Commercial Law

Quick Look (Banking)

VIII. Banking Laws

New Central State Policies 
 “The State shall maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of
Bank Act (RA its mandated responsibilities concerning money, banking and credit.
7653) In line with this policy, and considering its unique functions and responsibilities, the central monetary authority establishes under this Act, shall enjoy fiscal
and administrative autonomy while being a government-owned corporation.”

Responsibility and Responsibility 1. As a general responsibility, it shall provide policy directions in areas of money, banking and credit.
Primary Objective of 2. Supervision over operations of banks and regulate the operations of finance companies, quasi-banks and institutions
the BSP 
 performing similar functions.
Primary objective It is to maintain price stability conducive to a balanced and sustainable growth of economy.
of BSP It shall promote and maintain monetary stability and convertibility of the peso.

Monetary Board; Who exercises Powers and functions are exercised by the MB, which is composed of 7 members appointed by the President for a term of 6 year.
Powers and Functions powers and

 functions of BSP
Corporate powers 1. Enter into contracts
of BSP 2. Compromise, condone or release any claim of or settled liability to BSP regardless of amount involved, under terms and
conditions prescribed by MB
3. Acquire and hold assets and incur liabilities in connection with its operations or as are essential to proper conduct of its
operations.
4. Lease, own and dispose (sell) its real and personal property
5. Do and perform other necessary or proper powers to carry out purposes of NCBA
6. Sue and be sued
7. Adopt, alter and use corporate seal which shall be judicially noticed.
Functions of BSP In the exercise of its authority, MB shall:
in exercise of its 1. Establish a human resource management system
authority 2. Issue rules and regulations for discharge of responsibilities and exercise of powers
3. Adopt an annual budget for and authorize expenditures for administration and operations
4. Indemnify members for expenses and costs in connection with any civil or criminal action, suit or proceedings to which
its members are parties by reason of performance of functions
a. : He is finally adjudged to be liable for negligence or misconduct
5. Direct management, operations and administration, reorganize its personnel and issue rules and regulations for this
purpose

Note:
GR: Court cannot issue a TRO or injunction to enjoin BSP from examining any institution subject to its supervision or examination.
The character of banking business is one impressed with public interest.
: When there is convincing proof that the examination is plainly arbitrary, and made in BF and petition files a bond in favor of BSP,
in an amount fixed by court, with clerk or judge in court where the action is pending.

BSP and Banks in Conservatorship Nature of It is a tool in restoring the viability of banks and quasi-banks.
Distress conservatorship It consists of carrying out administrative, organizational, financial and/or other measures to address the
state of continuing inability or unwillingness to maintain liquidity in order to protect depositors and
creditors.
Who has the MB

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 power to appoint
a conservator
Who can be Any person who is:
appointed as 1. Competent
conservator 2. Knowledgeable in bank operations and management

Grounds for If MB finds the bank in the state of:

appointment 1. Continuing inability
2. Unwillingness to maintain a condition of liquidity deemed adequate to protect depositors and
creditors

Requisites in 1. Report submitted by appropriate supervising or examining department of BSP

placing an 2. MB makes a finding based on the report that the bank or quasi-bank is in a state of:
institution under a. Continuing inability
conservatorship b. Unwillingness to maintain a condition of liquidity deemed adequate to protect
depositors and creditors
3. BOD must be informed in writing of the MB Order directing conservatorship.

Note: A conservator may take over without the need to declare the bank as insolvent first.

Powers and duties 1. Report to the MB

of Conservator 2. Take charge of assets, liabilities and management of bank or quasi-bank as may be deemed
necessary
3. Reorganize management
4. Collect all monies and debts due said institution
5. Overrule or revoke actions of previous management and BOD
6. Necessary powers to restore viability

Notes:
1. Extent of authority is only up to acts of administration.
a. Conservator merely takes the place of the bank’s BOD. Thus, it cannot perform acts
the BOD cannot do. It cannot revoke a contract of sale of property acquired by the
bank entered by one of its officers even if the price agreed upon is no longer reflective
of the fair market value of property because of its appreciation over time.
2. These powers cannot extend to the post-facto repudiation of perfected transactions, otherwise
they would infringe against the non-impairment clause of the Constitution. It merely gives the
conservator the power to revoke contracts that are deemed to be defective.

Period of 1 year.
Conservatorship
When is MB may terminate the conservatorship on the following grounds, at any time before the 1-year period:
conservatorship 1. Institution can continue to operate on its own
terminated 2. On the basis of conservator’s report or MB findings determining that the continuance of business
of institution would involve probable loss to its depositors or creditors—in this case, Law on
Receivership shall apply.

Temporary “Close now, hear In cases where grounds for receivership are present, MB may summarily and without prior hearing forbid
Closure later” scheme the institution from doing business in the Philippines and designate PDIC (Philippine Deposit Insurance
Corporation) as receiver.
Current and complete examination of the bank before closure order is not necessary. Absence of an
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 examination before closure of bank does not mean that there was no basis for the closure.

Note: If circumstances warrant, MB may forbid a bank to do business and place it under receivership
without prior notice and hearing.

Is CNHR a valid It is valid:

practice 1. It is a measure for protection of public interest because BSP needs a swift action when the
bank is in dire straights.
a. Distressed and mismanage banks result to deterioration of public faith in the banking
system to prejudice of national economy itself, not to mention losses suffered by bank
depositors, creditors and stockholders.
2. It is a measure to prevent unwarranted dissipation of bank’s assets.
3. It is a valid exercise of police power to protect depositors, creditors, stockholders and general
public.

Note on declaration of Close Now Hear Later Scheme:

1. MB action on this matter is final and executory. However, this may still be subject to judicial
inquiry and can be set aside if there is excess of jurisdiction or with grave abuse of discretion
amounting to lack or excess of jurisdiction.
2. To require previous hearing would not only be impractical but would also defeat the purpose
of the law when it vested MB with such authority.

Remedy of Stockholders owning majority shares may file a Petition for Certiorari within 10 days from receipt of order
stockholders of a of receivership, liquidation or conservatorship.
bank subject to This remedy applies to conservatorship, CNHR scheme, receivership and liquidation.
closure
Notes:
1. Only stockholders of record representing majority capital stock may file a petition for
certiorari. It cannot be filed by the receiver or conservator appointed.
2. Period to foreclose a real estate mortgage is not interruption by receivership. 10-year
prescriptive period will not be interrupted as foreclosure is not among those activities which
banks are prevented from doing.
Is order of NO. Actions of MB shall be final and executory and may not be restrained orset aside by court.
Receivership : Petition for certiorari
appealable

Receivership Conservator vs. Conservatorship Receivership

Receiver Period He is appointed for a period
not exceeding 1 year.
Purpose To take charge of assets,
liabilities and management of
bank or quasi-bank in a state of
continuing inability, or
unwillingness to maintain a
condition of liquidity deemed
adequate to protect interest of
depositors and creditors.
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Receiver shall determine not later than 90 days from
take over whether:
1. Institution may be rehabilitated
2. Placed in a condition so that it may be
allowed to resume business
1. To recommend rehabilitation or liquidation of
bank
2. To manage the bank that is:
a. Unable to pay its liabilities, or
cannot continue its business
without probable losses to its
depositors or creditors
b. Has willfully violated a final cease
3
 and desist order, involving acts or
transactions amounting to fraud or
dissipation of assets
Grounds 1. Continuing inability 1. It cannot continue the business without
2. Unwillingness to involving probable losses to its depositors or
maintain a creditors.
condition of 2. It has insufficient realizable assets to meet
liquidity deemed its liabilities.
adequate to 3. It has willfully violated a cease and desist
protect depositors order under Sec 3:
and creditors 4. It is unable to pay its liabilities as they
become due in the ordinary course of
business.

