MODULE

Flexible Learning A.Y. 2020-2021

1
DISTANCE EDUCATION COURSE STUDY GUIDE v.3
Course instructor: Atty. Bebelan A. Madera, CPA, MBA, RCA, MICB
Contact details: FB messenger: Bebelan A. Madera | Email: b.madera@usls.edu.ph | Phone: +63 9179262342
Consultation schedule: MWF 5:30 to 6:30 p.m.
12 hours

Banking Laws

This module aims to teach the current law and practice in the field of banking law.
As businesses continues to grow, more and more people transact commercial
transactions in banks. Thus, the need to understand banking concepts and banking laws
to acquaint and prepare the students in the real-life scenario involving banking
transactions.

Particularly, this module, aims to discuss the following:

a. The New Central Bank Act (Rep. Act No. 7653) (the "BSP Law") The BSP
Law establishes the Bangko Sentral ng Pilipinas (“BSP”), its organizational set-
up, responsibilities, corporate authorities, key operational procedures, and
special powers over banks. It then defines the key roles of the BSP, namely:
(a) as a central monetary authority with the sole power to issue currency and
legal tender and to regulate the supply of money and credit in the system; (b)
as government banker with the power to represent the national government in
all dealings with international financial institutions; and (c) as a central bank
with regulatory and supervisory power over all banks and financial institutions
exercising quasi-banking functions.

b. The General Banking Law of 2000 (Rep. Act No. 8791) ("GBL") The GBL
provides for the regulatory supervision of the BSP over all banks in the
Philippines. It likewise provides for the authority of the BSP and the
organization, management, and administration of foreign and local banks,
quasi-banks, and trust entities, and other types of banks. Under the GBL,
banks are classified into commercial banks, universal banks, thrift banks,
cooperative banks, Islamic banks, and other classes as may be determined by
the Monetary Board, with various powers and requirements for each
classification. In addition, the GBL also provides for the rules on deposits,
loans and investments, trust operations, placement under conservatorship,
and cessation of banking business.

c. Secrecy of Bank Deposits Act (Rep. Act No. 1405, as amended) This law
prohibits the examination and inquiry into all bank deposits and investments
in government securities with Philippine banks by any person, government
official, bureau, or office, and prohibits the disclosure by any bank official or
employee to any unauthorized person of any information concerning the said
deposits, subject to certain exceptions.

Learning Outcomes
At the end of this module, you must have:
1. Discuss the objectives and basic functions of the BSP and the role of the Monetary Board
2. Distinguish banks from quasi banks and briefly describe the different kinds of banks.
3. Discuss the process and the effects of the placement of the bank under the liquidation.
4. Discuss the purpose and concept of the bank secrecy law.

CLAW5: Banking Laws Module 1 | Page 1

Look for Philippine coins and Philippine paper bills at your house. Observe their features.

What do you think are the security features of our paper bills so that they will not be
counterfeited? Share your ideas.

Read the following sections from the New Central Bank Act (R.A. No. 7653) and answer
the questions that follow on a separate piece of paper.

THE NEW CENTRAL BANK ACT (NCBA, R.A. 7653) as amended by R.A. 112111

Bangko Sentral ng Pilipinas (BSP) It is the State’s central monetary authority. It is the
government agency charged with the responsibility of administering the monetary,
banking and credit system of the country and is granted the power of supervision and
examination over bank and nonbank financial institutions performing quasibanking
functions, including savings and loan associations (Busuego v. CA, G.R. No. L-48955,
June 30, 1987).

Bangko Sentral ng Pilipinas as an institution

The BSP is a government-owned corporation which enjoys fiscal and administrative

autonomy. STATE POLICIES Policy of the state with respect to the creation of the
Bangko Sentral ng Pilipinas The State shall maintain a central monetary authority that
shall function and operate as an independent and accountable body corporate in the
discharge of its mandated responsibilities concerning money, banking and credit (NCBA,
Sec 2).

While it is a government owned corporation it enjoys fiscal and administrative autonomy.

1
2019 Golden Notes Mercantile Law

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Fiscal – relating to treasury as in the monetary
Administrative – being the regulatory agency in accordance with its policy directions.

Salient considerations on the creation of Bangko Sentral ng Pilipinas

1. It is established as an independent central monetary authority.

2. Its capital shall be P50,000,000,000, P200,000,000,000 to be fully subscribed by the
Philippine Government.
3. The increase in capitalization shall be funded solely from the declared dividends of
the Bangko Sentral in favor of the National Government.
4. Any declared dividends of the Bangko Sentral in favor of the National Government
shall be deposited in a special account in the General Fund, and earmarked for the
payment of Bangko Sentral’s increase in capitalization. Such payment shall be released
and disbursed immediately and shall continue until the increase in capitalization is fully
paid.

RESPONSIBILITY AND PRIMARY OBJECTIVE OF THE BSP

1. To provide policy directions in the areas of money, banking, and credit.

2. To supervise bank operations.
3. To exercise regulatory and examination powers over quasi-banking operations of non-
bank financial institutions, money service businesses, credit granting businesses and
payment system operators.

Primary objectives of BSP

1. To maintain price stability conducive to a balanced and sustainable growth of the

economy; and
2. To promote and maintain monetary stability and the convertibility of the peso (NCBA,
Sec. 3).

Functions of BSP(BRAGS-CHoBE)

1. Banker of the government – the BSP shall be the official depository of the Government
and shall represent it in all monetary fund dealings (NCBA, Secs. 110- 116).
2. Custodian of Reserves (NCBA, Secs. 64-66, 94, 103)
3. Financial Advisor of the government (NCBA, Secs. 123-124) – Under Article VII, Sec.
20 of the 1987 Constitution, the President may contract or guarantee foreign loans but
with the prior concurrence of the Monetary Board.
4. Government agent (NCBA, Secs. 117-122)
5. Source of credit (NCBA, Secs. 61-63, 81-89, 109)
6. Issuer of Currency (NCBA, Sec. 49-60)
7. Clearing channel or House; especially where the PCHC does not operate (NCBA, Sec.
102)
8. Supervisor of the Banking system (NCBA, Sec. 25) – shall include the power to:
a. Examine, which power extends to enterprises wholly or majority-owned or
controlled by the bank (GBL, Sec. 7); this power may not be restrained by a writ
of injunction unless there is convincing proof that the action of the BSP is plainly
arbitrary (NCBA, Sec. 25)
b. Place a bank under receivership or liquidation (NCBA, Sec. 30)
c. Initiate criminal prosecution of erring officers of banks.
9. Extends discounts, loans and advances to banking institutions in order to influence
the volume of credit consistent with objective of price stability.

