Reviewer

for Quiz in Banking [ July 29,2015]

Q: What is the preamble in GBL [2000]
A: SECTION 2. Declaration of Policy. The State recognizes the vital role of banks in
providing an environment conducive to the sustained development of the national
economy and the fiduciary nature of banking that requires high standards of integrity
and performance. In furtherance thereof, the State shall promote and maintain a
stable and efficient banking and financial system that is globally competitive, dynamic
and responsive to the demands of a developing economy

Q: What are the financial allies of the banks?
A: Following are financial allied enterprises:
1. Leasing companies
2. Banks
3. Investment houses
4. Financing companies
5. Credit card companies
6. Financial institutions
7. Companies in stock brokerage and foreign exchange dealership
8. Insurance companies
9. Holding company provided that the equities of the entity is confined
under universal bank BSP regulation

Q: What are the classes of banks
A: Classification of Banks (CUT-RICO-NQU)
Universal Banks large commercial banks that can do both commercial and
investment banking
o They have the power of both commercial bank and investment house
o Have the power to invest in non-allied enterprises
Commercial banks general powers incident of corporation and can perform
commercial banking
o Does not have the power to invest in non- allied enterprises
Rural banks banks that promote rural development
o They can extend loan or advances to primarily meet the normal
credit needs of farmers, fishermen and their families
o Can also deposit in private banks more than the amount prescribed
by Single Borrowers Limit in case there are no government banks
o Rural Banks Act (RA 7353)
Thrift banks encourages the industry, frugality and accumulation of savings
of the public
o To make it within easy reach to the people the credit facilities at
reasonable cost
o Includes: (1) savings and mortgage bank, (2) stock savings and loan

associations and (3) private development banks

o Thrift Banks Act (RA 7906)
Cooperative banks organized by cooperatives to provide financial and
credit services to cooperatives
o Cooperative Code (RA 6938)
o Membership of a cooperative bank shall include ONL Y cooperative
and federations of cooperatives
Islamic Banks promote socio-economic development in autonomous region
by performing banking and investment function based on Islamic concept of
banking
o Islamic Bank RA 6848
o Subject to the principles and rulings of Islamic Sharia
Others banks:
o Philippine Veterans- provide government depository to veterans for
appreciation of grateful nation (RA 3518)
o Land bank of the Philippines finance distribution of estate to resale
to small landholders (RA 3844)
o Development Bank of Philippines provide credit facilities for
development in agriculture, commerce and industry DBP was
previously named as Rehabilitation Finance Corporation (RFC)
o Non-stock savings and loan associations non- stock, non-profit
corporation engage in accumulation of savings of its members and
loans to meet its members needs Confines exclusive membership
and cannot transact business with the general public
Quasi-banks engaged in borrowing of funds through issuance of deposit
substitute for purpose of relending or purchasing receivables and other
obligations
Offshore Banks deals with transaction with foreign currencies in receiving
funds from external sources and utilization of such
o Governed by PD 1034
o
Q: Provide for Section 4: Supervisory and Regulatory Powers of the BSP
A: 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 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;
4.2. The conduct of examination to determine compliance with laws and
regulations if the circumstances so warrant as determined by the
Monetary Board;

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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.

Q: What is the Function of the Monetary Board
A: The Bangko Sentral shall provide policy direction in the areas of money, banking
and credit. (n) For this purpose, the Monetary Board may prescribe ratios, ceilings,
limitations, or other forms of regulation on the different types of accounts and
practices of banks and quasi-banks which shall, to the extent feasible, conform to
internationally accepted standards, including those of the Bank for International
Settlements (BIS). The Monetary Board may exempt particular categories of
transactions from such ratios, ceilings and limitations, but not limited to exceptional
cases or to enable a bank or quasi-bank under rehabilitation or during a merger or
consolidation to continue in business with safety to its creditors, depositors and the
general public.

Q: What is the job/role of the BSP as vanguard of depositor:
A: SECTION 7. Examination by the Bangko Sentral. The Bangko Sentral shall, when
examining a bank, have the authority to examine an enterprise which is wholly or
majority-owned or controlled by the bank.

