ORGANIZATION & OWNERSHIP OF BANKS

a) R.A. No. 8791 - “The General Banking Law of 2000”

b) R.A. No. 7906 - “Thrift Banks Act of 1995”

c) R.A. No. 7353 - “Rural Banks Act of 1992”

d) R.A. No. 7721 - “An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines & For
Other Purposes” (Approved: May 18,1994)

e) R.A. No. 10641 - “An Act Allowing the Full Entry of Foreign Banks in the Philippines, Amending for the Purpose.
R.A. No. 7721” (Approved July 15, 2014)

f) R.A.No. 10574 - “An Act Allowing the Infusion Of Foreign Equity In the Capital of Rural Banks, Amending R.A.No.
7353, Otherwise Known As “The Rural Banks Act of 1992”, As Amended, and for Other Purposes” (Approved: May
24, 2013)

“The Grandfather Rule” - is a method by which the percentage of Filipino equity in a corporation engaged in
nationalised and/or partially nationalised activities is computed.

To determine the percentage of foreign-owned voting stock – basis of computation is citizenship of each
stockholder.

For corporate owners of voting stock - citizenship of the individual owners of voting stock. (Cesar Villanueva,
Philippine Corporate Law 54)

• Ownership Ceiling of Voting Stocks in Banks:

A. Under R.A. No. 10641:

• Foreign Banks may own 100% of the voting stock by

1) acquiring, purchasing or owning up to 100% of the voting stock of an existing bank;

2) investing in up to 100% of the voting stock of a new banking subsidiary incorporated under
Phil. laws; or

3) establishing branches with full banking authority

Sec. 8 of the law (R.A.No. 10641) provides that any right, privilege or incentive granted to foreign banks under the
Act, shall be equally enjoyed by and extended under the same conditions to Philippine banks.

To ensure that the banking system remains with Filipinos, Sec. 2 of the same law mandates that at least 60% of
the resources or assets of the entire banking system is held by domestic banks which are majority-owned by Filipinos.

B. (1) Under R.A. No. 8791, R.A. No. 7906 & R.A. No. 10574:

The citizenship of a corporation, which is a stockholder of a bank shall follow the citizenship of the controlling
stockholders of the corporation, irrespective of the place of incorporation. The term “controlling stockholders” shall refer to
stockholders holding more than 50% of the voting stock of the corporate stockholders of the bank. (MORB, s x126 [i][2] 2009,
as amended by BSP Cir. No. 718 (2011).

The above MORB provision is the basis of BSP’s policy that shares belonging to corporations more than 50% of
the capital of which is owned by Filipino citizens has a Filipino nationality, although both the DOJ & The SEC use 60% as the
threshold of controlling interest.

The SEC has taken the view that in line with the government’s policy of attracting foreign investments,
there is a need to adopt a more liberal interpretation of our laws, hence, it decided to do away with the implementation of
the more strict “grandfather rule” and adopted a more lenient “control test” method.

• Stockholdings of Family Groups or Related Interests

• related within the 4th degree of consanguinity or affinity, legitimate or common law;

• Common-law relationship is included so as to subject common-law relatives to the same restrictions attendant to
those related legitimately

• the relationship need not be reported to the BSP. Disclosure of relationship must be made in transactions with the
bank (Op. Off. Gen. Counsel, 3/13/2001)

• in “affinity” , the marriage between husband & wife (according to canon law) makes husband & wife one. The
husband has the same relation by affinity to his wife’s blood relatives as she has by consanguinity and vice versa
(People vs. Berana, 311 SCRA 664 [July 29, 1999])

• Board of Directors

Composition of the Board of Directors-

• minimum of 5 and maximum of 15,

2 of whom should be independent directors

• 21 in case of merger or consolidation of banks

“Independent Director” - a person other than an officer or employee of the bank, its subsidiaries, affiliates or
related interests. (Sec. 15, GBL)

Public Officials - appointed or elected and whether full-time or part time are prohibited by Sec. 19, GBL to serve as officer
of any private bank, except:

• where such service is incident to the financial assistance provided by the gov’t.,

• Sec. 5 of the Rural Banks Act of 1992 which allows public officials to serve as Director, Officer
or consultant or in any capacity in the bank.

Meetings - may be conducted via modern technologies like teleconferencing or video-conferencing (Sec. 15, GBL). But
the MORB & MORNBFI require that every board member shall physically attend at least 25% of all Board
meetings every year.
“Fit and Proper Rule” - under this rule, it is the MB which is authorised to pass rules providing for the qualifications and
disqualification of individuals elected or appointed bank directors or officers and to disqualify those found
unfit after due notice. In determining whether the individual is fit for the position, regard shall be given to his integrity,
experience, education, training & competence (Sec. 16, GBL)

• Minimum Qualifications:

- of Directors

1. at least 25 years old

2. a college graduate or 5 years business experience

3. have attended a BSP seminar on corporate governance for the board

4. must be fit and proper for the position

- of Officers

1. at least 21 years old

2. a college graduate or 5 years experience or had training in banking

3. fit & proper for the position

• Disqualification of Directors:

a) persons convicted for offenses involving dishonesty or breach of trust;

b) persons convicted for offenses punishable by imprisonment of more than 6 years;

c) persons convicted cor violation of banking laws, rules & regulations;

d) directors, officers & employees responsible for a bank’s closure as determined y the MB;

e) directors & bank officers found administratively liable by the MB for violation of banking laws where the penalty of
removal from office is imposed which has become final & executory, and

f) those found by the MB to be unfit for the position because they were found administratively liable by another
government agency for violation of banking laws or any offense involving dishonesty or breach of trust &the
finding has become final & executory.

