THE GENERAL BANKING LAW OF 2000

Republic Act No. 8791 (approved May 23, 2000).

1. What is the policy of the State sought to be carried out by the law?
(Sec. 2)

The policy of the State sought to be carried out by the General Banking
Law of 2000 is the promotion and maintenance of a stable and efficient banking
and financial system that is globally competitive, dynamic and responsive to the
demands of a developing economy.

AUTHORITY OF THE BSP OVER SUPERVISED ENTITIES

2. What are banks? (Sec. 2)

Banks are entities engaged in the lending of funds obtained in the form of
deposits. The definition under Section 2 of the old General Banking Law
(Republic Act No. 337, as amended) is better: banks are entities duly authorized
by the Monetary Board to engage in the business of regularly lending funds
obtained regularly from the public through the receipt of deposits of any kind.
Thus, entities which lend funds obtained from the public but not as deposits but
rather as debts for their own account, whether done regularly or not, and those
which regularly lend funds obtained through the occasional receipt of deposits,
would not be considered as banks.

3. How are banks in the Philippines classified under the GBL?

(Sec. 3.2; BSP Circular No. 271, dated January 8, 2001)

(a) Universal banks – These are those that used to be called expanded
commercial banks and whose operations are now primarily governed by
the GBL. They can exercise the powers of an investment house and
invest in non-allied enterprises. They have the highest capitalization
requirement.

(b) Commercial banks – These are ordinary or regular commercial banks,

as distinguished from a universal bank. They have a lower capitalization
requirement tan universal banks and cannot exercise the powers of an
investment house and invest in non-allied enterprises.

(c) Thrift banks – These are savings and mortgage banks stock savings
and loan association, and private development banks which are
governed primarily by the Thrift Banks Act (Republic Act No. 7906);

(d) Rural banks – These are mandated to make needed credit available
and readily accessible in the rural areas on reasonable terms and which
are governed primarily by the Rural Banks Act of 1992 (Republic Act NO.
7353);

(e) Cooperative banks – These are banks organized primarily to make

financial and credit service available to cooperative banks and are
governed primarily by the Cooperative Code (Republic Act No. 6938);
 (f) Islamic banks – These are banks whose business dealings and
activities are subject to the basic principles and rulings of Islamic
Shari’a, such as the Al Amanah Islamic Investment Bank of the
Philippines which was created by Republic Act No. 6848; and

(g) Other classifications of banks as determined by the Monetary Board.

Another way of classifying banks is into (i) private banks and (ii)
government-owned banks.

4. The supervisory and regulatory powers of the BSP extend over what
entities? (Sec. 4)

The BSP has supervisory and regulatory powers over banks, quasi-banks,
trust entities, and other financial institutions which under special laws are subject
to BSP supervision.

5. What are quasi-banks? (Sec. 4; Sec. 95, RA 7653)

Quasi-banks are entities engaged in the borrowing of funds through the

issuance, endorsement or assignment with recourse or acceptance of deposit
substitutes (as defined in Sec. 95 of the BSP Law; see Paragraph 120) for
purposes of relending or purchasing of receivables and other obligations.

6. To what kinds of examination may the BSP subject banks? (Sec. 4)

Apart from the authority of the BSP under Section 25 of the BSP Law to
conduct periodic or special examinations of banking institutions and quasi-banks,
including their subsidiaries and affiliates engaged in allied activities, the BSP may
also conduct the following examinations of banks:

(a) An examination to determine compliance with laws and regulations

if the circumstances so warrant as determined by the Monetary
Board (Subsection 4.2);

(b) A 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
(Subsection 4.4);

(c) An inquiry into the solvency and liquidity of the institution

(Subsection 4.5).

7. What is the Bank of International Settlements and what standards has

it set? (Secs. 5 and 34; BSP Circular No. 280, dated March 29, 2001; see also
the The New Palgrave Dictionary of Banking & Finance, The Macmillan Press
Limited, 1992, vol. 1, pp 129-132; The Central Banks by Marjorie Deane and
Robert Pringle, Viking, 1995, pp. 163-165; and International Finance
Transactions, Policy and Regulations by Hal S. Scott and Philip A. Wellons, the
Foundation Press, Inc., 1995, 2nd ed., pp 232-264)

The Bank for International Settlements is an international organization

based in Basle, Switzerland which was established by the Hague Agreement of
January 20, 1930. Its stockholders are central banks, not governments.
 (a) It is a bank for central banks – The BIS assists central banks in
managing and investing part of their foreign exchange reserves.
Over 80 central banks have deposits with the BIS. These funds are
lent out to central banks (e.g., to provide bridge financing) or
placed in treasury bills or in the international inter-bank market.

(b) It is also a service organization – The BIS provide initiatives and

ideas, as well as the professional, organizational and material
logistics, for central bank cooperation in all areas of common
interest. One of its committees, the Committee on Banking
Regulations and Supervisory Practices, more popularly known as
the Basle Committee on Banking Supervision, came up in 1988 with
standards in the measurement and assessment of the capital
adequacy of banks and the minimum standards which all major
international banks would be expected to observe. These standards
came to be known as the Basle Accord. The Basle Accord is
aimed at raising the standards of safety and soundness in the
world’s banking business in a manner consistent with fair
competition. It splits a bank’s capital between core (Tier 1) capital
and supplementary (Tier 2) capital. Tier 1 capital includes lesser
equity and disclosed reserves while Tier 2 capital includes lesser
quality items that can still be legitimately recognized as capital such
as undisclosed reserves, asset revaluation reserves, hybrid
debt/equity instruments and subordinated term debt.
8. Does a universal commercial bank have to be separately licensed to
engage in quasi-banking functions? (Sec. 6)

No, an entity authorized by the BSP to perform universal or commercial

banking functions shall likewise have the authority to engage in quasi-banking
functions.

