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San Beda College of Law, MendiolaBANKING LAWS AND JURISPRUDENCEEfren L. Dizon and Efren Vincent M. DizonPrepared by:MANILA, ANTONIO CEASARBERNARDO, JANSENINTIG, JOY ESTELADE JESUS, TRACY ANN.FROM SECTION 2SAY 2011-Topic PageChapter 1- Banks and Business of Banking 2 Chapter 2 - Organization, Managem...

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San Beda College of Law, Mendiola

BANKING LAWS AND JURISPRUDENCE Efren L. Dizon and Efren Vincent M. Dizon Prepared by: MANILA, ANTONIO CEASAR BERNARDO, JANSEN INTIG, JOY ESTELA DE JESUS, TRACY ANN. FROM SECTION 2S AY 2011-2012

Topic

Chapter 1- Banks and Business of Banking Chapter 2 - Organization, Management, Administration Of Banks Chapter 3 - Deposit Functions Of Banks Chapter 4 - Investments, Loans and Other Bank Functions Chapter 5 - Prohibited Transactions and Cessation Of Banking Business Chapter 6 - Foreign Banks and Trust Operations Possible Questions MIDTERM COVERAGE: Chapter 1 - 6

Chapter 7 - The Banko Sentral ng Pilipinas Chapter 8- Currency, Monetary Stabilization and Functions of BSP Chapter 9 - Unclaimed Balances and Trust Receipts Chapter 10 - Deposit Insurance Chapter 11 - Anti-Money Laundering Chapter 12 – Special Purpose Vehicle FINALS COVERAGE: Chapter 7 - 12

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San Beda College of Law Banking Laws CHAPTER 1 – Banks and Business of Banking Declaration of the state with regards to banking – recognize vital role of the banks to provide environment conducive to development of national economy It also states that banks need high standards of integrity and performance Banks – entities engaged in the lending of funds obtained in the form of deposits (borrowing, lending, safe-keeping) Banks may engage in other activities allowed by the law other than lending Nature of Banking Business

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depositors with meticulous care and always have in mind the fiduciary nature of banks Not enough that he exerted reasonable diligence to ascertain the safety of his clients Such diligence is only required in its fiduciary relationship with its depositors and not to other transactions such as sale of foreign exchange demand draft Sec 2 of GBL prescribes the statutory diligence required from banks – “high standards of integrity and performance” in serving its depositors. Diligence required of banks is more than that of a good father (PBCom vs. CA) Diligence extends to financial institutions (e.g. GSIS) Treatment of accounts with meticulous care Must treat every account with utmost fidelity regardless of amount There is no law mandating banks to call up their clients whenever a significant amount shall be withdrawn from their account Duty to keep records Banks are not gratuitous bailees Banks not expected to be infallible However, they must bear the loss for not discovering mistakes if there are established procedures not followed Dealing with registered lands General Rule: mortgagee can rely on title and does not need to investigate further Exception: mortgagee cannot close his eyes to facts which should put a reasonable man on his guard, and yet claim that he is in good faith With banking institutions, mere reliance on the title is not enough as they need to investigate also Doctrine of the “mortgagee in good faith” – all persons dealing with property covered by the Torrens Certificates of Title are not required to go beyond what appears on the face of the title. (Cavite Development Bank vs. Spouses Lim)

