I.

THE PHILIPPINE FINANCIAL SYSTEM

A. Certain Constituents 1. Bangko Sentral ng Pilipinas
Sec. 4. Supervisory Powers. The operations and activities of banks shall be subject to supervision of the Bangko Sentral. Supervision shall include the following: *RAM: Supervision (overseeing to ascertain that regulations are complied with, and to determine whether the institution is conducting its business on a sound financial basis) not only means promulgation of rules of conduct but it also covers visitorial powers (like examining and investigating the activities of the institution) *What is the Monetary Board? The MB is the policy making body of the BSP that is headed by the Governor of the BSP. It determines policy directions in money, banking and credit. And its primary objective is to maintain price stability conducive to a balanced and sustainable growth of the economy. 4.1. The issuance of: 1. rules of conduct or 2. the establishment of standards of operation for uniform application to all institutions or functions covered, taking into consideration the distinctive character of the operations of institutions and the substantive similarities of specific functions to which such rules, modes or standards are to be applied; 4.2 The conduct of examination to determine compliance with laws and regulations if the circumstances so warrant as determined by the Monetary Board; *RAM: Examination could also include an enterprise that is wholly owner or majority controlled by such bank. This is because one of the conditions for the issuance of the Monetary Board of approval of a banks application to establish a subsidiary is the submission of a certification that the duly authorized examiners from BSP will be authorized to examine the subsidiary or affiliate. 4.3. Overseeing to ascertain that laws and regulations are complied with; 4.4. Regular investigation which shall not be oftener than once a year from the last date of examination to determine whether an institution is conducting its business on a safe or sound basis: Provided, That the deficiencies/irregularities found by or discovered by an audit shall be immediately addressed;

*RAM: Under Section 28 of the New Central Bank Act, the Monetary Board by an affirmative vote of 5 members, may order a special examination of a bank. So not necessarily once a year. 4.5. 4.6. Inquiring into the solvency and liquidity of the institution; or Enforcing prompt corrective action.

The Bangko Sentral shall also have supervision over the operations of and exercise regulatory powers over: 1. quasi-banks, 2. trust entities and 3. other financial institutions which under special laws are subject to Bangko Sentral supervision. For the purposes of this Act, quasi-banks shall refer to: 1. entities 2. engaged in the borrowing of funds 3. through the issuance, endorsement or assignment with recourse or acceptance 4. of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the New Central Bank Act) 5. for purposes of re-lending or purchasing of receivables and other obligations. *RAM: They obtain from the public funds other than deposits through issuance, endorsement, or acceptance of debt instruments Sec.5. Policy Direction; Ratios, Ceilings and Limitations. The Bangko Sentral shall provide policy direction in the areas of money, banking and credit. For this purpose, the Monetary Board may prescribe: 1. ratios, 2. ceilings, 3. limitations, or 4. other forms of regulation on the different types of accounts and practices of banks and quasi-banks which shall, to the extent feasible, conform to internationally accepted standards, including of the Bank for International Settlements (BIS). The Monetary Board may exempt particular categories of transactions from such ratios, ceilings, and limitations, but not limited to: 1. exceptional cases or 2. to enable a bank or quasi-bank under rehabilitation or during a merger or consolidation to continue in business, with safety to its creditors, depositors and the general public. Sec. 6. Authority to Engage in Banking and Quasi-Banking Functions. - No

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.

*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

The determination of whether a person or entity is performing banking or quasibanking 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 Central Bank 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

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

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

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 Loan associations from the BSP to HIGC

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

m. Specialized Non-Banks
These are classified as financial intermediaries, middlemen between sources of funds and the users of funds

e. Pawnshop
Grants loans for a pledge of personal property

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.

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.

(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 be necessary to carry on the business of commercial banking such as:

h. Cooperatives

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 credit for 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 the Monetary 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;

*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 fiduciary business. 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.

*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 Unit

The 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 vice versa 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

(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 a remittance of foreign exchange.

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 adjudged to 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 the countrys 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

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:

(iii) Trust Department

Sec. 79. Authority to Engage in Trust Business. Only a: 1. stock corporation or 2. a person duly authorized by the Monetary Board to engage in trust business shall

accordance with the provisions of this paragraph. 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 legal proceedings and of property of any kind which may be brought under the jurisdiction of the court; 83.3. Act as the executor of any will when it is named the executor thereof; 83.4. Act as administrator of the estate of any deceased person, with the will annexed, or as administrator of the estate of any deceased person when there is no will; 83.5. Accept and execute any trust for the holding, management, and administration of any estate, real or personal, and the rents, issues and profits thereof; and 83.6. Establish and manage common trust funds, subject to such rules and regulations as may be prescribed by the Monetary Board. *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 the financial 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 to increase the amount of its cash or securities on deposit with the Bangko Sentral in 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 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 the Bangko Sentral and, 2. from time to time, with the approval of the Bangko Sentral, to exchange the securities for others.

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 directed by 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 than trust 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 trust entity 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 a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation. 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

*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 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 *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 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. 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 the bank 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, a banks 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

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

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 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 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 Reserve Deposit 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 policy 2. Ready source of funds that will respond to unusually large number of withdrawals

(d) Systemic Risk: Certain Prudential Measures

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.