9. When could the BSP examine an enterprise which is wholly or

majority-owned or controlled by a bank? (Sec. 7)

The BSP could examine an enterprise which is wholly or majority-owned

or controlled by a bank only when examining the bank, i.e., in the course of its
examination of such bank. The legislative intent, as explained in the deliberations
of the Senate, is to limit the possibility of abuse.

ORGANIZATION OF BANKS

10.What are the minimum conditions that a prospective bank must comply
with before it may be authorized by the BSP to be organized as a bank?
(Sec. 8)

(a) That the entity must be organized as a stock corporation;

(b) That is funds must be obtained from the public, i.e., 20 or more
persons; and

(c) That the minimum capital requirements prescribed by the Monetary

Board for each category of banks are satisfied.
11.Could a bank issue no par value stocks? (Sec. 9; see also Sec. 6,
Corporation Code)

No, banks shall issue par value stocks only.

12.Could a bank acquire its own shares? (Sec. 10)

No bank shall purchase or acquire shares of its own capital stock or accept
is 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 6 months from the time of its purchased or acquisition, be sold or
disposed of at a public or private sale.

Does this mean that the stockholders of a bank can no longer exercise
their appraisal rights under Section 37 and 81 of the Corporation Code? No, the
stockholders of a bank may still exercise their appraisal right under the aforesaid
sections of the Corporation Code but, as stated in the proviso of Section 10, the
stock purchased or acquired by the bank shall, 6 months from the time of its
purchase or acquisition, be sold or disposed of.

13.What is the total number of voting stocks of a domestic bank that could
be owned by (i) a Filipino or a domestic non-bank corporation, and (ii)
a foreign individual or foreign non-bank corporation? (Sec. 11; BSP
Circular No. 256, dated August 15, 2000)

(a) In the case of a Filipino individual or a domestic non-bank corporation,

each one may own up to 40% of the outstanding voting stock of a
domestic bank.

(b) In the case of a foreign individual or foreign non-bank corporation, 40%

of the outstanding voting stock of a domestic bank is also the limit but
40% is, at the same time, also a limit on the aggregate foreign-owned
stocks that could be owned by foreign individuals and foreign non-bank
corporations in a domestic bank.

Note, however, that under Section 8 of Republic Act No. 7721 (An Act of
Liberalizing the Entry of Foreign Banks), Philippine corporations whose
shares of stocks are listed in the Philippine Stock Exchange or are of long
standing for at least 10 years shall have the right to acquire, purchase or
own up to 60% of the voting stock of a domestic bank. Note also that
under Section 73 of the GBL, a foreign bank may own up to 100% of the
voting stock of only 1 existing domestic bank within 7 years from the
effectivity of the GBL on June 13, 2000.

14.When are the stockholdings in a bank deemed owned by a family group

or by related interests? (Sec. 12)

The stockholdings in a bank are deemed owned by a family group or by

related interests if the individual stockholders are related to each other within the
4th degree of consanguinity or affinity, legitimate or common-law. Such
relationship must be fully disclosed in all transactions by such individuals with the
bank.
15.Could the SEC, motu proprio, approve the incorporation of a bank? (Sec.
14)

No, the SEC shall not 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 its seal. Such certificate shall not be issued by the
Monetary Board unless it is satisfied from the evidence submitted to it:

(a) 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;

(b) That the public interest and economic conditions, both general and
local, justify the authorization; and

(c) 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.

The SEC shall not also register the by-laws of any bank, or any
amendment thereto, unless accompanied by a certificate of authority from the
BSP.

16.What is an independent director? (Sec. 15)

An independent director is a person other that an officer or employee

of the bank, its subsidiaries or affiliates or related interests.

Note that the term “independent director” is also used in the Securities
Regulation Code (Sec. 38; see Paragraph 16.25) to refer to a persona other than
an officer or employee of the corporation, its parent or subsidiaries, or any other
individual having a relationship with the corporation, which would interfere with
the exercise of independent judgment in carrying out the responsibilities of a
director.

17.What is the fit and proper rule? (Sec. 16; BSP Circular No. 296, dated
September 17, 2001)

The fit and proper rule provides that to maintain the quality of bank
management and afford better protection to depositors and the public in general,
the Monetary Board shall –

(a) prescribe, pass upon and review the qualifications and

disqualifications of individuals elected or appointed bank directors
or officers and disqualify those found unfit; or
(b) 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.
18.Could an elective or appointive public official serve as an officer of a
private bank? (Sec. 19)

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 5 of RA 7353, i.e., the Rural Banks Act, allows an elected or
appointive public official to serve as director, officer, consultant or in any other
capacity in a rural bank.

OPERATIONS OF BANKS

19.Distinguish a universal bank from a commercial bank. (Secs. 23, 24 and

30)

(a) A universal bank shall have the authority to exercise, in addition to

the powers authorized for a commercial bank in Section 29 of the
GBL, the powers of an investment house as provided in existing
laws and the power to invest in non-allied enterprises as provided
in the GBL; a commercial bank does not have these additional
powers.

(b) A universal bank, subject to the conditions stated in Section 24 of

the GBL, may invest in the equities of allied, whether financial or
non-financial, and non-allied enterprises as may be determined by
the Monetary Board; a commercial bank, subject to the conditions
stated in Section 30 of the GBL, may only invest in the equities of
allied enterprises, whether financial or non-financial.

20.What are the financial and non-financial allied enterprises? How about
non-allied enterprises?