Purpose of 1. Receive collectibles

receivership 2. Preserve the assets of the bank in substitution of its former management
proceedings 3. Prevent the dissipation of assets to the detriment of the bank’s creditors

Note on Receivership Proceedings: Receivership is the equivalent of an injunction to restrain bank officers
from intermeddling with bank properties in any way.

Who may be Bank Quasi-bank

appointed as Receiver PDIC Any person of recognized competence in banking or finance may be appointed.
receiver

When will bank be 1. When the bank is declared insolvent, it shall be placed under receivership.
placed under a. A receiver takes control and possession of the bank’s assets.
receivership 2. After period of receivership, CB through the MB, determines whether to proceeding with
liquidation or reorganization and continue its operation.

Note: Designation of a conservator is not a precondition to the designation of a receiver.

Grounds to place a MB makes a finding based on the report of the head of the supervising or examining department:
bank or quasi- 1. It cannot continue the business without involving probable losses to its depositors or creditors.
bank to 2. It has insufficient realizable assets to meet its liabilities.
receivership 3. It has willfully violated a cease and desist order under Sec 3:
a. CDO has become final
b. It involves acts or transactions amounting to fraud or dissipation of assets of the
institution
i. In this case, MB does not need prior hearing to issue the CDO and to
designate PDIC as receiver.
4. It is unable to pay its liabilities as they become due in the ordinary course of business.
a. This shall not include inability to pay caused by extraordinary demands induced by
financial panic in the banking community.

Note: Grounds for placing bank under receivership cannot be given retroactive application.

Steps undertaken 1. Receiver shall immediately:

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 in receivership a. Gather and take charge of all assets and liabilities of the institution
b. Administer the same for benefit of its creditors
c. Exercise general powers of a receiver under RC
d. Not pay or commit any act that will involve transfer or disposition of any asset
i. : Administrative expenditures
ii. The receiver may deposit or place funds of the institution in non-
speculative investments
2. Receiver shall determine as soon as possible but not later than 90 days from take over
whether:
a. Institution may be rehabilitated or placed in a condition so that it may be allowed to
resume business
b. Any determination for resumption of business of institution shall be subject to prior
approval of MB
3. If the institution cannot be rehabilitated, liquidation will take place.

Note: Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of succession operation and solvency.

Legal effects on 1. Assets of the bank shall be deemed in custodia legis in the hands of the receiver
bank assets placed 2. Assets shall not be subject to attachment, garnishment, execution, levy or any other court
under receivership processes.
a. Judge, officer of court or any person who shall issue, order, process or cause the
issuance of implementation of the writ shall be liable to criminal prosecution.
3. Appointment of receiver does not terminate bank’s corporate existence nor prohibits it from
suing or from being sued.
a. It only suspends the authority of the bank and of its officers and directors over its
properties and effects because this authority is transferred to the receiver.

Liquidation Definition It is a court-assisted proceeding which connotes winding up or settling with creditors or debtors.
It is a process of reducing assets to cash, discharging liabilities and dividing surplus or loss—to distribute assets
to those entitled to receive them.

Involuntary vs. Involuntary liquidation Voluntary liquidation

Voluntary Definition Bank is first placed under There is a written notice of liquidation sent to the MB
liquidation receivership and subsequently and MB shall have the right to intervene and take
under liquidation. steps necessary to protect interests of creditors.

Grounds for 1. Insolvency or continuance would involve probable loss to depositors or creditors
liquidation 2. Determination by MB that bank can no longer be rehabilitated

Steps in If the receiver determines that the institution cannot be rehabilitated or permitted to resume business, MB
undertaking shall notify in writing the BOD of its findings and direct the receiver to proceeding with liquidation.
liquidation of a
bank or quasi- Receiver shall:
bank 1. File ex parte with RTC a petition for assistance in the liquidation pursuant to Liquidation Plan
adopted by PDIC for general application to all closed banks.
a. In case of quasi-banks, Liquidation Plan adopted by MB.
b. There is no need for prior notice or any other action before receiver files a petition for
assistance with RTC.

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 2. Court shall:
a. Adjudicate disputed claims against institution
b. Assist enforcement of individual liabilities of stockholders, directors and officers,
c. Decide on other issues material to the implementation of liquidation plan.
i. Receiver shall pay costs of proceedings from assets of institution.
ii. He must file a motion after due notice before court can acquire jurisdiction
and act
3. Covert assets to money, dispose of it to creditors and parties for paying debts in accordance with
rules on Concurrence and Preference of Credits under Civil Code.
4. May institute actions necessary to collect and recover accounts, assets, or defend the institution
against any action
a. Receiver files the actions in the name of the institution.
b. He files it with assistance of counsel.

Conventional Closed bank It refers to a bank under liquidation by the MB course.

liquidation under Liquidation It refers to the RTC of general jurisdiction where the petition for assistance in the liquidation
RA 10846 court of a closed bank is filed and give due course.
Duties of 1. Adjudicate disputed claims against closed banks
liquidation 2. Assist in the enforcement of individual liabilities of stockholders, directors and
court officers
3. Decide on all other issues as may be material to implement the distribution plan

Note: Banks closed by the MB shall no longer be rehabilitated. Therefore, banks after
being placed under liquidation are no longer permitted to resume banking business.

Legal effects 1. Banks hall continue as a body corporate only for liquidation purposes and
when bank is closing its affairs
under 2. Directors, officers and stockholders will have their powers terminated upon
liquidation closure. Thus, they are barred from interfering with bank assets, records and
affairs.
3. All assets of the closed bank shall be in custodial egis in the hands of the
receiver after the bank is served of notice of closure. These assets cannot be
subjected to attachment, garnishment, execution, levy or any other court
processes.
4. Employer-employee relationship between the bank and its employees shall be
terminated after the notice of closure.
5. Bank’s liability to pay interest on deposits and other obligations after closure
shall cease.
6. Closed bank shall not be liable for payment of penalties and surcharge for late
payment and nonpayment of taxes.
7. Actions pending for or against the closed bank in any court or quasi-judicial
body shall be suspended for period not exceeding 180 days and referred to
mandatory mediation, upon motion of the receiver.
8. Execution and enforcement of a final decision against a closed bank shall be
stayed.
9. Docket and other court fees relating to all cases or actions by receiver with any
judicial or quasi-judicial bodies shall be deferred until the action is terminated
with finality.
10. All assets, records and documents in possession of all closed banks at the time
of the closure are presumed held by the bank in the concept of an owner.
11. Receiver’s exercise of authority shall be presumed performed in the regular
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 course of business.
12. Assets and documents of the closed bank shall retain their private nature even
if administered by the receiver.

