Banking and Allied Laws Reviewer

8/12/2019 Banking and Allied Laws Reviewer

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COMMERCIAL LAW REVIEW 2014Banking Laws based on Catindig Syllabus

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By: Sieramon A. Lacambra

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General Banking Law of 2000(RA 8791)Policy

To promote and maintain a stable and efficient banking and financial system that is globallycompetitive, dynamic and responsive to thedemands of a developing economy. (Sec. 2)

CONCEPT OF INTERMEDIATION

The process performed by banks of taking infunds from a depositor and then lending themout to a borrower. The banking businessthrives on the financial intermediation abilities

of financial institutions that allow them to lendout money at relatively high rates of interestwhile receiving money on deposit at relativelylow rates of interest.(this is not the legaldefinition).

DEMAND DEPOSITS AND DEPOSITSUBSTITUTES

DEMAND DEPOSITS deposits payable on

demand and transferable by check or otherwiseusable in making payments. (Bangko Sentralng Pilipinas)

DEPOSIT SUBSTITUTES instrumentsused as an alternative form of obtaining fundsfrom the public other than deposits, throughthe issuance, endorsement or acceptance ofdebt instruments for the borrowers ownaccount. These represent all types of moneymarket borrowings by banks like promissory

notes, repurchase agreements, commercial papers/securities and certificates ofassignment/participation with recourse.(Bangko Sentral ng Pilipinas)

CLASSIFICATION OF BANKS

Classification of Banks (Sec. 3.2)

1) Universal Banks. (UB) These used to becalled expanded commercial banks and theiroperations are primarily governed by the GBL.They can exercise the powers of an investmenthouse and invest in non-allied enterprises.They have the highest capitalizationrequirement.

2) Commercial Banks. (KB) These areordinary or regular commercial banks, asdistinguished from a universal bank. They

have a lower capitalization requirement than aUB and cannot exercise the powers of aninvestment house and invest in non-alliedenterprises.

3) Thrift Banks. These area. savings and mortgage banks;

b. stock savings and loan associations; andc. private development banks

4) Cooperative Banks.These are banks organized primarily to makefinancial and credit services available tocooperative banks.

5) Islamic BanksThese are banks the business dealings andactivities of which are subject to the basic

principles and rulings of Islamic Sharia. TheAl Amanah Islamic Investment Bank of thePhilippines, which was created by RA 6848, isthe only Islamic bank in the country at thistime.

6) Rural BanksMandated to make needed credit available andreadily accessible in the rural areas on


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reasonable terms and which are primarilygoverned by the Rural Banks Act of 1992 (RA7353)

7) Other classifications of banks

As determined by the Monetary Board, i.e.,Philippine Veterans Bank (RA 3518),Landbank of the Philippines (RA 3844),Development Bank of the Philippines (RA 85)

Quasi-banks" (QB) refer to entities engagedin the borrowing of funds through theissuance, endorsement or assignment withrecourse or acceptance of deposit substitutes(as defined inSec. 95 RA 7653, the NewCentral Bank Act) for purposes of relending or

purchasing of receivables and otherobligations. (last par of Sec. 4)

rent power of UBs and KBs.Thusthey do not require separate licensing orauthorization for this purpose.Thus, they cantake deposit substitutes forrelending.(Morales)

DISTINCTION BETWEEN UNIVERSALBANKS AND COMMERCIAL BANKS

UNIVERSALBANKS

COMMERCIALBANKS

exercise the powersof an investmenthouse and invest innon-alliedenterprises

These areREGULARCOMMERCIALBANKS; CANNOTEXECISE POWERSof an investmenthouse in non-alliedenterprises

Have the largestCAPITALIZATIONrequirement by theBSP

LOWERCAPITALIZATION

Can engage inQUASI-BANKINGFUNCTIONS

Can also engage inquasi-bankingfunctions

DISTINCTION BETWEEN UNIBANK orCOMMERCIAL BANK AND OTHERBANKS

SECTION 33 . Acceptance of Demand

Deposits. A bank other than a universal orcommercial bank cannot accept or createdemand deposits except upon prior approvalof, and subject to such conditions and rules asmay be prescribed by the Monetary Board

DISTINCTION BETWEEN ALLIED ANDNON-ALLIED ENTERPRISES

SECTION 23. Powers of a Universal Bank. A universal bank shall have the authority to

exercise, in addition to the powers authorizedfor a commercial bank in Section 29, the

powers of an investment house as provided inexisting laws and the power to invest in non-allied enterprises as provided in this Act.

ALLIED UNDERTAKINGS: these banks mayinvest in equities of allied undertakings as may

be approved by the MB, provided that the totalinvestment shall not exceed 25% of the networth of the bank,, and the equity investment

in any single enterprise shall not exceed 15%of the net worth of the bank, which shallremain a minority holding in thatenterprise.(Sec.31)

SECTION 31 . Equity Investments of aCommercial Bank in Financial AlliedEnterprises. A commercial bank may ownup to one hundred percent (100%) of theequity 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, suchinvestment shall remain a minority holding inthat enterprise.


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INSTITUTIONS SUBJECT TO BSPSUPERVISORY AND REGULATORYPOWERS

SECTION 4. Supervisory Powers. The

operations and activities of banks shall besubject to supervision of the Bangko Sentral."Supervision" shall include the following:

4.2. The conduct of examination to determinecompliance with laws and regulations if thecircumstances so warrant as determined by theMonetary Board;

4.3. Overseeing to ascertain that laws andregulations are complied with;

4.4. Regular investigation which shall not beoftener than once a year from the last date ofexamination to determine whether aninstitution is conducting its business on a safeor sound basis: Provided, That thedeficiencies/irregularities found by ordiscovered by an audit shall be immediatelyaddressed;

4.5. Inquiring into the solvency and liquidity

of the institution (2-D); or

4.6. Enforcing prompt corrective action. (n)

The Bangko Sentral shall also havesupervision over the operations of and exerciseregulatory powers over quasi-banks, trustentities and other financial institutions whichunder special laws are subject to BangkoSentral supervision. (2-Ca)

For the purposes of this Act, "quasi-banks"shall refer to entities engaged in the borrowingof funds through the issuance, endorsement orassignment with recourse or acceptance ofdepositsubstitutes as defined in Section 95 ofRepublic Act No. 7653 (hereafter the "NewCentral Bank Act") for

purposes of relending or purchasing ofreceivables and other obligations. (2-Da)

4.1. The issuance of rules of conduct or the

establishment of standards of operation foruniform application to all institutions orfunctions covered, taking into considerationthe distinctive character of the operations ofinstitutions and the substantive similarities ofspecific functions to which such rules, modesor standards are to be applied;

R.A. No. 7653(The NCBA)

Section 25. Supervision and Examination. -The Bangko Sentral shall have supervisionover, and conduct periodic or specialexaminations of, banking institutions andquasi-banks, including their subsidiaries andaffiliates engaged in allied activities.

For purposes of this section, asubsidiary means a corporation more than fifty

percent (50%) of the voting stock of which isowned by a bank or quasi-bank and an affiliate

means a corporation the voting stock of which,to the extent of fifty percent (50%) or less, isowned by a bank or quasi-bank or which isrelated or linked to such institution orintermediary through common stockholders orsuch other factors as may be determined by theMonetary Board.

The department heads and theexaminers of the supervising and/or examiningdepartments are hereby authorized to

administer oaths to any director, officer, oremployee of any institution under theirrespective supervision or subject to theirexamination and to compel the presentation ofall books, documents, papers or recordsnecessary in their judgment to ascertain thefacts relative to the true condition of anyinstitution as well as the books and records of


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persons and entities relative to or in connectionwith the operations, activities or transactionsof the institution under examination, subject tothe provision of existing laws protecting orsafeguarding the secrecy or confidentiality of

bank deposits as well as investments of private persons, natural or juridical, in debtinstruments issued by the Government.

