Regulation of banks, quasi-banks, trust entities

Issuing authority, supervision, and scope

Bangko Sentral ng Pilipinas supervision governs the operations and activities of covered institutions (Section 4).
“Supervision” includes rulemaking, examination, ensuring compliance, investigation, solvency/liquidity review, and enforcing prompt corrective action (Section 4).
The Bangko Sentral also supervises quasi-banks, trust entities, and other financial institutions that, under special laws, are subject to Bangko Sentral supervision (Section 4).
“Quasi-banks” are entities engaged in borrowing funds through the issuance, endorsement or assignment with recourse, or acceptance of deposit substitutes (as defined in Section 95 of Republic Act No. 7653), for purposes of relending or purchasing receivables and other obligations (Section 4).
The Bangko Sentral’s supervisory powers extend to examining related enterprises wholly or majority-owned or controlled by a bank (Section 7).

Definitions and classification of banks

“Banks” refer to entities engaged in the lending of funds obtained in the form of deposits (Section 3).
Banks are classified into:
- Universal banks
- Commercial banks
- Thrift banks, composed of: (i) savings and mortgage banks, (ii) stock savings and loan associations, and (iii) private development banks, as defined in Republic Act No. 7906
- Rural banks, as defined in Republic Act No. 7353
- Cooperative banks, as defined in Republic Act No. 6938
- Islamic banks, as defined in Republic Act No. 6848 (Charter of Al Amanah Islamic Investment Bank of the Philippines)
- Other classifications determined by the Monetary Board (Section 3).

Organization, management, and corporate governance

The Monetary Board may authorize the organization of a bank or quasi-bank only if:
- it is a stock corporation;
- its funds are obtained from the public, meaning twenty (20) or more persons; and
- it meets minimum capital requirements prescribed by the Monetary Board (Section 8).
A new commercial bank may not be established within three (3) years from the effectivity of the Act, and the Monetary Board must consider financial resources, technical expertise, and integrity (Section 8).
The Monetary Board must incorporate an assessment of ownership structure, directors and senior management, operating plan and internal controls, and projected financial condition and capital base in the licensing process (Section 8).
Banks must issue par value stocks only; the Monetary Board may prescribe permissible stock types, terms, and rights appurtenant to them (Section 9).
A bank may not purchase or acquire shares of its own capital stock or accept its own shares as security for a loan unless authorized by the Monetary Board; any acquired stock must be sold or disposed of within six (6) months (Section 10).
Foreign stockholdings: foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank; this applies to Filipinos and domestic non-bank corporations (Section 11).
The percentage of foreign-owned voting stock is determined by the citizenship of individual stockholders, and corporate citizenship follows the controlling stockholders’ citizenship regardless of place of incorporation (Section 11).
“Family groups or related interests” are stockholdings of individuals related within the fourth degree of consanguinity or affinity (legitimate or common-law); all relevant transactions with the bank must be fully disclosed (Section 12).
Two or more corporations owned or controlled by the same family groups or group of persons are considered related interests and must disclose dealings with the bank (Section 13).
The Securities and Exchange Commission may not register a bank’s articles of incorporation (or amendments) without a certificate of authority from the Monetary Board under its seal; the certificate requires satisfaction that (i) existing legal requirements for banking are met, (ii) public interest and economic conditions justify authorization, and (iii) capital, organization, direction and administration, and organizer/admin integrity reasonably assure safety of deposits and public interest (Section 14).
The SEC may not register a bank’s bylaws (or amendments) without a certificate of authority from the Bangko Sentral (Section 14).
Board of directors:
- must have at least five (5) and not more than fifteen (15) members;
- must include two (2) independent directors; and
- an independent director is a person other than an officer or employee of the bank, its subsidiaries or affiliates, or related interests (Section 15).
Non-Filipino citizens may sit on the board only to the extent of foreign participation in equity (Section 15).
Board meetings may be conducted through modern technologies such as teleconferencing and video-conferencing (Section 15).
The Monetary Board prescribes and reviews qualifications and disqualifications of directors and officers and may disqualify, suspend, or remove an unfit director or officer after due notice (Section 16).
Fit-and-proper determinations consider integrity, experience, education, training, and competence (Section 16).
In bank mergers or consolidations, the number of directors must not exceed twenty-one (21) (Section 17).
Compensation and other benefits: the Monetary Board may regulate compensation, allowances, fees, bonuses, stock options, profit sharing, and fringe benefits only in exceptional cases and when circumstances warrant, including when the bank is under comptrollership or conservatorship; when the bank conducts business in an unsafe or unsound manner; or when the bank has an unsatisfactory financial condition (Section 18).
Public officials: except as otherwise provided in the Rural Banks Act, no appointive or elective public official may simultaneously serve as an officer of any private bank, unless service is incident to government financial assistance or is otherwise allowed under existing laws (Section 19).
Bank branches and offices:
- universal or commercial banks may open branches or offices within or outside the Philippines upon prior Bangko Sentral approval;
- other banks’ branching is governed by pertinent laws; and
- branches are treated as one unit with the head office and the bank is responsible for branch business as if conducted in the head office (Section 20).
Banking days and hours:
- banks transact business on all working days for at least six (6) hours a day unless otherwise authorized;
- banks may open at least three (3) hours a day on Saturdays, Sundays, or holidays; banks that open on other days must report additional days; and
- working days mean Mondays to Fridays, except if such days are holidays (Section 21).
Strikes and lockouts: if a strike or lockout involving banks remains unsettled after seven (7) calendar days, it must be reported by the Bangko Sentral to the Secretary of Labor, who may assume jurisdiction, decide the dispute, or certify it to the NLRC for compulsory arbitration; the President may intervene and assume jurisdiction to settle or terminate (Section 22).

