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CHAPTER 1
BANK AND BANKING PERSPECTIVES

Historical Perspective of the World

• 2000 BC- early banking practices started in the Babylon, credit transactions
engaged evidenced by tablets of clay.
• 4th Century BC - temples, public bodies and private firms deal in deposits and
loaning of funds.
• 2nd century A.D- transactions were registered by public notaries.
• 8th century- bank drafts and checks were in wide use in Assyria.
• Medici family ushered in the 2nd period of Florentine financial power.
• 16th Century- ruled by Fugger Family. John’s Laws financial system almost spelled
ruin to France.

Philippine Banking History

Spanish Era
• 16th century that OBras Pias, the first financial institution was organized
flourishing galleon trade between the Philippines and Mexico. Its capital came from
pious catholics and funds were loaned out interest.
• Banco Español – Filipino (1828) first established commercial bank performing
general banking functions and partly financed foreign trade. October 17, 1854 it
was given a privilege note of issue. Today its bearing name is Bank of The
Philippine Islands ( Banco delas Islas Filipinas)
• Opening of Suez Canal (1869) led to accessibility of European markets.
• Chartered Bank of India, Australia, and China establishes branches in the
country.
• Monte de Piedad (1882) a savings bank.
• Banco Peninsular Ultramarino in Madrid – put up a branch in the Philippines in
1853.

American Era
-Banks continue to do business and soon joined by the branches of International
Banking Corporation and the Guaranty Trust Company. Postal Savings bank was also
created as parcel to the bureau of post.Banks established after World War I ,Yokohama
Specie bank (1919) , China Banking Corporation (1920), Peoples Bank and Trust
Company and the Mercantile Bank of China (1926).
- Upon establishment of Commonwealth, Netherlands Indische Handels bank opened
(1973) The Philippine bank of Commerce was the first private bank with genuine Filipino
capital (1938). In 1939 Bank of the Commonwealth, Philippine Bank of
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Communications and the government-owned Agricultural- Industrial bank

commenced commercial banking operations.

Japanese Era
-During the Japanese occupation only Filipino and Japanese-owned banks were given
permission to operate. The Southern Development Bank opened a branch in Manila in
(1942) which acted as fiscal agent of the Japanese government in the Philippines.

Postwar Era
- Presidential Directive, Executive Order 96, invalidated all Japanese occupation
deposits. Executive Order 48 paved the way for the reopening of the pre-war banks.
Rehabilitation Finance Corporation was created by virtue of Republic Act 85 0n January 2,
1947 which took over the functions of the Agricultural Industrial Bank. In 1948 General
Banking Act passed into law. It provided the definitive rules of conduct of all banking
institutions. In1949 republic act No. 265 known as Central bank Act was passed. In 1972,
Presidential Decree no. 72 was issued amending Republic act no. 265 in attuned in
changing economics. In 1973 Constitution, Presidential decree no. 1801 designated central
Bank of the Philippines as the central monetary authority which was adopted aimed by the
1987 Constitution.

Philippine Banking Today

Republic Act No. 7653 or the New Central Bank Act of 1993, governs Philippine banking
today. It provides for the establishment of an independent monetary authority to be
known as Bangko Sentral ng Pilipinas (BSP).

The business of banking has changed irreversibly. Developments in technology have more
contributions in these irreversible changes in the banking system. Technology has brought
us E-Banking, the provision of banking services. The devise used to provide e-banking
services are called E-money which can be divided into three groups.

a. Access devices- these allow people to withdraw or deposit cash, transfer funds
and pay bills from their bank accounts without physically going to the banks or
writing a check.
b. Card-based products – these are prepaid cards in which funds are stored in
electronic form on a computer chip embedded in cards.
c. Prepaid software products or network money – involve funds that are stored
in electronic form and are transferred over communication networks among
participants in network.
Republic Act No. 8791 known as General Banking Law of 2000, institutionalized a
certain mass of banking reforms in the Philippines. It provides regulation of the
organization and operation of banks, quasi-banks, and trust entities.

Republic Act No. 9160 known as the Anti-Money Laundering Act of 2001, was passed
into law on 29 September 2001.
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On April 19, 2000 the Monetary Board approved the issuance of Circular No. 237,
consolidating and clarifying all existing rules and regulations on mergers and acquisitions.
Bank mergers and consolidations are distinguished as follows:

• Merger- is the absorption of one or more corporations by another existing

corporation which retains its identity and takes over the rights, privileges,
franchises, and properties and assumes all liabilities and obligations of the
absorbed corporations.
• Consolidation-the union of two or more corporations into a single new
corporation, called the consolidated corporation.

Banks – shall refer to entities engaged in lending of funds obtained in the form of deposits.