(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.

(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.

*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;

35.3. The above prescribed ceilings shall include:

*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.

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.

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, Stockholders and Their Related Interests. No:

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 board b. 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 highest credit 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. 2. 3. 4. 5. DOSRI may be declared vacant DOSRI may be subject to penal provisions in New Central Bank Act Erring bank may be prohibited from declaring dividends Share of erring directors may be applied against the excess loan 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

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

(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, financial or 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.

(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.

*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 necessarily goes 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)

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.

(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 worth shall 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.

*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.

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.

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 the Monetary 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.

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.

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

*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 called for 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

(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

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.

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 by ensuring 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

(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.

(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.

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 for collection 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 already been decided by the court and the decision is final between the same parties concerning the same issue. Prohibition in splitting a single cause of action A part cannot claim a specific amount in one case and the deficiency amount in another case.

*RAM: A bit comforting to know that a court in the RP may render judgment in dollars

2. Buyer is a non-bank or a quasi banking entity 3. Exempt transactions under Sec. 10 of SRC. If banks sells assets to qualified buyers, the financial assets need not be registered because qualified buyers are exempt. Exempt transactions exempt only for a specific transaction (if sold to a qualified buyer, then sold to a non-qualified buyer, the transaction is no longer exempt) Exempt securities involve permanent exemptions

2. Closing Opinion
Issued by lenders counsel to provide for qualifications regarding provisions in the loan agreement and apprise the lender of possible issues which may arise regarding the same.

3. Loan Transfers and Participations

Sec. X238. No bank shall: 1. sell, 2. discount, 3. assign or 4. negotiate, in whole or in part, such as thru syndications, participations and other similar arrangements, any notes, receivable loans, debt instruments and any type of financial asset or claim, except government securities, or be a party in any capacity in any of the above transactions, on a without recourse basis unless such receivables, notes, loans, debt instruments and financial assets or claims are registered with the SEC. This prohibition includes transactions between a bank and its trust department. Unregistered commercial papers may be sold, discounted, assigned, or negotiated by banks to the following: a. other banks b. quasi banks c. investment houses d. insurance companies e. finance companies f. investment companies g. pensions or retirement plan maintained by the government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; h. funds managed by another bank or other entities duly authorized to engage in trust or other fiduciary business i. such other persons as the SEC may by rule determine as qualified buyers *RAM: Rule Register financial assets with the SEC. Exceptions 1. Government securities

(a) Participation vs. Assignment

Assignment involves both transfer of the legal and beneficial title to the transferee. Participation -- Buying out of a loan or assumption of a loan by a participant. The participant who is generally a third party to the loan agreement, enters into an agreement with the creditor by paying the amount outstanding, thereby acquiring beneficial interest in the loan. Hence, it only involves the transfer of the beneficial title to the participant. The legal title remains with the assigning bank, who remains to be the creditor on record. The credit risk is only assumedby the participant. Normally, the participant cannot sue the borrower because there is no privity of contract between the borrower and the participant. Enforcement is through the bank. Silent Participation participation agreement between the creditor-bank and a participant of which the borrower is unaware, whereby beneficial title is transferred to the participant while legal title is retained by the bank. Useful device in fronting transactions involving a tax-exempt entity. When a tax-exempt entity executes a loan agreement where the bottower pays interest, and there is a silent participation, the participant is allowed to avail of the interest on the loan tax free. Risks in Participation 1. Credit Risk The risk that the borrower might be unable to pay, and therefore that the credit may not be realized. 2. Delivery Risk Even if the borrower pays, the bank may be unable to deliver the credit to the participant due to insolvency or some other cause.

4. Other Issues

(a) BSP approval and/or registration

BSP approval is needed when: 1. For non-residents when they open Peso accounts except when supported by inward forex remittance 2. For pre-payment of foreign currency loan. Not necessary for peso loans

cooperation plan and organized and conducted solely by the members thereof for the exclusive benefit of each member and not for profit. (b) Certificates of oaths administered to any government official in his official capacity or of acknowledgment by any government official in the performance of his official duties, written appearance in any court by any government official, in his official capacity; certificates of the administration of oaths to any person as to the authenticity of any paper required to be filed in court by any person or party thereto, whether the proceedings be civil or criminal; papers and documents filed in courts by or for the national, provincial, city or municipal governments; affidavits of poor persons for the purpose of proving poverty; statements and other compulsory information required of persons or corporations by the rules and regulations of the national, provincial, city or municipal governments exclusively for statistical purposes and which are wholly for the use of the bureau or office in which they are filed, and not at the instance or for the use or benefit of the person filing them; certified copies and other certificates placed upon documents, instruments and papers for the national, provincial, city, or municipal governments, made at the instance and for the sole use of some other branch of the national, provincial, city or municipal governments; and certificates of the assessed value of lands, not exceeding Two hundred pesos (P200) in value assessed, furnished by the provincial, city or municipal Treasurer to applicants for registration of title to land.