Powers for universal and commercial banking

A universal bank may exercise, in addition to commercial bank powers under Section 29, the powers of an investment house under existing laws and the power to invest in non-allied enterprises under the Act (Section 23).
Universal bank equity in allied and non-allied enterprises:
- total equity investments in allied and non-allied enterprises may not exceed fifty percent (50%) of net worth;
- equity investment in any one enterprise (allied or non-allied) may not exceed twenty-five percent (25%) of net worth; and
- equity acquisitions require prior approval of the Monetary Board, with guidelines to govern investments (Section 24).
“Net worth” means total unimpaired paid-in capital including paid-in surplus, retained earnings, and undivided profit, net of valuation reserves and other adjustments required by the Bangko Sentral (Section 24).
A universal bank may own up to one hundred percent (100%) of the equity of a thrift bank, rural bank, or financial allied enterprise (Section 25).
A publicly-listed universal or commercial bank may own up to one hundred percent (100%) of the voting stock of only one (1) other universal or commercial bank (Section 25).
A universal bank may own up to one hundred percent (100%) of the equity of a non-financial allied enterprise (Section 26).
Equity investment of a universal bank (or its wholly or majority-owned subsidiaries) in a single non-allied enterprise may not exceed thirty-five percent (35%) of the total equity in that enterprise and may not exceed thirty-five percent (35%) of the voting stock in that enterprise (Section 27).
The Monetary Board may limit universal banks’ equity investments in quasi-banks to forty percent (40%), and the same limit applies to commercial banks (Section 28).

Core commercial banking powers

A commercial bank may do commercial banking activities including:
- accepting drafts and issuing letters of credit;
- discounting/negotiating promissory notes, drafts, bills of exchange, and other evidences of debt;
- accepting or creating demand deposits and receiving deposits and deposit substitutes;
- buying and selling foreign exchange and gold or silver bullion;
- acquiring marketable bonds and other debt securities;
- extending credit subject to Monetary Board rules on eligibility, maturities, and aggregate amounts of investment (Section 29).
A commercial bank may invest only in equities of allied enterprises as determined by the Monetary Board (allied enterprises may be financial or non-financial), with limits:
- total allied equity investments not exceeding thirty-five percent (35%) of net worth; and
- investment in any one enterprise not exceeding twenty-five percent (25%) of net worth;
- subject to Monetary Board prior approval and guidelines (Section 30).
A commercial bank may own up to one hundred percent (100%) of the equity of a thrift bank or rural bank (Section 31).
In other financial allied enterprises (including another commercial bank), the commercial bank’s holding must remain a minority holding (Section 31).
A commercial bank may own up to one hundred percent (100%) of the equity of a non-financial allied enterprise (Section 32).

