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Banking - I. Title and Classification of Banks, A. The Financial System…

- - - - 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.
        
        Gcash, VISA, MasterCard - not banks but allowed to be payment systems. Established to facilitate payment. These are bank partners.
        
        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
        
        BSP prints and issues currency
        
        Currency enters financial system, either as cash in banks or the public
        
        Part of the public holdings are deposited in banks
        
        Banks lend out or invest the public deposits along with their own cash holds
        
        Funds go back to banking system via further deposits.
        
        Definition of Terms -
        
        Money Supply - The currency in circulation/held by non-bank public deposits liabilities of commercial banks
        
        Reserve Money - Currency issued + reserves held by banks with the BSP
        
        Base Money - Reserve Money + reserve-eligible government securities, liquidity reserves and reserve deficiency of banks
        
        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.
        
        Application in the PH - Due to the developing nature of the country, the banking system plays a bigger role as compared to other financial institutions in mobilizing financial resources and allocating them to those who can put these to good use.
        
        Bank channels savings to entrepreneurial activities via credit extensions.
      - B3. Fiduciary nature of Banking -
        
        B4. Framework for Maintaining a Safe and Sound Banking System - (3) dimensions in dealing with regulatory and supervisory issues
        
        Internal or Corporate Governance
        
        Market discipline
        
        External Governance/ Bank regulation
        
        Internal or Corporate Governance - Objective is to maximize the long-term shareholder value. Thus, bank owners motivated to elect competend Board and Directors.
        
        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
        
        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.
        
        How Done - GBL measures to address this - It authorizes the Monetary Board to:
        
        Institute prompt and corrective actions
        
        Regulate the extension of DORSI loans
        
        Regulate electronic transactions
        
        How Competitiveness Fostered - GBL seeks to improve competitiveness through a more liberal policy on the entry of foreign banks and non-bank foreign investors.
        
        Access to information - The GBL requires the submission and publication of financial statements
        
        Data disclosed to the general public so that they can easily monitor banks and respond to signs of unsafe practices.
        
        Banks would then be pressured to behave prudently
        
        How Implemented by the GBL -
        
        2 independent directors as members of the Board of Directors of banks
        
        Limitations on directors, officers, stockholders and related interests (DORSI) lending
        
        Allowing teleconferencing or videoconferencing in the meetings of the Board
        
        Granting authority to the Monetary Board to set fit and proper rules
        
        Adoption of risk-based capital adequancy ratios
        
        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.
        
        Rationale - Because banks are businesses affected with public interest. A depositor expects the bank to treat his account with the utmost fidelity, whether such an account consists only of a few pesos or millions.
        
        The bank must record every transaction accurately and as promptly as possible.
        
        Degree of Diligence in Mortgage Contracts - When banks enters into a mortgage contracts involving registered lands - Exercise the highest degree of diligence and high standards of integrity and performance [Manlapat v. CA]
        
        Effect of Degree of Diligence - persons dealing with registered lands can solely rely on the certificates of title does not apply to banks.
        
        Negligence of Banks -
        
        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
        
        Misrouting or Misclearing of Checks (Tan v. CA) - As soon as their deposits are accepted by the bank teller, they wholly repose trust in the bank. Thus, in case of misrouting or misclearing, bank is liable for the amount + damages
        
        Rationale - bank transactions pass through a succession of bank personnel whose duty is to check and counter check transactions for possible errors.
        
        Inadvertence of Employees (Metropolitan Bank & Trust Company v. CA) - The bank is under obligation to treat the accounts of its depositors with meticulous care, whether such account consists only of a few hundred pesos or of millions. It must bear the blame for failing to discover the mistake of its employee.
        
        Responsibility arising from negligence in the performance of every kind of obligation is demandable.
        
        Incomplete Counts (PNB v. CA) - Where a Bank's receipt is inconsistent with its records of actual payment, its receipt is controlling and it is liable for the amount indicated in the Manager's checks.
        
