GENERAL BANKING LAW (RA 8791)

1. Definition and Classification of Banks

BANKS refer to entities engaged in the lending of funds obtained in the form of deposits (Sec. 3.1)

Refer to entities engaged in lending of funds obtained from the public through the receipt of deposits of any kind and all entities regularly conducting such operations

Elements of Banks:a) Engaged in lending of funds (allocating resources)b) Obtained in the form of deposits (mobilizing savings)c) Authorized by the Monetary Boardd) Deposits obtained from the public (20 or more lenders)

Distinctions of Banks from Quasi-Banks

Basic distinction: Quasi-Banks do not accept deposits but rather accept merely deposit substitutes

QUASI-BANKS entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of receivables and other obligations

Deposit Substitutes alternative form of obtaining funds from the public, other than the deposits through the issuance, acceptance of debt instruments for the borrowers own account for the purpose of relending or purchasing receivables and other obligations (Sec. 95, NCBA)This may include:a. Bankers acceptancesb. Promissory notesc. Participationsd. Certificates of assignments and similar instruments with recoursee. Repurchase agreements

Classification of Banks:1. Universal Banks Primarily governed by the GBL and they have the powers of commercial bank; they can exercise the powers of an investment house and the power to invest in non-allied enterprises; they have the highest capitalization requirement

Investment House: any enterprise which engages or purports to engage, whether regularly or on an isolated basis, in underwriting of securities of another person or enterprise, including securities of the government and its instrumentalities

Underwriting securities process of guaranteeing distribution and sale within the Philippines of securities of the government and its instrumentalities

2. Commercial Banks Ordinary banks governed by the GBL which have a lower capitalization requirement; cannot exercise powers of investment house nor invest in non-allied enterprises

3. Thrift Banks (RA 7906) may exercise most of the powers and functions of a commercial bank except that they cannot open current or check accounts without prior Monetary Board approval and cannot issue letters of credit Savings and mortgage banks Stock savings and loan associations Private development banks

4. Rural Banks (RA 733) Mandated to make needed credit available and readily accessible in the rural areas on reasonable terms governed primarily by the Rural Banks Act

5. Cooperative Banks (RA 6938) Whose majority shares are owned and controlled by cooperatives primarily to provide financial and credit services to cooperatives

6. Islamic Banks (RA 6848) Whose business dealings & activities are subject to both principles and rulings of Islamic Shariah such as Al Amanah Islamic Investment Bank of the Philippines

7. Other classifications of Banks as the Monetary Board may determine

Universal Banks vs. Commercial Banks

UNIVERSAL BANKSCOMMERCIAL BANK

As to Powers

Powers authorized for a Commercial Bank Powers of an Investment House Power to invest in Non-Allied Enterprises

Sec. 53 (GBL) Receive in custody funds, documents and valuable objects Act as a financial agent & buy and sell, by order of and for the account of their customers, shares, evidence of indebtedness & all types of securities Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts Rent our safety deposit boxes General powers incident to corporations All such powers as may be necessary to carry on business of commercial banking Accepting drafts and issuing letters of credit Discounting & negotiating promissory notes, drafts, bills of exchange, & other evidence of debt Accepting or creating demand deposits Receiving other types of deposits and deposit substitutes Buying & selling foreign exchange & gold or silver bullion Acquiring marketable bonds and other debt securities Extending credit, subject to rules promulgated by Monetary Board

BSP Circular 271 (2002)(1) invest in the equities of allied enterprises;(2) purchase, hold and convey real estate;(3) receive in custody funds, documents and valuable objects;(4) act as financial agent;(5) make collections and payments for the account of others;(6) act as managing agent, adviser, consultant or administrator of investmentmanagement/advisory/-consultancy accounts;(7) rent out safety deposit boxes; and(8) engage in quasi-banking functions.

As to Capitalization Requirement

P3 billion (Head Office only)P6 billion (up to 10 branches)P15 billion (11-100 branches)P20 billion (more than 100 branches)P2 billion (Head Office only)P4 billion (up to 10 branches)P10 billion (11-100 branches)P15 billion (more than 100 branches)

As to Equity Investments*acquisition of such equity/equities shall be subject to the approval of the Monetary Board

Invest in equities of Allied (Financial or Non-Financial) and Non-Allied Enterprises

Total investment of equities (allied or non-allied) shall not exceed 50% of the net worth of the bank

Equity investment in any one enterprise shall not exceed 25% of the net worth of the bank