Nature Of Banking Business

“Banks makes money out of other people’s money”

Principle of Banking Business

• A certain amount deposited will support several times as much in credit, known as
the partial reserve system.
• A greater portion of deposits in commercial banks arises out of the proceeds of
loans.

Types of Banks

As to ownership
a. Privately owned- organized and capitalized by private citizens for their profit.
b. Publicly owned- organized by the state and sometimes has a minimum private
ownership.

As to place of Incorporation
a. Domestic – incorporated under Philippine Laws. Majority of the stocks are owned
by Filipinos.
b. Foreign- incorporated under laws of other country although the bank might be
doing business in the Philippines.

As to Structure
a. Stock corporation- when they sell shares of stocks to the general public to raise
capital.
b. Non-stock Corporations- the organization is on a membership basis. Such as
savings and loans associations.

As to Function
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a. Commercial bank – is one that receives demand deposits and gives out short-term
loans.
b. Trust company – an institution which deals in fiduciary activities such as
administrator of estates , guardians of minor’s interest, executor of last wills and
testaments, registrar and transfer agent of stocks and bonds and similar activities.
c. Savings Bank- one which primarily receives for safekeeping funds from persons
who have no immediate need for cash and invests these finds in long-term
investment.
d. Rural Bank- organized primarily to cater the needs of small farmers, small
business, small cottage industries, and cooperative associations. They also receive
deposits and loan out funds.
e. Development Bank- takes care of giving loans to be used for developing the
economy and may therefore engage in medium and long-term lending. The
organization of private development banks shall be, under the control and
supervision of the Development Bank of the Philippines (formerly Rehabilitation
Finance Corporation).
f. Cooperative bank- organized to furnish the credit needs of duly registered and
operating cooperative associations of different kinds.
g. Investment Bank - one which assist government bodies and newly organized
corporations to raise funds for capital through the sale of stocks and bonds.
h. Central Bank- is a bank of banks, as it does not deal directly with the public.

As to Management
a. Unit Bank- one where ownership is concentrated on one corporation which does
banking business independent of others.
b. Group Banking - When a majority portion of stocks of two more banks are held
by a holding company, this is considered as group banking.
c. Branch Banking – is one where there is a head office and two or more branches.
d. Chain Banking – When one or more persons control the activities of banks, it’s
known as chain banking.

Economic Significance of Bank

- A bank facilitates dealings between debtors and creditors because it acts as an
intermediary in the flow of credit funds. It allows others the use of idle funds of the
community in productive activities.
- Creates money out of proceeds of loans.
- Maintains foreign trade.
Why The State Supervises Banks
-The state does not only supervise banks, but with the advent of central banking, it
also controls the bank’s operation.

Reasons:
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1. The banks are entrusted with other people’s money. Mismanagement or

malfeasance in the duties of the board of directors will result to banking failure.
2. The state wants to assure that the banks will perform their functions in the best
interest of their clients through the honest and efficient conduct of their functions.
3. The banks may either abuse their power or use them prudently.
4. The Banks, furthermore, are quasi-public corporations and as in all other
corporations of this calling, the state must exert its restraining influence to
safeguard the welfare of its constituents.

CHAPTER 2
BANK ORGANIZATION

Bank Organization– the chapter provides the basic information about establishing a bank,
including pertinent laws, rules and regulations.
General Aspects in establishing Banks
1. Economic Justification for banks - ascertain the degree of competition in the
business, the degree of risk, potential customers, availability of manpower, the
businesses and products within the locale, the habits and custom of people, and
such other matters which will contribute to the bank’s successful operation.

2. Selection of stockholders - should ascertain they are of good moral character,

adequate knowledge in the business of banking, equipped with the necessary
capital, known in the community as honest and righteous citizens and are both
willing and able to contribute the banks success.

3. Determination of the kind of bank to be formed – depends on the economic survey;

income of the community, business and industries , the population of the place and
number of banks and factors which lead to a decision on the size of the
organization to be set up.

4. Determination of the amount of capital to be raised – depends on the type of bank.

They must be aware that at least the minimum requirements should be met. These
are to cover organizational expenses; to carry on operations which will require
current capital; to provide for acquisition of fixed assets and include enough room
for the initial cost of operation.
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Organization, Management, and Administration

