banking midterms reviewer

7/31/2019 Banking Midterms Reviewer

1/34


2/34

person or entity shall engage in banking operations or quasi-banking functions

without authority from the Bangko Sentral:

Provided, however, That an entity authorized by the Bangko Sentral to perform

universal or commercial banking functions shall likewise have the authority to engage

in quasi-banking functions.

The determination of whether a person or entity is performing banking or quasi-banking functions without Bangko Sentral authority shall be decided by the Monetary

Board. To resolve such issue, the Monetary Board may; through the appropriate

supervising and examining department of the Bangko Sentral:

1. examine,

2. inspect or

3. investigate the books and records of such person or entity.

Upon issuance of this authority, such person or entity may commence to engage in

banking operations or quasi-banking function and shall continue to do so unless such

authority is sooner surrendered, revoked, suspended or annulled by the Bangko

Sentral in accordance with this Act or other special laws.

The department head and the examiners of the appropriate supervising and

examining department are hereby authorized to:

1. administer oaths to any such person, employee, officer, or director of any such

entity and

2. to compel the presentation or production of such books, documents, papers or

records that are reasonably necessary to ascertain the facts relative to the true

functions and operations of such person or entity.

Failure or refusal to comply with the required presentation or production of such

books, documents, papers or records within a reasonable time shall subject the

persons responsible therefore to the penal sanctions provided under the New CentralBank Act.

Persons or entities found to be performing banking or quasi-banking functions

without authority from the Bangko Sentral shall be subject to appropriate sanctions

under the New Central Bank Act and other applicable laws.

*RAM: It must be understood that only a stock corporation may be licensed asa bank

or a quasi bank

Moreover, courts are prohibited from issuing a restraining order or injunction

enjoining the Bangki Sentral from examining any institution subject to its supervision

or examination unless it is clearly arbitrary and in bad faith

*Sanctions are imposed on the unlicensed. The SolGen, according to Section 66, can

instituted quo warranto proceedings for the dissolution of a corporation conducting

banking activities without a license.

Sec.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.

*RAM: A subsidiary is defined to mean a corporation more than 50% of the voting

stock of which is owned by a bank or a quasi bank.

An affiliate is one in which the stockholding of a bank or quasi-bank is less than 50%

or which is related or linked to such bank through common stockholders. (See page

24 for more information)

*Note that the BSP can only examine a subsidiary when examining a bank. In other

words, the authority to examine a subsidiary of a bank only arises in the course of its

examination of such bank

2. Investment Houses, Financing Companies,

Forex Companies etc.

a. Investment House

They underwrite/guarantees securities.

Firm underwriting the investment house buys all the issued shares of the

corporation and sells all these to third parties.

Best Effort Investment houses doesnt buy all but promises to exert its best efforts

to sell all the shares

*RAM: If a company wants to list in the PSE or issue commercial papers to borrow

money from the public it needs an investment house. Because if the public does not

buy the issued commercial papers, then the investment house will buy for them.

Syndicate is a group of investment houses

b. Finance Companies

They extend consumer credit and then underwrite


3/34

c. Investment Companies

One that is organized and sustained under the Investment Company Act.

When one invests in mutual funds, s/he becomes a shareholder of the mutual fund

not at par value but at net asset value.

Kinds of Investments

1. Open Ended

a. Mutual: Mutual funds are redeemable funds bought NOT on the basis of

par value but on the basis of net asset value.

2. Close Ended cannot be asked to buy back its shares

d. Securities Dealer or Broker

Broker person engaged in the business of buying and selling securities for the

account of others. You earn through commissions

Dealer Any person who buys and sells securities for his or own accounti n the

ordinary course of business.

Customer first policy One who is a both dealer and broker must take care of his

customers investment first

e. Pawnshop

Grants loans for a pledge of personal property

f. Money Brokers

Is a forex dealer, one who buys and sells dollars.

g. Fund Managers

Receive funds for investment purposes with the intent of yielding satisfactory returns

for their clients. They usually form the trust department of banks.

h. Cooperatives

i. Lending Investors

They cater to the needs of small borrowers. It is now possible for them to upgrade

themselves into finance companies

j. Insurance Company

Insurance companies are not supervised by the BSP. They are ordinarily under the

Office of the Insurance Commission

k. Non Bank Thrift Associations

l. Building and Loan Associations

Sec. 94 of the General Banking Law transfers the regulation of Building and Loanassociations from the BSP to HIGC

m. Specialized Non-Banks

These are classified as financial intermediaries, middlemen between sources of funds

and the users of funds

3. Universal and Commercial Banks

(including Philippine branches of foreign banks)

Universal banking is based on the German concept of universality in banking which

essentially means what one bank can do, any other bank can do.

Contrasted with a commercial bank, a UB is a KB with the authority to exercise

powers of an investment house and to invest in non-allied enterprises.

(a) Functions

Sec. 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 benecessary to carry on the business of commercial banking such as:


4/34

1. accepting drafts and

*Bankers Acceptance is a negotiable time draft or bill of exchange drawn on and

accepted by a commercial bank. Unlike a trade acceptance which is accepted by the

buyer, a bankers acceptance is drawn on and accepted by the bank.

This is used when the buyer and seller are not known to each other and credit

references are hard to obtain. The acceptance therefor substitutes the banks creditfor the unknown firm.

Hence, the accepting bank is unconditionally and irrevocably liable to pay the holder

at maturity. If unable to pay, the indorsers and the drawer are secondarily liable.

2. issuing letters of credit;

3. discounting and negotiating promissory notes, drafts, bills of exchange, and other

evidences of debt;

*RAM: The old law had the word, readily. It was deleted

It is another matter when it comes to selling the recievables and other financial

claims of a bank. Because Section X238 prohibits a bank from selling its recievables

and financial claims (other than govt securities) on a without recourse basis, unless

those recievables are first registered with the SEC, unless it is authorized to perform

a quasi-banking function or is a qualified buyer.

4. accepting or creating demand deposits;

*RAM: This is the core banking function. The term deposits refers to savings,

demand or current and time or fixed deposits which Article 1980 of the NCC

characterizes as loans.

*Only a universal or commercial bank can accept or create demand deposits (current

or checking accounts) Another bank must obtain prior authotization from theMonetary Board.

*The fiduciary nature of banking does not convert a simple loan into a trust

agreement because banks do not accept deposits to enrich depositors but to earn

money for themselves. If depositors are beneficiaries of banks, then the interest

spread belongs to the depositors, absurd.

*Since the relationship is one of debtor-creditor, the bank has a right to set off the

deposits in its hands for the payment of any indebtredness.

*It is presumed that the money deposited in a bank account belongs to the person

whose name the deposit account is opened. A bank is justified in paying out the

money to the depositor upon his order and cannot be liable to any other person who

turned out to be the true owner of the funds deposited.

However, if the bank had knowledge of the death of a person who had a deposit

account with it alone, it must not allow withdrawal unless the CIR has certified that

estate tax are paid.

5. receiving other types of deposits and deposit substitutes;

*RAM: While deposits are usually evidenced by passbooks, bank statements, and

certificates of deposits, deposit substitutes are evidenced by debt instruments that

are to be used for relending or purchasing of recievables and other obligations

6. buying and selling foreign exchange and gold or silver bullion;

*RAM: These are subject ot BSP rules. The MB may require banks to sell to the BSP

all or part of their surplus holdings of foreign exchange in order that the BSP may

have forex reserves to maintain international stability and convertability of the peso

and in order to promote domestic investment of bank resources

7. acquiring marketable bonds and other debt securities; and

8. extending credit, subject to such rules as the Monetary Board may promulgate.

*RAM: This is the flipside of deposit-taking. It deploys deposits and deposit

substitutes as loans to bank customers and clients.

Banks are not limited to accepting traditional security devices such as real estate or

chattel mortgages, but they may be able to accept nontraditional security.

*As a rule, a bank cannot lend pesos to a non-resident.

These rules may include the determination of bonds and other debt securities eligible

for investment, the maturities and aggregate amount of such investment.