Q: What is the fit and proper rule?
A: 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

Q: What is the Bank of International Settlement?
A: Established on 17 May 1930, the Bank for International Settlements (BIS) is the
world's oldest international financial organisation. The BIS has 60 member
central banks, representing countries from around the world that together make
up about 95% of world GDP.
The head office is in Basel, Switzerland and there are two representative offices:
in the Hong Kong Special Administrative Region of the People's Republic of
China and in Mexico City.
The mission of the BIS is to serve central banks in their pursuit of monetary and
financial stability, to foster international cooperation in those areas and to act as
a bank for central banks.
Q: What are the conditions for Organization of a bank:
A: SECTION 8. Organization. The Monetary Board may authorize the organization
of a bank or quasi-bank subject to the following conditions:
8.1. That the entity is a stock corporation (7);
8.2. That its funds are obtained from the public, which shall mean twenty (20) or
more persons (2-Da); and
8.3. That the minimum capital requirements prescribed by the Monetary Board for
each category of banks are satisfied. (n)
No new commercial bank shall be established within three (3) years from the
effectivity of this Act. In the exercise of the authority granted herein, the Monetary
Board shall take into consideration their capability in terms of their financial
resources and technical expertise and integrity. The bank licensing process shall
incorporate an assessment of the bank's ownership structure, directors and senior
management, its operating plan and internal controls as well as its projected
financial condition and capital base.

Q: Can the Bank acquire its own shares? How?
A: 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.

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Q: Can a Foreign Individual invest in local banks? How?

A: 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

Q: What does RA 7721 provide for foreign investors in local banks?
A: REPUBLIC ACT NO. 7721 . AN ACT LIBERALIZING THE ENTRY AND SCOPE OF
OPERATIONS OF FOREIGN BANKS IN THE PHILIPPINES AND FOR OTHER
PURPOSES

SECTION 1. Declaration of Policy. The State shall develop a self-reliant and
independent national economy effectively controlled by Filipinos and encourage,
promote, and maintain a stable, competitive, efficient, and dynamic banking and
financial system that will stimulate economic growth, attract foreign investments,
provide a wider variety of financial services to Philippine enterprises, households
and individuals, strengthen linkages with global financial centers, enhance the
country's competitiveness in the international market and serve as a channel for
the flow of funds and investments into the economy to promote industrialization.

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

Q: Discuss Banks owned by Family Group.
A: SECTION 12. Stockholdings of Family Groups or Related Interests. Stockholdings
of individuals related to each other within the fourth degree of consanguinity or
affinity, legitimate or common-law, shall be considered family groups or related
interests and must be fully disclosed in all transactions by such an individual with the
bank

Q: Who is an independent director? Why is it required in a Bank?

A: 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 of directors of bank, two (2) of whom shall be
independent directors.

An "independent director" shall mean a person other than an officer or employee
of the bank, its subsidiaries or affiliates or related interests. (n)

Non-Filipino citizens may become members of the board of directors of a bank to
the extent of the foreign participation in the equity of said bank. (Sec. 7, RA 7721)

The meetings of the board of directors may be conducted through modern
technologies such as, but not limited to, teleconferencing and video-conferencing

Q: Discuss Regulations of Banks owned by Family Groups and Related Interests
A. SECTION 12. Stockholdings of Family Groups or Related Interests. Stockholdings
of individuals related to each other within the fourth degree of consanguinity or
affinity, legitimate or common-law, shall be considered family groups or related
interests and must be fully disclosed in all transactions by such an individual with
the bank.

SECTION 13. Corporate Stockholdings. Two or more corporations owned or
controlled by the same family group or same group of persons shall be considered
related interests and must be fully disclosed in all transactions by such
corporations or related groups of persons with the bank

Q: May an elective official be a director of a bank? Are there exceptions, if any.
A: 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

EXCEPTION: RA 7353 Sec. 5. All members of the Board of Directors of the rural
bank shall be citizens of the Philippines at the time of their assumption to office:
Provided, however, That nothing in this Act shall be construed as prohibiting any
appointive or elective public official from serving as director, officer, consultant or
in any capacity in the bank.

Q: Distinguish Universal Bank from Commercial Bank
A: 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

AKD BANKING 2015

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.

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.

Q: Discuss how Universal Banks can invest in financial allied sources
A: Equity investments of Universal bank in Financial Allied enterprise
1. Universal bank can own 100% of the equity in a thrift, rural bank or financial
allied enterprise
2. Publicly-listed universal or commercial bank may own 100% of voting stock
of another universal or commercial bank
3. If not publicly-list then only 49% own
4. Following are financial allied enterprises:
Leasing companies
Banks
Investment houses
Financing companies
Credit card companies
Financial institutions
Companies in stock brokerage and foreign exchange dealership
Insurance companies
Holding company provided that the equities of the entity is confined
under universal bank BSP regulation

Q: Discuss how Universal Banks can invest in non-financial allied sources
A: Equity investments of universal bank in non-financial allied enterprise
Universal bank may own up to 100% of equity in non-financial allied
Examples are:
1. Warehousing companies
2. Storage