        The subject receipt remains to be the primary or best evidence or "that which affords the greatest certainty of the fact in question.
        
        PNB’s act issuing the manager's checks and corresponding receipt before payment thereof was completely counted reckless and grossly negligent
        
        Withdrawal in Violation of Rules (BPI v. CA) - Where the negligence of a bank's personnel in allowing the withdrawal of an amount beyond deposits in an account, the bank must shoulder the loss.
      - Simex International v. CA - The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation.
        
        Either safekeeping and saving of money or, business and commerce faiclitator.
        
        Ordinary person usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordinary expenses.
        
        Business Entities - Bank is treated as an active associate which can dole out loans and can help in day to day transactions via issuance or encashment of checks, etc.,
    - - C1. Legislative History and Rationale - Taken from RA 337 with several modifications.
        
        Definition of Banks - Adopted classic definition. Banks are entites that lend funds obtained in the form of deposits.
        
        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 -
        
        Acceptance of deposits from the public
        
        Lending of funds obtained from deposits
        
        Banks also perform additional activities depending on the category of the bank
        
        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.
        
        Definition under the PDIC Charter - For the purposes of insurance, it is:
        
        The unpaid balance of money or its equivalent received by a bank in the usual course of business
        
        for which it had given or is obliged to give credit to a commercial, checking, savings, time or thrift account
        
        or which is evidenced by passbook, check and/or certificate of deposit printed or issued in accordance with BSP rules and reg and other applicable laws.
        
        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.
        
        Quasi-Banking - Originated from the tendency of that banks and non-bank financial intermediaries have increasingly resorted to issuing a variety of debt instruments, other than bank deposits to obtain funds from the public.
        
        Characteristics of Deposit Substitutes -
        
        Evidenced by debt instruments (eg. banker’s acceptances in trade transactions, promissory notes, participations, certificates of assignment, and similar instruments with recourse, and repurchase agreements);
        
        T-o be used for the purpose of re-lending or purchasing of receivables and other obligations.
        
        WHEN BANKING FUNCTION/Lenders - borrowing from 20 or more lenders at any one time (same as banking) but the manner of borrowing is different—it is not thru the taking of deposits
        
        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.
        
        Loan Agreement - Specifies the terms and conditions for repayment of a loan, including the finance charge or interest rate
        
        Manners of Payment -
        
        (1) Demand loan - payable on demand
        
        (2) Installment loan - in equal monthly installments
        
        (3) Time loan - good until further notice or due at maturity
        
        Certain Other Functions (GBL, Sec. 29, 53) -
        
        Section 53. Other Banking Services. - In addition to the operations specifically authorized in this Act, a bank may perform the following services:
        
        53.1. Receive in custody funds, documents and valuable objects;
        
        53.2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities;
        
        53.3. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business;
        
        53.4 Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and
        
        53.5. Rent out safety deposit boxes.
        
        RF - Deposit taking most important. kasi other entities lend money, only banks take deposits
        
        C4. Classification of Banks -
        
        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
        
        Commercial Banks - Wields:
        
        General Powers - incident to Corporations
        
        All other powers - Necessary to carry on the business of commercial banking.
        
        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
        
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        Enumeration of necessary powers -
        
        Accepting drafts and issuing letters of credit
        
        Discounting & negotiating promissory notes, drafts, bills of exchange, & other evidences of debt
        
        Accepting or creating demand deposits
        
        Receiving other types of deposits and deposit substitutes
        
        Buying and selling foreign exchange and gold or silver bullion
        
        Acquiring marketable bonds and other debt securities
        
        Extending credit
        
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        Trust Departments - department in a bank that administers trusts and guardianships. Trust departments manage trust funds for their clients and decide what investments to make. Trust departments also may manage assets for businesses, such as administering pension funds and acting as a trustee for corporate bonds or as a transfer agent.
        
