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ATENEO de ManilaLAWSCHOOL

BANKING LAW I Outline[1] Atty. Alexander C. Dy

First Semester, SY 2009-2010 Friday, 19 June 2009

I. GENERAL CONCEPTS

  1. Concept of Banking

1.Definition – Sec. 3.1, GBL[2]

  1. Elements – Republic v. Security Credit and Acceptance Corporation, 19 SCRA 58 (1967); Central Bank v. Morfe, 20 SCRA 507 (1967); Bañas v. Asia Pacific Finance Corporation, 343 SCRA 527 (2000)
  1. Engaged in lending of funds
  2. Obtained in the form of deposits
  3. From the public, which shall mean 20 or more persons – Sec. 8.2, GBL
  1. Banking Distinguished from Quasi-Banking

1.Elements of Quasi-Banking – Sec. 4, par. 3, GBL;xSec. X234, MRB[3]

  1. Borrowing of funds for borrower’s own account
  2. From 20 or more lenders at any one time
  3. Through issuance, endorsement or assignment with recourse or acceptance of deposit substitutes – Sec. 95, NCBA[4]
  4. For purposes of relending or purchasing of receivables and other obligations

2.Requirement of Separate License – Sec. 6, par. 1, GBL

  1. Banks Distinguished From Other Financial Institutions

1.Investment Houses – xSecs. 2 and 3, Investment Houses Law[5]

2.Financing Companies – xSec. 3(a), Financing Company Act[6]

3.Investment Companies – xSec. 4, Investment Company Act[7]

4.Non-Stock Savings and Loans Associations – xSec. 3, Revised Non-Stock Savings and Loans Association Act of 1997[8]

5.Cooperatives – xArt. 3, Cooperative Code[9];But See xArt. 100, Cooperative Code

6.Insurance Companies – xSec. 2, Insurance Code[10]

  1. Nature of Banking Business – Sec. 2, GBL

1.Vital Role in Economy[11] – Simex International (Manila) Inc. v. Court of Appeals, 183 SCRA 360 (1990)

  1. Subject to reasonable regulation by the State – Central Bank of the Philippines v. Court of Appeals, 208 SCRA 652 (1992)
  2. Strikes and Lockouts – Sec. 22, GBL; xBSP[12] Circular No. 299 (Series of 2001); Article 263(g), Labor Code
  1. Fiduciary Nature of Banking Business
  1. Degree of diligence required[13]– Simex International (Manila) Inc. v. Court of Appeals, 183 SCRA 360 (1990); Bank of the Philippine Islands v. Intermediate Appellate Court, 206 SCRA 408 (1992)
  2. When utmost diligence required

(i)In dealing with accounts of depositors[14] – Philippine Banking Corporation v. Court of Appeals, 419 SCRA 487 (2004); Bank of the Philippine Islands v. Casa Montessori Internationale, 430 SCRA 261 (2004)

(ii)In selection and supervision of employees[15] –Philippine Commercial and International Bank v. Court of Appeals, 350 SCRA 446 (2001); Philippine National Bank v. Pike, 470 SCRA 328 (2005)

(iii)To be mortgagees in good faith[16] – Cruz v. Bancom Finance Corporation, 379 SCRA 490 (2002)

(iv)In the custody of documents; integrity of records[17] – Heirs of Eduardo Manlapat v. Court of Appeals, 459 SCRA 412 (2005)

(v)Exception: does not cover transactions outside bank deposits – Reyes v. Court of Appeals, 363 SCRA 51 (2001)

  1. Applicability to government financial institutions – xGovernment Service Insurance System v. Santiago, 414 SCRA 563 (2003)
  2. Liability for negligence

(i)Rules on determination of negligence –Philippine Bank of Commerce v. Court of Appeals, 269 SCRA 695 (1997); Consolidated Bank and Trust Corporation v. Court of Appeals, 410 SCRA 562 (2003)

