GENERAL BANKING LAW

Banking Law Issues GENERAL BANKING LAW

Topics • 6. Ownership of Real Property • 7. Loan to Banks • a. Loans without collateral • b. Emergency Loans • 8. Conservatorship • a. Grounds • b. Powers of Conservatorship • 9. Receivership and Liquidation • a. Grounds • b. Duties of Receiver • c. Close Now-Hear Later Scheme • d. Effect of Receivership and Liquidation • 10. Trust Operations of Banks • a. Prior Authority • b. Trust Business • c. Powers • d. Separation of Trust Business of Banks 1. Banks a. Nature of business b. Authority to incorporate and operate c. Classification of Banks 2. Functions of Banks a. Deposit Function b. Loan Function c. Other functions d. Prohibited Acts 3. Ownership of Banks a. Foreign Ownership b. Filipino Stockholdings c. Stockholdings of Family Groups and related interests 4. Directors and Officers a. Composition of Board b. Meetings c. Qualifications 5. Liquidity and Security

Objectives • General Objective: • To be familiarized with the provisions of the General Banking Law of 2000, and Basel I, II, and III, as well as jurisprudence involving the said laws.

Objectives • At the end of the report, the participants must be able to: • Discuss the policy behind the GBL; • Define, classify and differentiate banks; • Identify and discuss the core and other banking functions; • Discuss and apply the rules on ownership of banks; • Describe and evaluate the management of banks; and • Discuss and apply the rules on conservatorship, receivership, liquidation, and trust operation of banks

GENERAL BANKING LAW • R.A. 8791 • AN ACT PROVIDING FOR THE REGULATION OF THE ORGANIZATION AND OPERATIONS OF BANKS, QUASI-BANKS, TRUST ENTITIES AND FOR OTHER PURPOSES • Short Title: General Banking Law of 2000

1. Banks A. Definition B. Nature of business C. Authority to incorporate and operate D. Classification of Banks

A. Definition • Banks are entities engaged in: • the lending of funds • obtained in the form of deposits from the public. (Sec. 3.1, GBL) • Requirements: (Sec. 8, GBL) • Stock corporation • Funds obtained from public

Problem • SA Corp. is an investment company; • It established 74 branches throughout the Philippines; • It managed to induce the public to open 59,463 savings deposit accounts with an aggregate deposit of P1,689,136.74; • It loans out the money of its customers, collects the interest and charges a commission to both lender and borrower; • Is SA Corp. a bank?

Answer • Yes. • Sec. 2, GBL. • Republic v. Security Credit and Acceptance Corporation. • Funds were derived from the public; • Lent out the deposit to persons; • Violation - engaging in banking without securing the administrative authority required in Republic Act No. 337.

A. Definition • “Quasi-banks” (QB) refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of receivables and other obligations. (Sec. 4, GBL) • Quasi-banking function is an inherent power of Universal Banks and Commercial Banks.

B. Nature of Business • Policy (Sec. 2, GBL) • “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.”

B. Nature of Business • Rule on Strikes and Lockouts (Sec. 22, GBL) • If unsettled after seven (7) calendar days, BangkoSentral reports to the Secretary of Labor who has two options: • (1) assumption jurisdiction • (2) certify to NLRC for compulsory arbitration. • 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. • REASON: INDISPENSABLE TO NATIONAL INTEREST

C. Authority to Incorporate and Operate • TO INCORPORATE: Articles of Incorporation must be accompanied by a certificate of authority issued by the MB, under its seal. • TO OPERATE: Certificate of authority from the BSP

Prudential Measures • Reserve Requirements • Single Borrower’s Limit • Lending Restrictions to Bank Insiders (DORSI) • Loan-Loss Provisions • Deposit Insurance • Equity Investment Limits • Capital Adequacy • BSP – Lender of last resort

D. Classification of Banks • i. Universal Banks (UB) – banks that have the authority to exercise, in addition to the powers authorized for a commercial bank, the powers of an investment house and the power to invest in non-allied enterprises. (Sec. 23) • E.g. BDO Unibank, Inc., BPI, RCBC, SBC, Union Bank, UCPB, Al-Amanah, DBP, LBP, ANZ Banking, HSBC

D. Classification of Banks • ii. Commercial Banks (CB) – banks that 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. (Sec. 29) • E.g. • Bank of Commerce, Citibank, Maybank Phil., PBC, Veterans, BDO Private Bank

