UNIVERSITY OF SOUTHER PHILIPPINES FOUNDATION

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ANSWERS TO THE FIRST LONG EXAM - BANKING LAWS by Atty. Ediza
SECTION B. | SUNDAYS 1-2PM
I.
Briefly define the following:
a. UNIVERSAL BANKS – these used to be called expanded commercial banks and their operations
are primarily governed by the General Banking laws. They can exercise the powers of an investment
house and invest in non-allied enterprises. They have the highest capitalization requirement.
b. COMMERCIAL BANKS – these are ordinary or regular commercial banks, as distinguished from a
universal bank. They have a lower capitalization requirement than a universal bank and cannot exercise
the powers of an investment house and invest in non-allied enterprises.
c. THRIFT BANKS – shall include savings and mortgage banks, private development banks, and stock
savings and loans association organized under existing laws.
d. RURAL BANKS - banks which are designed to make needed credit available and readily accessible
in the rural areas on reasonable terms.
e. COOPERATIVE BANKS – one organized, the majority share of which is owned and controlled by
cooperatives, primarily to provide financial and credit services to cooperatives.
II.
Why is the BANGKO SENTRAL NG PILIPINAS considered a LENDER OF LAST RESORT? [5%]
ANSWER: It is considered the lender of last resort because it lends to banks and similar institutions
under financial distress when they have no other means to raise funds.
III.
Give the basic requirements to be complied with by the Central Bank before the Monetary Board
can declare a bank insolvent, order it closed and forbid it from doing further business in the
Philippines. [10%]
ANSWER: Before the Monetary Board can declare a bank insolvent, order it closed and forbid
it from doing further business in the Philippines, the following basic requirements must be
complied with by the Central Bank, to wit:
a) There must be an examination by the head of the Department of Supervision or his
examiners or agents into the condition of the bank.
b) The examination discloses that the condition of the bank is one of insolvency, or that
its continuance in business would involve probable loss to creditors or depositors.
c) The head of said Department shall inform in writing the Monetary Board of such facts.
d) Upon finding said information or statement to be true, the Monetary Board shall appoint
a receiver to take charge of the assets and liabilities of the bank.
e) Within 60 days, the Monetary Board shall determine and confirm if the bank is insolvent,
and public interest requires, to order the liquidation of the bank.
IV.
Explain the nature of the banking business. What is the relationship between the DEPOSITOR
and the BANK? [10%]

ANSWER: a. Debtor-Creditor Relationship. Read Article 1980 of the Civil Code of the
Philippines. The contract between the bank and its depositor is governed by the provisions of
the Civil Code on simple loan. The bank is the debtor and the depositor is the creditor.

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b. Fiduciary Duty. Banks are required to “treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship. The fiduciary
nature of banking requires banks to assume a degree of diligence higher than that of a good
father of a family. Thus, the bank’s fiduciary duty imposes upon it a higher level of
accountability.

c. Not a Trust Agreement. The fiduciary nature of banking does not convert the contract
between the bank and its depositors from a simple loan to a trust agreement, whether expressed
or implied. The law simply imposes on the bank a higher standard of integrity and performance
in complying with its obligations under the contract of simple loan, beyond those required of
non-bank debtors under a similar contract of simple loan. The law allows the banks to offer the
lowest possible interest rate to depositors while charging the highest possible interest rate on
their own borrowers

d. Indispensible Institution. Banks have become an ubiquitous presence among the

people, who have come to regard them with respect and even gratitude, and most of all,
confidence.

e. Impressed with Public Trust. The business of banking is imbued with public interest.
The stability of the banks largely depends on the confidence of the people in the honesty and
efficiency of banks.

V.
Due to growing financial difficulties, Z Bank was unable to finish construction of its 21-storey
building on a prime lot located in Makati City. Inevitably, the Bangko Sentral ordered the
closure of Z Bank and consequently placed it under receivership. In a bid to save the bank’s
property investment, the President of Z Bank entered into a financing agreement with a group
of investors for the completion of the construction of the 21-storey building in exchange for a
10-year lease and the exclusive option to purchase the building. [10%]

a. Is the act of the President valid? Why or why not?

b. Will a suit to enforce the exclusive right of the investors to purchase the property
prosper? Reason briefly.

ANSWERS:

a. No, the bank president’s act is not valid. He had no authority to enter into the financing
agreement. Z Bank was ordered closed and placed under receivership. Control over the
properties of Z Bank passed to the receiver. The appointment of a receiver operates to
suspend the authority of the bank and its officers over the bank’s assets and properties, such
authority being reposed in the receiver.
b. No, the exclusive option granted to the investors, having been entered into by one without
authority to do so, is unenforceable. The bank, therefore, cannot be compelled to sell the
property. Under Section 30 of the
R.A. No. 7653, New Central Bank Act, the properties of Z Bank should be administered for the
benefit of its creditors. The property in question can be disposed of only for the purpose of
paying the debts of Z Bank.

VI.
BAYANING Pilipino Banking Corporation (MPBC) operates several branches of BAYANING
Pilipino Rural Bank in Eastern Visayas. Almost all the branch managers are close relatives of
the members of the Board of Directors of the corporation. Many undeserving relatives of the
branch managers were granted loans. In time, the branches could not settle their obligations
to depositors and creditors.