(a) Under Section X377 of the Manual of Regulations for Banks (as
amended by BSP Circular No. 263 dated October 20, 2000), the
following are considered financial allied enterprises in the equities
of which universal and commercial banks (except as indicated) may
invest:

(i) leasing companies;

(ii) banks;
(iii) investment houses;
(iv) financing companies;
(v) credit card companies;
(vi) financial institutions catering to small and medium scale
industries, including venture capital corporations;
(vii) companies engaged in stock brokerage or securities
dealership;
(viii) companies engaged in foreign exchange dealership or
brokerage;
(ix) insurance companies [not allowed to commercial banks];
and
 (x) holding companies investing in allied and non-allied
enterprises [not allowed to commercial banks].

(b) Under Section X380 of the Manual of Regulations for Banks , the
following are considered non-financial allied enterprises in the
equities of which universal and commercial banks (except as indicated)
may invest:

(i) warehousing companies;

(ii) storage companies;
(iii) safe deposit box companies;
(iv) companies primarily engaged in the management of mutual
funds but not in mutual funds themselves;
(v) management corporations engaged in an activity similar to
the management of mutual funds;
(vi) companies engaged in providing compute services;
(vii) insurance agencies or brokerages;
(viii) companies engaged in house building and home
development;
(ix) companies providing drying or milling facilities for
agricultural crops;
(x) bank service corporations;
(xi) Philippine Clearing House Corporation;
(xii) Philippine Central Depository, Inc.

(c) Non-allied enterprises are all other enterprises not specified as

allied ones.

21.Distinguish a universal or commercial bank from other banks. (Sec. 33)

Only a universal or commercial bank can accept or create demand

deposits without the approval of the BSP. Other banks may do so only upon prior
approval of, and subject to such conditions and rules as may be prescribed by,
the Monetary Board.

22.What are SBL rules? (Sec. 35)

SBL (i.e., single borrower’s limit) Rules are those promulgated by the
BSP, upon the authority of Section 35 of the GBL, which regulate the total
amount of loans, credit accommodations and guarantees that may be extended
by a bank to any person, partnership, association, corporation or other entity.
The rules seek to protect a bank from making excessive loans to a single
borrower by prohibiting it from lending beyond a specified ceiling. The current
limit is 20% of the net worth of the bank concerned, subject to possible increase
by an additional 10% under certain conditions.

23.What are DOSRI Rules? (Sec. 36)

DOSRI Rules are those promulgated by the BSP, upon the authority of
Section 36 of the GBL, which regulate the amount of credit accommodations that
a bank may extend to tis directors, officers, stockholders and their related
interests (thus, DOSRI). Generally, a bank’s credit accommodations to tis DOSRI
must be in the regular course of business and on terms not less favorable to the
bank than those offered to non-DOSRI borrowers.
24.What are the formalities required to be observed by a director or
officer of a bank who wish to borrow from such bank? (Sec. 36)

(a) The borrowing must be with the written approval of a majority of

the bank’s board of directors, excluding the director concerned;

(b) Such approval must be entered upon the records of the bank, i.e.,
the minutes of the board meeting in which the approval was given;
and

(c) A copy of the entry of such approval shall be transmitted forthwith

to the appropriate supervising department of the BSP.

25.What is microfinancing? (Secs. 40, 43 and 44; BSP Circulars Nos. 272, dated
January 30, 2001, and 273, dated February 27, 2001)

Microfinancing, as defined in BSP Circular No. 272, is the grant of small

loans (microfinance loans) to the basic sectors, as described in the Social Reform
and Poverty Alleviation Act of 1997 (Republic Act No. 8425), and other loans to
the poor and low-income households for their microenterprises and small
businesses so as to enable them to raise their income levels and improve their
living standards. These loans are granted on the basis of the borrower’s cash
flow and are typically unsecured.

26.Could a bank prohibit a borrower from prepaying his loan? (Sec. 45)

No, 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 (such as the
payment of a prepayment fee) as may be agreed upon between the bank and
the borrower.

27.Could a bank acquire real estate? (Secs. 51 and 52)

(a) A 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 50% of the bank’s combined
capital accounts and, 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.

(b) Notwithstanding the limitations in Section 51, a bank may acquire,

hold or convey real property under the following circumstances:

(i) Such as shall be mortgage to it in good faith by way of

security for debts.
(ii) Such as shall be conveyed to it in satisfaction of debts
previously contracted in the course of its dealings; or
(iii) Such as it shall purchase at sales under judgments, decrees,
mortgages, or trust deeds held by it and such as it shall
purchase to secure debts due it.
 Any real property acquired or held under the circumstances enumerated above
shall be disposed of by the bank within a period of 5 years or as may be prescribed by
the Monetary Board; provided, however, that the bank may, after said period, continue
to hold the property for its own use, subject to the limitations of Section 51.

28.Apart from the services specified in Section 29, what other services
could a bank perform? (Sec. 53)

(a) Under Section 29 (Powers of a Commercial Bank), a commercial bank shall

have, in addition to the general powers incident to corporation, all such
powers as may be necessary to carry on the business of commercial banking
(subject to such rules as the Monetary Board may promulgate) such as –

(i) accepting drafts and issuing letters of credit;

(ii) discounting and negotiating promissory notes, drafts, bills of
exchange, and other evidences of debt;
(iii) accepting or creating demand deposits;
(iv) receiving other types of deposits and deposit substitutes;
(v) buying and selling foreign exchange and gold or silver bullion;
(vi) acquiring marketable bonds and other debt securities; and
(vii) extending credit;

(b) The other services a bank could perform under Section 53 are as follows:

(i) receive in custody of funds, documents and valuable objects;

(ii) 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;
(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 approval of the Monetary Board, act as managing agent,
adviser, consultant or administrator of investment management or
advisory or consultancy accounts; and
(v) rent out safety deposit boxes.