Can only invest in Allied (Financial or Non-Financial) Enterprises

Total investment of equities in allied enterprises shall not exceed 35% of the net worth of the bank

Equity investment in any one enterprise shall not exceed 25% of the net worth of the bank

As to Equity Investments in Financial Allied Enterprises

Can own up to 100% of the equity of thrift bank, rural bank or a financial allied enterprise Can own up to 100% of the equity of thrift bank or rural bank

Where the equity investment is in other financial allied enterprise, including another commercial bank, such investment shall remain a minority holding in that enterprise

As to Equity Investments in Non-Financial Allied Enterprises

Can own up to 100% of the equity in a non-financial allied enterprise Can own up to 100% of the equity in a non-financial allied enterprise

As to Equity Investments in Non-Allied Enterprises

Equity investment of a universal bank or of its wholly or majority-owned subsidiaries, in single non-allied enterprise shall not exceed 35% of the total equity in that enterprise nor shall it exceed 40% of the voting stock of that enterprise

As to Equity Investments in Quasi-Banks

Monetary Board may further limit to 40% equity investmentsMonetary Board may further limit to 40% equity investments

Distinctions of Banks from Trust Entities

BANKSTRUST ENTITIES

Refer to entities engaged in the lending of funds in the form of deposits from the public Engaged in the business of holding, managing funds and/or property of the trustor for the benefit of the trustee Trust agreement is entered into between trustor & trust entity covering the terms & conditions of the trust

TRUST ENTITY Stock Corporation or a person duly authorized by the Monetary Board to engage in trust business and act as trustee or administer any trust or hold property in trust or on deposit for the use, benefit or in behalf of others SEC will register the articles of incorporation or by-laws or any amendment thereto of a trust entity only if accompanied by certificate of authority from BSP

Trust Operations: Trust products and services range from simple custodianship and safekeeping to corporate mortgage trust indentures to complex estate planning and employee benefit administration and fund management

These assets are managed or invested by the trust institution in accordance with the trust or investment management agreement signed with the investor or owner of the assets

(1) Corporate powersGeneral powers incident to corporations (Sec 36, Corporation Code)

1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation.

(2) Banking and incidental powersAll such powers as may be necessary to carry on the business of commercial banking (Sec 29)a. Accepting draftsb. Issuing letters of creditc. Discounting and negotiating promissory notes, bills of exchanges, and other evidence of debtd. Accepting or creating demand deposits d. Diligence required of banksSection 2 of GBL prescribes the statutory diligence required from banks that banks must observe high standards of integrity and performance in servicing their depositors.

PBC v. CA The degree of diligence required of banks is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is concerned.In other words, the aforesaid higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors.

e. Nature of bank funds and bank depositsThe prevailing policy on the matter is to preserve the absolute confidentiality enjoyed by bank deposits.

f. Stipulation on interests (Sec 43)The Monetary Board may prescribe the maturities for various types of loans and other credit accommodations. Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action.

g. Grant of loans and security requirements(1) Ratio of net worth to total risk assetsThe minimum ration which the net worth of a bank must bear to its total risk assets which may include contingent accounts (Sec 34)GENERAL RULE: A bank must conform to the risk-based capital ratio prescribed by the MBEXCEPTIONSThe MB may alter or suspend compliance for a period of 1 year.a. In case of a bank merger or consolidationb. When a bank is under rehabilitation under a program approved by the BSP

(2) Single borrowers limit (SBL)GENERAL RULE:The total amount of loans, credit accommodations and guarantees extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed 25% of the net worth of such bank (as increased by BSP Circular 425). The basis for determining compliance with the SBL is the total credit commitment of the bank to the borrower. (Sec. 35, GBL)EXCEPTIONS 1. The MB may otherwise prescribes for reasons of national interest (Sec 35.1)2. Wholesale lending activities of government banks t participating institutions for relending to end-user borrowers: separate limit of 35% net worth (BSP Circular No.425, March 25,2004)Exclusions from the ceiling:1. Loans secured by the obligations of the Bangko Sentral or of the government.2. Loans fully guaranteed by the government.3. Loans covered by assignment of deposits in the lending bank and held in the Philippines.4. Letters of credit covered by margin deposits5. Non-risk items specified by the Monetary Board.

(3) Restrictions on bank exposure to DOSRI (directors, officers, stockholders and their related interests)GENERAL RULENo director or officer of any banka. shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such banks, norb. shall become a guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bankEXCEPTIONS1. Valid insider lending (Sec 36)2. Loans, credit accommodations extended by a cooperative bank to its cooperative shareholders (Sec 36)