial bank may purchase, hold, and convey real estate for the

following purposes:

1. Such as shall be necessary for its immediate accommodation in the transaction of its business;

2. Such as shall be mortgaged to it in good faith by way of security

for debts; 3. Such as shall be conveyed to it in satisfaction of debts previously

contracted in the course of its dealings; and 4. Such as its shall purchase at sales under judgments, decrees,

mortgages, or trust deeds held by it and such as it shall purchase to secure debts due to it.

However, no such bank shall hold the possession of any real estate

under mortgage or trust deed, or the title and possession of any real estate purchased to secure any debt due to it, for a longer period than five years.

47 BANKING LAWS

Establishment of branches Any commercial bank organized under Philippine laws may, with the

prior approval of the Monetary Board, establish branches in the Philippines or branches and agencies outside the Philippines, and the bank shall be responsible for all business conducted in such branches to the same extent and in the same manner as though such business had all been conducted in the head office.

A bank and its branches shall be treated as a unit.

THRIFT BANKS Thrift banks

development banks, and stock savings and loan associations organized under existing laws and any banking corporation that may be organized for the following purposes:

1. Accumulating the savings of depositors and investing them

together with capital loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds, and other forms of security or in loans for personal and household finance, whether secured or unsecured, or in financing for home building and home development, in readily marketable and debt securities; in commercial papers, and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; and in such other investments and loans which the Monetary Board will determine as necessary in the furtherance of national economic objectives;

2. Providing short term working capital, or medium- and long-term

financing to businesses engaged in agriculture, services, industry and housing; and

48 BANKING LAWS

3. Providing diversified financial and allied services for its chosen market and constituencies especially for small and medium enterprises and individuals.

Scope of authority Thrift banks may:

1. Accept savings and time deposits; 2. Act as correspondent for other financial institutions; 3. Purchase, hold and convey real estate; 4. Open letters of credit; 5. extend credit facilities to private and government employees; 6. Extend credit against the security of jewelry, precious stones and

similar articles; 7. Accept foreign currency deposits; 8. Invest in equity of allied undertakings; 9. Rediscount papers with the PNB, LBP, DBP, and other GOCCs; 10. Issue domestic letters of credit; 11. Invest in marketable bonds and other debt securities; 12. Grant loans, secured or not secured; and 13. With prior approval of the Monetary Board:

a. Open current or checking accounts;

49 BANKING LAWS

b. Act as collection agent for government entities; c. Act as official depository of national agencies and municipal,

city or provincial funds where the bank is located; d. Issue mortgage and chattel certificates; e. Engage in quasi-banking and money market operations; and f. Offer NOW accounts.

Thrift banks may perform services similar to those offered by

commercial banks under an expanded authority when permitted by the Bangko Sentral ng Pilipinas.

Capitalization Capitalization may vary according to the location of the head office:

Within Metro Manila - P250 million Outside Metro Manila - P 40 million

Incentives and exemptions 1. Reserve requirement differential 2. Liberalized branching rules 3. Notices of statement of condition 4. Tax exemptions 5. Exemption from publication requirement

50 BANKING LAWS

6. Exemption from notarial charges 7. Exemption from registration fees Equity ownership At least 40% of the voting stock of a thrift bank shall be owned by

Filipino citizens. Exception: In case of merger or consolidation of existing Thrift Banks

with foreign holdings, the resulting holding shall not be increased but may be reduced and, once reduced, shall not be increased thereafter beyond 60% of the voting stock of the Thrift Bank.

Minors as depositors Minors in their own rights and in their own names may make deposits

and withdraw the same, and may receive dividends and interests. If the guardian shall give notice in writing to any thrift bank not to make

payments of deposits, dividends or interest to the minor of whom he is the guardian, then such payment shall be made only to the guardian.