Sec. 53. Other Banking Services. In addition to the operations specifically

authorized in this Act, a bank may perform the following services:

5 53.1 Receive in custody funds, documents and valuable objects;

53.2 Act as financial agent and buy and sell, by order of and for the account of their

customers, shares, evidences of indebtedness and all types of securities;

*RAM: This simply means that the bank can act as a securities broker. Take note

that Banks do not have to be licensed by the SEC to be securities brokers for their

own customers. But the BSP has agreed that the SEC shall register/regulate

securities brokerage, activities of banks but the BSP shall not be precluded from

examining the same

5 53.3. Make collections and payments for the account of others and perform such

other services for their customers as are not incompatible with banking business;


5/34

*RAM: Other services are quite encompassing. 53.3 serves as the authority for the

use of branch premises for the presentation or sale of the financial products of a

non-allied enterprise of a universal bank.

53.4 Upon prior approval of the Monetary Board, act as managing agent, adviser,

consultant or administrator of investment management/advisory/consultancy

accounts; and

*RAM: This is not enough to enable the bank to engage in trust and other fiduciarybusiness. To go into such business, a bank must be licensed under Section 79 of the

GBL.

53.5. Rent out safety deposit boxes.

*RAM: This is not an ordinary contract of lease because the full and absolute

possession and control of the safety deposit box was not given to the joint renters.

Regardless, it is a special kind of deposit because the bank will be liable for the loss

of the contents of the box if it is found to be negligent.

The bank shall perform the services permitted under Subsections 53.1., 53.2., 53.3.

and 53.4. as depositary or as an agent. Accordingly, it shall keep the funds,securities and other effects which it receives duly separate from the bank's own

assets and liabilities:

The Monetary Board may regulate the operations authorized by this Section in order

to ensure that such operations do not endanger the interests of the depositors and

other creditors of the bank.

In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a

bank holiday, or in any manner suspends the payment of its deposit liabilities

continuously for more than thirty (30) days, the Monetary Board may summarily and

without need for prior hearing close such banking institution and place it under

receivership of the Philippine Deposit Insurance Corporation.

(b) Certain Basic Units

(i) Regular Banking Unit

Also called the bank proper. It accepts peso deposits.The RBU can also conduct

foreign currency transactions. In contrast, FCDUs can only engage in limited foreign

currency transactions. It can only receive dollar deposits for example

Note that a non resident cannot open a peso account unless it is funded by aremittance of foreign exchange.

*Fidelity Savings v. Cenzon It is settled jurisprudence that a banking institution

which has been declared insolvent and subsequently ordered closed by the Central

Bank of the Philippines cannot be held liable to pay interest on bank deposits which

accrued during the period when the bank is actually closed and non-operational.

(ii) Foreign Currency Deposit UnitThe FCDU accepts deposits in foreign currency acceptable as part of the international

reserve of the country.

Any person, natural or juridical, whether resident or non resident can open an FCDU

account. Unlike peso deposits, FCDU deposits are exempt from attachment,

garnishment of any other order of a court. Exception is Salvacion.

However, FCDU deposits are covered by the forfeiture provisions of the Anti-Money

laundering act.

General Rule: The taking out of foreign currency from the country requires CB

Authority. But this does not apply to foreign currency depositors.

NOTE: A bank is prohibited from transferring funds from the FCDU to the RBU viceversa unless the transfer results from a legitimate transaction (meaning there is an

actual consideration from the transfer)

*Cancio v. Court of Appeals: SEC. 5. Withdrawability and transferability of deposits.

There shall be no restriction on the withdrawal by the depositor of his deposit or

on the transferability of the same abroad except those arising from the contract

between the depositor and the bank.

Under the foregoing provision, the transferability abroad of foreign currency deposits

is unrestricted. Only one exception is provided for therein, which is, any restriction "

from the contract between the depositor and the bank." Neither is a Central Bank

authority required for the transferability abroad of foreign currency deposits.

BUT, TO: ALL BANKS AUTHORIZED TO ACCEPT FOREIGN CURRENCY DEPOSITS

UNDER THE PROVISIONS OF RA 6426, AS AMENDED AND PRESIDENTIAL DECREE

NO. 1035.

Effective immediately, the banks authorized to accept foreign currency deposits

under the provisions of RA 6426, as amended, and PD 1035 and as implemented by

Central Bank Circular 343 and 547, are hereby instructed to advise their foreign

currency depositors who are withdrawing funds for travel purposes to carry with

them the certificate of withdrawal that the banks shall issue. The travellers shall

present the certifications to the Customs and Central Bank personnel at the MIA, if

requested.

It is a fact that petitioner could not present a certificate of withdrawal at the Manila


6/34

International Airport when she was about to depart. As she had explained, however,

she was unaware of this requirement. And if she had wrapped her dollar currency

inside a chocolate box it was for "security reasons." Besides, as instructed in the

Circular-Letter abovequoted, it is the authorized depository bank which should advise

its depositors to carry with them the certificate of withdrawal. At any rate,

respondent Court has found that petitioner has presented in evidence her foreign

currency bank book and her withdrawal cards. These may be considered as

substantial compliance for purposes of this case.

Indeed, given the underlying objective of the Foreign Currency Deposit Act, as

amended, which is to attract and invite the deposit of foreign currencies which are

acceptable as part of the international reserve in duly authorized banks in order that

they may be put into the stream of the banking system, it would be to defeat the

very purpose of the law to place undue restrictions on the transferability of such

funds. The countervailing effect would be to discourage prospective foreign currency

depositors to the detriment of the banking system.

In fine, Central Bank Circulars Nos. 265 and 534 requiring prior Central Bank

authority for the taking out of the country of foreign currency should not be made to

encompass foreign currency depositors whose rights are expressly defined and

guaranteed in a special law, the Foreign Currency Deposit Act (RA 6426, as

amended). As a foreign currency depositor, therefore, petitioner cannot be adjudgedto have violated the aforestated Central Bank Circulars.

*Salvacion v. Central Bank: Expanding, the Central Bank said; that one reason for

exempting the foreign currency deposits from attachment, garnishment or any other

order process of any court, is to assure the development and speedy growth of the

Foreign Currency Deposit System and the Offshore Banking System in the

Philippines; that another reason is to encourage the inflow of foreign currency

deposits into the banking institutions thereby placing such institutions more in a

position to properly channel the same to loans and investments in the Philippines,

thus directly contributing to the economic development of the country

It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time when thecountrys economy was in a shambles; when foreign investments were minimal and

presumably, this was the reason why said statute was enacted. But the realities of

the present times show that the country has recovered economically; and even if

not, the questioned law still denies those entitled to due process of law for being

unreasonable and oppressive. The intention of the questioned law may be good

when enacted. The law failed to anticipate the inquitous effects producing outright

injustice and inequality such as as the case before us

(iii) Trust Department

Sec. 79. Authority to Engage in Trust Business. Only a:

1. stock corporation or2. a person duly authorized by the Monetary Board to engage in trust business shall

act as:

1. a trustee or

2. administer any trust or

3. hold property in trust or on deposit for the use, benefit, or behalf of others.

For purposes of this Act, such a corporation shall be referred to as a trust entity.

*RAM: Before a stock corporation can be a trust entity, it must be authorized by the

Monetary Board to do so.

Sec. 80. Conduct of Trust Business. A trust entity shall administer the funds

or property under its custody with the diligence that a prudent man would exercise in

the conduct of an enterprise of a like character and with similar aims.

No trust entity shall, for the account of the trustor or the beneficiary of the trust:

1. purchase or acquire property from, or

2. sell, transfer, assign, or lend money or property to, or

3. purchase debt instruments of, any of the:

a. departments, directors, officers, stockholders, or employees of the trust

entity,

b. relatives within the first degree of consanguinity or affinity, or

c. the related interests, of such directors, officers and stockholders, UNLESS

the transaction is:

1. specifically authorized by the trustor and

2. the relationship of the trustee and the other party involved in the transaction is

fully disclosed to the trustor of beneficiary of the trust prior to the transaction.

The Monetary Board shall promulgate such rules and regulations as may be

necessary to prevent circumvention of this prohibition or the evasion of the

responsibility herein imposed on a trust entity.