No restraining order or injunction shall be issued by the court enjoining the BangkoSentral from examining any institution subjectto supervision or examination by the BangkoSentral, unless there is convincing proof thatthe action of the Bangko Sentral is plainlyarbitrary and made in bad faith and the

petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bond executed in favor of theBangko Sentral, in an amount to be fixed bythe court. The provisions of Rule 58 of the

New Rules of Court insofar as they areapplicable and not inconsistent with the

provisions of this section shall govern theissuance and dissolution of the restrainingorder or injunction contemplated in thissection

AUTHORITY TO ENGAGE IN BANKINGFUNCTIONS

Section 6. Authority to Engage in Banking andQuasi-Banking Functions. - No person orentity shall engage in banking operations orquasi-banking functions without authorityfrom the Bangko Sentral: .Provided, however,

That an entity authorized by the BangkoSentral to perform universal or commercial

banking functions shall likewise have theauthority to engage in quasi-banking functions.

The determination of whether a person orentity is performing banking or quasi-bankingfunctions without Bangko Sentral authority

shall be decided by the Monetary Board. Toresolve such issue, the Monetary Board may;through the appropriate supervising andexamining department of the Bangko Sentral,examine, inspect or investigate the books and

records of such person or entity. Uponissuance of this authority, such person or entitymay commence to engage in bankingoperations or quasi-banking function and shallcontinue to do so unless such authority issooner surrendered, revoked, suspended orannulled by the Bangko Sentral in accordancewith this Act or other special laws.

The department head and the examiners of theappropriate supervising and examining

department are hereby authorized to administeroaths to any such person, employee, officer, ordirector of any such entity and to compel the

presentation or production of such books,documents, papers or records that arereasonably necessary to ascertain the factsrelative to the true functions and operations ofsuch person or entity. Failure or refusal tocomply with the required presentation or

production of such books, documents, papersor records within a reasonable time shall

subject the persons responsible therefore to the penal sanctions provided under the NewCentral Bank Act.

Persons or entities found to be performing banking or quasi-banking functions withoutauthority from the Bangko Sentral shall besubject to appropriate sanctions under the NewCentral Bank Act and other applicable laws.

REQUISITES(Sec.8)

Section 8.

Organization. - The Monetary Board mayauthorize the organization of a bank or quasi-

bank subject to the following conditions:


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1. 8.1 That the entity is a stock corporation (7);

2. not a close corporation : 8.2 That its fundsare obtained from the public, which shall mean

twenty (20) or more persons (2-Da); and

8.3 That the minimum capital requirements prescribed by the Monetary Board for eachcategory of banks are satisfied. (n)

No new commercial bank shall be establishedwithin three (3) years from the effectivity ofthis Act. In the exercise of the authoritygranted herein, the Monetary Board shall takeinto consideration their capability in terms of

their financial resources and technicalexpertise and integrity. The bank licensing

process shall incorporate an assessment of the bank's ownership structure, directors andsenior management, its operating plan andinternal controls as well as its projectedfinancial condition and capital base.

3. par value stock(Sec. 9)

Section 9. Issuance of Stocks. - The Monetary

Board may prescribe rules and regulations onthe types of stock a bank may issue, includingthe terms thereof and rights appurtenantthereto to determine compliance with laws andregulations governing capital and equitystructure of banks; Provided, That banks shallissue par value stocks only.

3. ownership of shares (Sec. 11)

Section 11. Foreign Stockholdings. - Foreignindividuals and non-bank corporations mayown or control up to forty percent (40%) of thevoting stock of a domestic bank. This ruleshall apply to Filipinos and domestic non-bankcorporations. (12a; 12-Aa) The percentage offoreign-owned voting stocks in a bank shall be

determined by the citizenship of the individualstockholders in that bank. The citizenship ofthe corporation which is a stockholder in a

bank shall follow the citizenship of thecontrolling stockholders of the corporation,

irrespective of the place of incorporation. (n)

4. MB Certificate of Authority

POWERS OF A UNIVERSAL BANK

Section 23. Powers of a Universal Bank - Auniversal bank shall have the authority toexercise, in addition to the powers authorizedfor a commercial bank in Section 29, the

powers of an investment house as provided in

existing laws and the power to invest in non-allied enterprises as provided in this Act. (21-B)

Section 24. Equity Investments of a Universal Bank. - A universal bank may, subject to theconditions stated in the succeeding paragraph,invest in the equities of allied and non-alliedenterprises as may be determined by theMonetary 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 alliedand non-allied enterprises shall not exceedfifty percent (50%) of the net worth of the

bank; and

24.2. The equity investment in any oneenterprise, whether allied or non-allied, shallnot exceed twenty-five percent (25%) of thenet worth of the bank.

As used in this Act, "net worth" shall mean thetotal of the unimpaired paid-in capitalincluding paid-in surplus, retained earningsand undivided profit, net of valuation reservesand other adjustments as may be required bythe Bangko Sentral.


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The acquisition of such equity or equities issubject to the prior approval of the MonetaryBoard which shall promulgate appropriateguidelines to govern such investments. (21-Ba)

Section 25. Equity Investments of a Universal Bank in Financial Allied Enterprises. - Auniversal bank can own up to one hundred

percent (100%) of the equity in a thrift bank, arural bank or a financial allied enterprise. A

publicly-listed universal or commercial bankmay own up to one hundred percent (100%) ofthe voting stock of only one other universal orcommercial bank. (21-B; 21-Ca)

Section 26. Equity Investments of a Universal

Bank in Non-Financial Allied Enterprises. - Auniversal bank may own up to one hundred

percent (100%) of the equity in a non-financialallied enterprise. (21-Ba)

Section 27. Equity Investments of a Universal Bank in Non-Allied Enterprises. - The equityinvestment of a universal bank, or of its whollyor majority-owned subsidiaries, in a singlenon-allied enterprise shall not exceed thirty-five percent (35%) of the total equity in that

enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in thatenterprise. (21-B)

Section 28. Equity Investments in Quasi- Banks. - To promote competitive conditions infinancial markets, the Monetary Board mayfurther limit to forty percent (40%) equityinvestments of universal banks in quasi-banks.This rule shall also apply in the case ofcommercial banks. (12-E) Article II.

Operations Of Commercial Banks

Section 29. Powers of a Commercial Bank. -A commercial bank shall have, in addition tothe general powers incident to corporations, allsuch powers as may be necessary to carry onthe business of commercial banking such asaccepting drafts and issuing letters of credit;

discounting and negotiating promissory notes,drafts, bills of exchange, and other evidencesof debt; accepting or creating demanddeposits; receiving other types of deposits anddeposit substitutes; buying and selling foreign

exchange and gold or silver bullion; acquiringmarketable bonds and other debt securities;and extending credit, subject to such rules asthe Monetary Board may promulgate. Theserules may include the determination of bondsand other debt securities eligible forinvestment, the maturities and aggregateamount of such investment.

Section 53. Other Banking Services. - Inaddition to the operations specifically

authorized in this Act, a bank may perform thefollowing services:

53.1. Receive in custody funds, documents andvaluable objects;

53.2. Act as financial agent and buy and sell, by order of and for the account of theircustomers, shares, evidences of indebtednessand all types of securities;

53.3. Make collections and payments for theaccount of others and perform such otherservices for their customers as are notincompatible with banking business;

53.4 Upon prior approval of the MonetaryBoard, act as managing agent, adviser,consultant or administrator of investmentmanagement/advisory/consultancy accounts;and

53.5. Rent out safety deposit boxes.

The bank shall perform the services permittedunder Subsections 53.1, 53.2,53.3 and 53.4 asdepositary or as an agent. Accordingly, it shallkeep the funds, securities and other effectswhich it receives duly separate from the bank'sown assets and liabilities: The Monetary Board


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may regulate the operations authorized by thisSection in order to ensure that such operationsdo not endanger the interests of the depositorsand other creditors of the bank. In case a bankor quasi-bark notifies the Bangko Sentral or

publicly announces a bank holiday, or in anymanner suspends the payment of its depositliabilities continuously for more than thirty(30) days, the Monetary Board may summarilyand without need for prior hearing close such

banking institution and place it underreceivership of the Philippine DepositInsurance Corporation.

