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Page 1 of 26 Notes of hotjurist in foro conscientiae BANKING LAWS GGOOVVEERRNNIINNGGLLAAWW Banking Institution are governed by the followinglaws:A.

General banking laws General Banking Law (R.A. No. 8791) . New Central Bank Act (R.A. No.7653) B. Special banking laws New Rural Banks Act (R.A. No. 7353) Private Development Banks Act (R.A. No. 4093) Savings and Loan Association Act (R.A. No. 3779) . Thrift Banks Act (R.A. No. 7906) C . Other laws affecting banks Secrecy of Bank Deposits Law (R.A. No. 1405) Unclaimed Balances Law (Act No. 3936) Philippine Deposit Insurance Corporation Act (R.A. No. 3591) The general banking laws above mentioned areapplicable to government banks like DBP and PNB. The Al- Amanah Islamic Bank is subject to all bankingand pertinent laws. (Bar Review Materials in Commercial Law, JorgeMiravite, 2002 ed.) TH R E E K I N D S O F E N T I T I E S T H A T I N T R O D U C E F U N D S I N T O T H E E C O N O M Y : 1 . banks : entities that obtains funds from the publicin the form of deposits and re-lend it to the public;2. quasi-banks : those that obtain funds in the form of deposit substitutes and re-lend the same and notfrom the public or depositors.3. Finance companies and other financialintermediaries: those that lend funds from their own assets. F IVE P ERSONS P

RIMARILY I NTERESTED IN THE B USINESS OF B ANKING 1 . Government2. Depositors3. Investors4. Creditors5. Borrowers BAR QUESTION:JOINT ACCOUNT VS. PARTNERSHIP (2000) Distinguish joint account from partnership. (3%) SUGGESTED ANSWER The following are the distinctions between jointaccount and partnership:1) A partnership has a firm name while a jointaccount has none and is conducted in the name of theostensible partner.2 ) WHILE A PARTNERSHIP HAS JURIDICALPERSONALITY AND MAY SUE OR BE SUEDUNDER ITS FIRM NAME, A JOINT ACCOUNT HAS NO JURIDICAL PERSONALITY AND CANSUE OR BE SUED ONL IN THE NAME OF Y THEOSTENSIBLE PARTNER. 3) While a partnership has a common fund, a jointaccount has none.4) While in a partnership, all general partners havethe right of management, in a joint account, theostensible partner manages its business operations.5) While liquidations of a partnership may, byagreement, be entrusted to a partner or partners, in joint account liquidation thereof can only be done bythe ostensible partner. BAR QUESTION: Theory of Cognition vs. Theory of Manifestation(1997)The Civil Code adopts the theory of cognition, whilethe Code of Commerce generally recognizes thetheory of manifestation, in the perfection ofcontracts. How do these two theories differ? SUGGESTED ANSWER: Under the theory of cognition, the acceptance isconsidered to effectively bind the offeror only fromthe time it came to his knowledge. Under the theoryof manifestation, the contract is perfected at themoment when the acceptance is declared or made bythe offeree.

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Notes of hotjurist in foro conscientiae GENERAL BANKING LAW OF 2000 (GBL)(RA No. 8791) Purpose: T promote and maintain a stable andefficient banking and financial system that is globallycompetitive, dynamic and responsive to o the demands of a developing economy ( S ec. 2) . Scope of Application: The GBL primarily governsuniversal banks and commercial banks. It suppletorilygoverns thrift banks, rural banks and other bankinginstitutions. GENERAL CONCEPTS BANKS Entities engaged in the lending of funds obtained inthe form of deposits ( S ec. 2) Entities duly authorized by the Monetary Board toengage in the business of regularly lending fundsobtained regularly from the public through thereceipt of deposits of any kind. An investment company that performs function assuch is NOT a bank. Thus an investment companythat is engage solely in investing, reinvesting or trading in securities is not engage in banking. ( Banas vs. Asia Pacific Finance Corp., Oct. 18,2000). However, an investment company which loans outmoney of its customers, collects interest, andcharges a commission to both lender or borrower isengage in banking (Republic vs. S ecurity Credit and Acceptance Corp.) QU ASI-BANKS Entities engaged in the borrowing of funds throughthe issuance, endorsement or assignment withrecourse or acceptance of deposit substitutes ( S ec.95) Entities authorized to perform universal or commercial banking functions may also engage inquasi-banking functions. FINAN C