*RAM: This is the prudent man rule or the rule against self-dealing. This is because

the essence of trusteeship should not be motivated by self-interest.

Sec. 81. Registration of Articles of Incorporation and By-Laws of a Trust

Entity. The Securities and Exchange Commission shall not register the articles of

incorporation and by-laws or any amendment thereto, of any trust entity, unless

accompanied by a certificate of authority issued by the Bangko Sentral.

Sec. 82. Minimum Capitalization. A trust entity, before it can engage in trust

or other fiduciary business, shall comply with the minimum paid-in capital

requirement which will be determined by the Monetary Board.

*RAM: For a trust entity, it is 250,000 pesos. For a stand alone trust company, it is

300,000 pesos combined capital accounts.

Sec. 83. Powers of a Trust Entity. A trust entity, in addition to the general

powers incident to corporations, shall have the power to:


7/34

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:

1. guardian, receiver, trustee, or depositary of the estate of any minor or other

incompetent person, and

2. as receiver and depositary of any moneys paid into court by parties to any legalproceedings 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.

*RAM: Trust Business shall refer to any activity resulting from a trustor trustee

relationship involving the appointment of a trustee by a trustor for the administration

of the properties of the trustor by the trustee.

Other fiduciary business shall refer to any activity of a trust licensed bank resulting

from a contract or agreement whereby the bank resulting from a contract binds itself

to render services or to act in a representative capacity such as in an agency,

guardianship etc.

Investment Management activity is any contract or agreement primarily for thefinancial return whereby the bank (as investment manager) binds itself to handle or

manage investible funds which does not create a trusteeship

Sec. 84. Deposit for the Faithful Performance of Trust Duties. Before

transacting trust business, every trust entity shall deposit with the Bangko Sentral,

as security for the faithful performance of its trust duties:

1. cash or securities

2. approved by the Monetary Board in

3. an amount equal to or not less than Five hundred thousand pesos (P500,000.00)

or such higher amount as may fixed by the Monetary Board:

Provided, however, That the Monetary Board shall require every trust entity toincrease the amount of its cash or securities on deposit with the Bangko Sentral in

accordance with the provisions of this paragraph.

Should the capital and surplus fall below said amount, the Monetary Board shall have

the same authority as that granted to it under the provisions of the fifth paragraph of

Section 34 of this Act.

A trust entity so long as it shall continue to be solvent and comply with laws or

regulations shall have:

1. the right to collect the interest earned on such securities deposited with theBangko Sentral and,

2. from time to time, with the approval of the Bangko Sentral, to exchange the

securities for others.

If the trust entity fails to comply with any law or regulation, the Bangko Sentral shall

retain such interest on the securities deposited with it for the benefit of rightful

claimants.

All claims rising out of the trust business of a trust entity shall have priority over all

other claims as regards the cash or securities deposited as above provided. The

Monetary Board may not permit the cash or securities deposited in accordance with

the provisions of this Section to be reduced below the prescribed minimum amount

until the depositing entity shall discontinue its trust business and shall satisfy the

Monetary Board that it has complied with all its obligations in connection with such

business.

*RAM: The MB may until the paid in capital is met (1) limit or prohibit the

distribution of the net profits by such entity and (2) restrict or prohibit investments

with the exception of purchases readily marketable evidence of indebtedness of the

RP and BSP.

Sec. 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:

1. application of any executor, administrator, guardian, trustee, receiver, depositary

or any other person in interest,

2. the court may, after notice and hearing,

3. 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


8/34

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.

Sec. 86. Exemption of Trust Entity from Bond Requirement. No bond or

other security shall be required by the court from a trust entry for the faithful

performance of its duties as court-appointed trustee, executor, administrator,

guardian, receiver, or depositary.

However, the court may, upon proper application with it showing special cause

therefore, require the trust entity to post a bond or other security for the protection

of funds or property confided to such entity.

*RAM: Because there is already a bond with the BSP, the court need not require

another one.

Sec. 87. Separation of Trust Business from General Business. The trust

business and all funds, properties or securities received by any trust entity as

executor, administrator, guardian, trustee, receiver, or depositary shall be kept

separate and distinct from the general business including all other funds, properties,

and assets of such trust entity.

The accounts of all such funds, properties, or securities shall likewise be kept

separate and distinct from the accounts of the general business of the trust entity.

*RAM: Separation of assets is warranted because the trust entity is not the beneficial

owner of the properties.

Moreover, the trust department is completely separate from the FCDU and RBU,

there is no overlapping of officers between these units. The Trust Department

officers are a separate bunch.

Sec. 88. Investment Limitations of a Trust Entity. Unless otherwise directedby the instrument creating the trust, the lending and investment of funds and other

assets acquired by a trust entity as executor, administrator, guardian, trustee,

receiver or depositary of the estate of any minor or other incompetent person shall

be limited to loans or investments as may be prescribed by law, the Monetary Board

or any court of competent jurisdiction.

Sec. 89. Real Estate Acquired by a Trust Entity. Unless otherwise specifically

directed by the trustor or the nature of the trust, real estate acquired by a trust

entity in whatever manner and for whatever purposes, shall likewise be governed by

the relevant provisions of Section 52 of this Act.

Sec. 90. Investment of Non-Trust Funds. The investment of funds other thantrust funds of a trust entity which is a bank, financing company or an investment

house shall be governed by the relevant provisions of this Act and other applicable

laws.

Sec. 91. Sanctions and Penalties. - A trust entity or any of its officers and

directors found to have willfully violated any pertinent provisions of this Act, shall be

subject to the sanctions and penalties provided tinder Section 66 of this Act as well

as Sections 36 and 37 of the New Central Bank Act.

Sec. 92. Exemption of Trust Assets from Claims. - No assets held by a trustentity in its capacity as trustee shall be subject to any claims other than those of the

parties interested in the specific trusts.

Sec. 93. Establishment of Branches of a Trust Entity. The ordinary business

of a trust entity shall be transacted at the place of business specified in its articles of

incorporation.

Such trust entity may, with prior approval of the Monetary Board, establish branches

in the Philippines and the said entity shall be responsible for all business conducted in

such branches to the same extent and in the same manner as though such business

had all been conducted in the head office.

For the purpose of this Act, the trust entity and its branches shall be treated as one

unit.

(c) Degree of Diligence

*Simex International v. CA: In every case, the depositor expects the bank to treat

his account with the utmost fidelity, whether such account consists only of a few

hundred pesos or of millions. The bank must record every single transaction

accurately, down to the last centavo, and as promptly as possible. This has to be

done if the account is to reflect at any given time the amount of money the depositor

can dispose of as he sees fit, confident that the bank will deliver it as and to

whomever he directs. A blunder on the part of the bank, such as the dishonor of acheck without good reason, can cause the depositor not a little embarrassment if not

also financial loss and perhaps even civil and criminal litigation.

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 accounts of its depositors

with meticulous care, always having in mind the fiduciary nature of their relationship.

In the case at bar, it is obvious that the respondent bank was remiss in that duty and

violated that relationship. What is especially deplorable is that, having been informed

of its error in not crediting the deposit in question to the petitioner, the respondent

bank did not immediately correct it but did so only one week later or twenty-three

days after the deposit was made


9/34

*BPI v. IAC: In every case, the depositor expects the bank to treat his account with

the utmost fidelity, whether such account consists only of a few hundred pesos or of

millions. The bank must record every single transaction accurately, down to the last

centavo, and as promptly as possible. This has to be done if the account is to reflect

at any given time the amount of money the depositor can dispose of as he sees fit,

confident that the bank will deliver it as and to whomever he directs. A blunder on

the part of the bank, such as the dishonor of a check without good reason, can cause

the depositor not a little embarrassment if not also financial loss and perhaps evencivil and criminal litigation.

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 accounts of its depositors

with meticulous care, always having in mind the fiduciary nature of their relationship

*BPI v. CA: By the nature of its functions, 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."As such, in dealing with its depositors, a bank should

exercise its functions not only with the diligence of a good father of a family but it

should do so with the highest degree of care. Petitioner violated its own rules by

allowing the withdrawal of an amount that is definitely over and above the aggregate

amount of private respondents dollar deposits that had yet to be cleared.