• General Responsibility of the Board of Directors

Sec. 2, X141.3 of MORB for Banks

Specific Duties and Responsibilities of:

(1) Board of Directors Itself - under Section X141.3 [c] of the MORB for banks

(2) Individual Directors - Sec. 4, Subsections.X141.3 (d)

 “Doctrine of Apparent Authority” in corporate law also finds application in banks. (First Phil. Intl. Bank vs. Court of
Appeals, G.R. No. 115849, Jan. 24, 1996). In Prudential Bank vs. Court of Appeals, 223 SCRA 350, 1993, the Supreme Court,
with reference to the doctrine, reiterated the rule that the principal is liable for the obligations contracted by its agents.

“A bank is liable for the wrongful acts of its officers done in the interest of the bank or in the course of dealings of
the officers in their representative capacity but not for acts outside the scope of their authority.”

“ A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds
they may thus be enabled to perpetrate in the apparent scope of their employment; nor will they permitted to shirk its
responsibility for such frauds, even though no benefit may accrue to the bank therefrom”

NOTE: The application of this doctrine is necessary because of the fiduciary relationship of banks with
the public.

The basic concerns of banks in their operations are:

(1) Liquidity- must always have sufficient funds for deposit withdrawals by depositors, and

(2) Security- activities that will not unduly expose the bank and its funds to undue risks.

Although a private enterprise, a bank’s stability affects the economic life of the community. Because of this , the General
Banking Law as well as the New Central Bank Act contain clear provisions that safeguard the twin concern of liquidity &
security.

Thus,

a) The MB shall prescribe a minimum risk-asset ratio;

b) Imposition of loan limits & credit accommodations that banks can extend;

c) Limitation on bank’s exposure to DOSRI Loans;

d) Restrictions of collateral value on loans;

e) The MB may provide restrictions on unsecured loans, and

f) Restrictions on dividend declaration.

Treasury Shares - Banks are prohibited from purchasing/acquiring their shares of stock (to become treasury shares), or
accept their own shares as collateral for a loan, except with prior MB approval but must be sold or disposed of within 6
months at a public or private sale.

Ownership of Real Property - a bank may acquire real estate necessary for its own use. But total investment over real
estate, the improvements including bank equipment shall not exceed 50% of combined capital
accounts.

However, a bank may acquire, hold or convey real property under the following circumstances:

1) those mortgaged to the bank as security for debts;

2) those conveyed to the bank by way of debt satisfaction, and

 3) those purchased at sales under judgments, decrees & mortgages

Provided: the real property acquired under any of the above circumstances is disposed/sold within 5 years.

• “Unsound Banking Practices”

Under Sec. 56 of the GBL, the MB is authorised to determine what are unsound banking practices acts of banks
which may not necessarily be prohibited by any law, Rule or regulation affecting banks, quasi-banks and trust companies.
The MB shall consider any of the following circumstances:

1) The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the
safety, stability, liquidity or solvency of the institution;

2) The act or omission has resulted or may result in material loss or damage, or abnormal risk to the institution’s
depositors, creditors, investors, stockholders or to the BSP or to the public in general;

3) The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or preference
to the bank or any party in the discharge by the director or officer of his duties and responsibilities through
manifest partiality, evident bad faith or gross inexcusable negligence; or

4) The act or omission involves entering into any contract or transaction manifestly or grossly disadvantageous to
the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby.

Sanctions:

Sec. 56, GBL - “Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe and
unsound manner, the MB may:

1) impose administrative sanctions provided in Sec. 37 of the New Central Bank Act,

2) initiate proceedings for receivership or liquidation under Sec. 30 of the same Act, and/or

3) immediately exclude the erring bank from clearing.

In this connection, whenever a bank, quasi-bank or trust entity conducts business in an unsafe and unsound manner, BSP
Circular No. 341 (Series of 2002), authorizes the BSP to impose any or all of the following sanctions:

a) to issue a cease and desist order to the institution from conducting business in an unsafe and unsound manner;

b) fines in amounts not exceeding P30,000 a day on a per transaction basis;

c) immediate exclusion from clearing;

d) suspension of rediscounting privileges;

e) suspension of responsible director/officer,

f) receivership and liquidation under Sec. 30 of R. A. 7653

The imposition of the above sanctions is without prejudice to the filing of appropriate criminal charges against culpable
persons as provided in Secs. 34, 35 & 36 of R. A. 7653.
SUPERVISION AND EXAMINATION OF BANKS
BSP - the only government agency and constitutional body

1) responsible for administering the monetary, banking and credit system of the country, and

2) granted the power of supervision & examination of banks, quasi-banks, trust entities & other financial
institutions which by special laws are subject to BSP supervision.

Primary Responsibility of the BSP –

provide policy directions in the areas of money, banking & credit

supervise over the operations of banks, and

exercise regulatory powers over finance companies & non-financial institutions performing quasi-banking functions.

Primary Objective of the BSP - to maintain price, monetary stability and convertibility of the peso.

