MODULE 8

REGULATIONS AND SUPERVISION OF FINANCIAL INSTITUTIONS

After this lesson, the reader must be able to comprehend and demonstrate mastery of the
following:

1. Bangko Sentral Non-bank Financial Services and the Banking Institution

2. Bangko Sentral Regulates Non-Bank Financial Institution
3. Supervision and Regulation Distinguished
4. Types of Examination
5. Purpose of Supervision and Regulations
6. Effectiveness of Supervision and Regulation
7. Benefit of Bank Supervision

Bangko Sentral Non-bank Financial Services and the Banking Institution

Introduction

Banks and Non-Banks in the Philippines

Non-Banks-A non-bank financial institution (NBFI) is a financial institution that does not have a
full banking license or is not supervised by a national or international banking regulatory agency.

 Pawnshops.
 Government non-bank financial institutions
 Lending companies
 Insurance
 Ventures

Banks-A financial establishment that invests money deposited by customers, pays it out when
required, makes loans at interest, and exchanges.

Partial List of Bank in the Philippines

 Banco de Oro Universal Bank

 Metropolitan Bank and Trust Company
 Bank of the Philippine Islands
 Philippine National Bank
 Rizal Commercial Banking Corporation
  UnionBank of the Philippines
 China Banking Corporation
 Citibank
 East West Bank
 Philippine Savings Bank
 Philtrust Bank (Philippine Trust Company)
 Security Bank
 United Coconut Planters Bank
 Allied Bank Corporation
 Philippine Bank of Communications
 Asia United Bank

The Philippine banking system is made up of four types of banks – commercial banks (further
subdivided into universal and regular commercial banks), thrift banks, rural banks, and
cooperative banks.

These banks are differentiated according to size of capitalization and types of activities that they
may undertake. In terms of capitalization, universal and regular commercial banks have a
minimum required capital of P4.9 billion and P2.4 billion, respectively, thrift banks with head
office in Metro Manila, P325 million, and thrift banks with head offices outside Metro Manila,
P52 million. For rural/cooperative banks, the required minimum capitalization ranges from 2.6
million to P20 million depending on the type of city/municipality. Aside from the minimum
capital, banks are also required to satisfy a minimum risk-based capital adequacy ratio of 10
percent. This riskbased capital requirement essentially conforms to the Basel Committee’s 1988
Capital Accord and its recent revisions including the most recent Basel II recommendations.

Bangko Sentral Regulates Non-bank Financial Services and the Banking Institution

Republic Act No. 7653 as amended, otherwise known as the New Central Bank Act of 1993
authorized the Bangko Sentral ng Pilipinas to exercise supervision over the operations of
banking institutions and quasi-banks including their subsidiaries and affiliates engaged in allied
activities. This provides the legal basis for the implementation of consolidated supervision. The
adoption of the risk based approach in the conduct of banking supervision, on the other hand, is
supported by the General Banking Law of 2000 (R.A. No. 8791).

The BSP, as part of its chartering process, puts emphasis on the suitability of shareholders,
adequacy of financial strength and sufficient expertise and integrity of management, among
others, in ensuring that the proposed bank will be operated in a secure and prudent manner.

The application for authority to establish a bank shall be submitted to the Supervisory Policy and
Research Department (SPRD). Following are the relevant guidelines and forms for the
establishment of banks:
Domestic Banks

Guidelines:
 Basic Guidelines in Establishing Banks (Appendix 33)
 Circular 902 - Phased Lifting of the Moratorium on the Grant of New Banking
License or Establishment of New Domestic Banks
 Circular 854 - Minimum Capitalization of Banks

Forms:
 Agreement to Organize a Bank
 Biographical Data
 Articles of Incorporation and By-Laws
 Projected Balance Sheet

Foreign Banks
In the case of foreign banks, they may operate in the Philippines through any one (1) of
the following modes of entry:

Mode 1: By acquiring, purchasing or owning up to 100% of the voting stock of an

existing domestic bank.
Mode 2: By investing in up to 100% of the voting stock of a new banking subsidiary
incorporated in the Philippines.
Mode 3: By establishing branches with full banking authority.