Universal, commercial, and deposit-taking rules

Demand deposits: a bank other than a universal or commercial bank may not accept or create demand deposits without prior Monetary Board approval and subject to conditions and rules the Monetary Board prescribes (Section 33).
Risk-based capital:
- the Monetary Board prescribes the minimum ratio of net worth to total risk assets (which may include contingent accounts);
- the Monetary Board may require computation based on a bank and its subsidiaries, and prescribe composition and determining manner of net worth and risk assets;
- the ratio must conform, as far as feasible, to internationally accepted standards including BIS standards;
- compliance may be altered or suspended for a maximum period of one (1) year; and
- the ratio applies uniformly to banks of the same category (Section 34).
If a bank fails to meet the minimum risk-based capital ratio, the Monetary Board may:
- limit or prohibit distribution of net profits and require that net profits be used to increase capital until the minimum requirements are met;
- restrict or prohibit acquisition of major assets and new investments (except purchases of readily marketable evidences of indebtedness of the Republic of the Philippines and Bangko Sentral and other evidences fully guaranteed by the Republic of the Philippines) until the capital ratio is restored (Section 34).
The Monetary Board may temporarily relieve full compliance with the capital ratio for surviving or consolidated banks in a merger or consolidation, or when under a rehabilitation program approved by the Bangko Sentral, subject to conditions the Monetary Board prescribes (Section 34).
Before the effectivity of Monetary Board rules under this risk-based capital authority, the continued force of certain provisions is governed by existing referenced provisions of Section 22 of the General Banking Act (as amended) and Section 9 of the Thrift Banks Act, including pertinent rules (Section 34).
Limit on loans/credit accommodations/guarantees (single-borrower limit):
- total loans, credit accommodations, and guarantees (as defined by Monetary Board) extended by a bank to any person, partnership, association, corporation, or entity may not exceed twenty percent (20%) of the bank’s net worth at any time, except for reasons of national interest where the Monetary Board may otherwise prescribe;
- the basis for compliance is the bank’s total credit commitment to the borrower (Section 35.1).
Collateralized additional headroom: unless the Monetary Board prescribes otherwise, ceilings may be increased by an additional ten percent (10%) of net worth if the additional liabilities are adequately secured by trust receipts, shipping documents, warehouse receipts, or similar documents transferring or securing title covering readily marketable, non-perishable goods fully covered by insurance (Section 35.2).
The ceilings include specified liabilities, including direct liability of makers/acceptors/paper discounted/sold, general indorser/drawer/guarantor liabilities when obtaining loans or discounting papers, and aggregated liabilities of controlled corporations/subsidiaries/members/other related entities as enumerated (Section 35.3).
The Monetary Board may prescribe combinations of liabilities among parents and controlled entities or affiliates in specified circumstances including guarantee, accommodation for another subsidiary, or subsidiaries operating merely as departments/divisions of a single entity (Section 35.4).
Exclusions from these limits cover enumerated categories such as loans secured by Bangko Sentral or Philippine Government obligations; loans fully guaranteed by the government; loans under assignment of deposits maintained in the lending bank; letters of credit covered by margin deposits; and other non-risk items the Monetary Board specifies (Section 35.5).
Loans and other credit accommodations to any other bank or non-bank entity (including deposits maintained with, and usual guarantees by a bank) are subject to the prescribed limits (Section 35.6).
Certain contingent accounts may be included among those subject to limits as determined by the Monetary Board (Section 35.7).