(b) Notarization
Art. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred in the order named: (14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively.

(c) DST
SEC. 179. Stamp Tax on Bank Checks, Drafts, Certificates of Deposit not Bearing Interest, and Other Instruments. - On each: 1. bank check, 2. draft, or 3. certificate of deposit not drawing interest, or 4. order for the payment of any sum of money drawn upon or issued by any bank, trust company, or any person or persons, companies or corporations, at sight or on demand, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50)

(d) Truth-in-Lending Act

Section 1. This Act shall be known as the "Truth in Lending Act." Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy. Section 3. As used in this Act, the term (1) "Board" means the Monetary Board of the Central Bank of the Philippines. (2) "Credit" means any loan, mortgage, deed of trust, advance, or discount; any conditional sales contract; any contract to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase contract; any contract or arrangement for the hire, bailment, or leasing of property; any option, demand, lien, pledge, or other claim against, or for the delivery of, property or money; any purchase, or other acquisition of, or any credit upon the security of, any

(i) Upon Execution

DST is due on execution of the PN and loan agreement

(ii) Upon Transfer

The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. 13-87 stating among others that no documentary stamp tax shall be imposed on documents of conveyance of instruments enumerated in Section 229
SEC. 199. Documents and Papers Not Subject to Stamp Tax. - The provisions of Section 173 to the contrary notwithstanding, the following instruments, documents and papers shall be exempt from the documentary stamp tax: (a) Policies of insurance or annuities made or granted by a fraternal or beneficiary society, order, association or cooperative company, operated on the lodge system or local

obligation of claim arising out of any of the foregoing; and any transaction or series of transactions having a similar purpose or effect. (3) "Finance charge" includes interest, fees, service charges, discounts, and such other charges incident to the extension of credit as the Board may be regulation prescribe. (4) "Creditor" means any person engaged in the business of extending credit (including any person who as a regular business practice make loans or sells or rents property or services on a time, credit, or installment basis, either as principal or as agent) who requires as an incident to the extension of credit, the payment of a finance charge. (5) "Person" means any individual, corporation, partnership, association, or other organized group of persons, or the legal successor or representative of the foregoing, and includes the Philippine Government or any agency thereof, or any other government, or of any of its political subdivisions, or any agency of the foregoing. Section 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information: (1) the cash price or delivered price of the property or service to be acquired; (2) the amounts, if any, to be credited as down payment and/or trade-in; (3) the difference between the amounts set forth under clauses (1) and (2); (4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; (5) the total amount to be financed; (6) the finance charge expressed in terms of pesos and centavos; and

Section 5. The Board shall prescribe such rules and regulations as may be necessary or proper in carrying out the provisions of this Act. Any rule or regulation prescribed hereunder may contain such classifications and differentiations as in the judgment of the Board are necessary or proper to effectuate the purposes of this Act or to prevent circumvention or evasion, or to facilitate the enforcement of this Act, or any rule or regulation issued thereunder. Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance charged required by such creditor in connection with such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any action under this subsection in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorney's fees and court costs as determined by the court. (b) Except as specified in subsection (a) of this section, nothing contained in this Act or any regulation contained in this Act or any regulation thereunder shall affect the validity or enforceability of any contract or transactions. (c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both. (d) No punishment or penalty provided by this Act shall apply to the Philippine Government or any agency or any political subdivision thereof. (e) A final judgment hereafter rendered in any criminal proceeding under this Act to the effect that a defendant has willfully violated this Act shall be prima facie evidence against such defendant in an action or proceeding brought by any other party against such defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the parties thereto. Section 7. This Act shall become effective upon approval.

(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.

*DBP v. Arcilla: If the borrower is not duly informed of the data required by the law prior to the consummation of the availment or drawdown, the lender will have no right to collect such charge or increases thereof, even if stipulated in the promissory

note. However, such failure shall not affect the validity or enforceability of any contract or transaction. In the present case, DBP failed to disclose the requisite information in the disclosure statement form authorized by the Central Bank, but did so in the loan transaction documents between it and Arcilla. There is no evidence on record that DBP sought to collect or collected any interest, penalty or other charges, from Arcilla other than those disclosed in the said deeds/documents. The Court is convinced that Arcillas claim of not having been furnished the data/information required by R.A. No. 3765 and CB Circular No. 158 was but an afterthought BPI v. Yu: Under Circular 158 of the Central Bank, the lender is required to include the information required by R.A. 3765 in the contract covering the credit transaction or any other document to be acknowledged and signed by the borrower. In addition, the contract or document shall specify additional charges, if any, which will be collected in case certain stipulations in the contract are not met by the debtor." In this case, the promissory notes signed by the Yus contained data, including penalty charges, required by the Truth in Lending Act. They cannot avoid liability based on a rigid interpretation of the Truth in Lending Act that contravenes its goal.