The Basic Functions of the BSP

1. It provides policy directions in the areas of money, credit and banking;

2. It shall have supervision over the operations of banks;

3. It shall exercise regulatory powers over the operations of finance companies, and non-bank financial institutions
performing quasi-banking functions;

4. It shall have the sole power and authority to issue currency within the territory of the Republic of the Philippines:

i. In connection thereto, the BSP shall have the power to issue regulations to prevent the circulation of
foreign currencies, or currency substitutes as well as the reproduction of facsimiles of BSP notes;

ii. It has the power to investigate, make arrests, conduct searches and seizure for the purpose of
maintaining the integrity of the currency;

Monetary Board (MB) - the authority that exercises the powers & functions of the BSP

composed of 7 members appointed by the President for a 6-year term;

membership: Governor who is the Chairman of the MB;

Member of the Cabinet designated by the President, &

5 members from the private sector serving full time

Exercise of Authority of the Monetary Board (pg. 42 of textbook)

In general, the Supervisory & Regulatory Powers of the BSP cover the ff:
 1. Banks

2. Subsidiaries and affiliates of banks engaged in allied activities;

3. Quasi-banks;

4. Subsidiaries and affiliates of quasi-banks engaged in allied activities;

5. Other institutions performing similar functions such as non-stock savings & loan associations, pawnshops, foreign
exchange dealers, money changers, remittance agents and trust entities.

Jurisprudence

Courts have no authority to issue TRO/injunction in the investigation or examination of banks by the BSP except only in cases
where there is bad faith or arbitrary actions.

The action of the MB in placing a bank under conservatorship, receivership or liquidation and/or in closing a bank is final and
executory in nature. It is an exercise of police power and there is no need for prior notice or hearing.

The “close now, hear later” rule on Judicial action on conservatorship, receivership, liquidation and bank closure.

Prosecution of violation of banking laws by private individuals

CONSERVATORSHIP, RECEIVERSHIP
& LIQUIDATION OF BANKS

Whenever a bank is in distress, whether seriously or otherwise, as in the case where it is having liquidity problems – the BSP
may perform any of the following:

1. Grant emergency loans to the bank.

2. Appoint a conservator.

3. Appoint a Receiver and order the liquidation of the bank.

It should be noted however that the grounds for receivership do not only cover cases when a bank is in financial distress. For
instance, a bank may be subject to receivership in other cases such as where the bank is being operated in a fraudulent
manner.

1. LOANS TO BANKS

Loans without Collateral

The BSP 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.

Emergency Loans

The BSP, upon the approval of at least five (5) members of the Monetary Board, may also grant emergency loans
or advances in the amount of not exceeding fifty percent (50%) of its total deposits and deposit substitutes. The loans shall
be released in two tranches.
2. CONSERVATORSHIP

In First Philippine International Bank (Formerly Producers Bank of the Philippines), et al., vs. Court of Appeals, G. R. No.
115849, January 24, 1996, the Supreme Court explained “that a conservator may not revoke a contract that was already
perfected and enforceable at the time he was appointed as such conservator.

Section 28 – A merely gives the conservator power to revoke contracts that are, under existing law, deemed to be
defective – i.e., void, voidable, unenforceable or rescissible.”

Report of the Conservator

The conservator shall report and be responsible to the Monetary Board and shall have the power to overrule or revoke the
actions of the previous management.

The Monetary Board may appoint a conservator connected with the Bangko Sentral, in which case he shall not be entitled to
receive remuneration or emolument from the Bangko Sentral during the conservatorship. The expenses attendant to the
conservatorship shall be borne by the bank or quasi-bank concerned.

Termination of Conservatorship

The Monetary Board shall terminate the conservatorship

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

2. if on the basis of the report of the conservator or of its own findings, determine that the continuance in
business of the institution would involve probable loss to its depositors or creditors, in which case the provisions of Section
30 of the NCBA shall apply. (Proceedings for Receivership and Liquidation)

Jurisdiction of the Monetary Board

“Regular courts do not have jurisdiction to hear and decide cases to place a bank under receivership. It is the
Monetary Board that exercises exclusive jurisdiction over proceedings for receivership of banks. Section 30 of the New
Central Bank Act is the provision that says the “appointment of a receiver under this section shall be vested exclusively with
the Monetary Board.”

WHO MAY BE RECEIVER

The only person who may be designated as a receiver of a bank under the GBL is the Philippine Deposit Insurance
Corporation.

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

THE PDIC
In addition to the insurance function of the PDIC, it is also the designated statutory receiver of banks.

“CLOSE NOW-HEAR LATER” SCHEME.

The designation of a receiver, as well as a conservator, is vested exclusively with the Monetary Board. The designation of a
conservator is not a precondition to the designation of a receiver.

LIQUIDATION

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.

ACTIONS TO TAKE (In Liquidation)

The following actions should be taken after determining that there is a need to liquidate:

1) The receiver shall file ex parte with the proper regional trial court, and without requirement of prior notice or any
other action, a petition for assistance in the liquidation of the institution pursuant to liquidation plan adopted by
the Philippine Deposit Insurance Corporation for general application to all closed banks. In case of quasi-banks,
the liquidation plan shall be adopted by the Monetary Board.

DISPUTED CLAIMS

Disputed claims are subject to the jurisdiction of the liquidation court. Regular courts do not have jurisdiction over actions
filed by claimants against an insolvent bank.

The rule, that all disputed claims are within the jurisdiction of the court, is consistent with the view that judicial liquidation is
intended to prevent municipality of action against the insolvent bank.

HOW ASSETS ARE DISTRIBUTED

Section 31 of the New Central Bank Act provides that in case of “liquidation of a bank or a quasi-bank, after payment of the
cost of the proceedings, including reasonable expenses and fees of the receiver shall pay the debts of such institution, under
order of the court, in accordance with rules on concurrence and preference of credit as provided in the Civil Code.”

