Let us begin with the General Banking Law of 2000 RA 8791. It was signed into law on May 23, 2000.

SECTION 1. Title. — The short title of this Act shall be "The General Banking Law of 2000."

The law it replaced was General Banking Law, so it add 2000.

SECTION 2. Declaration of Policy. — 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. (n)

We had seen this already in New Central Bank Act. The whole par is an exhortation and there is no legal measurement to verify the fulfilment of this provision.

What is a bank?

3.1. "Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits.

Many commentators say this definition is inferior to the definition in the old law because the old law says, banks are entities duly authorized by the monetary board to engage in the business of regularly lending funds obtained regularly from the public to the receipt of deposits of any the bank. So it’s a more precise definition because in the present definition, entities which lend funds obtained from the public but not as deposits but rather as debts for their accounts whether done regularly or not and those which regularly regulated obtained from occasional receipt of deposit should not be considered as a bank.

So what is the difference between the old and the new definition? The qualifier regularly because it would seem from this new definition even if you do not regularly receive deposits from the public, you can be bank.

What is the difference between a bank and a quasi-bank which also falls under the jurisdiction of BSP?

A quasi-bank does not receive deposits but it receives what is called deposit substitutes.

What is a deposit substitutes?

As you well know, deposits are not contract of deposits in the CC. Deposits made to the bank are actually mutuum. The depositor is lending money to the bank and the bank lends the money to the borrowers that it approves. And the purpose of money goes in and out on a regular basis because you the depositor cannot, upon notice, withdraw your deposit. In practice you can withdraw your deposits although the small

print of the passbook it says, bank reserves the right to require advance notice 1-2 days before it will give you back the money you deposited in the bank. (Fr discussed time deposits and consequences of pre terminating the same … pero asa ang deposit substitute didto? =)

Can the bank be forced to accept payment before the end of the term? Is it something like subscription of shares? In subscription, you have subscribed, you have a balanced, you give the money and the corporation cannot but accept it? Is it the same rule?

In a decided case, the SC ruled that the bank cannot refuse early payment. The only thing it can do is the bank can ask for a fine or penalty, a reasonable penalty for early payment. What justifies it? The bank has a right to rely on the term that this much of the fund has already been allocated and earning this much. You changed that; it will have to revise its plan. For the trouble of revising the plan, equitable considerations grant the bank the right to exact fine.

The essence of a bank is that it accepts deposits on a regular basis. In fact, that is its work. It borrows money from the public. It puts the portion of it as cash in its vault. Pat of the cash can be treasury bills. What does it do with the rest? It lends it to the public.

The difference between the interest it gets from the borrowers and the interest it pays to the public is the margin of the bank.

What make a bank run from debt of loan are the profits that are made out of its treasury. If it is commercial bank or a thrift bank, the treasury can buy and sell or exchange, that alone you can make money. You can buy and sell corporate bonds, government bonds, treasury bills, treasury bonds. And the treasury activities pay the bank.

Now, we go to quasi-bank (oooops! Si Fr. na jud. Taaaaaaaaaaaaaas kaung entrada. Latttttttttttttter part kayong deposit substitute =)

It accepts deposit substitutes. Deposit substitutes are trade acceptances, sale of receivables.

The quasi bank is actually an intermediary.

Fr. scribbled something on the board: Here is the borrower “contractor.” Here is the lender NCCC. Here is the quasi-bank.

The moment borrower wins a bid to build a bridge, he receives a receivable from the gov’t. Dalaon na niya sa quasi-bank. Let us say the receivable is P100M. Ihatag na niya sa quasi-bank para matagaan siya ug P100M kaysa maghulat siya sa P100M gikan sa gov’t. Imbis na dawaton sa borrower ang P100M ihatag na niya sa quasi-bank. So ang quasi-bank maghatag ug P100M. Pero asa mana niya kwaon? Didto sa kung kinsa man ang naay kwarta? Kinsa man ang nay cash adlaw-adlaw? Ang NCCC!

Tagbuon na dinhi ug apil. It is the paper of the quasi-bank stating that the money from the contractor is given to the lender at a given interest. If it is with kuros-kuros, with recourse, the lender can run after the quasi-bank.

So that is the meaning of trade acceptances, assignments, sale of receivables. Instead of the public, you just have a few clients.

What will measure the interest rate here?

The determination of the interest rate is the credit standing of the borrower. If the borrower is very big (banko, San Miguel), gamay ra kay dili na mana modagan, unlike the bank, this has no collateral because this is so called money market transactions. These are obligations that ripen within one year. In fact, a paper like this is deemed perfected the moment NCCC receives the post dated check of BPI. Kung naa kuros-kuros, mao na tong with recourse. Pag-untol anang check, maayo unta nga naa with recourse.

That is quasi-banking.

If you changed from quasi-bank to PS (pawnshop) and borrower to Ms X. There is still a pledge, a collateral, pagbalik nimo naa dayon kwarta. Why is it over collateralized sa pawnshop? Because it should not be a burden to you to redeem it. Why is it not regulated by the BSP? Because the money they used to lend to the borrower is their own, it is not other people’s money.

In quasi banking, it is other people’s money but in PS it is actually the owner’s money. PS is not covered with the General Banking Law but the quasi banks are covered. They have regular inspection. They have procedural examination.

Classification of Banks

3.2. Banks shall be classified into:

(a) Universal banks;

(b) Commercial banks;

(c) Thrift banks, composed of: (i) Savings and mortgage banks, (ii) Stock savings and loan associations, and (iii) Private development banks, as defined in Republic Act No. 7906 (hereafter the "Thrift Banks Act");

(d) Rural banks, as defined in Republic Act No. 7353 (hereafter the "Rural Banks Act");

(e) Cooperative banks, as defined in Republic Act No. 6938 (hereafter the "Cooperative Code");

(f) Islamic banks as defined in Republic Act No. 6848, otherwise known as the "Charter of Al Amanah Islamic Investment Bank of the Philippines"; and

(g) Other classifications of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas. (6-Aa)

(c) Thrift banks, composed of: (i) Savings and mortgage banks, (ii) Stock savings and loan associations, and (iii) Private development banks, as defined in Republic Act No. 7906 (hereafter the "Thrift Banks Act");

What is the difference between savings and mortgage banks and savings and loan associations?

Savings and mortgage banks are usually housing loans. Savings and loan associations are usually salary loans.

NB:1) AFSLAI – Armed Forces Savings and Loans

Associations Inc- Provides the highest returns, covered by

PD exempting it from deduction at source

- Marcos’ gift to Armed Forces- Only the members of AFP can put their

money there- Open to retired members of the AFP- Covered by the general banking law

because it is classified as a thrift bank

2) Private Development Banks- It is a thrift bank, not a big bank. The only

development bank classified as a big bank is Development Bank of the Philippines (DBP); it is not a thrift bank. DBP is a government depository.

If you are government, there are only 2 banks that you can put your money: Development Bank or Land Bank

(d) Rural banks, as defined in Republic Act No. 7353 (hereafter the "Rural Banks Act");

Each of the Rural Banks has their own special laws.

(g) Other classifications of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas. (6-Aa)

What is a new classification of bank created by the BSP? The Micro Bank supposed to engage in micro financing. The most dangerous kind of bank. (JLC)

December 19, 2012

3.2. Banks shall be classified into:

(a) Universal banks;

(b) Commercial banks;

(c) Thrift banks, composed of: (i) Savings and mortgage banks, (ii) Stock savings and loan associations, and (iii) Private development banks, as defined in Republic Act No. 7906 (hereafter the "Thrift Banks Act");

(d) Rural banks, as defined in Republic Act No. 7353 (hereafter the "Rural Banks Act");

(e) Cooperative banks, as defined in Republic Act No. 6938 (hereafter the "Cooperative Code");

(f) Islamic banks as defined in Republic Act No. 6848, otherwise known as the "Charter of Al Amanah Islamic Investment Bank of the Philippines"; and

(g) Other classifications of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas. (6-Aa)

Section 3 lists down the different categories for bank and each of these categories are covered by specific legislation. And the last category of other classifications of banks includes micro bank which is now a category that is recognized by the BSP. In all these categories of bank, micro financing used to cater unbankable people because if you have no assets or collateral you cannot borrow from banks. And banks cannot lend without collateral. The moment the bank does that, the bank is in violation of the regulations.

Now it could be that someone gets a clean loan but many times he has a deposit in the bank which is …so they still has the security for his loans. But when we talk about micro financing, you talk about people who traditionally cannot borrow from the banks because they have no collateral. The number one example of this is Pakistani. 90% of these borrowers are women who engage in small businesses.

The credit here is not a transaction but a cultural, social movement intended to transform society. This is the whole gospel propagated by those who study micro financing.

In the Philippines there have been rural banks to bridge in micro financing. The BSP is empowered under section 5

Section 5. Policy Direction; Ratios, Ceilings and Limitations. - The Bangko Sentral shall provide policy direction in the areas of money, banking and credit. (n)

For this purpose, the Monetary Board may prescribe ratios, ceilings, limitations, or other forms of regulation on the different types of accounts and practices of banks and quasi-banks which shall, to the extent feasible, conform to internationally accepted standards, including of the Bank for International Settlements (BIS). The Monetary Board may exempt particular categories of transactions from such ratios, ceilings. and limitations, but not limited to exceptional cases or to enable a bank or quasi-bank under rehabilitation or during a merger or consolidation to continue in business, with safety to its creditors, depositors and the general public. (2-Ca)

Ratios are very important for the BSP. They are saying, 10% of your funds should be micro financing. So the

rural banks are forced to lend out for micro financing. To give credit to the lowest level.

Where is it written that BSP has the power of supervision? It is written in section 4

You know supervision in your political law. What is supervision under political law?

It is compared to the definition of control. Control in political law is the power of the executive to substitute for his own judgment of that of his alter ego. Supervision, however, is applied to local governments. The executive cannot replace his own judgment; he only has the power to supervise. To see to it WON the officer is conducting himself in accordance of law. Take a look what is supervision in section 4.

Section 4. Supervisory Powers. The operations and activities of banks shall be subject to supervision of the Bangko Sentral. "Supervision" shall include the following:

4.1. The issuance of rules of, conduct or the establishment standards of operation for uniform application to all institutions or functions covered, taking into consideration the distinctive character of the operations of institutions and the substantive similarities of specific functions to which such rules, modes or standards are to be applied;

So the supervision here is not exactly the same in political law because the law here gives the BSP the power to fix the law - the yardstick itself as to be used on WON the bank or quasi-bank meets the legality. He does not only measure but also the authority to establish the measurement.

4.2 The conduct of examination to determine compliance with laws and regulations if the circumstances so warrant as determined by the Monetary Board;

This is supervision in the traditional sense – to determine WON there is compliance with the laws and regulations.

4.3 Overseeing to ascertain that laws and regulations are complied with;

Just a repetition

4.4 Regular investigation which shall not be oftener than once a year from the last date of examination to determine whether an institution is conducting its business on a safe or sound basis: Provided, That the deficiencies/irregularities found by or discovered by an audit shall be immediately addressed;

This is a limitation. The BSP cannot conduct an audit in form of investigation more often than once a year. And then, if deficiencies and irregularities are found, the banks and quasi-banks must report to BSP Monetary

Board on how these deficiencies and irregularities are addressed.

4.5 Inquiring into the solvency and liquidity of the institution (2-D); or

Remember the differentiation and examination. Investigation is more focus, examination is wider. It includes policies of management, yardsticks of liquidity, solvency examination and enfocive and corrective actions.

4.6 Enforcing prompt corrective action. (n)

The Bangko Sentral shall also have supervision over the operations of and exercise regulatory powers over quasi-banks, trust entities and other financial institutions which under special laws are subject to Bangko Sentral supervision. (2-Ca)

For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the "New Central Bank Act") for purposes of re-lending or purchasing of receivables and other obligations. (2-Da)

Financial institutions – leasing companies, money changers. So banks and quasi-banks, entities in engage in the borrowing of funds through the issuance or assignment with recourse or acceptance of deposit substitutes as defined in the New Central Bank Act.

You cannot just put up a sign “I buy Dollars”. You need authority from the Monetary Board. You have to be licensed to be a money changer.

What if your friend wants to exchange his dollars to peso with you? Can you do that? Is that a violation?

It used to be that possession of dollars was not allowed, only the banks. But now it’s no longer a fraud. You can do that. Why? That is an ordinary course of business. Pero kung naa ka sa kanto, naa kay pwesto dira, you can be reported to the BSP and can be summoned for questioning.

Section 5. Policy Direction; Ratios, Ceilings and Limitations. - The Bangko Sentral shall provide policy direction in the areas of money, banking and credit. (n)

For this purpose, the Monetary Board may prescribe ratios, ceilings, limitations, or other forms of regulation on the different types of accounts and practices of banks and quasi-banks which shall, to the extent feasible, conform to internationally accepted standards, including of the Bank for International Settlements (BIS). The Monetary Board may exempt particular categories of transactions from such ratios, ceilings. and limitations, but not limited to exceptional cases or to enable a bank or quasi-bank under rehabilitation or during a merger or consolidation to continue in

business, with safety to its creditors, depositors and the general public. (2-Ca)

So there is a wide discretion on the part of BSP with respect to policies regarding money, banking and credit.

Section 6. Authority to Engage in Banking and Quasi-Banking Functions. - No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: .Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions.

Right then and there, you will see how wide the scope and authority of a universal banks.by the license that a universal bank receives, it can engage in quasi-banking, thrift banking, rural banking that’s why it is called universal banking.

The authority to administer oath is given not only to Monetary Board but also to department heads.

The department head and the examiners of the appropriate supervising and examining department are hereby authorized to administer oaths to any such person, employee, officer, or director of any such entity and to compel the presentation or production of such books, documents, papers or records that are reasonably necessary to ascertain the facts relative to the true functions and operations of such person or entity. Failure or refusal to comply with the required presentation or production of such books, documents, papers or records within a reasonable time shall subject the persons responsible therefore to the penal sanctions provided under the New Central Bank Act.

So the examiner of BSP is just like a prosecutor. Mura na nag PI (preliminary investigation) under oath.

Persons or entities found to be performing banking or quasi-banking functions without authority from the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act and other applicable laws. (4a)

Section 7. Examination by the Bangko Sentral. - The Bangko Sentral shall, when examining a bank, have the authority to examine an enterprise which is wholly or majority-owned or controlled by the bank. (2-Ba)

Applicable even if it is not a bank. Before under the old Central bank Law, if a bank has a subsidiary and it is not a bank or not a quasi-bank, it could not be a subject of examination or inspection. Now the law specifically grants the BSP the authority to inspect and examine a non-bank which is a subsidiary of a majority owned corporation or entity of a bank.