The bank shall perform the services permitted under items (i) to (iv) 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.

29.Could a bank engage in the insurance business? (Sec. 54)

A bank cannot directly engage in the insurance business as the insurer.

However, if it is a universal bank, it could invest in the equity of an insurance
company.

30.Is a bank required to maintain the secrecy or confidentiality of deposits

only? (Sec. 55.1[b])

No. Without order of a court of competent jurisdiction, a bank cannot

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. In other words, under Section
 55.1[b], a bank is required to keep secret or confidential not only information
relative to deposits (which is governed principally by the Secrecy of Bank
Deposits Law) but also information about the funds or properties belonging to
private entities in the custody of the bank such as, for example, those held by
the bank in its capacity as trustee or escrow agent.

31.What functions could a bank outsource? (Sec. 55.1[e]; BSP Circular No.
268, dated December 5, 2000)

A bank may not outsource inherent banking functions, i.e., a bank may
not enter into a contract with a service provider for the latter to supply the
manpower, e.g., tellers, to service the deposit transactions of the former, so as
not to violate the Secrecy of Bank Deposits Law. Subject to the prior approval of
the Monetary Board, a bank may outsource the following:

(a) all information technology systems and processes, except for

certain functions affecting the ability of the bank to ensure the fit
of technology services deployed to meet its strategic and business
objectives and comply with pertinent laws and regulations (such as
strategic planning for the user of information technology,
determination of system functionalities, changing management
inclusion of quality assurance and testing, service level and
contract management, and security policy and administration);
(b) date imaging, storage, retrieval and other related systems;
(c) clearing and processing of checks not included in the Philippine
Clearing House System;
(d) printing of bank deposit statements;
(e) credit card services;
(f) printing of bank loan statements and other non-deposit records,
bank forms and promotional materials;
(g) credit investigation and collection;
(h) processing of export, import and other trading transactions;
(i) transfer agent services for debt and equity securities;
(j) property appraisal;
(k) property management services;
(l) messenger, courier and postal services;
(m) security guard services;
(n) vehicle service contracts;
(o) janitorial services; and
(p) such other services as may be determined by the Monetary Board.

32.Could a bank employ casual or non-regular personnel? (Sec. 55.4)

Consistent with the provisions of the Secrecy of Bank Deposits Law, no

bank shall employ casual or non-regular personnel or too lengthy probationary
personnel in the conduct of its business involving bank deposits.
33.What circumstances may be considered by the Monetary Board in
determining whether a particular act or omission of a bank, quasi-bank
or trust entity, not otherwise prohibited by any law, rule or regulation
affecting them, constitutes conducting business in an unsafe or
unsound manner? (Sec. 56)

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 Section 56 (Conducting Business in an Unsafe or
Unsound Manner), the Monetary Board shall consider any of the following
circumstances:

(a) 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;
(b) 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 BSP or to the public in general;
(c) 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
(d) The act or omission involves entering into any contractor
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.

34.Apart from the limitation under the Corporation Code, does the General
Banking Law impose any further limitation on the ability of banks to
declare dividends? (Sec. 57)

Yes, it does. No bank or quasi-bank shall declare dividends if at the time

of declaration:

(a) its clearing account with the Bangko Sentral is overdrawn; or

(b) it is deficient in the required liquidity floor for government
deposits for 5 or more consecutive days, or
(c) it does not comply with the liquidity standards/ratios
prescribed by the Bangko Sentral for purposes of
determining funds available for dividend declarations; or
(d) it has committed a major violations as may be determined
by the Bangko Sentral.

MISCELLANEOUS
35.What act or omissions of a director or officer, after a bank is declared
insolvent or placed under receivership by the Monetary Board, are
prohibited and penalized? (Sec. 70)

The following acts or omissions of a director or officer of a bank, done

after the bank is declared insolvent or placed under receivership by the Monetary
Board, are prohibited and penalized:
 (a) Refusal to turn over the bank’s records and assets to the
designated receivers, or
(b) Tampering with banks records, or
(c) Appropriating for himself or another party or destroying or causing
the misappropriation and destruction of the bank’s assets, or
(d) Receiving or permitting or causing to be received in said bank any
deposit, collection of loans and/or receivables, or
(e) Paying out or permitting or causing to be paid out any funds of said
bank, or
(f) Transferring or permitting or causing to be transferred any
securities or property of said bank.

36.What is a trust entity? (Sec. 79)

A trust entity is a stock corporation or a person duly authorized by the

Monetary Board to engage in the trust business, that is, to act as a trustee or
administer any trust or hold property in trust or on deposit for the use, benefit,
or behoof of others.

37.What is the degree of diligence required of a trust entity? (Sec. 80)

A trust entity shall administer the funds or property under its custody with
the diligence that a prudent man would exercise in the conduct of an enterprise
of a like character and with similar aims.

38.If a trustee entity should become insolvent, could its trust assets be
included in the insolvency proceeding? (Sec. 92; Art. 2240, Civil Code)

No. The assets held by a trust entity in its capacity as trustee shall not be
subject to any claims other than those of the parties interested in the specific
trusts. Article 2240 of the Civil Code provides that “[p]roperty held by the
insolvent debtor as a trustee of an express or implied trust shall be excluded
from the insolvency proceedings.”

39.What is the nature of the relationship between a bank and its

depositors?

The relationship between a bank and its depositors is that of creditor and
debtor. Under Article 1980 of the Civil Code, fixed savings and current deposits
of money in banks and similar institutions shall be governed by the provisions on
simple loans. Thus, the failure of the bank to honor the deposit is a failure to pay
its obligation as a debtor and not a breach of trust arising from a depositary’s
failure to return the subject matter of the deposit ( Serrano vs. Central Bank, et
al., G.R. No. L-30511, February 14, 1980, 96 SCRA 96).

