Chapter 3 Depository Institutions: Banks

 Banking Industry: Structure and Regulation

 Banking Products and Regulations
 Other Financial Institutions

A bank is defined as an organization that accepts deposits, issue loans, pays

checks and performs related services for the public. Banks act not only as financial and
credit intermediaries between the suppliers of funds and the users of funds but they also
collect funds through borrowings in the checking accounts, savings accounts, time
deposits, short-term borrowings from other banks, and from equity capital. The business
model of banks comprises the seeking of profits by reinvesting these funds in longer-
term assets.48 The General Banking Law of 2000 provides a brief and simple definition
of the term “Banks” - classifying banks in order that each class can have its own niche
or service orientation, which are stated as follows: “Banks” shall refer to entities
engaged in the lending of funds obtained in the form of deposits.

History of Philippine Banking

1754 - Obras Pias was established as the first credit institution by

Father Juan Fernandez de Leon with capital from the pious
Catholics. It is a charitable foundation during the Spanish period
hence the funds are used for charitable, religious and
educational purposes. However, some of the funds were
managed by confraternities that invested capital in secular
activities like underwriting cargoes for the galleon trade.

August 1, 1851 - Banco Espanol-Filipino de Isabela II was established as the first

Philippine Bank to perform the general banking function. As the
first government bank, Banco Espanol was given the privilege to
issue bank notes called pesos fuertesToday, the bank is known
as Bank of Philippine Islands

1869 The opening of the Suez Canal facilitated trade between the
Philippines and Europe. The Philippines then attracted British
capital and in the years that followed, the Chartered of India,
Australia and China (now known as the Standard Chartered Bank)
and the Hong Kong and Shanghai Banking Corporation, both
British-owned banks, opened their branches in Manila in 1873 and
1875 respectively.

1882 Monde de Piedad y Caja de Ahoros de Manila was established

1898 Banco Peninsula Ultramarino of Madrid

1906 Postal savings was created to promote habit of thrift

1916 The Philippine National Bank was established with the Philippine
Government as the majority stockholder. This is to break the foreign
banking monopoly and remedy the lack of credit facilities. The PNB
was meant to function as a government enterprise that would widen
the variety of banking services “beyond trade fiancé in exportation
and importation, money changing of foreign currency and fund
transfers, all of which, while useful in the short-term failed to
mobilize capital in the development of natural resources.”
Its charter at that time empowered PNB to issue bank notes and act
as a depository of government funds

1918 The Manila branch of the Yokohama Specie Bank was given license
to do business in the Philippines

1930 The Americans established the Guaranty Trust Corporation and

International Banking Corporation. The existence of GTC was short-
lived while IBC was eventually taken over by the National City Bank
of New York now known as Citibank.

1939 The government created the Agricultural and Industrial Bank to

absorb the functions of the National Loan and Investment Board
and to harness government resources.

The Philippine Bank of Communications was created and was the

first bank with genuine Filipino private capital. However, it was
temporarily closed at the outbreak of WWII

Only Filipino-owned and Japanese banks were allowed to operate

during WWII. Banks owned by other nationalities were treated as
enemy properties and placed under liquidation by the Japanese
Military Government

1942 The Nampo Kaihatsu Kinko now known as Southern Development

Bank opened a Manila branch and acted as the Japanese
government’s fiscal agent in the Philippines.
After the liberation, all domestic banks that operated during the
Japanese occupation were unable to reopen because the greater
part of their assets consisted of worthless Japanese war notes,
bonds and obligations of the Japanese-sponsored republic and
balances with Japanase banks.

1947 A branch of Bank of America was allowed to establish in Manila and

in the following year, it absorbed the assets and liabilities of the
 local branch of Nederlandsche Indische Handelsbanks.