Note: When availing of the loan facilities of the BSP, private banks assign to BSP their
receivables including the collaterals

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MONETARY BOARD; POWERS AND FUNCTIONS OF THE Monetary Board

It is the body through which the powers and functions of the BSP are exercised
(NCBA, Sec 6). Powers and functions of the Monetary Board (RASBI)

1. Issue Rules and regulations it considers necessary for the effective discharge
of the responsibilities and exercise of its powers.
2. Direct the management, operations, and Administration of the BSP, reorganize
its personnel, and issue such rules and regulations as it may deem necessary or
convenient for this purpose.
3. Establish a human resource management System.
4. Adopt an annual Budget for and authorize such expenditures by the BSP as
are in the interest of the effective administration and operations of the BSP in
accordance with applicable laws and regulations.
5. Indemnify its members and other officials of the BSP, including personnel of
the departments performing supervision and examination functions against all
costs and expenses reasonably incurred by such persons in connection with any
civil or criminal action (NCBA, Sec 15).

NOTE: In the event of a settlement or compromise, indemnification shall be provided

only in connection with such matters covered by the settlement as to which the BSP is
advised by external counsel that the person to be indemnified did not commit any
negligence or misconduct. The costs and expenses incurred in defending the
aforementioned action, suit or proceeding may be paid by the BSP in advance of the
final disposition of such action, suit or proceeding upon receipt of an undertaking by or
on behalf of the member, officer, or employee to repay the amount advanced should it
ultimately be determined by the Monetary Board that he is not entitled to be indemnified
as provided in this subsection (Ibid.).

Composition of the Monetary Board

The MB shall be composed of 7 members appointed by the President with a 6-year

term.No member of the MB may be reappointed more than once(NCBA, Sec. 6).

Members
1. The BSP Governor or his designated alternate (a deputy governor);
2. A Cabinet member to be designated by the President or his designated alternate (an
undersecretary in his department);
3. 5 members from the private sector

Retrieved from http://www.bsp.gov.ph/downloads/regs/New_Central_Bank_Act.pdf

Learning Task 1
Questions:

1. What’s the role of the Banko Sentral ng Pilipinas (BSP) in our Banking Systems?
2. Why is the BSP considered as the “lender of last resort”?
3. What is the role of the Monetary Board in Central Bank?
In this section, we will discuss in more detail the pertinent laws in relation to the conduct
of banking in the Philippines.

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 General Banking Act of 2000 (R.A. No. 8791)

Policy of the state behind the General Banking Act (RA 8791)

The State recognizes the vital role of banks in providing an environment

conducive to the sustained development of the national economy and the fiduciary
nature of banking that requires high standards of integrity and performance. In
furtherance thereof, the State shall promote and maintain a stable and efficient banking
and financial system that is globally competitive, dynamic and responsive to the
demands of a developing economy (RA 8791, Sec 2).

DEFINITION AND CLASSIFICATION OF BANKS

Bank - A bank is an entity engaged in the lending of funds obtained from the public in
the form of deposits.

Elements for an entity to be considered doing business as a bank

1. The entity is engaged in the lending of funds
2. Funds obtained from the public with at least 20 depositors
3. Funds are in the form of deposits

NOTE: A transaction involving not a loan but purchase of receivables at a discount

within the purview of investing, reinvesting, or trading in securities which an investment
company may perform is not banking.

Extent of ownership of foreign individuals and non-bank corporations in a bank

Foreign individuals may own or control up to forty percent (40%) of the voting stock of
a domestic bank (GBL, Sec 2).

Extent of ownership of a non-banking corporation in a bank

GR: A corporation may only own forty percent (40%) of the bank
XPNs:
1. A universal bank can own up to 100% of a thrift bank;
2. A corporation whose shares are listed in the stock exchange can own up to
60% of the bank; NOTE: This privilege can be exercised only once.

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 3. If the corporation is in existence for 10 years it can own up to 60% of the
bank; and NOTE: This privilege can be exercised only once.
4. Under Foreign Bank Liberalization Law (RA 7721), the Monetary Board may
authorize foreign banks to operate in the Philippines.

Ownership of foreign individuals in a bank

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
(GBL, Sec 2).

Classifications of banks

1. Universal banks- Primarily governed by the GBL. They can exercise the powers of
an investment house and invest in non-allied enterprises and have the highest
capitalization.
2. Commercial banks - Ordinary banks governed by the GBL which have a lower
capitalization requirement than universal banks and can neither exercise the powers of
an investment house nor invest in non-allied enterprises.
3. Thrift banks – These are: a. Savings and mortgage banks; b. Stock savings and
loan associations; and c. Private development banks, which are primarily governed
by the Thrift Banks Act (RA 7906).
4. Rural banks – These are mandated to make needed credit available and readily
accessible in the rural areas on reasonable terms and which are primarily governed by
the Rural Banks Act of 1992 (RA 7353).
5. Cooperative banks – Banks whose majority shares are owned and controlled by
cooperatives primarily to provide financial and credit services to cooperatives. It shall
include cooperative rural banks. They are governed primarily by the Cooperative Code
(RA 6938).
6. Islamic banks – Banks whose business dealings and activities are subject to the
basic principles and rulings of Islamic Shari’ a, such as the Al Amanah Islamic
Investment Bank of the Philippines which was created by RA 6848.
7. Other classification of banks as determined by the Monetary Board of the BSP

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DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST ENTITIES

Quasi-bank - These are entities engaged in the assignment with recourse or

acceptance of deposit substitutes for purposes of re-lending or purchasing of
receivables borrowing of funds through the issuance, endorsement or and other
obligations (GBL, Sec 4). Unlike banks, quasi-banks do not accept deposits. Neither
are funds obtained insured with the PDIC.