EFFECT OF RECEIVERSHIP & LIQUIDATION

a. Garnishment, Levy Attachment or Execution.

Section 30 of the New Central Bank Act provides that the assets of an institution under receivership or liquidation shall
be deemed in “cutodia 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.
 There will be no preference even if the claimant-depositor obtained a writ of preliminary attachment. After the
declaration of insolvency, the remedy of depositors is to intervene in the liquidation proceedings.

(Lipana vs. Development Bank of Rizal, 154 SCRA 257, 261)

Distinction Between Receiver and Liquidator

Broadly speaking, the term “liquidator” is embraced in definition of “receiver.” The following are the specific distinctions:

i. A receiver is appointed by the Monetary Board based on the recommendation of the supervising department of
the Bangko Sentral, while a liquidator is appointed by the Monetary Board based on the determination by the
receiver;

ii. There are six (6) grounds for the appointment of a receiver, while there is only one (1) ground for the appointment
of a liquidator, that is, when the institution cannot be permitted to resume business with safety to the depositors
and creditors and the general public;

iii. A receiver has ninety (90) days from takeover to determine whether the institution may be rehabilitated or placed
under liquidation, while there is no statutory period for a liquidator to prepare the liquid plan for the approval of
the liquidation court;

iv. Generally, the receiver has the duty to take charge of the assets and liabilities for the benefit of the creditors, while
a liquidator is bound to convert the assets to money for the purpose of paying the debts of the institution; and

v. A receiver is normally appointed ahead of the liquidator.

CASES TO READ:

1. BPI vs. C.A. & Napiza, 326 SCRA 641 (2000)

2. Prudential Bank vs. C.A. & Valenzuela, 328 SCRA 264 (2000)

3. Metropolitan Bank & Trust Co. (MBTC) vs. C.A. & Rural Bank of Padre Garcia, 237 SCRA 761 (1994)

4. PNB vs. C.A. & Flores, 256 SCRA 309 (1996)

5. Phil Bank of Commerce vs. C.A. & Rommel’s Marketing (RMC) 269 SCRA 695 (1997)

6. Moran vs. C.A. & Citytrust, 230 SCRA 799 (1994)

7. Salvacion vs. Central Bank, 278 SCRA 27 (1997)

8.Land Bank of the Phil. vs. Republic of the Phil., 543 SCRA 453 (2008)

9. Bangko Sentral vs. Hon. Valenzuela, 168 SCRA 623 (2009)

10. Central Bank of the Phil. vs. C.A., G.R. No. L-45710, Oct. 3, 1985

11. Go vs. Bangko Sentral, 604 SCRA 322 (2009)

12. Tan vs. C.A., 239 SCRA 310 (1994)

13. United Coconut Planters Bank vs. E. Ganzon 591 SCRA 349 (2009)

PROHIBITED TRANSACTIONS

• SEC. 55. OF GBL - PROHIBITED TRANSACTIONS

 A. Prohibited Transactions by a Bank Director, Officer, Employee, or Agent

1. False Entries in Bank Report or Statement – which

a. affected the financial interest of the bank or any person, or

b. caused damage to the bank or any person,

OR, Participating in Fraudulent Transaction -

Fraud in its general sense, is deemed to comprise anything calculated to deceive . . . resulting in damage to
another. (or breach of legal duty trust or confidence justly reposed, causing damage to another)

2. Disclosure of Information - disclosing to any unauthorised person any information relative to the funds or
properties in the custody of the bank belonging to private individuals, corporations or any other entity.

(NOTE: The prohibition covers all funds and properties in the possession of the bank. With regard to bank deposits &
investment in gov’t. bonds - The Secrecy of Bank Deposits Law shall govern.)

3. Accepting Gifts, Fees or Commissions - the Acceptance of any gifts, . . . in connection with the approval of a loan
is strictly prohibited and is a kin to commercial bribery in other jurisdictions. A conflict of interest-personal gain at
the expense of the institution.

4. Overvaluation or Aiding in Overvaluation of Security- this section intends to protect the funds of the bank. (There
is the opinion that actual damage or reliance is not an essential element of the offense.)

5. Outsourcing of Inherent Banking Functions - this section was added to prevent the possible violation of R.A. No.
1405, the Law on Secrecy of Bank Deposits. It means that a bank allows a service provider to supply the
manpower to service certain banking functions such as placements of deposits and withdrawals or actual opening
of deposit accounts or deposit-taking services.

BUT outsourcing of non-inherently banking duties may be allowed. These are Management Functions; Information
Technology; Credit Investigation & Collection; Credit Card Services and Call Center Operations for Credit.

B. Prohibited Acts of Borrowers

1. Fraudulent Overvaluation of Property- aside from the automatic cancellation of the loan application, a borrower
who fraudulently overvalued the property offered as security may also be prosecuted under this section. There
must be “intent to deceive” and not by mere inadvertence or an honest mistake.

2. False Statement or Information, Misrepresentation, Suppression of Material Facts

- false statement means untrue statement knowingly made with intent to mislead.
- misrepresentation refers to the act of making a false or misleading assertion about something, usually with
intent to deceive.
- the purpose is to obtain, renew or increase a loan or other credit accommodation

3. Attempt to Defraud the Bank in a Court Action - the court action filed by the Bank against a borrower to recover a
loan or other credit accommodation. Illegal disposition of properties in fraud or to the prejudice of creditors is
one example.
The transfer of property by a borrower after a suit has begun and while it is pending, is denominated a “badge of fraud” and
satisfies this section

4. Offer to Influence Approval of Loan - the borrower will be liable under Sec. 55.2 (d) while the bank officer will be
liable under Sec. 55.1 (c) This provision is similar to Section 3 of R.A. No. 3019 which enumerates the corrupt
practices of public officers and employees. The person giving the gift is punished together with the offending
public officer.

