Regulation of Banks and Banking Institutions

Who regulates banking institutions

Section 4 provides that cases of doubt on whether activities are banking activities, and the consequent applicability of this Act, are decided by the Monetary Board, subject to judicial review.
Section 4 provides that the Monetary Board may, through the Superintendent of Banks, examine, inspect, or investigate the books and records of the person or entity to resolve the question.
Section 71 provides that opinions, decisions, rulings, or regulations issued by the Superintendent of Banks may be appealed to the Monetary Board, which may confirm, modify, or repeal them; such Monetary Board action is subject to judicial review.

Limits on banks and “holding out”

Section 3 exempts insurance companies from the provisions of the Act, but requires them to present information, data, or reports to the Central Bank as the Monetary Board requires to ascertain effects of insurance operations on monetary credit and exchange in the Philippines.
Section 6 prohibits any person, association, or corporation not conducting the business of the defined banking institutions from advertising or holding itself out as engaged in the business of such banking institutions, from using specified titles such as “bank,” “banking,” “banker,” “building and loan association,” “trust corporation,” “trust company,” or words of similar import, from soliciting or receiving deposits, and from transacting in any manner the business of those banking institutions without complying with the Act’s requirements for the applicable institution type.
Section 6 provides that for a corporation’s violation, its officers and directors are jointly and severally liable.
Section 6 establishes the penalty for violations as a fine of five hundred pesos for each day during which the violation is continued or repeated, with subsidiary imprisonment as prescribed by law.

Domestic banks and corporate approvals

Section 7 provides that domestic banking institutions, except building and loan associations, must be organized as stock corporations.
Section 8 prohibits banking institutions from issuing no-par value stock.
Section 9 provides that the Securities and Exchange Commissioner may not register a bank’s articles of incorporation or amendments unless accompanied by a certificate of authority issued by the Monetary Board under its official seal.
Section 9 provides that the Monetary Board must not issue the certificate unless satisfied that: (a) legal and regulatory requirements to engage in the proposed business are complied with; (b) public interest and economic conditions justify the authorization; and (c) capital, financing, organization, direction and administration, and the integrity and responsibility of organizers and administrators reasonably assure safety of public interests.
Section 10 provides that the Securities and Exchange Commissioner may not register a bank’s by-laws (or amendments) unless accompanied by a Monetary Board certificate that the by-laws or amendment are in accordance with law.

Ownership and board citizenship rules

Section 12 requires that at least 60% of the capital stock of any banking institution established after approval of the Act must be owned by citizens of the Philippines.
Section 13 requires that at least two-thirds of the members of the board of directors of any bank or banking institution established after approval of the Act must be citizens of the Philippines.
Section 11 prohibits, after approval of the Act, banks established and licensed to do business in the Philippines from receiving deposits unless incorporated under Philippine laws.
Section 11 provides exceptions for branches and agencies of foreign banks that, at the time of approval of the Act, are actually receiving deposits, and mandates that after passage of the Act their deposits must not be invested outside the territorial limits of the Republic of the Philippines.

Licensing and service for foreign banks

Section 14 prohibits any foreign bank or banking corporation formed, organized, or existing under laws other than those of the Republic of the Philippines from transacting business in the Philippines, or from maintaining any suit for recovery of any debt or claim, until it obtains a license upon order of the Monetary Board from the Securities and Exchange Commissioner.
Section 14 provides criminal liability for officers, directors, or agents who transact business without the license: imprisonment of not less than one year nor more than ten years and a fine of not less than one thousand pesos nor more than ten thousand pesos.
Section 14 requires that, for issuance of such license, the Securities and Exchange Commissioner collects a fee proportional to corporate capital according to the schedule established in Section eight of Act Numbered Fourteen hundred and fifty-nine, as amended.
Section 14 prohibits a Monetary Board order for the license unless convinced that public interest and economic conditions justify issuance, the foreign bank is solvent and in sound financial condition, and a duly appointed Philippine agent is authorized to accept summons and legal processes.
Section 15 prohibits foreign building and loan associations or building and loan associations not formed under Philippine laws from transacting business in the Philippines.