Conflicts, exposure limits, and credit security

Insider lending and guarantees:
- no director or officer of any bank may borrow from the bank, become a guarantor/indorser/surety for loans from the bank to others, or incur contractual liability to the bank except with written approval of a majority of all directors excluding the director concerned (Section 36).
- written approval is not required for loans, credit accommodations, and advances to officers under a fringe benefit plan approved by the Bangko Sentral (Section 36).
- required approval must be entered into the bank records and a copy must be transmitted forthwith to the appropriate supervising and examining department of the Bangko Sentral (Section 36).
Bank dealings with directors, officers, stockholders, and related interests must be on terms not less favorable than those offered to others (Section 36).
After due notice to the board, an office of a bank director or officer violating Section 36 may be declared vacant, and the director or officer is subject to penal provisions under the New Central Bank Act (Section 36).
The Monetary Board may regulate amounts of loans, credit accommodations, guarantees, and investments extended to directors/officers/stockholders and related interests, with individual limits tied to unencumbered deposits and paid-in capital contribution, and with exclusions for non-risk assets and fringe benefit loans granted under Monetary Board rules (Section 36).
The limit does not apply to loans, credit accommodations, and guarantees a cooperative bank extends to its cooperative shareholders (Section 36).
“Related interests” is defined by the Monetary Board (Section 36).
Real estate mortgage loans: loans and credit accommodations secured by real estate may not exceed seventy-five percent (75%) of the appraised value of the real estate security plus sixty percent (60%) of the appraised value of the insured improvements; such loans may be made to the owner or his assignees (Section 37).
Chattels and intangible collateral loans: loans and credit accommodations secured by chattels and intangible properties (patents, trademarks, trade names, copyrights) may not exceed seventy-five percent (75%) of appraised collateral value, and may be made to the title-holder or his assignees (Section 38).
Loan purpose and safe-and-sound lending:
- banks grant loans and credit accommodations only in amounts and for periods essential to complete the operation financed and consistent with safe and sound banking practices (Section 39).
- the purpose must be stated in the application and contract; if proceeds are employed for purposes other than agreed, the bank may terminate the loan/credit and demand immediate repayment (Section 39).
Credit capacity and verified financial statements:
- banks must ascertain the debtor’s capacity to fulfill commitments (Section 40).
- banks may demand statements of assets and liabilities, income and expenditures, and other information required by law or Monetary Board rules, including financial statements submitted for taxation to the Bureau of Internal Revenue (Section 40).
- if statements prove false or incorrect in material detail, the bank may terminate the loan/credit and demand immediate repayment or liquidation (Section 40).
- Monetary Board rules must recognize microfinance characteristics, including cash-flow-based lending to basic sectors not covered by traditional collateral (Section 40).
The Monetary Board may issue regulations on unsecured loans (Section 41).
The Monetary Board may prescribe further security requirements, reduce maximum ratios in Sections 36 and 37, and in special cases increase those maximum ratios (Section 42).
The Monetary Board may prescribe maturities and related terms and conditions for various types of loans, and any change in maximum maturities applies only to loans made after the change date (Section 43).
The Monetary Board regulates interest on microfinance borrowers by lending investors and similar lenders to address unconscionable interest on salary loans and similar credit accommodations (Section 43).
Amortization:
- loan amortization schedules must match the nature of the financed operation (Section 44).
- for loans with maturities of more than five (5) years, periodic amortization payments must occur at least annually (Section 44).
- where borrowed funds do not initially produce revenues adequate for regular amortization, the bank may defer the initial amortization payment, but the initial amortization date must not be later than five (5) years from loan grant (Section 44).
- for microfinance sectors, amortization scheduling must consider projected cash flow and be integrated into bank terms and conditions (Section 44).
Prepayment: a borrower may prepay any bank loan or credit accommodation in whole or in part prior to agreed maturity subject to reasonable terms and conditions agreed by bank and borrower (Section 45).
Development assistance incentives: the Bangko Sentral provides incentives to banks that extend, without government guarantee, loans to finance educational institutions, cooperatives, hospitals and other medical services, socialized or low-cost housing, local government units, and other social-content activities (Section 46).

Foreclosure rights and redemption

In foreclosure of any real estate mortgage securing a bank loan:
- whether judicially or extrajudicially, the mortgagor or debtor whose property is sold has a right of redemption within one (1) year after the sale by paying the amount due plus interest at the rate specified in the mortgage and the bank’s sale and custody costs less the income derived from the property (Section 47).
- the purchaser at auction (judicial or extrajudicial) may enter and take possession immediately after confirmation of the auction sale and administer the property according to law (Section 47).
- any petition to enjoin or restrain foreclosure proceedings must be given due course only upon filing a bond in an amount fixed by the court conditioned on payment of damages the bank may suffer from the injunction/restraint (Section 47).
- notwithstanding Act 3135, juridical persons whose property is sold via extrajudicial foreclosure may redeem in accordance with this provision until but not after registration of the foreclosure sale certificate with the proper Register of Deeds, and this registration period shall not exceed three (3) months after foreclosure, whichever is earlier (Section 47).
- owners whose property was sold in foreclosure sales prior to the Act’s effectivity retain redemption rights until their expiration (Section 47).