Notes:
1. Any preliminary attachment or garnishment existing at the time of the closure
shall not give any preference to the attaching of the garnished party. Upon the
motion of the receiver, preliminary attachment or garnishment shall be lifted
and/or discharged.
2. Upon termination of the mediation, the case shall be referred back tot eh court
or quasi-judicial court for further proceeding.
3. Liquidation does not require prior tax clearance. Omission does not compel the
court to apply the analogy of a tax clearance requirement of SEC because
dissolution of a corporation by SEC is totally different from receiver and
liquidation of a bank by BSP.

Steps The following steps shall be observed when a bank is placed under conventional
undertaken liquidation:
in a 1. Asset Management and Conversion
conventional 2. Petition for Assistance in the Liquidation of a Closed Bank
liquidation 3. Winding up

Guidelines in 1. Assets gathered shall be verified (as to existence, ownership and other factors to
management determine their realizable value).
and/or 2. Conversion of assets of the closed bank shall be carried out in a fair and
conversion of transparent manner.
assets by the 3. LRA, RD, assessor’s office and other appropriate office of LGU shall not allow any
receiver transaction affecting the assets of the closed bank without consent of the
receiver.
4. Any person in custody or possession of assets or records of the closed bank shall
immediately turn these over to the receiver.
5. Persons or entities in custody or possession of assets shall not allow, authorized
or cause the withdrawal, transfer or other transaction involving or relating to the
subject asset, unless otherwise directed by the receiver.

Powers and In the management and/or conversion of assets of the closed bank, the receiver shall have
duties of the authority to:
receiver in 1. Represent the bank before LRD, RD, LTO, Assessor’s Office or other appropriate
management office of LGU or such other similar government agencies or private entities in:
and/or a. Verifying the authenticity of ownership documents
conversion of b. Registering on a specific property
assets of c. Consolidating ownership over an asset
closed bank d. Securing certified true copies of documents held by agencies in
relation to an asset
e. Securing appropriate certification from the agencies’ entities in
relation to an asset of the closed bank
f. Performing other related activities
2. Conduct an ocular inspection of properties owned by, or mortgaged to the
closed bank.
3. Determine the disposal price of assets.
4. Dispose real or personal properties of closed bank through bidding, negotiated

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 sale or any other mode including lease with option to purchase.
5. Engage third parties to assist in liquidation, management and disposal of
assets, handle cases filed against or by the closed bank, subject to guidelines as
determined by the receiver.

Petition for Nature It is a special proceeding and includes declaration of

assistance concomitant rights of its creditors and order of payment of their
valid claims in the disposition of assets.
Petition shall be considered in rem.
Acquiring Through publication of order setting the case for hearing in any
jurisdiction over newspaper of general circulation in the Philippines.
persons
Where shall petition RTC which has jurisdiction over principal office of closed bank or
be filed principal officer of receiver, at the option of the latter.
Steps undertaken in 1. File an e parte petition within reasonable period
petition for from receipt of MB resolution placing the bank
assistance under liquidation.
2. Persons or entities with claims against the closed
bank’s assets shall file their claims with the receiver
within 60 days from date of publication of notice of
closure.
a. Claims filed outside the prescribed period
shall be disallowed.
3. Once the order approving the final asset distribution
plan is finalized, the petition for assistance shall be
considered closed and terminated. Its receiver,
officers, employees or agents, are forever discharged
from any and all claims and/or liabilities arising from
or in connection with the liquidation.
a. In case the validity of the claim has not
yet been determined with finality at the
time the final asset distribution plan is
submitted, claims shall be considered as
contingent claims and shall not be paid
under the proposed plan.
4. Receiver shall submit a final report on the
implementation of approved final asset distribution
plan to the MB and SEC after expiration of winding
up period.

Powers of Powers and duties of Conservator shall have the following powers and duties:
Receiver during receiver 1. Represent on behalf of the closed bank
Conventional 2. Take care of all assets, records of the closed bank and administer
Liquidation it for the benefit of its creditors
3. Convert assets of closed bank to liquid assets
4. Bring suits to enforce liabilities or to collect and preserve all
assets
5. Appoint persons of recognized competence to perform powers of
the receiver, or persons of recognized competence in forensic and

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Scope of powers of receiver
Available defenses in case of
an action or demand against
officers and agents of
receiver
Modes of liquidation the
receiver is authorized to
adopt without consent of
stockholders, BOD, creditors
or depositors
Remedy of persons or
entitles after denial of
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frauud investigations.
6. Pay accrued utilities, rentals and salaries of personnel for a period
not exceed 3 months
7. Modify, compromise or restructure loans or claims
8. Retain private counsel
9. Obtain loan encumbering any asset or redeem foreclosed assets
10. Reduce interest rate if stipulated interest rate is usually high
11. Utilize available funds to pay for preservation of assets and
liquidation
12. Change reasonable fees for liquidation
13. Distribute available to creditors
a. Collaterals securing the loans granted by BSP shall not
be included in the assets for distribution.
14. Dispose records no longer needed in liquidation.
15. Cancel, repudiate contracts not necessary to liquidation or are
grossly advantageous for the bank
16. Assign bank assets as collaterals to the extent of outstanding
obligations
17. Use reasonable resources for actual possession and custody of
bank assets and take charge of affairs upon service of notice of
closure
18. Facilitate and implement purchase of assets and assumption of its
liabilities by another insured bank without need for approval of
liquidation court.
a. Such action of receiver to determine whether a bank
may be the subject of a purchase of assets and
assumption of liabilities shall be final and executory
and may not be aside by any court.
19. Invest funds from conversion of assets in government securities,
other than government-guaranteed marketable securities or
investment-grade instruments.
20. Keep all pertinent records of closed bank for 6 months from date
of publication of approval of asset distribution.
All authorities to facilitate the liquidation of a closed bank for benefit of all
its creditors.
Officers and agents of receiver shall have no liability and shall not be subject
to any action, claim or demand in connection with any act done or omitted
to be them in GF in connection with powers and functions.
1. Conventional liquidation
2. Purchase of assets and assumption of liabilities
a. Receiver is authorized to facilitate the purchase of
assets of closed bank.
b. Assumption of its liabilities by another insured bank
and such action to determine whether the bank may
be subject to purchase of assets and assumption of
liabilities shall be final and executory. It may be not set
aside by court.
Claims denied by the receiver shall be filed with liquidation court within 60
days from receipt of final notice of denial of claim.
9