Give an example.

1. Banko ka, universal bank, you have a subsidiary armoured car corporation. Puros na armoured car. And you have contacts with other banks. Before that could not be subject to inspection. But not it can be.

2. Subsidiary of a bank - the credit card company, the BSP can examine that.

3. An ATM company as a subsidiary that imports/sells credit card, BSP can also examine that.

Section 8. Organization. - The Monetary Board may authorize the organization of a bank or quasi-bank subject to the following conditions:

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

8.2 That its funds are 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 each category of banks are satisfied. (n)

No new commercial bank shall be established within three (3) years from the effectivity of this Act. In the exercise of the authority granted herein, the Monetary Board shall take into consideration their capability in terms of their financial resources and technical expertise and integrity. The bank licensing process shall incorporate an assessment of the bank's ownership structure, directors and senior management, its operating plan and internal controls as well as its projected financial condition and capital base.

The highest capital requirement is the universal bank; the lowest is the rural bank. Before its amendment, the Rural Bank requires only 100,000. That was in the 1960s.

Section 9. Issuance of Stocks. - The Monetary Board may prescribe rules and regulations on the types of stock a bank may issue, including the terms thereof and rights appurtenant thereto to determine compliance with laws and regulations governing capital and equity structure of banks; Provided, That banks shall issue par value stocks only.

Provided, That banks shall issue par value stocks only xxx it cannot issue normal value stocks.

There is what we call a second-tier capital. BSP now approves banks floating a bond abroad. Then the … that is considered as the second capital of the bank.

If you’re LBP, you can do that without necessary clearance from BSP.

Section 10. Treasury Stocks. - No bank shall purchase or acquire shares of its own capital stock or accept its own shares as a security for a loan, except when authorized

by the Monetary Board: Provided, That in every case the stock so purchased or acquired shall, within six (6) months from the time of its purchase or acquisition, be sold or disposed of at a public or private sale. (24a)

So this is notwithstanding the fact that the shares of stocks are redeemable shares. The bank can only purchase its shares with prior permission from BSP and the longest it can hold its share is 6 months and it must be sold or disposed at a public or private sale. (JLC)

January 10, 2013

If I am not mistaken we parted last year with the beginnings of organizing a bank. That is chapter 3 of the Gen Banking Act.

Under the Chapter 3 organization, management and administration of banks and quasi-banks and trust entities, you have a particular provision addressed to the Securities and Exchange Commission (SEC). Imagine that in law for banks has a provision prohibiting the SEC from approving the articles of incorporation of main bank unless it is indorsed by the monetary board of the Bangko Sentral. That is why specific provision of the General Banking Law.

Q: Where is that found?A: that is found in the…section 6, 1st paragraph it says:

No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: .Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions.

If you do attend to perform banking functions what awaits you? Last sentence says

Persons or entities found to be performing banking or quasi-banking functions without authority from the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act and other applicable laws.

Sec. 8 puts down the conditions under which a bank maybe organized.

First. It may be a stock corporation. Is there an exception? Yes, there is. What is the exception? It is the BS. It is also a bank and yet it is own only by the republic. It has no other shareholders. It has capital stocks but it is own only by the Republic.

Section 8. Organization. - The Monetary Board may authorize the organization of a bank or quasi-bank subject to the following conditions:8.1 That the entity is a stock corporation

Second condition:

8.2 That its funds are obtained from the public, which shall mean twenty (20) or more persons; and

You cannot register a corporation whose purpose is to organize a bank and to maintain and administer a bank if it has less than 20 stockholders.

Third condition.

8.3 That the minimum capital requirements prescribed by the Monetary Board for each category of banks are satisfied.

The minimum capital requirement is not found in the law governing the banks. If you go to the rural banks act you will be surprised because the minimum requirement there is 100,000 pesos that was long time ago. The BS puts out circulars adjusting the minimum capital requirements of a bank. For instance a universal bank now is supposed to be capitalized at 3.2M pesos--- I think it has been subsequently increased to a little higher amount but you don’t find the minimum capital requirements from the law that authorizes you a particular…bank that discovered by the—it is covered in the circulars of the Bangko Sentral.

Again, issuance of stocks Sec 9:

Section 9. Issuance of Stocks. - The Monetary Board may prescribe rules and regulations on the types of stock a bank may issue, including the terms thereof and rights appurtenant thereto to determine compliance with laws and regulations governing capital and equity structure of banks;

Then there is a proviso:

Provided, That banks shall issue par value stocks only.

This doesn’t mean that the banks cannot issue--shares. This means that the banks cannot issue no par value shares. So, not even the Bangko Sentral can authorize banks to issue no par value shares. Banks shall issue par values stocks. Your articles of incorporation is presented to the Bangko Sentral. The Bangko Sentral will indorse it to the monetary board and the MB issues what is called in Sec 14, a certificate of authority to register.

Take a look of Sec.14. This is a command to the SEC.

Section 14. Certificate of Authority to Register. - The Securities and Exchange Commission shall no register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under it seal. Such certificate shall not be issued unless the Monetary Board is satisfied from the evidence submitted to it.

Q: What are the evidences submitted to it?

14.1 That all requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with;

14.2 That the public interest and economic conditions, both general and local, justify the authorization; and

So there is an economic impact—

14.3 That the amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest.

So there is a background check as to the organizers, incorporators. Who will do this? Supposed to be the BS. So open yourself to those—

First you make a declaration. There is a biodata of each incorporator, director. Then,

The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless accompanied by a certificate of authority from the Bangko Sentral

This second one the certificate of authority of by laws is only found in the General Banking law. You remember of course, Sec.6 of the Corp. Code. One of those vested kinds of corporations that must have an endorsement in appropriate government agency or instrumentality, banks/not banks, insurance companies, public utilities you must have an endorsement from the appropriate governmental agency for it the approval of your articles. That is repeated here. Then there is the addition that your by-laws too must have an authority, certificate of authority to register issued by the BS and later on if you amend it, for every amendment you must have an authority, certificate of authority to amend it. That is how grossly supervised for the formation and alteration based in the documents of the bank.

I bring you but to Sec.10 because you must remember this. Prohibition one of the powers we saw in the corporation that has its power to acquire his own shares. The limitation being, it must have unrestricted—earnings but for the banks under sec.10 treasury stocks.

Section 10. Treasury Stocks. - No bank shall purchase or acquire shares of its own capital stock or accept its own shares as a security for a loan, except when authorized by the Monetary

Why is it these 2 prohibitions is put together?No bank can purchase its own shares and no bank can accept as collateral for a loan of its stockholder, its shares of stock? Why is it put

together? Because the second is a form of the first.

If you say, no banks shall purchase/ acquire its own capital stock and then a shareholder if you wants to get out of the bank he will just offer it as a collateral of a loan of somebody and he will tell the owner, give me the proceeds of the loan Pasagdan na lang na nato. Dili na lang nato bayaran na kwarta lang nimo ang imong shares. What is that? That is just like a bank purchasing its own shares. The shares of the bank cannot be used as collateral for a loan with the same bank. Take note there is no prohibition from making collateral or a loan somewhere else. You can make it a collateral of a loan somewhere else, but you can’t make it a collateral of a loan in the same bank because in so doing you will facilitate that which is already prohibited, for the bank to buy its own shares.

Now, is a bank unlike any other corporation closely scrutinized when it comes to buying its own shares?

Remember capital raised by the bank by issuing shares is not the purpose of funds that is used to lend out loans to the public before that is not for it’s used by banks to lend money. What is used by the bank to lend money? The deposits of the depositing public. When you open an account in the bank where you deposit money the subtotal of deposits is the source of money that is lend out by the bank. You will see later on banks are prohibited from lending out more than its deposits.

What then is the purpose of the capital that is raised by the owner? It is used to purchase other assets that the banks needs in its --.let say computers, furnitures, vehicles, building, real property for the extent that the law allows it to acquire. The capital is used when there is a failure on the part of its lenders, its borrowers to bring back the loans. The capital is used to, in other words the capital there to act as buffer in cases when there are non-performing loans that is where the most important functions of capital stocks raised by the owner.

Alright, the prohibition against the bank buying its own shares is not absolute. It can be allowed because the law says, except if author by MB. But then again the MB is subjected to certain limitations. What are those?Section 10 further says:

Provided, That in every case the stock so purchased or acquired shall, within six (6) months from the time of its purchase or acquisition, be sold or disposed of at a public or private sale.

So again the bank is prohibited from maintaining treasury shares indefinitely. The longest that the bank can have treasury shares is 6 months. Within which it must again sell its shares to the public. In other words the law is clear that the bank should not have any excuse to be deficient in its capital stock. So, that it must always have ready assets to buffer so called past due loans, non-performing loans because the failure of the banks is not like the failure of any business corporation. The failure of the bank could result in a critical injury to the financial industry. This is an admission of how critical the roles of the banks in the financial industry. So, within 6 months from the time of its purchase/acquisition the bank should sell/ dispose the treasury shares at a public/private sale.

In organizing a bank, what is the role of foreigners? How much if at all are foreigners is allowed to invest in banks? The general rule is put here in section11:

Section 11. Foreign Stockholdings. - Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations. The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation.

So it tells you the nationality rule for banks. First, the incorporation test is set aside. The situs of incorporation doesn’t reflect on the citizenship of the bank /stockholder of the bank. What is determinative? It is the control of the bank, the citizenship of the controlling stockholder of the bank. If the controlling stockholder is 60 percent, if he say natural person, then very simple it’s just its citizenship. If it’s a corporation, then you must determine whether that corporation is 60 percent also controlled by Filipinos. The rule laid down here is nationality of banks is determined by the control test.

Besides the control test there is the so called control of family groups or related interest that is section 12. A family group or related is not allowed just to own shares as bank as there can be owned. Section 12 says:

Section 12. Stockholdings of Family Groups of Related Interests. - Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in

all transactions by such corporations or related groups of persons with the bank.

Then, corporate stockholdings.

Because again there is a limit to the amount of shares or control that a family can have.

Central bank circulars are take effect that a single family group/related interest cannot be in control for more than 1 bank that is why, what is the purpose of that rule is to broaden the ownership pace of that bank. If you are able to control banks then you can be able to control economy of Phil. As much as possible we don’t want people to control more than1 bank. Although if you own, or you are a controlling owner of a universal bank, necessarily you can also run a rural bank, a thrift bank it is all through a squand universal bank but certainly you are not allowed to own 2 universal banks.

Fourth degree of consanguinity /affinity. So up to 1st cousin and then there is also this corporate stockholdings rule.

Section 15 Board of Directors, the rules with respect to board of directors of a bank is not very complicated it can be between 5 and 15 maximum as a general rule but under section 17 in cases of merger and consolidation of banks the number of directors can be up to 21 in other words it says here, shall not exceed 21.

General rule: 5-15 if you’re organizing a banking corp. If you are merging, to encourage mergers you can have up to 21 directors. This is to encourage mergers and consolidation of banks. It seems that we have too many banks compared with our Southeast Asian neighbours. Our banks are smaller capitalization wise. You got to Hongkong almost every corner there is a bank, bank branch but their banks are better capitalized, bigger capitalization.

There is a belief the bigger the bank the more secure. The more capital stock, the more it engenders faith in the banking public. So they’re encouraging in the Philippines for banks to merge. One of the provisions by which mergers is encourage, is this provision that you can even have board of directors up to 21 if 2

banks merge. What if a problem in mergers is the constituent banks in the merger might be reluctant to merge because the existing directors will no longer be directors. Ma wagtang sila ba sa ilang na andan nga pwesto.

If you have 9 directors in bank A and 9 directors in bank B and you can accommodate all of them, 18 that eliminates personal objections which you can have even stronger from any other argument against merger. So you can have them and agree to merger.

For a while there was a talk of BPI acquiring PNB and Allied Bank and there was already an order to suspend trading of shares of stack of BPI, Allied Bank and PNB because the merger is also being concluded. But suddenly you hear nothing, nawala.(…story about Allied bank and Lucio Tan)

In other words the corporation holding corporation here does not have enough share of stocks…You know Mr. Tan has a very prolific family. They have been corded ownerships in different corps. That is one of the reasons that are delaying the conclusion of the mergers.

Central bank actively encouraging that. Why? The moment that BPI raises its capital, the others will be forced to raise their capital. The bigger the capital, the more there is financial powers supposed to be in the bank. Right now, its considered really junior banks compared to the banks of Singapore, Hongkong, Bangkok, or even Jakarta Indonesia or Malaysia. Their banks are well founded. That is why there is no limitations there as to number of branches because they have more than enough capital justifying that is why they can put up branches every corner that is why they’re not afraid when other entities put up ATM machines. in Hongkong and US you don’t have to be a bank to put up an ATM machines even in gas stations there are ATM machines. ATM machines are just cash, sources of cash. So you can apply for a license to put up ATM machines. Diri sa ato ang huna2 nato sa ATM, bangko ray naay ATM not necessarily so. You have a license, a service or cards of cards and they can bill the banks and they specialized so, lowers down the costs.

That is important to realize with respect to board of directors the number, the exception as to the number. There is a proviso in Section 15:

Section 13. Corporate Stockholdings. - Two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests and must be fully disclosed in all transactions by such corporations or related group of persons with the bank.

Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank.

So, there is no prohibition of non -Filipinos of becoming directors of a bank only you cannot exceed your proportion of stockholdings in relation to the outstanding balance. You are confined to that. If you have 40percent of outstanding capital stocks, which is the maximum. You can only hold 40 percent seats of the board of directors of a bank and then there is this proviso in section 15 which is the 1st explicit proviso for any corp.

There is no such provision in our corporation code although there is a circular from SEC on meetings of the board via teleconferencing and video-conferencing, they list down the requirements. Here for the 1st time there is specific confirmation allowed by law to hold teleconferencing and video conferencing meetings of the board.

What is the differencing of teleconferencing and video-conferencing?

Teleconferencing - audio ra. You are meeting by voice. Video con-you are meeting audio and video. (…taxi story sa GSIS)

You will have to undergo certain requisites in teleconferencing meeting.— there is primary identification. There is verification as whether it can be heard and understood by each one and by each one as to the other. This is not a laughing matter because this days because the phenomenon in hacking is not to be---. Hacking is done by people who are motivated just by sheer fun and evil motives.