Trust entities - These are entities engaged in trust business that act as a trustee or
administer any trust or hold property in trust or on deposit for the use, benefit, or behalf
of others (GBL, Sec. 79). A bank does not act as a trustee.

Financial intermediaries - Persons or entities whose principal functions include the

lending, investing, or placement of funds on pieces of evidence of indebtedness or
equity deposited with them, acquired by them or otherwise coursed through them,
either for their own account or for the account of others.

Retrieved from http://www.bsp.gov.ph/downloads/Regulations/gba.pdf

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 Liquidation Framework for Banks Act (R.A. No. 10846)

THE BSP AND BANKS IN DISTRESS

In case of a distressed bank, the BSP appoints a conservator or receiver for

closure of the bank.

Illiquidity
This occurs when the bank is not liquid. It means that the bank cannot meet its
current liabilities. It is handled by conservatorship.

Liquidity
It is the ability of an asset to be converted into cash. An entity is liquid when it is
able to pay its liabilities when they fall due.

Insolvency
This occurs when the actual market value of assets is insufficient to pay its
liabilities, not considering capital stock and surplus which are not liabilities for such
purpose. An entity is insolvent when it is unable to meet current and long-term
obligations. It is handled by receivership or closure. The duration of conservatorship
shall not exceed 1 year (NCBA, Sec. 29)

CONSERVATORSHIP

Conservator
One appointed if the bank is in the state of illiquidity or the bank fails or refuses
to maintain a state of liquidity adequate to protect its depositors and creditors. The
bank still has more assets than its liabilities but its assets are not liquid or not in cash
thus it cannot pay its obligation when it falls due. The bank, not the BSP, pays for fees.

Powers of a conservator (CARe BEAr)

1. Collect all monies and debts due to the said bank
2. To take charge of the Assets, liabilities, and the management thereof
3. REorganize, the management thereof
4. And such other powers as the monetary Board deems necessary
5. Exercise all powers necessary to restore its viability, with the power to overrule or
revoke the actions of the previous management and board of directors of the bank or
quasi-bank
6. To bring court actions to Assail or Repudiate contracts entered into by the bank
(First Philippine International Bank v. CA, G.R. No. 115849, Jan. 24, 1996).

Powers of a conservator do not extend to the revocation of valid and perfected

contracts
The powers of a conservator cannot extend to post facto repudiation of valid
and perfected transactions. Thus, the law merely gives the conservator power to
revoke contracts that are deemed to be defective- void, voidable, unenforceable or
rescissible. Hence, the conservator merely takes the place of the bank’s board (First
Philippine International Bank v. CA, supra.).

Termination of conservatorship

1. Conservatorship is terminated when the Monetary Board is satisfied that the bank
can operate on its own and the conservatorship is no longer necessary; or
2. When the Monetary Board, on the basis of the report of the conservator or of its own
findings, determine that the continuance in business of the institution would involve
probable losses to its depositors or creditors (effect: the bank or quasibank would then
be place under receivership)

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CLOSURE

Grounds for closure of a bank or a quasi-bank

1. Cash Flow test - Inability to pay liabilities as they become due in the ordinary course
of business (NCBA, Sec. 30 [a]).
2. Balance sheet test – Insufficiency of realizable assets to meet its liabilities (NCBA,
Sec 30 [b]).
3. Inability to continue business without involving probable losses to its depositors and
creditors (NCBA, Sec 30 [c]).
4. Willful violation of a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets
(NCBA, Sec 30 [d]).
5. Notification to the BSP or public announcement of a bank holiday (GBL, Sec 53).
6. Suspension of payment of its deposit liabilities continuously for more than 30 days
(GBL, Sec 53).
7. Persisting in conducting its business in an unsafe or unsound manner (GBL, Sec 56).

Close now-hear later doctrine

The doctrine is founded on practical and legal considerations to obviate

unwarranted dissipation of the bank’s assets and as a valid exercise of police power to
protect the depositors, creditors, stockholders, and the general public. The law does
not contemplate prior notice and hearing before the bank may be directed to stop
operations and placed under receivership (Central Bank of the Philippines v. CA, G.R.
No. 76118 Mar. 30, 1993).

Swift, adequate and determined actions must be taken against financially

distressed and mismanaged banks by government agencies lest the public faith in the
banking system deteriorate to the prejudice of the national economy (Vivas v. The
Monetary Board of the Bangko Sentral ng Pilipinas, G.R. No. 191424, August 07,
2013).

Under R.A. No. 7653, the power of the Monetary Board (MB) over banks,
including rural banks, was increased and expanded. The Court, in several cases,
upheld the power of the MB to take over banks without need for prior hearing. It is not
necessary inasmuch as the law entrusts to the MB the appreciation and determination
of whether any or all of the statutory grounds for the closure and receiver-ship of the
erring bank are present. The MB, under R.A. No. 7653, has been invested with more
power of closure and placement of a bank under receivership for insolvency or
illiquidity, or because the bank’s continuance in business would probably result in the
loss to depositors or creditors. BSP may order the closure of the bank even without
prior hearing.

BSP may rely on the report of either the conservator, receiver or the head of the
supervising and examining department. It is not required to conduct a thorough audit
of the bank before ordering its closure. The "close now, hear later’’ doctrine justifies
BSP in ordering bank closures even without prior hearing. Thus, injunction does not lie
against BSP in the exercise of the power and function. A contrary rule may lead to
dissipation of assets and trigger bank run. Judicial review comes only after action of
the Monetary Board if the same was attended with bad faith and grave abuse of
discretion (BSP v. Valenzuela, G.R. No. 184778, October 2, 2009).

Note: The probability of bank runs may give rise to the right to invoke borrowing
of emergency loans and advancements under Sec. 84 of NCBA

The closure and liquidation of a bank, which is considered an exercise of police

power may be the subject of judicial inquiry

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 The validity of such exercise of police power is subject to judicial inquiry and
could be set aside if it is either capricious, discriminatory, whimsical, arbitrary, unjust or
a denial or due process and equal protection clauses of the Constitution (Central Bank
v. CA, G.R. No. L-50031-32, July 27, 1981).