BUILDING AND LOAN ASSOCIATIONS Building and loan associations Building and loan associations are corporations whose capital stock is

required or is permitted to be paid in by the stockholders in regular, equal periodical payments and whose purpose is:

1. to accumulate the savings of its stockholders; 2. to repay to said stockholders their accumulated savings and

profits upon surrender of their shares;

51 BANKING LAWS

3. to encourage industry, frugality, and home building among its stockholders; and

4. to loan its funds, and funds borrowed for the purpose, to

stockholders on the security of unencumbered real estate and with the pledge of shares of the capital stock owned by such stockholders as collateral security.

Prohibition It shall be unlawful for any building and loan association to make any

loan upon property that is suitable for us only as theatre, public hall, church, convent, school, club, hotel, garage, or other public building. Monetary Board may grant exemptions in cases of public hall, school, hotel and other public buildings to facilitate the investment of idle funds.

Investment in bonds With the approval of the Monetary Board, a building and loan

association may also invest such of its funds as may otherwise remain idle in bonds and obligations of the Republic of the Philippines or any of its subdivisions, or GOCCs.

Capital stock The capital stock of such associations shall be paid in by the

stockholders in regular, equal, periodical payments known as dues, at such times and in such amounts as shall be provided in their by laws.

The dues on each share of stock subscribed for by a stockholder shall

continue to be paid by the stockholder to the association until the share has been duly withdrawn, cancelled, or forfeited or until the share has reached its matured value.

52 BANKING LAWS

Matured value is when the due paid on each share and the net earnings thereof, in accordance with the by laws, shall amount to the matured of the share.

Certificates of stock Certificates of stock shall be issued to each stockholder upon the

payment of the membership fees and first installment of the dues. Installment shares v. paid -up shares While still being paid, the shares are called installment shares. After

they are fully paid, they are called paid-up shares. Once paid-up, relationship between the association and stockholder is

changed into that of debtor and creditor. Free shares and pledged shares Shares which have not been pledged as security for the payment of a

loan shall be called and shares which have been so pledged shall be called

Surrender of shares Stockholders may surrender their shares and withdraw from the

association after paying twelve (12) monthly installment of dues upon in writing to the board of directors and the

withdrawal value shall be the total sum of the dues paid thereon plus not less than ninety percent (90%) of all dividends earned by such shares up to the end of the last preceding fiscal period plus such interest for the time elapsed since the end of the period as shall be allowed by the board of directors.

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Stockholders who have not paid twelve (12) monthly installments of

their shares and withdraw from the association, and the withdrawal value shall be the total sum of the due paid thereon plus such dividend or interest as may be allowed by the board of directors.

RURAL BANKS Scope of authority A rural bank may perform any or all of the following services:

1. Extend loans and advances primarily for the purpose of meeting

the normal and credit needs of farmers, fishermen, or farm families as well as cooperatives, merchants, private and public employees;

2. Accept savings and time deposits; 3. Ac as correspondent bank of other financial institutions; 4. Rediscount paper with the LBP, DBP, or any other bank, including

its branches and agencies. 5. Act as a collection agent; 6. Offer other banking services as provided in Section 772 of RA 337,

as amended; 7. Extend financial assistance to private and public employees in

accordance with RA 3779, as amended; and 8. With prior approval of the Monetary Board:

a. Accept current or checking accounts;

54 BANKING LAWS

b. Accept NOW accounts; c. Act as trustee over estates or properties of farmers and merchants; d. Act as official government depository; e. Sell domestic drafts; and f. Invest in allied undertakings.

Rationale The rationale behind rural banking system is the need to promote

comprehensive rural development with the end in view of the following: 1. A more equitable distribution of opportunities, income and wealth; 2. A sustained increase of goods and services produced by the nation

for the benefit of the people; and 3. An expanding productivity as a key to raising the quality of life for all. This can be achieved by making credit available and readily accessible in

the rural areas. Capital stock With the exception of shareholdings of corporations organized primarily

to hold equities in rural banks, and of Filipino-controlled domestic banks, the capital stock of any rural bank shall be fully-owned and held by Philippine citizens or entities qualified under Phil. law to own and hold such capital stock.