Any person, natural/juridical, resident/non-resident can open an FCDU account as well as a peso account. BUT, a non-resident cannot open a peso account UNLESS it is funded by a remittance of foreign exchange. Since the bank is the debtor and the borrower is the creditor, then a bank has the right to set-off deposits in its hands for the payment of any indebtedness to it on the part of a depositor. Conversely, the depositor has every right to apply his deposit in a bank against his loan from the bank. FCDU deposits are exempt from attachment, garnishment or any other process of any court. Peso deposits on the other hand may be garnished as long as it does not violate secrecy of bank deposits. NOTE: Anti-Money laundering act extends to ALL DEPOSITS. Deposit Substitutes are funds obtained from the public (20 or more lenders at any one time) other than in the form of savings, demand or current, and time or fixed deposits. A deposit substitute is still cash. These are funds taken in usually by quasi-banks entities engaged in obtaining from the public funds through means other than deposits like through the issuance of their own debt instruments DEPOSIT Evidence by passbooks, bank statements and certificates of deposit May be used for lending and other purposes DEPOSIT SUBSTITUTES Evidenced by debt instruments with recourse and repurchase agreements To be used for the purpose of relending or purchasing of receivables and other obligations Not withdrawable freely 20% final withholding tax Subject to regular/liquidity reserves Not insured

B. Deposit Transactions
1. Savings, Current and Time Deposits
(a) Depositary (RBU/FCDU)
Accepting and creating demand deposits, and receiving other types of deposits and deposit substitutes is a core banking function. Only a universal or commercial bank can accept or create demand deposits. Other banks need prior authorization of the Monetary Board. This is because demand deposits are better left to the commercial banks which are functionally suited and geared to managing these funds for optimum use. Because UB and KB are allowed to branch out nationwide. Deposits refers to savings, demand or current, and time or fixed, deposits which are characterized as loans from the depositor to the bank. Note: RBUs accept peso deposits and foreign currency deposits. While the banks FCDU can accept only foreign currency deposits that are acceptable as part of the international reserve of the country.

Withdrawable freely Tax is 20% 71/2% or 0% Subject to regular/liquidity reserves Insured by PDIC up to 200,000 per deposit

*RAM: Without recourse means that when the bank goes under, the participant can go after the bank making the bank a debtor. If there is no recourse, the bank is a seller/assignor

(b) Tax

Peso deposits 20% withholding tax rate Dollar deposits Resident 7.5% Non-resident exempt.

(c) Secrecy of Bank Deposit

RA 1405 as amended Section 1. It is hereby declared to be the policy of the Government to give encouragement to the people to deposit their money in banking institutions and to discourage private hoarding so that the same may be properly utilized by banks in authorized loans to assist in the economic development of the country. Section 2. All: 1. deposits of whatever nature with banks or banking institutions in the Philippines 2. including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon: a. written permission of the depositor, or b. in cases of impeachment, or c. upon order of a competent court in cases of bribery or dereliction of duty of public officials, or d. in cases where the money deposited or invested is the subject matter of the litigation. Section 3. It shall be unlawful for any official or employee of a banking institution to disclose to any person other than those mentioned in Section two hereof any information concerning said deposits. Section 4. All Acts or parts of Acts, Special Charters, Executive Orders, Rules and Regulations which are inconsistent with the provisions of this Act are hereby repealed. Section 5. Any violation of this law will subject offender upon conviction, to an imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court. Section 6. This Act shall take effect upon its approval. *Ejercito vs. Sandiganbayan: trust placements were characterized as deposits as the money was deemed as for the boosting of economic development. The SC said that RA1405 is broad enough to cover trust department.

Trust Account No. 858 is, without doubt, one such account. The Trust Agreement between petitioner and Urban Bank provides that the trust account covers "deposit, placement or investment of funds" by Urban Bankfor and in behalf of petitioner.6The money deposited under Trust Account No. 858, was, therefore, intended not merely to remain with the bank but to be invested by it elsewhere. To hold that this type of account is not protected by R.A. 1405 would encourage private hoarding of funds that could otherwise be invested by banks in other ventures, contrary to the policy behind the law. Sir: Intention of SC: Law of bank deposits covers trust placements. SC EXPANDED definition of deposits.+ on SC's ruling that the last portion of Section 2, there is INVESTED (so not only deposits): SC failed to consider the initial portion of Section 2, in which the reference of investments is on the bonds issued by the government. Invested refers NOT TO TRUST PLACEMENTS *Other exceptions 1. Prosecution for unexplained wealth under RA 3019 2. BSP periodic inquiry into deposits 3. Anti-money laundering 4. Inquiry be BSP into the deposits of the decedent for determining gross estate 5. Disclosure to the Treasurer of the Phils of certain information about bank deposits which have been dormant for 10 years. 6. Upon order by the Ombudsman 7. PCGG can compel production of deposits in order to sequester ill gotten wealth 8. When borrower submits to a hold out arrangement coupled with a set off provision, this constitutes waiver 9. In loans to DOSRI, the DOSRI must waive PD 1405 before loan allowed. RA 6426 as amended Section 8. Secrecy of foreign currency deposits. All foreign currency deposits authorized under this Act, as amended by PD No. 1035, as well as foreign currency deposits authorized under PD No. 1034, are hereby declared as and considered of an absolutely confidential nature and, except: 1. upon the written permission of the depositor, in no instance shall foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or office whether judicial or administrative or legislative, or any other entity whether public or private; Provided, however, That said foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. *Other exceptions: 1. Upon order of a competent court in violation of the Anti-Money Laudnering Act