1. Debtor-Creditor Relationship It is a contract of loan and not deposit Contract between bank and depositor is 7. governed by the provisions of the NCC on simple loan (Consolidated Bank and Trust Corp vs. CA) 2. Fiduciary duty Fiduciary relationship – bank’s obligation to observe high standard of integrity and performance (Phil. Banking Corp. vs. CA) 8. 3. Not a trust agreement 9. It is not a trust agreement and failure to 10. pay a loan is not a breach of trust It is not a trust agreement because banks do not accept deposits to enrich depositors but to earn for themselves 11. 4. Indispensable Institution Has a vital role in economic life Significance of banking institution to commercial transactions (Metropolitan Bank & Trust Co. vs. Cabilzo) 5. Impressed with public interest Has public interest because people depend on the honesty and efficiency of banks Stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks. 6. Degree of diligence Diligence higher than that of a good father. It must be extraordinary diligence In Simex International vs. CA, the bank is under obligation to treat the accounts of its AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws The business o a bank is one affected with public interest, for which reason the bank should guard against loss due to negligence or bad faith (Sps. Omengan vs. PNB) Where the mortgagee does not directly deal with the registered owner of real property, the law requires higher degree of prudence be exercised by the mortgagee (Abad vs. Guimba) 12. Banks may exclude persons in their premises 13. Charging interest for loans It is considered the very core of the banking’s very existence Liability for Acts of Officers and Employees A bank is liable for the wrongful acts of its officers done in the interest of the bank or dealings as bank representatives but not for acts outside the scope of their authority. 1. Negligence of Manager – employer is liable to the acts of the manager 2. Negligence of officer – general rule: tortuous acts of officers within their scope of employment shall make banks liable 3. Negligence of tellers – tellers must exercise high degree of diligence Teller should not give passbook to wrong person as a person in possession of passbook is presumed the owner Appropriation of deposited money by the teller is not estafa but considered as theft as the client only had material possession of it. Such deposit money are considered owned by the bank 4. Right to recover from employees 5. Liability for damages Actual, exemplary, moral Actual and compensatory – the interest due shall itself earn interest from the time it is judicially demanded 12% - legal interest when judgment becomes final and executory 6% - interest for obligations not constituting a loan or forbearance of money

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Moral damages Gen. Rule – a corporation is not entitled to moral damages Exception – when its good reputation is besmirched by breach of fiduciary duty. In culpa contractual – recoverable if there is fraud or bad faith Depositor may recover even if bank’s negligence not attended by bad faith if he suffered mental anguish, serious anxiety, etc. 6. Respondeat superior of employees Command responsibility A bank is bound by the negligence of its employees Classification of Banks (CUT-RICO-NQU) 1. Universal Banks – large commercial banks that can do both commercial and investment banking They have the power of both commercial bank and investment house Have the power to invest in non-allied enterprises 2. Commercial banks – general powers incident of corporation and can perform commercial banking Does not have the power to invest in nonallied enterprises 3. Rural banks – banks that promote rural development They can extend loan or advances to primarily meet the normal credit needs of farmers, fishermen and their families Can also deposit in private banks more than the amount prescribed by Single Borrower’s Limit in case there are no government banks Rural Banks Act (RA 7353) 4. Thrift banks – encourages the industry, frugality and accumulation of savings of the public To make it within easy reach to the people the credit facilities at reasonable cost Includes: (1) savings and mortgage bank, (2) stock savings and loan associations and (3) private development banks Thrift Banks Act (RA 7906)

AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws 5. Cooperative banks – organized by cooperatives to provide financial and credit services to cooperatives Cooperative Code (RA 6938) Membership of a cooperative bank shall include ONLY cooperative and federations of cooperatives 6. Islamic Banks – promote socio-economic development in autonomous region by performing banking and investment function based on Islamic concept of banking Islamic Bank – RA 6848 Subject to the principles and rulings of Islamic Shari’a 7. Others banks: Philippine Veterans Bank – created to provide government depository to veterans for appreciation of grateful nation (RA 3518) Land bank of the Philippines – finance distribution of estate to resale to small landholders (RA 3844) Development Bank of Philippines – provide credit facilities for development in agriculture, commerce and industry DBP was previously named as Rehabilitation Finance Corporation (RFC) 8. Non-stock savings and loan associations – nonstock, non-profit corporation engage in accumulation of savings of its members and loans to meet its members’ needs Confines exclusive membership and cannot transact business with the general public 9. Quasi-banks – engaged in borrowing of funds through issuance of deposit substitute for purpose of relending or purchasing receivables and other obligations 10. Offshore Banks – deals with transaction with foreign currencies in receiving funds from external sources and utilization of such Governed by PD 1034 Authority to Engage in Banking and Quasi-Banking Functions