Closure after
Liquidation
Legal Tender Power 
 Definition
Maximum amount of coins to be
considered legal tender
What currency should monetary
obligations be paid?
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receiver of claims against
closed bank
Period within which the 6 months from publication of notice of approval of court and final asset
creditors and individual distribution of closed bank.
stockholders are allowed to
claim payments Note: during 6-month period, receiver shall hold as trustee the assets
allocated in the final asset distribution plan. Failure to comply with
documentary requirements shall be deemed as wavier of his right to
payment.
Legal effect on assets These shall be turned over to Bureau of Treasury.
remained unclaimed after 6-
month period
When shall closure of the Service of notice of closure
bank deemed effective
How is notice of closure It shall be served to highest ranking officer present in the bank premises.
served If there is no one present, posting the notice in the bank premises or on its
main entrance.
Guidelines to facilitate 1. Receiver is authorized to use reasonable force open the premises
takeover activities after of the bank and to use necessary acts to have actual possession
notice of closure and custody of the bank and its assets upon service of notice of
closure.
2. Directors and employees of closed bank shall immediately
account for information relative to assets, records and affairs in
their possession, custody, administration or management.
3. LGU and local enforcement agencies shall provide assistance to
the receiver upon request.
Effects of bank closure 1. It does not diminish the authority and powers of the designated
liquidator to carry on the administration of the bank.
2. The bank liquidator can still continue receiving collectibles and
receivables or to pay the creditor’s claims and other transactions
pertaining to the normal operations of the bank.
3. The bank is allowed to collect interest on its loans while under
liquidation, as long as interests are legal.
It is the power to issue notes and coins that are fully guaranteed by the Republic.
These shall be legal tender in the Philippines for all debts, both public and private.
All forms of currency issued by BSP must be accepted when offered as payments of debts, public or private.
1-Peso, 5-Peso, 10-Peso coins are considered legal tender if not exceeding 1,000.
25 centavo or less are considered legal tender if not exceed 100.
Payments of monetary obligations shall be discharged in legal tender in the Philippines.
But since RA 529 does not provide for rate of exchange for payment of foreign currency obligations after its
enactment, rate of exchange for conversion in the peso equivalent should be the prevailing rate at the time of
payment.
10
 Foreign Exchange Who determines exchange rate
Operations 
 policy
Steps taken when international
stability of peso is threatened
MB
When 1. International reserve of BSP fails to a level which MB considers inadequate to
applicable meet prospective net demands on the BSP for foreign currencies
2. International reserve appears to be in imminent danger of falling to such level
3. International reserve is failing as a result of payments of remittances abroad which
are contrary to national welfare
Actions of MB 1. Take remedial measures
2. Submit to President and to Congress a detained report, which includes the
description and analysis of:
a. Nature and causes of existing or imminent decline
b. Remedial measures already taken or to be taken by MB
c. Monetary, fiscal or administrative measures further proposed
d. Character and extent of corporation required from other government
agencies for succession execution of policies

What should MD do if threat to the
international stability of Philippine
peso is continuous and chronic
Composition of international
reserves
Purpose of maintaining
International Reserves by BSP
Guiding principle of MB in judging
the adequacy of international
reserves
MB shall propose to President additional action necessary to restore equilibrium in international balance of
payments of Philippines, if:
1. Resultant actions fail to check the deterioration of reserve position of BSP
2. Deterioration cannot be checked except by chronic restrictions on exchange and trade transactions or by
sacrifice of domestic objectives of balanced and sustainable growth of economy
It may include but is not limited:
1. Gold
2. Assets in foreign currencies in the form of documents and instruments customarily employed for
international transfer of funds; demands and time deposits in central banks, treasuries and commercial
banks abroad, foreign government securities and foreign notes and coins.
To meet the foreseeable net demands on BSP for foreign currencies, in order to maintain the international stability
and convertibility of the Philippine peso.
MB shall be guided by:
1. Prospective receipts and payments of foreign exchange
2. Volume and maturity of BSP’s own liabilities in foreign currencies, to the volume and maturity of foreign
exchange assets and liabilities of other banks operating in the Philippines.
3. Insofar as they are known or can be estimated, the volume and maturity of foreign exchange assets and
liabilities of other persons and entitles in the Philippines.

Law on Purpose 
 1. To encourage people to deposit in banking institutions

Secrecy of 2. To discourage private hoarding so that banks may lend such funds and assist in the economic development of the country
Bank
Deposits (RA Prohibited Acts 
 1. Examination and inquiry, or looking into all deposits of whatever nature with banks in the Philippines including investments in bonds issued by the
1405, as Government, its political subdivisions and its instrumentalities
amended) 2. Disclosure by any official or employee of any banking institution to any unauthorized person of any information concerning these deposits.

Deposits Covered 
 General Rule 1. RA 1405 only covers peso deposits (of whatever nature) with banking institutions in the Philippines.
2. It includes investments in bonds issued by the Government.
3. Foreign deposits are not covered because these are regulated by the Foreign Currency Deposit Act (RA 6425).

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 Exceptions Upon written permission of Notarization There is no need to notarize it.
the depositor Co-depositor gives When a co-payee in a check deposited in a bank is a co-depositor,
permission he does not need the written consent of the other co-payee.
Waiver of confidentiality If the creditors of an insolvent corporation signs a waiver of
of bank accounts in the confidentiality of the insolvent corporation’s accounts, the waiver
compromise agreement is not valid against the corporation.

Existence of waiver must be positively demonstrated because a

waiver by implication is not tolerated. Waiver must not made
knowingly, intelligently and with sufficient awareness of relevant
circumstances and consequences. The corporation or its
representatives did not give any written consent. Thus, it is not
bond.

Upon court order of Money When you say “subject matter of litigation”, inquiry into bank deposits must
competent court in cases: deposited or be premised on the fact that the money deposited in the account is itself the
1. Where money invested is the subject of the action.
deposited or subject matter
invested is the of litigation A criminal information was filed YES. Testimonial and documentary
subject matter of with court charging the accused evidence relative to respondent’s
litigation with Qualified Theft. Security Bank account will prove
2. Bribery or nothing else except:
dereliction of On the premise that the accused 1. Existence of this account,
duty or public had deposited the stolen mount 2. its nature
officials to her personal banking account, 3. Amount kept in it.
the prosecutor moved for
subpoena against the manager This constitutes as an attempt by the
or records of the bank. Is there a prosecution to inquire into a bank
violation on RA 1405? deposit protected by law.
Sun life filed a motion for NO. These are compatible. Sec 2 RA
examination of bank accounts 1405 provides “in cases where money
with BPI, which the court deposited is the subject matter of
granted. litigation”.

The accused agrued that the
order of examination is invalid
because he was not given an
notice of these examinations
under Sec 10, Rule 57. Is Sec 10,
Rule 57 incompatible with RA
1405?
It is clear from Sec 10 Rule 57 that
notice is only given to the garnishee.
The provision does not require that
the notice be furnished to the
defendant himself, except when
there is a need to examine him for
purposes of giving information
respective his property.