(ii)Award of actual, moral, compensatory or temperate damages – Araneta v. Bank of America, 40 SCRA 144 (1970); Prudential Bank v. Court of Appeals, 328 SCRA 264 (2000); Citytrust Banking Corporation v. Villanueva, 361 SCRA 446 (2001)

(iii)Right to recover against erring employee –xPacific Banking Corporation v. Court of Appeals, 173 SCRA 102 (1989)

  1. Authority to Operate

1.Incorporation – Secs. 17 and 46, Corporation Code; Sec. 14, GBL

  1. Operation – Sec. 6, GBL
  1. Authority required – Sec. 6, par. 1, GBL
  2. MB[18] determination – Sec. 6, par. 2, GBL
  3. Unauthorized advertisement/ business representation – Sec. 64, GBL
  4. Change in name –xP.C. Javier & Sons, Inc. v. Court of Appeals, 462 SCRA 36 (2005)
  5. Sanctions for operating without authority – Sec. 6, par. 4, in rel. to Sec. 66, GBL; Republic v. Security Credit and Acceptance Corporation, 19 SCRA 58 (1967); Central Bank v. Morfe, 20 SCRA 507 (1967); xPerez v. Monetary Board, 20 SCRA 502 (1957)

II. CLASSIFICATION OF BANKS

  1. Universal Banks (UB) – Sec. 3.2(a), GBL

1.Governing Law – xGBL

2.Powers – Sec. 23, GBL; xSec. X101(b)(1), MRB

a.Commercial Bank (KB) powers – xSec. 29, GBL; xSec. X101(b)(2), MRB

b.Investment House powers – xSec. 7, Investment Houses Law; xSEC Omnibus Rules and Regulations for Investment Houses and Universal Banks Registered as Underwriter of Securities

(i)Definition/function of investment house – any enterprise which engages or purports to engage, whether regularly or on an isolated basis, in the underwriting (i.e., guaranteeing distribution and sale) of securities of any kind issued by another corporation – xSec. 3, Investment Houses Law; xSec. 2(a), IRR of Investment Houses Law[19]

(iI)Limitations on UB’s exercise of investment house powers –xSec. 101(b)(1), MRB:

(a)subject to pertinent laws and SEC regulations

(b)if investment house functions performed directly by UB, such functions shall be undertaken by separate department/unit

(c)UB cannot perform functions of investment house both directly (i.e., through a separate department/unit) and indirectly (i.e., through a subsidiary)

c.To invest in equity of non-allied enterprises – xSec. 27, GBL; xSec. 1381, MRB

  1. Commercial Banks (KB) – Sec. 3.2(b), GBL

1.Governing Law – xGBL

2.Powers– xSec. X101(b)(2), MRB

a.KB powers – Sec. 29, GBL

(i)Accepting drafts

(ii) Issuing letters of credit (L/Cs)

(iii)Discounting and negotiating promissory notes (PNs), drafts, bills of exchange, and other evidences of debt

(iv)Accepting or creating demand deposits

(i)Receiving other types of deposits and deposit substitutes

(ii)Buying and selling foreign exchange and gold or silver bullion

(iii)Acquiring marketable bonds and other debt securities

(iv)Extending credit

b.Engage in quasi-banking functions– xSec. 6, par. 1, GBL

c.To invest in equity of allied enterprises – xSecs. 31 and 32, GBL

d.To purchase, hold and convey real estate – xSecs. 51 and 52, GBL

e.Other services – xSec. 53, GBL

(i)Receive in custody funds, documents and valuable objects

(ii)Act as financial agent and buy and sell, by order of and for the account of customers, shares, evidences of indebtedness and all types of securities

(iii)Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business

(iv)Upon prior MB approval, act as managing agent, adviser, consultant or administrator of investment management/advisory/ consultancy accounts

(v)Rent out safety deposit boxes

f.To issue guarantees – See xSec. 74, General Banking Act

  1. Thrift Banks(TB) – Secs. 3.2(c), GBL

1. Governing Law – Sec. 71, pars. 1 and 3, GBL

  1. Organization, ownership, capital requirements, powers, supervision, and general conduct of business – xThrift Banks Act[20]
  2. Net worth to risk assets ratio – xSec. 71, par. 3, in rel. to Sec. 33, GBL
  3. Other matters: GBL of suppletory application