        Publicly Listed Universal banks - May own up to 100% of the voting stock of ONLY ONE other universal bank or commercial bank
        
        Non-allied enterprise - Determined by the BSP via a memorandum circular.
        
        not connected/related to traditional banking e.g., warehouses
      - D. Bank Deposits
        
        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 -
        
        Depositary - The bank that received the funds
        
        Depositor - Person who places the funds with the bank.
        
        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.
        
        Types of Depositary - Once bank receives deposits, it may deposit either in its RBU or FCDU Books.
        
        RBU - If peso deposits
        
        If peso transactions, recorded in RBU
        
        FCDU - if foreign currency.
        
        If foreign, recorded in FCDU books
        
        Tax on Deposits -
        
        GR - 20% FWT withheld by the bank. Subject of tax is here is the interest paid by the bank to the depositor.
        
        XCPN - 15% interest income from foreign currency deposits under expanded foreign currency deposit system.
        
        Secrecy/Confidentiality -
        
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        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.
        
        Transfer of Ownership; Effects - The banks where the funds are deposited are considered the owners, as ownership is transferred upon the perfection of the contract.
        
        This is why banks can make use of the amount deposited for its banking operations such as the payment of interests or withdrawals.
        
        Delivery Requirement; Perfection - because deposit is a real contract, there should be delivery of money.
        
        Similarly, there must be the presence of all the essential elements of a contract (consent, object, cause).
        
        Contractual Relationship - between banks and depositors.
        
        Being a contract, the bank may receive or decline deposits and do business with whom it pleases.
        
        Savings or current deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of-the parties
        
        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.
        
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        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:
        
        Specify the criteria and description of the type of customers that are likely to pose low, normal or high risk to their operations
        
        The· standards in applying reduced, average and enhanced due diligence including a set of conditions for the denial of account opening.
        
        How Policy is Formulated - Several Factors must be taken into account such as:
        
        Background/Source of Funds
        
        Country of Origin
        
        Linked Accounts
        
        business Activities
        
        Type of services/products/transactions to be entered into with the covered institution
        
        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:
        
        OBTAIN - minimum information from individual customers and authorized signatories of corporate and juridical entities
        
        CONFIRM - said information with valid identification documents.
        
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        Natural Person Accounts - can be subdivided into individual (personal) accounts and joint accounts.
        
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        Presumption of Ownership - A depositor is presumed to be the owner of funds standing in his name in a bank deposit.
        
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        Corporate Entities/Other Institutions - The opening of a bank account is a precondition for the issuance of a certificate of incorporation.
        
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        Types of Deposits -
        
        Demand
        
        Savings
        
        NOW
        
        Time Certificate
        
        Long Term Negotiable Certificates of Deposit
        
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        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)
        
        https://coggle.it/diagram/YDz_EFR6db4TqwcW/t/i-concept-of-loan-ii-commodatum-iii-simple-loan
        
        E. Systemic Risk: Certain Prudential Measures
        
        E1. Reserves
        
        E2. SBL/Single Borrower's Limit
        
        (3) Directors, Officers, Stockholders and Related Interests (DOSRI) Rules
        
        (4) Allowance for Credit Losses
        
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        Trust Departments - department in a bank that administers trusts and guardianships. Trust departments manage trust funds for their clients and decide what investments to make. Trust departments also may manage assets for businesses, such as administering pension funds and acting as a trustee for corporate bonds or as a transfer agent.
  - - - Change of to Structure of Banking System - Occurred during the 1990s.
        
        More banks in the country
        
        More foreign banks actively participating in the domestic system, they brought in capital, new technology and more financial products
        
        close integration of the domestic financial system with international system
        
        Tremendous increase of the total assets of the baking system and the rise of their ration to the country’s gross national product (GNP)
        
        these indicated that the banking system can mobilize resources to support growing economy
- - - - 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.
        
        4. Securities and Exchange Commission - All banks organized as a stock corporation thus, SEC has regulatory jurisdiction over them.