Bribery or Is a trust account Bank deposits Trust accounts

dereliction of subjected to Relationship is Relationship is trustor-
duty or public litigation covered debtor-creditor trustee
officials by RA 1405 since

VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 12
 it states that it SC Held that Trust accounts are protected by RA
covers “peso 1405.
deposits” only? 1. Sec 2, RA 1405 states “all deposits of
whatever nature… where money
deposited or invested is the subject
matter of litigation”
2. The term “deposits” is general. It is not
limited to accounts which give rise to
creditor-debtor relationship.
3. If the money deposited under an account
may be used by banks for authorized loan
to third persons, this account falls under
the protected category of accounts
regardless of whether there is a creditor-
debtor relationship of not.
4. “Whatever nature” proscribes any
restrictive interpretation of deposits.
Thus, the law applies not only to money
deposited but also to those invested.
Since bribery is SC held that since elements of Bribery and Plunder
one of the are related, and under Rule of Equivalence or
exceptions, is relation, Plunder can be considered of the
Plunder covered exceptions, in line with Bribery.
as one of the (Ejercito vs. Sandiganbayan).
exceptions of the
Law on Secrecy of
Bank Deposits?
In cases of impeachment

Exceptions Anti-Graft and Corrupt Requisites before the 1. There is a pending case before a court of competent
provided by Practices Act Ombudsman can jurisdiction.
other laws examine bank accounts 2. Account must be clearly identified
in case of violation of a. Inspection must be limited only to the subject
Anti-Graft and Corrupt matter of the pending case.
Practices Act b. It must be limited to the account identified.
3. Bank personnel and account holder must be informed
that there will be an examination.

Note: If there is no pending case yet, only an investigation,

examination of bank account is premature
Purpose Upon order of competent court or tribunal in cases involving
unexplained wealth.

NIRC CIR may inquire bank deposits of:

1. Decedent in determining his gross income.
2. Any taxpayer who filed an application for compromise of his tax liability under Sec 204
(A2) by reason of financial incapacity to pay his tax liability. He must file a written waiver.

VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 13
 AMLA Inquiry by AMLC 1. If there is probable cause that deposits or investments with any
by order of any banking or non-bank financial institution are related to an
competent court unlawful activity or a money laundering offense.
in cases of 2. These are covered or suspicious transactions.
violation of AMLA a. “Covered transactions”: transactions involving total
amount in excess of 500,000 within 1 banking day.
b. “Suspicious transactions”: transactions, regardless
of amount where”
i. There is no legal or trade obligation,
purpose or economic justification.
ii. Client is not properly identified.
iii. Amount is not commensurate to business
or financial capacity of client.
iv. It may be perceived that client’s
transaction is structured to avoid being
the subject of reporting requirements
under the Act.
v. Any circumstance observed to deviate
from the client’s profile and/or past
transactions with the covered institution.
vi. Transaction is related to an unlawful
activity or money laundering offense that
is about to be, is being or has been
committed.
vii. Any transaction that is similar, analogous
or identical to any of the foregoing.

A court order is 1. Kidnapping for ransom under Art 267 RPC

not necessary 2. Hijacking and other violations under RA 6235
when offense or 3. Destructive arson and murder, including those perpetrated by
unlawful activity terrorists against non-combatant persons and similar targets
involved is any of 4. Violations of DDA
the following:
Money laundering It is a crime whereby proceeds of an unlawful activity are transacted, to
make them appear as if they originated from a legitimate source:
1. If the person knows that the instrument or property represents,
involves or relates to the proceeds of an unlawful activity, and
he still transacts it.
2. If the person knows that it involves proceeds of an unlawful
activity, performs or fails to perform any act as a result of which
he facilitates the offense.
3. If the person knows that instrument or property is required to
be disclosed and filed with AMLC but fails to do so.

Disclosure of Treasurer of Philippines of dormant deposits for at 10 years under Unclaimed Balances Act
Directors, officers, stockholders and related interest (DOSRI) who contract loan or any form of financial accommodation with their
bank or related bank are required to execute a written waiver.
PDIC and BSP may inquire into bank deposits when there is a finding of unsafe or unsound banking practices.
CA, designated as a special 1. Person is charged with or is suspected to commit terrorism, or conspiracy to commit it.
court, may issue an order in 2. It involves a judicially declared and outlawed terrorist organization, association or group
VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 14
 relation to Anti-Terrorism of persons.
case. 3. It is a member of such organization.
COA may examine and audit government deposits pertaining to government, its agencies, GOCCS in their original charters.
PCGG to recover ill-gotten In cases involving unexplained wealth, it is not limited only to the name of the public official
wealth accrued by President concerned. It also extends to family members.
Marcos, his immediate
family relatives,
subordinates and associates.

Garnishment of Rule on garnishment GR: Bank accounts may be garnished by creditors of depositor.
Deposits, including of local deposits There is no violation of Law on Secrecy of Bank if accounts are garnished. Amount of deposit is not actually disclosed and intent of
Foreign Deposits legislature does not cover garnishment.
EXCEPTIONS:
1. Foreign currency deposits
2. Those exempted under Civil Procedure (like provision for family for 4 months)

Can a creditor YES. A creditor can garnish bank deposits without violating the Law on Secrecy of Bank Deposits.
garnish bank
deposits of the Prohibition against examination or inquiry into a bank deposit does not prejudice its being garnished to
debtor without insure satisfaction of judgment.
violation RA 1405?
There is no real inquiry in this case. In case the deposit is disclosed, this disclosure is only incidental to
the execution process.

Rule on garnishment Rule on garnishment Foreign currency deposits shall be exempted from garnishment, attachment, or any other order
of foreign currency or process of any court, legislative body, government agency, or any administrative body.
deposits
Secrecy of Bank Deposits Foreign Currency AMLA
Act
Exceptions 1. Written Only one exception 1. Written
permission of under Foreign permission
depositor Currency Act: of
2. Court order depositor
3. Impeachment There is written 2. Anti-
consent of Money
depositor. Laundering

RA 6246 on Foreign
Currency Deposits in
relation to RA 1405 on
Secrecy of Bank Deposits
Law
Will filing of NO. When account subject of the complaint is in foreign currency,
complaint for filing for violation of RA 1405 will not suspend the period for filing
violation of RA 1405 the complaint for violation of RA 6426.
suspend the
prescriptive period RA 1405 covers deposits under Philippine currency.
of filing RA 6426 RA 6426 governs deposits over foreign currency.

Can a foreign currency YES. In the case of Salvacion vs. CBP, SC did not apply toe GR on non-garnishment of foreign

VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 15
 deposit of transient
foreigner who illegally
detained and raped a
minor Filipino be
garnished to satisfy
damages?
Can the owner of US
Dollar Checks unlawfully
taken and deposited with
another bank inquire into
the said deposits
currency deposits because the case was peculiar. Application of the Rule should not be used to
prevent justice.
Art 10 Civil Coed provides that in case of doubt in interpretation of application of laws, it is
presumed that the lawmaking body intended right and justice to prevail.
YES. In China Banking vs. CA, SC allowed the owner of US Dollar Checks unlawfully taken to inquire
into the deposits. Since he is the named co-payee of the US Dollar Checks in Citibank which were
deposited in China Bank by another co-payee, he is likewise a depositor.
As owner of funds unlawfully taken and which are now deposited, creditor has the right to inquire
about the deposits.

