A. History of the System - Primarily based on RA 8971 or the General Banking Law of 2000

B. Declaration of Policy (GBL Sec. 2) - New Provision introduced by the amendments.

• The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy.

B2. Role of banks in the Economy - 3 major roles.

• (1) Involvement in financial intermediation,
• (2) Money supply creation process and
• (3) Payment systems
  

Financial Intermediation - Financial intermediaries take money from investors, pool it, and invest the pooled money in other enterprises Ex. Depository institutions, life insurance companies, mutual funds, and pension funds

Money Supply - The money creation process involves the BSP, the banks and the general public.

Payment Systems - Banks transfer wealth from one party to another via economic transactions. Via clearing checks and transmitting electronic payments, banks enable goods and services to be exchanged throughout the economy.

• Due to large volume of everyday transactions, there must be a safe and acceptable means of payment. This is where banks come in.

B3. Fiduciary nature of Banking -

B4. Framework for Maintaining a Safe and Sound Banking System - (3) dimensions in dealing with regulatory and supervisory issues

1. Internal or Corporate Governance
2. Market discipline
3. External Governance/ Bank regulation

C. Definition and Classification of Banks

C1. Legislative History and Rationale - Taken from RA 337 with several modifications.

1. Definition of Banks - Adopted classic definition. Banks are entites that lend funds obtained in the form of deposits.
2. Class of Banks -

• Universal Banks - Formerly, commercial banks with expanded commercial banking authority
• Cooperative/Islamic Banks - Introduced new definitions
• Deleted old provisions re: DBP and Landbank. Both now covered by regular classifications.

C2. Banks - refers to entities engaged in the lending of funds obtained in the form of deposits.

• Moneyed institutes founded to
  
  • (1) facilitate the borrowing, lending, and safe-keeping of money and
  • (2) deal in notes, bills of exchange, and credits
• “Bank” and “banking institution” are synonymous and interchangeable

C3. Basic / Classic Functions -

1. Acceptance of deposits from the public
2. Lending of funds obtained from deposits

• Banks also perform additional activities depending on the category of the bank
  

C4. Classification of Banks -

D. Bank Deposits

Definitions

A. Money - Comes in three forms:

1. Commodity Money - value of money is derived from the commodity of which it is made (gold for e.g.)
2. Fiat Money - value of money is only by order of government (Central bank)
3. Fiduciary - depends for its value on confidence that it is an accepted medium of exchange

B.Financial Instruments - monetary contracts; tradeable assets; bundles of capital that can be traded; the products traded in the financial market

C. Financial Markets - A place where finacnial institutions and individuals interact to exchange FInstruments.

D. Financial Institutions - Entities that provide services to the individual participants of the FMarket e.g., banks, insurance firms, hedge funds, mortgage companies, etc.,

B. Regulators of the Financial System

Regulators in the Philippines -

1. BSP
2. PDIC (PH Deposit Insurance Corporation)
3. Insurance Commission
4. Securities and Exchange Commission

1. BSP (Bangko Sentral ng Pilipinas - Regulator for banks.

• Governing Laws/Rules - The New Central Bank Act, Central Banking Act, the PDIC Act, and the Manual of Regulation of Banks (MORB)
• Note responsibilities and objective of BSP under Sec. 3 of the Central Bank Act.

2. PDIC (PH Deposit Insurance Corporation) -

• Governing Laws/Rules - the PDIC Act.
• Primarily insures the deposits in banks and acts as receiver and liquidator of banks in distress.
• However, also acts as a regulator by issuing rules and regulations such as the implementing rules on premiums to be paid by banks.

3. Insurance Commission - Handles insurance companies. Some overlap between this and the BSP.

Legislative History - Lapsed into effectivity on June 13, 2000 and repealed RA No. 337 the former General Banking Act.

Rationale for Change - Legal framework for the operation of banks and other financial institutions needs to keep pace with the changing domestic and international economic developments.

• Tide of liberalization, globalization and technological innovation
  

Procedure for Creation of Money - This allows the contraction/expansion in the money supply to become a multiple of the contract/expansion in base money

1. BSP prints and issues currency
2. Currency enters financial system, either as cash in banks or the public
3. Part of the public holdings are deposited in banks
4. Banks lend out or invest the public deposits along with their own cash holds
5. Funds go back to banking system via further deposits.

Relationship of Banking System with money Supply - monetary instruments use certain instruments to manage the money supply, via the control of reserve money and base money such as the purchase and sale of securities in the open market, etc.,

• These all involve the banking industry.
• Thus, any breakdown of the banking system affects the money supply.
• This is why banks are called the transmission belts of the monetary policy.

Public Interest - Despite commercial relationship between banks and clients, Due to importance of banks to the economy and level of trust placed in them, the banking industry is impressed with public interest.