2. Declaration of Policy – Sec. 2, Thrift Banks Act

3. Definition/Purpose – Sec. 3.2(c), GBL; Sec. 3(a), Thrift Banks Act

a.Composed of:

(i) Savings and mortgage banks

(ii) Stock savings and loans associations; and

(iii) Private development banks

b.For purposes of:

(i)Accumulating savings of depositors and investing them in marketable bonds and other debt securities, commercial papers and accounts receivable, drafts, bills of exchange, acceptances, or notes arising out of commercial transactions

(ii)Providing short-term working capital, medium- and long-term financing, to businesses engaged in agriculture, services, industry and housing

(iii)Providing diversified financial and allied services for its chosen market and constituencies specially for small and medium enterprises and individuals

4.Powers –Sec. 10, Thrift Banks Act;xSec. X101(b)(3), MRB

  1. Rural Banks (RB) – Sec. 3.2(d), GBL

1. Governing Law – Sec. 71, pars. 1 and 3, GBL;

  1. Organization, ownership, capital requirements, powers, supervision, and general conduct of business –xRural Banks Act[21]
  2. Other matters: GBL of suppletory application

2. Declaration of Policy – Sec. 2, Rural Banks Act

3.Powers – Sec. 12, Rural Banks Act; xSec. X101(b)(4), MRB

  1. Cooperative Banks (Coop Banks) – Sec. 3.2(e), GBL

1. Governing Law – Sec. 71, pars. 1 and 3, GBL; Art. 99, Cooperative Code

  1. Organization, ownership, capital requirements, powers, supervision, and general conduct of business – xArts. 99 to 109, Cooperative Code
  2. Other matters: GBL of suppletory application

2. Declaration of Policy – Art. 2, Cooperative Code

3. Definition/Functions – Art. 100, Cooperative Code

a.Definition: Organized by, the majority shares of which is owned and controlled by, cooperatives primarily to provide financial and credit services to cooperatives

b.Functions – xArt. 100 Cooperative Code

4.Powers:Same as RB – xSec. X101(b)(5), MRB

  1. Islamic Banks(IB) – Sec. 3.2(f), GBL

1. Governing Law – Sec. 71, par. 2, GBL

  1. Organization, ownership, capital requirements, powers, supervision, and general conduct of business – xIslamic Bank Charter[22]

2.Purpose – Sec. 3, Islamic Bank Charter

3.Powers –Sec. 6, Islamic Bank Charter; xSec. X101(b)(6), MRB

  1. Other Classifications of Banks – Sec. 3.2(g), GBL

1.Land Bank of the Philippines (Land Bank) – xSecs. 74 to 100-A, Code of Agrarian Reform of the Philippines[23]

2.Development Bank of the Philippines (DBP) – xRevised Charter of Development Bank of the Philippines[24]

3.Philippine Veterans Bank (PVB) – xPhilippine Veterans Bank Act[25]; xAn Act to Rehabilitate the PVB[26]

4.Philippine National Bank (PNB) but now privatized – xRevised Charter of Philippine National Bank[27]; xPhilippine National Bank v. Velasco, 564 SCRA 512 (2008)

5.Pawnshops? – First Planters Pawnshop, Inc. v. Commissioner of Internal Revenue, 560 SCRA 606 (2008)

  1. Foreign Banks

1.Entry of Foreign Banks

a.Modes of entry – Sec. 2, Foreign Banks Liberalization Act[28]

(i)By acquiring, purchasing or owning up to 60% of the voting stock of an existing domestic bank

(ii)By investing in up to 60% of a new banking subsidiary incorporated under the laws of the Philippines

