Bukidnon State University

City of Malaybalay
College of Business
FM103 (Banking and Financial Institutions)

CHAPTER 4
BANK SUPERVISION AND EXAMINATION

Purpose of Examination and Supervision

The bank examination and supervision is done internally and externally. This is undertaken to
insure the safe and efficient operations of any bank. The external supervision comes from agencies of
the government and is not in any way connected with banks management. This is done to ensure that
they conduct their business properly and lawfully.

Purposes:
a. To find out whether banks are doing their business in conformity with the banking laws and
that of the rules and regulation of the central bank and other government agencies.

b. Determine how soundly the bank I financially. The examiners should establish the fact that the
bank owns the assets, that the titles to property are good, that the assets are properly valuated
in the books, and that they are of acceptable quality.

c. Examination is more for discovering the unsound and unsafe practice and to offer remedies or
solutions for such practice. Some of such practices are granting of big loans to a single interest,
receiving collaterals of inferior quality, laxity in collection of loans, payment of excessive
salaries of dividends, keeping incomplete or inaccurate records and payment of unreasonably
high rate of interests on time deposits. These practices serve to jeopardize not only the
stockholders but also the depositor’s interest.

External Supervision

In the Philippines, the Supervision and Examination Sector of the Bangko Sentral is charged
with responsibility of conducting spot and regular checks on all banking institutions. It is therefore, a
vital arm of the Bangko Sentral. It is headed by a Deputy Governor and staffed by examiners and other
administrative personnel.

The Major functions of this sector are the chartering of banks, supervisions ad examinations of
banking and other non-bank financial institutions.

|Page1
Provisions of the New Central Bank Act:

Sec.25 Supervision and Examination – The Bangko Sentral shall supervision over, and conduct periodic
or special examination of banking institutions and quasi-banks, including their subsidiaries and
affiliates engaged in allied activities.
For purposes of this section, a subsidiary means a corporation more than fifty percent (50%) of
the voting stock of which is owned by a quasi-bank and an affiliate means a corporation the voting
stock of which, to the extent of fifty percent (50%) of less, is owned by a bank or quasi-bank or which
is related or linked to such institution or intermediary through common stockholders or such other
factors as may be determined by the Monetary Board.

Sec.26 Bank Deposits and Investments - Any director, officer or stockholder who, together with his
related interest, contracts a loan or any form of financial accommodation from : (1) his bank; or (2)
from a bank (a) which is a subsidiary of a bank holding company of which both his bank and the
lending bank are subsidiaries or (b) in which is controlling proportion of shares is owned by the same
interest that owns a controlling proportion of shares of his bank, in excess of five percent (5%) of the
capital and surplus of the bank, or in the maximum amount permitted by law.

Sec.27 Prohibition
(a) An officer, director lawyer, or agent or stockholder subject to supervision by the Bangko
Sentral, except non-stock saving loans associations and provident funds organized exclusively
for employees of the BSP.
(b) Directly or indirectly requiring or receiving any gift, present or pecuniary or material benefit
for himself or another, from any institution subject to supervision or examination by the BSP.
(c) Revealing in any manner, except under the court, the Congress or any government office or
agency authorized by law, or under such conditions as may be prescribed by the Monetary
Board, information relating to the condition or business of any institution.
(d) Borrowing from any institution subject to supervision or examination of the BSP shall be
prohibited unless said borrowings are adequately secured, fully disclosed to the Monetary
Board may prescribe.

Sec.28 Examination and Fees. The supervising and examining department head, personally or by
deputy, shall examine the book and every banking institution once in every twelve (12) months, and
such other times as the Monetary Board by an affirmative vote of five (5) members: may deem
expedient and to make a report to the Monetary Board.
Banking and quasi-banking institutions which are subject to examination by the BSP shall pay
to the BSP, within the first thirty (30) days of each year, an annual fee in an amount equal to a
percentage prescribed by the Monetary Board.

Sec.29 Appointment of Conservator. Whenever on the basis of the report submitted by the appropriate
supervising or examining department, the Monetary Board finds that a bank or a quasi-bank 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 Monetary Board may appoint a conservator with such powers as the Monetary Board shall
deem necessary to take charge of the assets, liabilities, and the management, collect all monies and
debts due said institutions, and exercise all powers necessary to restore its viability. The conservator
|Page2
shall report and be responsible to the Monetary Board and shall have the power to overrule or revoke
the actions of the previous management and board of directors of the bank or quasi-bank.

The conservator shall be competent and knowledgeable in bank operations and management.
The conservatorship shall not exceed one (1) year. The Conservator shall receive remuneration to be
fixed by the Monetary Board in an amount not to exceed two-thirds (2/3) of the salary of the
president of the institution on one(1) year, payable in twelve (12) equal monthly payments.

The Monetary Board shall terminate the conservatorship when it is satisfied that the
institution can operate on its own and the conservatorship is no longer necessary. The
conservatorship is likewise terminated, should the Monetary Board, on basis of the report of the
conservator or of its findings, determine that the continuance in business of the institution would
involve probable loss to its depositors or creditors or creditors, in which case the provision of Sec.30
shall apply.

Sec.30 Proceedings in Receivership and Liquidation. Monetary Board finds that a bank or quasi-bank:
a. Is unable to pay its liabilities as they become due in the ordinary course of business.
b. Have insufficient realizable assets, as determined by the BSP to meets its liabilities.
c. Cannot continue in business without involving probable losses to its depositors or creditors.
d. Involving acts or transactions which amount to fraud or a dissipation of the asset of the
institution.