(note that the court order in some instances is no longer required) 2. BSP periodic or special inquiry 3. Disclosure to the treasurer of the Philippines of certain information about bank deposits which have been dormant for 10 years. *China Banking Corporation vs. Court of Appeals: F: A US dollar check, payable to a father and/or his daughter, was deposited by her in an FCDU account under her name. When the father wanted to look into such FCDU account, he was not allowed to do so by the depository bank as he was not a depositor of record thereof. H: He is considered a "co-depositor" of the account since he was a co-payee of the check deposited in that account. So he can look w/o written consent of his daughter. *this is pro hac vice General Banking Act. Section 55.1. No director, officer, employee, or agent of any bank shall (b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail; *RAM: This covers funds which are not deposits

A survivorship agreement between joint depositors is one that permits either of them to withdraw the whole deposit during their lifetime and to transfer the balance to the survivor upon the death of one of them. NIRC Sec. 97 If a bank has knowledge of the death of a person, who has a deposit account with it alone or jointly with another, it must not allow any withdrawal from said account, unless the Commissioner of Internal Revenue certified that the estate tax thereon has been paid *RAM: This does not apply if there is a survivorship agreement because the entire deposit becomes the sole property o the survivor and nothing passes to the decedents estate, which may be subject to estate tax. *Ana Rivera v. Peoples Bank: A survivorship agreement is an aleatory contract supported y a lawful consideration -the mutual agreement of the joint depositors permitting either of them to withdraw the whole during their lifetime, and transferring the balance to the survivor upon the death of one of them. But while the survivorship agreement is per se not contrary to law, its operation or effect may be violative of law where it is shown that such agreement is a mere cloak to hide an inofficious donation to transfer property in fraud of creditors, or to defeat the legitime of a forced heir. it doesn't mean that when the relationship between the co-depositors is that of a master-servant, the servant doesn't have the capacity to make deposits. It is not uncommon for other people to make deposits for others, or open accounts for others. Ana Rivera has been the housekeeper of Stephenson for 19 years! *Vitug vs. Court of Appeals: The survivorship agreement is neither a donation mortis causa or inter vivos. It is an aleatory contract in reality the contract imposed a mere obligation w/ a term -the term being death. (1) WHY NOT A WILL? Because for it to be a will, the property should belong solely to the testator. The funds involved here belong to both Vitug and his wife (2)WHY NOT A DONATION INTER VIVOS? Because it was to take effect after the death of one of the spouses AND the other spouse could not donate what is not solely his/hers. the savings account being part of Vitug's separate property, it does not belong to the estate. *BIR Ruling 010-2003: Considering that the joint account is co-owned by the depositors, there is a presumption that they owned it equally or in 50/50 shares, in which case, the transfer of the remaining balance of the whole deposit to the surviving co-depositor/s upon death of the other co-depositor pursuant to their

2. Overdraft
These are not allowed. They are issuance of checks without sufficient funds. But banks may extend a loan to the customer so that the checks can still be honored (lusot) CASH Sweeping when: MNC w/ several subsidiaries all over the world e.g. there's a current account in RP then another current account in NY. Then there is a master account, say, kept in NY. At the end of the day, all balances are transferred to master account, minimal balance kept to current accounts. When there is a need to replenish funds in RP, it would be debited from the master account. It would be easier if these accounts are maintained in 1 bank.

3. Survivorship Issue

Survivorship Agreement is a transfer made by the said depositor in contemplation of death, as provided under Section 85(B) of the 1997 Tax Code, Hence, the funds in the joint deposit account cannot be withdrawn by the survivingdepositor/s unless the Commissioner has certified that the taxes imposed thereon by TitleIII of the 1997 Tax Code have been paid; *RAM: This is in conflict with SC decisions

Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or documents of title. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank. The bank pays if it finds that the documents conform with what the letter requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the documents only upon paying the bank. Note that when the beneficiary has strictly complied with the terms of the letter of credit and presentation fo the documents, the issuing bank has no recourse but to pay the beneficiary. The exception to this is fraud discussed in Transfield Philippines. A letter of credit is a composite of at least 3 distinct but intertwined relationships:

C. Deposit Substitute Activities

1. Quasi-Banking
While quasi-banking is a fitting term for non-banks that are engaged in such activity, it would be inappropriate to apply the same term even to banks engaged in depositsubstitute operations. Quasi-banking should be used only in reference to the depositsubstitute operations of non-banks. For banks, it should be called deposit-substitute operation

2. Reserves

D. Letters of Credit
A letter of credit is a financial device developed to satisfy the seemingly irreconcilable interests of a seller who refuses to part with his goods before he is paid and a buyer who wants to have control of the goods before paying. It is essentially a declaration by a bank that it will make certain payments or cause another bank to make payments to a specified party under certain conditions It is a letter because it takes the form of a notification to the party likely to be the recipients of the payments. It is documentary because the parties involved only deal with documents and will rely on documents to demand payment. In this case, the bank lends its credit to an importer or a buyer so that his exporter or seller can be persuaded to conclude or consummate the sale with him So the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the letter of credit the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit.