Assailing the order of closure (receivership or conservatorship)

a) The order may be assailed by the stockholders representing at least majority of the
outstanding capital stock;
b) within ten days from receipt by the board of directors of the order; and
c) thru a petition for certiorari on the ground that the action taken by the BSP was in
excess of jurisdiction or with grave abuse of discretion as to amount to lack of
jurisdiction.

No prior hearing is necessary in appointing a receiver and in closing the bank. It

is enough that subsequent judicial review is provided for. Indeed, to require such
previous hearings would not only be impractical but would tend to defeat the very
purpose of the law (Rural Bank of Lucena v. Arca, G.R. No. L-21146, September 20,
1965).

Q: Upon maturity of the time deposit, the bank failed to remit. By reason of
punitive action taken by Central Bank, the bank has been prevented from
performing banking operations. Is the bank still obligated to pay the time
deposits despite the fact that its operations were suspended by the Central
Bank?

A: YES, the suspension of operations of a bank cannot excuse non-compliance

with the obligation to remit the time deposits of depositors which matured
before the bank’s closure (Overseas Bank of Manila v. CA, G.R. No. 45886, April
19, 1989).

Bank not liable to pay interest when closed

As a general rule, the bank is not liable to pay interest on DEPOSIT once it is
closed and ceased operations.

RECEIVERSHIP

Receiver
One appointed if the bank is already insolvent which means that its liabilities are
greater than its assets. The Court has no authority to appoint a receiver for a bank if
the latter will function as such under BSP law. The power to appoint belongs to BSP.
NOTE: For banks, the receiver would be the Philippine Deposit Insurance
Corporation; for quasi-banks, it could be any person of recognized competence in
banking or finance (NCBA, Sec. 30).

Duties of a receiver

The receiver shall: (IAN-WiDE)

1. Immediately gather and take charge of all the assets and liabilities of the
institution;
2. Administer the same for the benefit of the creditors, and exercise the general
powers of a receiver under the Revised Rules of Court;
3. Not, with the exception of administrative expenditures, pay or commit any act
that will involve the transfer or disposition of any asset of the institution:
Provided that the receiver may deposit or place the funds of the institution in
non-speculative investments;
4. Within 90 days from the take-over, the receiver shall determine whether the
institution may be rehabilitated or otherwise placed in such a condition that it

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 may be permitted to resume business with safety to its depositors and creditors
and the general public; and
5. If the receiver determines that the institution cannot be rehabilitated or
permitted to resume business, then the Monetary Board shall notify in writing
the board of directors of the institution of its findings and direct the receiver to
proceed with liquidation of the institution (NCBA, Sec 30).

The insolvency of a bank and the consequent appointment of a receiver restrict

the bank's capacity to act, especially in relation to its property.

Where upon the insolvency of a bank, a receiver therefor is appointed, the

assets of the bank pass beyond its control into the possession and control of the
receiver whose duty it is to administer the assets for the benefit of the creditors of the
bank. Thus, the appointment of a receiver operates to suspend the authority of the
bank and of its directors and officers over its property and effects, such authority being
reposed in the receiver (Villanueva v. CA, G.R. No. 114870, May 26, 1995).

The receiver is not authorized to transact business in connection with the bank’s
assets and property

A receiver can only perform acts of administration and not acts of dominion. The
receiver cannot approve an option to purchase real property. He has only the authority
to administer the same for the benefit of its creditors (Abacus Real Estate Development
Center, Inc. v. Manila Banking Corp, G.R. No. 162270, Apr. 6, 2005).

Nature of order of receivership

While resolutions of the Monetary Board forbidding a bank to do business on

account of a condition of insolvency and appointing a receiver to take charge of the
bank’s assets or determining whether the bank may be rehabilitated or should be
liquidated are by law “final and executory.” However, they can be set aside by the
court on one specific ground - if the action is plainly arbitrary and made in bad faith.
Such contention can be asserted as an affirmative defense or a counterclaim in the
proceeding for assistance in liquidation (Salud v. Central Bank, G.R. No. L-17630,
August 19, 1986).

LIQUIDATION

Liquidation of a bank

Acts of liquidation are those which constitute the conversion of the assets of the
banking institution to money or the sale, assignment or disposition of the same to
creditors and other parties for the purpose of paying debts of such institution (Banco
Filipino v. Central Bank, G.R. No. 70054, December 11, 1991).

Liquidator of a distressed bank can prosecute and defend suits against the bank

Prosecution of suits, collection and the foreclosure of mortgages against

debtors of the bank by the liquidator are among the usual and ordinary transactions
pertaining to the administration of a bank (Banco Filipino v. Central Bank, ibid).

A liquidator may foreclose mortgages due to a bank while the issue of

receivership is pending

A liquidator can foreclose mortgages for and in behalf of the bank even if the
issue on receivership and liquidation is still pending (Supra).

Q: An intra-corporate case was filed before RTC. On the other hand, another
complaint was filed before BSP to compel a bank to disclose its stockholdings
invoking the supervisory power of the latter. Is there a forum shopping?

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 A: NONE. The two proceedings are of different nature praying for different relief.
The complaint filed with the BSP was an invocation of its supervisory powers
over banking operations which does not amount to a judicial proceeding (Suan
v. Monetary Board, A.C. No. 6377, March 12, 2007).

Commencement of liquidation proceedings bar the filing of a separate action or

petition to assail the order of closure

Once liquidation proceedings have been initiated, the majority stockholders of

the bank can no longer file a separate action or petition to assail the order of closure.
Instead, issues on validity of closure should be raised as affirmative defenses in the
liquidation proceeding. This is necessary to prevent multiplicity of suits or conflicting
resolutions (Salud v. Central Bank of the Philippines, G.R. No. L-17620, August 19,
1986).