1949 Central Bank Act was passed

1952 The Rural Bank Act was enacted and two years later, the
Agricultural and Industrial Bank merged with the Reconstruction and
Rehabilitation Fund to form the Development Bank of the
Philippines

1963 Land Bank of the Philippines was established on August 8, 1963 as

part of the Agricultural Land Reform Code (program of land reform
in the Philippines). It was to help with the purchase of agricultural
estates for division and resale to small landholders and the
purchase of land by the agricultural lessee.

Types of Banks in the Philippines

There are different banks operating in the Philippines. Under the law, the
classification and the capital requirement for each category follows:
Type of Bank Minimum Capital (PHP million)
(1) universal banks; 4,950.0
(2) commercial banks; 2,400.0
(3) thrift banks;
With head office within Metro Manila 325.0
With head office outside Metro Manila 52.0
(4) rural banks;
Within Metro Manila 26.0
Cities of Cebu and Davao 13.0
1st, 2nd & 3rd class cities and 1st class municipalities 6.5
4th, 5th & 6th class cities and 2nd – 4th class municipalities 3.9
5th and 6th class municipalities 2.6
(5) cooperative banks
(6) Islamic banks;
(7) government-owned banks

There are branches, subsidiaries and affiliates of foreign banks in the Philippines
that are licensed either as universal or commercial banks. Others have offshore banking
units with more limited functions.
 The BSP, which is the Philippine central bank, acting through its Monetary Board,
is mandated by law to ensure that the control of 60 per cent of the resources or assets
of the banking system is held by domestic banks that are at least majority-owned by
Philippine nationals.

Commercial banks 
Commercial banks handle regular financial needs. These are privately-owned
institutions that accept deposits and lend money to projects to earn interest. They also
offer personal, business, and mortgage loans, checking account services, and basic
financial products like savings accounts and certificate of deposit to individuals and
businesses. Both individuals and organizations are the usual customers of such banks. 
Some commercial banks in operation in the Philippines are BDO Private Bank,
Inc. Philippine Veterans Bank, CTBC Bank Corporation, Maybank Philippines,
Robinsons Bank Corporation.
Universal banks 
Universal and commercial banks are the dominant groups, representing
approximately 70 per cent of the resources of the banking system. Under the General
Banking Law of 2000 (GBL), a universal bank is defined as a commercial bank with the
additional authority to exercise the powers of an investment house and invest in non-
allied enterprises. Hence, universal banks are the most powerful for these banks can
exercise all the legal power of an investment house, including underwriting, invest in
non-allied enterprises, own up to 100% of the equity of a thrift bank, rural bank or allied
enterprise and own up to 100% of the voting stock of publicly-listed universal or
commercial bank.
According to BSP, there are 21 universal banks with active operations in the
Philippines as of March 2018. These banks include Land Bank of the Philippines, Union
Bank of the Philippines, Security Bank Corporation, Philippine National Bank, China
Banking Corporation, BDO Unibank, Inc and Bank of Philippine Islands.
Rural banks 
Popular in rural communities, these banks are tasked with providing basic financial
services to residents. These are meant to help promote and expand the local economy
in an orderly and effective manner. Rural banks can help farmers through the stages of
production, from buying seedlings until marketing of their produce. 
Cooperative banks 
These banks are very similar to rural banks, but the main difference is in
their ownership. Rural banks are privately owned and managed, while cooperative
banks are organized or owned by cooperatives or federation of cooperatives. 
Rural Banks and Cooperative Banks have the same powers and may:
  Extend loans to farmers, fishermen, cooperatives, and certain other persons and
merchants.
 Take savings and time deposits.
 Take current / checking accounts, if the bank has net assets of PHP5 million or
more.
 Offer NOW (negotiable order of withdrawal) accounts.
 Act as a trustee over the estates of farmers and merchants.
 Take municipal, city or provincial deposits from the municipality, city or province
where the bank is located.