Obviously the requisites that the SEC puts out is applicable here because a banking corporation is also a corp.

Video so much better because you can see and you can recognize if he is really the member of the board or his wife of the member of the board ;-), but still there are verification requirements… Bow…;-) (AO)

January 16, 2013

Latest circular of BIR of BS on single borrowers clinic.

You will notice that Circular 779 series 2013 dated 9 January 2013(1/19/2013) two big paragraphs, the only

difference between these 2 paragraphs is the first one is for banks and the other one is for quasi- banks.

The single borrower’s limit is 25% of net worth of the bank. It is the amount that the bank can lend to any single borrower. Now they can increase it up to 50% of net worth, provided that the increase of 25%is a loan that is in connection with PPP, the approved project of the P-noy administration on his priority public works project. Airports, roads, hinges that have been listed as priority of P-noy. So that is the increase of 25 percent. We will come to that, just giving it to you. So that you will have a copy of the circular.

Normally the net worth of a bank is its capital. If it lends out money only equivalent to the amount that the deposits that makes because its capital is suppose to be its net worth if you don’t have bad loans, you will not take away your capital. As a rule of thumb it is 25% of your capital. If you are a commercial bank/ universal bank the minimum capital paid up is 3.5Billion so 25% of that is not even 1 Billion. They increase it by another 25%, so minimum capital of universal bank 3.5 let’s say 50% of that , is about 1.75 Billion that you can lend to single borrower, provided that is PPP, the additional 25% and that in no case would that its overall exposure…more than 25% of the net worth the bank. You have the…1 example of a PPP project that is the terminal 2 of international airport of Cebu. How much is that project? It’s supposed to be 7 Billion. Normally projects like that is 3 times 50% equity, 50 % borrowings. Independently, the 1 who bids of that who wins must have at least 1/2 of the amount as equity, that’s 3.5 Billion. Mangita kag consortium of banks in the end because not one bank can credit (?)his projects are really paid very big specially the power projects. The energy projects are very expensive. Cebu airport terminal 2 is 7 million; the extension of MRT is 10 Billion, mga makabungog ug kwarta.

The government cannot undertake it because it doesn’t have money so it’s giving it to private sector and the private sector will recover their money by toll. If it is MRT they will be collecting the fare. If airport, they will run the airport and collect airport fee. If it is a road they will put toll. (Story about sky way and its toll fee and Paradise. haha)

We have taken up directors, board of directors of banks that is on Chapter 3, section 15 and the provision with respect to directors of merge and consolidated banks which is an exception of the section 24 of the corporation code, mainly that banks that are merge and consolidated can have as many as 21 directors, the board of directors is 21. Then, we took up this very important passage with respect of the directors and the oversight power of MB and that is section 16 the so called---fit and proper rule.

The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and video-conferencing.

The Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit.

So they can prescribe qualifications. 1 of the prescription of directors of banks is that they must attend a seminar, not even run by BS. It is run by institutions that are accredited by the Bangko Sentral. That is 1 of their prescribed norms. Then, they will pass upon the qualifications of those that are elected and then they will review. You have already passed and then your continuing to be a bad director but they can review you and then if they find you objectionable. What does the MB have to do?

So they can take you out. All they need to do is inform the Board of directors in writing. Then,

Of course it is the MB who will interpret what that means. Suppose you have a Phd. in economics and you are elected to the board. Let’s say of Metro Bank or BDO. Do you still have to attend the seminar? One who is accredited, usually the speaker is the retired official of the BS, who is the resource person of this accredited institution in BSP. Technically speaking, you have.

Now, what is the aim for this? The aim is to keep those small rural banks that have the entire family of the board who have no qualifications to upgrade their education and their competence. Many of them because they are already sick…the chairman, in the wheelchair cannot attend the seminar anymore so he is disqualified. That is how they will base the disqualification.

Rules as to the compensation and benefits of directors and officers Section 18.

Comptrollership when the management corporation-- and a management committee is appointed to oversee the operations of the bank that is distressed.

That is when they look into and oversee the compensation of the directors and officers. What is the reason? To protect the funds of the depositors and creditors.

Sometimes the land bank invests in a particular rural bank and as a consequence of that investment the land bank official may be appointed as a official of that bank. But the general rule is, if you’re a mayor or a vice –president of the PAGCOR or whatever, you cannot be an officer of a private bank. Of course this doesn’t include officials of BSP that are appointed as conservators of a bank, in case a bank is under conservatorship. We’ve seen the 3 stages of distress banks in the new central bank act. Conservators are appointed by the BS. Many times its one of their officials but you know very well that a receiver can only be the Philippine Depositors Insurance Corporation (PDIC).

What are the rules with respect to bank branches?

Now they are now allowed not branch but outlets. Last year the BS revoked their policy in limiting bank branches. You’re capitalization can support it, you can now readily grant your application to open banking branches before they are very wary about opening as many branches as you will wish.

Now section 21 is about Banking Days and Hours. The requirement is a min of 6 hours a day, working day that is the requirement. So you will notice, banking hours is 9am-3pm. Although they will allow you to open longer than that and even open on Saturdays, Sundays and holidays for at least 3 hours a day. That’s why BDO has a

Section 16. Fit and Proper Rule. X x x Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit.

After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position.

In determining whether an 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, and competence

Section 18. Compensation and Other Benefits of Directors and Officers. To protect the finds of depositors and creditors the Monetary Board may regulate the payment by the bank to its directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing and fringe benefits only in exceptional cases and when the circumstances warrant, such as but not limited to the following:

18.2. When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or18.3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition.

Section 19.  Prohibition on Public Officials. - Except as otherwise provided in the Rural Banks Act, no appointive or elective public official whether full-time or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or a government owned or controlled corporation to the bank or unless otherwise provided under existing laws.

Section 20. Bank Branches. - Universal or commercial banks may open branches or other offices within or outside the Philippines upon prior approval of the Bangko Sentral. Branching by all other banks shall be governed by pertinent laws.A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as outlets for the presentation and/or sale of the financial products of its allied undertaking or of its investment house units.

policy of opening certain branches during holidays even Saturdays for at least half day. This is the meaning.

The banks that choose to open other than working days shall report to BS the additional days during which they/ their branches /offices shall transact business.

Working days in this law is understood to mean Mondays to Fridays except if such days are holidays. Section 22, here is the labor provision of General Banking Law.

As far as banks are concern, the moment the BS reports to the secretary of Labor the occurrence of strike or lockout involving a bank, the secretary of Labor may assume jurisdiction over the dispute or decide to certify it to National Labor’s Commission. The President may also intervene and assume jurisdiction over the labor dispute. It says here,

There is no prohibition for BS to report to the secretary of labor earlier than that.

Let us now go to operations of universal bank section 23 to (way sumpay?haha)

There are 3 kinds of powers that are exercised by the universal Banks:

1. Powers of Universal bank

2. Powers of investment house

3. Power to invest in so called non- allied enterprise

What are non-allied enterprises? We will see later on that the example is insurance business. That is non-allied. Give an example of an allied. ATM-Allied but separate and distinct from the banking business because what is the commercial banking business? What are properly classified as commercial banking? That is the first power spelled out in section 29.

Section 29. Powers of a Commercial Bank. - A commercial bank shall have, in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking such as accepting drafts and issuing letters of

credit; discounting and negotiating promissory notes, drafts, bills of exchange, and 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; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment.

Those are the activities that constitute commercial banking. You want to be the traditional activity of commercial banking is demand deposits, checking accounts. Other banks may be allowed to accept demand deposits but it must be explicit, separate and distinct from the license that they obtained to operate a thrift bank or a development bank or a rural bank. They must separately apply to obtain a license to accept the primary deposits checking accounts. Many rural banks have checking accounts but they are not really participants of the clearing house of the BSP. They clear their checks through another commercial banks. That is normally one of the conditions of Bangko Sentral will allow you in acceptance of demand deposits.

Another bread and butter activity of commercial bank is really letters of credit. That is a specific commercial banking activity that becomes very important when you try to import goods from outside of credit. You have to facilitate that through letters of credit.

Equity investments of commercial banks . Equity investments of universal banks, section 24.

Section 24. Equity Investments of a Universal Bank. - A universal bank may, subject to the conditions stated in the succeeding paragraph, invest in the equities of allied and non-allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial.

Example of an allied that is financial… let’s say an ATM or credit card. Non-financial would be leasing corporation, warehousing corporations. Universal banks can enter into warehouses that are bonded, bonded warehousing and subject to the Bureau of Customs supervision that is non-financial.

Suppose you’re importing coal…asa man ibutang sa customs. Ang barko p mupark mana. Gi import mana nila. They must have a warehouse that is bonded to relieve themselves of duties of bonded warehouse, the bank handled it. And normally it is the banks you facilitates the letter of credits. Our coal is of inferior quality it has to be mixed with high grade coal so we import from West Virginia (story sa coal, and other ingredients of cement…)

That is received by a bonded warehouse again and that is embraced on circulation of inventory. The customs people do not have enough people to go their every

Section 22. Strikes and Lockouts. - The banking industry is hereby declared as indispensable to the national interest and, notwithstanding the provisions of any law to the contrary, any strike or lockout involving banks

if unsettled after seven (7) calendar days shall be reported by the Bangko Sentral

to the secretary of Labor who may assume jurisdiction over the dispute or decide it or certify the sane to the National Labor Relations Commission for compulsory arbitration. However, the President of the Philippines may at any time intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same.

time there is loading or unloading. Assures that nothing comes in or goes out that has not inspected or supervised for the benefit of the Bureau of Customs. The problem of a bonded warehouse (story of imported fighting cocks’ taxed 100% gikambyuhan ug bisaya. haha)

What happens to the bonds? The bonding company will pay for the loss. That’s the purpose of bonded warehouse.

Equity investment of universal banks you must compare it to equity investments that are allowed to commercial banks in section 30.

Section 30. Equity Investments of a Commercial Bank. - A commercial bank may, subject to the conditions stated in the succeeding paragraphs, invest only in the equities of allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial.

Financial-allied enterprise- ATM or credit card. Non-financial, what is the example? Armoured cars! It’s a separate company. That is allied to banking and that is nonm-financial.

Except as the Monetary Board may otherwise prescribe:

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

30.2. The equity investment in any one enterprise shall not exceed twenty-five percent (25%) of the net worth of the bank. The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investment.

You have the power to invest and yet the BS wants you to ask their permission first before you invest.

Now universal banks Section 24:

Except as the Monetary Board may otherwise prescribe:

24.1. The total investment in equities of allied and non-allied enterprises shall not exceed fifty percent (50%) of the net worth of the bank; and

24.2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-five percent (25%) of the net worth of the bank.

As used in this Act, "net worth" shall mean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the Bangko Sentral.

You know you have to make provisions if you have non performing loans so you take that from capital. Net of that those you have to provide for that is the basis for determination of 50% and 25%. --------bowowow- alfiefay ;-)

January 17, 2013

Chapter 4, Article 1:Operations of the Universal Banks and Article 2: Operations of Commercial Banks. The other provisions here provide for limitations on the equity investments of universal banks and equity investments of commercial banks. Universal banks and commercial banks.

It is good for you to know when a universal bank can wholly own a particular enterprise, like a universal bank can own 100% of a thrift bank. That is why you know that BPI has its own thrift bank, and that is the BPI Family Savings Bank. When they bought it they did not merge it completely. They kept it a separate corporation.

Why is that? - As many of you know, the deposit liability

requirements of the smaller banks are smaller than the deposit liability requirements of the bigger banks. That used to be the case until the middle of last year. Now the deposit liability requirements of all banks are the same by virtue of the new circular issued by the Monetary Board. So it no longer pays to have a thrift bank as a cheaper source of funds. You know before thrift banks and rural banks, the deposit liability’s required was 4% of investments whereas the deposit liability requirement of the commercial bank used to 9-10%. So you actually have lent out more money if you had a thrift bank than if you had a commercial bank, like 4-5 percentage points of the deposit that you can gather from the public. But now that is no longer true because most of the, all banks now have the same deposit liability requirements. I think it is now 5-6% of all banks.

So, what is the thrift bank of Metrobank? - The thrift bank of Metrobank, wholly-owned

100% is Philippine Savings Bank. That is their thrift bank. BDO, it’s not clear what its thrift bank. It owns some rural banks in Luzon but they do not have a clear national thrift bank.

BPI Family Savings Bank used to be owned by the Gutianun’s. The one who owns Filinvest. The Gutiauns towards the later part of Martial Law, during Marcoses’ time, mga1983-1984, they decided to invest all of their money in Canada. The only thing that they did not divest was Filinvest. Their biggest enterprise was Family Savings Bank. Family Savings Bank was sold at a good price to BPI. Then they found out after about 4 or 5 years in Canada, that the returns of the investment in Canada were not as good as in the Philippines so they came back in the Philippines. They invested into agriculture. They put up (DASURECO) Davao Sugar Refinery Corporation. They also put the Sugar Central of Matalam. And now I heard, they have majority of the Bukidnon Sugar Company. So all of the three sugar

central in the South are all controlled by the Gutnianon. They have also invested in real property development.

Now they are looking for a bank because they want to duplicate what was started before. The first generation has already gone old, they are approaching their 80’s. It is already the 2nd or 3rd generations who are active in the business.

CHAPTER IVDEPOSITS. LOANS AND OTHER OPERATIONS

Article IOperations Of Universal Banks

Section 23. Powers of a Universal Bank - A universal bank shall have the authority to exercise, in addition to the powers authorized for 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 the conditions stated in the succeeding paragraph, invest in the equities of allied and non-allied enterprises as may be determined by the Monetary 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 allied and non-allied enterprises shall not exceed fifty percent (50%) of the net worth of the bank; and

24.2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-five percent (25%) of the net worth of the bank.

As used in this Act, "net worth" shall mean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the Bangko Sentral.

The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investments. (21-Ba)

Now, if a universal bank had owned 100% in a thrift bank, as it is so provided in Sec. 25, so also can a commercial bank. A commercial bank can also own up to 100% of a thrift bank or a rural bank. That is by virtue of Section 25.

Section 25. Equity Investments of a Universal Bank in Financial Allied Enterprises. - A universal bank can own up to one hundred percent (100%) of the equity in a thrift bank, a rural bank or a financial allied enterprise.

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

So go through the provisions there and you will see what percentage a universal bank can be allowed to own if it is alive or non-alive financial and non-financial corporations.