In sum, the powers include the following:

a. Exercise powers of an investment bank b. Invest in equities of allied(financial or

non-financial) and or non-alliedenterprises

c. Can own up to 100% of the equity in athrift bank, rural bank or a financialallied or non-allied enterprises

d. Powers as may be necessary to carry onthe business of commercial bankingsuch as:

1. Accepting drafts and negotiatingP/Ns

2. Discounting and negotiating P/Ns,drafts, B/E, and other evidence ofdebt

3. Accepting or creating demanddeposits

4. Receiving other types of depositsand deposit substitutes

5. Buyong and selling foreignechange and gold or silver bullion

6. Acquiring marketable bonds andother debt securities7. Extending credit

NB: 40% equity investment only in quasi- banks

Powers under the expanded authority granted by the MB:

1. Powers of an investment house2. Invest in the equity of a non-allied

undertakings, or3. Own majority or all of the equity in a

financial intermediary other than acommercial or a bank authorized to

provide banking services

POWERS OF A COMMERCIAL BANK

Section 29. Powers of a Commercial Bank. -A commercial bank shall have, in addition tothe general powers incident to corporations, all

such powers as may be necessary to carry onthe business of commercial banking such asaccepting drafts and issuing letters of credit;discounting and negotiating promissory notes,drafts, bills of exchange, and other evidencesof debt; accepting or creating demanddeposits; receiving other types of deposits anddeposit substitutes; buying and selling foreignexchange and gold or silver bullion; acquiringmarketable bonds and other debt securities;and extending credit, subject to such rules as

the Monetary Board may promulgate. Theserules may include the determination of bondsand other debt securities eligible forinvestment, the maturities and aggregateamount of such investment.

Section 30. Equity Investments of aCommercial Bank. - A commercial bank may,subject to the conditions stated in thesucceeding paragraphs, invest only in theequities of allied enterprises as may be

determined by the Monetary Board. Alliedenterprises may either be financial or non-financial. Except as the Monetary Board mayotherwise prescribe:

30.1. The total investment in equities of alliedenterprises shall not exceed thirty-five percent(35%) of the net worth of the bark; and


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30.2. The equity investment in any oneenterprise shall not exceed twenty-five percent(25%) of tile net worth of the bank. Theacquisition of such equity or equities is subjectto the prior approval of the Monetary Board

which shall promulgate appropriate guidelinesto govern such investment.(2lA-a; 21-Ca)

Section 31. Equity Investments of aCommercial Bank in Financial Allied

Enterprises. - A commercial bank may own upto one hundred percent (100%) of the equity ofa thrift bank or a rural bank. Where the equityinvestment of a commercial bank is in otherfinancial allied enterprises, including anothercommercial bank, such investment shall

remain a minority holding in that enterprise.(21-Aa; 21-Ca)

Section 32. Equity Investments of aCommercial Bank in Non-Financial Allied

Enterprises. A commercial bank may own upto one hundred percent (100%) of the equity ina non-financial allied enterprise. (21-Aa)Article III. Provisions Applicable To AllBanks, Quasi-Banks, And Trust Entities

Section 53. Other Banking Services. - Inaddition to the operations specificallyauthorized in this Act, a bank may perform thefollowing services:

53.1. Receive in custody funds, documents andvaluable objects;

53.2. Act as financial agent and buy and sell, by order of and for the account of theircustomers, shares, evidences of indebtedness

and all types of securities;

53.3. Make collections and payments for theaccount of others and perform such otherservices for their customers as are notincompatible with banking business;

53.4 Upon prior approval of the MonetaryBoard, act as managing agent, adviser,consultant or administrator of investmentmanagement/advisory/consultancy accounts;and

53.5. Rent out safety deposit boxes.

The bank shall perform the services permittedunder Subsections 53.1, 53.2,53.3 and 53.4 asdepositary or as an agent. Accordingly, it shallkeep the funds, securities and other effectswhich it receives duly separate from the bank'sown assets and liabilities: The Monetary Boardmay regulate the operations authorized by thisSection in order to ensure that such operations

do not endanger the interests of the depositorsand other creditors of the bank. In case a bankor quasi-bark notifies the Bangko Sentral or

publicly announces a bank holiday, or in anymanner suspends the payment of its depositliabilities continuously for more than thirty(30) days, the Monetary Board may summarilyand without need for prior hearing close such

banking institution and place it underreceivership of the Philippine DepositInsurance Corporation.

AREAS OF SUPERVISION ANDREGULATION OF BANKS

Examination and investigation ofbanksSection 4. Supervisory Powers. The operationsand activities of banks shall be subject tosupervision of the Bangko Sentral."Supervision" shall include the following:4.1. The issuance of rules of, conduct or the

establishment standards of operation foruniform application to all institutions orfunctions covered, taking into considerationthe distinctive character of the operations ofinstitutions and the substantive similarities ofspecific functions to which such rules, modesor standards are to be applied;


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4.2 The conduct of examination to determinecompliance with laws and regulations if thecircumstances so warrant as determined by theMonetary Board;4.3 Overseeing to ascertain that laws and

regulations are complied with;4.4 Regular investigation which shall not beoftener than once a year from the last date ofexamination to determine whether aninstitution is conducting its business on a safeor sound basis: Provided, That thedeficiencies/irregularities found by ordiscovered by an audit shall be immediatelyaddressed;4.5 Inquiring into the solvency and liquidity ofthe institution (2-D); or

4.6 Enforcing prompt corrective action. (n)The Bangko Sentral shall also havesupervision over the operations of and exerciseregulatory powers over quasi-banks, trustentities and other financial institutions whichunder special laws are subject to BangkoSentral supervision. (2-Ca)For the purposes of this Act, "quasi-banks"shall refer to entities engaged in the borrowingof funds through the issuance, endorsement orassignment with recourse or acceptance of

deposit substitutes as defined in Section 95 ofRepublic Act No. 7653 (hereafter the "NewCentral Bank Act") for purposes of re-lendingor purchasing of receivables and otherobligations.

Section 28. Examination and Fees. - Thesupervising and examining department head,

personally or by deputy, shall examine the books of every banking institution once inevery twelve (12) months, and at such other

times as the Monetary Board by an affirmativevote of five (5) members, may deem expedientand to make a report on the same to theMonetary Board: Provided, That there shall bean interval of at least twelve (12) months

between annual examinations.The bank concerned shall afford to the

head of the appropriate supervising and

examining departments and to his authorizeddeputies full opportunity to examine its books,cash and available assets and general conditionat any time during banking hours whenrequested to do so by the Bangko Sentral:

Provided, however, That none of the reportsand other papers relative to such examinationsshall be open to inspection by the publicexcept insofar as such publicity is incidental tothe proceedings hereinafter authorized or isnecessary for the prosecution of violations inconnection with the business of suchinstitutions.

Banking and quasi-banking institutionswhich are subject to examination by theBangko Sentral shall pay to the Bangko

Sentral, within the first thirty (30) days of eachyear, an annual fee in an amount equal to a

percentage as may be prescribed by theMonetary Board of its average total assetsduring the preceding year as shown on its end-of-month balance sheets, after deducting cashon hand and amounts due from banks,including the Bangko Sentral and banksabroad.

Acquisition by bank of own sharesSection 10. Treasury Stocks. - No bank shall

purchase or acquire shares of its own capitalstock or accept its own shares as a security fora loan, except when authorized by theMonetary Board: Provided, That in every casethe stock so purchased or acquired shall,within six (6) months from the time of its

purchase or acquisition, be sold or disposed ofat a public or private sale.