C. Prohibited Acts of Examiners, Officers or Employees of the Bangko Sentral or of Any Department or Bureau,
Office, Branch or Agency of The Government

1. False Entries in Bank Report or Statement OR Participating in any Fraudulent Transaction causing damage to the
bank or any person.

2. Disclosure of Information - without order of a court of competent jurisdiction, disclosing to any unauthorized
person

• Insurance Business

Banks are prohibited from engaging in insurance business which under the
Insurance Code include among others the following:

a) making or proposing to make as insurer, any insurance contract

b) making or proposing to make as surety, any contract of suretyship as a vocation

c) doing any other kind of insurance business as recognized under the Insurance Code, including
reinsurance.

• DEGREE OF DILIGENCE REQUIRED OF BANKS

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

- HIGHEST DEGREE OF CARE OR
- EXTRAORDINARY DILIGENCE

The diligence of an ordinary prudent man, or ordinary diligence, is not enough.

• The reasons for the strict and highest standard required all because:

1. the business of banking is so impressed with PUBLIC INTEREST,

2. where TRUST AND CONFIDENCE of the public in general is of paramount interest, and

3. arising from the FIDUCIARY ATURE of its function

With particular reference to deposits, the doctrine is “a bank is under obligation to treat the accounts of its depositors wi th
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.

(Legal Essays on Banking, The Viray Lectures, by Atty. V. Viray, pg. 43)

• OWNERSHIP OF BANKS

• Unlawful and Void Transactions

The following transactions, to the extent of the excess over any of the prescribed ceilings under Republic Act No.
7721 and other relevant laws are unlawful and void: (MORB, Section X126.2(a), as amended by BSP Cir. No. 718 (2011)

i. Any transaction involving voting shares of stock of a bank, if such transaction, in itself, or in relation with
other/previous transaction/s shall result in the ownership and control by an individual or corporation of voting
shares in excess of any of the following ceilings:

ii. Any act, contact, agreement or arrangement, such as voting trust agreement or proxy, which vests in any person,
whether natural or juridical , the right to vote or the control of the voting shares of stock of a bank, if such
agreement in itself, or in relation with other/previous transaction/s, shall result in the acquisition of the right to
vote or the control of voting shares of stock of the bank, in excess of the prescribed ceilings.

(The General Banking Law Annotated, by BSP, 2011 pg. 106-108)

BANK DEPOSITS

BANK DEPOSITS

A bank has two basic functions, namely:

acceptance of deposits from the public, and lending the funds obtained from deposits.

Absent any of these two functions, particularly that of deposit, the institution is not a bank. Although other entities are in the
business of extending loans, yet they will not be considered performing banking business if they do not accept deposits from
the public.

Contract of Loan - contract entered into between a bank and a depositor. Art. 1980 of the NCC provides that-

“fixed, savings and current deposits of money in banks and similar institutions

shall be governed by the provisions concerning simple loan”.

In addition to the above NCC Article, bank deposits are also covered by special rules provided for by special laws and BSP
regulations.

In China Banking Corp. vs. The Hon. C.A., 511 SCRA 110, 120, defined a depositor as one who pays money into the bank in the
usual course of business, to be placed to his credit and subject to his check or beneficiary held by the bank.
Since contracts are voluntary in nature, a bank may not be compelled to accept deposits unless the action of the bank is
shown to be discriminatory. In fact the BSP, in compliance with the Anti-Money Laundering Act, is quite strict on the
acceptance of bank deposits as all banks are required to adopt the Know-Your- Customer (KYC) standards.

The relationship between the depositor and the bank is that of a creditor and debtor. The obligation of the bank is to pay the
creditor and not to return exactly the same thing that was given.

Some pertinent jurisprudence on this creditor-debtor relationship-

the bank can make use as its own the money deposited (Tan TiongTick vs. American Apothecaries, 65 Phil. 414)

officers of the bank cannot be held liable for estafa under Art. 315 (1)(b)of the Revised Penal Code for authorizing the use of
the money deposited, even if the bank failed to return the amount deposited. The money that is deposited is not held in
trust by the bank (Guingona vs. City Fiscal of Mla, 128SCRA 577)

3rd persons who may have a right to the money deposited cannot hold the bank responsible unless there is a court order or
garnishment. The duty of the bank is to its creditor-depositor and not to 3rd persons (Fulton Iron Works Co. vs. China
Banking Corp., G.R. No. 32576, Nov. 6, 1930). If a 3rd person has a valid right over the money deposited, he must prove the
same before a court of competent jurisdiction.

bank deposits are not preferred credits under the Civil Code (Central Bank vs. Morfe, 63 SCRA 114)

the bank has the right to compensation. It can set-off the deposits with the indebtedness of the depositor that are due and
demandable (Gullas vs. PNB, 62 SCRA 519).

Likewise, it can set-off the value of dishonored checks that were previously credited (BPI vs. C.A., et. al., G.R. No. 136202, Jan.
25, 2007).