Revocation, hearings, and protective actions

Section 16 provides that the Monetary Board may revoke a foreign bank’s license (with affirmative vote of at least five members and with approval of the President) if, after due investigation with an opportunity to be heard, the bank is in imminent danger of insolvency or its continuance will involve probable loss to persons transacting business with it.
Section 16 provides that after revocation it is unlawful for the foreign bank to transact business unless its license is renewed or reissued.
Section 16 directs that after revocation, the Solicitor General shall take proper proceedings to protect creditors of the foreign bank and the public.
Section 17 provides rules on service of summons and legal process on the Philippine agent: service upon the agent gives courts jurisdiction over the corporation, and service of notices on the agent binds the corporation as if made on the corporation itself.
Section 17 requires the corporation to designate promptly another agent and file a duly authenticated nomination with the Securities and Exchange Commissioner if the agent’s authority is revoked, or if the agent becomes mentally incompetent or otherwise unable to accept service.
Section 17 provides that if no person is authorized for service, service may be made upon the Superintendent of Banks, and such service is effective as if made upon the corporation; the Superintendent must register and mail a certified copy to the corporation’s president or secretary at its head office, and the registry receipt is prima facie evidence of transmission; the party making the service pays the Superintendent’s costs in advance.

Commercial banking—powers and credit limits

Section 20 defines a commercial banking corporation as one that accepts or creates demand deposits subject to withdrawal by check.
Section 21 provides that a commercial bank may, besides general corporate powers, carry on commercial banking by accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of indebtedness; receiving deposits; buying and selling foreign exchange and gold or silver bullion; and lending money secured by personal security or by securities consisting of personal property or first mortgages on improved real estate and insured improvements.
Section 21 prohibits real estate loans from having maturity in excess of fifteen years and limits the aggregate of such real estate security loans to 70% of the bank’s total savings deposits.
Section 21 allows a commercial bank to accept real estate security to protect itself from loss on a loan previously contracted in good faith, and to exclude from the limitations loans arising out of the sale of property owned by the bank.
Section 21 provides that the Monetary Board generally shall not permit commercial banks to invest in securities with maturities greater than three years from date of acquisition in excess of 20% of total deposits, except in exceptional circumstances.

Capital adequacy, profit use, and new investment limits

Section 22 requires combined capital accounts of each commercial bank to be at least an amount equal to 15% of total assets, excluding: (a) cash on hand; (b) amounts due from banks (home and abroad) including deposits with the Central Bank; and (c) evidences of indebtedness of the Republic of the Philippines and the Central Bank and other fully guaranteed obligations.
Section 22 mandates that the Monetary Board prescribes the manner of determining total assets, and provides that contingent accounts are not defined as included among total assets.
Section 22 requires that when a bank’s capital accounts are deficient, the Monetary Board—after considering the Superintendent of Banks’ solvency report—must limit or prohibit distribution of net profits and require part or all of net profits to be used to increase capital accounts until the minimum requirement is met.
Section 22 authorizes the Monetary Board, after considering the solvency report and where deficiency justifies it, to restrict or prohibit new investments of any sort except readily marketable evidences of indebtedness under Section 22(c), until the minimum capital ratio is restored.

Borrower exposure ceilings for commercial banks

Section 23 limits total liabilities of any borrower to a commercial banking corporation for money borrowed (with enumerated exceptions) to 15% of the unimpaired capital and surplus at all times.
Section 23 allows total liabilities to be further 15% of unimpaired capital and surplus (i.e., up to an additional 15%) if adequately secured by shipping documents, warehouse receipts, or similar documents transferring or securing title covering readily marketable, nonperishable staples fully covered by insurance, with market value at least 125% of such additional liabilities.
Section 23 defines “liabilities” for this purpose to include direct liability of makers/acceptors of discounted/sold paper and liability of indorsers/drawers/guarantors obtaining loans from or discounting paper under their guaranty, and to include liabilities of partners, and all subsidiary liabilities where a corporation owns or controls a majority interest.
Section 23 excludes from “money borrowed” the discount of bills of exchange drawn in good faith against actually existing values and discount of commercial or business paper actually owned by the negotiator.

Prohibited self-share lending and quick disposition

Section 24 prohibits a commercial bank from making any loan or discount secured by the security of the bank’s own capital stock, and from purchasing or holding its own shares, except where necessary to prevent loss upon a debt previously contracted in good faith.
Section 24 requires that bank-held shares acquired for such protection or for other reasons in the course of operations must be sold or disposed of within six months; otherwise, a receiver must be appointed to close the bank in accordance with law.