Independent directorsSection 15. Board of Directors. - The provisions of the Corporation Code to thecontrary notwithstanding, there shall be at leastfive (5), and a maximum of fifteen (15)members of the board or directors of a bank,two (2) of whom shall be independentdirectors. An "independent director" shall


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mean a person other than an officer oremployee of the bank, its subsidiaries oraffiliates or related interests. (n) Non-Filipinocitizens may become members of the board ofdirectors of a bank to the extent of the foreign

participation in the equity of said bank. (Sec.7, RA 7721) The meetings of the board ofdirectors may be conducted through moderntechnologies such as, but not limited to,teleconferencing and video-conferencing

Qualifications of directors andofficers: the fit and proper rule

Section 16. Fit and Proper Rule. - To maintainthe quality of bank management and afford

better protection to depositors and the public in

general the Monetary Board shall prescribe, pass upon and review the qualifications anddisqualifications of individuals elected orappointed bank directors or officers anddisqualify those found unfit. After due noticeto the board of directors of the bank, theMonetary Board may disqualify, suspend orremove any bank director or officer whocommits or omits an act which render himunfit for the position. In determining whetheran individual is fit and proper to hold the

position of a director or officer of a bank,regard shall be given to his integrity,experience, education, training, andcompetence.

Prohibition on public officialsSection 19. Prohibition on Public Officials. -Except as otherwise provided in the RuralBanks Act, no appointive or elective publicofficial whether full-time or part-time shall atthe same time serve as officer of any private

bank, save in cases where such service isincident to financial assistance provided by thegovernment or a government owned orcontrolled corporation to the bank or unlessotherwise provided under existing laws.

Compensation and other benefits ofdirectors and officers

Section 18. Compensation and Other Benefitsof Directors and Officers. To protect the findsof depositors and creditors the MonetaryBoard may regulate the payment by the bark toits directors and officers of compensation,

allowance, fees, bonuses, stock options, profitsharing and fringe benefits only in exceptionalcases and when the circumstances warrant,such as but not limited to the following:18.1. When a bank is under comptrollership orconservatorship; or18.2. When a bank is found by the MonetaryBoard to be conducting business in an unsafeor unsound manner; or18.3. When a bank is found by the MonetaryBoard to be in an unsatisfactory financial

condition.

Ratio of net worth to total riskassets; Basle Accord

Section 34. Risk-Based Capital. - TheMonetary Board shall prescribe the minimumratio which the net worth of a bank must bearto its total risk assets which may includecontingent accounts. For purposes of thisSection, the Monetary Board may require such

ratio be determined on the basis of the networth and risk assets of a bank and itssubsidiaries, financial or otherwise, as well as

prescribe the composition and the manner ofdetermining the net worth and total risk assetsof banks and their subsidiaries: Provided, Thatin the exercise of this authority, the MonetaryBoard shall, to the extent feasible conform tointernationally accepted standards, includingthose of the Bank for InternationalSettlements(BIS), relating to risk-based capital

requirements: Provided further, That it mayalter or suspend compliance with such ratiowhenever necessary for a maximum period ofone (1) year: Provided, finally, That such ratioshall be applied uniformly to banks of thesame category. In case a bank does not complywith the prescribed minimum ratio, theMonetary Board may limit or prohibit the


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distribution of net profits by such bank andmay require that part or all of the net profits beused to increase the capital accounts of the

bank until the minimum requirement has beenmet The Monetary Board may, furthermore,

restrict or prohibit the acquisition of majorassets and the making of new investments bythe bank, with the exception of purchases ofreadily marketable evidences of indebtednessof the Republic of the Philippines and of theBangko Sentral and any other evidences ofindebtedness or obligations the servicing andrepayment of which are fully guaranteed bythe Republic of the Philippines, until theminimum required capital ratio has beenrestored. In case of a bank merger or

consolidation, or when a bank is underrehabilitation under a program approved by theBangko Sentral, Monetary Board maytemporarily relieve the surviving bank,consolidated bank, or constituent bank orcorporations under rehabilitation from fullcompliance with the required capital ratiounder such conditions as it may prescribe.Before the effectivity of rules which theMonetary Board is authorized to prescribeunder this provision, Section 22 of the General

Banking Act, as amended, Section 9 of theThrift Banks Act, and all pertinent rules issued

pursuant thereto, shall continue to be in force.Limits on loans: the SBL Rules

Section 35. Limit on Loans, Credit Accommodations and Guarantees 35.1 Except as the Monetary Board mayotherwise prescribe for reasons of nationalinterest, the total amount of loans, creditaccommodations and guarantees as may bedefined by the Monetary Board that may be

extended by a bank to any person, partnership,association, corporation or other entity shall atno time exceed twenty percent (20%) of thenet worth of such bank. The basis fordetermining compliance with single borrowerlimit is the total credit commitment of the bankto the borrower.

35.2. Unless the Monetary Board prescribesotherwise, the total amount of loans, creditaccommodations and guarantees prescribed inthe preceding paragraph may be increased byan additional ten percent (10%) of the net

worth of such bank provided the additionalliabilities of any borrower are adequatelysecured by trust receipts, shipping documents,warehouse receipts or other similar documentstransferring or securing title covering readilymarketable, non-perishable goods which must

be fully covered by insurance.35.3 The above prescribed ceilings shallinclude (a) the direct liability of the maker oracceptor of paper discounted with or sold tosuch bank and the liability of a general

endorser, drawer or guarantor who obtains aloan or other credit accommodation from ordiscounts paper with or sells papers to such

bank; (b) in the case of an individual whoowns or controls a majority interest in acorporation, partnership, association or anyother entity, the liabilities of said entities tosuch bank; (c) in the case of a corporation, allliabilities to such bank of all subsidiaries inwhich such corporation owns or controls amajority interest; and (d) in the case of a

partnership, association or other entity, theliabilities of the members thereof to such bank.35.4. Even if a parent corporation, partnership,association, entity or an individual who ownsor controls a majority interest in such entitieshas no liability to the bank, the MonetaryBoard may prescribe the combination of theliabilities of subsidiary corporations ormembers of the partnership, association, entityor such individual under certain circumstances,including but not limited to any of the

following situations: (a) the parentcorporation, partnership, association, entity orindividual guarantees the repayment of theliabilities; (b) the liabilities were incurred forthe accommodation of the parent corporationor another subsidiary or of the partnership orassociation or entity or such individual; or (c)the subsidiaries though separate entities


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operate merely as departments or divisions of asingle entity.35.5. For purposes of this Section, loans, othercredit accommodations and guarantees shallexclude: (a) loans and other credit

accommodations secured by obligations of theBangko Sentral or of the PhilippineGovernment: (b) loans and other creditaccommodations fully guaranteed by thegovernment as to the payment of principal andinterest; (c) loans and other creditaccommodations covered by assignment ofdeposits maintained in the lending bank andheld in the Philippines; (d) loans, creditaccommodations and acceptances under lettersof credit to the extent covered by margin

deposits; and (e) other loans or creditaccommodations which the Monetary Boardmay from time to time, specify as non-riskitems.35.6. Loans and other credit accommodations,deposits maintained with, and usual guarantees

by a bank to any other bank or non-bankentity, whether locally or abroad, shall besubject to the limits as herein prescribed.35.7. Certain types of contingent accounts of

borrowers may be included among those

subject to these prescribed limits as may bedetermined by the Monetary Board.