Now let us go to Article 3-Provisions applicable to all banks, quasi-banks and trust entities. Let me remind you that these 3 separate entities are under the supervision of the Bangko Sentral but the types of business are not essentially the same. Banks: business is to get deposits of the public. By definition once you get a deposit from the public, more than 90 people, you are already engaged in banking.

But if it is quasi-banks, you are receiving not deposits but deposit substitutes. You discount receivables; you accept placements. The equivalent of deposits in quasi-banks are so called placements. People with cash put money with you and in turn around you lend it to those with cash by a single note and that note could either be with recourse or without recourse. Those types of transactions are at a maturity within a year. They are not secured accounts in the same way as the lending of the banks are secured by most often real property mortgage. The transactions of the quasi-banks are unsecured. They have then short-term maturity periods, mostly less than a year.

When you come to a trust entity, you have basically, a trust entity is a trustee. It manages a certain corpus of assets. It could be money, it could be a group of investments and that setup is a semi-person, a semi-personality.

Why is it a semi-person? - Because it has a limited life, usually measured

as to its fulfilment of its specific purpose. If it is a retirement fund and a trust entity manages it, it has certain tax obligations to meet according to the NIRC. It has its own tax number and yet it must answer to a certain board and there are articles of trust that are drawn up to govern how the retirement fund is to be managed and the trustee must respect the controls that are in the articles of trust.

- Normally, a retirement fund should not be speculative because its primary responsibility is the protection of the principal of the trust assets. The safety of the trust assets is the number one concern.

- Now, so normally, the big bulk of the trust funds, if it is funds, they are invested in so-called fixed-income sovereign funds like the bonds of the Republic of the Philippines. Those

are sovereign conditions and they are supposed to be close to 0 if not 0 risk because it is government. And the return is steady, it is already fixed. The return is not handsome but the corpus is safe.

- Now, once you have a very big retirement fund like GSIS, it is not given to a trust entity. The GSIS itself manages but then it can partition the funds and its responsibility such that it will hire a trustee for a certain portion of the funds.

Why would it do that when it has supposed to be its management to do the work of managing the funds?

- Sometimes, by necessity it has to do that because a fund such as the GSIS is so big that it cannot afford to remain under one currency. It risks destruction by inflation. It is supposed to answer for the retirement needs of the whole public officials in the Philippines, both local and national government. And then your money is just in peso.

What happens when the peso devaluates, devalues? - The whole fund goes with it. That is why most

retirement funds of government employees in most jurisdictions, they are multi-currency, some are in US dollars, some are in euros, some are in pounds, and some are even in yuan, so as to spread the risk. You do not put all your eggs in one basket because you cannot afford to lose it. One very big fund for instance is CALPERS.

What is CALPERS?- California Public Employees Retirement Fund. How big is it? It is over 500 million US Dollars. That is big! Again they say it is underfunded. A good part of it is spread out outside the jurisdiction of the United States and so since they are in California and they have no knowledge of Asia and so on, they hire trust entities to manage a portion of the funds that are invested in Asia. It makes sense isn’t not? If it will slow down in the US, it will balance out by the extraordinary performance of the Philippine economy. If there is a slow-down in Europe, it will be balanced out. This is a new field now, Risk Management. And that is what regulations of banks are now evolving to. They are trying to limit the risks that banks can go into. Because the banks in 2008 went into very risky transactions as in the US and which almost brought the whole world financial industry down. So they are thinking about how to, not manage risk, but how to prevent banks and financial institutions from taking risks that could prove fatal not only to itself but to the countries. So, you have trust entities. You have quasi-banks. And you have banks itself. Now, Article 3 gives you provisions that are applicable to all 3.

Now, Section 33 says acceptance of demand deposits. This is the rule: A bank other than a universal or commercial bank cannot accept or create demand deposits. But then right away it says: except upon prior approval of and subject to such conditions and rules as mainly prescribed by the Monetary Board. So you end up with the Monetary Board granting certain

development banks, even rural banks, the license, separate from the rural bank license, of accepting demand deposits. Remember demand deposits are checking accounts. That is why you have One Network Bank, a rural bank, you can open a checking account. Philippine Savings Bank is a thrift bank, you can open a checking account. They have a special approval of the Bangko Sentral. It is not part of their license, it is a special approval. It can be withdrawn by the Bangko Sentral.

Section 33. Acceptance of Demand Deposits. - A bank other than a universal or commercial bank cannot accept or create demand deposits except upon prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board. (72-Aa)

Alright, Section 34. There is this new terminology now called “Risk-based Capital”. [Read said section]:

Section 34. Risk-Based Capital. - The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts. For purposes of this Section, the Monetary Board may require such ratio be determined on the basis of the net worth and risk assets of a bank and its subsidiaries, financial or otherwise, as well as prescribe the composition and the manner of determining the net worth and total risk assets of banks and their subsidiaries: Provided, That in the exercise of this authority, the Monetary Board shall, to the extent feasible conform to internationally accepted standards, including those of the Bank for International Settlements(BIS), relating to risk-based capital requirements:

The Bank for International Settlements is in Basel, Switzerland. It has met 3 times. There are 3 basic protocols of Basel, Switzerland. First meeting was how to administer the obligations of Germany at the end of the 1st World War. Germany was found to be the bad boy of the World War 1 and all the destruction was charged on Germany so that Germany had to pay for all the destruction of World War 1. The one who administered it was the Basel Court. All the central bankers met and they said this is how Germany will be made to pay. And Germany of course was always given, on paper, a right to reconsideration.

But historically now, on hindsight, they found that the conditions given to Germany was really harsh. So it laid the foundation for the 2nd meeting. That’s how Hitler rose to power. Hitler played on the pride of the Germans. (Father talked about Adolf Hitler)

Now, before, the accepted principle was no central bank could print more money than there was gold held in reserve. So that was the Gold Standard. They came to an agreement to unpeg it, to detach it from the Gold

Standard. That was in 1930’s. And then the latest one is already around the 90’s. The Basle meeting, that’s when they established the measurement of banks. Which is summarized in the word “CAMELS”. C stands for Capital Adequacy. A stands for the assets of the bank. Don’t be mislead because for the banks the loans are assets. So that the quality of the loans reflect the quality of the assets. M stands for the reliability of management. The competence of management. E stands for earnings. Is there reliable, foreseeable earnings. L is for liquidity. Finally, S is for the stability of the bank. That was the product of the 3rd Basle Protocol.

So, there is reference here of the Bank of International Settlements that the capital ratios of the bank should be in conformity with the Basle agreements relating to risk-based capital requirements. It may, the Bangko Sentral, alter or suspend compliance with such ratio whenever necessary for a maximum period of 1 year. But provided, that such ratio should be applied uniformly to banks of the same category.

Now, what happens if the banks do not comply with the prescribed minimum ratio?

- The Monetary Board may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met. So there you see the function of capital. It is basically, as a short-fall recourse. If there is a failure of the assets, because the loans are falling past due, the loans are no longer performing, then the capital there must be provisioning of the capital.

[continuation of Section 34]:

Provided further, That it may alter or suspend compliance with such ratio whenever necessary for a maximum period of one (1) year: Provided, finally, That such ratio shall be applied uniformly to banks of the same category. In case a bank does not comply with the prescribed minimum ratio, the Monetary Board may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met The Monetary Board may, furthermore, restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the Republic of the Philippines and of the Bangko Sentral and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines, until the minimum required capital ratio has been restored. In case of a bank merger or consolidation, or when a bank is under rehabilitation

under a program approved by the Bangko Sentral, Monetary Board may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio under such conditions as it may prescribe. Before the effectivity of rules which the Monetary Board is authorized to prescribe under this provision, Section 22 of the General Banking Act, as amended, Section 9 of the Thrift Banks Act, and all pertinent rules issued pursuant thereto, shall continue to be in force. (22a)

Alright, Section 35. The Limits on loans, credit accommodations, and guarantees. What are the limitations on loans? [Read Section 35]:

Section 35. Limit on Loans, Credit Accommodations and Guarantees

35.1 Except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees as may be defined by the Monetary Board that may be extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed twenty percent (20%) of the net worth of such bank. The basis for determining compliance with single borrower limit is the total credit commitment of the bank to the borrower.

So this is the red letter of the law. Must not exceed 20% of the net worth of the bank. Single borrowers limit! Now, that has since been increased to 25% by the Central Bank. Now that 25% new limit has been further increased to 50% by that Circular we gave you yesterday. Provided that the additional 25% to that single borrower is for him to participate in a PPP. This priority of people’s projects that are approved by the President and which are big-ticket items which the government cannot afford, has no money, and which the government has asked the private sector to undertake. So the single borrower’s limit may be exceeded but in no case above 50%, if the last 25% is for purposes of the PPP. This covers banks and quasi-banks. Does not cover trust entities.

Now 35.2 is in respect to quasi-banks. [Read Section 35.2]

35.2. Unless the Monetary Board prescribes otherwise, the total amount of loans, credit accommodations and guarantees prescribed in the preceding paragraph may be increased by an additional ten percent (10%) of the net worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance.

So, this is what makes the provision geometric because the moment they put a limit then they say there will be another limit provided these other conditions are present. So, this is the way there is flexibility given to the monetary institutions.

Alright, let us go to restrictions on bank exposure to directors, officers, and stockholders and their related interests. This is the DOSRI which we talked about in the New Central Bank Act. Here there are more conditions that are outlined in Section 36. [Read Section 36]:

Section 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related Interests. - No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor shall he 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 bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned:

When the Board of Directors votes upon a DOSRI loan, it must be in writing. Everybody signs. It is just not an ordinary resolution that is passed and then the Secretary notes that the resolution was passed by the majority of the Board of Directors. If it is a DOSRI loan then all those who vote for it must sign and it must be the majority of all directors of the bank that means absolute majority and not just the majority of the quorum.

[continued reading]

Provided, That such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the Bangko Sentral.

That is employee benefits. That is not a DOSRI loan. If that particular privilege has been granted as a fringe benefit pre-approved by the Bangko Sentral. For instance, housing loan to officers. Managers, vice-presidents, they are given housing loans at prime rate. That is not considered a DOSRI loan. But let me give you an example. Here is a manager. He has been hiding a loss in the bank transaction. You know in Accounting, they create a certain account that is to be liquidated, books are still balanced, until it gets bigger and bigger until finally it is discovered by auditors. Then he says I will just sign a loan. And then immediately the top people says Ok. We will approve your loan to answer for that. The Bangko Sentral says that is a DOSRI loan. But a fringe benefit is not a DOSRI loan.

Remember what makes it a fringe benefit? - It is in the personal policy and it is pre-approved by the Bangko Sentral.

Alright, the second condition is: the required approval shall be entered upon the records of the bank.

The third condition is: a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko Sentral. Now what is the significance of that? The significance of that is that now there is a special monitoring of the performance of this particular loan. Is this loan being paid? Is it moving? Because now it is in the records of the bank and it is transmitted to the Bangko Sentral.

And then the fourth condition is this: Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others. So you might get the same interest as the blue chip clients of the bank but you cannot get interest of this DOSRI loan lower than what your prime clients are granted because if you do that is a violation of this provision. So they are the safeguards on the so-called DOSRI loans. So that the bank will not be used as a private source of funds of the majority owners of the bank. This whole rule of DOSRI loans is to prevent you, just in case you are thinking now of “tukod ko bangko” that is not supposed to happen because of the DOSRI loan.(END)

January 23, 2013 Banking Law

Sec. 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related Interests. - No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor shall he 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 bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned: Provided, That such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the Bangko Sentral. The required approval shall be entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko Sentral.

Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others.

After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions of the New Central Bank Act.

The Monetary Board may regulate the amount of loans, credit accommodations and guarantees that may be extended, directly or indirectly, by a bank to its directors, officers, stockholders and their related interests, as well as investments of such bank in enterprises owned or controlled by said directors, officers, stockholders and their related interests. However, the outstanding loans, credit accommodations and guarantees which a bank may extend to each of its stockholders, directors, or officers and their related interests, shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank: Provided, however, That loans, credit accommodations and guarantees secured by assets considered as non-risk by the Monetary Board shall be excluded from such limit: Provided, further, That loans, credit

accommodations and advances to officers in the form of fringe benefits granted in accordance with rules as may be prescribed by the Monetary Board shall not be subject to the individual limit.

The Monetary Board shall define the term “related interests.”

The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders.

We have seen the procedural conditions for the specific kind of loan known as the DOSRI loan.

The Five preconditions:

1) Written approval from the majority of all the directors of the bank.

So, for if is a loan it is just approved by the majority of a quorum of a board. The DOSRI loan must be approved of the absolute majority of all the board of directors.

2) The is DOSRI loan is entered upon the records of the bank.

3) And a copy of such entry is then transmitted to the examining department of the Banko Sentral. The appropriate supervising department with really does not have the records for the loan when they come to audit they make a random sampling of the loans once the encoder of the loans take a look as to whether or not the required procedure is followed. That there is a resolution of the bank of directors approving it. Whether there is a submission of collateral etc. But in the case of DOSRI loan it is really submitted purposely to the examining department of the Banko Sentral. There are different examining department of each kind of bank. There is an examining and supervising examiner for the thrift bank, there is also for rural banks, for commercial banks. Don't think that this is only one (local?) department looking and examining banks. There are separate departments.

4) The loans to DOSRI shall be upon terms not less favorable to the bank than those offered to others.

It cannot be possible that the DOSRI loan will not have any collateral. the requirements of the Bangko Sentral but we shall see later on that there are exemptions. that is the general rule and finally if the amount of the loan to DOSRI shall be limited to the amount equivalent to the respective and convert(/) deposits and the value of their paid in capital contribution. So other than single borrower's value limit to the amount loan. There is this additional limit. They cannot borrow more than the (6:15) aggregate value of their capital paid in contribution as a stock holder.

5) So then, it says "The Monetary Board shall define the term “related interests.” And the board has done that, as define what related interest means. it has issued a particular circular, BSP Circular 170. This circular defines what related intererest means.