• Thus, governmental regulation and oversight extends to many aspects of banking

Degree of Diligence Required (RA 8297 Sec. 2) - Banks must observe high standards of integrity and performance, beyond degree of diligence required from a good father of a family.

Negligence of Banks -

1. GR - A bank should observe the highest degree of care and diligence in the performance of its fiduciary duty.

• Thus, it must bear the blame for the mistake, inadvertence and negligence of its employees

1. Internal or Corporate Governance - Objective is to maximize the long-term shareholder value. Thus, bank owners motivated to elect competend Board and Directors.

2. Market Discipline - market, if working properly and not subjected to unnecessary interventions from the government, can exert pressure on banks to maintain their safety and soundness.

• Thus, there must be (a) Competitive Market Structure + Access to information

3. External Governance/ Bank regulation - Bank regulation and supervision.

• in areas where corporate governance and market discipline are weak or ineffective, bank regulation and supervision may play a greater role.

Acceptance of Deposits - Deposits are funds placed with a bank in a savings/demand account subject to withdrawal by check. As an action, is the act of placing cash, checks or drafts, int he custody of a bank to be withdrawn at the will of a depositor.

Deposit Taking and Lending of Funds - Can refer to either commodatum or mutuum. But, generally refers to mutuum

• Simple Loan Mutuum - Delivery of a consumable. Condition that thing of the same kind and quality shall be paid later.
• Need not be gratuitous, can be with interest
• Here, ownership passes to the borrower.

Deposit Substitutes - Alternate forms of obtaining funds from the public for the purpose of relending or purchasing of receivables and other obligations.

• Ex. Through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account
• This is done by Banks authorized by the BSP to engage in quasi-banking functions.
• Still a loan from the public with the bank as the debtor or borrower. The mode just changes. Instead of borrowing through deposits, mode is done through debt instruments. Substitutes for loans.

Loan Agreement - Specifies the terms and conditions for repayment of a loan, including the finance charge or interest rate

1. Universal banks - Wields all the powers granted to commercial banks.

• Additionally, authorized to
• (1) exercise the powers of an investment house and
• (2) invest in non-allied enterprises
• (3) May own up to 100% of the equity in thrift bank, rural bank, financial allied enterprise, or non-financial allied enterprise

2. Commercial Banks - Wields:

• General Powers - incident to Corporations
• All other powers - Necessary to carry on the business of commercial banking.
  

3. Thrift Banks - Composed of the following:

• Savings and mortgage banks
• Stock savings and loan associations
• Private development banks
• Any Banking corporation that may be organized for any of its enumerated purposes
  

4. Rural banks

5. Cooperative Banks - Organized to provide a wide of financial services to cooperatives and their members.

• Primary Function - To provide financial, banking, and credit services to cooperative orgs and their members

6. Islamic Banks - Al-Amanah Islamic Investment Bank of the PH. Governed pby the basic principles of Shari'a within the purview of its stated purpose.

7. Other Classifications as determined by the monetary board - Monetary Board is authorized to determine other categories of banks as it may deem appropriate

Enumeration of necessary powers -

1. Accepting drafts and issuing letters of credit
2. Discounting & negotiating promissory notes, drafts, bills of exchange, & other evidences of debt
3. Accepting or creating demand deposits
4. Receiving other types of deposits and deposit substitutes
5. Buying and selling foreign exchange and gold or silver bullion
6. Acquiring marketable bonds and other debt securities
7. Extending credit
   

Purpose -

1. Promote and accelerate the socioeconomic development of the Autonomous Region by performing banking, financing, and investment operations and
2. to establish and participate in agricultural, commercial, and industrial ventures based on the Islamic concept of banking (RA 6848, sec 3)
   

Government Banks - Universal or commercial banks owned or controlled by the national government such as the DBP or Landbank.

• Subject to regulation and supervision by the BSP pursuant to RA 7653, Sec. 25 and their chaters.
  

Functions of Government Banks - may act as depositary of funds of the govt, its pol subdivisions and instrumentalities, and GOCCs

Definition of Bank Deposits (Deposit Transaction) - the act of placing money, checks and the like with a bank. This is peculiar to the banking business.

Distinctions between Terms -

1. Depositary - The bank that received the funds
2. Depositor - Person who places the funds with the bank.
3. Deposit - The fund itself.

• Note that this is more than an ordinary debt, since the fund is subject to the depositor’s call, with distinct legal qualities and the bank is required to repay the deposit at a designated place, in accordance with banking rules.
  

Nature of Bank Deposits - Not true deposits but are instead irregular, simple loans under Art. 1980 of the Civil Code.

Simple Loan / Mutuum - a contract whereby one of the parties delivers to another, money or other consumable thing and the latter acquires ownership thereof upon the condition that the same amount of the same kind and quality shall be paid.