Liquidation proceedings may be carried out with or without tax clearance

Unlike in a voluntary dissolution of a corporation under the Corporation Code,

BSP can liquidate the bank with or without tax clearance (GBL). Banks under
liquidation by the PDIC as ordered by the Monetary Board constitute a special case
governed by the special rules and procedures provided under Section 30 of the New
Central Bank Act, which does not require that a tax clearance be secured from the BIR.
Only a final tax return is required to satisfy the interest of the BIR in the liquidation of a
closed bank. It is unreasonable for the liquidation court to require that a tax clearance
be first secured as a condition for the approval of project of distribution of a bank
under liquidation (PDIC v. BIR, G.R. No. 172892, June 13, 2013).

Filing of the claims against the insolvent bank

GR: All claims against the insolvent bank should be filed in the liquidation proceeding.
It is not necessary that a claim be initially disputed in a court or agency before it is filed
with the liquidation court (Ong v. CA, G.R. No. 112830, Feb. 1, 1996).
XPN: Where it is the bank that files a claim against another person or legal
entity, the claim should be filed in the regular courts.
Reason: The judicial liquidation is intended to provide an orderly mode for
payment of all claims. In addition, such petition is not in the nature of a disputed
claim against the bank.

Retrieved from https://www.officialgazette.gov.ph/2016/05/23/republic-act-no-10846/.

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 Law on Secrecy of Bank Deposits (R.A. No. 1405)

LAW ON SECRECY OF BANK DEPOSITS (R.A. 1405, AS AMENDED)

PURPOSE

The purposes of RA 1405 are:

1. Encourage deposit in banking institutions; and
2. Discourage private hoarding so that banks may lend such funds and assist in
the economic development of the country.

PROHIBITED ACTS

The following are the prohibited acts in RA 1405:

1. Examination/inquiry/looking into all deposits of whatever nature with banks or
banking institutions in the Philippines (including investment in bonds issued by
the government) by any person, government official or office (RA 1405, Sec. 2).
2. Disclosure by any official or employee of any banking institution to any
unauthorized person of any information concerning said deposit (RA 1405, Sec.

Acts not covered by the prohibition

Non-bank official or employee is not covered by the prohibition. Neither is

disclosure by a bank official or employee of information about bank deposit in favor of
a co-employee in the course of the performance of his duties covered by the
prohibition.

DEPOSITS COVERED
1. All deposits of whatever nature with banks or banking institutions found in the
Philippines.
2. Investments in bonds issued by the Philippine government, its branches, and
institutions (R.A. 1405, Sec. 2).
3. Trust accounts Meaning of the phrase "of whatever nature and kind"
R.A.1405 is no longer limited to deposits governed by the law on loans giving
rise to creditor-debtor relationship but it covers fund of whatever nature so long
as the bank may use and utilize it in authorized loans.

NOTE: Despite such pronouncement that trust funds are considered deposits, trust
funds remain not covered by PDIC.

Confidentiality granted by RA 1405 does NOT extend to Letters of Credit and

Trust Receipts
The confidentiality granted by the law does NOT extend to other documents and
records like L/C’s, TR’s, bank drafts and promissory notes (Opinion of the Secretary of
Justice No. 5, Series of 1982; Opinion of the Secretary of Justice No. 126, Series of
1989).

EXCEPTIONS

Instances where examination or disclosure of information about deposits can be

allowed (WICS)
1. Upon written consent of the depositor (RA 1405, Sec. 2)
2. In cases of impeachment (Ibid)
3. Upon order of competent court in cases of bribery or dereliction of duty of
public officials
4. In cases where the money deposited or invested is the subject matter of the
litigation (Ibid)

Other Instances:

CLAW5: Banking Laws Module 1 | Page 13

 a. Upon order of the Commissioner of Internal Revenue in respect of the bank
deposits of a decedent for the purpose of determining such decedent’s gross
estate (NIRC, Sec. 6[F][1])
b. Upon the order of the Commissioner of Internal Revenue in respect of bank
deposits of a taxpayer who has filed an application for compromise of his tax
liability by reason of financial incapacity to pay his tax liability (Ibid)

c. The Commissioner of Internal Revenue is authorized to inquire into bank

deposits of a specific taxpayer upon request for tax information from a foreign
tax authority pursuant to an international convention or agreement on tax
matters to which the Philippines is a party (Ibid)

d. In case of dormant accounts/deposits for at least 10 years under the

Unclaimed Balances Act (Act No. 3936, Sec. 2)

e. The prohibition against examination of bank deposit does not preclude its
garnishment to satisfy a judgment against the depositor (Oñate v. Abrogar, G.R.
No. 107303, February 21, 1994)

f. Presidential Commission on Good Government (PCGG) may require the

production of bank records material to its investigation (Opinion of the Secretary
of Justice, February 27, 1987)

g. The Anti-Money Laundering Council (AMLC) may inquire into any deposit with
any bank in case of violation of the RA 9160 or the AMLA if there is probable
cause that it is related to an unlawful activity (RA 9160, as amended, Sec. 11)

h. The PDIC and the BSP may examine deposit accounts and all information
related to them in case of a finding of unsafe or unsound banking practices (RA
3591, as amended, Sec. 8)

i. With court order:

a. In cases of unexplained wealth under Sec. 8 of the Anti-Graft and
Corrupt Practices Act (PNB v. Gancayco, L-18343, September 30, 1965)
b. In cases filed by the Ombudsman and upon the latter’s authority to
examine and have access to bank accounts and records (Marquez v.
Desierto, GR 138569, September 11, 2003)

j. Without court order: If the AMLC determines that a particular deposit or

investment with any banking institution is related to the following (HK-MADS):
a. Hijacking, b. Kidnapping, c. Murder, d. Destructive Arson, and e.
Violation of the Dangerous Drugs Act. f. Acts of Terrorism or in violation
of Human Security Act. k. In case the law is repealed, superseded or
modified by any law to the contrary.

Foreign currency deposits

Foreign currency deposits are covered by R.A. 6426 otherwise known as the “Foreign
Currency Deposits Act”.

Secrecy of foreign currency deposits

GR: Foreign currency deposits cannot be inquired or looked into. All foreign
currency deposits are absolutely confidential (RA 6426, Sec. 8).