*Consolidated Bank and Trust Corporation vs. Court of Appeals: The law imposes on

banks high standards in view of the fiduciary nature of banking. Section 2 of

Republic Act No. 8791 (RA 8791), which took effect on 13 June 2000, declares that

the State recognizes the fiduciary nature of banking that requires high standards of

integrity and performance.

This fiduciary relationship means that the banks obligation to observe high

standards of integrity and performance is deemed written into every deposit

agreement between a bank and its depositor. The fiduciary nature of banking

requires banks to assume a degree of diligence higher than that of a good father of a

family. Article 1172 of the Civil Code states that the degree of diligence required of

an obligor is that prescribed by law or contract, and absent such stipulation then the

diligence of a good father of a family. Section 2 of RA 8791 prescribes the statutory

diligence required from banks that banks must observe high standards of integrity

and performance in servicing their depositors. Although RA 8791 took effect almost

nine years after the unauthorized withdrawal of the P300,000 from L.C. Diazs

savings account, jurisprudenceat the time of the withdrawal already imposed on

banks the same high standard of diligence required under RA No. 8791.

*Philippine Banking Corporation v. Court of Appeals: Although RA No. 8791 took

effect only in the year 2000, at the time that the BANK transacted with Marcos,

jurisprudence had already imposed on banks the same high standard of diligence

required under RA No. 8791. This fiduciary relationship means that the banks

obligation to observe high standards of integrity and performance is deemedwritten into every deposit agreement between a bank and its depositor.

The fiduciary nature of banking requires banks to assume a degree of diligence

higher than that of a good father of a family. Thus, the BANKs fiduciary duty

imposes upon it a higher level of accountability than that expected of Marcos, a

businessman, who negligently signed blank forms and entrusted his certificates of

time deposits to Pagsaligan without retaining copies of the certificates

*Samsung. Vs. Far East Bank: Even assuming that FEBTC had a standing habit of

dealing with Sempio, acting in behalf of Samsung Construction, the irregular

circumstances attending the presentment of the forged check should have put thebank on the highest degree of alert. The Court recently emphasized that the highest

degree of care and diligence is required of banks.

Banks are engaged in a business impressed with public interest, and it is their duty

to protect in return their many clients and depositors who transact business with

them. They have the obligation to treat their clients account meticulously and with

the highest degree of care, considering the fiduciary nature of their relationship. The

diligence required of banks, therefore, is more than that of a good father of a family

*Heirs of Eduardo Manlapat v. CA: The highest degree of diligence is expected, and

high standards of integrity and performance are even required of it

*PNB v. Pike: Nevertheless, though its employees may be the ones negligent, abanks liability as an obligor is not merely vicarious but primary, as banks are

expected to exercise the highest degree of diligence in the selection and supervision

of their employees,[19] and having such obligation, this Court cannot ignore the

circumstances surrounding the case at bar how the employees of petitioner PNB

turned their heads, nay, closed their eyes to the suspicious circumstances enfolding

the two withdrawals subject of the case at bar. It may even be said that they went

out of their ways to disregard standard operating procedures formulated to ensure

the security of each and every account that they are handling. Petitioner PNB does

not deny that the withdrawal slips used were in breach of standard operating

procedures of banks in the ordinary and usual course of banking operations as

testified to by one of its witnesses, Mr. Lorenzo T. Bal, Assistant Vice President of

Petitioner PNBs Buendia branch, on cross-examination

*Cadiz v. Court of Appeals: The fiduciary nature of bankingis enshrined in Republic

Act No. 8791 or the General Banking Law of 2000. Section 2 of the law specifically

says that the State recognizes the fiduciary nature of banking that requires high

standards of integrity and performance. The bank must not only exercise high

standards of integrity and performance, it must also ensure that its employees do

likewise because this is the only way to ensure that the bank will comply with its

fiduciary duty.

*Far East Bank v. Pacilan: The facts, as found by the court a quo and the appellate

court, do not establish that, in the exercise of this right, petitioner bank committed

an abuse thereof. Specifically, the second and third elements for abuse of rights are

not attendant in the present case. The evidence presented by petitioner bank

negates the existence of bad faith or malice on its part in closing the respondents


10/34

account on April 4, 1988 because on the said date the same was already overdrawn.

The respondent issued four checks, all due on April 4, 1988, amounting to P7,410.00

when the balance of his current account deposit was only P6,981.43. Thus, he

incurred an overdraft of P428.57 which resulted in the dishonor of his Check No.

2434886. Further, petitioner bank showed that in 1986, the current account of the

respondent was overdrawn 156 times due to his issuance of checks against

insufficient funds. In 1987, the said account was overdrawn 117 times for the same

reason. Again, in 1988, 26 times. There were also several instances when the

respondent issued checks deliberately using a signature different from his specimen

signature on file with petitioner bank. All these circumstances taken together

justified the petitioner banks closure of the respondents account on April 4, 1988 for

improper handling.

*Citibank vs. Cabamongan: The Court has repeatedly emphasized that, since the

banking business is impressed with public interest, of paramount importance thereto

is the trust and confidence of the public in general. Consequently, the highest degree

of diligence40 is expected,41 and high standards of integrity and performance are

even required, of it.42 By the nature of its functions, a bank is "under obligation to

treat the accounts of its depositors with meticulous care,43 always having in mind

the fiduciary nature of their relationship."44

In this case, it has been sufficiently shown that the signatures of Carmelita in the

forms for pretermination of deposits are forgeries. Citibank, with its signature

verification procedure, failed to detect the forgery. Its negligence consisted in the

omission of that degree of diligence required of banks. The Court has held that a

bank is "bound to know the signatures of its customers; and if it pays a forged check,

it must be considered as making the payment out of its own funds, and cannot

ordinarily charge the amount so paid to the account of the depositor whose name

was forged

*Citibank v. Sabeniano: Although this Court appreciates the right of petitioner

Citibank to effect legal compensation of respondent's local deposits, as well as its

right to the proceeds of PNs No. 20138 and 20139 by virtue of the notarized Deeds

of Assignment, to partly extinguish respondent's outstanding loans, it finds that

petitioner Citibank did commit wrong when it failed to pay and properly account for

the proceeds of respondent's money market placements, evidenced by PNs No.

23356 and 23357, and when it sought the remittance of respondent's dollar accounts

from Citibank-Geneva by virtue of a highly-suspect Declaration of Pledge to be

applied to the remaining balance of respondent's outstanding loans. It bears to

emphasize that banking is impressed with public interest and its fiduciary character

requires high standards of integrity and performance

(d)

Systemic Risk: Certain PrudentialMeasures

Systemic Risk is that the failure of one bank might affect the rest of the members of

the banking system and the banking system as a whole.

This arises due to:

1. Inter bank linkages If banks have huge interbank deposits with a failed bank,

they may in turn experience liquidity problems

2. Inter-bank payment system --

a. Net Settlement system: Payment obligations are aggregated and netted at the end

of the day. It is possible for a bank not to be able to settle its payment obligations to

other banks at the end of the day, and thereby make these other banks in danger of

defaulting on their own payment obligations. Thus there is a shift to real time system

b. Real time system: Each payment obligation is settled immediately.

3. Public Perception The failure of one bank may lead to a public perception that

other banks are at the same situation. This may result in hesitance.

(i) Reserves

In order to control the volume of money created by the credit operations of the

banking system, BSP requires all banks to maintain reserves against their deposit

and deposit substitute liabilities.. These are not static, as they vary from time to

time.

As of July 15, 2005, the liquidity reserve requirement against peso deposit and

deposit substitute liabilities of universal and commercial banks had been increased to

11%.

The required liquidity reserves are now met by placing term deposits in the ReserveDeposit Account maintained with the BSP. Since the requirement of reserves is

imposed primarily to control the volume of money. BSP shall not pay interest on the

reserves maintained with it unless MB declares otherwise.

Deposit substitutes which are duly evidenced by repurchase agreements covering

government securities are subject to a lower statutory reserve of 2%

With FCDUs the requirement is to maintain 100% cover for their foreign currency

liabilities. At least 30% of these must be in form of liquid assets.