Real estate acquisitions and holding period

Section 25 authorizes a commercial bank to purchase, hold, and convey real estate for immediate accommodation in business, mortgaged to it in good faith as security for debts, conveyed to it in satisfaction of debts, and purchased at sales under judgments, decrees, mortgages, or trust deeds, or to secure debts due to it.
Section 25 restricts the total investment in real estate and improvements for immediate accommodation to 25% of paid-up capital stock and surplus.
Section 25 prohibits holding mortgaged or purchased real estate under title and possession for longer than five years.

Branching and liquidation power

Section 27 authorizes a commercial bank organized under Philippine laws, with prior approval of the Monetary Board, to establish branches in the Philippines and branches or agencies outside the Philippines; the bank is responsible for business in branches as if conducted in the head office.
Section 27 requires that, for purposes of the Act, a bank and its branches are treated as a unit.
Section 28 authorizes the Monetary Board, with affirmative vote of at least five members, to compel the head office to liquidate a branch or agency if the branch is conducted unlawfully or in a manner likely to prejudice creditors of the branch or head office.

Savings and mortgage banks—permitted lending

Section 29 defines a savings and mortgage bank as a corporation organized primarily to accumulate small savings of depositors and invest them, together with its capital, in bonds, or in loans secured by bonds, real estate mortgages, and other forms of security as provided in the Act.
Section 30 requires combined capital accounts of each savings and mortgage bank to be at least 15% of total assets after deducting: (a) cash on hand; (b) amounts due from banks including deposits with the Central Bank; and (c) evidences of indebtedness of the Republic of the Philippines and the Central Bank and other fully guaranteed obligations.
Section 30 provides the Monetary Board’s powers when capital accounts are deficient: limit/prohibit net profit distribution and require use of net profits to increase capital accounts until minimum is met; and restrict/prohibit new investments (except specified evidences of indebtedness under Section 30(c)) until minimum capital ratio is restored.
Section 31 limits savings and mortgage banks’ loans and investments to the enumerated categories, including—among others—loans secured by their own savings deposit obligations or mortgage/chattel mortgage bonds they issued; medium-term agricultural livestock breeding loans up to three years with principal security lien on animals and specified borrowing limits; equipment loans up to five years for agricultural/industrial production with first lien on acquired assets (plus optional additional security); and mortgage loans with specified maturities (up to ten years for productive property improvements; and real estate mortgage loans up to twenty years for specified purposes).
Section 31 limits other investments and collateral categories, including a cap for the investments arising from endorsed/accepted commercial transactions at 10% of total assets, plus detailed constraints for collateral trust bonds/notes and bullion pledge loans (including caps of 90% of pledge value and other valuation ceilings).
Section 31 provides that savings and mortgage banks operating on the approval date and engaged in lending against the pledge of jewelry, precious stones, and articles of similar nature may continue that business notwithstanding contrary provisions.

Savings banks—direct indebtedness ceiling

Section 32 limits direct indebtedness to a savings and mortgage bank of any person/company/corporation/firm (including members’ indebtedness) to 25% of unimpaired capital and surplus, with an exception that the limitation does not apply to loans under Section 31(f).

Mortgage/chattel certificates and matching liquidity

Section 33 allows savings and mortgage banks, with Monetary Board approval, to issue mortgage and chattel mortgage certificates, buy and sell them for their own account or others, or accept them in payment or as amortization of loans.
Section 33 requires that certificates be issued exclusively in national currency and exclusively for financing the loans enumerated in Section 31(b), (c), and (d).
Section 33 authorizes the Monetary Board to issue regulations on maturities, rates of interest, denominations, and other conditions.
Section 33 requires the bank to strive to coordinate amounts and maturities of certificates with those of its loans to ensure adequate cash receipts for principal and interest payments when due.
Section 33 provides that the bank must accept its own certificates at least at the actual issue price for prepayment of loans by mortgagors, with the certificate maturity not later than the otherwise due date.