Receiving reports of these irregularities, the Supervising and Examining Department (SED) of
the Monetary Board prepared a detailed report (SED Report) specifying the facts and the

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chronology of events relative to the problems that beset MPBC rural bank branches. The
report concluded that the bank branches were unable to pay their liabilities as they fell due,
and could not possibly continue in business without incurring substantial losses to its
depositors and creditors.

May the Monetary Board order the closure of the MPBC rural banks relying only on the SED
Repost, without need of an examination? Explain. [5%]
ANSWER: Yes. Upon receipt of the report of the SED, the Monetary Board is authorized to take
any of the actions enumerated under Sec. 30, RA No. 7653, otherwise known as the New
Central Bank Act, leading to the receivership and liquidation of a bank or quasi-bank. There is
no requirement that an examination be first conducted before a banking institution may be
placed under receivership.
VII.
Distinguish a conservator from a receiver of a bank. [5%]
ANSWER:
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.
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).

OTHER ANSWER:
A CONSERVATOR is appointed if a bank or quasi-bank is in a state of continuing inability or
unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of
creditors and depositors. The conservator shall take charge of the assets and liabilities of the
bank and exercise management and exercise other powers to restore the bank’s viability. The
conservatorship shall not exceed one year. A RECEIVER is appointed generally if the realizable
value of the bank’s assets as determined by BSP is less than its liabilities. The receiver shall
take charge of the assets and liabilities of the institution and administer the same for the
benefit of its creditors. The receiver shall determine within 90 days whether the bank can be
rehabilitated, otherwise, he shall recommend the closure of the institution.

VIII.
XXX Corporation (XXX) and its sister company, YYY Corporation (YYY), are both under judicial
receivership. The receiver has the option to sell all or substantially all of the properties of YYY
to XXX, or simply merge the two corporations. Under either option, the requirements under
the Corporation Code have to be complied with.
The receiver seeks your advice on whether the Bulk Sales Law will apply to either, or both,
options. What will your advice be? [5%]

ANSWER: I will advice the receiver that the Bulk Sales Law does not apply to both options.
Section 8 of the Bulk Sales Law expressly provides that it will not apply to executors,
administrators, receivers, and assignees in insolvency, or public officers, acting under
judicial process. In this case, the receiver is acting under judicial process.

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IX.
Enumerate the FUNCTIONS OF BANGKO SENTRAL NG PILIPINAS [10%]

ANSWER:

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.
9. 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

X.
Does a conservator have the power to revoke valid and perfected contracts? Briefly
explain [5%]

ANSWER: 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, G.R. No. 115849, Jan. 24, 1996).

XI.
Distinguish Conservatorship from Liquidation [5%]
ANSWER:
CONSERVATORSHIP RECEIVERSHIP LIQUIDATION

1. Insolvency
Grounds 1. Continuing inability 1. Inability to pay liabilities as they fall due e.g: bank run,
rumors, etc.
2. Assets are less than its liabilities

2. Unwillingness to maintain 3. Cannot continue business

2. Bank cannot be
rehabilitated
condition of liquidity 4. without causing damage;
5. Violation of a cease and desist order
6. “Bank holiday” for more than 30 days (NCBA, Sec.

30).

Effects 1. Juridical personality is 1. Juridical personality is retained

Same with conservatorship
retained.
2. Suspension of operation
2. Perfected transactions /stoppage of business
cannot be repudiated
3. Assets deemed in custodia legis
(Domingo v. NLRC, G.R. 156761,
October 17, 2006).

XII.

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After many years of shopping in the Metro Manila area, housewife HW has developed the sound
habit of making cash purchases only, none on credit. In one shopping trip to Mega Mall, she got
the shock of her shopping life for the first time, a store’s smart salesgirl refused to accept her
coins in payment for a purchase worth not more than P100. HW was paying P70 in 25- centavo
coins and P25 in 10-centavo coins. Strange as it may seem, the salesgirl told HW that her coins
were not “legal tender”. Do you agree with the salesgirl in respect of her understanding of “legal
tender”? Explain. [5%]

ANSWER: No. The salesgirl’s understanding that coins are not legal tender is not correct. Coins
are legal tender in amounts not exceeding P50 for denominations from 25- centavos and above,
and in amounts not exceeding P20 for denominations 10-centavos and less.
XIII.
Explain the CLOSE NOW-HEAR LATER DOCTRINE. Does this protect CREDITOR OR
DEPOSITORS? [10%]

ANSWER:
It is to prevent 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).

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).
XIV.
State the composition of the MONETARY BOARD. To be a member, what are their qualifications?
[10%]

ANSWER: Composition of the Monetary Board:

There are 7 members who are appointed by the President of the Republic of the Philippines.
They are only appointed once.
a. Governor, as Chairman;
b. A member of the Cabinet designated by the President of the Philippines;
c. Five (5) members who shall come from the sector, all of whom shall serve full-time.
Term: 6 years
Qualifications of the Members of the Board:
a. Must be a natural-born citizens of the Philippines;
b. At least 35 years of age with the exception of the Governor, who should at least be 40
years of age;
c. Of good moral character, of unquestionable integrity, of known probity and patriotism.
d. With recognized competence in social and economic disciplines.

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