The receiver shall immediately take charge of all the assets and liabilities of the institution. He
shall determine as soon as possible, but not later than ninety (90) days from takeover, whether the
institution may be rehabilitated or placed in such condition so that it may be permitted to resume
business.

If the receiver determines that the institution cannot be rehabilitated or permitted to resume
business in accordance with the next preceding paragraph. The receiver shall:
a. File ex parte with the proper regional trial court, and without requirement of prior notice or
any other action, a petition for assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the PDIC.
b. Convert the asset of the institution into money, dispose of the same to creditors and other
parties, for the purpose of paying debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of the Philippines. The asset of an
institution under the receivership or liquidation shall be deemed in custodialegisin the
hands of receiver and shall, from the moment the institution was placed under such
receivership or liquidation, be exempted from any order of garnishment, levy, attachment,
or execution.

Sec.31 Distribution of Assets. In case of liquidation of a bank or quasi-bank, after payment of the cost of
proceedings, including reasonable expenses and fees of the receiver to be allowed by the court, the
receiver shall pay the debts of such institution, under order of the court.

Sec.32 Disposition of Revenues and Earnings – All revenues and earnings realized by the receiver in
winding up shall be used to pay the costs, fees, and expenses mentioned in preceding section, salaries
|Page3
of such personnel whose employment is rendered necessary in the discharged of liquidation together
with other additional expenses caused thereby.

Sec.33 Disposition of Banking Franchise-The BSP may, if public interest so requires, award to an
institution, upon such terms as the Monetary Board may approve. Provided, that whatever proceeds
may be realized from such award shall be subject to the appropriate exclusive disposition of the
Monetary Board.

Sec.34 Refusal to Make Reports on Permit Examination- Any officer, agent, manager etc… subject to
supervision or examination by the BSP within purview of this Act, who willfully refuses to file the
required report or permit any lawful examination into the affairs of such institution shall be punished
by a fine not less than 50,000 or not more than 100,000 or by imprisonment of not less than (1) year
or not more than (5) years or both, in discretion of the court.

Sec.35 False Statement- the willfully making of a false or misleading statement on a material fact to the
Monetary Board or to the examiners of the BSP shall be punished by a fine of not less than one
(100,000) or not more than (200,000), or by imprisonment of not more than (5) years.

Sec. 36 Proceedings Upon Violation of this Act and Other Banking Laws, Rules, Regulations, Orders or
Instructions.
- Whenever a bank or quasi-bank or any person or entity, willfully violates this act or other
pertinent laws enforced by BSP or any rule issued by the Monetary Board, this act be punished
by a fine of not less than (50,000) or not more than (200,000) or by imprisonment of not less
than (2) years or not more than (10) years, or both.

Sec.37. Administrative Sanctions on Banks and Quasi-banks - Without prejudice to the criminal
sanctions against the culpable persons provided in section 34, 35 and 36, the Monetary Board may, at
its discretion, impose upon any bank or quasi-bank their directors or officers, for any willful violation
o its charter by laws, willful delay in the submission of reports or publications thereof as required by
law, rules and regulations.

Mechanics of Examination
-Bank examiners examine bank’s books at any time during banking hours. Examiner takes
possession of the banks books and documents which are owned by the bank or pledged by debtors as
collaterals. Analysis involves the classification of assets as to quality, valuation, and assurance that
everything is in order. This would lead to the conclusion on how efficient the management is and on
how effective the policies are. If there are any violations, immediate steps are suggested and are taken
up to correct the banks position.

Programming of Controls
a. Embezzlement – the taking of funds that belongs to depositors and customers.
b. Defalcation – the misappropriation of funds which belongs to stockholders such as income,
fees, and commissions or through fictitious notes or fraudulent expense vouchers.
c. Peculation- would mean all kinds of embezzlement, defalcation, or misappropriation of funds.
|Page4
 d. Examination- the review and analysis of the assets and liabilities of a bank to determine their
existence, values and true ownership, and to ascertain that everything in regard to said assets
and liabilities is in order.

Causes of Peculation
1. Gambling- simply a recreation then it becomes a habit and finally a status symbol that must be
maintained.
2. Pride and Envy – A man working in a bank consumed by pride and envy will do most
everything to get even.
3. Living beyond ones income– keeping up with rich neighbors and thus spending well beyond
one’s income could also lead to embezzlement.
4. Unsound salary policies- the rising prices without commensurate salary adjustments may invite
one to commit peculation.
5. Poor employee relations- officers may look down on their subordinates and even go to the
extent of emphasizing this cleavage between them in public places.
6. Immorality- bank officers and employees are not free from temptation to commit crimes
against morality.

Preventive Measures - the most effective prevention against peculation is the establishment of
sound and adequate internal controls. To be effective, it should compose of two parts:
a. First part is setting up procedures where the work of one person shod checked and proven by
another. Adopting a system where an entire department or section should not be under the
complete control of one person but rather that another person should exercise the right to
approve; and to prevent anyone person to have custody and control over any of the major
subsidiary accounts.
b. Second part constitute of procedures and routines to determine that the work performed
balances and that everything is in order in relation to the general ledger accounts. The use of
daily proof sheets, periodical statement reconciliation of accounts, reports, and similar
activities are the objects of this phase of internal control.

“No matter how far you travel, you can never get away from yourself”

-Haruki Murakami- 

|Page5