BSP CIRCULAR NO. 170 Series of 1998

4. For purposes of Section 26 of Republic Act No. 7653, the term "related interest" shall include the following:

1. Spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of a director, officer or stockholder of the bank;

2. Partnership of which a director, officer, or stockholder or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, is a general partner;

3. Co-owner with the director, officer, stockholder or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of the property or interest or right mortgaged, pledged or assigned to secure the loans or credit accommodations, except when the mortgage, pledge or assignment covers only said co-owner's undivided interest;

4. Corporation, association, or firm of which a director or officer of the bank, or his spouse is also director or officer of such corporation, association or firm, except (a) where the securities of such corporation, association of firm are listed and traded in the big board or commercial and industrial board of domestic stock exchanges and less than fifty percent (50%) of the voting stock thereof is owned by any one person or by persons related to each other within the third degree of consanguinity or affinity; or (b) where the director, officer or stockholder of the lending bank sits as a representative of the bank in the board of directors of such corporation: Provided, That the bank representative shall not have any equity interest in the borrower corporation except for the minimum shares required by law, rules and regulations, or by the by-laws of the corporation: Provided, further, That the borrowing corporation under (a) or (b) is not among those mentioned in items (5) and (6) hereof.

5. Corporation, association or firm of which any or a group of directors, officers, stockholders of the lending bank and/or their spouses or relatives within the first degree of consanguinity or affinity, or relative by legal adoption, hold/own more than twenty percent (20%) of the subscribed capital of such corporation, or of the equity of such association or firm;

6. Corporation, association or firm wholly or majority-owned or controlled by any related entity or a group of related entities mentioned in items (2), (4) and (5) hereof.

Sec. 37. Loans and Other Credit Accommodations Against Real Estate. – Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations against real estate shall not exceed seventy-five percent (75%) of the appraised value of the respective real estate security, plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees.

Limitation as to how much credit accommodations of loans against real estate can be made. (75%) of the appraised value of the respective real estate security plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees. 75% as to the real estate and 60% as to the improvemements. Why less as to its improvement? Because the improvements of real estate can be depreciated. The resl estate cannot be depreciated. Exception where a real estate can be depreciated? The real estates in the Peoples Republic of China, where real property is owned by the State. Where your interest is up to 99 years only, so therefore you depreciate it.

Now 75% of the value of the estate that is the maximum amount of the loan that can be granted to you. Now, when you say 75% of the appraised value, appraised value is lower than market value. Because there can be countervailing evidences to the value of the real estate.

Sec. 38. Loans And Other Credit Accommodations on Security of Chattels and Intangible Properties. - Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations on security of chattels and intangible properties such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed seventy-five percent (75%) of the appraised value of the security, an such loans and other credit accommodation may be made to the title-holder of the chattels and intangible properties or his assignees.

Now Sec. 38, limitations as to the amount where the security is chattel and intangible property. What is that? Sec. 38 says shall not exceed seventy-five percent (75%) of the appraised value of the security, an such loans and other credit accommodation may be made to the title-holder of the chattels and intangible properties or his assignees. By title-holders of chattels if there is a title holder for chattel like car there is registration but but if you have jewelry what right do you have? Jewelry can be bought and sold just like any other personal property. If you have a pink diamond which has 12 carat. what is the appraised value to that? and what is you title to it? If it reaches a certain amount mosty owners they will want to insure jewelry, they will procure an appraisal. (Father's stories about diamonds, tel aviv appraisals..)

does the bank recieve the appraisal notes as security? It has the power to do so under the general banking law. but you might not hear anybody giving her diamond as security for the loan. Why? Because the bank may value the diamond so low. So it is not worth it. Patents, trademarks, trade names, and copyrights shall not exceed seventy-five percent (75%) of the appraised value of the security.

Sec. 39. Grant and Purpose of Loans and Other Credit Accommodations. - A bank shall grant loans and other credit accommodations only in amounts and for the periods of time essential for the effective completion of the operations to be financed. Such grant of loans and other credit accommodations shall be consistent with safe and sound banking practices.

The purpose of all loans and other credit accommodations shall be stated in the application and in the contract between the bank and the borrower. If the bank finds that the proceeds of the loan or other credit accommodation have been employed, without its approval, for purposes other than those agreed upon with the bank, it shall have the right to terminate the loan or other credit accommodation and demand immediate repayment of the obligation. .

The bank is supposed to grant loans only in amounts and for a period of time essential for the effective completion of the operations to be financed. Technically speaking, if you have no need for the loan and there if there is no actual application for the loan. You cannot borrow, technically speaking. But if you talk to investors, you talk to those who are very experienced to the financial market, they will say that the time to borrow is when you have no need of funds. Because you will have the best rates. Now, to make sure that the loan is granted only for a purpose and for duration the loan is needed. The purpose of all loans and other credit accommodations shall be stated in the application and the contract between the bank and the borrower. If the bank finds that the proceeds of the loan and credit accommodations have been employed without its approval for the purposes other than those agreed upon. It has the right to terminate the loan and other credit accommodation and demand immediate repayment of the loan. The bank has a right and it is an essential violations of the agreement.

Sec. 40. Requirement for Grant Of Loans or 0ther Credit Accommodations. - Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.

Toward this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or other credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation.

In formulating rules and regulations under this Section, the Monetary Board shall recognize the peculiar characteristics of micro financing, such as cash flow-based lending to the basic sectors that are not covered by traditional collateral.

Now here is the rule, to grant a loan according to Sec. 40 the bank may demand from its credit applicants statements of their assets and liabilities, and their income and expenditures and other information, as may be prescribed by law, and by the rules and regulations of the monetary board.

In formulating rules and regulations under this section, the Monetary Board shall recognize the characteristics of micro financing, such as cash flow-based lending to the basic sectors that are not covered by traditional collateral. This is still very formalistic, if you are indeed in micro-financing you cannot demand financial statements. thsi is an exception from the rule of Bangko Sentral, that it must demand financial statements. It does not say here that it should be audited but normally it is audited. In fact the bank will require financial statements which is the exact copy of what you filed in the Bureau of Internal Revenue. Why? Because those financial statements are covered by oath and you could be pinned down with perjury. So those basic financial statements that you submit to the BIR are covered by regulation and you can be subjected to criminal prosecution for falsification. As to other supporting documents, It is covered by the (stretch? 25:41) you must prove, unless you submit it to the BIR. That is not strictly covered by our (jury 25:51?).

Sec. 41. Unsecured Loans or Other Credit Accommodations. – The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks.

Now how about unsecured loans and other credit accomodations. Sec. 41 forbids this. Of course micro-financing is the exception here. (Father shared about the social structure of micro-financing.)

Sec. 42. Other Security Requirements for Bank Credits. - The Monetary Board may, by regulation, prescribe further security requirements to which the various types of bank credits shall be subject, and, in accordance with the authority granted to it in Section 106 of the New Central Bank Act, the Board may by regulation, reduce the maximum ratios established in Sections 36 and 37 of this Act, or, in special cases, increase the maximum ratios established therein.

The Bangko Sentral may prescribe further security requirements. The Monetary Board may by regulation reduce the maximum ratio established in Sec. 36 and 37. Loans secured by real estate and loans secured by chattel mortgage. It says the Bangko Sentral may reduce the maximum ratio, not increase but reduce. Or, in special cases, increase the maximum ratios established therein

Sec. 43. Authority to Prescribe Terms and Conditions of Loans and Other Credit Accommodations. - The Monetary Board, may, similarly in accordance with the authority granted to it in Section 106 of the New Central Bank Act, and taking into account the requirements of the economy for the effective utilization of long-term funds, prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities, as well as related terms and conditions for various types of bank 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.

The Monetary Board shall regulate the interest imposed on micro finance borrowers by lending investors and similar lenders such as, but not limited to, the unconscionable rates of

interest collected on salary loans and similar credit accommodations.

So, Monetary Board may prescribe maturities, as well as related terms and conditions for various types of bank 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.

Sec. 44. Amortization on Loans and Other Credit Accommodations. - The amortization schedule of bank loans and other credit accommodations shall be adapted to the nature of the operations to be financed.

In case of loans and other credit accommodations with maturities of more than five (5) years, provisions must be made for periodic amortization payments, but such payments must 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 regular amortization payments therefrom, the bank may permit the initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial amortization date be later than five (5) years from the date on which the loan or other credit accommodation is granted.

In case of loans and other credit accommodations to micro finance sectors, the schedule of loan amortization shall take into consideration the projected cash flow of the borrower and adopt this into the terms and conditions formulated by banks.

Rules with respect to amortization. Amortization according to Sec. 44, The amortization schedule of bank loans and other credit accommodations shall be adapted to the nature of the operations to be financed. But in case of loans and other credit accommodations with maturities of more than five (5) years, provisions must be made for periodic amortization payments, but such payments must be made at least annually. That is the general rule. This annually, there must be an amortization made, if the maturity of the loan is five years or more.

There can be exceptions-- when the borrowed funds are to be used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial amortization date be later than five (5) years from the date on which the loan or other credit accommodation is granted. So the longest where there is a grace period for amortization is five years. [I cannot imagine micro-financing more than one year. There is only small amount.]

Now how about, with respect to prepayment? This is where the principle is enunciated in Sec. 45,

Sec. 45. Prepayment of Loans and Other Credit Accommodations. – A borrower may at any time prior to the agreed maturity date prepay, in whole or in part, the unpaid balance of any bank loan and other credit accommodation, subject to such reasonable terms and conditions as may be agreed upon between the bank and its borrower.

The SC has said that these reasonable terms and conditions is a reasonable penalty for prepaying your loan. If the loan is five year term but then you have already have money and pay at the end of 2 years. If you did not agree the penalty at the time of the release of the loan, then the amount that should be paid should be within the realm of reason determined at the time you are going to pay. It is a reasonable penalty, but you cannot deny the prepayment of loan. The borrower can always prepaid the loan at any time prior to the agreed day of payment.

Sec. 46. Development Assistance Incentives. - The Bangko Sentral shall provide incentives to banks which, without government guarantee, extend loans to finance educational institutions cooperatives, hospitals and other medical services, socialized or low-cost housing, local government units and other activities with social content.

Sec. 47. Foreclosure of Real Estate Mortgage. - In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration.

Now you are taking up the basic foreclosure of mortgages. There is recent rules in foreclosure whether judicial or extra-judicial in connection with banks is found in section 47. The borrower whose collateral is foreclosed and his real property has the right within one year after the sale of the real estate to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. Now so one year only. The borrower has one year to redeem. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Subject to the right of redemption of the borrower. Provided he(borrower) puts up a bond in the amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. The borrower has the burden of proving that the foreclosure is unlawful. That is why he needs to put up a bond.

Now, what is the exception to the one year redemption period? the exception is that the borrower is a corporation, a juridical person. If the borrower is a juridical person, then he loses his right for redemption to the property as soon as the bank registers the certificate of foreclosure sale with the applicable ROD and placed a notice more than three months after the foreclosure. So if you are a natural person, then he could not pay after foreclosure then he will still have one year to redeem. But if you are a corporation, you are borrower that was foreclosed, the moment the purchaser of the foreclosure sale registers it with the ROD, then you can no longer redeem it or of the passage of three months. Those are the new rules with respect to the right of redemption.

There is difference between equity redemption and right redemption.

Equity redemption-- you could not pay the bank tells you a notice to the point of foreclosing your property. the bank from the foreclosure of the property. There is always within that you can redeem provided you pay the balance, penalties, interest and cost of the foreclosure and sale. Anytime even the day of the day of foreclosure sale itself. The moment there is a sale already then you have one year, if you are a natural person. How much will you pay? The principal, unpaid balance, penalties and charges, cost of sale, on-going interest. If you are a corporation, the moment the purchaser consolidates the ownership with the ROD, you have three months. That is the rule with respect to foreclosure.

Example: nangutang sila ug 10 M, three pieces of property, they have paid already 3M. Sige sila ug sulat sa bangko, "buhi-i ning among mortgage sa usa para mabaligya namo, makakwarta mi, ibayad namo, impas ang utang." Dili mubuhi ang bangko, why? They have a perfect right because the loan is a indivisible contract, those three properties cover the entire amount of the loan. So it is considered as only one. Ang nagdawat sa sulat kay legal department man. Wala man naga-hunahuna sa bank business kay legal point of view man. The bank business wants to clear its books. These properties na naforeclosed kay magdeteriorate. That is the problem, they thought of it as exclusively a legal problem.

Sec. 48. Renewal or Extension of Loans and Other Credit Accommodations. – The Monetary Board may, by regulation, prescribe the conditions and limitations under which a bank may grant extensions or renewals of its loans and other credit accommodations.

Now, how about of renewal or extensions of Loans and Other Credit Accomodations.

This is how banks cure otherwise already (grave?) financial statement. Dili na kabayad ug isa ka loan, ang usa ka borrower, mag ingun na sial mag bayad nalang ka ug this much. Arun ma active na pud imo loan ug ato nang iroll over, di matangtang nato gikan sa bad loan column unya mabutang nato sa on-going mahimo nang assets. Matangtang to sa imo bad loan ug mudako imo column sa good loan. That is why the Central Bank Monetary Board has to prescribe conditions and limitations under which with respect to grant of extensions or renewals because you can fix your financial statements in order to make it look good. We call that window dressing. [Father explained window dressing using the analogy of a department store fixing and changing the clothes of their mannequins although they really have no new stocks.] A financial analyst can easily see that there is window dressing, by looking at the history of the financial statements but to the general public, you cannot detect that when the banks publish their financial statement every quarter. That is why there is a need to prescribe the conditions and limitations under which a bank may grant extensions or renewals of its loans and other credit accommodations.

Sec. 49. Provisions for Losses and Write-Offs. - All debts due to any bank on which interest is past due and unpaid for such period as may be determined by the Monetary Board, unless the same are welt-secured and in the process of collection shall be considered bad debts within the meaning of this Section.

The Monetary Board may fix, by regulation or by order in a specific case, the amount of reserves for bad debts or doubtful accounts or other contingencies.

Writing off of loans, other credit accommodations, advances and other assets shall be subject to regulations issued by the Monetary Board.

Where do you get these reserves you take it from the paid-up capital of the banks. That is why it is essential that the loans,

the aggregate loans of the bank should not exceed its aggregate deposits because that capital of the bank is supposed to answer for these write offs and to these contingencies.

Writing off of loans, other credit accommodations, advances and other assets shall be subject to regulations issued by the Monetary Board. That requires a specific resolution approved by the board, that an independent director must make. It is commenced of removal of write-offs, and reserves of bad loans.

END. DC

BANKING LAW January 24, 2013

We are almost through we need another exam.

Sec. 51 provides for Ceiling on Investments in Certain Assets most specifically on real assets.