RA 6426 is a special law designed especially for foreign currency deposits in the
Philippines. RA 1405 which covers all bank deposits in the Philippines is the
general law which does not nullify the special law on foreign currency deposits.
The surety which issued a bond to secure the obligation of the principal debtor
cannot inquire into the foreign currency deposits of the debtor even if its

CLAW5: Banking Laws Module 1 | Page 14

 purpose is to determine whether or not the loan proceeds were used for the
purpose specified in the surety agreement. The foreign currency deposits
cannot be examined without the written consent of the depositor. The subpoena
issued by the bank should be quashed because foreign currency deposits are
not subject to court order except for violation of the anti-money laundering law
(GSIS v. Court of Appeals GR 189206, June 8, 2011, in Divina, 2014).

XPNs:
1. The depositor has given his written permission.

2. Where the funds deposited in a joint foreign currency savings account

belonged exclusively to one of the depositors and were held in trust for him by
the other depositor and the other depositor unilaterally closed the joint account
and transferred the funds to her personal account, the latter cannot invoke the
exemption from court processes under RA 6426 because she is not the owner
of the deposit in the account. Consequently, the depositor who owned the funds
can have her enjoined from making withdrawals from her personal account (Van
Twest v. Court of Appeals, G.R. No. 106235, February 10, 1994).

3. A father who sued his daughter for illegally withdrawing funds from his foreign
currency deposit and transferring to another bank in the name of her sister, can
inquire into the deposit of the sister, because the money deposited belongs to
him (China Banking Corp. v. CA, G.R. No. 140687, December 18, 2006).

4. The exemption from court process of foreign currency deposits under RA

6426 cannot be invoked by a foreign transient who raped a minor, escaped and
was held liable for damages to the victim. The garnishment of his foreign
currency deposit should be allowed to prevent an injustice and for equitable
grounds. The law was enacted to encourage foreign currency deposit and not to
benefit a wrongdoer (Salvacion v. Central Bank of the Philippines, G.R. No.
94723, August 21, 1997).

5. The Commissioner of Internal Revenue is authorized to inquire into bank

deposits of the following: a. A decedent to determine his estate; and b. Any
taxpayer who has filed for an application for compromise of his tax liability c. A
specific taxpayer upon request for tax information from a foreign tax authority
pursuant to an international convention or agreement on tax matters to which
the Philippines is a party (NIRC, Sec. 6 [f]).

6. AMLC may inquire into any deposit with a bank or financial institution in case
of violation of RA 9160 if there is probable cause that it is related to an unlawful
activity (RA 9160, Sec. 11).

7. Upon ex parte application by a law enforcer authorized by the Anti-Terrorism

Council, the justices of the CA designated as special court to handle anti-
terrorism cases may authorize the examination of deposits in a financial
institution upon finding probable cause of the commission of terrorism or
conspiracy to commit terrorism (RA 9372, Sec. 27-28).

8. PDIC and BSP may examine deposit accounts and all information related to
them in case of a finding of unsafe or unsound banking practices (RA 3591, as
amended, Sec. 8).

9. AMLC can investigate (a) any property of funds related to financing terrorism;
(b) property or funds of any person if there is probable cause to believe he is
committing or attempting or conspiring to commit terrorism or financing
terrorism (RA 10168, Sec. 10).

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GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS

Garnishment of a bank deposit does not violate the law

The prohibition against examination or inquiry does not preclude its being
garnished for satisfaction of judgment. The disclosure is purely incidental to the
execution process and it was not the intention of the legislature to place bank
deposits beyond the reach of judgment creditor (PCIB v. CA, G.R. No. 84526,
January 28, 1991).

Garnishment of foreign currency deposits

GR: Foreign currency deposits shall be exempt from attachment, garnishment,

or any other order or process of any court, legislative body, government agency
or any administrative body whatsoever (RA 6426, Sec 8).

XPN: The application of Sec. 8 of RA 6426 depends on the extent of its justice.
The garnishment of a foreign currency deposit should be allowed to prevent
injustice and for equitable grounds, otherwise, it would negate Article 10 of the
New Civil Code which provides that “in case of doubt in the interpretation or
application of laws, it is presumed that the lawmaking body intended right and
justice to prevail (Salvacion v. Central Bank of the Philippines, G.R. 94723,
August 21, 1997).

The foreign currency deposit of a transient foreigner who illegally detained

and raped a minor Filipina can be garnished to satisfy the award for
damages to the victim The exemption from garnishment of foreign
currency deposits under R.A. 6426 cannot be invoked to escape liability for
the damages to the victim.

The garnishment of the transient foreigner’s foreign currency

deposit should be allowed to prevent injustice and for equitable grounds.
The law was enacted to encourage foreign currency deposit and not to
benefit a wrongdoer (Salvacion v. Central Bank of the Philippines, supra).

Penalties for violation of R.A. 1405

1. Imprisonment of not more than five (5) years

2. Fine of not more than P20,000.00
3. Both, in the discretion of the court (RA 1405, Sec. 5)

Retrieved from http://www.pdic.gov.ph/files/ra1405.pdf

Learning Task 2
In this section are questions that will help enhance the understanding of the concepts discussed
in this module. Write your answers on a separate piece of paper.

1. Read the article “SC approves new rules on liquidation of banks” found on Annex A of the
study guide.

Based on your reading, map out the process in bank liquidation.

CLAW5: Banking Laws Module 1 | Page 16

2. Read pages 670 to 680 of the Ateneo law journal found in Annex B for the secrecy of bank
deposits.

Answer the question below:

The Law on Secrecy of Bank Deposits, otherwise known as RA 1405, is intended to encourage
people to deposit their money in banking institutions and also to discourage private hoarding so
that the same may be properly utilized by banks to assist in the economic development of the
country. Is a notice of garnishment served on a bank at the instance of a creditor of a depositor
covered by the said law? State the reason(s) for your answer.