Note: All things considered and in view of distinctive circumstances in the above mentioned cases, SC was constrained to render
a limited pro hac vice ruling.

When can foreign Although absolutely confidential in nature, they can be inquired whenever judicial, administrative or legislative, or any other
currency deposit be entity whether public or private acquires written permission from the depositor.
inquired into?

General Definition and Definition of banks These are entities engaged in the lending of funds obtained in the form of deposits from the public.
Banking Law Classification of Banks
of 2000 (RA 
 Notes on Banks:
8791) 1. Conditions for organization of banks:
a. It must be a stock corporation.
b. Funds obtained “from the public” shall mean funds obtained from 20 or more persons. Corporation Code
prevents banking corporations to be registered as close corporations.
c. Minimum capital requirements prescribed by MB must be satisfied.
d. There must first be a prior Certificate of Authority from BSP before SEC registers the by-laws of any bank.
2. Consequences of banking business:
a. MB may prescribe rules and regulations on types of stock a bank may issue.
i. Bank shall issue par value stocks only.
b. Banks must be an open corporation because it is vital to industry.
c. Banks must observe highest degree of diligence
d. The word “bank” cannot be used if the entity is not engaged in the banking business.
e. If strikes and lockouts are unsettled after 7 calendar days, BSP shall report this to Secretary of DOLE who may
assume jurisdiction over the dispute or certify it to NLRC for compulsory arbitration. The President may also
intervene over it.
3. An investment company that performs functions as an investment company is not a bank. It is engaged solely in
investing, reinvesting or trading securities. However, an investment company which loans out the money of its
customers, collects interests and charges commission to both lender and borrower is engaged in banking.
4. Entity authorized by BSP to perform universal or commercial functions shall have the authority to engage in quasi-
banking functions.

Classification of Cooperative Those organized by majority of shares owned by controlled by cooperatives to provide financial and credit
banks banks services to cooperatives.
It shall include cooperative rural banks.
These banks are governed by Cooperative Code.

VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 16
 Universal banks Those which has the authority to exercise:
1. Powers authorized for a commercial bank
2. Powers of an investment house
3. Power to invest in non-allied enterprises
These banks are primarily governed by General Banking Act.

Thrift banks These include:

1. Savings and mortgage banks
2. Stock savings and loan associations
3. Private development banks
These banks are governed by Thrift Banks Act.

Rural banks Those mandated to make needed credit available and readily accessible in rural areas on reasonable
terms.
These are governed by Rural Banks Act.

Islamic banks Those whose business dealings and activities are subject to basic principles and rulings of Islamic Sharia.

Commercial Banks that have:

banks 1. General powers incidental to corporations
2. Necessary powers to carry on business of commercial bank
3. Lower capitalization compared to universal banks
4. They have the power to accept draft, issue LOC, negotiation of negotiable instruments and
evidence of debt, accept and demand deposits and the like.
They cannot exercise powers of investment house nor invest in non-allied enterprises.

Others These are banks determined by MB:

1. Philippine Veterans Bank
2. Land Bank
3. Development Bank of the Philippines

Distinction of Banks Quasi-bank An entity engaged in borrowing funds through issuance, endorsement or assignment with course or acceptance of deposit
from Quasi-Banks and substitutes for relending or purchasing receivables and other obligations.
Trust Entities 

Banks vs. quasi- Banks Quasi-banks
banks They deal with deposits They deal with deposit substitute.

Deposit substitutes These are alternative form of obtaining funds from the public, other than deposits, through issuance, endorsement or acceptance
of debt instruments for the borrower’s own account, for the purpose of relending or purchasing receivables and other
obligations.
These instruments may include, but are not limited to, banking acceptances, PN, participations, certificates of assignment nd similar
instruments with recourse, and repurchase agreements.

Banks vs. trust Banks Trust entities

entities They must exercise the highest Ordinary diligence (diligence that a prudent man would exercise in the conduct of enterprise
degree of diligence. of like character with similar aims in administration of funds or property under its custody).

VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 17
 Bank Powers and Corporate powers 1. Sue and be sued in its corporate charter
Liabilities 2. Succeed by its corporate name for a period stated in AOI and Certificate of Incorporation
3. Adopt and use corporate seal
4. Amend AOI
5. Adopt by-laws
6. In case of stock corporations, issue or sell stocks to subscribers and to issue treasury stocks
7. In case of non-stock, admit members
8. Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property.
a. This includes bonds of other corporations.
b. This is for lawful business of the corporation.
9. Establish pension, retirement and other plans for its directors, trustees, officers and employees
10. Enter into merger or consolidation
11. Make reasonable donations, except donations for any public party or candidate for partisan political activity
12. Exercise essential or necessary powers as stated in AOI

Banking and Principal 1. Power to accept deposits

incidental powers 2. Power to lend funds obtained in the form of deposits from the public
Incidental 1. Make collections and payments for others and for other services not incompatible with banking
business.
2. Receive in custody funds, documents and valuable objections
3. Rent out safety deposit boxes
4. Act out as financial agent and buy and sell shares, evidences of indebtedness and all types of
securities for the customer
5. Upon prior approval of MB, act as managing agent, adviser, consultant or administrator of
investment management or consultancy accounts.
Prohibited 1. Banks are prohibited from engaging in insurance business.
functions 2. They are generally prohibited from outsourcing functions.
a. EX: Bank cannot hire another company to accept deposits

Diligence Required of Diligence required Rule on treatment Highest degree of diligence.

Banks 
 of accounts and
selection of
employees
VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut
: This is not expected if it involves commercial transactions and not bank fiduciary relationship with its
depositors
Notes on Treatment of Accounts:
1. Highest degree of diligence Is required in:
a. Treatment of accounts
b. Selection and supervision of employees
2. Fiduciary relationship means that the “bank’s obligation is to observe high standards of
integrity and performance” is deemed written into every deposit agreement.
3. Illustrations:
a. The bank was held negligent when it allowed pre-termination of account deposit
despite discrepancies in signature and photograph of person claiming to be the
depositor. If the waiver document is not notarized, it is contrary to standard
procedure of the bank.
b. A bank was remiss in diligence required if the client has not been properly notified
of the delinquencies of the loan and the process of terminating his credit. Had the
18
 required diligence been observed, dishonor of the check would have been avoided.

Rule on handling While an innocent mortgagee is not expected to conduct an exhausted investigation of the mortgagor’s
real estate title, banks must exercise due diligence and cannot reply upon what is annotated in it.
mortgage 1. Rule that persons dealing with registered banks can rely solely on certificate of title does not
apply to banks.
2. Before approving a loan, banks and other financial institutions must conduct an ocular
inspection of property and verify the genuineness of title to determine the real owners. Failure
to do so makes them mortgagees in BF.
3. This requires the bank to further check the actual occupants of the subject property and verify
their status.