55 BANKING LAWS

Board All members of the BOD shall be Filipino citizens.

However, there is no prohibition against any appointive or elective

public official from serving as director, officer, consultant or in any capacity in the bank.

Incentives Foreclosure of mortgages exempt from newspaper publication

requirements if the loan, excluding interest due and unpaid, does not exceed P100,000.

Exempt from payment of all taxes, fees and charges of whatever nautre

and description, except corporate income taxes and local taxes, fees and charges for aperiod of five years from the date of commencement of operations.

Free from notarization fees

Free from registration fees and DST in RD.

ACT LIBERALIZING ENTRY OF FOREIGN BANKS Republic Act No. 7721 An act liberalizing the entry and scope of operations of foreign banks in the Philippines and for other purposes Declaration of policy The State shall:

1. Develop a self-reliant and independent national economy

effectively controlled by Filipinos; and

56 BANKING LAWS

2. Encourage, promote and maintain a stable, competitive, efficient

and dynamic banking and financial system. Pursuant to this policy, the Philippine banking and financial system is

hereby liberalized to create a more competitive environment and encourage greater foreign participation through increase in ownership in domestic banks by foreign banks and the entry of new foreign bank branches.

In allowing increased foreign participation in the financial system, it

shall be the policy of the State that the financial system shall remain effectively controlled by Filipinos.

Three (3) modes of entry for foreign banks The Monetary Board may authorize foreign banks to operate in the

Philippine banking system through any of the following modes of entry:

1. by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank;

2. by investing in up to sixty percent (60%) of the voting stock of a

new banking subsidiary incorporated under Philippine laws; or 3. by establishing branches with full banking authority.

A foreign bank or a Philippine corporation, however, may own up to

sixty percent (60%) of the voting stock of only one domestic bank or new banking subsidiary.

Guidelines for entry In approving entry applications of foreign banks, the Monetary Board

shall:

57 BANKING LAWS

1. ensure geographic representation and complementation; 2. consider strategic trade and investment relationships between the

Philippines and the country of incorporation of the foreign bank; 3. study the demonstrated capacity, global reputation for financial

innovations and stability in a competitive environment of the applicant;

4. see to it that reciprocity rights are enjoyed by Philippine banks in

5. consider willingness to fully share their technology.

Only those among the top one hundred fifty (150) foreign banks in the

world or the top five (5) banks in their country of origin as of the date of application shall be allowed entry in (b) and (c) of modes of entry.

In approving entry, Monetary Board shall adopt such measures as may

be necessary:

1. to ensure that, at all times, the control of seventy (70%) of the resources or assets of the entire banking system is held by domestic banks which are at least majority-owned by Filipinos;

2. prevent a dominant market position by one bank or the

concentration of economic power in one or more financial institutions, or in corporations, partnerships, groups or individuals with related interests; and

3. secure the listing in the Philippine Stock Exchange of the shares of

stocks of banking corporations established under (a) and (b) modes of entry.

To qualify to establish a branch or subsidiary, the foreign bank applicant

must be widely-owned and publicly-listed in its country of origin, unless

58 BANKING LAWS

the foreign bank applicant is owned by the government of its country of origin.

Capital requirements Locally incorporated subsidiaries shall have the same minimum capital

requirements as domestic banks of the same category. For foreign bank branches, they shall permanently assign capital of not

less than the U.S. dollar equivalent of P210,000,000.00 at the exchange rate on the date of effectivity of this law.

The permanently assigned capital shall be inwardly remitted and

converted into Philippine currency. Branches A foreign bank shall be entitled to three (3) branches upon remittance of

minimum capital requirement. A foreign bank may open three (3) additional branches in locations

designated by the Monetary Board by inwardly remitting and converting into Philippine currency as permanently assigned capital the U.S. dollar equivalent of P35,000,000.00 per additional branch at the exchange rate on the date of effectivity of this law.