3. Safe deposit box

4. Companies engaged in management of mutual funds and not funds

itself
5. Computer services
6. Home building and development
7. Service bureaus
8. PCHC

Q: Discuss how Universal Banks can invest in non-allied sources
A: Equity investment of Universal Bank in Non-allied enterprise - Equity investment
in a single non-allied enterprise shall not exceed 35% in total equity or voting
stock
Investments in non-allied enterprises
Universal bank may invest in equity of enterprise of eligibles:

1. Enterprises engaged in agriculture, mining, quarrying, manufacturing,
public utilities

2. Industrial parks

3. Commercial project with government privatization program
Equity investment in Quasi-banks universal bank can only invest up to 40%
in equity of quasi-banks

Q: Discuss the SINGLE-BORROWER LIMIT
A: 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.

Total amount of loans, credits accommodation and guarantees extended to any
person, partnership or corporation shall not exceed 20% of net worth of bank
In Circular 425 of 2004 of BSP, the SBL was increased to 25%
Exceptions to SBL:
1. MB may otherwise prescribe for reasons of national interest
2. Deposit of rural banks with GOC financial institutions such as LB,
DBP and PNB
Basis for determining SBL is the total credit commitment of bank to borrower
Loans - to all accounts under loan portfolio
Credit accommodations - to credit and market risk exposure of banks arising
from accommodation other than the loan

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 Total credit commitment - include loans, credit accommodation, deferred

letters of credit less margin deposits and guarantees
Total credit commitment can be increased by 10% provided additional
liabilities are secured by trust receipts, shipping documents or readily
marketable goods
Readily marketable goods articles of commerce, agriculture or industry as
constant dealings in ready market and price is easily ascertainable and
disposable
Parent corporation s total credit commitment shall also include its
subsidiaries if it guarantees, accommodate or subsidiary is merely a
department of it
Wholesale lending of government banks shall not exceed 35% of net worth to
participating financial institutions
PFI institutions for relending to end-user borrowers
The end-user borrower shall be subject to the 25% SBL
In municipalities where there are no government banks, deposits of rural and
coop banks in private banks shall not be subject to SBL
Deposit in private depository bank used by thrift, rural and coop banks, with
authority to accept demand deposits, after being cleared, shall be
exempted from SBL
Bank guarantee irrevocable commitment of a bank binding to pay a sum of
money in event of non-performance of third party
Credit Risk Transfer arrangement that allows the bank to transfer the credit
risk associated with its loan or other credit accommodation to a third
party
Control of majority interest or controlling interest parent owns, directly or
indirectly through its subsidiaries, more than half of voting power
ofenterprise
o Even if less than half of said voting power, it shall still have
controlling interest if:

1. Agreement with investors

2. Govern financial and operations

3. Can appoint majority of directors

4. Cast majority vote on meetings
Subsidiary corporation where more than 50% of the voting stock is owned
by a parent corporation
Bill of exchange drawn in good faith against actually existing values drawn
by a seller on the purchase for the price of commodity sold
Commercial paper owned by person negotiating the same paper arising from
business transaction
Exclusion from SBL:
1. Discount bills of exchange and discount commercial paper

2. Credit accommodation to finance importation of rice or corn up to

100% net worth of bank
Must be approved by NEDA
3. Loans and credit accommodation guaranteed by Industrial Guarantee
and Loan Fund
4. Liabilities of commercial paper issuer for commercial paper held by
UB as firm underwriter. Only 180 days and not exceed 5% from
normal SBL
5. Loans and credit accommodations covered by international or regional
institutions where Philippines is shareholder such as ADB
6. Loans and credit accommodations with valuation reserves provided
that bank has no unbooked valuation reserves
7. Loans and credit accommodations as a result of underwriting
agreement of debt securities not exceeding 30 days
Inclusion to Limit
o The following shall be included
1. Maker, acceptor of paper discounted and general indorser, drawer
or guarantor
2. Individual who controls majority interest in corporation
3. In case of corporation, all liabilities to such bank of all subsidiaries it
has majority interest
4. Partnership, liabilities of members
o Also includes parent coporations with majority interest
Exclusion to limit
1. Loans and credit accommodations secured by BSP or RP. State is
always solvent
2. Loans and credit accommodations guaranteed by government
3. Loans and credit accommodations covered by assigned of deposits
by lending bank
4. Loans and credit accommodations under letters of credit covered by
margin deposits
5. Loans and credit accommodations determined by MB as non-risk
items