Guidelines:
 Application Guide in Establishing Foreign Banks
 Circular 858 - Amendments to Relevant Provisions of the Manual of Regulations for
Banks Implementing Republic Act No. 10641
 Circular 858 FAQ
 Circular 854 - Minimum Capitalization of Banks

Forms:

 Agreement to Organize a Bank (Mode 2)

 Head Office Guarantee (Mode 3)

The Manual of Regulations for Non-Bank Financial Institutions (MORNBFI) codifies and
logically organizes Bangko Sentral rules and policy issuances governing non-bank financial
institutions supervised by, or are under the regulatory ambit of, the Bangko Sentral such as
quasi-banks, investment houses, non-stock savings and loan associations, pawnshops and trust
corporations in the country. The MORNBFI serves two fundamental objectives: one, a
convenient reference for operators and regulators regarding the implementation of domestic laws
and their pertinent rules and regulations governing said financial intermediaries; and two, a
useful guide for all individuals, organizations, and agencies with interest in the country’s non-
bank financial institutions

Supervision and Regulation Distinguished

Banking Supervision
The Bangko Sentral has supervision over the operations of banks and exercises such regulatory
powers as provided in the New Central Bank Act and other pertinent laws over the operations of
finance companies and non-bank financial institutions performing quasi-banking functions.

Supervision and Examinations of Banking Institutions.

The Bangko Sentral, through the Supervision and Examination Sector, conducts supervision and
examinations of banking institution by means of:

1. Examining the books, documents and records of banking institutions operating in the
Philippines, including all government credit institution.

2. The department heads and examiners of the supervising and/ or examining department are
authorized to administer oaths to any directors, officer, or employee.

3. Compel the presentation of all books. Documents, papers or records necessary to ascertain as
well as the books and records of persons and entities in connection.

4. No restraining order or injunction is to be issued by the Court enjoining the Bangko Sentral
from examining any institution subject to the supervision and/ or examination by the Bangko
Sentral.

5. Department heads and examiners are authorized by the Monetary Board to examine, inquire or
look into all deposits of whatever nature with banking institutions in the Philippines, including
investment in debt instrument issued by the national government, its political subdivisions and its
instrumentalities, after being satisfied that there is reasonable ground to believe.

Types of Examination

Risk based supervision features a balanced complementation of on-site examination and off-site
monitoring. An effective off site monitoring mechanism that yields an updated assessment of the
changing risk profile of a banking unit or group serves as a valuable input to the scoping and
planning of an on-site examination. On the other hand, a Report of Examination that is
completed and shared shortly after an on site examination, one that is well written and clearly
presents major supervisory conclusions, contributes significantly to the preparation of an updated
assessment of bank risk profile. The interdependency and close coordination of work units
discharging those separate tasks should serve to foster teamwork and build mutual trust.

The on-site examination assumes a different focus, from a compliance-based exercise to one that
puts emphasis on the soundness of governance and risk management and the effectiveness of the
audit function. Its conduct entails reliance on enhanced analytic skills and judgment calls of
examiners. The method for implementing the rating system for banks, known as CAMELS, has
likewise undergone review to reflect the new approach. Moreover, examination teams are now
expected to discuss more candidly with banks how ratings were determined.

For off-site monitoring, the challenge is to be able to identify sources of potential threats to
financial and reputational soundness. Critical thinking abilities and sound judgment skills are
very crucial. Bank supervision staff assigned to do this task need to alert higher management of
what he perceives as potential threats, based on all available information. As the central point of
contact, he is also expected to thoroughly understand and be updated on the business of a bank.
These assessments are synthesized in an Institutional Overview (IO) document that is updated on
a quarterly basis.

SECTION 28. Examination and Fees. — The supervising and examining department head,
personally or by deputy, shall examine the books of every banking institution once in every
twelve (12) months, and at such other times as the Monetary Board by an affirmative vote of five
(5) members, may deem expedient and to make a report on the same to the Monetary Board:
Provided, That there shall be an interval of at least twelve (12) months between annual
examinations.

The bank concerned shall afford to the head of the appropriate supervising and examining
departments and to his authorized deputies full opportunity to examine its books, cash and
available assets and general condition at any time during banking hours when requested to do so
by the Bangko Sentral: Provided, however, That none of the reports and

other papers relative to such examinations shall be open to inspection by the public except
insofar as such publicity is incidental to the proceedings hereinafter authorized or is necessary
for the prosecution of violations in connection with the business of such institutions.

Banking and quasi-banking institutions which are subject to examination by the Bangko Sentral
shall pay to the Bangko Sentral, within the first thirty (30) days of each year, an annual fee in an
amount equal to a percentage as may be prescribed by the Monetary Board of its average total
assets during the preceding year as shown on its end-of-month balance sheets, after deducting
cash on hand and amounts due from banks, including the Bangko Sentral and banks abroad.

Purpose/Effectiveness of Supervision and Regulations

BSP's role is primarily to evaluate the quality of oversight, the adequacy of policies and
procedures, and the robustness of the risk management system and the effectiveness of the
internal audit function.

Benefits of bank Supervision

The major benefits of bank controls are:

1. Prevention of over-expansion or under-expansion of money and credit through a system-wide

monopoly or through excessive competition.

2. Elimination of monopoly.

3. Protection of depositors against the consequences of bank failures.