Total number of branches for each new foreign bank entrant shall not

exceed six (6). Head office guarantee The head office of foreign bank branches shall guarantee prompt

payment of all liabilities of its Philippine branches.

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Equal treatment Foreign banks authorized to operate under the law shall perform the

same functions, enjoy the same privileges, and be subject to the same limitations imposed upon a Philippine bank of the same category.

capital to risk asset ratio as well as the capitalization required for expanded commercial banking activities under the General Banking Act and other related laws of the Philippines.

OFFSHORE BANKING SYSTEM LAW Presidential Decree No. 1034 Authorizing the establishment of an offshore banking system in the Philippines Approved 30 September 1976 Offshore banking Offshore banking shall refer to the conduct of banking transactions in

foreign currencies involving the receipt of funds from external sources and the utilization of such funds in transactions with non-residents or other offshore banking units.

Offshore banking unit Offshore banking unit shall mean a branch, subsidiary or affiliate of a

foreign banking corporation which is duly authorized by the Central Bank to transact offshore banking business in the Philippines.

Deposits Deposits shall mean funds in foreign currencies which are accepted and

held by an offshore banking unit in the regular course of business, with

60 BANKING LAWS

the obligation to return an equivalent amount to the owner thereof, with or without interest.

Who are qualified to operate an offshore ba nking unit? Only banks which are organized under any law other than those of the

Republic of the Philippines, their branches, subsidiaries or affiliates, shall be qualified to operate offshore banking units in the Philippines.

Local branches of foreign banks already authorized to accept foreign

currency deposits under RA 6426 may opt to apply for authority to operate an offshore banking unit under PD 1034. However, upon their receipt of a corresponding certificate of authority to operate as an offshore banking unit, the license to transact business under RA 6426 shall be deemed automatically withdrawn.

Certificate of authority to operate The Monetary Board is authorized to issue certificates of authority to

operate offshore banking units. In issuing such certificate, the Monetary Board shall take into

1. Liquidity and solvency position; 2. Net worth and resources; 3. Management; 4. International banking expertise; 5. Contribution to the Philippine economy; and

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6. Other relevant factors such as participation in equity of local commercial banks and appropriate geographic representation.

The Central Bank is authorized to collect a fee of not less than US

$20,000 upon issuing any certificate of authority to operate and annually thereafter on the anniversary date of such certificate.

Corporate undertaking No application to operate as an offshore banking unit shall be

considered unless the applicant shall have first submitted to the Central Bank a sworn undertaking of its head office or parent or holding company, duly supported by an appropriate resolution of its board of directors, that, among other things:

1. It will, on demand, provide the necessary specified currencies to

cover liquidity needs that may arise or other shortfall that its offshore banking unit may incur;

2. The operations of its offshore banking unit shall be managed

soundly and with prudence; 3. It will train and continually educate a specific number of Filipinos

in international banking and foreign exchange trading with a view to reducing the number of expatriates;

4. It will provide and maintain in its offshore banking unit net office

funds in the minimum amount of US $ 1,000,000; and 5. It will start operations of its offshore banking unit within 180 days

from receipt of its certificate of authority to operate such unit.

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Transactions of offshore banking units Transactions of offshore banking units with non-residents or with other

offshore banking units shall be freely allowed, but safeguards will be established to prevent circumvention of foreign exchange regulations.

Transactions of offshore banking units with residents of the Philippines,

including those with local commercial banks and local branches of foreign banks authorized to receive foreign currency deposits under RA 6426, shall be subject to applicable law and regulations.

Tax and other incentives The provisions of any law to the contrary notwithstanding, the

transactions of offshore banking units with non-residents and other offshore banking units shall be subject to a five percent (5%) tax on the net income from such transactions which shall be in lieu of all taxes on the said transactions.

The transactions of offshore banking units with local commercial banks,

including branches of foreign banks that may be authorized by the Central Bank to transact business with offshore banking units, shall likewise be subject to the same tax, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board, to be subject to the usual income tax payable by banks.