3. What are the responsibilities and primary objectives of the BSP? (5pts)

4. XYZ Corporation is engaged in lending funds to small vendors in various public markets. To
fund the lending, XYZ Corporation raised funds through borrowings from friends and
investors. What’s the classification of XYZ Corporation? Bank or Quasi Bank? Explain. (10pts)

5. Aaron, a well-known architect, is suffering from financial reverses. He has four creditors with
a total claim of P 26 million. Despite his intention to pay these obligations, his current assets
are insufficient to cover all of them. His creditors are about to sue him. Consequently, he was
constrained to file a Petition for Insolvency (Act 1956).

a. Since Aaron was merely forced by circumstances to petition the court to declare him insolvent,
can the judge properly treat the petition as one for involuntary insolvency. Explain. (5pts)
b. If Aaron is declared an insolvent by the court, what would be the effect, if any, of such
declaration on his creditors? Explain. (5pts)
c. Assuming that Aaron has guarantors for his debts, are the guarantors released from their
obligations once Aaron is discharged from his debts? Explain. (5pts)
d. What remedies are available to the guarantors in case they are made to pay the creditors?
Explain (5pts)

6. Michael withdrew without authority funds of the partnership in the amounts of P500th and
US$50th for services he claims rendered for the benefit of the partnership. He deposited the
P 500th in his personal peso current account with Prosperity Bank and the US$50th in his
personal foreign currency savings account with Eastern Bank. The partnership instituted an
action in court against Michael, Prosperity, and Eastern to compel Michael to return the
subject funds to the partnership and pending litigation to order both banks to disallow any
withdrawal from his accounts. At the initial hearing of the case, the court ordered Prosperity
to produce the records of his Michael’s peso current account and Eastern to produce the
records of his foreign currency savings account. Can the court compel Prosperity and Eastern
to disclose the bank deposits of Michael? Discuss fully. (10pts)

7. A, an individual, secured a loan from XYZ Company. C, a surety company, issued a bond to
further secure the obligation. A has dollar deposits with ABC Bank. Can C inquire to ABC
Bank about the foreign currency deposits of A to determine whether or not the loan proceeds
were used for the purpose specified in their surety agreement? (10 pts)

CLAW5: Banking Laws Module 1 | Page 17

Learning Task 3
MULTIPLE CHOICE

1. Under Republic Act No. 6426 also known as Foreign Currency Deposit Act of the
Philippines, what is the only exception provided by such law from the absolute
confidentiality of foreign currency deposit?

A. Upon written permission or consent in writing by the depositor.

B. In cases of impeachment of the President, Vice President, members of the
Supreme Court, members of the Constitutional Commission (Commission on Elections,
Civil Service Commission and Commission on Audit) and the Ombudsman for culpable
violation of the Constitution, treason, bribery, graft and corruption, other high crimes or
betrayal of public trust.
C. Upon order of a competent court in cases of bribery or dereliction of duty of public
officials.
D. In cases where the money deposited or invested is the subject matter of the
litigation.

2. Which of the following is not protected by Republic Act No. 1405 also known as
Bank Secrecy Law?

A. Investment in government bonds

B. Certificate of time deposit
C. Demand account
D. Money market placement

3. It is the only bank allowed to exercise the powers of investment house and to
invest in non-allied enterprises.

A. Commercial bank
B. Rural bank
C. Thrift bank
D. Universal bank

4. Under Circular No. 425 of 2004 issued by Monetary Board of Bangko Sentral ng
Pilipinas, what is the maximum limit of loan to be granted by a bank to a single borrower?

A. 25% of net worth of the bank

B. 20% of net worth of the bank
C. 10% of net worth of the bank
D. 15% of net worth of the bank

5. Under the Central Bank Act, who shall be appointed as the receiver of a banking
institution in case the conservatorship of a bank is converted into receivership?

A. Monetary Board of Bangko Sentral ng Pilipinas

B. Supervising Officer of Bangko Sentral ng Pilipinas
C. Office of Government Corporate Counsel
D. Philippine Depositor Insurance Corporation

CLAW5: Banking Laws Module 1 | Page 18

6. Who is primarily liable to the notes and coins which are considered legal tender
in the Philippine jurisdiction?

A. Bangko Sentral ng Pilipinas

B. Government of the Republic of the Philippines
C. Landbank of the Philippines
D. Development Bank of the Philippines

7. Which of the following does not characterize a bank or banking institution?

A. Authorized to engage in lending of funds
B. Funds for lending are obtained mainly from private institutions
C. Funds are from receipt of deposits or sale of bonds
D. It conducts banking activities on a regular basis

8. Which of the following is excluded from the term “banking institution”?

A. Building and loan association
B. Money changer
C. Trust company
D. Savings bank

9. Which of the following security cannot be issued by banks?

A. Preferred stock
B. Common stock
C. Bonded instrument
D. No par value stock

10. At least what percent of the capital stock of any banking institution shall be owned
by citizens of the Philippines?
A. 50%
B. 60%
C. 75%
D. 90%

11. What type of banking institution is one which accepts or creates demand deposits
subject to withdrawal by check?
A. Trust company
B. Mortgage bank
C. Commercial bank
D. Building and loan association

12. Which of the following is not a purpose of a building and loan association?
A. to accumulate the savings of its stockholders
B. to repay to stockholders their accumulated savings and profits upon surrender of their
shares
C. to loan its funds to stockholders of the security of unencumbered real estate
D. to act as trustee or administer any trust or hold property in trust or on deposit for the
benefit of others

13. What does the D in DOSRI represent?

A. Dividends
B. Directors
C. Discounts
D. Depreciation

14. DOSRI should be in the regular course of business and the dealings should be upon
which terms?
A. Not more favorable to the bank than those offered to others
B. Not less favorable to the bank than those offered to others
C. Exactly similar to those offered to others
D. Double those offered to others

CLAW5: Banking Laws Module 1 | Page 19

15. A substantial stockholder shall mean a person, or group of persons whether natural
or juridical, owning such number of shares that will allow such person or group to elect
at least _______________ of the board of directors of a bank or who is directly or indirectly
the registered or beneficial owner of more than _______________ of any class of its equity
security.
A. 1 member; 20%
B. 2 members; 10%
C. 1 member; 10%
D. 2 members; 20%

16. What does SBL stand for?

A. Standard By Laws
B. Secured Banking Legislation
C. Single Borrower’s Limit
D. See Bottom Line

17. Per Bangko Sentral ng Pilipinas Circular No. 425, series of 2004, consistent with
national interest, the total amount of loans, credit accommodations and guarantees that
may be extended by a bank to any person, partnership, association, corporation or other
entity shall at no time exceed ______ of the net worth of such bank.
A. 10%
B. 20%
C. 25%
D. 40%