Purposes of Bank Reserves:

1. Instrument of monetary policy2. Ready source of funds that will respond to unusually large number of withdrawals


11/34

or preterminations of deposits taking shape of a bank run

3. The free reserves are largely invested by the BSP in debt securities issued by the

RP, hence they help finance the deficit in the countrys budget.

Note that a fraction of the deposit goes to reserve.

(ii) SBL

Sec. 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.

*RAM: SBLs main purpose is to prevent the bank from making excessive loans to a

single borrower or a corporate group, including guarantees. Hence, it is to distribute

the risk.

*Total credit commitment is defined as: including outstanding loans and other credit

accommodations, deferred letters of credut less margin deposits and guarantees

*Net worth: Total unimpaired paid-in capital including paid-in surplus, retained

earnings and undivided profit, net of valuation reserves and other adjustments.

*A separate SBL is required to wholesale lending activities of government banks to

participating financial institutions for relending to end-user borrowers 35% of net

worth

35.2. Unless the Monetary Board prescribes otherwise, the total amount of loans,

credit accommodations and guarantees prescribed in the preceding paragraph may

be increased by an additional ten percent (10%) of the net worth of such bank

provided the additional liabilities of any borrower are adequately secured by:

1. trust receipts,

2. shipping documents,

3. warehouse receipts or

4. other similar documents transferring or securing title covering readily

marketable, non-perishable goods which must be fully covered by insurance.

35.3. The above prescribed ceilings shall include:

(a) the direct liability of the maker or acceptor of paper discounted with or sold to

such bank and the liability of a general endorser, drawer or guarantor who obtains a

loan or other credit accommodation from or discounts paper with or sells papers to

such bank;

*RAM: They are deemed a borrower since each of the is primarily liable to the bank

under such paper. It is clear that the parties primarily liable to the holder or payee

are the maker of the PN and the acceptor of a BoE.

(b) in the case of an individual who owns or controls a majority interest in a

corporation, partnership, association or any other entity, the liabilities of said entities

to such bank;

(c) in the case of a corporation, all liabilities to such bank of all subsidiaries in which

such corporation owns or controls a majority interest; and

(d) in the case of a partnership, association or other entity, the liabilities of the

members thereof to such bank.

35.4. Even if a parent corporation, partnership, association, entity or an individual

who owns or controls a majority interest in such entities has no liability to the bank,

the Monetary Board may prescribe the combination of the liabilities of subsidiary

corporations or members of the partnership, association, entity or such individual

under certain circumstances, including but not limited to, any of the following

situations:

(a) the parent corporation, partnership, association, entity or individual guarantees

the repayment of the liabilities;

(b) the liabilities were incurred for the accommodation of the parent corporation or

another subsidiary or of the partnership or association or entity or such individual; or

(c) the subsidiaries though separate entities operate merely as departments or

divisions of a single entity.

*See page 93 of RAMs book for an illustration

35.5. For purposes of this Section, loans, other credit accommodations and

guarantees shall exclude:

(a) loans and other credit accommodations secured by obligations of the Bangko

Sentral or of the Philippine Government;

(b) loans and other credit accommodations fully guaranteed by the government as to

the payment of principal and interest;


12/34

*RAM: This is on the assumption that the Philippine Government and the BSP cannot

become insolvent.

(c) loans and other credit accommodations covered by assignment of deposits

maintained in the lending bank and held in the Philippines;

*RAM: This is normally coupled out with a hold-out arrangement that prohibits the

withdrawal of the deposits by the assigning depositor. The depositor is also made to

consent to a conventional compensation or set-off. This is so that the payment of the

loan would not be construed as a pactum commisorium. Hence this is classified as an

assignment of credit.

This is also the legal basis for a chargeback being valid in this jurisdiction. A

charge-back is an assignment by way of security, of a debt by the creditor to the

debtor liable on the debt

(d) loans, credit accommodations and acceptances under letters of credit to the

extent covered by margin deposits; and

(e) other loans or credit accommodations which the Monetary Board may from time

to time, specify as non-risk items.

*The Monetary Board also considers as a non-risk item loans and other credit

accommodations secured by US treasury notes and other securities issued by central

governments and central banks of foreign countries.

*RAM: All of these are called non-risk items

35.6. Loans and other credit accommodations, deposits maintained with, and usual

guarantees by a bank to any other bank or non-bank entity, whether locally or

abroad, shall be subject to the limits as herein prescribed.

*RAM: This just shows that a bank can now issue a guarantee in favor of a another

bank.

35.7. Certain types of contingent accounts of borrowers may be included among

those subject to these prescribed limits as may be determined by the Monetary

Board.

*RAM: This includes outstanding foreign and domestic deferred letters of credit less

marginal deposits.

(iii) DOSRI

Sec. 36. Restriction on Bank Exposure to Directors, Officers, Stockholdersand Their Related Interests. No:

1. director or officer of any bank

2. shall, directly or indirectly, for himself or as the representative or agent of others,

3. borrow from such bank

4. nor shall he become a guarantor, endorser or surety for loans from such bank to

others, or

5. in any manner be an obligor or incur any contractual liability to the bank

except with the written approval of the majority of all the directors of the bank,

excluding the director concerned:

Provided, That such written approval shall not be required for loans, other credit

accommodations and advances granted to officers under a fringe benefit plan

approved by the Bangko Sentral.

The required approval shall be entered upon the records of the bank and a copy of

such entry shall be transmitted forthwith to the appropriate supervising and

examining department of the Bangko Sentral.

Dealings of a bank with any of its directors, officers or stockholders and their related

interests shall be upon terms not less favorable to the bank than those offered to

others.

After due notice to the board of directors of the bank, the office of any bank director

or officer who violates the provisions of this Section may be declared vacant and the

director or officer shall be subject to the penal provisions of the New Central Bank

Act.

The Monetary Board may regulate the amount of loans, credit accommodations and

guarantees that may be extended, directly or indirectly, by:

1. a bank to its directors, officers, stockholders and their related interests, as well as

2. investments of such bank in enterprises owned or controlled by said directors,

officers, stockholders and their related interests.

However, the outstanding loans, credit accommodations and guarantees which a

bank may extend to each of its stockholders, directors, or officers and their related

interests, shall be limited to an amount equivalent to their respective unencumbered

deposits and book value of their paid-in capital contribution in the bank:

Provided, however, That loans, credit accommodations and guarantees secured by

assets considered as non-risk by the Monetary Board shall be excluded from such

limit:

Provided, further, That loans, credit accommodations and advances to officers in the

form of fringe benefits granted in accordance with rules as may be prescribed by the

Monetary Board shall not be subject to the individual limit.

The Monetary Board shall define the term related interests.


13/34

The limit on loans, credit accommodations and guarantees prescribed herein shall not

apply to loans, credit accommodations and guarantees extended by a cooperative

bank to its cooperative shareholders.

*RAM: These are rules on insider lending. The SHs and directors of a bank should

inhibit themselves from availing of the banks credit facilities for their own purposes

and benefit.

*DOSRI Directors, Officers (includes those generally known to be officers of the

bank), Stockholders (not all are included, only those with 1% threshold stockholding

are included) and Related interests

*DOSRI ceilings:

1. Individual Ceiling total allowable outstanding direct credit accommodations to

each DOSRI, which is an amount equivalent to his unencumbered deposits in the

lending bank plus book value of his paid-in capital contribution.

Excluded:

a. Loans, other credit accommodations, and guarantees secured by assets

considered as non-risk items by the Monetary boardb. Loans and other credit accommodations to bank officers under a Bangko

Sentral approved fringe benefit plan

c. Loans, credit accommodations and guarantees extended by a

cooperative bank to its cooperative stockholders

Non risk items

a. Cash

b. Debt securities issued by the BSP or RP

c. Deposits maintained in the lending bank and held in the Philippines

d. Debt securities issued by the US government

e. Debt securities issued by the central governments and central banks of

foreign countries and multilateral financial institutions with the highestcredit quality

f. Such other assets considered as non-risk by the MB

2. Aggregate Ceiling Total allowable direct and indirect credit accommodations to

DOSRI. It is 15% of the total loan portfolio of the bank or 100% of its net worth,

whichever is lower. Again, there is a 30% ceiling on unsecured loans and 70% on

secured.