Q: Discuss Applicability of DOSRI Rules and Regulations
A: 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, indorser or surety for loans from such
bank to others, or in any manner be an obligor or incur any contractual liability to
the bank except with the written approval of the majority of all the directors of the
bank, excluding the director concerned: Provided, That such written approval shall
not be required for loans, other credit accommodations and advances granted to

AKD BANKING 2015

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.
Restriction on Bank Exposure to Directors, Officers, Stockholder and related interests
(DOSRI)
No DOSRI can directly or indirectly borrow from such bank or become a
guarantor, indorser or surety for loan
Exception is when there is a written approval of the majority of all directors
of the bank excluding the DOSRI concerned
Such approval is not required if it is under a fringe benefit plan approved by
BSP
Directors include those named in incorporations, elected or filled
Officers shall include any person who performs function of management
Stockholder stockholder of record in the books of the bank
st
Related interest includes souse or relative within 1 degree or by legal
adoption. This includes partnership, co-ownership of DOSRIs
Corporations where the above mentioned owns 20% of subscribed capital,
then the prohibition shall apply
Can also be less than 50% if the DOS sits as representative of the bank in the
board of such corporation

Effect of violation : The director or officer who violates may be declared vacant
and subject to penal provisions of NCBA Limit on loans : MB can limit the valid
loan given to DOSRI provided that it shall be based on their unencumbered
deposits and book value of their paid in capital contribution

Exclusion to Limit:
Loans and credit accommodations considered as non-risk
Loans and credit accommodations to officers in for of fringe benefits Limit
on loans and credit accommodations shall not apply on those extended by
coop bank to its coop shareholders

Applicability of DOSRI Rules and Regulation to Government Borrowings:
Circular 547 of 2006 provides that DOSRI rules shall also apply to loans and
credit accommodations granted to RP , subdivisions, instrumentalities and
GOCCs
Exceptions would be:
1. Loans and credit accommodations that are non-risk and not subject to
ceiling
2. Those made by BSP

3. LGU due to full autonomy in their propriety function

4. Director who acts as government
Q: Discuss Microfinancing
A: CIRCULAR NO. 272 [Series of 2001 ] Pursuant to Monetary Board Resolution No.
40 dated January 11, 2001, the following guidelines shall be observed in
implementing the provisions of Sections 40, 43 and 44 of the General Banking Law
of 2000 with respect to microfinancing loans:
1. Microfinancing loans are small loans granted to the basic sectors, as defined in
the Social Reform and Poverty Alleviation Act of 1997 (Republic Act 8425), and
other loans granted to the poor and low-income households for their
microenterprises and small businesses so as to enable them to raise their
income levels and improve their living standards. These loans are granted on
the basis of the borrowers cash flow and are typically unsecured.
2. The maximum principal amount of microfinance loans shall not exceed
P150,000. This is equivalent to the maximum capitalization of microenterprise
under R.A. 8425.

Q: Can the Bank acquire Real Estate:
A: 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. (25a)

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Q: Discuss the Confidentiality Rule in All Bank Transactions
A: SECTION 55. Prohibited Transactions.
55.4. Consistent with the provisions of Republic Act No. 1405, otherwise known as
the Banks Secrecy Law, no bank shall employ casual or nonregular personnel or
too lengthy probationary personnel in the conduct of its business involving bank
deposits

REPUBLIC ACT NO.1405 - AN ACT PROHIBITING DISCLOSURE OF OR INQUIRY
INTO, DEPOSITS WITH ANY BANKING INSTITUTION AND PROVIDING PENALTY
THEREFOR

SECTION 1. It is hereby declared to be the policy of the Government to give
encouragement to the people to deposit their money in banking institutions and to
discourage private hoarding so that the same may be properly utilized by banks in
authorized loans to assist in the economic development of the country.

SECTION 2. All deposits of whatever nature with banks or banking institutions in
the Philippines including investments in bonds issued by the Government of the
Philippines, its political subdivisions and its instrumentalities, are hereby
considered as of an absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official, bureau or office, except
upon written permission of the depositor, or in cases of impeachment, or upon
order of a competent court in cases of bribery or dereliction of duty of public
officials, or in cases where the money deposited or invested is the subject matter of
the litigation.

SECTION 3. It shall be unlawful for any official or employee of a banking institution
to disclose to any person other than those mentioned in Section two hereof any
information concerning said deposits.