Restrictions on Bank exposure: theDOSRI Rules

Section 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related Interests. - No director or officer ofany bank shall, directly or indirectly, forhimself or as the representative or agent of

others, borrow from such bank nor shall he become a guarantor, endorser or surety forloans from such bank to others, or in anymanner be an obligor or incur any contractualliability to the bank except with the writtenapproval of the majority of all the directors ofthe bank, excluding the director concerned:Provided, That such written approval shall not

be required for loans, other creditaccommodations and advances granted toofficers under a fringe benefit plan approved

by the Bangko Sentral. The required approvalshall be entered upon the records of the bank

and a copy of such entry shall be transmittedforthwith to the appropriate supervising andexamining department of the Bangko Sentral.Dealings of a bank with any of its directors,officers or stockholders and their relatedinterests shall be upon terms not less favorableto the bank than those offered to others. Afterdue notice to the board of directors of the

bank, the office of any bank director or officerwho violates the provisions of this Sectionmay be declared vacant and the director or

officer shall be subject to the penal provisionsof the New Central Bank Act. The MonetaryBoard may regulate the amount of loans, creditaccommodations and guarantees that may beextended, directly or indirectly, by a bank toits directors, officers, stockholders and theirrelated interests, as well as investments of such

bank in enterprises owned or controlled bysaid directors, officers, stockholders and theirrelated interests. However, the outstandingloans, credit accommodations and guarantees

which a bank may extend to each of itsstockholders, directors, or officers and theirrelated interests, shall be limited to an amountequivalent to their respective unencumbereddeposits and book value of their paid-in capitalcontribution in the bank: Provided, however,That loans, credit accommodations andguarantees secured by assets considered asnon-risk by the Monetary Board shall beexcluded from such limit: Provided, further,That loans, credit accommodations and

advances to officers in the form of fringe benefits granted in accordance with rules asmay be prescribed by the Monetary Boardshall not be subject to the individual limit. TheMonetary Board shall define the term "relatedinterests." The limit on loans, creditaccommodations and guarantees prescribedherein shall not apply to loans, credit


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accommodations and guarantees extended by acooperative bank to its cooperativeshareholders.

Microfinancing

Section 40. Requirement for Grant Of Loansor 0ther Credit Accommodations. - Beforegranting a loan or other credit accommodation,a bank must ascertain that the debtor is capableof fulfilling his commitments to the bank.Toward this end, a bank may demand from itscredit applicants a statement of their assets andliabilities and of their income and expendituresand such information as may be prescribed bylaw or by rules and regulations of theMonetary Board to enable the bank to properly

evaluate the credit application which includesthe corresponding financial statementssubmitted for taxation purposes to the Bureauof Internal Revenue. Should such statements

prove to be false or incorrect in any materialdetail, the bank may terminate any loan orother credit accommodation granted on the

basis of said statements and shall have theright to demand immediate repayment orliquidation of the obligation. In formulatingrules and regulations under this Section, the

Monetary Board shall recognize the peculiarcharacteristics of micro financing, such as cashflow-based lending to the basic sectors that arenot covered by traditional collateral.

Section 43. Authority to Prescribe Terms andConditions of Loans and Other Credit

Accommodations. - The Monetary Board, may,similarly in accordance with the authoritygranted to it in Section 106 of the New CentralBank Act, and taking into account the

requirements of the economy for the effectiveutilization of long-term funds, prescribe thematurities, as well as related terms andconditions for various types of bank loans andother credit accommodations. Any change bythe Board in the maximum maturities, as wellas related terms and conditions for varioustypes of bank loans and other credit

accommodations. Any change by the Board inthe maximum maturities shall apply only toloans and other credit accommodations madeafter the date of such action. The MonetaryBoard shall regulate the interest imposed on

micro finance borrowers by lending investorsand similar lenders such as, but not limited to,the unconscionable rates of interest collectedon salary loans and similar creditaccommodations. (78a)

Section 44. Amortization on Loans and OtherCredit Accommodations. - The amortizationschedule of bank loans and other creditaccommodations shall be adapted to the natureof the operations to be financed. In case of

loans and other credit accommodations withmaturities of more than five (5) years,

provisions must be made for periodicamortization payments, but such paymentsmust be made at least annually: Provided,however, That when the borrowed funds are to

be used for purposes which do not initially produce revenues adequate for regularamortization payments therefrom, the bankmay permit the initial amortization payment to

be deferred until such time as said revenues are

sufficient for such purpose, but in no case shallthe initial amortization date be later than five(5) years from the date on which the loan orother credit accommodation is granted. (79a)In case of loans and other creditaccommodations to micro finance sectors, theschedule of loan amortization shall take intoconsideration the projected cash flow of the

borrower and adopt this into the terms andconditions formulated by banks.

Prepayment of loansSection 45. Prepayment of Loans and OtherCredit Accommodations. - A borrower may atany time prior to the agreed maturity date

prepay, in whole or in part, the unpaid balanceof any bank loan and other creditaccommodation, subject to such reasonable


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terms and conditions as may be agreed upon between the bank and its borrower.

Real estate investments andacquisitions

Section 51. Ceiling on Investments in Certain Assets. - Any bank may acquire real estate asshall be necessary for its own use in theconduct of its business: Provided, however,That the total investment in such real estateand improvements thereof including bankequipment, shall not exceed fifty percent(50%) of combined capital accounts: Provided,further, That the equity investment of a bank inanother corporation engaged primarily in realestate shall be considered as part of the bank's

total investment in real estate, unless otherwise provided by the Monetary Board. (25a)

Section 52. Acquisition of Real Estate by Wayof Satisfaction of Claims. - Notwithstandingthe limitations of the preceding Section, a bankmay acquire, hold or convey real propertyunder the following circumstances:

52.1. Such as shall be mortgaged to it in goodfaith by way of security for debts;

52.2. Such as shall be conveyed to it insatisfaction of debts previously contracted inthe course of its dealings, or

52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deedsheld by it and such as it shall purchase tosecure debts due it.

Any real property acquired or held under the

circumstances enumerated in the above paragraph shall be disposed of by the bankwithin a period of five (5) years or as may be

prescribed by the Monetary Board: Provided,however, That the bank may, after said period,continue to hold the property for its own use,subject to the limitations of the precedingSection.

Outsourcing of bank functions

55.1. No director, officer, employee, or agent

of any bank shall -

(a) Make false entries in any bankreport or statement or participate in anyfraudulent transaction, therebyaffecting the financial interest of, orcausing damage to, the bank or any

person;

(b) Without order of a court ofcompetent jurisdiction, disclose to any

unauthorized person any informationrelative to the funds or properties in thecustody of the bank belonging to

private individuals, corporations, orany other entity: Provided, That withrespect to bank deposits, the provisionsof existing laws shall prevail;

(c) Accept gifts, fees, or commissionsor any other form of remuneration inconnection with the approval of a loan

or other credit accommodation fromsaid bank;

(d) Overvalue or aid in overvaluing anysecurity for the purpose of influencingin any way the actions of the bank orany bank; or

(e) Outsource inherent bankingfunctions.

Employment of casual andprobationary personnel55.4. Consistent with the provisions ofRepublic Act No. 1405, otherwise known asthe Banks Secrecy Law, no bank shall employcasual or non regular personnel or too lengthy


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probationary personnel in the conduct of its business involving bank deposits. Declaration of dividends

Section 57. Prohibition on Dividend

Declaration. - No bank or quasi-bank shalldeclare dividends, if at the time of declaration:

57.1 Its clearing account with the BangkoSentral is overdrawn; or

57.2 It is deficient in the required liquidityfloor for government deposits for five (5) ormore consecutive days, or

57.3 It does not comply with the liquidity

standards/ratios prescribed by the BangkoSentral for purposes of determining fundsavailable for dividend declaration; or

57.4 It has committed a major violation as may be determined by the Bangko Sentral

AUTHORITY TO ENGAGE IN TRUSTBUSINESS

o Trust entitySection 79. Authority to Engage in Trust

Business. - Only a stock corporation or a person duly authorized by the Monetary Boardto engage in trust business shall act as a trusteeor administer any trust or hold property in trustor on deposit for the use, benefit, or behoof ofothers. For purposes of this Act, such acorporation shall be referred to as a trustentity.

o Diligence required( Utmost Diligence:highest form of diligence)

Section 80. Conduct of Trust Business. - Atrust entity shall administer the funds or

property under its custody with the diligencethat a prudent man would exercise in theconduct of an enterprise of a like character

and with similar aims. No trust entity shall, forthe account of the trustor or the beneficiary ofthe trust, purchase or acquire property from, orsell, transfer, assign, or lend money or

property to, or purchase debt instruments of,

any of the departments, directors, officers,stockholders, or employees of the trust entity,relatives within the first degree ofconsanguinity or affinity, or the relatedinterests, of such directors, officers andstockholders, unless the transaction isspecifically authorized by the trustor and therelationship of the trustee and the other partyinvolved in the transaction is fully disclosed tothe trustor of beneficiary of the trust prior tothe 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 responsibilityherein imposed on a trust entity.