Thrift banks 
Thrift Banks have all the powers enumerated above, and in addition may:
 Grant all secured and unsecured loans
 Invest in bonds, commercial paper, and other fixed income securities
 Issue domestic letters of credit
 Extend credit facilities to private and government employees
 Rediscount paper with the Land Bank of the Philippines (LBP), Development
Bank of the Philippines (DBP), and other government-owned or-controlled
corporations
 Accept foreign currency deposits
 Purchase, hold and convey real estate
This category is made up of savings and mortgage banks, private development banks,
and stock savings and loan associations. These banks focus on accumulating and
investing depositors’ savings, while also providing short-term working capital, and
medium- and long-term financing. 
The main clients of thrift banks are businesses engaged in agriculture, services,
industry and housing, and diversified financial and allied services, in addition
to other markets and constituencies, especially individuals and small- and medium-
size enterprises. 
Islamic banks 
Such banks conduct business in accordance with the principles of the Shari’a, or Islamic
Law. Their objectives and operations do not involve interest, or riba, which is prohibited
by the Shari’a. 
Islamic banks are expected to give Muslim Filipinos greater access to banking products
and services. Their establishment is seen as a big step in the financial inclusion
mandates of the BSP.
Regulatory framework
Key policies
The government recognizes the vital role of banks in providing an environment
conducive to the sustained development of the country’s economy. Accordingly, it is the
government’s policy to promote and maintain a stable and efficient banking system that
is globally competitive, dynamic and responsive to the demands of a developing
economy.
Primary and secondary legislation
The General Banking Law governs not only universal banks but also commercial
banks. Section 71 provides that the organization, ownership, capitalization and powers
of thrift banks (savings and mortgage banks, stock savings and loan associations, and
private development banks), rural banks, cooperative banks and Islamic banks, as well
as the general conduct of their businesses, are governed by the Thrift Banks Act, the
Rural Banks Act, the Philippine Cooperative Code and the Charter of Al-Amanah
Islamic Investment Bank of the Philippines respectively. The General Banking Law
applies, however, to thrift banks and rural banks insofar as it is not in conflict with the
provisions of the special laws governing such banks. On the other hand, the Philippine
Cooperative Code recognizes the primacy of the General Banking Law in the regulation
of cooperative banks.
The rules implementing the above statutes are embodied in the Manual of
Regulations for Banks (MORB) issued by the Bangko Sentral ng Pilipinas (BSP), the
Philippine central bank. From time to time, additional circulars and other issuances are
promulgated by the BSP to cover new matters, if not to amend, repeal, supplement or
otherwise modify existing rules.

Regulatory authorities
The BSP, through its Monetary Board, is primarily responsible for overseeing
banks. The Philippine Deposit Insurance Corporation (PDIC) can also conduct
examination of banks, with the prior approval of the Monetary Board, provided that no
examination can be conducted by the PDIC within 12 months of the previous
examination date.
Government deposit insurance
Banks must insure their deposit liabilities with the PDIC. Each depositor is a
beneficiary of the insurance for a maximum amount of 500,000 Philippine pesos or its
foreign currency equivalent.
There are very few remaining government-owned or controlled banks (currently, only
seven), owing to the government’s privatization program.
Transactions between affiliates
The grant of loans and other credit accommodations by a bank to its directors,
officers, stockholders and their related interests (DOSRI) and to subsidiaries and
affiliates is regulated. The MORB provides different ceilings for loans to DOSRI, and to
subsidiaries and affiliates. Total outstanding loans to each of the bank’s DOSRI is
limited to an amount equivalent to their respective unencumbered deposits and book
value of their paid-in capital contribution in the bank. On the other hand, total
outstanding loans to each of the bank’s subsidiaries and affiliates must not exceed 10
per cent of the net worth of the lending bank. For these purposes, an affiliate is an entity
linked directly or indirectly to a bank by means of:
 ownership, control or power to vote of at least 20 per cent of the outstanding
voting stock;
 interlocking directorship or officership;
 common stockholders owning at least 10 per cent of the outstanding voting stock
of the bank and at least 20 per cent of the outstanding voting stock of the
borrowing entity;
 management contract or any arrangement granting power to the bank to direct or
cause the direction of management and policies of the borrowing entity; or
 permanent proxy or voting trusts in favor of the bank constituting at least 20 per
cent of the outstanding voting stock of the borrowing entity, or vice versa.
The BSP recently excluded portions of loans and other credit accommodations covered
by guarantees of international and regional institutions or multilateral financial
institutions where the Philippine government is a member or shareholder, from the
ceilings on loans granted by banks to their subsidiaries and affiliates.
Related-party transactions are generally allowed provided that these are done on an
arm’s-length basis. Banks, including their non-bank financial subsidiaries and affiliates,
are expected to exercise appropriate oversight and implement effective control systems
for managing exposures arising from related-party transactions.
Core banking consists of deposit taking and lending; all of which is subject to pertinent
rules promulgated by the Monetary Board. In particular, commercial banking includes:
 accepting drafts;
 issuing letters of credit;
 discounting and negotiating promissory notes, drafts, bills of exchange, and other
evidence of debt;
 accepting or creating demand deposits;
 receiving other types of deposits, as well as deposit substitutes;
 buying and selling foreign exchange, as well as gold or silver bullion;
 acquiring marketable bonds and other debt securities; and
 extending credit.