Q: What is the purpose of the GBL?
A: The GBL of 2000 as well as improving market access, upgraded the rules governing
the operation of the BSP to conform to international banking standards. The aim was
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

ADDITIONAL QUESTIONS FOR MIDTERM REVIEW

Q: What are the functions that a bank can outsource?
A: BSP Circular 765, pursuant to the Money Board Resolution No. 1179 dated July 19,
2012, approved the revisions to the outsourcing framework of banks, amending the

entirety of relevant sections and other provisions of the Manual of Regulations for
Banks. An amended Section X162.2 on the Prohibition against outsourcing of inherent
banking functions. No bank shall outsource functions such as:
1. Services normally associated with placement of deposits and withdrawals
including the recognition based on recording of movements in the deposit
accounts;
2. Granting of loans and extension of other credit exposures
3. Position taking and market risk taking activities
4. Managing of risk exposures; and
5. Strategic decision making

Q: What is the degree of diligence required of Banks to be exercised?
A: The time-honored, and still current, judicial doctrine on the degree of bank
diligence is that every bank, in dealing with the public must exercise the highest
degree of diligence, the highest degree of care or extra-ordinary diligence. The
diligence of an ordinary prudent man, or ordinary diligence, is not enough. The
reasons for the strict and highest standard required are the following: (1) the
business of banking is so impressed with public interest; (2) trust and confidence of
the public in general is of paramount interest, and (3) the fiduciary nature of its
function.
With particular reference to deposits, the doctrine is a bank is under obligation to
treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship, whether such account consists only of a few
hundred pesos or of millions of pesos.

The point is that as a business affected with public interest and because of the nature
of its functions, the bank is under obligation to treat the account of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship.
In the recent case of Philippine National Bank vs. Court of Appeals, we held that a
bank is under obligation to treat the accounts of its depositors with meticulous care
whether such account consists only of a few hundred pesos or of millions of pesos.
Responsibility arising from negligence in the performance of every kind of obligation
is demandable. While petitioners negligence in this case may not have been attended
with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and
humiliation.

Hence we ruled that the offended party in said case was entitled to recover
reasonable moral damages.

Q: What is the nature of the depositor bank relationship?
A: SECTION 2. Declaration of Policy. The State recognizes the vital role of banks in
providing an environment conducive to the sustained development of the national economy

AKD BANKING 2015

and the fiduciary nature of banking that requires high standards of integrity and
performance.
It is impressed with public interest where the trust and confidence of the public in
general is of paramount importance such that:

1. The appropriate standard of diligence must be very high, if not the highest,
degree of diligence; highest degree of care (PCI Bank vs. CA, 350 SCRA 446,
PBCom vs. CA, G.R. No.121413, 29 Jan. 2001)
>> This applies only to cases where banks are acting in their fiduciary capacity, that is,
as depository of the deposits of their depositors (Reyes vs. CA, G.R. No.118492, 15 Aug.
2001)

2.

Subject to reasonable regulation under the police power of the state

Q: Reconcile the situation where in a combination account (deposit and
current/checking account), an officer of the bank is not alert enough to transfer
funds from the deposit account to the current account which leads to the
dishonoring of the check issued by the depositor in BP 22 cases.
A: In PNB vs. CA & Pujol the depositor opened a checking account together with a savings
account under what is known as Combination Deposit Plan or Combo Account under
which checks drawn against the checking account shall be charged automatically against
the savings account. The operation and effectivity of the automatic transfer arrangement
(ATA) was however subject to the submission of certain documents, like business permit
and the like. Notwithstanding the non-submission of the documentary requirements the
bank staff already stamped on the passbook Combo Deposit Plan which led depositor to
believe that the ATA was already in effect. Depositor then issued two checks which the
bank dishonored for insufficiency of funds. In the suit for damages against the bank, the
Court ruled that PNB was in estoppel, i.e., estopped to deny the existence and perfection of
the ATA because by stamping Combo Deposit Plan on the passbook, depositor was led
to believe that the ATA was already effective. The Court ruled that a bank is under
obligation to treat the accounts of its depositors with meticulous care whether such account
consists a few hundred pesos or millions of pesos. The Court continued that while the
banks negligence may not have been attended by malice or bad faith, nevertheless it
caused serious anxiety, embarrassment and humiliation to the depositor which entitled her
to moral damages.
In Prudential Bank vs. CA & Valenzuela, 7 depositor maintained current and savings
accounts with automatic transfer arrangement. The bank misposted depositors check
deposit to the savings account for P35,993.48 made on June 1, 1988 to another account.
The mistake was corrected and credited only on June 24, or after 23 days. In the meantime,
a check issued by the depositor was dishonored for insufficiency of funds. In awarding
damages in favor of the depositor, the Court ruled that the misposting of plaintiffs check