Savings bank deposit rights and reserves

Section 35 allows married women and minors to make deposits and withdraw in their own right and name and to receive dividends and interest.
Section 35 provides that if a guardian gives written notice to a savings bank not to make payments to the minor, then payments of deposits, dividends, or interest must be made only to the guardian.
Section 36 requires savings deposits to be returned to depositors or legal representatives upon petition in the manner, at the time, and under conditions determined by the board of directors and stipulated in regulations conforming to law and Monetary Board regulations.
Section 37 requires savings and mortgage banks to maintain on deposit with the Central Bank reserves against their deposit liabilities as the Monetary Board determines under the Central Bank Act.

Deposit calls and criminal exposure

Section 38 prohibits a savings bank, after a call by depositors for repayment that reduces its legal reserves below the Monetary Board-required minimum, from making any new loans or investments of deposit funds or earnings of deposit funds until the deposit call is satisfied and legal reserves are restored to the required minimum.
Section 38 penalizes violations by imprisonment of not less than one year nor more than ten years and a fine of not less than one thousand pesos nor more than ten thousand pesos for any officer or director who makes or causes such prohibited loans or investments.

Building and loan associations—permitted objects

Section 39 defines building and loan association as a corporation whose capital stock is paid in by stockholders through regular, equal periodical payments; whose purposes are to accumulate stockholders’ savings, repay accumulated savings and profits upon surrender of shares; encourage industry, frugality, and home building; and loan its funds and borrowed funds to stockholders secured by unencumbered real estate and pledged shares as collateral security.
Section 39 mandates that “mutual building and loan association” form part of every such association’s name.
Section 39 prohibits building and loan associations from making loans on property suitable for specified public or institutional buildings such as theater, public hall, church, convent, school, club, hotel, garage, or other public building, and allows the Monetary Board to waive this prohibition in special instances for cases including public hall, school, hotel and other public buildings.
Section 39 allows, with Monetary Board approval, investment of idle funds in bonds and obligations of the Republic, political subdivisions, and government-owned or controlled corporations, including the Central Bank.
Section 40 requires articles of incorporation to state the association’s purpose as set forth in Section 39.

Building and loan associations—loan caps

Section 41 allows any person to become a stockholder by subscribing for one or more shares and signing the by-laws with post office address.
Section 41 restricts borrowing: no member may borrow on real estate security from an association with assets of one hundred thousand pesos or more in excess of ten per cent (10%) of total assets, and no loan on any one piece of real estate may exceed ten per cent (10%) of total assets.
Section 41 provides a lower asset bracket rule: if assets are less than one hundred thousand pesos, no loan to any one borrower and no loan on any one piece of real estate shall exceed ten thousand pesos.
Section 41 grants the Monetary Board power to issue regulations governing the manner of determining such assets for computing the limitations.

Paid-in capital, dues, forfeiture, and maturity

Section 42 provides that capital stock must be paid in through regular, equal periodical payments called dues as provided in by-laws; dues on each share continue until withdrawal, cancellation, forfeiture, or matured value.
Section 42 authorizes the issuance and sale of paid-up stock and investment stock payable in installments, with dividends fixed by the board of directors and expressed in stock certificates; paid-up stock issued after Act effectiveness is not entitled to vote, and dividends are not cumulative.
Section 44 allows the association to charge a membership or entrance fee not exceeding one peso per share and a transfer fee not exceeding twenty centavos per share transferred; all such fees go into the association treasury.
Section 46 provides that if a stockholder is six months in arrears on free shares, the secretary or clerk must notify by mailing a statement of arrearages to the stockholder’s last post office address, and forfeiture may be declared if full payment is not made within two months after receipt of notice.
Section 47 provides that when shares reach matured value, payment of dues ceases and matured value is paid from association funds with interest at the rate in by-laws; the association’s by-laws must prescribe payout order and cap monthly allocation: never more than one-third of receipts can be applied to payment of matured shares without board consent and Monetary Board approval.

Association borrowing, loan documentation, and enforcement

Section 48 allows borrowing for temporary uses by majority vote of all directors, consistent with objects of the association, with aggregate outstanding indebtedness not exceeding 50% of capital stock actually paid in (excluding indebtedness to the Central Bank).
Section 49 requires that every loan must be evidenced by a writing and secured by a first mortgage or deed of trust on unencumbered real estate and also by a pledge of association shares whose matured value at least equals the loan amount, with a free-shares exception where withdrawal value of free shares exceeds the amount borrowed and interest and fines due thereon for six months.
Section 52 provides that when a borrowing stockholder is three months in arrears on stock dues or loan interest/premium/installments, the whole loan becomes due at board option, and the board may enforce collection on securities held; withdrawal value of pledged shares must be applied to pay the loan and the shares are deemed surrendered as of application.