1. One links the party applying for the L/C (account party/buyer) and the party for whose benefit the L/C is issued (beneficiary/seller) Hence the account party/buyer agrees that subject to the terms of the contract, he will pay the money to the seller. 2. Second contract relationship is between the account party/buyer and the bank. There is a reimbursement agreement where the account party applies to the issuing bank for a specified L/C and agrees to reimburse the bank for amounts paid 3. Third contract, between the issuing bank and the beneficiary *Feati Bank v. Court of Appeals: It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary Thus the rule of strict compliance. In the United States, commercial transactions involving letters of credit are governed by the rule of strict compliance. In the Philippines, the same holds true.

Since a bank deals only with documents, it is not in a position to determine whether or not the documents required by the letter of credit are material or superfluous. The mere fact that the document was specified therein readily means that the document is of vital importance to the buyer. Under the foregoing provisions of the U.C.P (Arts 3, 7 and 8)., the bank may only negotiate, accept or pay, if the documents tendered to it are on their face in accordance with the terms and conditions of the documentary credit. And since a correspondent bank, like the petitioner, principally deals only with documents, the absence of any document required in the documentary credit justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. In its decision, the trial court ruled that the petitioner, in accepting the obligation to notify the respondent that the irrevocable credithas been transmitted to the petitioner on behalf of the private respondent, has confirmed the letter. The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit. These types of letters have different meanings and the legal relations arising from there varies. These types of letters have different meanings and the legal relations arising from there varies. A credit may be an irrevocablecredit and at the same time a confirmed credit or vice-versa. An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and conditions of the credit. Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank. In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit.. A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller.

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below. A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter of credit. The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter of credit. What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum of money from the buyer or the issuing bank. On the contrary, when the correspondent bank accepts the tender and pays the amount stated in the letter, the money that it doles out comes not from any particular fund that has been advanced by the issuing bank, rather it gets the money from its own funds and then later seeks reimbursement from the issuing bank. We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the issuing bank and in effect also of the latter's principal or client, i.e., Hans Axel Christiansen." It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and the seller but also of the credit agreement between the issuing bank and the buyer. The relationship between the buyer (Christiansen) and the issuing bank (Security Pacific National Bank) is entirely independent from the letter of credit issued by the latter. As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has also nothing to do with the contract between the issuing bank and the buyer regarding the issuance of the letter of credit. The contract between the two has no bearing as to the non-compliance by the buyer with the agreement between the latter and the seller. Their contract is similar to that of a contract of services (to open the letter of credit) and not that of agency as was intimated by the Court of Appeals. The unjustified refusal therefore by Christiansen

to issue the certification under the letter of credit should not likewise be charged to the issuing bank. *RAM: sir said that SL/C is not an accessory contract, court probably refers to the independence principle, there's even a UN Convention on standby L/Cs.it is not accessory to anything but it is actually a guarantee; it is an accessory in the sense that it cannot exist without a valid obligation *Note that a letter of credit transaction is described as documentary because the parties thereto only deal with documents to demand or make payment without regard to the underlying transaction involving goods or services. In other words, the obligations of the parties to a letter of credit are independent of the obligations of the parties to the underlying transaction *Transfield Philippines v. Luzon Hydro Corporation: 1. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. 2. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. 3. Since the banks customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. 4. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. 5. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable. There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must

demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract. Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank The so-called independence principle assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Given the nature of letters of credit, petitioners argumentthat it is only the issuing bank that may invoke the independence principle on letters of creditdoes not impress this Court. To say that the independence principle may only be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary. L/C is also not a guaranty. The standby credit has different expectations. He reasonably expects that he will receive cash in the event of nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor (the applicant) over the nature of the applicants performance takes place. The standby credit has this opposite effect of the surety contract: it reverses the financial burdenof parties during litigation. In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of the obligors performance. The beneficiary may have to establish that fact in litigation. During the litigation, the surety holds the moneyand the beneficiary bears most of the cost of delay in performance. Fraud exception: Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment.The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and

(c) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged *Philippine National Bank v. Pineda: A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the Letter of Credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt. A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods. It secures an indebtedness and there can be no such thing as security interest that secures no obligation. PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances given to TCC under the Letter of Credit, said possession by itself cannot be considered payment of the loan secured thereby. Payment would legally result only after PNB had foreclosed on said securities, sold the same and applied the proceeds thereof to TCC's loan obligation. Mere possession does not amount to foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself. *Stand by letter of credit: The beneficiary has the right to trigger the loan option if the account party fils to meet its commitment. This has the force of a demand guarantee which means regardless of WON there has been default, the bank must pay. *Can a bank issue a Standby letter of credit in favor of another bank? Under the old law, banks were prohibited from issuing guarantees except in certain instances like L/C. Prior to the passage of the GBL, bank guarantees were in the form of L/C. But this is no longer restated in the new law. Banks are now allowed to issue guarantees in any form and not limited to the exceptional cases. See Sec. 35.6 *How is UCP applicable? Justified by Art. 2 of Code of Commerce which says that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by the usages and customs generally observed.