deposit to another account and the delayed posting of the same x x x is a clear proof of lack
of supervision on the part of the bank x x x while it may true that the banks negligence in
dishonoring the properly funded check x x x might not have been attended with malice and
bad faith, x x x nevertheless, it is the result of lack of due care and caution expected of an
employee of a firm engaged in so sensitive and accurately demanding task as banking.
Q: When a bank grants a securitized or collateralized loan, what is the duty of
the bank in relation to the Certificate of Title?
A: It is the duty of the bank to confirm that the COT provided by the person applying for a
loan is clean, by comparing the title submitted to that which is in the Register of Deeds, in
order to verify the existence of tax liens, and/or adverse claims that may be attached to the
title. The bank also has the duty to register the mortgage/lien obtained by the person
applying for the same, in order to bind the land.
Q: Reconcile the law on secrecy of bank deposits and survivorship agreements with
regard to deposit accounts.
A: A survivorship agreement is an aleatory contract supported by a lawful consideration the mutual agreement of the joint depositors permitting either of them to withdraw the
whole during their lifetime, and transferring the balance to the survivor upon the death of
one of them. But while the survivorship agreement is per se not contrary to law, its
operation or effect may be violative of law where it is shown that such agreement is a mere
cloak to hide an inofficious donation to transfer property in fraud of creditors, or to defeat
the legitime of a forced heir.
Section 97, NIRC provide that If a bank has knowledge of the death of a person, who has a
deposit account with it alone or jointly with another, it must not allow any withdrawal from
said account, unless the Commissioner of Internal Revenue certified that the estate tax
thereon has been paid.
Considering that the joint account is co-owned by the depositors, there is a presumption
that they owned it equally or in 50/50 shares, in which case, the transfer of the remaining
balance of the whole deposit to the surviving co-depositor/s upon death of the other codepositor pursuant to their Survivorship Agreement is a transfer made by the said depositor
in contemplation of death, as provided under Section 85(B) of the 1997 Tax Code, viz:
(B) Transfer in Contemplation of Death To the extent of any interest therein of which
the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or
intended to take effect in possession or enjoyment at or after death, or of which he has at
any time made a transfer, by trust or otherwise, under which he has retained for his life or
for any period which does not in fact end before his death (1) the possession or enjoyment
of, or the right to the income from the property, or (2) the right, either alone or in
conjunction with any person, to designate the person who shall possess or enjoy the

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property or the income therefrom; except in case of a bona fide sale for an adequate and
full consideration in money or moneys worth.

prevent circumvention of this prohibition or the evasion of the responsibility herein

imposed on a trust entity

Thus, upon the death of the co-depositors, the 50% share of the deceased co-depositor in
the deposit shall be included in computing the value of his gross estate. Hence, the funds in
the joint deposit account cannot be withdrawn by the surviving co-depositor/s unless the
Commissioner has certified that the taxes imposed thereon by Title III of the 1997 Tax
Code have been paid; Provided, however, That the administrator of
the estate or any one (1) of the heirs of the deceased co-depositor may, upon the
authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand
pesos (P20,000.00) without the said certification.

Section 97 does not apply when there is a survivorship agreement between the co-
depositors and it is known to the bank.

Q: Provide the exceptions to RA 1405 (Secrecy of Bank Deposits)
A: Section 2 of RA 1405 provides: All deposits of whatever nature with banks or
banking institutions in the Philippines including investments in bonds issued by the
Government of the Philippines, its political subdivisions and its instrumentalities, are
hereby considered as of an absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official, bureau or office, except
upon written permission of the depositor, or in cases of impeachment, or upon order
of a competent court in cases of bribery or dereliction of duty of public officials, or in
cases where the money deposited or invested is the subject matter of the litigation.

Q: Discuss the duties of a Trust Entity
A: 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.
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 trust or 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
trust or and the relationship of the trustee and the other party involved in the transaction is
fully disclosed to the trust or or beneficiary of the trust prior to the transaction. The
Monetary Board shall promulgate such rules and regulations as may be necessary to

Q: Discuss the powers of a trust entity.