Rule on savings Banks must ensure that they return the passbook only to the depositor or his authorized
accounts and representatives.
return of 1. Following presumptions on savings account:
passbooks a. Any person in possession of the passbook is its owner.
b. Bank fails to observe degree of diligence when it:
i. Gives the passbook to the wrong person, thus facilitating unauthorized
withdrawals.
ii. Fails to return the passbook to authorized representatives.
2. Bank’s liability may be mitigated if the depositor made contributory negligence in allowing a
withdrawal slip signed by its signatories to fall into the hands of an impostor.

Rule on regulation A bank has the right to exclude certain individuals from its premises or to limit their access as to protect
of access to not only its premises and records but also its personnel and clients while in it.
premises Banks may impose conditions or limitations even if there is no imminent or actual unlawful aggression or
an invasion of its premises or usurpation, provided these limitations are not contrary to law.

Rationale Banking business is affected with public interest.

Bank is under obligation to treat accounts of its depositors with meticulous care.
A blunder on part of the bank, such as dishonor of check without good reason can cause the depositor embarrassment. financial
loss, civil and criminal litigation.

Nature of Bank Funds Relationship There is a debtor-creditor relationship.

and Bank Deposits 
 between depositor The bank is the debtor and the depositor is the creditor.
and bank with The depositor lends the bank money and bank agrees to pay the depositor on demand.
respect to money
deposited
Nature of bank Simple loans, because they earn interest.
funds and deposits 1. Deposits are covered by Law on Loans.
2. Bank deposits are in the nature of irregular deposits.
3. The savings deposit agreement between the bank and the depositor is the contract that determines the rights and
obligations of parties.
a. Failure of the bank to honor the time deposit is a failure to pay its obligation as debtor and not a breach of
trust for failure to return the subject matter.
4. Mandamus is not an available remedy because the relationship is contractual and mandamus does not lie to enforce
performance of contractual obligations.

VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 19
 Consequences of There is a passing of ownership to the bank. The bank is not a trustee but rather the owner of funds passed to it. It is a creit
bank deposits as transaction.
simple loans 1. Bank can use the money as its own. It is not held for safe-keeping.
a. Bank can appropriate the deposits without consent of the depositor.
2. Bank officers cannot be held for Estafa if they authorized the use of money deposited.
a. There would be no Estata even if the bank fails to return the amount.
3. Third persons who may have a right to the money deposited cannot hold the bank responsible, unless there is c court
order or a garnishment.
a. The duty of the bank is to its creditor-depositor and not to third persons. Hence, the third person must prove
his valid right over the deposited account to a court of competent jurisdiction.
4. Banks can set off deposits with indebtedness. Legal compensation can take place because they are mutual creditor-
debtor of each other.
5. Prior to incorporation, depositors can be named corporate treasurer. He will hold it in trust for the corporation.

Stipulation on Interests Can banks stipulate interest

 on bank deposits
In what cases can interests
on bank deposits be struck
down
YES. Banks must stipulate the interest in writing. Otherwise, no interest shall be due.
If the interest is iniquitous or unconscionable, stipulated interests can be declared void.
Note: it should be emphasized that only the rate of interest is void. Stipulation itself requiring the party to pay interest
on his loan is still valid and binding. Legal rate of interest is 6% per annum.

Can a bank unilaterally
increase interest rate on a
loan?
NO. This will be violative on the Principle of Mutuality of Contracts under Art 1308 CC, which provides that the contract
must bind both contracting parties. Its validity or compliance cannot be left to the will of one of them.
Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result,
this partaking the nature of a contract of adhesion is void.
If the stipulation regarding validity or compliance of contract is left solely to the will of one of the parties, it is invalid.

Is stipulated interest based YES, because it did not signify unilateral and automatic increase in the interest.
on prevailing market rate It simply means that bank may adjust the interest according to the prevailing market rate. This may result to either an
allowed? increase or decrease in the market.

Is 24% per annum interest NO. Unconscionable rates are those which will either enslave their borrowers or lead to a hemorrhaging of their assets.
unconscionable? 24% per annum is not unconscionable because there is jurisprudence rendering it as valid.
Considering that the mortgage was freely entered into by both parties, this is considered the law between them.

Grant of Loans and Loan function A bank shall grant loans and other credit accommodations only in amounts and for periods of time essential for completion of
Security Requirements operations to be financed. As long as person can provide collateral or security for the loan, loan should be allowed.
The bank gets its income from the loan’s interest.

Basic rules on Loan 1. Bank shall grant loans and other credit accommodations only in amounts and for periods of time essential for effective
Functions completion of operations to be financed.
2. This grant shall be consistent with safe and sound banking practices.
3. Before granting a loan, bank must determine whether the debtor is capable of fulfilling his commitments to the bank.
4. Payments:
a. Amortization schedule of loans shall be adapted to the nature of operations to be financed.
b. There must be periodic amortization payments, at least annually, for loans with maturities of more than 5
years.
VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 20
 c. A borrower may prepay the unpaid balance of loan and credit accommodation at any time before agreed
maturity date.
5. Single borrower’s limit.

If a loan is written off by
a bank, would it amount
to Condonation?
NO. These debts are considered bad debts.
1. Writing off is an accounting act of setting aside bad debts in order for the lender to
have a realistic realization of its net worth.
a. Since loans are receivables or part of assets of the creditor, written these off
shall be considered as bad debt for tax purposes. It will not extinguish the sale
and it will not be equivalent to Condonation.
b. If the loan and written off and paid later on, it will be written bank. Thus, it
does not preclude enforcement of pay-off but more of an accounting strategy.

2. Writing off a loan does not release the debt. It is not one of the legal grounds for
extinguishing an obligation under the Civil Code.
a. It is not a compromise of liability because there is no donation on the part of
the obligee and acceptance of obligor.
b. In this case, the creditor only removes the uncollectible account from its
books without approval or participation of the debtor.

Ratio of Net Worth Rules governing ration between net worth and total assets with respect to banks:
to Total Risk Assets 1. MB shall prescribe the minimum ratio which the net worth of the bank must bear to its total risk assets which may

 include contingent accounts.
2. MB may alter or suspend compliance whenever necessary for a maximum period of 1 year as long as ratio shall be
applied uniformly to banks of the same category.
3. If case the prescribed minimum ratio is not complied with:
a. Distribution of net profits may be limited or prohibited
b. MB may require that net profits be used to increase the capital accounts of the bank until the minimum
requirement has been met
c. Acquisition of major assets and making of new investments may be restricted or prohibited
i. : Purchases of readily marketable evidence of indebtedness or obligations, servicing and
repayment of which are guaranteed by Government until minimum required capital ration has
been restored.
4. In case of a bank merger or consolidation, or when a bank is rehabilitation, MB may temporarily relieve from compliance.