(iii)By establishing branches with full banking authority

b.Subject to MB approval, guidelines – Secs. 2 and 3, Foreign Banks Liberalization Act

c.Foreign bank may avail of only 1 mode of entry – Sec. 2, Foreign Banks Liberalization Act;But may change from one mode of entry to another – xSubsec. 121.10, MRB

d.Control of 70% of resources or assets of entire banking system must be held by banks which are at least majority-owned by Filipinos – Sec. 73, par. 3, GBL; Sec. 3, par. 3, Foreign Banks Liberalization Act

e.Equal treatment of local banks – Sec. 73, par. 4, GBL; Sec. 8, Foreign Banks Liberalization Act

2.Rules on Acquisition of Voting Stock in Existing Domestic Bank

a.May own up to 60% voting stock of only 1 domestic bank – Sec. 2, Foreign Banks Liberalization Act

b.Within 7 years from GBL effectivity, MB may authorize foreign bank:

(i)To acquire up to 100% of voting stock of only 1 domestic bank – Sec. 73, par. 1, GBL

(ii)Which acquired up to 60% of voting stock under the Foreign Banks Liberalization Act and Thrift Banks Act, to further acquire up to 100% voting stock thereof – Sec. 73, par. 2, GBL

c.MB shall secure the listing in the PSE[29] of shares of stocks of banks established under this mode of entry – Sec. 3, par. 3, Foreign Banks Liberalization Act

d.License to do business not required: Equity investment is not deemed doing business – Sec. 3(d), Foreign Investments Act of 1991[30]

3.Rules on Acquisition of Voting Stock in New Domestic Bank

a.May own up to 60% of the voting stock of only 1 new banking subsidiary – Sec. 2, Foreign Banks Liberalization Act

b.Must be among top 150 foreign banks in the world or top 5 in their country of origin as of application date – Sec. 3, par. 2, Foreign Banks Liberalization Act

c.MB shall secure the listing in the PSE of shares of stocks of banks established under this mode of entry – Sec. 3, par. 3, Foreign Banks Liberalization Act

d.Must be widely-owned and publicly-listed in its country of origin, unless applicant is owned by government thereof – Sec. 3, par. 4, Foreign Banks Liberalization Act

e.Capitalization – Sec. 4(i), Foreign Banks Liberalization Act

f.License to do business not required: Equity investment is not deemed doing business – Sec. 3(d), Foreign Investments Act of 1991

4.Rules on Establishing Branches

a.Governing Laws

(i)Creation, formation, organization or dissolution of corporations; fixing of relations, liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other and the corporation: Law of place where foreign bank established – Sec. 77, GBL

(ii)Entry into the Philippines through establishment of branches: xForeign Banks Liberalization Act – Sec. 72, par. 1, GBL

(iii)Conduct of offshore banking business: xOffshore Banking System Decree[31]; xChapter 1, Part Three, BSP Circular No. 1389 – Sec. 72, par. 2, GBL

(iv)All other matters: GBL – Sec. 77, GBL

b.Must be among top 150 foreign banks in the world or top 5 in country of origin– Sec. 3, par. 2, Foreign Banks Liberalization Act

c.Must be widely-owned and publicly-listed in country of origin, unless government-owned – Sec. 3, par. 4, Foreign Banks Liberalization Act

d.Time limitation on entry – Sec. 6, Foreign Banks Liberalization Act

e.Capitalization – Sec. 4(ii), Foreign Banks Liberalization Act

f.Treatment of multiple branches – Sec. 74, GBL;Citibank, N.A. v. Sabeniano, 514 SCRA 441 (2007)

g.Head office guarantee – Sec. 75, GBL; Sec. 5, Foreign Banks Liberalization Act

h.Must be licensed to transact business – Sec. 133, Corporation Code; Hang Lung Bank, Ltd. v. Saulog, 201 SCRA 137 (1991)

i.Summons and legal processes – Sec. 76, GBL; Sec. 12, Rule 14, 1997 Rules of Civil Procedure

j.Revocation of license – Sec. 78, GBL

5.Offshore Banking Units (OBU) – Secs. 1(a) and 1(b), Offshore Banking System Decree

a.Qualification – Sec. 2, Offshore Banking System Decree

b.Certificate of authority to operate – Sec. 3, Offshore Banking System Decree

c.Head office guarantee – Sec. 4, Offshore Banking System Decree

d.Effects of certain laws – Sec. 8, Offshore Banking System Decree

III. DEPOSIT FUNCTION

  1. Nature of Deposit

1.Deposits as Simple Loans[32] – Arts. 1953 and 1980, Civil Code; Serrano v. Central Bank, 96 SCRA 96 (1980)