Any income of non-residents from transactions with said offshore

banking units shall be exempt from any tax. In the case of transaction with residents (other than other offshore

banking units or local commercial banks including local branches of foreign banks that may be authorized by the Central Bank to transact business with offshore banking units), interest income from loans granted to such residents shall be subject only to a ten percent (10%) withholding tax as final tax.

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Effect of certain laws The Usury Law, Uniform Currency Law, and PDIC law shall not apply to

transactions and/or deposits in offshore banking units in the Philippines.

The provisions of RA 1405 or the Law on Secrecy of Bank Deposits shall

apply to deposits in offshore banking units. FOREIGN CURRENCY DEPOSIT ACT Republic Act No. 6426, as amended An act instituting a foreign currency deposit system in the Philippines and for other purposes Approved 04 April 1974 Authority to deposit foreign currencies Any person, natural or juridical, may deposit with such Philippine banks

in good standing, as may upon application be designated by the Central Bank for the purpose, foreign currencies which are acceptable as part of the international reserve.

Exception Foreign currencies which are required by the Central Bank to be

surrendered in accordance with the provisions of RA 7653 may not be deposited.

Authority of the banks to accept foreign currency deposits The banks designated by the Central Bank shall have the authority:

1. To accept deposits and to accept foreign currencies in trust; 2. To issue certificates to evidence such deposits;

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3. To discount said certificates; 4. To accept said deposits as collaterals for loans subject to such

rules and regulations as may be promulgated by the Central Bank; and

5. To pay interest in foreign currency on such deposits.

Foreign currency cover requirements Depositary banks shall maintain at all times a one hundred percent

(100%) foreign currency cover for their liabilities, except as the Monetary Board may otherwise prescribe or allow.

At least fifteen percent (15%) of such cover shall be in the form of

foreign currency deposit with the Central Bank and the balance in the form of foreign currency loans or securities, which loans or securities shall be of short term maturities and readily marketable.

Foreign currency cover shall be in the same currency as that of the

corresponding foreign currency deposit liability, unless the Monetary Board may otherwise prescribe or allow.

The Central Bank may pay interest on the foreign currency deposit, and

if requested, shall exchange the foreign currency notes and coins into foreign currency instruments drawn on its depositary banks.

Central Bank may exempt from the 15% foreign currency cover in the

form of foreign currency deposit with the Central Bank in cases of depository banks which, on account of their net worth, resources, past performance, or other pertinent criteria, have been qualified by the Monetary Board to function under an expanded foreign currency deposit system.

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Said banks may also be exempt from the limitations on the maturity periods for loans and securities subject to prior approval by the Central Bank.

Withdrawability and transferability of deposits There shall be no restriction on the withdrawal by the depositor of his

deposit or on the transferability of the same abroad except those arising from the contract between the depositor and the bank.

Tax exemption All foreign currency deposits made under RA 6426, as amended, as well

as foreign currency deposits authorized under PD 1304, including interest and all other income or earnings of such deposits, are hereby exempted from any and all taxes whatsoever irrespective of whether or not these deposits are made by residents or non-residents so long as the deposits are eligible or allowed under the said laws and, in the case of non-residents, irrespective of whether or not they are engaged in trade or business in the Philippines.

Secrecy of foreign currency deposits All foreign currency deposits authorized under RA 6426, as amended by

PD 1305, as well as foreign currency deposits authorized under PD 1034, are hereby declared as and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or entity whether public or private.

Unlike the Law on Secrecy of Banks Deposits Act, there is only one

exception for foreign currency deposits and that is when there is a written permission from the depositor.

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Exemption from attachment, garnishment and other process Foreign currency deposits shall be exempt from attachment,

garnishment, or any other order or process of any court, legislative body, government agency, or any administrative body whatsoever.

Salvacion v. Central Bank of the Philippines 278 SCRA 27 FACTS:

Greg Bartelli, an American tourist, was arrested for committing four counts