A: SECTION 83. Powers of a Trust Entity. A trust entity, in addition to the general
powers incident to corporations, shall have the power to:
83.1 Act as trustee on any mortgage or bond issued by any municipality,
corporation, or any body politic and to accept and execute any trust consistent
with law;
83.2 Act under the order or appointment of any court as guardian, receiver,
trustee, or depositary of the estate of any minor or other incompetent person,
and as receiver and depositary of any moneys paid into court by parties to any
legal proceedings and of property of any kind which may be brought under the
jurisdiction of the court;
83.3. Act as the executor of any will when it is named the executor thereof;
83.4 Act as administrator of the estate of any deceased person, with the will
annexed, or as administrator of the estate of any deceased person when there is
no will;
83.5. Accept and execute any trust for the holding, management, and
administration of any estate, real or personal, and the rents, issues and profits
thereof; and
83.6. Establish and manage common trust funds, subject to such rules and
regulations as may be prescribed by the Monetary Board.

Q: Discuss duties of trust entities to minor beneficiaries.
A: Testamentary Trust - As its name implies, it is a trust whereby the trustor
transfers his property in trust through his will and testament and this is to take effect
only upon his death. It is a part of the will and testament itself and is not a separate
legal document.
This is for clients who intend to accumulate all their assets as may be allowed by law
into one fund to be managed by a competent and responsible trustee, specially if the
trustor feels that he will be survived by heirs who would still be minors, or who are
incapacitated or not competent to manage their own affairs or the properties they
stand to inherit from the trustor. This prevents the unnecessary division of the
trustors estate and the consequent loss of earning power through unwise
management or dissipation. Depending on how it is drafted, the testamentary trust
can also minimize or avoid a second tax on the family estate as it is transferred from
the surviving spouse to the children.

Living or Inter Vivos Trust
This trust, which is created by a trust agreement, starts to operate during the lifetime
of the trustor. Under this arrangement, the trustor transfers assets to a trustee for the
latter to manage as the trust agreement dictates. The functions and authorities to be

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exercised by the trustee are defined in the trust agreement. These would include : (1)
the scope or extent of the trustees investment powers; (2) the beneficiaries; (3) the
terms and conditions under which the income and/or principal of the trust is to be
paid or to be disposed of ultimately.

Q: Discuss a TRUST BOND.
A: SECTION 85. Bond of Certain Persons for the Faithful Performance of Duties.
Before an executor, administrator, guardian, trustee, receiver or depositary appointed by
the court enters upon the execution of his duties, he shall, upon order of the court, file a
bond in such sum, as the court may direct. Upon the application of any executor,
administrator, guardian, trustee, receiver, depositary or any other person in interest, the
court may, after notice and hearing, order that the subject matter of the trust or any part
thereof be deposited with a trust entity. Upon presentation of proof to the court that the
subject matter of the trust has been deposited with a trust entity, the court may order that
the bond given by such persons for the faithful performance of their duties be reduced to
such sums as it may deem proper: Provided, however, That the reduced bond shall be
sufficient to secure adequately the proper administration and care of any property
remaining under the control of such persons and the proper accounting for such property.
Property deposited with any trust entity in conformity with this Section shall be held by
such entity under the orders and direction of the court


CASES
1. SIMEX INTERNATIONAL (MANILA) V. CA
A bank may be held liable for damages by reason of its unjustified dishonor of a
check, which caused damage to its clients credit standing. 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. The bank is a fiduciary of the depositors
money.

Facts: Simex International is a private corporation engaged in the exportation of
food products. It buys these products from various local suppliers and then sells
them abroad to the Middle East and the United States. Most of its exports are
purchased by the petitioner on credit. Simex was a depositor of the Far East Savings
Bank and maintained a checking account in its branch in Cubao, Quezon City which
issued several checks against its deposit but was surprised to learn later that they
had been dishonored for insufficient funds. As a consequence, several suppliers sent
a letter of demand to the petitioner, threatening prosecution if the dishonored check
issued to it was not made good and also withheld delivery of the order made by the
petitioner. One supplier also cancelled the petitioners credit line and demanded that

future payments be made by it in cash or certified check. The petitioner complained

to the respondent bank. Investigation disclosed that the sum of P100,000.00
deposited by the petitioner on May 25, 1981, had not been credited to it. The error
was rectified only a month after, and the dishonored checks were paid after they
were re-deposited. The petitioner then filed a complaint in the then Court of First
Instance of Rizal against the bank for its gross and wanton negligence.

Issue: Whether or not the bank can be held liable for negligence by reason of its
unjustified dishonor of a check

Held: 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. A blunder on the part of the bank,
such as the dishonour of a check without good reason, can cause the depositor not a
little embarrassment if not also financial loss and perhaps even civil and criminal
litigation.

Article 2205 of the Civil Code provides that actual or compensatory damages
may be received (2) for injury to the plaintiff s business standing or commercial
credit. There is no question that the petitioner did sustain actual injury as a result of
the dishonored checks and that the existence of the loss having been established
absolute certainty as to its amount is not required. 7 Such injury should bolster all
the more the demand of the petitioner for moral damages and justifies the
examination by this Court of the validity and reasonableness of the said claim.