COMMENT(UP REVIEWER):

Banks should observe the highest degree of

diligence. Notwithstanding the degree ofdiligence required, a bank is not expected to

be infallible (Prudential Bank vs. CA, 2000)

Fiduciary Nature of Banks

Failure on the part of the bank to satisfy thedegree of diligence required of banks maywarrant the award of damages.

high standards of integrity and performance . In numerous cases, the Supreme

Court has held that the highest degree ofdiligence and care is expected from banks(Simex International v. CA [1990]; PhilippineBank of Commerce v. CA [1997]; WestmontBank v. Ong [2002]; Solidbank v. Spouses Tan[2003]; Samsung Construction v. FEBTC[2004]; Citibank, N.A. v. SpousesCabamongan [2006]; Philippine Savings Bank


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v. Chowking Food Corporation [2008]; Bankof America NT &SA v. Philippine RacingClub [2009].

PCI Bank v. CA, 2001: Banks are expected toexercise the highest degree of diligence in theselection and supervision of their employees.

Philippine Savings Bank v. Chowking Food

Corporation, 2008: It cannot beoveremphasized that the banking business isimpressed with public interest. Of paramountimportance is the trust and confidence of the

public in general in the banking industry.Consequently, the diligence required of banksis more than that of a Roman pater familias ora good father of a family. The highest degreeof diligence is expected

Bank of America NT&SA v. PhilippineRacing Club, 2009 : The banking business isso impressed with public interest where thetrust and confidence of the public in general isof paramount importance such that the

appropriate standard of diligence must be ahigh degree of diligence, if not the utmostdiligence.

Under the doctrine of last clear chance, a bankmay be held liable for loss despite thenegligence of a depositor. Examples of thesecases are the following:

employee despite the employees failure tostrictly abide with the banks internal

procedure. (PBC v. CA, 1997)

parcels of land as security for a loan not owned by the prospective borrower. (Canlas v. Courtof Appeals, 2000)

Crediting the deposit in favor of anotherdepositor, a check where the signature of thedrawer was forged. (Westmont Bank v. Ong,2002)

-signed checks of thedepositor which were stolen by its employee.(Bank of America NT & SA v. PhilippineRacing Club, 2009)

A bank is liable to a depositor when it honoredand paid on a forged check against thedepositors account even if the bank followedits internal procedure in preventing a faulty

discharge. (Samsung

Construction v. FEBTC, 2004)

bank was held liable for damages for failing tofollow its internal procedures in paying on aforged check despite the gross negligence onthe part of the depositor .

o Deposit required as security for faithfulperformance of trust duties

Section 84. Deposit for the Faithful Performance of Trust Duties. - Beforetransacting trust business, every trust entityshall deposit with the Bangko Sentral, assecurity for the faithful performance of its trustduties, cash or securities approved by theMonetary Board in an amount equal to or notless 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 shallrequire every trust entity to increase theamount of its cash or securities on deposit withthe Bangko Sentral in accordance with the

provisions of this paragraph. Should the capitaland surplus fall below said amount, theMonetary Board shall have the same authority


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as that granted to it under the provisions of thefifth paragraph of Section 34 of this Act. Atrust entity so long as it shall continue to besolvent and comply with laws or regulationsshall have the right to collect the interest

earned on such securities deposited with theBangko Sentral and, from time to time, withthe approval of the Bangko Sentral, toexchange the securities for others. If the trustentity fails to comply with any law orregulation, the Bangko Sentral shall retainsuch interest on the securities deposited with itfor the benefit of rightful claimants. Al claimsrising out of the trust business of a trust entityshall have priority over all other claims asregards the cash or securities deposited as

above provided. The Monetary Board may not permit the cash or securities deposited inaccordance with the provisions of this Sectionto be reduced below the prescribed minimumamount until the depositing entity shalldiscontinue its trust business and shall satisfythe Monetary Board that it has complied withall its obligations in connection with such

business.

o Separation of trust business from

general businessSection 87. Separation of Trust Business fromGeneral Business. - The trust business and allfunds, properties or securities received by anytrust 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 ofall such funds, properties, or securities shalllikewise be kept separate and distinct from the

accounts of the general business of the trustentity.o Exemption of trust assets from claimsSection 92. Exemption of Trust Assets fromClaims. - No assets held by a trust entity in itscapacity as trustee shall be subject to anyclaims other than those of the parties interestedin the specific trusts.

PENALTIES FOR VIOLATIONSo Fine, imprisonment, etc.(Sections 34-37

R.A. No. 7653 Section 34. Refusal to Make Reports

or Permit Examination. - Any officer,owner, agent, manager, director orofficer-in-charge of any institutionsubject to the supervision orexamination by the Bangko Sentralwithin the purview of this Act who,

being required in writing by theMonetary Board or by the head of thesupervising and examining departmentwillfully refuses to file the requiredreport or permit any lawful

examination into the affairs of suchinstitution shall be punished by a fineof not less than Fifty thousand pesos(P50,000) nor more than One hundredthousand pesos (P100,000) or byimprisonment of not less than one (1)year nor more than five (5) years, or

both, in the discretion of the court. Section 35. False Statement. -

The willful making of a false ormisleading statement on a material fact

to the Monetary Board or to theexaminers of the Bangko Sentral shall

be punished by a fine of not less thanOne hundred thousand pesos(P100,000) nor more than Twohundred thousand pesos (P200,000), or

by imprisonment of not more than (5)years, or both, at the discretion of thecourt.

Section 36. Proceedings UponViolation of This Act and Other

Banking Laws, Rules, Regulations,Orders or Instructions. - Whenever a

bank or quasi-bank, or whenever any person or entity willfully violates thisAct or other pertinent banking laws

being enforced or implemented by theBangko Sentral or any order,instruction, rule or regulation issued by


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the Monetary Board, the person or persons responsible for such violationshall unless otherwise provided in thisAct be punished by a fine of not lessthan Fifty thousand pesos (P50,000)

nor more than Two hundred thousand pesos (P200,000) or by imprisonmentof not less than two (2) years nor morethan ten (10) years, or both, at thediscretion of the court.

Whenever a bank or quasi-bank persists in carrying on its business in anunlawful or unsafe manner, the Boardmay, without prejudice to the penalties

provided in the preceding paragraph ofthis section and the administrative

sanctions provided in Section 37 of thisAct, take action under Section 30 ofthis Act.

Section 37. AdministrativeSanctions on Banks and Quasi-banks. -Without prejudice to the criminalsanctions against the culpable persons

provided in Sections 34, 35, and 36 ofthis Act, the Monetary Board may, atits discretion, impose upon any bank orquasi-bank, their directors and/or

officers, for any willful violation of itscharter or by-laws, willful delay in thesubmission of reports or publicationsthereof as required by law, rules andregulations; any refusal to permitexamination into the affairs of theinstitution; any willful making of afalse or misleading statement to theBoard or the appropriate supervisingand examining department or itsexaminers; any willful failure or refusal

to comply with, or violation of, any banking law or any order, instruction orregulation issued by the MonetaryBoard, or any order, instruction orruling by the Governor; or anycommission of irregularities, and/orconducting business in an unsafe orunsound manner as may be determined

by the Monetary Board, the followingadministrative sanctions, wheneverapplicable:

(a) fines in amounts as may bedetermined by the Monetary Board to

be appropriate, but in no case to exceedThirty thousand pesos (P30,000) a dayfor each violation, taking intoconsideration the attendantcircumstances, such as the nature andgravity of the violation or irregularityand the size of the bank or quasi-bank;

(b) suspension of rediscounting privileges or access to Bangko Sentralcredit facilities;

(c) suspension of lending or foreignexchange operations or authority toaccept new deposits or make newinvestments;

(d) suspension of interbank clearing privileges; and/or

(e) revocation of quasi-banking license. Resignation or termination from

office shall not exempt such director orofficer from administrative or criminalsanctions.