3. Ceiling on unsecured loans --

A loan is secured if:

a. Real estate Mortgage

b. Chattel mortgage

c. Pledge

d. Assignment of intangible assets

e. Unconditional payment guarantees

f. Assignment or hold out on deposits/substitutes

*Sanctions for violations

1. DOSRI may be declared vacant

2. DOSRI may be subject to penal provisions in New Central Bank Act

3. Erring bank may be prohibited from declaring dividends

4. Share of erring directors may be applied against the excess loan

5. Fines may be imposed by the Monetary Board.

(iv) Loan-loss provision

Sec. 49. Provisions for Losses and Write-Offs. - All debts due to any bank on

which:

1. interest is past due and unpaid for such period

2. as may be determined by the Monetary Board,

unless the same are well-secured and in the process of collection

shall be considered bad debts within the meaning of this Section.

The Monetary Board may fix, by regulation or by order in a specific case, the amount

of reserves for bad debts or doubtful accounts or other contingencies.

Writing off of loans, other credit accommodations, advances and other assets shall be

subject to regulations issued by the Monetary Board.

*RAM: Rationale is that the bank is paying interest in the deposits made by the

depositors but it is not recouping that interest from the loan it made. Eventually, the

bank may have to write off loan losses against profits. This is called interest

mismatch

ALLOWANCES

1. Unclassified Loan 0%. Unclassified loans are defined as loans that do not have a

greater than normal risk and do not possess the characteristics of classified loans

2. Loans especially mentioned 5%. These are loans that have potential weaknesses

that if left uncorrected may affect the repayment of the loans. Examples Loans

without credit investigation report, collaterals with small value, loans that are past

due for more than 30 90 days.

3. Substandard (If secured 10%, If unsecured 25%) Loan is substandard if it is

past due for more than 90 days and loans under litigation


14/34

4. Doubtful 50% loans previously classified by BSP as substandard but without at

least 20% of repayment of principal after 12 months of the classification. It is also

doubtful when it is past due and there is an adverse claim over the real estate

securing such loan rendering foreclosure uncertain

5. Loss 100% -- Loans or portions thereof which are considered uncollectible or

worthless and of such little value that their continuance as bank assets is not

warranted

NOTE: RA 9182 The Special Purpose Vehicle Act of 2002

To address the non-performing asset problem of the banking system, this was

passed so that the banks can sell their non performing assets to SPVs and to

qualified individuals for housing

(v) PDIC Insurance

This is an added prudential measure. Banks are required to insure their deposit

liabilities with the PDIC.

Each depositor is a beneficiary of that insurance for a maximum amount of 250K, or

its foreign currency equivalent in case of an FCDU.

Full insurance is not granted because it might encourage risky banking activities on

the part of the insured bank.

Moral Hazard Is the paradox that when a person is insured against risk,

considerations of morality or ethics are eroded by the very assurance against risk

provided by his insurer. A house owner will be less likely to make sure that his house

is always locked if he is secure in the knowledge that he will recover any loss from

his insurance.

Prudential measures to combat Moral Hazard

1. Minimum capital requirement is intended to limit by putting the money of bank

owners or stockholders at risk. The higher the minimum capital requirement is, the

less moral hazard will hopefully be. Also, expose the capital of bank owners to risk of

loss in case of bank mismanagement.

2. Insurance policies provide for a certain minimum amount that the insured has to

shoulder in a given insurance claim. For banks, PDIC does not fully insure bank

deposits.

(vi) Capital Adequacy

Sec. 34. Risk-Based Capital. - The Monetary Board shall prescribe the minimum

ratio which the net worth of a bank must bear to its total risk assets which may

include contingent accounts.

For purposes of this Section, the Monetary Board may require such ratio be

determined on:

1. the basis of the net worth and risk assets of a bank and its subsidiaries, financialor otherwise, as well as

2. prescribe the composition and the manner of determining the net worth and total

risk assets of banks and their subsidiaries:

Provided, That in the exercise of this authority, the Monetary Board shall, to the

extent feasible conform to internationally accepted standards, including those of the

Bank for International Settlements (BIS), relating to risk-based capital

requirements:

Provided further, That it may alter or suspend compliance with such ratio whenever

necessary for a maximum period of one (1) year:

Provided, finally, That such ratio shall be applied uniformly to banks of the same

category.

In case a bank does not comply with the prescribed minimum ratio, the Monetary

Board may:

1. limit or prohibit the distribution of net profits by such bank and

2. may require that part or all of the net profits be used to increase the capital

accounts of the bank until the minimum requirement has been met.

3. The Monetary Board may, furthermore, restrict or prohibit the acquisition of major

assets and

4. the making of new investments by the bank,

with the exception of purchases of:

a. readily marketable evidences of indebtedness of the Republic of the Philippines

and of the Bangko Sentral and

b. any other evidences of indebtedness or obligations the servicing and repayment of

which are fully guaranteed by the Republic of the Philippines, until the minimum

required capital ratio has been restored.

In case of a:

1. bank merger or consolidation, or

2. when a bank is under rehabilitation under a program approved by the Bangko

Sentral,

Monetary Board may temporarily relieve the surviving bank, consolidated bank, or

constituent bank or corporations under rehabilitation from full compliance with the

required capital ratio under such conditions as it may prescribe.


15/34

*RAM: Note that it may also suspend whenever necessary, for at least 1 year.

Before the effectivity of rules which the Monetary Board is authorized to prescribe

under this provision, Section 22 of the General Banking Act, as amended, Section 9

of the Thrift Banks Act, and all pertinent rules issued pursuant thereto, shall continue

to be in force

*RAM: A bank must not be allowed to expand the volume of its loans and

investments in a manner that is disproportionate to its net worth. This necessarilygoes into the area of capital adequacy, WON a bank has adequate capital to answer

for its total risks. Minimum capital adequacy rations are necessary to reduce the risk

of loss to depositors, ceditors and other shareholders.

*1988 Basel I, provided for at least 8% solvency (or risk asset) ratio for banks as

indicative of a minimum accepted capital adequacy. Capital as the numerator, and

assets as the denominator. For every 100 units of risk weighted assets, a bank must

carry at least 8 units in Tier 1 or Tier 2 capital.

*Now, the daily risk based capital ratio of a bank must not be less than 10% for both

solo basis (head office plus branches) and consolidated basis (parent bank plus

subsidiaries)

(vii) Equity Investment limits (allied

vs. non-allied enterprises)

Sec. 24. Equity Investments of a Universal Bank. A universal bank may,

subject to the conditions stated in the succeeding paragraph, invest in the equities of

allied and non-allied enterprises as may be determined by the Monetary Board.

Allied enterprises may either be financial or non-financial.

Except as the Monetary Board may otherwise prescribe:

24.1. The total investment in equities of allied and non-allied enterprises shall not

exceed fifty percent (50%) of the net worth of the bank; and

24.2. The equity investment in any one enterprise, whether allied or non-allied, shall

not exceed twenty-five percent (25%) of the net worth of the bank.

As used in this Act, net worthshall mean the total of the unimpaired paid-in capital

including:

1. paid-in surplus,

2. retained earnings and

3. undivided profit,

4. net of valuation reserves and other adjustments

as may be required by the Bangko Sentral.

The acquisition of such equity or equities is subject to the prior approval of the

Monetary Board which shall promulgate appropriate guidelines to govern such

investments.

*RAM: All enterprises not otherwise specified as allied is non-allied.

Moreover, all of the foregoing equity investments must have prior approval of the

Monetary Board.

*RAM: The equity investments contemplated in Section 24 et seq are for purposes of

control, affiliation or other continuing business advantage. Hence debt-to-equity

conversion where a bank converts its loans into shares of stock in the borrowing

company) is generally NOT the equity investment contemplated since the conversion

is an afterthought to prevent losses

Sec. 25. Equity Investments of a Universal Bank in Financial Allied

Enterprises. - A universal bank can own up to one hundred percent (100%) of the

equity in a:

1. thrift bank, a

2. rural bank or a

3. financial allied enterprise.