IAL INTERMEDIARIES Persons or entities whose principal functionsinclude the lending, investing or placement of fundson evidences of indebtedness or equity depositedwith them, acquired by them or otherwise coursedthrough them, either for their own account or for theaccount of others. ORGANIZATION AND OPERATION A. Authority to Register/Incorporate The SEC shall not register the articles of incorporation of any bank or any amendmentthereto unless accompanied by a certificate of authority issued by the Monetary Board under itsseal ( S ec. 14). The certificate of authority shall not be issuedunless the Monetary Board is satisfied: 1 . That all requirements of existing laws andregulations to engage in the business for whichthe applicant is proposed to be incorporatedhave been complied with;2. That the public interest and economicconditions, both general and local, justify theauthorization; and3. That the amount of the capital, the financing,organization, direction and administration, aswell as the integrity and responsibility of theorganizers and administrators, reasonablyassure the safety of deposits and the publicinterest ( S ec. 14). Organization of a Bank or Q uasi-BankRequirements: 1 . The entity is a stock corporation;2. Its funds are obtained from the public,i.e. 20 or more persons; and3. The minimum capital requirements prescribedby the Monetary Board are satisfied ( S ec. 8). Note: InQuasibanks, Deposit substitute arealternative forms of obtaining funds for thepublic, other than deposit, through theissuance, endorsement, or acceptance of debtinstrument for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations.in banking or quasi-banking functions A person or entity cannot engage in banking or quasi-banking functions without a certificate of authority from the BSP ( S ec. 6). The determination of whether a person or entity isperforming banking or quasi-banking functionswithout BSP authority shall be decided by theMonetary Board. NATURE OF BANKING BUSINESS Impressed with public interest where the trust andconfidence of the public in general is of paramountimportance such that: 1 . The appropriate standard of diligence must bevery high, if not the highest, degree of diligence;

h ig h est degree of care (PCI Bank vs.CA, 350 S CRA 446, PBCom vs. CA, G.R. No.121413, 29 Jan. 2001) This applies only to cases where banksare acting in their fiduciary capacity, thatis, as depository of the deposits of their depositors (Reyes vs. CA, G.R. No.118492, 15 Aug. 2001) .2. Subject to reasonable regulation under thepolice power of the state. While an innocent mortgagee is not expected toconduct an exhaustive investigation on the historyof the mortgagors title, in case of a banking

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Notes of hotjurist in foro conscientiae institution, it must exercise due diligence beforeentering into said contract, and cannot rely upon onwhat is or is not annotated on the title. Reason: Before a loan is approved, representatives are sentto the premises offered as collaterals so as toinvestigate who the real owners are (DBP vs. CA,331 S CRA 267). The business of a bank is one affected by publicinterest for which reason the bank should guardagainst loss due to negligence and bad faith. It isexpected to ascertain and verify the identities of thepersons it transacts business with (UCPB vs.Ramos, G.R. No. 147800, November 11, 2003,Callejo, J.). Due diligence required of banks extend even topersons, or institutions like the GSIS, regularlyengaged in the business of lending money securedby real estate mortgages (G S I S vs. Eduardo S antiago, G.R. No. 155206. October 28, 2003). C ONSEQUENCES OF NATURE OF BUSINESS : 1 . It is subject to heavy and close supervision and/or regulation by the BSP ( Central Bank of t h eP h ils. v.CA, 208 S CRA 652 ) . 1 . It is required to exercise utmost diligence in thehandling of deposits ( S imex International ManilaInc., 183 S CR 361 A ) .2. Special rules on strikes and lockouts: any strike or lockout involving banks, if unsettled after 7calendar days shall be reported by the BSP to theSec. of Labor who has 2 options:a. He may assume jurisdiction over and decidethe dispute; or b. certify it to the NLRC for compulsoryarbitrationThe President may also intervene at any time andassume jurisdiction over such labor dispute in order tosettle or terminate the same. CLASSIFICATION OF BANKS (S