Single Borrower’s Definition A bank may extend total amount of loans, credit, accommodations and guarantees in favor of any person,
Limit partnership, association, corporation or other entity. However, it shall at no time exceed 25% of net
worth of such bank.
Basis for determining compliance is the total credit commitment of the bank to the borrower.

Additional Total amount of loans, credit, accommodations and guarantees which may be extended may be increased
extension by an additional of 10% (totaling to 35% of the bank’s net worth), provided additional liabilities of any
borrower are adequately secured.

Basis for Total credit commitment of the bank to the borrower.

determining 1. Total credit commitment shall include:
compliance a. Outstanding loans
b. Other credit accommodations
c. Deferred LOC
VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 21
 2. Margin deposits and guarantees are not included.
3. Those excluded from the coverage of SBL:
a. Loans guaranteed by BSP, government, US treasury and other central banks of foreign
countries with high credit qualify.
b. Loans withheld out on or security on deposit.
c. Other loans excluded by MB.

Guidelines Except as specifically provided, total credit commitment rely on credit risk-weighted basis consistent with
existing regulation.
EXCEPTIONS:
1. MB may otherwise prescribe for reason of national interest.
2. Deposits of rural banks with GOCC financial institutions like Land Bank, DBP and PNB

Restrictions on Bank Nature of Nature Restrictions are imposed on borrowings and security arrangements by DOSRI of the
Exposure to DOSRI DOSRI bank. This does not involve total prohibition.
(Directors, Officers, DOSRI transactions per se are not illegal. They are only subject to restrictions to prevent
Stockholders and abuse by DOSRI.
their Related
Interests) 
 Coverage This covers loans made by the bank’s director either:
1. Directly
2. Indirectly
3. For himself
4. As representative or agent of others

Restrictions Restriction on GR: DOSRI of any bank shall not directly or indirectly borrow from his bank. He
under DOSRI borrowing DOSRI shall not be a guarantor, indorser or surety for loans or in any manner be an
from their bank obligor or incur any contractual liability to the bank.
: There is a written approval by majority of directors, excluding the director
concerned.
: Written approval shall not be required for loans, credit accommodations
and advances granted to officers under a fringe benefit approved by BSP.

Procedural All directors of the lending bank, excluding the DOSRI concerned, should give
requirement their written approval before the borrowing and security arrangement is
approved.
Arms Length Rule Dealings of a bank with any of its DOSRI shall not be less favorable to the bank
than those offered to others.
Ceilings Aggregate ceilings Individual ceilings
1. MB may regulate amount extended to Outstanding loans, credit
the DOSRI, as well as investments of accommodations and
such bank owned or controlled by guarantees extended to
DOSRI DOSRI shall be only be up
2. Manual of Regulations of Banks to their unencumbered
provides that aggregate amount is deposits and back value
15% of total loan portfolio of bank or of their paid-in capital
100% of combined capital accounts, contribution in the bank.
whichever is lower.

VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 22
 EXCEPTIONS (Ceilings do not apply):
1. Those loans, credit accommodations and guarantees that are
secured by assets as non0risk items.
2. Under a fringe benefit approved by BSP
3. Extended by cooperative banks to its cooperative stockholders

Reportorial Resolution approving the loans hall be entered in records of the bank.
requirement A copy shall be sent to Superior Examination Sector of BSP.

Secrecy of Bank 1. The lending bank shall require the DOSRI to waive secrecy of his
deposits deposits in all banks in the Philippines.
2. Although there is a waiver, any information obtained from
examination of his deposits shall be strictly confidential and may be
used only in connection with supervisory and examination
responsibility of BSP in an appropriate legal action involving the
deposit account.

Notes:
1. DOSRI imposes 3 restrictions:
a. Approval requirement from the bank’s BOD
b. Reportorial requirements upon the records of the corporation
c. Ceiling requirement
2. Failure to observe the 3 requirements constitutes constitution of 3 separate and different
offenses.

Rules governing Requisites 1. Borrower must be DOS of a bank. 1. Power

restriction on 2. He contracted a loan or any form of financial accommodation.
borrowing of 3. Loan or financial accommodation is from:
DOSRI from a. His bank
their bank b. A bank which is the subsidiary of a bank holding company of
which both his bank and lending bank are subsidiaries
c. A bank in which a controlling proportion of shares in the
subject bank is owned by the same interest that owns a
controlling proportion of shares of his bank
4. Loan or financial accommodation is in excess of 5% of capital and
surplus of lending bank or in maximum amount permitted by law,
whichever is lower.

Examples 1. If there are interlocking directors between both banks

2. If general partner is either a DOSRI of a lending bank.
3. If a stranger applied for a loan, subjecting a property as collateral:
a. If he alone owns the property, it is not subject to DOSRI.
b. If the property is co-owned by a DISRI, it is subject to DOSRI.
4. If DOSRI owns more than 20% of the borrower-corporation.

Who are covered 1. Directors of lending bank

2. Officers either identified in AOI or generally known as such
3. Stockholders of record
a. This shall also refer to a juridical person such as
VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 23
 corporations, associations or firm
4. His spouse, relative within 1st degree of affinity or consanguinity,
relative by legal adoption, partnership wherein any of the foregoing is
a general partner
5. Co-owner with stockholder’s spouse, or relatives mentioned above of
right or interest mortgaged
a. : When mortgage, pledge or assignment covers only the
co-owners undivided interest

Related interest 1. Spouse, relatives within 1st degree of affinity or consanguinity,

relative by legal adoption of DOS
2. Partnerships of which DOS or his spouse or relatives is a general
partner
3. Co-owner with DOS his souse or relatives of the property or right
mortgaged, pledged or assigned to secure loans or other credit
accommodations
a. : When mortgage, pledge or assignment covers only the
co-owners undivided interest
4. Corporation, association or firm of which DO of bank or his spouse is
also a director or officer:
a. EXCEPTIONS:
i. Where securities are listed and traded in big
board or commercial and industrial board of
domestic stock exchanges, and less than 50% of
voting stock is owned by the person or persons
related to each other within 1st degree of
consanguinity or affinity
ii. DOS sits as representatives of the bank in BOD of
such corporation
iii. Corporation is, at least, 99% owned by non-stock
5. Corporation, association or firm of which any or a group DOs in a
lending bank or their spouses or relatives, own at least 20% of
subscribed capital of such corporation, or of equity of such association
or firm.
6. Corporation, association or firm or majority-owned or controlled by a
related entity or group of related entities in items (#2, #4 and #5)
7. Corporation, association or firm which owns or controls a group of
related interest at least 20% of subscribed capital of a substantial
stockholder of the lending bank or which contracts majority interest of
the bank.
8. Corporation, association or firm in which the lending bank and/or its
parent or subsidiary holds or owns at least 20% of subscribed capital of
such corporation, or in the equity of such association or firm, or has an
existing management contract with lending bank or its
parents/subsidiary

VIP Notes, Bedan Red Book, Additional Notes by Lee Anne Yabut 24