Contractual Relationship - between banks and depositors.

1. Being a contract, the bank may receive or decline deposits and do business with whom it pleases.
2. Savings or current deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of-the parties

Customer Acceptance Policy - The BSP, pursuant to the Anti-Money Laundering Act developed a customer acceptance policy that must be observed by banks

Effect of Policy - Under the policy, banks must:

1. Specify the criteria and description of the type of customers that are likely to pose low, normal or high risk to their operations
2. The· standards in applying reduced, average and enhanced due diligence including a set of conditions for the denial of account opening.
   

Special Capacity of Minors - RA 3237, Sec. 35 as amended expressly allows minors, in their own right and in their own name to open savings and time deposits.

• XCPN - if any guardian shall give notice in writing to the bank to not make payment of deposits, dividends or interest to the minor, such payment shall be made only to the guardian.

Types of Deposit Accounts - Deposit accounts may be opened by natural persons, corporate entities and any other institutions. These can be further subdvided.

Requisites for Opening Deposit Account - Prior to opening the account, the bank must:

1. OBTAIN - minimum information from individual customers and authorized signatories of corporate and juridical entities
2. CONFIRM - said information with valid identification documents.

Natural Person Accounts - can be subdivided into individual (personal) accounts and joint accounts.

Joint Account - Owned by (2) or more persons, sharing equal rights and liabilities. Thus, the funds inside are co-owned by the joint depositors. The funds are presumed to be in equal portions, with the benefits and charges proportional to the respective shares as well.

Presumption of Ownership - A depositor is presumed to be the owner of funds standing in his name in a bank deposit.

Corporate Entities/Other Institutions - The opening of a bank account is a precondition for the issuance of a certificate of incorporation.

Prohibited Accounts - Anonymous Accounts/Under Fictitious Names Are absolutely prohibited by RA 9160, Sec. 9 (Anti Money Laundering Act)

Effect of Deceased Depositors -

1. GR - If the bank has knowledge of such death, it shall not allow withdrawals from the deposit UNTIL the Commissioner of the BIR certificies the payment of estate taxes.
2. XCPN - If the Commissioner authorizes the administrator or, one of the heirs to withdraw an amount not exceeding P20,000 without certification.

• a. Here, all withdrawal slips shall contain a statement that all of the joint depositors are still living at the time of withdrawal, with the statement made under oath by said depositors.
  

Survivorship Agreements - Aleatory contract, supported by lawful consideration. A mutual agreement of the joint depositors permitting either of them to withdraw the whole deposit during their lifetime and to transfer the balance to the survivor upon the death of one of them.

• considered an obligation with a term, with the term being death. Specifically allowed by Art. 2010 of the Civil Code.

Garnishment -

1. GR - Bank deposits may be subject of garnishment to satisfy a final judgment. Thus, the prohibition against examination or inquiry into a bank deposit under RA 1405 does not cover garnishment.
2. XCPN -

• Receivership or Liquidation
• Foreign Currency Deposits
• Rules of Court

Receivership or Liquidation - assets of institutions under receivership/liquidation are deemed in custodia legis in the hands of the receiver. Thus, exempt from any order of garnishment, levy attachment or execution.

Foreign Currency Deposits -

1. GR - 6426, Sec. 8 in relation to Central bank circ. No. 960, Sec. 113 exempts foreign currency deposits from attachment, garnishment, or any other process of any court, legislative body, or any administrative body whatsoever.
2. XCPN -In the case of Salvacion, the SC held that the application of the exemption depends on the extent of the justice achieved by its implementation. There, the exemption was not applied because otherwise an alien debtor would have been able to evade payment of damages owned to his rape victim as his remaining assets were in a Foreign Currency Deposit.

• case was pro hac vice, applying only to transients.

Types of Deposits -

1. Demand
2. Savings
3. NOW
4. Time Certificate
5. Long Term Negotiable Certificates of Deposit

Interest -

1. GR - Deposits shall not be subject to interest ceilings
2. XCPN - When it constitutes unsafe and unsound banking practice.
   

Demand Deposits/Current/Checking Accounts - All liabilities of a bank denominated in PH Currency and are subject to payment in legal tender upon demand via presentation of checks.

• Also refers to deposits subject to withdrawal by check or ATMs. these are known as current or checking accounts.
• Interest here may or may not be paid by the bank. This is becuase the depositor can take out his funds at any time.
  

Savings Deposit - Interest-bearing deposits withdrawable by presentation of a withdrawal slip with passbook or, via ATMs.

• As contrasted with time deposits, Savings deposits are interest bearing deposit accounts without a stated maturity.
• Funds can be deposited or withdrawn at will.
• These usually pay interest from the day of deposit to the day of withdrawal.
  