The New General Banking Act (RA 8791) – requires that all banks shall be established as
corporations. With the exception of building and loan associations, all banking institutions
shall be stock corporations and shall without exception issue par value stocks.
Provisions of the New Central Bank Act
Sec. 8 Organization- The monetary Board may authorize the organization of the bank or
quasi-bank subject to the following conditions:
8.1 That an entity is a stock corporation;
8.2 That its funds are obtained from the public, which shall mean twenty (20) or
more persons;
8.3 That the minimum capital requirements prescribed by the Monetary Board for
each category of banks are satisfied.
Sec.9 Issuance of Stock. The Monetary Board may prescribe rules and regulations on the type
of stocks a bank may issue; including the terms thereof and rights appurtenant thereof to
determine compliance with the laws and regulations governing capital and equity
structure of banks; provided , that banks shall issue par value stock only.
Sec.10 Treasury Stocks. No Bank shall purchase or acquire of its own capital stock or accept
its shares as a security for loan, except when the stock so Foreign Stockholdings. Foreign
individuals and non-bank corporations may own or control up to forty percent (40%) of
voting stock of a domestic bank. This rule shall apply to Filipinos and Domestic non-bank
corporations.
The percentage of foreign-owned voting stocks in a bank shall be determined by the
citizenship of the individual stockholders in that bank. The citizenship of the corporation
which is a stockholder in a bank shall follow the citizenship of the controlling stockholders
of the corporation, irrespective of the place of incorporation.
Sec. 12 Stockholdings of Family Groups or Related Interest. -Stockholdings of individuals
related to each other within the fourth degree of consanguinity or affinity, legitimate or
common law, shall be considered family groups or related interest and must be fully
disclosed in all transactions by such an individual with the bank.
Sec.13 Corporate Stockholdings. Two or more corporations owned or controlled by the same
family group or same group of persons shall be considered related interest and must be
fully disclosed in all transactions by such corporations or related groups of persons with
the bank.
Sec.14 Certificate of Authority to register. The Securities and Exchange Commission shall not
register the articles of incorporation of any bank, or any amendment thereto, unless
accompanied by a certificate of authority issued by the Monetary Board, under its seal.
Such certificate shall not be issued unless the Monetary Board is satisfied from the
evidence submitted to it:
14.1 That all requirements of existing laws and regulations to engage in the business
for which the applicant is proposed to be incorporated have been complied with;
14.2 That the public interest and economic conditions, both general and local
justify the authorization:
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14.3 That the amount of capital, the financing , organization, direction and
administration, as well as the integrity and responsibility of the organizers and
administrators reasonably assure the safety of deposits and the public interest. The
Securities and Exchange Commission shall no register the by-laws of any bank, or any
amendment thereto, unless accompanied by a certificate.
Sec.15 Board of Directors. The provisions of the Corporation Code to the contrary
notwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members of
the board of directors of a bank, two (2) of whom shall be independent directors. An
“independent directors “ shall mean a person other than an officer or employee of the
bank, its subsidiaries or affiliates, or related interests.
Non-Filipino citizens may become member of the board of directors of a bank to the extent of
the foreign participation in the equity of said bank.
The meetings of the board of directors may be conducted through modern technologies such
as, but not limited to, teleconferencing and video-conferencing.
Furthermore, in conformity with the Corporation Code and the Basic Guidelines in establishing
banks, the following points must also be taken into account:
a. That there should be not less than five (5) nor more than fifteen (15) incorporators.
In case there are more than fifteen (15) persons initially interested in organizing
and investing in proposed bank, the excess may be listed among the original
subscribers in the Articles of Incorporation;
b. That at least twenty five percent (25%) of the total authorized capital stock shall
be subscribed by the subscribers of the proposed bank and at least twenty five
percent (25%) of such subscription shall be paid-up, provided that in no case shall
the paid-up capital be less than the minimum required capital;
c. That a majority of the incorporators are resident of the Philippines;
d. Incorporators must possess the capacity to contract, which means that they must
be of majority age; and are competent to enter into contractual obligations; and
e. That the number of members of the board of directors of the bank shall not be less
than five (5) nor more than fifteen (15) and shall always be in odd number and at
least two (2) of the directors are “independent directors”.