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No person or entity shall engage in baking operations without authority from Bangko Sentral Universal or commercials banks may engage in quasi-banking functions Under Corporation Code: No articles of incorporation or amendment of banks shall be given unless accompanied by recommendation of appropriate government agency (MB) The determination whether the person or entity is performing banking or quasi-banking functions without authority of BSP shall be determined by MB MB may examine the books and records to achieve this purpose The department head and examiners can administer oaths and compel presentation of books, documents or records BSP can examine a bank or an enterprise that is wholly or majority-owned by the bank This can only be done when BSP is examining bank SEC shall not register articles of incorporation of bank unless it is accompanied by authority of MB SEC shall not register by-laws of bank unless accompanied by authority of BSP Service of summons upon banks May be made on the president, managing partner, general manager, corporate secretary, treasurer, in-house counsel (domestic) Upon resident agent or BSP (foreign bank) As long as institute loans out money to its customers and collect the interest and charges a commission to lender and banker, it is a bank Investment company engages primarily in the investing or trading of securities and is not a bank Bank name Only universal and commercial banks may represent itself to the public as such in connection with its business name Thrift banks can be allowed to have a business name of its own provided that “A thrift bank, savings bank or private development bank” shall be added Above rule is also available to Rural/Coop

AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws CHAPTER 2 – Organization, Administration of Banks

Management,

Organization of Banks MB can authorize the organization of a bank based on the following conditions: 1. Entity is a stock corporation (par value stocks only) 2. Funds are obtained from the public which shall mean twenty persons or more 3. Minimum capital requirement prescribed by MB shall be satisfied MB shall take into consideration the capabilities of the entity in terms of their financial resources, technical expertise and integrity Bank licensing process shall incorporate assessment of: 1. Banks’ ownership structure 2. Director management 3. Operating plan 4. Internal controls 5. Projected financial condition Capital requirements: Type of Bank Amount (M) Universal 4,950 Commercial 2,400 Thrift banks 1. Head office in Manila 325 2. Otherwise 52 Rural Banks 1. Within Manila 26 2. Cebu/Davao 13 3. 1st -3 rd class city and 1st class 6.5 municipality 4. 4th-6 th class city and 2-4 th class 3.9 municipality 5. 5th-6 th class municipality 2.6 At least 25% of total authorized capital stock shall be subscribed by subscribers of proposed bank 25% of such subscription shall be paid-up. It shall not be less than the minimum capital requirement Incorporators/subscribers and proposed directors and officers must be (2) persons of integrity and (1) good credit standing Such persons must (1) not be convicted of crime involving moral turpitude and (2) not officers of

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government agency or department charged with granting loans to banks Bank is organized 5-15 people (incorporators) Cooperatives may organized a rural bank upon consultation with the rural banks in the area Bank and its branches shall be treated as one unit Universal and commercial banks may open branches within or outside the Philippines upon prior approval of BSP Other banks shall be governed by their pertinent laws Stockholdings 1. Treasury Stocks GBL provides that NO bank shall: i. Purchase or acquire shares of its own capital stock ii. accept own shares as security for loan 1. Except if it approved by MB and will be returned in 6 months Reason: if banks were allowed to have a lien in their own stocks for indebtedness of stockholders, prohibition against granting loans or discounts upon security would become ineffective 2. Foreign stockholdings: Foreign individuals and non-banks can own 40% of voting stock of domestic bank.(aggregate foreign voting stocks) A Filipino individual and domestic nonbank may each own up to 40% of the voting stock (no aggregate ceiling) Citizenship of the corporation shall follow the citizenship of the controlling stockholders (>50%) The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of individual stockholders At least 60% of voting stock in any commercial bank shall be owned by Filipino citizens In thrift banks, it shall be at least 40% Rural banks, 100% Filipinos

AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws

a. Convicted of final judgment involving dishonesty or breach of trust b. Persons convicted of final judgment with a maximum imprisonment term of more than 6 years c. Convicts of banking laws d. Persons judicially declared insolvent e. Culpable of bank’s closure f. Administratively liable for violation of banking laws with penalty of removal from office g. Found unfit for position There can be also temporary disqualifications and shall exist until DQ is gone Under CC (Corporation Code) disqualification is only with (1) imprisonment more than 6 years or (2) violation of code committed within 5 years NCBA also provides DQ for members of MB that is connected with bank under supervision or examination of BSP Public officials cannot also be an officer of any private bank unless position is incidental to office

In determining nationality of banks, control test is applied Family groups or related interest must be fully disclosed in all transactions of the individual Board of Directors According to Corporation Code, there shall be at least five and maximum of 15 board of directors of bank Two of such shall be independent directors. Independent director – person other than officer or employee of bank All must be of legal age and majority of them are residents of the Philippines Non-Filipino citizens may become members of board of directors of bank up to the extent of allowed foreign participation Directors of merged or consolidated banks shall not exceed 21 Election: President, Treasurer (director or not), Secretary (resident citizen). Not allowed position: President/Secretary, President/Treasurer Meetings may be conducted through modern technologies A foreigner may be a member of the Board of directors of a rural bank at the time of their assumption of office To protect funds of depositors and creditors, MB shall regulate payment of directors under certain circumstances: 1. Comptrollership 2. Business in unsafe or unsound manner 3. Bank is found to be in an unsatisfactory financial condition

Rural Banks Act – public official may be director (exception) PDIC – conviction of any criminal offenses involving breach of trust Banking Days and Hours At least 6 hours a day on working days (Mon-Fri except holidays) May open in Saturdays, Sundays and holidays for 3 hours (to report to BSP) For purposes of deposits and withdrawals, bank can extend beyond or early of 8AM and 8PM If it is for other purposes, they can exceed 6 hours minimum but not extend beyond or early of 8AM and 8PM Banks in airports or major fish ports can open 24hours Changes in banking days and hours can be made once every 30 days except during emergencies

Fit and Proper Rule Powers of MB against directors: a. Review qualifications and DQs of directors b. After due notice, may disqualify, suspend or remove director c. Fit and proper rule shall be determine by integrity, experience, education, training, competence of the director Disqualifications of directors:

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ATMs Classes: 1.) Offsite 2.) Mobile

Banks may establish off-site ATMS provided that there is report on BSP and adequate security AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws measures. They are installed only in centers of activity Mobile ATMS are allowed to visit places with large crowds of people provided it has adequate security Independent Auditor

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Any unsettled strike or lockouts involving banks after 7 days shall be reported by BSP to DOLE who will assume jurisdiction Banks, through their president, shall inform BSP of the cause of the strike and the operations affected

MB may require bank to engage services of independent auditor from list of CPA acceptable to MB Financial Statements Every bank, quasi-bank or trust entity shall submit to the BSP its financial statements Such statements must show the actual financial condition of its institution, including its operations Must publish such in an understandable knowledge once every quarter in a newspaper of general circulation Consolidated financial statement – combined statement of balance sheet and income expenses of two or more corporate entity Subsidiary – corporation where more 50% of its voting stock is owned by a bank Affiliate – linked directly/indirectly to the bank by 1.) 10% ownership or control 2.) interlocking directorship 3.) common stockholders owning 10% of each intermediary 4.) management contract 5.) permanent proxy or voting trust of 10% Publication of Capital Stocks Bank, quasi-bank or trust entity shall not publish the amount of its subscribed capital stock without indicating the amount of its capital actually paidup Settlement of Disputes BSP shall be consulted by (1) government agencies in actions initiated or brought before them by banks and (2) disputes between any of them which they are directors, officers, or stockholders Strike and Lockouts AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws CHAPTER 3 – Deposit Functions of Banks I. Kinds of Deposits 1. Demand deposits All those liabilities of BSP and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by pre...