Law Summary
Definition and Classification of Banks
- Banks are entities engaged in lending funds obtained from deposits.
- Classified as Universal Banks, Commercial Banks, Thrift Banks (including savings, mortgage, savings and loan, private development banks), Rural Banks, Cooperative Banks, Islamic Banks, and other classifications by the Monetary Board.
Authority of the Bangko Sentral ng Pilipinas (BSP)
- BSP has supervisory powers over banks and quasi-banks, issuing rules and conducting examinations.
- Includes overseeing compliance, conducting investigations, and enforcing corrective actions.
- Regulates money, banking, and credit policies with prescribed ratios and limits, adhering to international standards.
- No person or entity may engage in banking or quasi-banking without BSP authority.
- BSP can examine books and records to determine unauthorized operations.
Organization, Management, and Administration of Banks
- Banks must be stock corporations with funds from at least 20 persons.
- Minimum capital requirements apply per bank category.
- New commercial banks restricted from establishment for 3 years from the Act's effectivity.
- Monetary Board regulates stock issuance, treasury stock acquisition, and foreign ownership (up to 40%).
- Family and related group stockholdings require full disclosure.
- Articles of incorporation and amendments require Monetary Board certificate of authority.
- Board of Directors must have 5 to 15 members, including at least 2 independent directors.
- Fit and proper criteria for directors and officers, including disqualification.
- Public officials generally prohibited from serving as bank officers.
- Branch openings require BSP approval; banks responsible for all branch transactions.
- Banks must operate at least six hours on working days and may open on weekends or holidays with BSP notice.
- Banking industry declared indispensable; strikes or lockouts unresolved after 7 days are subject to government intervention.
Operations of Universal Banks
- Possess commercial bank powers plus investment house powers.
- May invest in allied and non-allied enterprises, subject to limits: total investments up to 50% of net worth; single enterprise up to 25%.
- Can wholly own thrift or rural banks and non-financial allied enterprises.
- Investment in non-allied enterprises capped at 35% equity and voting stock.
- Equity investment in quasi-banks limited to 40%.
Operations of Commercial Banks
- Powers include accepting drafts, discounting notes, handling deposits, foreign exchange, and extending credit.
- Can invest only in allied enterprises, with total investments capped at 35% of net worth; single enterprise not exceeding 25%.
- May own 100% of thrift or rural banks; other financial allied enterprises investments must remain minority holdings.
- 100% ownership allowed in non-financial allied enterprises.
Provisions Applicable to All Banks, Quasi-Banks, and Trust Entities
- Demand deposits acceptance by non-universal/commercial banks requires BSP approval.
- Risk-based capital ratio prescribed by Monetary Board, based on international standards.
- Single borrower lending limit is 20% of bank's net worth, with possible increase to 30% under secured conditions.
- Loans to directors, officers, stockholders, and related interests regulated; individual loans limited to their unencumbered deposits and paid-in capital.
- Loans secured by real estate limited to 75% of appraised land value plus 60% of improvements.
- Loans secured by chattels/intangible assets limited to 75% of appraised value.
- Loans must be consistent with safe banking practices and used only for stated purposes.
- Banks must ascertain borrower's capacity to repay via financial disclosures; false statements permit loan termination.
- Monetary Board regulates unsecured loans.
- Monetary Board may prescribe additional or reduced security requirements and terms of loans.
- Amortization schedules adapted to operation nature; microfinance borrowers' schedules consider cash flow.
- Prepayment of loans allowed under agreed terms.
- Incentives for loans financing social activities without government guarantees.
- Mortgagors have a right to redeem property sold in foreclosure within one year.
- Monetary Board regulates loan renewals and provisions for bad debts.
- Investments in real estate limited to 50% of capital accounts.
- Banks may acquire real estate in satisfaction of claims but must dispose of within 5 years.
- Banks may provide custodial and agency services; prohibited from directly engaging in insurance business.
- Prohibitions on fraudulent acts by bank personnel, borrowers, and examiners established.
- Unsafe or unsound business practices subject to corrective actions.
- Dividend declarations limited to accumulated profits; conditions apply on liquidity and compliance.
- Monetary Board may require independent auditors.
- BSP regulates electronic banking transactions.
- Banks must submit and publish financial statements regularly, with public disclosure mandates.
Placement under Conservatorship
- Governed by provisions in the New Central Bank Act; applies also to quasi-banks.
Cessation of Banking Business
- Voluntary liquidation requires BSP notice; BSP may intervene to protect creditors.
- Receivership and involuntary liquidation procedures follow New Central Bank Act rules.
- Penalties for directors/officers who handle insolvent banks improperly include criminal sanctions.
Other Types of Banks
- Thrift, rural, cooperative, and Islamic banks governed primarily by their respective laws.
- Provisions of this Act apply to them unless conflicting with special laws.
Foreign Banks
- Entry regulated by Foreign Banks Liberalization Act and Offshore Banking System Decree.
- Foreign banks may acquire up to 100% of one domestic bank's stock within 7 years.
- Branches treated as a single entity; head office guarantees liabilities.
- Legal process served via designated agents; BSP may be served if no agent exists.
- Foreign banks subject to this Act except on corporate formation matters.
- BSP may revoke foreign bank licenses for insolvency or potential loss risks.
Trust Operations
- Only authorized stock corporations or persons may act as trust entities.
- Trust entities manage property with diligence; transactions with insiders disclosed and regulated.
- Articles and by-laws require BSP certificate.
- Minimum capitalization set by BSP.
- Powers include acting as trustee, executor, administrator, guardian, and managing trusts.
- Trust entities must deposit securities or cash as security for faithful performance.
- Courts may reduce bonds for fiduciaries who place assets with trust entities.
- Trust business assets held separately from general business.
- Investment limitations set for trust funds.
- Trust entities exempt from bond requirements unless court orders otherwise.
- Branch establishments require BSP approval.
- Violation penalties align with the Act and New Central Bank Act.
Final Provisions
- BSP authority over building and loan associations to be phased out in 3 years.
- Inconsistent laws repealed.
- Separability and effectivity clauses included.
This comprehensive explanation covers all critical aspects of the law including its scope, regulatory authority, classification, organizational rules, operational mandates, capital and investment limits, supervisory mechanisms, penalties, and special provisions for foreign banks and trust entities.