A publicly-listed universal or commercial bank may own up to one hundred percent(100%) of the voting stock of only one other universal or commercial bank.

*RAM: A Universal Bank can wholly own a financial allied enterprise such as a thrift

bank or a rural bank. However, only a publicy lister Universal bank can own up to

100% of the voting stock of only one other UB or KB.

An unlisted UB (such as a foreign banks Philippine branch licensed as a UB) can only

acquire up to 49% of the voting stock of only one other universal or commercial

bank.

*HSBC Limited was able to acquire a thrift bank, now HSBC Savings Bank

Sec. 26. Equity Investments of a Universal Bank in Non-Financial Allied

Enterprises. A universal bank may own up to one hundred percent (100%) of the

equity in a non-financial allied enterprise.

*RAM: This is subject to the approval of the Monetary Board.

Sec. 27. Equity Investments of a Universal Bank in Non-Allied Enterprises.

The equity investment of a universal bank, or of its wholly or majority-owned

subsidiaries, in a single non-allied enterprise shall not exceed:

1. thirty-five percent (35%) of the total equity in that enterprise

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


16/34

*RAM: In computing the said limits, the equity investments in such non-allied

enterprise of such UBs subsidiaries are to be included

Sec. 28. Equity Investments in Quasi-Banks. To promote competitive

conditions in financial markets, the Monetary Board may further limit to forty percent

(40%) equity investments of universal banks in quasi-banks. This rule shall also

apply in the case of commercial banks.

Sec. 30. Equity Investments of a Commercial Bank. - A commercial bank may,

subject to the conditions stated in the succeeding paragraphs, invest only in the

equities of allied enterprises as may be determined by the Monetary Board. Allied

enterprises may either be financial or non-financial.

Except as the Monetary Board may otherwise prescribe:

30.1. The total investment in equities of allied enterprises shall not exceed thirty-five

percent (35%) of the net worth of the bank; and

30.2. The equity investment in any one enterprise shall not exceed twenty-five

percent (25%) of tile net worth of the bank.

The acquisition of such equity or equities is subject to the prior approval of theMonetary Board which shall promulgate appropriate guidelines to govern such

investment.

*RAM: A commercial bank cannot invest in non-allied enterprises.

And in allied enterprises, the commercial bank cannot invest in insurance and holding

companies.

Sec. 31. Equity Investments of a Commercial Bank in Financial Allied

Enterprises . - A commercial bank may own up to one hundred percent (100%) of

the equity of a thrift bank or a rural bank.

Where the equity investment of a commercial bank is in other financial allied

enterprises, including another commercial bank, such investment shall remain a

minority holding in that enterprise.

*RAM: This seems to be in conflict with Sec. 25 which allows publicly listed KB to

own up to 100% of the voting stock of only one other commercial bank.

Theoretically there wil be no conflict if the voting stock in such other other

commercial bank constitutes a minority in relation to the non-voting stock

Sec. 32. Equity Investments of a Commercial Bank in Non-Financial Allied

Enterprises . - A commercial bank may own up to one hundred percent (100%) of

the equity in a non-financial allied enterprise.

B. Foreign Exchange Liberalization

1. Manual of Regulations on Foreign Exchange

Transactions

2. RA 8183

This repealed the Uniform Currency Act. Under the Uniform Currency Act, all

transactions were required to be in the Peso Currency. With the repeal, stipulations

in contracts providing for payment in foreign currecy are no longer void.

The aim was to encourage foreign investments and dealings in foreign currency

transactions.

3. Section 72, New Central Bank Act

SECTION 72. Emergency Restrictions on Exchange Operations.

In order to achieve:

1. the primary objective of the Bangko Sentral as set forth in Section 3 of this Act, or

2. protect the international reserves of the Bangko Sentral in the imminence of, or

during an exchange crisis, or

3. in time of national emergency and to give the Monetary Board and the

Government time in which to take constructive measures to forestall, combat, or

overcome such a crisis or emergency,

the Monetary Board, with the concurrence of at least five (5) of its members and

with the approval of the President of the Philippines, may:

1. temporarily suspend or restrict sales of exchange by the Bangko Sentral, and

2. may subject all transactions in gold and foreign exchange to license by the Bangko

Sentral, and

3. may require that any foreign exchange thereafter obtained by any person residing

or entity operating in the Philippines be delivered to the Bangko Sentral or to any

bank or agent designated by the Bangko Sentral for the purpose, at the effective

exchange rate or rates:

Provided, however, That foreign currency deposits made under Republic Act No.

6426 shall be exempt from these requirements.

*RAM: We now have a liberalized forex system. Anybody can now bring in and out

foreign currencies without any questions asked. BUT you cant bring in or out the

Phils. more than 10,000 pesos without BSP authority. Also if you are going to the US,there is a 10,000 dollar limit.


17/34

BSP can still impose forex restrictions because of the RA 7653

II. CERTAIN FINANCIAL TRANSACTIONS

AND DOCUMENTS

A. Loan Transactions

1. Analysis of Parts of a Loan Agreement

(a) Preamble

Parts:

1. Introductory Paragraph Identifies the parties to the loan transaction

2. Whereas Clauses Recite why the loan agreement is being entered into by and

among the parties

(b) Terms of Loan

Embodies matters agreed upon by the parties. These are provisions on the:

1. Commitment of the lenders

2. Disbursement of the loan

3. Repayment

4. Interest

5. Fees and taxes.

6. Amount of the loan, maturity date, and the payment schedule.

Terms of Interest

1. Interest on a Eurodollar loan transaction is calculated on the basis of a floating

rate plus a spread or margin. 2 concepts which underpin a Eurodollar transaction

a. Matched Funding A lender is supposed to go to the market for the

purpose of obtaining a deposit in dollars equal or comparable in amount and duration

to the portion of the loan to be disbursed or rolled over by such lender to the

borrower. Hence there must be a Eurodollar disaster clause to the effect that in the

event the bank fails to obtain a matching deposit, then the borrower and the banks

will have to agree on some substitute basis. If the fail to agree on the funding of the

loan or compounding of interest thereon, the borrower may prepay the loan.

b. Net Lending May have concomitant effects on disbursement and

interest mechanisms in a Eurodollar loan agreement

*Dio vs. Japor: CB Circular No. 905, which took effect on January 1, 1983, effectively

removed the ceiling on interest rates for both secured and unsecured loans,

regardless of maturity. However, nothing in said Circular grants lenders carte blanche

authority to impose interest rates which would result in the enslavement of their

borrowers or to the hemorrhaging of their assets. While a stipulated rate of interest

may not technically and necessarily be usurious under Circular No. 905, usury now

being legally non-existent in our jurisdiction, nonetheless, said rate may be equitably

reduced should the same be found to be iniquitous, unconscionable, and exorbitant,

and hence, contrary to morals (contra bonos mores), if not against the law. What is

iniquitous, unconscionable, and exorbitant shall depend upon the factual

circumstances of each case.

In the instant case, the CA found that the 5% interest rate per month and 5%

penalty rate per month for every month of default or delay is in reality interest rate

at 120% per annum. This Court has held that a stipulated interest rate of 5.5% per

month or 66% per annum is void for being iniquitous or unconscionable. We have

likewise ruled that an interest rate of 6% per month or 72% per annum is

outrageous and inordinate. Conformably to these precedent cases, a combined

interest and penalty rate at 10% per month or 120% per annum, should be deemed

iniquitous, unconscionable, and inordinate. Hence, we sustain the appellate court

when it found the interest and penalty rates in the Deed of Real Estate Mortgage in

the present case excessive, hence legally impermissible. Reduction is legally calledfor now in rates of interest and penalty stated in the mortgage contract.

*Consolidated Bank v. CA: WE jointly and severally agree to any increase or

decrease in the interest rate which may occur after July 1, 1981, when the Central

Bank floated the interest rate, and to pay additionally the penalty of 1% per month

until the amount/sor instalments/s due and unpaid under the trust receipt on the

reverse side hereof is/are fully paid

We agree with the CA that the foregoing stipulation is invalid, there being no

reference rate set either by it or by the Central Bank, leaving the determination

thereof at the sole will and control of petitioner.