40.What is the responsibility of a bank to its depositors?

(a) As banking is a business affected with public interest, a bank is

under obligation to treat the accounts of its depositors with
meticulous care, having in mind the fiduciary nature of their
relationship. Accordingly, while a bank is not expected to be
infallible it must bear the blame for not discovering the mistake of
its teller despite the established procedure requiring the papers and
 bank books to pass through a battery of bank personnel whose
duty it is to check and countercheck them for possible errors. The
bank in this case is liable to the client for moral damages because
its negligence caused serous anxiety, embarrassment and
humiliation to the client (BPI vs. IAC, et al., 206 SCRA 408 [1992]).

(b) When a bank account is carried in the name of a depositor with

words added to the effect that the money belongs to some other
person than the depositor, the money in such account cannot be
applied by the bank to the satisfaction of an overdraft in the
personal account of the same depositor. However, a bank is not a
guardian of trust funds deposited with it in the sense that it must
see to its proper application; and so long as it serves its function
and pays the money out in good faith to the person who deposited
it, without knowledge that it is assisting in the misappropriation,
the bank will be protected (Fulton Iron Works Co. vs. China
Banking Corporation, et al., G.R. No. 32576, November 6, 1930; 55
Phil. 208). ON the other hand, where a depository bank allows its
client to withdraw deposits of treasury warrants before they are
cleared, it is guilty of negligence (Metropolitan Bank & Trust Co. vs.
Court of Appeals, et al., 194 SCRA 169 [1991]).
 LAW ON SECRECY OF BANK DEPOSITS
Republic Act No. 1405 (approved September 9, 1955), as amended
by PD 1792 (1981), RA 6832 (1990) and RA 7653 (1993); see also
Sec. 6 (f), NIRC Sec. 15 (8), RA 6770 (Ombudsman Act of 1989),
and Sec. 11, RA 9160 (Anti-Money Laundering Act of 2001), as
amended by RA 9194 [2003].

1. What is the purpose of the law? (Sec. 1)

The purpose of the law is to encourage people to deposit their money in

banks and, thereby, discourage private hoarding so that the banks may lend out
the money and assist in the economic development of the country.

2. What acts are prohibited by the law?

(a) the examination and inquiry or looking into all deposits of whatever
nature with banks in the Philippines (including investments in bonds
issued by the Government or its political subdivisions and
instrumentalities) by any person, government official, bureau or office
(Sec. 2); and

(b) the disclosure by any official or employee of any bank to any

unauthorized person of any information concerning the said deposits
(Sec. 3).

3. Under what situations could the examination of, or disclosure of

information about, deposits be allowed?

(a) upon written permission of the depositor (Sec. 2);

(b) in cases of impeachment (Sec. 2);

(c) upon order of a competent court in cases of bribery or dereliction of

duty of public officials (Sec. 2);

(d) in cases where the money deposited or invested is the subject matter
of the litigation (Sec. 2);

(e) upon order of the court in cases of unexplained wealth under Section 8
of the Anti-Graft and Corrupt Practices Act ( PNB vs. Gancayco, 15
SCRA 91 [1965]);

(f) upon order of the Commissioner of Internal Revenue in respect of the

bank deposit of a decedent for the purpose of determining such
decedent’s gross estate (Sec. 6[F][1], NIRC);

(g) upon order of the Commissioner of Internal Revenue in respect of the

bank deposits of a taxpayer who has filed an application for
compromise of his tax liability under Section 204(A)(2)of the NIRC by
reason of financial incapacity to pay his tax liability (Sec. 6[F][2],
NIRC); and
 (h) upon order of the court in cases filed by the Ombudsman and upon
the latter’s authority to examine and have access to bank accounts and
records (Marquez, et al. vs. Desierto, et al., G.R. No. 135882, June
27, 2001, in relation to Sec. 15[8], RA 6770);

(i) in the case of unclaimed balances (Sec. 2, Act 3936);

(j) without need of a court order, if the Anti-Money Laundering Council

determines that a particular deposit or investment with any banking
institution is related to any one of the following unlawful activities:

(i) kidnapping for ransom under Article 267 of Act No. 3815,
otherwise known as the Revised Penal Code, as amended
(Sec. 3[i][1], RA 9160);

(ii) violations of Sections 4,5,6,8,9,10,12,13,14,15, and 16 of

Republic Act No. 9165, otherwise known as the
Comprehensive Dangerous Drugs Act of 2002 (Sec. 3[i][2],
RA 9160); and

(iii) hijacking and other violations under Republic Act No. 6235;
destructive arson and murder, as defined under the Revised
Penal Code, as amended, including those perpetrated by
terrorists against non-combatant persons and similar targets
(Sec. 3[i][12], RA 9160).

(k) upon order of the court, if the Anti-Money Laundering Council

determines that a particular deposit or investment with any banking
institution is related to any one of the unlawful activities under Section
3(i), except those referred to in Section 3(i)[1],[2] and [12] of RA
9160 or a money laundering offense under Section 4 (Sec. 11, RA
9160); and

(l) inquiry into or examination of any deposit or investment with any

banking institution when the examination is made by the Bangko
Sentral ng Pilipinas in the course of a periodic or special examination in
accordance with the rules of examination of the BSP (Sec. 11, RA
9160; see also Sec. 4, RA 8791);

4. Will the garnishment of a bank deposit violate the law?

No, the garnishment of a bank deposit will not violate the law. According
to the Supreme Court in the case of China Bank vs. Ortega , 49 SCRA 355 (1973),
the discussion in the conference committee report on the Senate and House bills
which eventually became RA 1405 indicated that it was not the intention of the
legislature to place bank deposits beyond the reach of execution to satisfy a final
judgment. Furthermore, there is no real inquiry in an order for garnishment and
if the existence of the deposit were disclosed, the disclosure was purely
incidental to the execution process. Finally, as stated by the Supreme Court in
the case of RCBC vs. de Castro, 168 SCRA 49 (1988), to expose garnishees to
risks for obeying court orders and processes would only undermine the
administration of justice.
5. Would the examination of the bank deposits of another person in
connection with an inquiry into illegally acquired property of the
defendant in an anti-graft case violate the law?