EC . 3) 1 . U niversal banks - Primarily governed by theGeneral Banking Law (GBL ) , can exercise thepowers of an investment house and invest in non-allied enterprises and have the highestcapitalization requirement.2. C ommercial banks - Ordinary banks governed bythe GBL which have a lower capitalizationrequirement than universal banks and can neither exercise the powers of an investment house nor invest in non-allied enterprises.3. Thrift banks These are a ) Savings and mortgagebanks; b ) Stock savings and loan associations; c ) Private development banks, which are primarilygoverned by the Thrift Banks Act (R.A. 7906). 4. Rural banks Mandated to make needed creditavailable and readily accessible in the rural areason reasonable terms and which are primarilygoverned by the Rural Banks Act of 199 2 (RA7353). 5. C ooperative banks Those banks organizedwhose majority shares are owned and controlled bycooperatives primarily to provide financial andcredit services to cooperatives. It shall includecooperative rural banks. They are governedprimarily by the Cooperative Code (RA 6938). 6 . Islamic banks Banks whose business dealingsand activities are subject to the basic principles andrulings of Islamic Shari a, such as the Al AmanahIslamic Investment Bank of the Philippines whichwas created by R 6848. A 7. Other classification of banks as determined bythe Monetary Board of the Bangko Sentral ngPilipinas. ORDINARY C ORPORATIONBANKING C ORPORATION May be a stock or non-stockcorporationMust generally be astock corporationMay issue par valueor no par valuestocks.Shall issue par valuestocks only ( S ec. 9). May be registeredwith the SECwithout anycertificate of authority issued bya governmentagency.Must secure acertificate of authorityfrom the MonetaryBoard before it canregister with SEC.Maypurchase/acquireits own shares for alegitimate corporatepurpose; providedthat, it hasunrestrictedretained earnings inits books to cover the shares to bepurchased/acquired.May not purchase/acquire its shares or accept them assecurity for a loan.

Except : whenauthorized by theMonetary Board. Insuch case, the bankmust sell or disposeof said shares within 6 months from thetime of their acquisition ( S ec. 10). Must be composedof 5 to 1 5 directors,each of whom shallown at least one ( 1) share of the capitalstock of thecorporation. Also composed of 5to 1 5 directors. Incase of merger or consolidation, thenumber of directorsshall not exceed 2 1 ( S ec. 17). May declaredividends out of itsunrestrictedretained earnings.May not declaredividends, if any of the conditions setforth under Sec. 57are present.

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Notes of hotjurist in foro conscientiae U NIVERSAL BANK C OMMER C IAL BANK Authority to exerciseadditional powersother than thoseauthorized for commercial banksNo such additionalpowersMay invest in theequities of allied,whether financial or non-financial, andnon-allied enterprises( S ec. 24 ) May only invest inequities of alliedenterprises, whether financial or non-financial Powers 1 . The powersauthorized for acommercial bank;2. The powers of aninvestment house;and3. The power to investin nonalliedenterprises ( S ec.23). 1 . General powersincident tocorporations2. Such powers as maybe necessary to carryon the business of commercial banking:a. Accepting draftsand issuing letter of credits;b. Discounting andnegotiatingpromissory notes,drafts, bills of exchange and other evidence of debt;c. Accepting or creating demanddeposits; receivingother types of deposits and depositsubstitutes;d. Buying and sellingforeign exchangeand other debtsecurities;e. Extending credit.( S ec. 29 ) U NIVERSAL & C OMMER

C IAL BANKOTHER BANKS Authorized to engage inquasi-banking functionswithout need for approvalNot so authorizedMay accept or createdemand depositswithout need for approval Demand deposits Liabilities of the BSPand of other bankswhich are denominatedin Philippine currencyand are subject toMust seek approval of Monetary Boardbefore accepting or creating demanddeposits. ( S ec. 33 ) payment in legal tender upon demand by thepresentation of checks ( S ec. 58, NCBA). E QU ITY INVESTMENTS POINT OFDISTIN C TION UNIVERSAL BANK ( Sec. 24-28) C OMML BANK ( Sec. 30-32) Total investmentin alliedenterprises50%of net worth35%of net worthTotal investmentin nonalliedenterprises50%of net worthN/AEquityinvestment in anyone enterprise25%of net worth25%of net worth(Allied only ) Equityinvestment infinancial alliedenterprise: thriftbank, rural bankor any financialallied enterprise ( S ec. 25) A publicly-listedbank may own upto 1 00% of thevoting stock of only one other UB / CB ( S ec.25). 1 00%of equity 1 00%of equity y In other financial alliedenterprises,investment shallremain aminority holding ( S ec. 31). Equityinvestment innon-financialallied enterprises 1 00%of equity 1 00%of equityEquityinvestment in asingle non-alliedenterpriseShall not exceed35% of the totalequity in thatenterprise nor shall it exceed35% of thevoting stock inthat enterpriseN/AEquityinvestment inQuasiBanks40% 40%