2. BPI CASES
BPI vs FRANCO Court of Appeals, GR No. 123498, November 23, 2007
Facts: Franco opened 3 accounts with BPI with the total amount of P2,000,000.00.
The said amount used to open these accounts is traceable to a check issued by
Tevesteco. The funding for the P2,000,000.00 check was part of the P80,000,000.00
debited by BPI from FMICs account (with a deposit of P100,000,000.00) and credited
to Tevestecos account pursuant to an Authority to Debit which was allegedly forged
as claimed by FMIC.
Tevesteco effected several withdrawals already from its account amounting to
P37,455,410.54 including the P2,000,000.00 paid to Franco.
Franco issued two checks which were dishonoured upon presentment for payment
due to garnishment of his account filed by BPI.
BPI claimed that it had a better right to the amounts which consisted of part of the
money allegedly fraudulently withdrawn from it by Tevesteco and ending up in

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Francos account. BPI urges us that the legal consequence of FMICs forgery claim is
that the money transferred by BPI to Tevesteco is its own, and considering that it was
able to recover possession of the same when the money was redeposited by Franco, it
had the right to set up its ownership thereon and freeze Francos accounts.

Issue: WON the bank has a better right to the deposits in Francos account.

Held: No. Significantly, while Article 559 permits an owner who has lost or has been
unlawfully deprived of a movable to recover the exact same thing from the current
possessor, BPI simply claims ownership of the equivalent amount of money, i.e., the
value thereof, which it had mistakenly debited from FMICs account and credited to
Tevestecos, and subsequently traced to Francos account.
Money bears no earmarks of peculiar ownership, and this characteristic is all the
more manifest in the instant case which involves money in a banking transaction gone
awry. Its primary function is to pass from hand to hand as a medium of exchange,
without other evidence of its title. Money, which had been passed through various
transactions in the general course of banking business, even if of traceable origin, is
no exception.

BPI v. CA [G.R. No. 104612, May 10, 1994]
DAVIDE, JR., J.

FACTS:
Private respondents Eastern and Lim, an officer and stockholder of Eastern, held at
least one joint bank account with the Commercial Bank and Trust Co. (CBTC), the
predecessor-in-interest of petitioner BPI. Sometime in March 1975, a joint checking
account ("and" account) with Lim in the amount of P120,000.00 was opened by
Mariano Velasco. When Velasco died, an Indemnity Undertaking was executed by Lim
for himself and as President and GM of Eastern, wherein one-half of the outstanding
balance was provisionally released and transferred to one of the bank accounts of
Eastern with CBTC. Later on, Eastern obtained a loan of P73,000.00 from CBTC as
"Additional Working Capital," evidenced by the "Disclosure Statement on Loan/Credit
Transaction". The loan was payable on demand with interest at 14% per annum. For
this loan, Eastern issued on the same day a negotiable promissory note which was
signed by Lim both in his own capacity and as President and General Manager of
Eastern. No reference to any security for the loan appears on the note. In addition,
Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement,"
wherein it was stated that as security for the Loan [Lim and Eastern] have offered
[CBTC] and the latter accepts a holdout on said Current Account in the joint names of
Lim and Velasco. After CBTC was merged with BPI, BPI filed a complaint against Lim
and Eastern demanding payment of the promissory note for P73,000.00. Defendants
Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance

in the disputed account subject of the Holdout Agreement and the interests thereon
after deducting the amount due on the promissory note.

ISSUE:
Whether BPI can demand payment of the loan of P73,000.00 despite the existence of
the Holdout Agreement.
Whether or not BPI is still liable to the private respondents on the account subject of
the Holdout Agreement after its withdrawal by the heirs of Velasco.

HELD:
The deposit under the questioned account was an ordinary bank deposit; hence, it
was payable on demand of the depositor. When the ownership of a particular
property is disputed, the determination by a probate court of whether that property is
included in the estate of a deceased is merely provisional in character and cannot be
the subject of execution.
The payment of the money deposited with BPI that will extinguish its obligation to the
creditor-depositor is payment to the person of the creditor or to one authorized by
him or by the law to receive it.
Payment made by the debtor to the wrong party does not extinguish the
obligation as to the creditor who is without fault or negligence, even if the
debtor acted in utmost good faith and by mistake as to the person of the
creditor, or through error induced by fraud of a third person

BPI v. Roxas GR 157833
Macalinao vs. BPI GR 175490

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