Universal banking includes the above functions and two additional powers, namely the
capacity to invest in enterprises not allied to banking and to underwrite securities.
However, no bank in the Philippines can engage in insurance business as an insurer.
Regulatory challenges
Among the principal regulatory challenges facing the banking industry at present are
those posed by the use of financial technology, including compliance with know-your-
customer (KYC) requirements, incorporating fintech into their systems and structures,
and ensuring cybersecurity.
With the issuance of the implementing rules and regulations of the Data Privacy Act,
banks (as with other entities that collect and process personal information) are expected
to observe certain registration and compliance requirements. The BSP and the National
Privacy Commission are currently reviewing possible overlaps in their functions with a
view to harmonizing them for a more efficient regulatory framework.

Consumer protection
Banks are subject to the BSP’s Financial Consumer Protection Framework, which sets
out the minimum standards of consumer protection in the areas of:
 disclosure and transparency;
 protection of client information;
 fair treatment;
 effective recourse; and
 financial education.
The BSP is responsible for enforcing these rules in the banking sector.

Supervision
Extent of oversight
The BSP examines the books of every bank once every 12 months, and at such other
times as the Monetary Board may deem expedient. An interval of at least 12 months is
required between annual examinations.
The BSP examiners are authorized to administer oaths to any director, officer or
employee of any bank and to compel the presentation of all books, documents, papers
or records necessary to ascertain the facts relative to the true condition of such bank.
The PDIC may also examine banks, with the prior approval of the Monetary Board, to
determine whether they are engaging in unsafe and unsound banking practices. No
examination can be conducted by the PDIC within 12 months of the last examination
date. To avoid overlapping of efforts, the PDIC examination considers the relevant
reports and findings of the BSP pertaining to the bank under examination.
Enforcement
Violations of any of the provisions of the General Banking Law are subject to the
penalties and other sanctions under the New Central Bank Act.
Any owner, director, officer or agent of a bank who, being required in writing by the
Monetary Board or by the head of the supervising and examining department of the
BSP, willfully refuses to file the required report or refuses to permit a lawful examination
into the affairs of such bank, will be punished by a fine of between 50,000 and 100,000
Philippine pesos or by imprisonment of not less than one year or no more than five
years, or both, at the discretion of the court.
On the other hand, the willful making of a false or misleading statement on a material
fact to the Monetary Board or to the BSP examiners will be punished by a fine of
between 100,000 and 200,000 Philippine pesos or by imprisonment of not more than
five years, or both, at the court’s discretion.
In turn, any person who is responsible for willful violation of the General Banking Law or
any order, instruction, rule, or regulation issued by the Monetary Board will, at the
court’s discretion, be punished by a fine of between 50,000 and 200,000 Philippine
pesos or by imprisonment of not less than two years or no more than 10 years, or both.
Whenever a bank persists in carrying on its business in an unlawful or unsafe manner,
the Monetary Board may take action for the receivership and liquidation of such bank,
without prejudice to the penalties provided in the first sentence of this paragraph and
the administrative sanctions provided in the next paragraph.
Without prejudice to the foregoing criminal sanctions against culpable persons, the
Monetary Board may impose administrative sanctions for any of the above violations,
willful violation of the charter or by-laws of the bank, any commission of irregularities, or
conducting business in an unsafe or unsound manner as determined by the Monetary
Board. These administrative sanctions are as follows:
 fines in amounts as may be determined by the Monetary Board to be appropriate,
but in no case to exceed 30,000 Philippine pesos a day for each violation, taking