Withdrawal, surrender, profit distribution, and reserve

Section 54 allows stockholders to surrender shares and withdraw after paying twelve monthly installments and giving sixty days written notice to the board; withdrawal value is dues paid plus not less than 90% of dividends earned up to the end of the last fiscal period plus interest for time elapsed as allowed by the board.
Section 54 allows surrender and withdrawal without the twelve installments after giving sixty days notice, with withdrawal value computed as dues paid plus allowed dividend or interest, and imposes a monthly cap: in no event can more than one-third of total receipts be paid in any one month to retire shares.
Section 54 provides that withdrawal payments are made in order notices are received and that if the association shows a loss in excess of reserve during the withdrawing member’s stockholder period, the withdrawal value is charged with the member’s proportionate share of the excess loss; lawful fines or charges against shares may be deducted before payment.
Section 54 prohibits the board from forcing surrender and withdrawal of unmatured shares except in voluntary or forced liquidation or forfeitures under Section 46.
Section 55 requires annual profit determination and apportionment based on actual value (not withdrawal value), deducting expenses and losses; mandates that 5% of net earnings be credited to a reserved account until reserve equals 5% of total assets, with the reserve maintained at 5% and available to meet losses.
Section 55 provides that upon liquidation, any remaining part of the reserve after charging off losses and defraying liquidation expenses escheats to the State.

Trust corporations—scope and capital-security

Section 56 defines a trust corporation or company as a corporation formed or organized for acting as trustee, administering trust property, or holding property in trust or on deposit for the use and benefit of others.
Section 57 authorizes a trust company, with Monetary Board approval, to do commercial banking business only if kept separate and distinct from its trust business, and provides that Chapter IV rules on commercial banking apply to the commercial banking activities.
Section 58 grants trust companies powers to act as trustee/executor/administrator/guardian/receiver/depositary and to execute legal trusts conferred by courts of record or persons or corporations, and to accept and manage estates and their rents, issues, and profits.
Section 59 generally exempts trust companies from needing bond or other security for faithful performance, but allows the court officer appointing the company to require adequate security upon proper application showing special cause; failure revokes appointment; courts require reports, accounts, and duties as for natural persons.
Section 61 requires trust companies to keep trust moneys, properties, and securities received in fiduciary capacities separate and distinct from general business assets, and to keep corresponding accounts separate.

Lending limits for trust businesses

Section 62 provides that a trust company must not accept any trust that it would be unlawful for an individual to accept, and must execute lawful trusts according to their terms.
Section 63 limits lending or investment of deposits/moneys received in fiduciary capacities (unless the trust instrument otherwise directs) to the loans and investments enumerated in Section 31 of Chapter V (Savings and Mortgage Banks).
Section 63 penalizes officers or directors authorizing or making loans secured otherwise than as provided: imprisonment of not less than one year nor more than ten years and a fine of not less than one thousand pesos nor more than ten thousand pesos.

Trust capital deposit and dividend surplus

Section 65 requires every trust company, before transacting trust business, to carry on deposit with the Central Bank cash or approved securities in an amount not less than two hundred and fifty thousand pesos, with the Monetary Board able to require increases due to growth of trust business.
Section 65 requires that paid-in capital and surplus be at least equal to the amount required for Central Bank deposit; if capital and surplus fall below, the Monetary Board exercises the same authority granted to it under Section 22’s last paragraph.
Section 65 grants the trust company the right to collect interest earned on deposited securities and to exchange securities from time to time with Monetary Board approval; it provides priority of claims arising out of trust business over other claims regarding the deposited securities, and prohibits reduction of securities below two hundred and fifty thousand pesos until trust business stops and the Monetary Board is satisfied that obligations are complied with.
Section 66 requires that before declaring dividends, trust companies carry to surplus 10% of net profits accruing since the last preceding dividend until surplus reaches 20% of authorized capital stock, and prohibits paying any part of surplus as dividends