2.Bank as Debtor

  1. Deposit is voluntary agreement; “Know Your Customer” standards –xMemorandum dated 1 October 2002; xSec. X262.1, MRB
  2. Bank acquires ownership of money deposited; obligation to pay amount, but no obligation to return the same money[33]– Guingona, Jr. v. City Fiscal of Manila, 128 SCRA 577 (1984);BPI Family Bank v. Franco, 538 SCRA 184 (2007)
  3. Payment to proper party-depositor – Fulton Iron Works Co. v. China Banking Corp., 58 Phil. 206 (1930); Bank of the Philippine Islands v. Court of Appeals, 232 SCRA 302 (1994)
  4. Deposits are not preferred credits – Central Bank v. Morfe, 63 SCRA 114 (1975)
  5. Bank has right to compensation – Gullas v. Philippine National Bank, 62 Phil. 519 (1935); Republic v. Court of Appeals, 65 SCRA 186 (1975); Bank of the Philippine Islands v. Court of Appeals, 512 SCRA 620 (2007)
  6. No breach of trust; Mandamus not a remedy – xLucman v. Malawi, 511 SCRA 268 (2006)

3.Bank’s Duty of Utmost Care[34]– Sec. 2, GBL

  1. Kinds of Deposit

1.Demand Deposits – Secs. 58-60, NCBA; xSecs. X201 to X204, MRB

a.For UB and KB – Sec. 33, GBL

b.For TB – Sec. 10(b), Thrift Banks Act

c.For RB/Coop Bank – Sec. 12(b), Rural Banks Act;xSubsec. X201.1, MRB

d.For Islamic Banks – Sec. 6, par. (7)(a), Islamic Bank Charter

2.Savings Deposits – xSec. X213 and X214, MRB; International Exchange Bank v. Commissioner of Internal Revenue, 520 SCRA 688 (2007)

3.Negotiable Order of Withdrawal (NOW) Accounts – xSecs. X223 to X226, MRB; People v. Reyes, 454 SCRA 635 (2005)

4.Time Deposits– xSecs. X231, MRB; BPI Family Savings Bank v. First Metro Investment Corporation, 429 SCRA 30 (2004)

5.Foreign Currency Deposits – Secs. 2 and 3, FCDA[35]

6.Money Market Placements? – Allied Banking Corporation v. Lim Sio Wan, 549 SCRA 504 (2008)

  1. Capacity of Depositors

1.Minors – Sec. 1, Presidential Decree No. 734;Sec. 22, Thrift Banks Act

2.Married Women – Sec. 5, Republic Act No. 7192

3.Corporations: Through signatories designated by Board of Directors – Sec. 23, Corporation Code

4.Bank Officers and Employees: Prohibited from maintaining demand deposits or current accounts in banking office where they are assigned –xSec. X204, MRB

  1. Opening of Deposit Accounts

1.Know Your Customer Standards: At least 3 specimen signatures updated every 5 years, ID optional – xSubsec. X262.1, MRB

2.Prohibitions:

a.Anonymous Accounts/Fictitious Names – Sec. 9(a), AMLA[36]

b.Pseudonyms – xArt. 178, Revised Penal Code; xCommonwealth Act No. 142, as amended; xArts. 379-380, Civil Code

c.Exception: Numbered accounts – Sec. 9(a), AMLA; Sec. 3(1), FCDA

3.Joint Accounts – Arts. 485, 1207 and 1208, Civil Code

  1. Administration of Deposit Accounts

1.Deposit of Funds

  1. Delivery required – Art. 1934, Civil Code
  2. Acceptability of withdrawal slips as deposits – Firestone Tire & Rubber Co. of the Phil. v. Court of Appeals, 353 SCRA 601 (2001)