into consideration the attendant circumstances, such as the nature and gravity of
the violation or irregularity and the size of the bank;
 suspension of rediscounting privileges or access to the BSP credit facilities;
 suspension of lending or foreign exchange operations or authority to accept new
deposits or make new investments;
 suspension of interbank clearing privileges; and
 revocation of the quasi-banking license.
In addition, the Monetary Board can suspend or remove the offending director or officer
of a bank. In this respect, the termination (or even the resignation) from office of such
director or officer will not exempt him from administrative or criminal sanctions.
Moreover, the erring corporation may be dissolved by quo warranto proceedings
instituted by the solicitor general. In this connection, an original quo warranto
proceeding may be commenced with the Supreme Court of the Philippines.
Cybersecurity concerns continue to confront financial institutions (both locally and
worldwide). Top cyber-threats include card skimming, phishing attacks, ransomware
and other malware. Accordingly, the BSP has directed banks to adopt advanced
cybersecurity controls and countermeasures, and to improve the management of
information security risks and exposures.
Meanwhile, the money laundering incident in 2016 where proceeds from the hacking of
the Bangladesh Bank were permitted to enter the Philippine financial system prompted
the BSP to update anti-money laundering guidelines. The new regulation emphasizes
the use of a risk-based approach to the KYC processes.

Resolution
Government takeovers
As noted in question 19, the Monetary Board may appoint a conservator for a bank that
is in a ‘state of continuing inability or unwillingness to maintain a condition of liquidity
deemed adequate to protect the interest of depositors and creditors’. The conservator
will have such powers as the Monetary Board deems necessary to:
 take charge of the assets and liabilities of the bank;
 manage it or reorganize its management;
 collect all monies and debts due; and
 restore its viability.
If, based on the report of the conservator or its own findings, the Monetary Board
determines that the continuance in business of the bank would involve probable loss to
the depositors and other creditors of the bank, the bank would be placed under
receivership and eventually liquidated. The PDIC is usually the designated receiver. If
the bank notifies the BSP or publicly announces a bank holiday, or in any manner
suspends the payment of its deposit liabilities continuously for more than 30 days, the
Monetary Board may, summarily and without prior hearing, close the bank and place it
under receivership of the PDIC.
The assets of a bank under liquidation are held in trust for the equal benefit of all
creditors. The receiver must first pay the costs of the proceedings, before paying the
debts of the bank, in accordance with the rules on concurrence and preference of credit
under the Civil Code of the Philippines. The shareholders are the last to receive
payment, if any funds remain. The depositors can claim from the PDIC the amount of
their insured deposits.
Bank failures
The directors and officers of a failing bank must cooperate with the regulators, including
the conservator and receiver. The following acts of a director or an officer of such bank
are subject to criminal penalties:
 refusal to turn over bank records and assets to the designated receiver;
 tampering with bank records;
  appropriating bank assets for himself or herself or another party;
 causing the misappropriation and destruction of bank assets;
 receiving or permitting or causing to be received in the bank any deposit,
collection of loans, or receivables;
 paying out or permitting or causing to be paid out any fund of the bank; and
 transferring or causing to be transferred securities or property of the bank.
In addition, erring directors and officers will be included in the list of persons disqualified
by the Monetary Board from holding any position in any bank or financial institution.
No voluntary dissolution and liquidation of a bank can be undertaken without the prior
approval of the Monetary Board. For this purpose, a request for Monetary Board
approval must be accompanied by a liquidation plan.
Domestic systemically important banks (DSIBs) are required to submit a recovery plan
to the BSP.