Sec. 16 Fit and Proper Rule. To maintain the quality of bank management and afford better
protection to depositors and the public in general, the Monetary Board shall prescribe,
pass upon review the qualifications and disqualifications of individuals elected or
appointed bank directors or officers and disqualify those found unfit.
After due notice to the board of directors of the bank, the Monetary Board may disqualify,
suspend, or remove any bank director or officer who commits or omits an act which render
him unfit for the position.
In determining whether an individual is fit and proper to hold the position of a director or
officer of a bank, regard shall be given to hid integrity, experience, education, training, and
competence.
Sec. 17 Directors of Merged or Consolidated Banks. In the case of a bank merger or
consolidation, the number of directors shall not exceed twenty –one (21).
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Sec.18 Compensation and Other benefits of Directors and Officers. To protect the funds of
depositors and creditors, the Monetary Board may regulate the payment by the bank of its
directors and officers of compensation, allowances, fees, bonuses, stock options, profits
sharing, and fringe benefits only in exceptional cases and when the circumstances
warrant, such as :
18.1 When a bank is under comptrollership or conservatorship; or
18.2 When a bank is found by the Monetary Board to be in an unsatisfactory
financial condition.
Sec. 19 Prohibition on Public Officials. Except as otherwise provided in the Rural Banks Act, no
appointive or elective public officials, whether full-time or part-time, shall at the same
time serve as officer of any private bank, save in case where such service is incident to
financial assistance provided by the government or a government owned or controlled
corporation to the bank or unless otherwise provided under existing laws.
Sec.20 Bank Branches. Universal or commercial banks may open branches or other offices
within or outside the Philippines upon prior approval of the Bangko Sentral. Branching by
all other banks shall be governed by pertinent laws.
A bank may, subject to prior approval of the Monetary Board, use any or all of its
branches as outlets for the presentation and/or sales of the financial products of its allied
undertaking or if its investment house units.
A bank authorized to established branches or other offices shall be responsible for all business
conducted in such branches and offices to the same extent and in the same manner as
though such business had all been conducted in the head office. A bank and its branches
and offices shall be treated as one unit.
Sec.21 Banking Days and Hours. Unless otherwise authorized by the Bangko Sentral in the
interest of the banking public, all banks including their branches and offices shall transact
business on all working days for at least six (6) hours a day. In addition, banks or any of
their branches or offices may open for business on weekends or holidays for atleast three
(3) hours a day; provided, that banks which opt to open on days other than working days
shall report to the Bangko Sentral the additional days during which they or their branch
or offices shall transact business.
Sec.22 Strikes and Lockouts. The banking industry is hereby declared as indispensable to the
national interest and notwithstanding the provisions of any law to the contrary, any strike
or lockout involving banks, if unsettled after seven (7) calendar days shall be reported by
the Bangko Sentral to the Secretary of Labor who may assume jurisdiction over the
dispute or decide it or certify the same to the National Labor Relations Commission for
compulsory arbitration. However, the President of the Philippines may at any time
intervene and assume jurisdiction over such labor dispute in order to settle of terminate
the same.
Licensing of Foreign Banks
Sec.72 Transacting Business in the Philippines- the entry of foreign banks in the Philippines
through the establishment of branches shall governed by the provisions of the Foreign
Banks Liberalization Act. The conduct of offshore banking unit in the Philippines shall be
governed by Presidential Decree No. 1034, known as “Offshore Banking System Decree”.
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Sec. 73 Acquisition of Voting stock in a Domestic Bank – The Monetary Board may authorized
the foreign bank to acquire up to 100% of the voting stock of only one (1) bank organized
under the laws of the Republic of the Philippines.
Sec.74 Local Branches of Foreign banks. – In the case of foreign banks which have more than
one (1) branch in the Philippines, all such branches shall be treated as one (1) unit for the
purpose of this Act, and all references to the Philippines branches of foreign banks shall be
held to refer to such units.
Sec.75 Head Office Guarantee- the head office of such branches shall fully guarantee the
prompt payment of all liabilities of its Philippine branch. Residents and citizens of the
Philippines who are creditors of a branch in the Philippines of a foreign bank shall have
preferential rights to the asset of such branch in accordance with existing laws.
Sec.76 Summon and Legal Process. Summons and legal foreign process served upon the
Philippine agent or head of any foreign bank designated to accept service there of shall
give jurisdiction to the courts over such bank, and service of notice on such agent or head
shall be as binding upon the bank which he represents as if made upon the bank itself.
Sec.77 Laws Applicable – Any foreign bank licensed to do business in the Philippines shall be
bound by the provision of this act, all other laws, rules, and regulations applicable to banks
organized under the laws of the Philippines of same class, except those that provide for the
creation, formation, organization or dissolution of corporations or for fixing of the
relations, liabilities , responsibilities, or duties of stockholders, members, directors, or
officers of corporation to each other or to the corporation.
Sec.78 revocation of License of a Foreign Bank. – if it finds that the foreign bank is insolvent or
in imminent danger thereof or that its continuance in business will involve probable loss to
those transacting business with it. After the revocation of its license, it shall be unlawful
for any such foreign bank to transact business in the Philippines unless its license is
renewed or reissued.
Why Banks are established as Corporations
-A corporation is formed by a number of persons who pool in their resources to enter a
business for profit. Banks, which by their nature, deal in large amount of capital.
Furthermore, loans are given out for long durations in some instances and only an entity
with a long tenure could be beneficial in such case. A corporation then meets the test of its
perpetual life.
-The risk of an investor is also limited to the extent of his contribution in the business, And
above all a corporation’s charter represents a tripartite contract among the state, the
stockholders, and the bank.
Role of Regulatory Government Bodies I Bank Organization
-The role of the regulatory government bodies’ organization is to facilitate the processing and
approval of pertinent documents to make the organization legal.
-The Security and Exchange Commission, for its part, also examine the papers to see to it that
all requirements are met before issuing the certificate of incorporation.
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