2.Withdrawal of Funds

  1. From current accounts: Allowing withdrawal of value of check drawn:

(i)In case of insufficiency of funds –Moran v. Court of Appeals, 230 SCRA 799 (1994); Villanueva v. Nite, 496 SCRA 459 (2006)

(ii)Prior to clearing – Associated Bank v. Tan, 446 SCRA 282 (2004)

(iii)In favor of other persons when check crossed – Traders Royal Bank v. Radio Philippines Network, Inc., 390 SCRA 608 (2002)

(iv)By issuing a manager’s check – Equitable PCI Bank v. Ong, 502 SCRA 119 (2006)

  1. From savings accounts: Presentation of passbook and withdrawal slip – Bank of the Philippine Islands v. Court of Appeals, 326 SCRA 641 (2000)
  2. From time deposits: Surrender of certificate of deposit – Far East Bank and Trust Company v. Querimit, 373 SCRA 665 (2002)
  3. From foreign currency deposit accounts: Based on contract – Sec. 5, FCDA
  4. If deceased depositor:

(i)Tax clearance required – Sec. 97, NIRC; But See:xSec. 28(A)(1)(a) and (6), NIRC

(ii)Survivorship Agreements – Vitug v. Court of Appeals, 183 SCRA 755 (1990)

3.Booking of Deposits – xSec. X261, MRB

4.Interest on Deposits– Citibank, N.A. v. Cabamongan, 488 SCRA 517 (2006)

a.Not subject to interest ceilings – xSec. X242, MRB

b.Time of payment of interest on time deposits – xSubsec. X242.1, MRB

c.Matured time deposits– xSubsec. X242.2, MRB

d.Disclosure requirements – xSec. X243, MRB

5.Closing of Account – Far East Bank and Trust Company v. Pacilan, Jr., 465 SCRA 372 (2005)

  1. Secrecy of Bank Deposits

1.General Rules

a.Rationale: right to privacy – Art. III, Secs. 2, 3, and 7 and Art. II, Sec. 28, 1987 Constitution; Republic v. Eugenio, 545 SCRA 384 (2008)

b.Applicable law – Intengan v. Court of Appeals, 377 SCRA 63 (2002)

c.Applicability of exclusionary rule – Art. III, Secs. 2 and 3, 1987 Constitution; Ejercito v. Sandiganbayan (Special Division), 509 SCRA190 (2006)

2.Rules for Peso Deposits

a.Coverage – Sec. 2, Law on Secrecy of Bank Deposits[37];Ejercito v. Sandiganbayan (Special Division), 509 SCRA190 (2006)

b.Prohibitions –Secs. 2 and 3, Law on Secrecy of Bank Deposits;Secs. 55.1(b) and 55.4, GBL

c.Exceptions

(i)Under the Law on Secrecy of Bank Deposits – Sec. 2, Law on Secrecy of Bank Deposits

(a)Upon written permission of the depositor or investor:

(1)DOSRI[38] loans – Sec. 26, NCBA; xSec. X337, MRB

(2)For loans secured by hold-out or assignment of CTDs – xSec. X315(f), MRB

(b)In cases of impeachment

(c)Upon the order of a competent court in cases of bribery or dereliction of duty of public officials

(d)In cases where the money deposited or invested is the subject of litigation

(ii)Under the Anti-Graft and Corrupt Practices Act[39]: In cases involving unexplained wealth – Sec. 8, Anti-Graft and Corrupt Practices Act; Philippine National Bank v. Gancayco, 15 SCRA 91 (1965); Banco Filipino Savings and Mortgage Bank v. Purisima, 161 SCRA 576 (1988)

(iii)Under the Ombudsman Act[40] – Sec. 15(8), Ombudsman Act; Marquez v. Disierto, 359 SCRA 772 (2001); Ejercito v. Sandiganbayan (Special Division), 509 SCRA190 (2006)