The Monetary Board may,whenever warranted by circumstances,

preventively suspend any director orofficer of a bank or quasi-bank pendingan investigation: Provided, That shouldthe case be not finally decided by theBangko Sentral within a period of onehundred twenty (120) days after thedate of suspension, said director orofficer shall be reinstated in his

position: Provided, further, That whenthe delay in the disposition of the caseis due to the fault, negligence or

petition of the director or officer, the period of delay shall not be counted incomputing the period of suspensionherein provided.


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The above administrativesanctions need not be applied in theorder of their severity.

Whether or not there is anadministrative proceeding, if theinstitution and/or the directors and/orofficers concerned continue with orotherwise persist in the commission ofthe indicated practice or violation, theMonetary Board may issue an orderrequiring the institution and/or thedirectors and/or officers concerned tocease and desist from the indicated

practice or violation, and may furtherorder that immediate action be taken tocorrect the conditions resulting fromsuch practice or violation. The ceaseand desist order shall be immediatelyeffective upon service on therespondents.

The respondents shall beafforded an opportunity to defend theiraction in a hearing before the MonetaryBoard or any committee chaired by anyMonetary Board member created forthe purpose, upon request made by therespondents within five (5) days fromtheir receipt of the order. If no suchhearing is requested within said period,the order shall be final. If a hearing isconducted, all issues shall bedetermined on the basis of records,after which the Monetary Board mayeither reconsider or make final itsorder.

The Governor is herebyauthorized, at his discretion, to imposeupon banking institutions, for anyfailure to comply with the requirementsof law, Monetary Board regulationsand policies, and/or instructions issued

by the Monetary Board or by theGovernor, fines not in excess of Tenthousand pesos (P10,000) a day foreach violation, the imposition of which

shall be final and executory untilreversed, modified or lifted by theMonetary Board on appeal.

o Suspension or removal of director orofficer

o Dissolution of bankSection 66. Penalty for Violation of this Act. -Unless otherwise herein provided, theviolation of any of the provisions of this Actshall be subject to Sections 34, 35, 36 and 37of the New Central Bank Act. If the offender isa director or officer of a bank, quasi-bank ortrust entity, the Monetary Board may alsosuspend or remove such director or officer. If

the violation is committed by a corporation, such corporation may be dissolved by quowarranto proceedings instituted by theSolicitor General.

CASES:

1. FIDUCIARY nature of bankingrequires high standards of integrity and

performance

G.R. No. 127469 January 15, 2004 PHILIPPINE BANKINGCORPORATION, petitioner,vs.COURT OF APPEALS and LEONILOMARCOS, respondents.

The BANKs Fiduciary Duty to its Depositor

The BANK is liable to Marcos for offsettinghis time deposits with a fictitious promissorynote. The existence of Promissory Note No.20-979-83 could have been easily proven hadthe BANK presented the original copies of the

promissory note and its supporting evidence.In lieu of the original copies, the BANK


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presented the "machine copies of theduplicate" of the documents. These substitutedocuments have no evidentiary value. TheBANKs failure to exp lain the absence of theoriginal documents and to maintain a record of

the offsetting of this loan with the timedeposits bring to fore the BANKs dismalfailure to fulfill its fiduciary duty to Marcos.

Section 2 of Republic Act No. 8791 (GeneralBanking Law of 2000) expressly imposes thisfiduciary duty on banks when it declares thatthe State recognizes the "fiduciary nature of

banking that requires high standards ofintegrity and performance." This statutorydeclaration merely echoes the earlier

pronouncement of the Supreme Court in Simex International (Manila) Inc. v. Court of Appeal s31 requiring banks to "treat theaccounts of its depositors with meticulouscare, always having in mind the fiduciarynature of their relationship." 32 The Courtreiterated this fiduciary duty of banks insubsequent cases .33

Although RA No. 8791 took effect only in theyear 2000 ,34 at the time that the BANK

transacted with Marcos, jurisprudence hadalready imposed on banks the same highstandard of diligence required under RA No.8791 .35This fiduciary relationship means thatthe banks obligation to observe "highstandards of integrity and performance" isdeemed written into every deposit agreement

between a bank and its depositor.

The fiduciary nature of banking requires banksto assume a degree of diligence higher than

that of a good father of a family. Thus, theBANKs fiduciary duty imposes upon it ahigher level of accountability than thatexpected of Marcos, a businessman, whonegligently signed blank forms and entrustedhis certificates of time deposits to Pagsaliganwithout retaining copies of the certificates.

The business of banking is imbued with publicinterest. The stability of banks largely dependson the confidence of the people in the honestyand efficiency of banks. In Simex International(Manila) Inc. v. Court of Appeal s36 we pointed

out the depositors reasonable expectationsfrom a bank and the banks corresponding dutyto its depositor, as follows:

In every case, the depositor expects the bank totreat his account with the utmost fidelity,whether such account consists only of a fewhundred pesos or of millions. The bank mustrecord 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 ofmoney the depositor can dispose of as he seesfit, confident that the bank will deliver it asand to whomever he directs.

As the BANKs deposi tor, Marcos had theright to expect that the BANK was accuratelyrecording his transactions with it. Upon thematurity of his time deposits, Marcos also hadthe right to withdraw the amount due him afterthe BANK had correctly debited his

outstanding obligations from his time deposits.

By the very nature of its business, the BANKshould have had in its possession the originalcopies of the disputed promissory note and therecords and ledgers evidencing the offsettingof the loan with the time deposits of Marcos.The BANK inexplicably failed to produce theoriginal copies of these documents. Clearly,the BANK failed to treat the account ofMarcos with meticulous care.

The BANK claims that it is a reputable banking institution and that it has no reason toforge Promissory Note No. 20-979-83. Thetrial court and appellate court did not rule thatit was the bank that forged the promissorynote. It was Pagsaligan, the BANKs branchmanager and a close friend of Marcos, whom
http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt31http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt31http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt31http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt32http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt32http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt33http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt33http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt33http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt34http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt34http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt34http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt35http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt35http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt36http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt36http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt36http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt36http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt35http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt34http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt33http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt32http://www.lawphil.net/judjuris/juri2004/jan2004/gr_127469_2004.html#fnt31


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the trial court categorically blamed for thefictitious loan agreements. The trial court heldthat Pagsaligan made up the loan agreement tocover up his inability to account for the timedeposits of Marcos.

Whether it was the BANKs negligence andinefficiency or Pagsaligans misdeed thatdeprived Marcos of the amount due him willnot excuse the BANK from its obligation toreturn to Marcos the correct amount of histime deposits with interest. The duty toobserve "high standards of integrity and

performance" imposes on the BANK thatobligation. The BANK cannot also unjustlyenrich itself by keeping Marcos money.

Assuming Pagsaligan was behind the spurious promissory note, the BANK would still beaccountable to Marcos. We have held that a

bank is liable for the wrongful acts of itsofficers done in the interest of the bank or intheir dealings as bank representatives but notfor acts outside the scope of theirauthority .37 Thus, we held:

A bank holding out its officers and agents as

worthy of confidence will not be permitted to profit by the frauds they may thus be enabledto perpetrate in the apparent scope of theiremployment; nor will it be permitted to shirkits responsibility for such frauds, even thoughno benefit may accrue to the bank therefrom(10 Am Jur 2d, p. 114). Accordingly, a

banking corporation is liable to innocent third persons where the representation is made inthe course of its business by an agent actingwithin the general scope of his authority even

though, in the particular case, the agent issecretly abusing his authority and attemptingto perpetrate a fraud upon his principal orsome other person, for his own ultimate

benefit.