Section 51. Ceiling on Investments in Certain Assets. - Any bank may acquire real estate as shall be necessary for its own use in the conduct of its business: Provided, however, That the total investment in such real estate and improvements thereof including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts: Provided, further, That the equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the bank's total investment in real estate, unless otherwise provided by the Monetary Board. (25a)

Combined capital accounts which means paid up capital (common stock?) plus unrestricted earnings supplied and surplus profits. So 50 % is the limit. Now, the equity investment of the bank in another corporation engaged in primarily real estate shall be considered as part of the bank's total investment in the real estate unless provided by the monetary board. So that is a restriction of banks. Investments in real estate. Another restriction of real estate, if you acquire real estate, the bank acquires. how does it acquire? Because of mortgages in good faith. they are provided with securities or because it is real estate that is paid to the bank as satisfaction for debts. Or in any other legitimate way the bank is nonetheless provide to within a period of five years from its acquisition as prescribed by the monetary board to dispose of such real estate provided that the bank may after said period of five years continue to hold the property for its own use subject to the limitations of (proceedings?). If it does not own more than 50% of the combined capital accounts, it may hold on to it provided it is really using it.

Now, let me tell you a practical exemption in which the monetary board readily grants. Sometimes a bank forecloses on a real property that had already receded because it is in region where people are afraid to go there. NPAs or places where it is in the hands of rebels. People do not go there, much more you could dispose of the property. So when the bank examiner comes around. Why is it still when the acquisition is more than five years ago? Then you explain to the examiner, you have not seen property. Why? Because it is there in the mountain. Naa pay mudawat ani, ihatag na namo pero walay mutultul dinhi. And that is where the examiner will take note and allow it to stay in the books because there is an ecxception.

Now sec. 53 enumerates the so-called the other banking services in addition to the operations specifically authorized to the bank.

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;

Example of this [53.3] is the collection for payments in Davao Light, tuition fees of the Ateneo. Those are services, other services which the bank is allowed to offer to the general public. Now these services are not granted out of the goodness of the heart of the bank. The bank always asks fees.

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.

Safety boxes of the bank are cerfified as fireproof. [Father talked about safes not being fireproof.] This is where the bank is a depositary. A service of deposit box is a contract of deposit under the civil code. Butangan nimo ug things of value just like your certificate of stock.

The bank shall perform the services permitted under Subsections 53.1, 53.2,53.3 and 53.4 as depositary or as an agent. Accordingly, it shall keep the funds, securities and other effects which it receives duly separate from the bank's own assets and liabilities: The Monetary Board may regulate the operations authorized by this Section in order to ensure that such operations do not endanger the interests of the depositors and other creditors of the bank. In case a bank or quasi-bark notifies the Bangko Sentral or publicly announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days, the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of the Philippine Deposit Insurance Corporation. (72a)

So declaring a bank holiday is one of the grounds for receivership. Remember we had taken receivership in the three instances (?) of distressed banks 1) conservatorship, 2) receivership and 3) liquidatorship. The difference between conservatorship and receivership is that the bank in receivership ceases to operate, in conservatorship (?). Liquidatorship it is placed in the hands of the court because it is already selling off its assets to satisfy its debts.

Sec. 54 is the explicit prohibition for the bank to engage in insurance business as insurer.

Section 54. Prohibition to Act as Insurer. - A bank shall not directly engage in insurance business as the insurer. (73)

But we have seen that, a universal bank is allowed to make investments in non-alike businesses. So a universal bank can buy equity in insurance companies. That is when banks will allow insurance companies to sell to its own bank and the bank itself for its insurance needs will use its own insurance company. When does the bank needs insurance? Every time you have a mortgage of a house and lot. The bank will not approve mortgage unless you buy insurance of the security of the house and lot. And for the lenght of the loan that insurance is active and should the house burn down the creditor bank is subrogated to the shoes owner of the house because it has the right to such amount of the proceeds of the insurance of the unpaid balance of the loan.

Now, you will ask, why is a bank prohibited from taking a direct insurer? Because it is in traditional banking (as distinguished from enlightened banking--the one-stop banking made for the convenience of the banking public---kumpleto may insurer, loan, deposit.) why it is not done before? Because in

traditional banking-- it is seem to be a conflict of interest. You received a collateral, a house-and-lot, you wanted to be safeguarded as to the loan, so that when you foreclose this house, you can sell the house to recover the loan. Now if you are the insurer, are you going to go for the maximum insurable amount or the lower insurable amount. Dapat mas gamay, para mas gamay ang bayrunon na insurable amount just in case of loss. Kung ikaw ang Bangko unsay gusto nimo ipa insure higher or lower insurable interest. Mas dako kay ikaw gud ang nagpahiram sa kwarta. So there is a conflict of interest. Kinsay imo padag-on if you are both the lender and insurer. Will you win for the insurer or for the lender? There is a conflict of interest. That is why the bank is prohibited to be a direct insurer. Mind you with the clearings now being conducted, the direction is the banks are going back to a cut and dry business of banking.

Section 55. Prohibited Transactions.

55.1. No director, officer, employee, or agent of any bank shall -

(a) Make false entries in any bank report or statement or participate in any fraudulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or any person;

You a layman reading this, you will ask why you need to put this? guinadili man gani ang pamakak, why? That is where it is covered by regulation. [Father shared that Europeans are standard based, while Americans are rules based.]

(b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail;

Secrecy of Bank Deposits Act is really with respect to bank deposit. This qualification of disclosure is with respect to any other matter other than bank deposits. You are not supposed to say or to disclose any information relative to the funds or property in the custody of the bank belonging to private individuals. Supposed you are a bank employee and you say that so-and-so has a deposit box. Is that falling under this provision? No. It is merely observatory. It can be seen by the people of the bank. When you get something from the deposit box, you need to sign a logbook and everybody could see it. Since everyone could see it, it is very hard to prove that you got this information from an employee or officer of the bank.

(c) Accept gifts, fees, or commissions or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank;

Na-approve imong loan, then nagpadala ka ug lechon, it is supposed to be prohibited just like the graft and corrupt practices act. [Father talked about Enrile disbursing funds.]

(d) Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank; or

(e) Outsource inherent banking functions.

Now there is a circular that a bunchof the functions of the bank cannot be outsource because they are considered as the heart of banking. Other functions they can be outsource. What is an example that cannot be outsourced? The teller because it accepts money for the bank and disburse money for the bank. Tellering cannot be outsource. Messengerial service can be outsource. IT that can be outsource. Security can be outsource

55.2. No borrower of a bank shall -

(a) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank;

(b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof;

(c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or

(d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application.

55.3 No examiner, officer or employee of the Bangko Sentral or of any department, bureau, office, branch or agency of the Government that is assigned to supervise, examine, assist or render technical assistance to any bank shall commit any of the acts enumerated in this Section or aid in the commission of the same. (87-Aa)

The making of false reports or misrepresentation or suppression of material facts by personnel of the Bangko Sental ng Pilipinas shall be subject to the administrative and criminal sanctions provided under the New Central Bank Act.

Suppose a bank manager attempts to borrow money from a big depositor of the bank. And the depositor lends money. Are they violating anything here? You cannot, it is in the ethics of banking. Because the bank manager is taking advantage of the depositor. First, how does he know that there is much money that depositor asks that can be lendout. They take advantage of the information. So it is more in the ethics of banking. [Father talked about employees being fired, when caught in their wrong-doing and then reported to the Bangko Sentral.] On

55.4. Consistent with the provisions of Republic Act No. 1405, otherwise known as the Banks Secrecy Law, no bank shall employ casual or non regular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits.

Section 56. Conducting Business in an Unsafe or Unsound Manner - In determining whether a particular act or omission, which is not otherwise prohibited by any law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed as conducting business in an unsafe or unsound manner for purposes of this Section, the Monetary Board shall consider any of the following circumstances:

56.1 The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the safety, stability, liquidity or solvency of the institution;

56.2 The act or omission has resulted or may result in material loss or damage or abnormal risk to the institution's depositors, creditors, investors, stockholders or to the Bangko Sentral or to the public in general;

56.3 The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable negligence; or

56.4 The act or omission involves entering into any contract or transaction manifestly and grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby.

Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe or unsound manner, the Monetary Board may, without prejudice to the administrative sanctions provided in Section 37 of the New Central Bank Act, take action under Section 30 of the same Act and/or

immediately exclude the erring bank from clearing, the provisions of law to the contrary notwithstanding. (n)

There are certain instances when you do succeed then nothing (bad) happens, you are rewarded but if something goes wrong. Example: a bank officer accommodated a representative of the mayor to encashed a check. If it is true, then the bank officer accommodated a big client. If it is not true, it is not the mayor then the officer is liable for gross negligence.

CROSS-REFERENCE TO SEC. 37, RA 7653 THE NEW CENTRAL BANK ACT

Section 37. Administrative Sanctions on Banks and Quasi-banks. - Without prejudice to the criminal sanctions against the culpable persons provided in Sections 34, 35, and 36 of this Act, the Monetary Board may, at its discretion, impose upon any bank or quasi-bank, their directors and/or officers, for any willful violation of its charter or by-laws, willful delay in the submission of reports or publications thereof as required by law, rules and regulations; any refusal to permit examination into the affairs of the institution; any willful making of a false or misleading statement to the Board or the appropriate supervising and examining department or its examiners; any willful failure or refusal to comply with, or violation of, any banking law or any order, instruction or regulation issued by the Monetary Board, or any order, instruction or ruling by the Governor; or any commission of irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the Monetary Board, the following administrative sanctions, whenever applicable:

(a) fines in amounts as may be determined by the Monetary Board to be appropriate, but in no case to exceed Thirty thousand pesos (P30,000) a day for each violation, taking into consideration the attendant circumstances, such as the nature and gravity of the violation or irregularity and the size of the bank or quasi-bank;

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

(c) suspension of lending or foreign exchange operations or authority to accept new deposits or make new investments;

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

(e) revocation of quasi-banking license.

Resignation or termination from office shall not exempt such director or officer from administrative or criminal sanctions.

The Monetary Board may, whenever warranted by circumstances, preventively suspend any director or officer of a bank or quasi-bank pending an investigation: Provided, That should the case be not finally decided by the Bangko Sentral within a period of one hundred twenty (120) days after the date of suspension, said director or officer shall be reinstated in his position: Provided, further, That when the delay in the disposition of the case is due to the fault, negligence or petition of the director or officer, the period of delay shall not be counted in computing the period of suspension herein provided.

The above administrative sanctions need not be applied in the order of their severity.

Whether or not there is an administrative proceeding, if the institution and/or the directors and/or officers concerned continue with or otherwise persist in the commission of the indicated practice or violation, the Monetary Board may issue an order requiring the institution and/or the directors and/or officers concerned to cease and desist from the indicated practice or violation, and may further order that immediate action be taken to correct the conditions resulting from such

practice or violation. The cease and desist order shall be immediately effective upon service on the respondents.

The respondents shall be afforded an opportunity to defend their action in a hearing before the Monetary Board or any committee chaired by any Monetary Board member created for the purpose, upon request made by the respondents within five (5) days from their receipt of the order. If no such hearing is requested within said period, the order shall be final. If a hearing is conducted, all issues shall be determined on the basis of records, after which the Monetary Board may either reconsider or make final its order.

The Governor is hereby authorized, at his discretion, to impose upon banking institutions, for any failure to comply with the requirements of law, Monetary Board regulations and policies, and/or instructions issued by the Monetary Board or by the Governor, fines not in excess of Ten thousand pesos (P10,000) a day for each violation, the imposition of which shall be final and executory until reversed, modified or lifted by the Monetary Board on appeal.

January 30, 2013

Section 55. Prohibited Transactions.55.1. No director, officer, employee, or agent of any bank shall –

(a) Make false entries in any bank report or statement or participate in any fraudulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or any person;

Even without this, if the document where you write a false entry is demanded by BS becomes part of the bank records then that is falsification. So you can be still be held culpable but anyway there is this prohibition against making false entries in any bank report or statement.

(b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail;

Of course there is still the provisions of the secrecy of bank deposits act that penalizes disclosure of bank deposits that prohibits not only the director, or any employee of the bank but also any govt official.

(c) Accept gifts, fees, or commissions or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank;

So you’re so happy that your loan is approved and you sent one lechon to the branch manager that is technically a ---(?) in connection of any loan. Unless you will say that the bank manager is your relative and it’s his birthday and you’re together in a family celebration. You loan is approved and your happy and you sent a lechon that this a loan in connection with the approval loan or other credit accommodation.

(c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or

(d) Overvalue or aid in overvaluing any security for the purpose of s not influencing in any way the actions of the bank or any bank; or

To undervalue a security is not prohibited. You undervalue security; you present a piece of property to secure a loan and you’re willing to accept the valuation of the bank is the assessed value of the assessor—the city assessor. Normally, it is lower than the market value, lower than zonal valuation of BIR. That is no harm done there but if you over value, then that is an offense. And then,

(e) Outsource inherent banking functions.

There is a SB Circular as to what is considered as inherent functions which cannot be outsource. One of them is the teller because he accepts and disburses money for and in behalf of the bank. You can outsource IT, messengerial services, security guards, you can even outsource armoured car services but you cannot outsource tellering, the officers of the bank. The bank branch manager, the bank operations officer, the branch accountant and the branch cashier, those are normallythe four officers of the branch and as a check many documents of a bank require the signature of at least two(2) officers. Why not just one (1)? One checks the other. Always like that. So, at any one time there are always 2 officers in the bank.

The next set of prohibitions applied to a borrower of the bank. What are the prohibitions?

55.2. No borrower of a bank shall -

(a) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank;

Both bank officer and borrower will be penalized in cases of overvaluing.

(b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof;

You are a school teacher and you apply for a salary loan with a bank, you signed and agreed to the term of the loan. But at the time you sign it you already have a VISA for permanent residency in Australia. What is that? Pa-ingon naka sa Australia, gisagad pa jud nimo ug salary loan. Salary loan is largely unsecured. Normally it is institutional grant to a particular school being offered salary loans with regular employees of an educational institution, high school mostly public high

schools, public elementary school… making false representation.