18. With certain requirements, SBL can be increased by what percent?

A. 5%
B. 10%
C. 15%
D. 20%
19. Which of the following are covered by the bank secrecy law?
A. Only demand deposits
B. All deposits of whatever nature
C. Investments in bonds issued by the Philippine Government
D. B and D

20. In all of the following cases, the deposits may be examined, inquired or looked into
by any person, government official, bureau or office. Choose the exception.
A. When permitted (written) by the depositor
B. In cases of impeachment
C. When the depositor is a public official
D. In cases where the money deposited or invested is the subject matter of litigation

21. Can independent external auditors inquire into or examine bank deposits during the
course of the audit?
A. Yes, anytime.
B. Yes, in the regular audit of the bank, with conditions
C. No, because of the absolute nature of secrecy
D. No, unless the auditor has reason to believe that bank fraud exists

22. Violations of the bank secrecy law subjects the offender, upon conviction, to which
of the following?
A. Imprisonment of not more than 2 years or fine of not more than P20,000 or both
B. Imprisonment of not more than 5 years or fine of not more than P20,000 or both
C. Imprisonment of not more than 2 years or fine of not more than P40,000 or both
D. Imprisonment of not more than 5 years or fine of not more than P40,000 or both

CLAW5: Banking Laws Module 1 | Page 20

Rubric in checking the activity Task:
LE1, LE2 96-100 86-95 76-85 75 Below 75

Area to Weight Excellent Above Average Passing Failure

Assess Average

Complete- 30% All required 86-99% of 71-85% of 50%-70% <50% of

contents are required required of required
ness present contents are contents required contents
present are present contents are present
are
present

Substance- 70% Depth & Depth & Depth & Depth & Generally
Logic and elaboration elaboration elaboration elaboratio lacks depth
Justification are are very are good n are &
exemplary good wanting in elaboration
some
parts

LE3 Excellent Above Average Passing Failure

Average

Raw score vis-à- 96%- 88% - 80% – At least Below

vis perfect score 100% 95% 87% 70%cor 70%
correct correct correct rect correct

References

1. 2019 Golden Notes Mercantile Law

2. Ateneo Mercantile Law
3. Official Gazette
4. BSP Issuances
5. Reviewer on Commercial Law, 2014 Ed. By: Jose Sundiang, Sr. and Timoteo B. Aquino
6. Mercantile Law Digests by: Co Untian Jr.
7. Pre-week Reviewer in Commercial Law by: Jaapar B. Dimaampao and Ella Dumlao-
Escalante

CLAW5: Banking Laws Module 1 | Page 21

 ANNEXES

ANNEX A: Learning Task 3

SC approves new rules on liquidation of banks

April 2, 2020 | 12:01 am

THE SUPREME COURT (SC) approved new rules on the liquidation of closed banks which will
take effect on April 16.

Under A.M. No. 19-12-02-SC dated Feb. 18, the Supreme Court approved the proposed rules
of the Philippine Deposit Insurance Corp. (PDIC), as reviewed by the Sub-committee on
Commercial Courts, to assign as liquidation courts the regional trial courts designated as
special commercial courts (SCC).

All pending petition for assistance in the liquidation (PAL) of closed banks that have not been
given due course by regular courts will be transferred to SCCs.

“Other PALs which have been given due course shall continue to be heard by the courts where
they are pending, but shall be governed by these Rules, unless the LC orders otherwise to
prevent manifest injustice to the parties involved,” the resolution read.

Under the rules, the receiver, who will take over and liquidate the bank, will file a petition with
the court within 180 days from the publication of the notice of the bank’s closure.

If the PAL is insufficient in form, the court shall order the receiver to comply with the
requirements within 10 days from the receipt of the petition.

If the petition is sufficient, the court will issue an order setting for initial hearing in 60 days and
direct claimants whose claims were denied by the receiver to file their claims with the court
within 20 days from the date of publication of the order or 60 days from the receipt of notice of
denial or disallowance of the claim, whichever is issued later.

The receiver will present proof of compliance with publication requirements and submit a
formal offer of evidence before the court, submitting the petition for resolution. The court,
within 10 days, shall issue an order giving due course to the petition.

The court, meanwhile, may dismiss a dispute claim on any applicable grounds under the Rules
of Court or hold a pre-trial and trial before rendering a decision.

After the court gives due course to the petition, the receiver should file a liquidation report on
the closed bank not later than the end of the third quarter of the succeeding year or as may be
required by the court.

The partial or final asset distribution plan (ADP) of a closed bank for its creditors may be filed
anytime after the submission of the liquidation report and the motion for approval for the final
ADP will be filed within five years from the date of the closure but maybe extended to seven
years based on compelling grounds.

A hearing will be set within 90 days from the receipt of the ADP and creditors will have to file
their comments within 10 days.

The resolution approving the partial or final ADP must be published in a newspaper within five
days and its finality will take effect after 30 days or after denial of motion for reconsideration.
The receiver will implement the ADP.

CLAW5: Banking Laws Module 1 | Page 22

“No temporary restraining order may be issued by any court, except the Court of Appeals
when the matter is of extreme urgency, against the implementation of the Partial or Final ADP,”
it said.

A final report on the implementation of the final ADP will be submitted by the receiver to the
Monetary Board and Securities and Exchange Commission after expiration of winding-up
period under the charter of the PDIC and submit a copy to the court.

The resolution also states the rule directing the receiver to file a motion for approval of plan
within five years from closure should apply prospectively to banks which will close after the
effectivity of the rules while for banks closed prior to this, receivers are given seven years from
the effectivity of the rules to file a motion for approval of a final ADP. — V.M.M. Villegas

Retrieved from https://www.bworldonline.com/sc-approves-new-rules-on-liquidation-of-

banks/.

ANNEX 2 – Separate File

Retrieved from
http://ateneolawjournal.com/Media/uploads/2f795167212fb1d225bdfaae6598f5b8.pdf.

CLAW5: Banking Laws Module 1 | Page 23