NOTE:

bank deposit not a trust under the NCC. The amount is delivered to the bank by the depositor not as trustor but as a
creditor. In an ordinary trust agreement, the trustee does not become the owner of the property; whereas in a deposit the
bank becomes the owner of the cash that was deposited subject to the obligation to pay the depositor. Unlike an ordinary
trustee who cannot use the money held in trust for his own benefit, the bank is free to use the money deposited for its own
use.

Unilateral Freezing of Account, Not Allowed-

The person whose name appears in the passbook as depositor and other bank documents is presumed to be the owner of
the money in the bank account. The depositary bank does not have a unilateral right to freeze the accounts of its depositor
based on its mere suspicion that the funds therein were proceeds of fraudulent acts.(BPI Family Bank vs. Amado Franco and
Kurtis of Appeals, G.R. No. 123498, Nov. 23, 2007)

But a bank must not release the funds if the same was already garnished at the instance of third persons.

Bank’s Insolvency: Effect on Deposit

As deposits are protected only up to the extent of the deposit insurance of the PDIC, any excess amount is treated as an
ordinary unsecured credit which may be defeated by other preferred claims like claims for unpaid taxes as well as claims of
secured creditors.
Process of Depositing in a Bank Account

In Phil. Bank of Commerce vs. C.A., G.R.No. 97626, March 14, 1997, The Court described the process as follows:

1. current account deposits are accepted by the bank on the basis of deposit slips prepared and signed
by the depositor, the latter’s agent or representative;

2. who (depositor) indicates therein the current account number to which the deposit is to be credited;

3. the name of the depositor or current account holder,

4. the date of the deposit,

5. and the amount of the deposit either in cash or checks.

The deposit slips are prepared by the depositor in duplicate- the original is retained by the bank while the duplicate copy is
returned or given to the depositor.

Also, the bank may directly credit the account of the depositor whenever the bank is obligated to pay an amount to the
same depositor.

Deposit Slips -

They serve as proof that an amount was deposited in an account. In Prudential Bank vs. Chonney Lim, ___________________,
(pg. 56, Red Book)

Due Diligence required in the Validation of Deposits -

In Phil. Bank of Commerce, et. al. vs. C.A., Rommel’s Marketing Corp., et. al., 269 SCRA 695, the Supreme Court ruled that the
bank cannot be relieved of liability if it validated blank or incomplete duplicate copies of deposit slips thereby facilitating the
taking of the funds of the depositor by the latter’s employee.

In another case - Firestone Tire and Rubber Co. of the Phil. vs. C.A., 353 SCRA 600, 601, a bank was likewise made liable when
it accepted withdrawal slips for deposits which turned out to be unfunded. The fact that withdrawal slips were honored in the
past does not excuse it from liability. The bank bears the risk attendant to the acceptance of the withdrawal slips.

Withdrawals –

for cash deposits, anytime withdrawals subject to prescribed procedures

for check deposits, withdrawal may only be allowed after drawee bank clears the amount covered by the check.

Demand Deposits - withdrawable through checks

Savings Deposits - withdrawable through withdrawal slips

With Savings Deposits, depositor’s passbook must be presented with the withdrawal slip. A bank is negligent if it allows
withdrawal without requiring the presentation of the passbook (BPI vs. C.A., 326 SCRA 200)

Withdrawals from a bank account can be made upon the authority of the depositor as reflected in the withdrawal slip.
However, a bank is liable if it allows withdrawal of funds on the basis of forged signatures in the withdrawal slips.
A bank which allows unauthorised withdrawals can be required to return the amount illegally withdrawn plus 12%/annum
interest in the absence of interest stipulation from the time of demand (Citibank N.A. vs. Sps. Luis & Carmelita Cabamongan,
488 SCRA, 517, 533-534).
SECRECY OF BANK DEPOSITS

- R.A. No. 1405: "All deposits of whatever nature in banks or banking institutions in the Philippines and investments in
government bonds are ABSOLUTELY CONFIDENTIAL in nature. They may NOT be examined, inquired or looked into by any
person, government official, bureau or office, save in certain limited exceptions."

- the law PROHIBITS any official or employee of a bank from disclosing to any person any information concerning bank
deposits, except if the disclosure is made in the circumstances provided by Section 2

- It is not required that all the details of a bank deposit be examined, inquired or looked into. The PROHIBITION APPLIES
even if the disclosure pertains only to the mere existence of a bank deposit, without revealing the bank or amount. (See letter
of the BSP Deputy Governor & General Counsel to the Chairman on Ways & Means, house of Representatives, Dec.13, 2011)

- Deposits refer to money or funds placed in a bank that can be withdrawn on depositor's order or demand. Examples are
savings, current and time deposits, long term negotiable certificates of deposit and negotiable order of withdrawal accounts.

- EXCEPTIONS to Confidentiality:

1) upon written permission of the depositor

2) in cases of impeachment

3) upon order of a competent court in cases of bribery or dereliction of duty of public officials; and

4) in cases where the money deposited or invested is the subject matter of the litigation

5) analogous cases - cases of unexplained wealth are similar to cases of bribery or dereliction of duty. Also cases of plunder.