You just attempt to defraud, how do you do that? You remove the security, moving somewhere. You know when your car is a chattel mortgage of a car loan normally you cannot travel outside of the city/province where the chattel mortgage is constituted. If you borrow in Philippine Savings Bank, normally it is the thrift bank that does, car loan. Magcar loan pa ba diay nag ubang uni bank maglisud na kay dagko na kayo nang ilang loans. Car loans are with so much paper works with so little…

So, normally the thrift banks that go after such car loans, BPI families bank the biggest bank for Metro bank. They lend you the money the car is bought by the money you borrowed but then you execute a chattel mortgage on the vehicle and you have a promise there that you will use it only within the confines of the city or the province.

What happen if you say you want to go to Camiguin for a vacation? That is out already of the territorial limits of your promise in the chattel mortgage. You ask for a waiver on the part of the PS bank on the promise not to remove the waiver. If you do so without that waiver on the part of the bank, that lends you the money to purchase it, that is defrauding removing the chattel mortgage from the place you promised that is confined to for reasons of the limitations of the chattel mortgage. Chattel mortgage, car, gi-carnap nawala na. No problem if carnap because there is an insurance for that. The bank that lends you money will never allow a car loan without an insurance that covers carnapping.

(d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application.

You know here, a little defective. It should not offering gift in order to influence him in approving a loan because he has no authority in authority in approving the loan. Who has the authority in approving the loan? It is the Board of the bank relies to the recommendation of its officers. They should be influenced such person into positively endorsing a loan or other credit accommodation. So we’ve seen as far as an officer, director, employee of the bank, the crime is to receive a gift. As far as the borrower is concerned what is the prohibited transaction it is to make an offer.

Even the offering of a gift is prohibited. Kung ang bangko nag-offer nagpadungog na sila. “hapit ng Pasko, hapit na ang Christmas party sa branch office masking gamay na lechon”. So you offer a bigger lechon(haha). Remember that the officer is not yet

culpable if it solicits an offer. It is when he receives but for a borrower it is the offering. He is already culpable when he makes an offer according to Section 55.2 (b).

Then, section 55.3 prohibited transactions of an examiner, officer or employee of the Bangko Sentral or of any department, bureau, office, branch or agency of the Government that is assigned to supervise, examine, assist or render technical assistance to any bank.

55.3 No examiner, officer or employee of the Bangko Sentral or of any department, bureau, office, branch or agency of the Government that is assigned to supervise, examine, assist or render technical assistance to any bank shall commit any of the acts enumerated in this Section or aid in the commission of the same.

It’s more strict for the examiner, officer, or employee if he just aids in the commission or any of those mentioned that are prohibited to a borrower, officer or employee of the bank. He is culpable.

We said before that one of the grounds for putting a bank for receivership is conducting banking business in an unsafe or unsound manner. When can it be considered that a bank is conducting business in an unsafe and unsound manner? The criteria are listed in section 56.

Section 56. Conducting Business in an Unsafe or Unsound Manner - In determining whether a particular act or omission, which is not otherwise prohibited by any law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed as conducting business in an unsafe or unsound manner for purposes of this Section, the Monetary Board shall consider any of the following circumstances:

56.1 The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the safety, stability, liquidity or solvency of the institution;

56.2 The act or omission has resulted or may result in material loss or damage or abnormal risk to the institution's depositors, creditors, investors, stockholders or to the Bangko Sentral or to the public in general;

56.3 The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable negligence; or

Those are the criteria.

The branch suddenly approached by the depositor who opens an account and brings in money three (3) times or four (4) times the volume of the big deposits of the bank and it is followed by withdrawals the volume of which is 3 or 4 times the normal volume of the branch. What is that? Is that the transaction that will result or may result in the loss or damage or abnormal risks to the institution’s creditors, depositors, investors, stockholders because that kind of business

which is out of normal is actually a pyramiding scheme. That is a pyramiding scheme.

That is what is happening to Dipolog. Abnormal! Gideposit money. Their checks are also issued, different people cashing checks. When that was reported I said that is a pyramiding scheme stop it. They didn’t believe me. They said they will still ask the BSP. They said wait for our order they’re still operating in the paper era. Pag-issue nila ug order 2 days later, nahurot ng kwarta. Daghan na ug nanuktok sa branch nagdala pa ug cheke.

Now the CB issues a show cost order(?) why the Cb is not penalized in the act or omission has resulted in material loss or damage or abnormal risk to the institution's depositors, creditors, investors. Fourth,

56.4 The act or omission involves entering into any contract or transaction manifestly and grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby.

ss

The bank is like a government. If you enter into a bank transaction that is manifestly disadvantageous to the government then that is one of the acts penalized in the anti-graft and corrupt practices act.

You cannot approve a DOSRI loan at range of interest that is not given to any debtor or client of the bank. If you give a loan to an officer or director of the bank, an interest rates lower than you have given to anybody that is manifestly disadvantageous to the bank and the only reason of giving it is because he is a DOSRI.

Section 57 is Prohibition on Dividend Declaration. Remember this is assuring that the bank has unrestricted ----(??28min)that if it were an ordinary corporation it will be well within its means to give out dividends, to declare dividends but even if the bank has unrestricted--?. Section 57 says No bank or quasi-bank shall declare dividends, greater than its accumulated net profits then on hand, deducting there from its losses and budgets and then it says actually that is a surplusage because that is prohibited by the corporation code. The second sentence is, neither shall bank nor quasi bank declare dividends if at the time of declaration anyone of these conditions is present.Section 57. Prohibition on Dividend Declaration. - No bank or quasi-bank shall declare dividends, if at the time of declaration:

57.1 Its clearing account with the Bangko Sentral is overdrawn; or

Which means that the banks account with the BS, it owes more than what it has deposited in the BS. Overdrawn!

57.2 It is deficient in the required liquidity floor for government deposits for five (5) or more consecutive days, or

57.3 It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration; or

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

But the BS may still even if you did not done any of this, it may still not give a clearance for you to issue a cash or stock dividends the bank can do that, BS can do that just by not giving its prior approval but depending to the auditor, that is common sense. Must be a CPA determined by the auditor chosen by the bank.

Section 59 explicit Authority of BS to Regulate Electronic Transactions.

Section 60. Rules with regards to Financial Statements of a bank, quasi-bank or trust entity.

First, shall submit to the appropriate supervising and examining department of the Bangko Sentral financial statements in such form and frequency as may be prescribed by the Bangko Sentral.

What is the frequency? The very least, at least quarterly. That is over and above the requirement of BS to make certain financial forms, monthly and there are even cases of daily reports like deposit liabilities that is a daily report on the part of the bank.

Section 61 Publication of Financial Statements. how often is a bank require to have its financial statements published? The requirement for publication is every quarter. Once every quarter and BS can require the newspaper where it should have to be published. 2nd par.of section 61, “The Bangko Sentral may by regulation prescribe the newspaper where the statements prescribed herein shall be published.”

They might be getting commission from Manila bulletin. hmmm. I don’t know. (chika2 galore)

The BS can prescribe even the newspaper. I don’t know what particular reason behind that. If you have the legal document that requires publication it’s just the frequency that is required and the kind of newspaper. Then usually newspaper of general circulation is.. you have the settlement of the state, probate, the law---general circulation.

Now the principal, that is commercial bank that has branches in Philippines, it should be a national paper. Can BS name a particular newspaper? The law says so.

Section 61. x x x In periods of national and/or local emergency or of imminent panic which directly threaten monetary and banking stability, the Monetary Board, by a vote of at least five (5) of its members, in special cases and upon application of the bank, quasi-bank or trust entity, may allow such bank, quasi-bank or trust entity to defer for a stated period of time the publication of the statement of financial condition required herein.

In periods of national, local emergency. The law says quarterly, the publication. Here is one quarter and there is no publication. Is not that equate a sure sign that we are in emergency? Instead of mitigating panic is that not a sure sign that people should now starts to panic because there is no more publication of financial statement and therefore this particular provision Section 61 is now signalling an emergency, national or otherwise.

They should have said that the BS has the discretion to defer stated period of time of publication but they do not trust the BS. We have to push, push the ground here that it is national or local emergency or imminent panic. So it will defer. That’s the only instance here that bank can defer. So it’s like telling the banking public that “Now is the time to panic.” It’s creating that which it seeks to avoid.

Then, the publication of capital stock… Please bear attention to me :-)

Section 62. Publication of Capital Stock. - A bank, quasi-bank or trust entity incorporated under the laws of the Philippines shall not publish the amount of its authorized or subscribed capital stock without indicating at the same time and with equal prominence, the amount of its capital actually paid up. X x x

You cannot say, “This is my authorized capital.” Suppose you give a press release but the newspaper just put “authorized andsubscribed” and forgot the paid up. You press release it’s there. Kinsa manang sala? That is required by section 62. X x x No branch of any foreign bank doing business in the Philippines shall in any way announce the amount of the capital and surplus of its head office, or of the bank in its entirety without indicating at the same time and with equal prominence the amount of the capital, if any, definitely assigned to such branch, such fact shall be stated in, and shall form part of the publication.

Settlement of Disputes… (Section 63)

Section 63. Settlement of Disputes. - The provisions of any law to the contrary notwithstanding, the Bangko Sentral shall be consulted by other government agencies or instrumentalities in actions or proceedings initiated by or brought before them involving controversies in banks, quasi-banks or trust entities arising out of and involving relations between and among their directors, officers or stockholders, as well as disputes between any or all of

them and the bank, quasi-bank or trust entity of which they are directors, officers or stockholders.

Government agencies must inform the BS if there are any disputes involving directors, officers, stockholders among themselves. As well as disputes between any or all of them and the bank, quasi-bank or trust entity of which they are directors, officers or stockholders.

Unauthorized Advertisement or Business Representation is Section 64.

If you do not have a banking business and you hold yourself out as conducting a banking business or you use the words

Section 64. Unauthorized Advertisement or Business Representation. x x x "bank", "banking", "banker", "quasi-bank", "quasi-banking", "quasi-banker", "savings and loan association", "trust corporation", "trust company" or words of similar import.

When you used those names you are engaged in unauthorized advertisement of business representation. So before you can set yourself out as a bank you must have banking license. If you don’t have then you that will be prohibited activity and you be penalized.

Section 65. Service Fees. BS has the power to charge equitable rates, commissions or fees.

Section 65. Service Fees. - The Bangko Sentral may charge equitable rates, commissions or fees, as may be prescribed by the Monetary Board for supervision, examination and other services which it renders under this Act.

Then you have the penal provision (Section 66).Section 66. Penalty for Violation of this Act. - Unless otherwise herein provided, the violation of any of the provisions of this Act shall be subject to Sections 34, 35, 36 and 37 of the New Central Bank Act. If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary Board may also suspend or remove such director or officer. If the violation is committed by a corporation, such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General.

We are almost through. ( BowOwOw. Alfie Ω)

JANUARY 31, 2013

Everything is just dry but we have to go through this. You know Chapter 7, Section 71 just mentions the particular laws that covers the particular kinds of banks. “Thrift Banks” are covered by the provisions of the Thrift Banks Act. “Rural Banks” are covered by the Rural

Banks Act and the Cooperative Code. But the last sentence of Sec. 71 says that for purposes of prescribing minimum ratio which the net worth of a thrift bank must bear to its total risk assets, the provisions of Sec. 33 of this Act shall govern.

Section 71. Other Banking Laws. - The organization, the ownership and capital requirements, powers, supervision and general conduct of business of thrift banks, rural banks and cooperative banks shall be governed by the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code, respectively. The organization, ownership and capital requirements, powers, supervision and general conduct of business of Islamic banks shall be governed by special laws. The provisions of this Act, however, insofar as they are not in conflict with the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code shall likewise apply to thrift banks, rural banks, and cooperative banks, respectively. However, for purposes of prescribing the minimum ratio which the net worth of a thrift bank must bear to its total risk assets, the provisions of Section 33 of this Act shall govern.

Foreign Banks—foreign banks are authorized now under Sec. 73 to acquire 100% of the voting stock of one bank organized under the laws of the Philippines. But if it wants that bank to own real property, then it will own only 40% so than 60% will be Filipino owned, so that they can own real properties. But if they just want to put an office, they do not have to own real property, then they can own the bank 100% and buy property—a building that is a condominium office building, and buy a unit or several units in that condominium corporation.

Section 73. Acquisition of Voting Stock in a Domestic Bank. - Within seven (7) years from the effectivity of this act and subject to guidelines issued pursuant to the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to one hundred percent (100%) of the voting stock of only one (1) bank organized under the laws of the Republic of the Philippines. Within the same period, the Monetary Board may authorize any foreign bank, which prior to the effectivity of this Act availed itself of the privilege to acquire up to sixty percent (60%) of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks Act, to further acquire voting shares such bank to the extent necessary for it to own one hundred percent (100%) of the voting stock thereof. In the exercise of the authority, the Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos. Any right, privilege or incentive granted to a foreign bank under this Section shall be equally enjoyed by and extended under the same conditns to banks organized

under the laws of the Republic of the Philippines. (Secs. 2 and 3, RA 7721)

Now, Sec. 75 is the so called “Head Office Guarantee”. This is a requirement of a foreign bank which is not asked of a local bank. In order to provide effective protection of the interests of the depositors and other creditors of Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of the Philippine Branch. Residents and citizens of the Philippines who are creditors of a bank in the Philippines of a foreign bank, shall have preferential rights in the assets of such branch, in accordance with existing laws because that is part of being a foreign bank. If the foreign bank that let us say is based in the States, is dissolved and is liquidated, it has its own creditors. The law says that the Philippine creditors are preferred over other creditors as to the assets of that foreign bank here within the territorial jurisdiction of the Philippines. That preference is created by Philippine law affecting assets of the foreign bank located within the territorial jurisdiction of the Philippines. That is for the protection of Filipinos.

Section 75. Head Office Guarantee. - In order to provide effective protection of the interests of the depositors and other creditors of Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch. (69) Residents and citizens of the Philippines who are creditors of a branch in the Philippines of a foreign bank shall have preferential rights to the assets of such branch in accordance with the existing laws.

Then there is the employment of an agent with respect to summons and legal processes. In the absence of an agent, according to Sec. 76(3), “should there be no person authorized by the bank upon whom service of summons, processes, and all legal notices may be made, service of summons may be made upon the Bangko Sentral Deputy Governor in charge of the supervision and examining departments. Service upon him will be considered under the law equivalent to service of the foreign bank.