Short term CP Maturity of less than 365 days Long term CP Maturity of more than 365 days. Even if the CP is not expressly mentioned in the definition of securities in the SRC, it can still be considered as security under the catch all provision.

F. Security Devices and Other Credit Supports/Enhancements

Security devices serve as collateral provided by a borrower to enahce his credit standing to the satisfaction of a bank. Applicable law is the lex situs.

1. Types (a) Real Estate Mortgage

Requisites: 1. Constituted to secure the fulfillment of a principal obligation 2. Must cover real property 3. Mortgagor must be the absolute owner of the property mortgaged 4. Person constituting the mortgage has the free disposal of the property or legally authorized to do so 5. Registration of the document appears. 6. Execution in a public instrument acknowledged before a notary public

(b) Chattel Mortgage

Requisites: (1) must cover PERSONAL PROPERTY (2) constituted to secure the fulfillment of an obligation (3) person constituting mortgage has free disposal of his property (4) mortgagor must be the owner of the personal property (5) execution of a public instrument acknowledged before a notary public (6) the instrument must contain an AFFIDAVIT OF GOOD FAITH -in its absence, the instrument is still binding BETWEEN THE PARTIES BUT NOT AGAINST 3RD PERSONS (7) registration in the Register of Deeds where the property is located and/or where mortgagor resides *RAM: If the mortgage is delivered and nothing else is done (like registration), then

E. Commercial Papers
These are evidence of indebtedness of a corporation. Before these can be sold to the public, they must be first registered with the SEC except if they are: 1. Exempt securities 2. Sold in exempt transactions

it should be construed as a pledge. Hence to avoid its transformation into a pledge, register it. *double registration requirement: where the mortgagor and mortgagee's domicile is not the same! If the mortgagor is outside the RP, register in the place where property is located

result in the reduction of the actual amount which could ultimately be collected from IBAA, the latter's separate undertaking under its L/Cs remains. *Ong vs. PCIB: A guarantor insures the solvency of the debtor while a surety is an insurer of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the creditor has proceeded against the properties of the principal debtor and the debt remains unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the principle of excussion. In a suretyship contract, however, the benefit of excussion is not available to the surety as he is principally liable for the payment of the debt. As the surety insures the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go directly against the surety although the principal debtor is solvent and is able to pay or no prior demand is made on the principal debtor. A surety is directly, equally and absolutely bound with the principal debtor for the payment of the debt and is deemed as an original promissor and debtor from the beginning. The provisions of the MOA regarding the suspension of payments by BMC and the non-filing of collection suits by the creditor banks pertain only to the property of BMC. Firstly, in the rehabilitation receivership filed by BMC, only the properties of BMC were mentioned in the petition with the SEC. Secondly, there is nothing in the MOA that involves the liabilities of the sureties whose properties are separate and distinct from that of the debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the creditor-banks was approved by the SEC whose jurisdiction is limited only to corporations and corporate assets. It has no jurisdiction over the properties of BMCs officers or sureties. *International Finance Corporation v. Imperial Textile Mills: The Agreement uses guarantee and guarantors, prompting ITM to base its argument on those words. This Court is not convinced that the use of the two words limits the Contract to a mere guaranty. The specific stipulations in the Contract show otherwise. While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was jointly and severally liable. To put emphasis on the nature of that liability, the Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety. *JN Development Corporation v. Philippine Export: While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the obligation once demand is made on him. Excussion, after all, is a right granted to him by law and as such he may opt to make use of it or waive it. PhilGuarantees waiver of the right of excussion cannot prevent it from demanding reimbursement from petitioners. The law clearly requires the debtor to indemnify the guarantor what the latter has paid.

(c) Mortgage Trust Indenture (d) Pledge

Requisites: 1. Constituted to secure the fulfillment of a principal obligation 2. Must cover personal property 3. Mortgagor must be absolute owner 4. Persons constituting the pledge has the free disposal of the property or is legally authorized for the purpose. 5. Thing pledged is placed in the possession of the creditor or a 3rd person by common agreement. *RAM: Delivery is not always necessary? NO. There can be delivery through book entries

(e) Guarantee/Suretyship/Standby Letter of Credit

By a guarantee a person binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. Note that Guarantors are subject to the benefit of excussion unlike suretys. *RAM: Banks now have the power to issue guarantees in the new law: 1. Guarantees are now included in the computation of an SBL 2. GBL does not restate the prohibitory language of Sec. 74 General Banking Act. *A standby letter of credit is a first-demand guarantee. There is no excussion. *Insular Bank v. IAC: The standby L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount for which credit is given on the faith of the instrument.". They are primary obligations and not accessory contracts. Being separate and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA's liability under its own standby letters of credit. Payments made by the Mendozas directly to Philam Life are in compliance with their own prestation under the loan agreements. And although these payments could

There is likewise no merit in petitioners claim that PhilGuarantees failure to give its express consent to the alleged extensions granted by TRB to JN had extinguished the guarantee. The requirement that the guarantor should consent to any extension granted by the creditor to the debtor under Art. 2079 is for the benefit of the guarantor. As such, it is likewise waivable by the guarantor.