EXCEPTIONS UNDER OTHER LAWS: as expressly provided in other laws, bank deposits and investments may be examined,
inspected and inquired into, by authorized persons or government agencies in the following instances:

a) violations of Anti-Graft and Corrupt Practices Act

b) investigation by the Ombudsman of bank accounts & records

c) determination by the Comm. of Internal Revenue of a decedent's gross estate and exchange of tax information

e) inquiry by the Anti-Money Laundering Council into deposits and & investments related to unlawful activities and money
laundering offenses

f) conduct of annual testing by the BSP which is solely limited to the determination of the existence and true identity of the
owners of peso or foreign currency non-checking numbered accounts, to prevent money-laundering

g) investigation by the Anti-Money Laundering Council of deposits and investments related to financing or acts of terrorism

h) examination by the Anti-Terrorism Council of bank accounts pursuant to judicial order in anti-terrorism cases
I) inquiry by the PDIC & BSP in cases of unsafe or unsound banking practices

j) audit of government deposits by the COA

k) investigation by the PCGG to recover ill-gotten wealth, and

l) review of records by a Rehabilitation Receiver in connection with the rehabilitation or liquidation of financially distressed
enterprises and individuals.

WITH COURT ORDER:

> The AMLC may inquire into or examine any particular deposit or investment, including related accounts, upon order of any
competent court based on an ex-parte application in cases of violations of the AMLA. The Court of Appeals shall act on the
application within 24 hours from filing.

BSP AUTHORITY:

To ensure compliance with the AMLA, the BSP may, in the course of periodic or special examination, check the compliance
of a covered institution with the requirements of the Act, it's implementing rules and regulations.

DISCLOSURES TO DIRECTORS:

> Inquiry by bank directors of client's deposit accounts may be allowed when such is in relation to the exercise of their
official functions. Disclosures to them may be justified because they are primarily responsible for the corporate governance
of the bank and the monitoring and overseeing of management actions.
DEFINITION AND NATURE OF BANKS

DEFINITION
and
NATURE OF BANKS

A. DEFINITION

entities engaged in the lending of funds obtained in the form of deposits (Sec. 3.1. of R.A. No. 8791 [GBL of 2000])

moneyed institute founded to facilitate the borrowing, lending and safe-keeping of money and to deal in notes, bills of
exchange and credits \ (Republic of the Philippines vs. Security Credit and Acceptance Corp., 19 SCRA 58)

B. NATURE OF BUSINESS

The importance of banks is recognized by the General Banking Law (hereinafter referred to as GBL) in its Declaration of
Policy. Section 2 of the GBL provides that:

Section 2. Declaration of Policy. – The State recognizes the vital role of banks in providing an environment conducive to the
sustained 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.

UTMOST DILIGENCE

One of the consequences of the nature of the bank’s business is that it is required to exercise utmost diligence in the
handling of deposits.

STRIKES AND LOCKOUTS

The nature of the business of banks also requires special rules on strikes and lockouts. Section 22 of the GBL declares that
the banking industry as indespensable to the national interest and “notwithstanding the provisions of any law to the country,
any strike or lockout involving banks, if unsettled after seven (7) calendar days shall be reported by the BSP to the Secretary
of Labor who has two (2) options: (1) he may assume jurisdiction over and decide the dispute or (2) certify the same to the
National Labor Relations Commission for compulsary arbitration.”
The law also allows the President of the Philippines to, at any time, intervene and assume jurisdiction over such labor dispute
in order to settle or terminate the same.

Banks operate (and earn income) by:

extending credit facilities

financed primarily by deposit from the public

by ploughing back the bulk of said deposits in the economy in the form of loans.

For this reason, banking is imbued with public interest (BDO-EPCI, Inc. vs JAPRL Dev’t. Corp, GR No. 17991, 14 April 2008
[fiduciary nature of banking]). Consequently, banking is properly subject to reasonable regulation under the police power of
the state because of its nature and relation to the fiscal affairs of the people and the revenues of the state (Central Bank of
the Phil. vs. Court of Appeals, 208 SCRA 652, [May 8, 1992])

“The essence of banking”

the taking of deposits from the public and lending out these funds

thus, a financial institution obtaining deposits from the public which was lent to persons deemed suitable by it, is engaged in
banking (Republic vs. Security Credit and Acceptance Corp., 19 SCRA 58 [1967])

Aside from the two (2) basic functions of banks: (1) deposit taking and (2) lending, banks perform other activities depending
on what category they belong to. These additional activities are set out in various sections of Republic Act No. 8791 (Secs. 23,
29 & 53) and other special banking laws.

But, an investment firm that purchased a PN at a discount secured by a CM for purposes of reinvesting is not engaged in a
loan transaction or in banking but only in the purchase of receivables (Banas vs. Asia Pacific Corp., 343 SCRA 527 [2000])

GOVERNING LAW

1. Republic Act No. 8791, “An Act Providing for the Regulation of the Organization and Operation of Banks, Quasi-
Banks, Trust Entities and Other Purposes” Otherwise known as the “General Banking Law of 2000” (GBL) which
took effect on June 13, 2000.

2. Republic Act No. 7653, “The New Central Bank Act” which was passed on June 14, 1993. This law prevails over
general laws, like the Corporation Code, in the regulation of banks (In Re: Petition for Assistance in the Liquidation
of RB of Bokod, (Benguet), Inc.., G.R. No. 158261, December 18, 2006.)

GOVERNING LAW

3. Republic Act No. 7906, “Thrift Banks Act of 1995”

4. Republic Act No. 7353, “Rural Banks Act of 1992”

Financial Intermediation

performed by financial intermediaries (like financial institutions) who take money from investors, pool it, and invest the
pooled money in other enterprises. Financial intermediaries include depository institutions, life insurance companies, mutual
funds and pension funds (“Banking Law & Regulation 48 [2001] by Jonathan R. Micey, Texas al. In the Phil., banks rank first
among financial intermediaries.