Negotiable Order of Withdrawal Accounts (NOW) - Interest-bearing deposits withdrawable by NOWs or Negotiable Orders of Withdrawal.

• Combines the payable on demand feature of checks + investment feature of savings account
  

Time Certificate Deposits - Interest-bearing deposits with specific maturity dates, evidenced by certificates issued by the bank.

• A deposit account with interest for a fixed term.
• Funds cannot be withdrawn before maturity without giving advance notice.
• Thus, issued for a specific period or (of yung nasa book but parang or) term.

Interest in Time Deposits - Shall not exceed the interest for (1) year. But, such interest/yield paid in advance shall not exceed the interest for (1) year.

Long Term negotiable Certificates of Deposit - Interest bearing negotiable certificates of deposit WITH a minimum maturity of (5) years.

Overdraft - when a check is issued for an amount more than what the depositor has in deposit with the bank.

E. Systemic Risk: Certain Prudential Measures

(3) Directors, Officers, Stockholders and Related Interests (DOSRI) Rules

(6) Capital Adequacy (Basel I-III) Section 34, General Banking Law of 2000

D. Foreign Banks in the Philippines - the Foreign Investments Act of 1991 defines a Philippine national as: “a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines.

(1) Subsidiaries - omestic corporations whose entire or majority shares of stock are owned by a foreign bank. A subsidiary is considered a separate legal entity from the parent foreign corporation.

(2) Branches - branch is that part of the foreign bank licensed to do business in the Philippines. The Philippine branch is not considered a separate legal entity from the parent corporation

• (Foreign Banks Liberalization Act, Sec. 74), although for purposes of license to operate, the BSP issues the license only to the Philippine branch, thereby treating such branch as a separate legal entity.

(3) Offshore Banking Units (OBUs) - a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Central Bank of the Philippines to transact offshore banking business in the Philippines.

• Offshore Banking" shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds from external sources and the utilization of such funds as provided in this Decree

Insured Deposits (PDIC Charter, Sec. 5) - amount due to any bonafide depositor for legitimate deposits in an insured bank as of the date of closure but not to exceed Five hundred thousand pesos (P500,000.00)

• determined by addiung together all deposits in the bank mantained in the same right and Capacity

Definition of Deposits - unpaid balance of money or its equivalent received by a bank in the usual course of business. with evidence of deposit.

Joint Accounts - shall be insured separately from any individually-owned deposit account.

• Maximum insured deposit shall be divided into equal shares as there are individuals.
  

Types of Depositary - Once bank receives deposits, it may deposit either in its RBU or FCDU Books.

1. RBU - If peso deposits

• If peso transactions, recorded in RBU

2. FCDU - if foreign currency.

• If foreign, recorded in FCDU books

Tax on Deposits -

1. GR - 20% FWT withheld by the bank. Subject of tax is here is the interest paid by the bank to the depositor.
2. XCPN - 15% interest income from foreign currency deposits under expanded foreign currency deposit system.

Secrecy/Confidentiality -

Confidentiality for General deposits (RA 1405) -

1. GR - All deposits, of whatever nature may not be looked into. Covers funds of whatever nature so long as the bank may use and utilize it in authorized loans.
2. XCPN -

• upon written permission of the depositor or investor
• in cases of impeachment
• upon order of a competent court in cases of bribery (plunder), dereliction of duty, violates of Anti-Graft act.
• (d) when the money deposited or invested is the subject matter of the litigation, and
• e) in cases of violation of the Anti-Money Laundering Act (AMLA), the Anti-Money Laundering Council (AMLC) may inquire into a bank account upon order of any competent court.

For Foreign Currency Deposits -

1. GR - All deposits, of whatever nature may not be looked into. Covers funds of whatever nature so long as the bank may use and utilize it in authorized loans.
2. XCPN - Only upon written permission.

• AMLA may also look into this

Scope of the Term Deposits - Includes placement in trust departments of banks.

• XCPN - Bonds, being debt instruments and not investments are not covered. Also does not cover funds under safe-keeping in safety deposit boxes.

Confidentiality under the GBL - Sec. 55 is broader in scope.The confidentiality applies to any information relative to the funds or properties in the custody of the bank. It’s not just applicable to deposits.

• This 55.1(b) provides that the confidentiality and secrecy applies to all FUNDS OR PROPERTIES (even if it’s not in the nature of a deposit) received by the bank, not just deposits. s
• Must be WRITTEN Consent

Effect of Irregular Deposits (Serrano v. Central Bank) - Therefore, Art. 1287 of the Civil Code, which prohibits compensation when one of the debts arises from depositum,
does NOT apply.

• Article 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum.

  
  

• Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of article 301. (1200a)