Capital requirements
Capital adequacy
The BSP prescribes the minimum level of capitalization for banks. For instance, a
universal bank with more than 100 branches must have a minimum capital of 20 billion
Philippine pesos, while that of a commercial bank with similar number of branches is 15
billion Philippine pesos.
In addition, the BSP adopted Basel III-based capital adequacy requirements for
universal banks and commercial banks. Thrift banks and rural banks that are not
subsidiaries of universal banks or commercial banks continue to be subject to Basel II-
based guidelines. In any case, the daily risk-based capital ratio of a bank, expressed as
a percentage of qualifying capital to risk-weighted assets, must not be less than 10 per
cent for both a solo basis (ie, head office plus branches) and a consolidated basis (ie,
parent bank plus subsidiary financial allied enterprises, excluding an insurance
company). The qualifying capital is the sum of Tier 1 (going concern) capital and Tier 2
(gone-concern) capital, less required deductions.
Universal and commercial banks have their respective internal capital adequacy
assessment process that supplements the BSP’s risk-based capital adequacy
framework. These banks are responsible for setting internal capital targets consistent
with their risk profile, operating environment and strategic plans.

In the event of non-compliance by a bank with the prescribed minimum ratio, the
Monetary Board may, until that ratio is met or restored by such bank:
 limit or prohibit the distribution of net profits by such bank, and require that such
profits be used, in full or in part, to increase the capital accounts of such bank;
 restrict or prohibit the acquisition of major assets by such bank; and
  restrict or prohibit the making of new investments by such bank, with the
exception of purchases of readily marketable evidence of indebtedness of the
Philippines and the BSP, and other evidence of indebtedness or obligation, the
servicing and the repayment of which are fully guaranteed by the Philippines.

Undercapitalization
If a bank becomes undercapitalized, it may be placed under conservatorship by the
BSP, with a view to rectifying the capital deficiency. It may be possible to correct this
condition, and the threatened insolvency of the bank may be averted by effective
management reforms and infusion of additional capital.
The amended charter of the PDIC also provides for a resolution framework, where the
PDIC may, in coordination with the BSP, commence the resolution of a bank upon
failure of prompt corrective action as declared by the Monetary Board, or upon request
by the bank. For this purpose, the PDIC may, among other things, determine a
resolution package for the bank, identify possible acquirers or investors, and conduct a
bidding to determine the acquirer of the bank.

Insolvency
The Monetary Board may first appoint a conservator for a bank that is in a ‘state of
continuing inability or unwillingness to maintain a condition of liquidity deemed adequate
to protect the interest of depositors and creditors’. If conservatorship is not successful or
not deemed proper by the Monetary Board, the Monetary Board may summarily forbid
the bank from doing business and designate the PDIC as its receiver. If the receiver
determines that the bank cannot be rehabilitated or permitted to resume business, the
Monetary Board may instruct the receiver to liquidate the bank.
Likewise, in case of a bank placed under resolution, in case the PDIC determines that
the bank may not be resolved, the Monetary Board may place the bank under
receivership and designate the PDIC as its receiver.

Ownership restrictions and implications

Controlling interest
Control is defined as ownership of more than 50 per cent of the voting stock of a bank.
Foreign individuals and non-bank corporations controlled by foreign nationals can
collectively own up to 40 per cent of the voting stock of a universal or commercial bank.
However, Philippine citizens and non-bank corporations controlled by Philippine citizens
can collectively own up to 100 per cent of the voting stock of such bank. Under Republic
Act No. 10641, a qualified foreign bank can be authorized by the BSP to acquire up to
100 per cent of the voting stock of an existing domestic bank, form a 100 per cent-
owned banking subsidiary, or establish a Philippine branch with full banking license.