(f) Aval
An aval is a form of guarantee for the payment of drafts already accepted by the drawee. Aval comes from the word foot or bottom. Its like a 2nd layer of guaranty over and above that provided by the acceptor.

made the SC decide otherwise in Odom) 2. The deed must clarify that the assignment is NOT intended to discharge the loan until the deposit is actually applied in payment of the loan. To avoid the construction that it is a dacion en pago. 3. The deed ought to provide for the reconveyance of the deposit to the depositor upon payment of the loan 4. There should be a clause stating that nothing in this deed is to be construed as creating a pledge of the deposit. *People v. Odom: Odom vigorously argues that none of the three contracts is one of mortgage, but an assignment of rights, because in none of said contracts did the parties intend to constitute a mortgage. A careful examination of the documents shows that they were really mortgage contracts inasmuch as they were executed to guarantee the principal obligations of the defendant, consisting of the overdrafts or the indebtedness resulting therefrom. It positively appears in each of them that the defendant assigned to the plaintiff all his rights in the contracts of lease, in the land, and in the insurance policy to guarantee his indebtedness resulting from the overdrafts. An assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance of title which confers ownership on the assignee. In Exhibits C and D it was stipulated that if Odom should comply with all the conditions of the contracts and should pay his indebtedness, together with interest at 9% pa, the assignments would become null and void, otherwise they would remain in full force. If the parties' intention were that the assignments are absolute, and not by way of guaranty or mortgage, the stipulation would not have been made because it would be inconsistent with the will of the contracting parties. *Lopez v. Court of Appeals: Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however, We hold and rule that the transaction should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof. The indemnity agreement and the stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article 1371 CC). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. *Manila Banking v. Teodoro: Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dation in

(g) Hold-out
A hold out provision may be useless unless it is coupled with a set-off. A set-off is advisable because the depositor may not necessarily be the borrower. But the banks right of set-off over ones deposit applies only if the depositor is a t the same time the debtor of the bank. Hold-out-cum-set-off arrangement may also be coupled with an assignment of deposit in favor of the lending bank.

(h) Assignment by way of Security

This actually constitutes a charge-back of a debt by the creditor to the debtor liable on the debt. A lending bank can accept, as security for a loan from such bank to a borrower, an assignment of deposits maintained locally by such borrower in such bank. (Note that that makes the loan a non-risk item, excluded from the SBL) A lending bank usually requires an assignment of deposit by way of security to be acknowledged by the assigning depositor before a notary public in order to make the assignment binding on third persons. *RAM: Banks would not want the assignment to be characterized as a chattel mortgage and/or pledge for the ff reasons: (a) Pledge is not a preferred security device, especially if the amount of the deposit is less than the loan and interest. Foreclosure extinguishes the entire obligation kasi. (b) Chattel mortgages and pledges are subject to DST. *So that an assignment would not be deemed a pledge: 1. It must provide for absolute transfer of title to the deposit from the depositor to the bank. Must not contain words by way of security or this deed of assignment shall be null and void if the principal obligation is fulfilled (The security language

payment, exchange or donation, and without the need of the consent of the debtor, transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. ... It may be in the form of a sale, but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against a third person, or it may constitute a donation as when it is by gratuitous title; or it may even be merely by way of guaranty, as when the creditor gives as a collateral, to secure his own debt in favor of the assignee, without transmitting ownership. The character that it may assume determines its requisites and effects. Concurring Opinion: The foregoing is applicable where, as in the present instance, the deed of assignment of receivables combines elements of both a complete or absolute alienation of the credits being assigned and a security arrangement to assure payment of a principal obligation. Where the second element is absent, that is, where there is nothing to indicate that the parties intended the deed of assignment to function as a security device, it would of course follow that the simple absolute conveyance embodied in the deed of assignment would be operative; the assignment would constitute essentially a mode of payment or dacion en pago. Put a little differently, in order that a deed of assignment of receivables which is in form an absolute conveyance of title to the credits being assigned, may be qualified and treated as a security arrangement, language to such effect must be found in the document itself and that language, precisely, is embodied in the deed of assignment in the instant case. *Yau Chu vs. CA: The encashment of the deposit certificates was not a pacto commissorio which is prohibited under Art. 2088 of the Civil Code. A pacto commissorio is a provision for the automatic appropriation of the pledged or mortgaged property by the creditor in payment of the loan upon its maturity. The prohibition against a pacto commissorio is intended to protect the obligor, pledgor, or mortgagor against being overreached by his creditor who holds a pledge or mortgage over property whose value is much more than the debt. Where, as in this case, the security for the debt is also money deposited in a bank, the amount of which is even less than the debt, it was not illegal for the creditor to encash the time deposit certificates to pay the debtors' overdue obligation, with the latter's consent.