Banks have the duty to exercise the highestdegree of diligence when transacting with the

public (FULL TEXT)

G.R. No. 167346 April 2, 2007

SOLIDBANK CORPORATION/ METROPOLITANBANK AND TRUST COMPANY ,* Petitioner,vs.SPOUSES PETER and SUSANTAN, Respondents

CORONA, J.: Assailed in this petition for review bycertiorari under Rule 45 of the Rules of Courtare the decisio n1 and resolution 2 of the Courtof Appeals (CA) dated November 26, 2004and March 1, 2005, respectively, in CA-G.R.

CV No. 58618 ,3 affirming the decision of the

Regional Trial Court (RTC) of Manila, Branch31.4 On December 2, 1991, respondentsrepresentative, Remigia Frias, deposited with

petitioner ten checks worthP455,962. Grace Neri, petitioners teller no. 8 in its Juan Luna,Manila Branch, received two deposit slips forthe checks, an original and a duplicate. Neriverified the checks and their amounts in thedeposit slips then returned the duplicate copy

to Frias and kept the original copy for petitioner.In accordance with the usual practice between

petitioner and respondents, the latters passbook was left with petitioner for therecording of the deposits on the banks ledger.Later, respondents retrieved the passbook anddiscovered that one of the checks,Metropolitan Bank and Trust Company(Metrobank) check no. 403954, payable tocash in the sum of P250,000 was not posted

therein.Immediately, respondents notified petitioner ofthe problem. Petitioner showed respondentPeter Tan a duplicatecopy of a deposit slip indicating the list ofchecks deposited by Frias. But it did notinclude the missing check. The deposit slip

bore the stamp mark "teller no. 7" instead of
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"teller no. 8" who previously received thechecks.Still later, respondent Peter Tan learned fromMetrobank (where he maintained an account)that Metrobank check no. 403954 had cleared

after it was inexplicably deposited by a certainDolores Lagsac in Premier Bank in San Pedro,Laguna. Respondents demanded that petitioner

pay the amount of the check but it refused,hence, they filed a case for collection of a sumof money in the RTC of Manila, Branch 31.In its answer, petitioner averred that thedeposit slips Frias used when she deposited thechecks were spurious. Petitioner accusedrespondents of engaging in a scheme toillegally exact money from it. It added that,

contrary to the claim of respondents, it was"teller no. 7" who received the deposit slipsand, although respondents insisted that Friasdeposited ten checks, only nine checks wereactually received by said teller. By way ofcounterclaim, it sought payment of P1,000,000as actual and moral damages and P500,000 asexemplary damages.After trial, the RTC found petitioner liable torespondents:Upon examination of the oral, as well as of the

documentary evidence which the parties presented at the trial in support of theirrespective contentions, and after taking intoconsideration all the circumstances of the case,this Court believes that the loss of MetrobankCheck No. 403954 in the sum of P250,000.00was due to the fault of [petitioner][It]retained the original copy of the [deposit slipmarked by "Teller No. 7"]. There is a

presumption in law that evidence willfullysuppressed would be adverse if produced.

Art. 1173 of the Civil Code states that "thefault or negligence of the obligor consists inthe omission of that diligence which isrequired by the nature of the obligation andcorresponds with the circumstances of the

person of the time and of the place"; and that"if the law or contract does not state thediligence which is to be observed in the

performance, the same as expected of a goodfather of a family shall be required."For failure to comply with its obligation,[petitioner] is presumed to have been at faultor to have acted negligently unless they prove

that they observe extraordinary diligence as prescribed in Arts. 1733 and 1735 of the CivilCode (Art. 1756) xxx xxx xxxWHEREFORE, premises considered,

judgment is hereby rendered in favor of[respondents], ordering [petitioner] to pay thesum of P250,000, with legal interest from thetime the complaint [for collection of a sum ofmoney] was filed until satisfied; P25,000.00moral damages; P25,000.00 exemplary

damages plus 20% of the amount due[respondents] as and for attorneys fees. Withcosts.SO ORDERED .5 Petitioner appealed to the CA whichaffirmed in toto the RTCs assailed decision: Serious doubt [was] engendered by the factthat [petitioner] did not present the original ofthe deposit slip marked with "Teller No. 7"and on which the entry as to Metrobank Check

No. 403954 did not appear. Even the most

cursory look at the handwriting thereonreveal[ed] a very marked difference with thatin the other deposit slips filled up [by Frias] onDecember 2, 1991. Said circumstancesspawn[ed] the belief thus, the said deposit slipwas prepared by [petitioner] itself to cover upfor the lost check .6 Petitioner filed a motion for reconsideration

but the CA dismissed it. Hence, thisappeal. 1a\^/phi1.net Before us, petitioner faults the CA for

upholding the RTC decision. Petitioner arguesthat: (1) the findings of the RTC and the CAwere not supported by the evidence andrecords of the case; (2) the award of damagesin favor of respondents was unwarranted and(3) the application by the RTC, as affirmed bythe CA, of the provisions of the Civil Code on
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common carriers to the instant case waserroneous .7 The petition must fail.On the first issue, petitioner contends that thelower courts erred in finding it negligent for

the loss of the subject check. According to petitioner, the fact that the check wasdeposited in Premier Bank affirmed its claimthat it did not receive the check.At the outset, the Court stresses that it accordsrespect to the factual findings of the trial courtand, unless it overlooked substantial mattersthat would alter the outcome of the case, thisCourt will not disturb such findings .8Wemeticulously reviewed the records of the caseand found no reason to deviate from the rule.

Moreover, since the CA affirmed thesefindings on appeal, they are final andconclusive on us .9 We therefore sustain theRTCs and CAs findings that petitioner wasindeed negligent and responsible forrespondents lost check. On the issue of damages, petitioner argues thatthe moral and exemplary damages awarded bythe lower courts had no legal basis. For theaward of moral damages to stand, petitioneravers that respondents should have proven the

existence of bad faith by clear and convincingevidence. According to petitioner, simplenegligence cannot be a basis for its award. Itinsists that the award of exemplary damages is

justified only when the act complained of wasdone in a wanton, fraudulent and oppressivemanner .10 We disagree.While petitioner may argue that simplenegligence does not warrant the award ofmoral damages, it nonetheless cannot insist

that that was all it was guilty of. It refused to produce the original copy of the deposit slipwhich could have proven its claim that it didnot receive respondents missing check. Thus,in suppressing the best evidence that couldhave bolstered its claim and confirmed itsinnocence, the presumption now arises that itwithheld the same for fraudulent purposes .11

Moreover, in presenting a false deposit slip inits attempt to feign innocence, pet itioners badfaith was apparent and unmistakable. Bad faithimports a dishonest purpose or some moralobliquity or conscious doing of a wrong that

partakes of the nature of fraud .12 As to the award of exemplary damages, thelaw allows it by way of example for the publicgood. The business of banking is impressedwith public interest and great reliance is madeon the banks sworn profession of diligenceand meticulousness in giving irreproachableservice .13 For petitioners failure to carry outits responsibility and to account forrespondents lost check, we hold that the lowercourts did not err in awarding exemplary

damages to the latter.On the last issue, we hold that the trial courtdid not commit any error. 1awphi1.nt Acursory reading of its decision reveals that itanchored its conclusion that petitioner wasnegligent on Article 1173 of the Civil Code .14 In citing the different provisions of the CivilCode on common carriers ,15 the trial courtmerely made reference to the kind of diligencethat petitioner should have performed underthe circumstances. In other words, like a

common carrier whose business is also imbuedwith public interest, petitioner should haveexercised extraordinary diligence to negate itsliability to respondents.Assuming arguendo that the trial court indeedused the provisions on common carriers to pindown liability on petitioner, still we see noreason to strike down the RTC and CA rulingson this ground alone.In one case ,16 the Court did not hesitate toapply the doctrine of last clear chance

(commonly used in transportation lawsinvolving common carriers) to a bankingtransaction where it adjudged the bankresponsible for the encashment of a forgedcheck. There, we enunciated that the degree ofdiligence required of banks is more than thatof a good father of a family in keeping withtheir responsibility to exercise the necessary
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