No. The permitted inquiry into illegally acquired property in anti-graft

cases extends to instances where such property is concealed by being held by or
recorded in the name of other persons. (Banco Filipino vs. Purisima, 161 SCRA
576 [1988])

6. In a case where the money deposited or invested is the subject matter

of the litigation, could an inquiry into the whereabouts of the amount
extend to the deposits held in the name of persons others than the one
responsible for the illegal acquisition?

Yes. Even in cases not involving prosecution under the Anti-Graft and
Corrupt Practices Act, an inquiry into the whereabouts or the amount converted
necessarily extends to whatever is concealed (by being held or recorded in the
name of persons other than the one responsible for the illegal acquisition) in
asmuch as the case is aimed at recovering the amount converted. ( Mellon Bank
vs. Magsino, 190 SCRA 633 [1990])

7. SC Ruling Marquez, et al. vs. Desierto, et al., G.R. No. 135882, June 27,
2001

This case involves a petition for declaratory relief, prohibition and

injunction filed by petitioner Lourdes T. Marquez, the branch manager of the
Julia Vargas Branch of La Union Bank of the Philippines, against Ombudsman
Aniano A. Desierto. It arose from the attempt of the Ombudsman to inspect
certain deposit accounts maintained at the said branch which are involved in a
case pending with the Ombudsman entitled Fact Finding and Intelligence Bureau
vs. Amado Lagdameo, et al. (OMB-0-97-0411). One of the respondentns in the
said case, a certain George Triviño, deposited 11 Manager’s checks payable to
cash or bearer in the total amount of P70.6 million to an account maintained at
the aforementioned branch.

The case required the Court to determine the scope of the power of the
Ombudsman under Section 15(8) of the Ombudsman Act (i.e., to administer
oaths, issue subpoena and subpoena duces tecum, and take testimony in an
investigation or inquiry, including the power to examine and have access to bank
accounts and records in relation to Sections 2 and 3 of Republic Act No. 1405, as
amended. In the words of the Court, one of the issues to be resolved is
“[w]hether the order of the Ombudman to have an in camera inspection of the
questioned account is allowed as an exception to the law on secrecy of bank
deposits (R.A. No. 1405)”. In respect of the issue, the Court ruled in the
negative:

We rule that before an in camera inspection may be allowed, there must

be a pending case before a court of competent jurisdiction. Further, the
account must be clearly identified, the inspection limited to the subject
matter of the pending case before the court or competent jurisdiction. The
bank personnel and the account holder must be notified to be present
during the inspection, and such inspection may cover only the account
identified in the pending case.
xxx
 In the case at bar, there is yet no pending litigation before any court of
competent authority. What is existing is an investigation by the Office of
the Ombudsman. In short, what the Office of the Ombudsman would wish
to do is to fish for additional evidence to formally charge Amado
Lagdameo, et al. with the Sandiganbayan. Clearly, there was no pending
case in court which would warrant the opening of the bank account for
inspection.

Zones of privacy are recognized and protected in our laws. The Civil Code
provided that “[e] every person shall respect the dignity, personality,
privacy and peace of mind of his neighbors and other persons” and
punishes as actionable tort several acts for medling and prying into the
privacy of another. It also holds a public officer or employee or any
private individual liable for damages for any violation of the rights and
liberties of another person, and recognizes the privacy of letters and other
private communications. The Revised Penal Code makes a crime of the
violation of secrets by an office, the revelation of trade and industrial
secrets, and trespass to dwelling. Invasion of privacy is an offense in
special laws like the Anti-Wiretapping Law, the Secrecy of Bank Deposits
Act, and the Intellectual Property Code.

Comment: This was a unanimous decision by the Court en banc. Other than the last
paragraph quoted above, the Court provided no further justification for its ruling.
Specially noteworthy is the absence of any reference to, much less a discussion of, the
constitution role of the Ombudsman as the “protector of the people” nor of the
constitutional power of the Office of the Ombudsman to “investigate”. There was also
no explanation as to why the Ombudsman Act of 1989, being a later legislation, should
not be considered as having created an additional exception to the Law on Secrecy of
Bank Deposits. It remains to be seen whether the Office of the Ombudsman, after
having been emasculated by this unfortunate decision, could continue to protect the
interests of the property with the thoroughness and efficiency expected of it.

FOREIGN CURRENCY DEPOSIT ACT

8. Background

Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act,
established the foreign currency deposit account system in the country in 1972.
Essentially, it allowed any person to deposit, and banks to accept for deposit, any
foreign currency acceptable as part of our international reserve.