CLASSIFICATION OF BANKS

The GBL modified the classification of banks under the old law. The
General Banking Act did not use the term “universal banks”; instead it used the term” expanded commercial banks.” Banks
are classified under Section 3.2 of the GBL into:

1. Universal Banks;

2. Commercial Banks;

CLASSIFICATION OF BANKS

3. Thrift banks, composed of: (i) Savings and mortgage banks, (ii) Stock savings and loan associations, and (iii)
Private development banks, as defined in Republic Act No. 7906;

4. Rural banks, as defined in Republic Act No. 7353;

5. Cooperative banks, as defined in Republic Act No. 6938 (hereafter the “Cooperative Code”);

CLASSIFICATION OF BANKS

6. Islamic banks as defined in Republic Act No. 6848, otherwise known as the “Charter of Al Amanah Islamic
Investment Bank of thhe Philippines”; and

7. Other classifications of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas.

Before an entity may engage in banking, the need for an authority from the BSP is indispensable. Thus, if such entity
performs banking and quasi-banking functions without the required certificate of authority from the BSP, the officers
concerned may be subject to criminal prosecution and the Articles of Incorporation of the corporation may be revoked
(Republic of the Phil. vs. Security Credit and Acceptance Corp., (G.R. No. L 20583, Jan. 23, 1967; Central Bank vs. Morfe, G.R.
No. L- 20119, June 30, 1967)

The determination of whether a person or entity is performing banking or quasi- banking functions without BSP’s authority
shall be decided by the Monetary Board (Sec. 6, GBL)

DISTINCTIONS

In general, banks may be distinguished as follows:

1. As to capitalization – They have different minimum capitalization requirements. For example, the minimum capital
of a Universal bank is P5.4 Billion while the capital of a Commercial Bank is P2.8 Billion.

2. As to purpose – Some of the banks have specific purposes and social functions. For instance, Rural banks are
meant to hasten rural development.

DISTINCTIONS
 3. As to powers or functions – There are functions and powers that are not exercised by one but are exercised by
others. Some banks may exercise certain powers only upon prior approval of the Monetary Board. Thus, only
universal banks and commercial banks can create and accept demand deposits without separate authority from
the Monetary Board while other banks must secure authority from the Monetary Board; only universal banks may
act as an investment house; generally, only universal banks and commercial Banks may be involved in quasi-
banking functions.

DISTINCTIONS

4. As to who can be directors – Public offers can be directors of the Rural Banks while such officers are prohibited
from being directors or officers of other types of banks.

5. As to incorporators – Consistent with the provisions of the Corporation Code, incorporators of banks are natural
persons. The exception is with respect to rural banks which can be organized or established by cooperatives and
corporations primarily organized to hold equities in rural banks.

DISTINCTIONS

6. As to neccessity of public offering – Public offering of shares is necessary for domestic banks seeking authority to
act as universal bank while there is no such requirement for other banks.

(Aquino, “Notes & Cases on Bangking Law & Negotiable Instruments Law”, Vol. II, 2010)

FOREIGN BANKS

The entry of foreign banks in the Philippines through the establishment of branches shall be governed by the provisions of
the “Foreign Banks Liberalization Act”.

OTHER ACTIVITIES / SERVICES OF BANKS

a) Custodianship of Funds, Documents & Valuable Objects - ( a custodian or depositary. The relationship between
the bank as a depositary and it’s clients is generally governed by the provisions of the Civil Code on deposit [R.A.
No. 386, Title XII, 1950])

b) Act as Financial Agent and Buyer and Seller of Shares, Evidences of Indebtedness and Securities - (relationship
with client is governed by the Contract of Agency. “Securities” - shares of stock, bonds, debentures and notes

OTHER ACTIVITIES / SERVICES OF BANKS

c) Collection and Payment Agent and Performance of Other Services - for the account of its clients. Also as tax and
customs collection agent of the gov’t., SSS premium contributions and overseas remittance services

d) Rent out Safety Deposit Boxes - stored in a bank’s vault to secure a customer’s valuables (Black’s Law Dictionary).
The legal relationship between the bank and client is classified as a special kind of deposit, specifically a bail ent
for hire and mutual benefit (CA Agro-Industrial Dev. Corp. vs. Court of Appeals, 219 SCRA 426; and Luzon Sia vs.
Outrage of Appeals, 222 SCRA 24).

Commercial Banks / ________________________

1. Accepting Drafts - ( A draft is the term used for a bill of exchange if drawn on a bank.
 2. Issue Letters of Credit - ( A letter of credit is an engagement by a bank made at the request of a customer that the
issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit
[Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257])

Commercial Banks / ________________________

3. Discount & Negotiate Promissory Notes, Drafts, Bills of Exchange & Other Evidences of Indebtedness- ( A discount
refers to interest paid in advance)

4. Accept or Create Demand Deposits - (Demand Deposits are all liabilities of a bank denominated in Phil. currency
and are subject to payment upon demand by the presentation of checks [R. A. No. 7653])

Commercial Banks / ________________________

5. Receive Other Types of Deposits/Deposit Substitutes - (like savings & time Deposits, Negotiable Order of
Withdrawal Account

6. Buy and sell foreign exchange and gold or silver bullion - (“foreign exchange” is foreign money used in settlement
in international trade between countries

Commercial Banks / ________________________

7. Acquire Marketable Bonds & Other Debt Securities- (like evidences of indebtedness of the Republic of the Phil. or
the Bangko Sentral

8. Extend Credit - (lending function of banks of funds obtained through deposit & deposit substitutes