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Notes of hotjurist in foro conscientiae Allied Enterprises those entities which enhance or complement banking Non-Financial Allied Enterprises pertains toactivities that do not involve money matters (such aswarehousing, safety deposit boxes ) NET WORTH The total of the unimpaired paid-in capital includingpaid-in surplus, retained earnings and undivided profit,net valuation reserves and other adjustments as may berequired by the Bangko Sentral ( S ec. 24). R ISK B ASED C APITAL The minimum ratio prescribed by the MonetaryBoard which the net worth of a bank must bear toits total risk assets which may include contingentaccounts. However, the Monetary Board may require or suspend compliance with such ratio whenever necessary for a maximum period of one year;PROVIDED that, such ratio shall be applieduniformly to banks of the same category

( S ec. 34). Effect of non-compliance with the prescribedminimum ratio: 1 . Distribution of net profits may be limited or prohibited and MB may require that part or allof the net profits be used to increase thecapital accounts of the bank until the minimumrequirement has been met; or 2. Acquisition of major assets and making of newinvestments may be restricted. EXCEPT:purchases of evidence of indebtednessguaranteed by the Government ( S ec. 34). 3. In case of a bank merger or consolidation, or when a bank is under rehabilitation under aprogram approved by BSP, the MB maytemporarily relieve the surviving bank,consolidated bank, or constituent bank or corporations under rehabilitation from fullcompliance with the required capital ratio. Effects of non-compliance with the prescribedminimum ratio: 1 . Distribution of net profits may be limited or prohibited and MB may require that part or all of thenet profits be used to increase the capital accountsof the bank until the minimum requirement hasbeen met; or 2. Acquisition of major assets and making of newinvestments may be restricted. EXCEPT:purchases of evidence of indebtedness guaranteedby the Government.3. In case of a bank merger or consolidation, or whena bank is under rehabilitation under a programapproved by BSP, the MB may temporarily relievethe surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the requiredcapital ratio. FUNCTIONS OF BANKS BASI C F U N C TIONS: 1 . Loan Function2. Deposit Function OTHER F U N C TIONS Universal banks and commercial banks may alsoexercise any of the following functions:a. Receive in custody funds, documents andvaluable objects;b. Act as financial agent and buy and sell, byorder of and for the account of their customer,shares, evidences of indebtedness and typesof securities;c. Make collection and payments for the accountof others and perform such other services for their customer as are not incompatible withbanking business;d. Upon prior approval of the Monetary Board, actas managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; ande. Rent out safety deposit boxes. The depositary would be liable if in performing itsobligation it is found guilty of fraud, negligence; in theabsence of any stipulation prescribing the degree of diligence required, that of a good father of the family isto be observed. Any stipulation exempting thedepositary from any liability arising from loss on accountof fraud, negligence would be void for being contrary topublic policy (CA-Agro Devt vs. CA, 219 S CRA 426,Marc h 5, 1993). Note: The bank acting as depositary or as an agentshall keep the funds, securities and other effects whichit receives duly separated from its own assets andliabilities. (Sec. 53 ) A.

LOAN F U N C TION Requirement for Grant of Loans Before granting a loan, a bank must ascertain thatthe debtor is capable of fulfilling his commitments to thebank. Rules: 1 . A bank may demand from its applicants astatement of their assets and liabilities and of their income and expenditures and other information.2. Sh ould suc h statements prove to be false or incorrect , the bank may terminate any loan grantedon the basis of said statements and shall have theright to demand immediate repayment or liquidationof obligation ( S

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