D. Classification of Banks • iii. Rural Banks – banks that are created to make needed credit available and readily accessible in the rural areas for purposes of promoting comprehensive rural development. R.A. No. 7353 • E.g. • Providence Rural Bank, Rural Bank of Gattaran, Claveria Rural Bank, Rural Bank of Sanchez Mira, Rural Bank of Cauayan, Golden Rural Bank of the Philippines, BancoAgricula

D. Classification of Banks • iv. Thrift Banks – banks that include: • savings and mortgage banks, • private development banks, and • stock savings and loan associations. • E.g. • Allied Savings Bank, Bank of Makati, BPI Direct Savings Bank, Century Savings Bank, Express Savings Bank, Malayan Bank, Win Bank

D. Classification of Banks • v. Cooperative Banks – banks that primarily provide financial, banking and credit services to cooperative organizations and their members. (Sec. 100, R.A. 6938 as amended by R.A. 9520) • E.g. • Cooperative Bank of Cagayan, Coop of Bulacan, Coop of La Union, Coop of Bohol

D. Classification of Banks • vi. Islamic Banks – Charter of Al Amanah Islamic Investment Bank of the Philippines. (R.A. 6848) • E.g. • Al-Amanah Islamic Investment Bank of the Philippines

D. Classification of Banks

Classification of Banks

2. Functions of Banks A. Deposit Function B. Loan Function C. Other functions D. Prohibited Acts

A. Deposit Function • Simple Loan • Fixed, savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan (Article 1980, Civil Code of the Philippines).

Problem • A deposited in Bank X; • Bank used the money; • A would like to withdraw but the Bank cannot pay; • Is the Bank liable for estafa?

Answer • No. • Guingona v. City Fiscal of Manila, 128 SCRA 577 • Since the bank is the borrower, it can make use as its own the money deposited, and the amount is not held in trust for the depositor nor is it kept for safekeeping. (Tang Tiong Tick v. American Aphothecaries, 65 Phil. 414)

Problem • A deposited in Bank X; • B alleges that the money deposited by A belongs to him; • A withdraws from the bank; • Is Bank X liable?

Answer • No. • Third persons who may have the right to the money deposited cannot hold the bank responsible unless there is a court order or garnishment, since the duty of the bank is to the creditor-depositor and not to third persons. • Fulton Iron Work v. Chinabank, 55 Phil. 208

Problem • A deposits in Bank X; • Bank X loans out money to A; • If A defaults in payment, can Bank X off of the deposits in its hands for the payment of A’s indebtedness?

Answer • Yes. • “A bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor.” Gullas v. PNB, 1935

Kinds of Deposit • 1. Demand deposits • The depositor can take out his funds any time. • No interest is paid by the bank • The depositor can withdraw the money he deposited on the very same day.

Kinds of Deposit • 2. Savings Account • Evidenced by a passbook • Has interest rate, but not as high as time deposits. • 3. Time Deposit • Has a fixed term • Money deposited cannot be withdrawn within a certain period • Has a higher rate of interest than saving account.

Kinds of Deposit • 4. Negotiable Order of Withdrawal (NOW) Account is an interest-bearing deposit account that combines the payable on demand feature of checks and investment feature of savings accounts. • 5. Other Account is one that may be opened by one individual or by two or more persons. Whenever two or more persons open an account, the same may be an “and/or account” or an “and” account.

Kinds of Deposit • Safety Deposit Boxes • Special kind of deposit • Not an ordinary contract of lease • Bailer and bailee

Loan Function • Basic Rules and Restrictions • Risk-Based Capital Ratio • Single Borrower’s Limit • DORSI Restrictions

Single Borrower’s Limit • Not exceed 25% of the net worth of bank • Basis: total credit commitment of the bank to the borrower • GBL provides that the total amount of loans, etc. may be increased by an additional 10% of the net worth of such bank provided: • The additional liabilities of any borrower are adequately secured • Sec. 35.2

DORSI Account • GENERAL RULE: • CANNOT BECOME AN OBLIGOR OF THE BANK. • cannot borrow from bank; • cannot become a guarantor, indorser or surety for loans from such bank to others;

DORSI Account • EXCEPTION: • written approval of the majority of all the directors • entered upon the records of the bank • copy of such entry transmitted to BSP. • 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 BSP.

DORSI Account • Individual lending ceiling = • insider’s unencumbered deposit + book value of his paid-in capital contribution • Aggregate Ceiling = • Whichever is lower between 15% of the total loan portfolio and 100% of combined capital accounts • Unsecured portion of the loan = • It should not exceed 30% of the loan of the insider

GENERAL BANKING LAW