9. What are the unique features of the Act?

Unlike ordinary bank deposits, foreign currency deposits have the following
unique features:

(a) Absolute confidentiality – A foreign currency deposit cannot be examined,

inquired or looked into by any person or office, whether public or private, or
judicial, administrative or legislative (Sec. 8, as amended by PD 1246 [1977]
except –

(i) upon the written permission of the depositor;

 (ii) without need of a court order, if the Anti-Money Laundering Council
determines that a particular deposit or investment with any banking
institution is related to any one of the following unlawful activities:
(aa) kidnapping for ransom under Article 267 of Act No. 3815, otherwise
known as the Revised Penal Code, as amended (Sec. 3[i][1]);
(bb) violations of Sections 4,5,6,8,9,10,12,13,14,15, and 16 of the
Republic Act No. 9165, otherwise known as the Comprehensive
Dangerous Drugs Act of 2002 (Sec. 3[i][2]); and
(cc) hijacking and other violations under Republic Act No. 6235;
destructive arson and murder, as defined under the Revised Penal
Code, as amended, including those perpetrated by terrorists against
non-combatant persons and similar targets (Sec. 3[i][12]).

(iii) upon order of the court, if the Anti-Money Laundering Council determines
that a particular deposit or investment with any banking institution is
related to any one of the unlawful activities under Section 3(i)[1], [2] and
[12], of RA 9160 or a money laundering offense under Section 4 (Sec. 11,
RA 9160); and

(iv) inquiry into or examination of any deposit or investment with any banking
institution when the examination is made by the BSP in the course of a
periodic or special examination in accordance with the rules of
examination of the BSP (Sec. 11, A 9160; see also Sec. 4, RA 8791).

(b) Numbered accounts – Authorized banks may adopt a numbered account system for
recording and servicing deposits in non-checking accounts (Sec. 3 in relation to Sec.
9[a], RA 9160, as amended).

(c) Taxes – The foreign currency deposits, including interest and all other income or
earnings of such deposits, are exempt from any and all taxes whatsoever
irrespective of whether or not these deposits are made by residents of non-residents
and, in the latter case, irrespective of whether or not the non-residents are engaged
in trade or business in the Philippines (Sec. 6, as amended by PD 1246). Note,
however, that under Sections 24(B)(1), 27(D)(1) and 28(A)(7)(a) of the NIRC, the
interest received by an individual (except a nonresident individual), domestic
corporation and resident foreign corporation from such deposits shall, effective
January 1, 1998, be subject to a final income tax of 7.5%.

(d) Court order or process – They are exempt from attachment, garnishment or any
other order or process of any court, legislative or administrative body, or
government agency whatsoever (Sec. 8, as amended by PD 1246), except that the
Court of Appeals, upon application ex parte by the Anti-Money Laundering Council
and after determination that probable cause exists that any unlawful activity as
defined in Section 3(i) of the Anti-Money Laundering Act, may freeze the account
into which the monetary instrument or property is deposited (Sec. 10, RA 9160, as
amended).

(e) New enactment or regulation – In the event a new enactment or regulation is issued
decreasing the rights granted under the law, such new enactment or regulation shall
not apply to foreign currency deposits already made or existing at the time of
issuance of such new enactment or regulation (Sec. 12-A, as inserted by PD 1246).
10. SC Ruling Salvacion, et al. vs. Central Bank, et al., G.R. No. 94723,
August 21, 1997
 Petitioner Karen E. Salvacion, a minor, was detained and raped by Greg
Bartelli, an American tourist. Salvacion was later on rescued by the police,
Bartelli was arrested, and criminal cases for serious illegal detention and rape
were filed against the latter. A case for damages was also filed by Salvacion and
her parents against Bartelli. Bartelli was able to escape from jail and the criminal
cases against him were thereafter archived. However, the civil case for damages
against Bartelli continued and judgment was rendered in favor of Salvacion and
her parents. At the time of his arrest, Bartelli maintained a U.S. dollar deposit
account with China Banking Corporation (CBC). When petitioners tried to have
the bank deposit of Bartelli with CBC garnished to satisfy the judgment rendered
in their favor, the bank refused citing Section 8 of Republic Act No. 6426, as
amended, which exempts foreign currency deposit accounts from attachment,
garnishment or any other order or process of any court, legislative or
administrative body, or government agency whatsoever.

The Court ruled that Section 8 of RA 6426 does not protect and would not
apply to the foreign currency deposit of a transient alien depositor under the
peculiar circumstances of this case and ordered CBC to release to Salvacion and
her parents the dollar deposit of Bartelli in such amount as would satisfy the
judgment.

Comment: This case should not be understood as removing from foreign

currency deposit accounts maintained by transient alien depositors the benefit
and protection afforded by Section 8 of RA 6426. Such benefit and protection
may be removed only under circumstances similar to the facts of this case.

11. SC Ruling: Intengan, et al. vs. CA, et al., G.R. No. 128996, February 15,
2002

The Court held that the accounts in question, being U.S. dollar deposits,
are not covered by the Law on Secrecy of Bank Deposits (RA 1405, as amended)
but by the Foreign Currency Deposit Act (RA 6426, as amended). Thus, a case
for the violation of the latter law should have been the proper case brought
against private respondents Vic Lim, a Vice President of Citibank, and Joven
Reyes, Vice President/Business Manager of the Global Consumer Banking Group
of Citibank, who admitted that they had disclosed details of petitioners’ dollar
deposits without the latter’s written permission. Accordingly to the Court, Lim’s
act of disclosing details of petitioners’ bank records regarding their foreign
currency deposits, with the authority of Reyes, would appear to belong to that
species of criminal acts punishable by special laws called malum prohibitum.