Bank reporting, audits, publication, and conduct

Banks, quasi-banks, and trust entities must keep their financial statements:
- every institution must submit financial statements to the appropriate Bangko Sentral supervising and examining department in prescribed form and frequency, showing actual financial condition as of a designated date and containing required information about the institution and its branches, offices, subsidiaries, and affiliates (Section 60).
Banks, quasi-banks, and trust entities must publish financial statements:
- they must publish a statement of financial condition (including subsidiaries and affiliates) in understandable terms and in English or Filipino;
- publication must occur at least once every quarter in a newspaper of general circulation in the city/province of the principal office (domestic) or principal branch/office (foreign), or if no newspaper is published in that province, in a newspaper in Metro Manila or the nearest city/province;
- the Monetary Board may regulate the newspaper for publication;
- the Monetary Board may allow posting in public places in lieu of publication when warranted by circumstances; and
- banks must make available to the public the complete set of audited financial statements and other relevant information, including on enterprises majority-owned/controlled by the bank, to inform the public of true financial condition at any given time (Section 61).
In periods of national and/or local emergency or imminent panic threatening monetary and banking stability, the Monetary Board may by vote of at least five (6) members and upon application of the institution allow a deferred publication period for the financial statement (Section 61).
Independent audits:
- the Monetary Board may require engagement of an independent auditor from a list of acceptable certified public accountants; engagement terms are set by the Monetary Board and may be continuing or special engagements, but the independent auditor remains responsible to the institution’s board of directors;
- the institution must furnish a copy of the report to the Monetary Board; and
- the Monetary Board may direct the board (or a committee) to conduct an annual balance sheet audit to review internal audit and control systems and submit the report (Section 58).
Financial records for publication of capital stock:
- a domestic bank/quasi-bank/trust entity may not publish authorized or subscribed capital stock without simultaneously and equally prominently indicating the amount actually paid up;
- a foreign bank’s branches may not announce head office capital and surplus without simultaneously and equally prominently indicating the capital assigned to the branch, and if none is assigned the fact must be stated in the publication and form part of it (Section 62).
Dispute consultation:
- other government agencies must consult the Bangko Sentral in actions/proceedings involving controversies in banks/quasi-banks/trust entities arising from relations among their directors, officers, or stockholders and disputes between them and the institution (Section 63).
Unauthorized advertisement/business representation is prohibited:
- no person/association/corporation may advertise or hold itself out as engaged in banking/quasi-banking/trust business or use related titles, or transact in any manner the business of such institutions, unless duly authorized (Section 64).
Service fees:
- the Bangko Sentral may charge equitable rates, commissions, or fees prescribed by the Monetary Board for supervision, examination, and other services rendered under the Act (Section 65).
Penalty for violation:
- violations are subject to the penalties under sections 34, 35, 36, and 37 of the New Central Bank Act, unless otherwise provided;
- if the offender is a director/officer, the Monetary Board may also suspend or remove;
- if the violation is committed by a corporation, the corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General (Section 66).

Prohibited acts and unsafe or unsound conduct

Prohibited conduct by bank directors, officers, employees, and agents includes:
- making false entries in bank reports/statements or participating in fraudulent transactions that affect financial interest or cause damage;
- disclosing to unauthorized persons information relative to funds/properties in custody of the bank belonging to private individuals/corporations or other entities (except that for bank deposits, existing laws on bank secrecy prevail);
- accepting gifts, fees, or commissions or other remuneration connected with loan/credit approval;
- overvaluing or aiding overvaluing of security to influence bank action; and
- outsourcing inherent banking functions (Section 55.1).
Prohibited conduct by bank borrowers includes:
- fraudulently overvaluing property offered as security;
- furnishing false or misrepresenting or suppressing material facts to obtain/renew/increase a loan/credit or extend its period;
- attempting to defraud the bank in court action to recover a loan/credit; and
- offering directors/officers/employees/agents gifts/fees/commissions/compensation to influence approval (Section 55.2).
Prohibited conduct by Bangko Sentral examiners and government personnel assigned to supervise/examine/assist banks includes participating in or committing the enumerated prohibited acts, or aiding in their commission (Section 55.3).
False reporting/misrepresentation/suppression of material facts by Bangko Sentral personnel constitutes fraud and triggers administrative and criminal sanctions under the New Central Bank Act (Section 55.3).
Bank secrecy and employment rules:
- consistent with Republic Act No. 1405 (Banks Secrecy Law), no bank may employ casual or nonregular personnel or too lengthy probationary personnel in the conduct of business involving bank deposits (Section 55.4).
Unsafe or unsound conduct:
- the Monetary Board determines that an act or omission not otherwise prohibited may be unsafe or unsound based on circumstances including: material loss/damage or abnormal risk to safety/stability/liquidity/solvency; material loss/damage or abnormal risk to depositors/creditors/investors/stockholders or to the Bangko Sentral or