Section 76. Summons and Legal Process. - Summons and legal process served upon the Philippine agent or head of any foreign bank designated to accept service thereof shall give jurisdiction to the courts over such bank, and service of notices on such agent or head shall be as binding upon the bank which he represents as if made upon the bank itself. Should the authority of such agent or head to accept service of summons and legal processes for the bank or notice to it be revoked, or should such agent or head become mentally incompetent or otherwise unable to accept service

while exercising such authority, it shall be the duty of the bank to name and designate promptly another agent or head upon whom service of summons and processes in legal proceedings against the bank and of notices affecting the bank may be made, and to file with the Securities and Exchange Commission a duly authenticated nomination of such agent. In the absence of the agent or head or should there be no person authorized by the bank upon whom service of summons, processes and all legal notices may be made, service of summons, processes and legal notices may be made upon the Bangko Sentral Deputy Governor In-Charge of the supervising and examining departments and such service shall be as effective as if made upon the bank or its duly authorized agent or head. In case of service for the bank upon the Bangko Sentral Deputy Governor In-charge of the supervising and examining departments, the said deputy Governor shill register and transmit by mail to the president or the secretary of the bank at its head or principal office a copy, duly certified by him, of the summons, process, or notice. The sending of such copy of the summons, process, or notice shall be a necessary part of the services and shall complete the service. The registry receipt of mailing shall be prima facie evidence of the transmission of the summons, process or notice. All costs necessarily incurred by the said Deputy Governor for the making and mailing and sending of a copy of the summons, process, or notice to the president or the secretary of the bank at its head or principal office shall be paid in advance by the party at whose instance the service is made.

Now, Sect. 78 gives you the conditions and process for revocation of a foreign banking license.

Section 78. Revocation of License of a Foreign Bank - The Monetary Board may revoke the license to transact business in the Philippines of, any foreign bank, if it finds that the foreign bank is insolvent or in imminent danger thereof or that its continuance in business will involve probable loss to those transacting business with it. After the revocation of its license, it shall be unlawful for any such foreign banks to transact business in the Philippines unless its license is renewed or reissued. After the revocation of such license, the Bangko Sentral shall take the necessary action to protect the creditors of such foreign bank and the public. The provisions of the New Central Bank Act on sanctions and penalties shall likewise be applicable.

Now let us go to trust operations. Sec. 70, Chapter 9, it is explicit that you cannot engage in a trust operation unless you have a license from the Monetary Board. Only a stock corporation or a person duly authorized by the Monetary Board to engage in trust business shall act as a trustee, or administer any trust, or hold property in trust or on deposit for the use/benefit on behalf of

others. For purposes of this Act, such corporation shall be referred to as a “Trust Entity”.

Section 79. Authority to Engage in Trust Business. - Only a stock corporation or a person duly authorized by the Monetary Board to engage in trust business shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or behoof of others. For purposes of this Act, such a corporation shall be referred to as a trust entity.

Who makes use of trustees? Or trust entities? Retirement Funds, Mutual Funds, and private trusts for the benefit of disabled or incapacitated people. Somebody is a very rich parent and he has a son who is afflicted with Down Syndrome. So before he dies he makes a trust fund to look after the son who is sick. So he’s caring for his son can still be done even if he is no longer around. Who will be entrusted to provide for his son? It is this trust entity.

Tua sa bukid, ang imong anak, Down Syndrome, magdadaro ka, mamatay ka na, unsa man imong buhaton? I-entrust nimo imong anak, ignon nimo imong igsoon, “Bantayi ni akong anak.” Is he performing trust function? Does the law prohibit that? You are the trustor, he is the trustee who will look after your son who has Down Syndrome because you are dying. What’s the difference between that and the bank? The difference is the corpus of property that is set aside. There is a corpus of property that is made to serve a beneficiary that continues to exist independent from the trustor and the trustee. The trustee, in his own life, he has his own properties, but he has to administer a set of properties that do not belong to him. It is a person, it earns income, it pays taxes. Who looks after the paying of the taxes of the trust fund or the trust corpus? It is the trust entity that looks after that.

Now, to do that in an organized and formal fashion that involves property, you need authority and license from the Monetary Board. That is why you have China Bank AND TRUST COMPANY. He has a banking license and he has also a license to act as a trust company.

Ateneo has a Retirement Fund of its employees, the National Internal Revenue Code prohibits Ateneo from administering its own retirement fund. It must be separately managed, it must be entrusted to a trustee. Why is Ateneo, that creates the trust fund for retirement of its employees, prohibited from acting to administer the trust fund? Because it has concerns of its own. Magkalisod ning Ateneo, walaon nalang to niya ang retirement fund kay gamiton niya ang kwarta. Unsa may mahitabo sa employees? For every year that they serve the Ateneo, they are entitled to the retirement benefit that is provided by law, at least one-half month pay for every year of service. How do you provide for that if Ateneo also uses up the retirement fund? That is why the retirement fund is separated and it is entrusted

to a trustee. Now suppose the Ateneo will tell the trustee, “I will put it with you, I will not put it with BDO, I will put it with you China Bank, because you will also lend that to me for my use.” Is that allowed? That is when Sec. 80 comes into play, the conduct of trust business, first of all, the measure of the care that the trust entity must apply in the funds and property under its custody is the diligence that a prudent man will exercise in the conduct of an enterprise of a like manner and with similar case. So, that is synonymous to “good father of a family” measuring stick. Good father is the measuring stick for continental law, civil law. Prudent man, the diligence of a prudence man is the yardstick in common law, that is the due diligence that should be applied by the trustee. Then here comes the provision, “No trust entity shall, for the account of the trustor or the beneficiary of the trust, purchase or acquire property from, or sell, 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.”

Suppose Ateneo, in its trust account for its retirement fund, it is mandated that it must put a separate governing board for its retirement fund, otherwise it will not be tax exempt under the National Internal Revenue Code. So it has its own Articles of Trust. In the Articles of Trust, there are members of the university administrator, and there are representatives for the employees, that are also representative for the union, suppose they come to the conclusion, “Let us appoint China Bank and Trust Company to be the trustee.” So all the monies of this retirement fund are transferred to China Bank. Suppose China Bank says, “Salamat, dia nimo gihatag nimo, kami ang inyong trustee.” Now, remember the trustee does not do his job out of the goodness of his heart, he is paid from the trust funds to do the trust function. Now, suppose the trust entity, China Bank, will say, “Aahhh, in gratitude to Ateneo, since Ateneo is floating a bond because it’s going to erect these buildings, we will use this trust money to buy the bonds of the Ateneo.” Can the trust entity do that? You read Sec. 80 whether they can do that. No trust entity shall, for the account of the trustor or the beneficiary of the trust, purchase or acquire property from, or sell, 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 of consanguinity or affinity of the related interest of such directors, officers, and stockholders, unless the transaction is specifically authorized by the trustor and the relationship of the trustee and other parties involved in the transaction is fully disclosed to the trustor or beneficiary of the trust prior to the transaction. That is the requirement, full disclosure, and it must be arms-length. Full disclosure and arms-length transaction.

Now, Sec. 81—Registration of the Articles of Incorporation and By-Laws of the Trust Entity. It must

be recommended by the Bangko Sentral. Minimum capitalization? Determined by the Monetary Board. What are the powers of a trust entity?

1.) 83.1: Act as trustee on any mortgage or bond issued by any municipality, corporation, or any body politic to accept and execute any trust consistent with law.

So, if you are the trustee of a particular bond issue, you hold the collateral, the mortgage, and under the order of or appointment of any court as guardian, receiver, trustee, or depositary of the estate of any minor or other incompetent person.

2.) 83.2 Act under the order or appointment of any court as guardian, receiver, trustee, or depositary of the estate of any minor or other incompetent person, and as receiver and depositary of any moneys paid into court by parties to any legal proceedings and of property of any kind which may be brought under the jurisdiction of the court;

3.) 83.3: Act as executor.

4.) 83.4: Act as administrator.

5.) 83.5: Accept, and execute any trust for the holding, management, and administration of any estate, real or personal, and the rents, issues, and profits thereof.

6.) 83.6: Establish and manage common trust funds, subject to such rules and regulations as may be prescribed by the Monetary Board.

You know, the articles of trust that control a certain fund that the trust entity is supposed to administer, demarcates just what type of investments can be entered into by the trust entity for and in behalf of the trust account. Can the trustee delegate his trust functions? If the law allows him to delegate; if the articles of trust allows him to delegate, look at the SSS, it is basically a trustee of the funds of the beneficiaries who are the members of the SSS. They administer the fund. Now, why is it that the SSS can segregate some of the funds and put it in New York and invest it there and designate a trustee for that particular corpus of funds? It’s actually delegating its functions to another trust entity. That is the sound practice, because some trust functions are just so complicated that you have no choice but to delegate. You cannot but delegate because the funds that you are administering are so huge that you cannot possibly perform. It is reckless, it is not the actions of a prudent man to administer all of it by yourself. In other words you will fail in the measure

of degree of diligence and due care of a prudent man if you continue to administer it just by your own trust entity self. You have something like CALPERS—California Public Employees Retirement Funds. That is, they say it’s over $300B. Now, you cannot afford to put it all in the U.S., because if something happens in the U.S., it’s denominated in dollars, it will just risk such loss. It is not prudent to just put it there, so you have to divide all over the world. Now, if you are based in the U.S., you are like SSS, you are there, wala na dili naka matulog ana. Ngano man? Pagsira sa stock market gyud ana sa America, andar na ang Europe, pagkahuman, Asia na sad. Magsige ka ug tanaw ana kay mabyaan man ka. Ah, wa na, di na ka matulog. It’s not prudent to do that.

So, that is the governing principle. Second paragraph of Sec. 82: Deposit for the Faithful Performance of Trust Duties. Take a look at the first part, “Before transacting trust business, every trust entity shall deposit with the Bangko Sentral, as security for the faithful performance of its trust duties, cash or securities approved by the Monetary Board in an amount equal to not less than Php500,000.00 or such higher amount as may be fixed by the Monetary Board: Provided, however, that the Monetary Board shall require every trust to increase the amount of its cash or securities or deposit with the Bangko Sentral, whenever in its judgment such increase is necessary by reason of the trust business of such entity.”

So he has an overall security bond. Who keeps it? The Bangko Sentral. Just like any receiver who is charged of property, he puts up a bond. What’s the purpose of a bond if you are a receiver, it is the legal certitude that you will not run away with the corpus. Idagan unya na nimo! Naa kay bond diha ibutang, unya pagdagan nimo, iputol/ibuton na to! They will execute on the bond. So, take note, that this minimum P500K security placed with the Bangko Sentral is not conditioned that the trust entity has at least one fund over which it is a trustee. If it has no trust business, naa lang gihapon na ang P500K with the Bangko Sentral. That comes with the obligation as a licensed trust entity. Ug way musalig nimo, way muduol nimo na magbutang sila ug retirement fund, naa lang gihapon na. That is part of your obligation as a trust entity imposed by the law. Ready, arun kanunay ka andam mudawat ug trust obligations.

This is the difference between a trust entity and an ordinary receiver. Ang receiver, ordinaryong tao ka, buhaton kang receiver in bankruptcy, magbutang ka ug bond, kay mao man nay qualifying act nimo. Pagdawat nimo sa appointment, butang ka ug bond. Kini (referring to trust operations) wala pa gani kay gidawat, mobutang ka na ug P500K. And the Monetary Board may increase the amount if in its perception there is a necessity.

Now, take a look at Sec. 85—Bond of Certain Persons for the Faithful Performance of Duties. “Before an

executor, administrator, guardian, trustee, receiver, or depository appointed by the court, enters upon the execution of his duties, he shall, upon order of the court, file a bond in such sum as the court may direct.” That is an ordinary person. You are taking special proceedings. One of the special proceedings is settlement of estate, settlement of estate of the deceased. Let us say it is testate, there is a will. Let us say that will says, “This person should be the administrator, or if this person cannot, then this other person, or of he cannot, this three persons.” Can the will say, “Any of these can serve and without need of bond.” Can it provide that and is that valid? Can the court overrule that and say, “Regardless of what is there, you must put up a bond”? You did not take that up? That is part of the will being served: “without a bond”. It is abuse of discretion on the part of the court if it contravenes because its purpose is to look at the inherent provisions of the will and give it effect. Now, if the testator said he [the administrator] will serve without a bond, then he will serve without a bond. It means that the testator is willing to accept the risk that none of these provisions will be carried out if this administrator will turn out to be a scallywag, and run away with all the money. Because he has all the authority, he can sign the checks, etc., he can issue checks for the expenses of the administration of the property and so on. He’s the one who will pay the taxes. Unsa man lang diay ginabuhat sa court? Maghuwat lang sa report na gibuhat sa administrator, maghuwat lang pud sa plano sa pagbahin. And the court has the jurisdiction to approve.

Section 85. Bond of Certain Persons for the Faithful Performance of Duties. - Before an executor, administrator, guardian, trustee, receiver or depositary appointed by the court enters upon the execution of his duties, he shall, upon order of the court, file a bond in such sum as the court may direct. Upon the application of any executor, administrator, guardian, trustee, receiver, depositary or any other person in interest, the court may, after notice and hearing, order that the subject matter of the trust or any part, thereof be deposited with a trust entity. Upon presentation of proof to the court that the subject matter of the trust has been deposited with a trust entity. Upon presentation of proof to the court that the subject matter of the trust has been deposited with a trust entity, the court may order that the bond given by such persons for the faithful performance of their duties be reduced to such sums as it may deem proper: Provided, however, That the reduced bond shall be sufficient to secure adequately the proper administration and care of any property remaining under the control of such persons and the proper accounting for such property. Property deposited with any trust entity in conformity with this Section shall be held by such entity under the orders and direction of the court.

Now, if the will is silent, then that is when the court can say, “Put up a bond.” How much is the bond? The court will determine, normally, 10% of the estimated value of the estate. That is where there will be discretion. Why? Because the general rule is: these people who are entrusted with trust duties must be bonded. In other words, they are actually saying they have nothing to gain by these duties, because we will lose more by putting up our money if the law will find us neglectful in our duties.

Alright, Sec. 86—Exception of Trust Entity from Bond Requirement.

Section 86. Exemption of Trust Entity from Bond Requirement. - No bond or other security shall be required by the court from a trust entry for the faithful performance of its duties as court-appointed trustee, executor, administrator, guardian, receiver, or depositary. However, the court may, upon proper application with it showing special cause therefore, require the trust entity to post a bond or other security for the protection of funds or property confided to such entity

This is a trust entity exempt from putting up a bond, why? Because he has already put up P500K with the Bangko Sentral.

Final provisions, so this is the end. You all know about trusts, so you should be able to draw up Articles of Trust. (END) JS