The private respondents, however, could no longer be charged under RA

6426, a special law, as the offense has prescribed. Being a special law, the
provisions of Act No. 3326, entitled “An Act to Establish Periods of Prescription
for Violations Penalized by Special Acts and Municipal Ordinances and to Provide
When Prescription Shall Begin to Run”, as amended by Act No. 3763, are
applicable. A violation of RA 6426 shall subject the offender to imprisonment of
not less than 1 year nor more than 5 years, or to a fine of not less than
P5,000.00 nor more than P25,000.00, or both. Applying Act 3326, the offense
prescribed in 8 years. The filing of the complaint or information for alleged
violation of RA 1405 did not have the effect of tolling the prescriptive period. It is
the filing of the complaint or information corresponding to the correct offense
which produces that effect.
 PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT
Republic Act No. 3591 (approved June 22, 1963), as amended by
RA 6037 (1969), PD 120 (1973), PD 1094 (1977), PD 1451 (1978),
PD 1935 (1984) and RA 7400 (1992)

1. What is the purpose of the law?

The purpose of the law is to create a government-owned entity, the

Philippine Deposit Insurance Corporation, that shall insure the deposit liabilities
of all banks entitled to the benefits of insurance under the Act. Such insurance is
intended to protect depositors from situations that prevent banks from paying
and deposits, as in bank failures or closures, and to encourage people to deposit
in banks.

2. Whose deposit liabilities are required to be insured with the PDIC? (Sec. 4)

The deposit liabilities of any bank engaged in the business of receiving

deposits are required to be insured with the PDIC.

3. When does the PDIC become liable to pay the insured deposits? (Sec. 10[c])

The PDIC becomes liable to pay the insured deposits in a bank when the
bank is closed by the Monetary Board of the Bangko Sentral ng Pilipinas, that is,
prohibited from doing further business in the Philippines, on account of
insolvency and other grounds under the law (see Paragraph 1.10).

4. What is the extent of the PDIC’s liability to a bank depositor? (Sec. 3[g])

The PDIC’s liability is up to P100,000.00 per depositor/per capacity.

5. Is the liability of the PDIC on a per bank or per branch basis?

On a per bank basis.

6. When an insured bank is closed on account of insolvency, how will

payment of the insured deposits in such bank be made by the PDIC? (Sec.
10[c])

The PDIC shall pay either (i) in cash or (ii) by making available to each
depositor a transferred deposit in another insured bank in an amount equal to
the insured deposit of such depositor.

7. What is a transferred deposit? (Sec. 3[h])

A transferred deposit is a deposit in an insured bank made available to

a depositor by the PDIC as payment of the insured deposit of such depositor in a
closed bank and assumed by another insured bank. By paying its liabilities to
depositors in this manner, the PDIC hopes to persuade these depositors to keep
their savings in banks where such funds could be lent out, rather than hoarded
and kept out of the banking system.
8. If a depositor has several accounts with the bank, how will the liability
of the PDIC to him be calculated? (Sec. 3[g])

The liability of the PDIC will be calculated by adding together all deposits
in the bank maintained by the depositor in the same capacity and the same right
for his benefit either in his own name or in the name of others.

9. What is the effect of payment to the depositor of his insured deposit?

(Secs. 10[d] and 11[a])

Payment to the depositor of his insured deposit (i) discharges the

PDIC from any further liability to the depositor, and (ii) subrogates the
PDIC to all the rights of the depositor against the closed bank to the
extent of such payment.

10.What notice requirement is imposed by the Act on banks? (Sec. 16[a])

Every insured bank is required by the Act to display at each place

of business maintained by the bank a sign or signs stating that its deposits
are insured by the PDIC. A similar statement shall be included by the bank
in its advertisements.

11.SC Ruling PDIC vs. CA, et al., G.R. 118917, December 22, 1997

The PDIC was created by law and, as such, is governed primarily

by the provisions of the special law creating it. The liability of the PDIC for
insured deposits therefore is statutory and, under RA 3591, such liability
rests upon the existence of deposits with the insured bank, not on the
negotiability or non-negotiability of the certificates evidencing these
deposits.

In order that a claim for deposit insurance with the PDIC may
prosper, the law requires that a corresponding deposit be placed in the
insured bank. A deposit, as defined in Section 3(f) of RA 3591, may be
constituted only if money or the equivalent of money is received by a
bank.
Practice Problem: Nicky and Jimboy’s Bank

Your friends, Nicky and Jimboy, being new stockholders and directors in XYZ Bank,
approached you for advice. Nicky said that he owns a manpower company and
would like to supply the bank with janitors, messengers and tellers for employment
during peak periods of the year. Your other friend, Jimboy, told you that he would
like to increase his stockholdings in the bank by subscribing to 51% of the
outstanding voting stocks of the bank and that the other stockholders have no
objection to his plan. What will you advise them?
Double Billing

There was once a young lawyer, age 29, who was on his way to work when he
was hit by a bus.

He goes to heaven and meet’s St. Peter and pleads, “I am much too young to
die, there must be a mistake!”.

St. Peter thinks about this for a moment and goes out the back to consult with
God. Ten minutes later he returns saying, “There’s no mistake. Accordingly to the hours
you have billed your clients, you are 176 years old”.

Gutless

Four surgeons were taking a coffee break and discussing their work. The first
one said, “I think accountants are the easiest to operate on. Everything inside them is
numbered.

“I think librarians are the easiest,” said the second, “When you open them up, all
their organs are arranged alphabetically.”

The third surgeon said, “I prefer to operate an electricians. Their organs are
color-coded.”

“You’re all wrong,” said, the fourth. “Lawyers are easiest. They’re heartless,
spineless, gutless, and their heads and assess are interchangeable.”
Bar Problem: Mañosa vs. Gigi
[Question VII[a], 1990 Mercantile Law exam]

Mañosa, a newspaper columnist, while making a deposit in a bank, overheard a pretty

bank teller informing a co-employee that Gigi, a well-known public official, has just a
few hundred pesos in her bank account and that her next check will in all probability
bounce. Mañosa wrote this information in his newspaper column. Thus, Gigi filed a
complaint against Mañosa with the Office of the City Fiscal of Manila for unlawfully
disclosing information about her bank account. Will the said suit prosper? Explain your
answer.