While it may be acceptable, for practical reasons given the fluctuating economic

conditions, for banks to stipulate that interest rates on a loan not be fixed and

instead be made dependent upon prevailing market conditions, there should always

be a reference rate upon which to peg such variable interest rates. A provision may

be upheld notwithstanding that it may partake of the nature of an escalation clause,

because at the same time it provides for the decrease in the interest rate in case the

prevailing market rates dictate its reduction. In other words, unlike the stipulation

subject of the instant case, acceptable floating interest is designed to be based on

the prevailing market rate. On the other hand, a stipulation ostensibly signifying an

agreement to "any increase or decrease in the interest rate," without more, cannot

be accepted by this Court as valid for it leaves solely to the creditor the

determination of what interest rate to charge against an outstanding loan.

*Macalinao vs. BPI: The charges or balance thereof remaining unpaid after the


18/34

payment due date indicated on the monthly Statement of Accounts shall bear

interest at the rate of 3% per month for BPI Express Credit, BPI Gold Mastercard and

an additional penalty fee equivalent to another 3% of the amount due for every

month or a fraction of a months delay.

We are of the opinion that the interest rate and penalty charge of 3% per month

should be equitably reduced to 2% per month or 24% per annum.

(c) Yield Protection (disaster clause;tax gross-up clause)

This is meant to preserve the small spread or margin, the gain derived by the lending

bank. To account for the fact that banks charge a rather thin spread or margin over

and above the LIBOR, Eurodollar loan agreements contain yield protection clauses to

the effect that the borrower bears the risk of events that might make the loan more

expensive or onerous for the lender-bank to maintain.

Hence, all risks of the increased costs of the loan are borne by the borrower.

Example: A lending bank sources the loan from other banks, an increase in the

lending rate of such other banks will be borne by the borrower.

Gross up Clause If any withholding tax is imposed on the lender, the borrower

must compensate the bank such that as to the bank, it is as if there is no withholding

tax to be paid.

(d) Representations and Warranties

(pari passu representations)

They are the financial and legal circumstances which induced the banks to commit

the loan to the borrower. It enumerates the criteria on which the bank decides to

lend credit

Parri passu representation It means with or at equal pace.

The indebtedness will at all times be equal in rank with other loan agreements in

terms of priority of payment and in all other respects.

Generally these apply only to unsecured loans. However, it can also refer to secured

loans but only with regard to the residual obligation that is not sarisfied out of the

proceeds of the security given.

Note that notarization of a loan agreement may violate an existing parri passu

representation in that such notarization makes the loan agreement a preferred credit

as compared to the other loan agreements that are not notarized or notarized at a

later date.

Can be solved in two ways:

1. Waive the preferences of credit under Art 2244(14) [doesnt apply to Government

of the Philippines though]

2. Incorporate into the agreement a provision that states that the notarization only

pertains to the security and not to the loan.

(e) Negative and Affirmative Covenants

These reflect the banks attempt to minimize the risk of non-payment of the loan byensuring the continued creditworthiness of the borrower. In a sense they are

constraints on the exercise of managerial discretion of the borrower

1. Affirmative Covenant Borrower agrees to do something (maintain a business)

2. Negative Covenant Borrower agrees not to do certain things without first

obtaining the consent of the lender. (Hold out arrangement borrower is not allowed

to withdraw funds from his deposit account during subsistence of loan)

Negative Pledge Undertaking of the borrower generally not to secure his

other loans or enter into a preferential agreement with another creditor without

offering to the lender the benefit of the same security or preference.

This enforces the pari passu representation. But this is not absolute,

encumbrance of the borrowers property is allowed if the lender is given a

proportionate share in the encumbrance

(f) Conditions Precedent

Any act that either or all of the parties to a loan agreement have to do or must

comply with. These are the facts which would give rise to the loan agreement

Procedural Function: Consolidates in one place the documents that must be

delivered

Substantive Function: Enables the banks to withhold payment or disbursement of

the loan if the required state of affairs are not in order.

(g) Events of Default

Circumstances under which the banks have a right to terminate the unused portion of

the commitment and to accelerate payment.

1. Payment Default Borrowers failure to pay any amount due to the banks

under a loan agreement. Ask for a grace period if possible.


19/34

2. Covenant Default Borrower fails to perform covenants under the agreement.

Ask for curing period. Ask for materiality standard (the covenant has a material

adverse effect on the ability of the borrower to perform its obligations)

3. Representation Default Any representation is incorrect, incomplete or

misleading in any material respect. Must be material.

4. Cross Default There are 2 sets of lenders. Borrower pays on time to A, but

faisl to pay B. B accelerates the loan. In this case, A should likewise have the right to

accelerate the loans if it wanted to. Ask for a trigger amount

5. Bankruptcy Default

6. Approval Default A government approval is necessary

7. Judgment Default Judgment against the borrower for the payment of money

8. Material-adverse change Default A circumstance where the borrower gave

the bank reasonable grounds to believe that it may no longer perform its obligations

9. Guarantor Default Guaranty is not accepted or questioned as to the validity.

Also applicable in the inability of the guarantor to pay

*China Banking Corporation v. Court of Appeals: The subject Home Notes, in fact,

specifically states that payment of the principal and interest due on the notes shall

be made only upon presentation for notation and/or surrender for cancellation of the

notes. Thus, the maturity date of the Home Notes is not controlling as far as accrual

of cause of action is concerned. What said date indicates is the time when the

obligation matures, when payment on the Notes would commence, subject to

presentation, notation and/or cancellation of those Notes. The date for computing

when prescription of the action for collection begins to set in is properly a function

related to the date of actual demand by the holder of the Notes for payment by the

obligor, herein petitioner bank.

Since the demand was made only on July 20, 1995, while the civil action forcollection of a sum of money was filed on September 24, 1996, within a period of not

more than ten years, such action was not yet barred by prescription.

*Mondragon v. Court of Appeals: Clearly, under the foregoing provisions of the

Agreement, petitioner may be validly declared in default for failure to pay the

interest. As a consequence of default, the unpaid amount shall earn default interest,

and the respondent-banks have four alternative remedies without prejudice to the

application of the provisions on collaterals and any other steps or action which may

be adopted by the majority lender.

The four remedies are alternative, with the right of choice given to the

lenders, in this case the respondents. Under Article 1201 of the Civil Code, the

choice shall produce no effect except from the time it has been communicated. This

is the reason why a written notice is required under Section 6.02 of the Omnibus

Agreement.

In the present case, we find that written notices were sent to the petitioner by

the respondents. The notices clearly indicate respondents choice of remedy: to

accelerate all payments payable under the loan agreement. On January 6, 1999,

respondents notified petitioner that it was in default, and demanded payment of the

stated amount within five days from receipt of the letter, otherwise all outstanding

availments of the US$20M term loan together with interests and other sum payable

shall be declared due and demandable. The letter clearly indicated the choice of

remedy by the respondents, pursuant to the Omnibus Agreement.

Even though subsequent demand is waived by the petitioner in Section 6.02

of Part B of the Omnibus Agreement, on February 5, 1999, the respondents

nevertheless actually made their demand in writing for the payment of the principal

plus interest and penalty charges due on or before February 28, 1999, with express

notice that they would take all legal remedies available to protect the interests of

their clients. Clearly, respondents have more than complied with the requirement

concerning notice to the petitioner.

(h) Miscellaneous (judgment currency

clause, sharing clause)

Found at the end of the loan agreement.

Sharing clause Ensures that the lender shares in the recovery of another lender

from the borrower when the borrower becomes insolvent. Ex. Bank A, B and C lend

90thousand as a group. Borrower has a bank deposit in Bank A of 30,000. Then A

must share the 30T with B and C (10K each)

How? Bank A can sell its participation to other banks (paper work), or there can be

actual sharing (no paper work)

Judgment currency clause Incorporated in a Eurodollar loan agreement which

authorizes the creditor to sue for the deficit of the dollar loan and its peso/local

currency equivalent should the court award the local currency equivalent of the loan

instead of its dollar value.

Enforceability should be qualified. Why?

Res Judicata Case has al

banking midterms reviewer

Documents