COMMERCIAL &

INVESTMENT BANK
OPERATIONS PART II –
BANK & NON-BANK
REGULATIONS
Presented By:
Jason M. Metra
MM-FM
FM214
 Banks are classified into the following subject to the power of the Monetary Board to create
other classes or kinds of banks:
 Universal Banks (Ubs)
 Commercial Banks (KBs)
 Thrift Banks (TBs) as defined in R.A.#7906 or the Thrift Banks Act of 1995
 Rural Banks (RBs) as defined in R. A. #7353 or the Rural Act of 1992
 Cooperative Banks (Coop Banks)
 Islamic Banks (IBs) as defined in R.A. 6848 or the Charter of the Al-Amanah Islamic
Investment Bank of the Philippines
 Commercial Banks - Commercial banks are entitled to carry on the business of commercial
banking, by accepting drafts and issuing letters of credit, by discounting and negotiating
promissory notes, drafts, bills of exchange, and other evidences of indebtedness, by
receiving deposits, by buying and selling and selling foreign exchange and gold and silver
bullion, and by lending money against security, by accepting or creating demand deposits
subject to withdrawal by check, by offering negotiable order of withdrawal accounts, by
investing in allied undertakings, and by acquiring readily marketable bonds and other debt
securities. However, unlike universal banks, commercial banks cannot (i) underwrite
securities, (ii) invest in the equity of insurance companies, (iii) hold more than a 40% equity
stake in financial allied undertakings other than publicly-listed universal and commercial
banks (100%), privately-owned universal and commercial banks (49%), and venture capital
companies (60%), nor (iv) hold an equity stake in non-allied enterprises.

CLASSIFICATIONS OF BANKS
 Universal Banks - Universal banks or expanded commercial banks are granted, in addition
to commercial banking powers enumerated in the preceding paragraph, the authority to (i)
exercise the powers of investment houses, (ii) invest in up to 100% of the equity of an
insurance company, (iii) invest in up to 100% of the equity of most financial allied
undertakings, including publicly-listed universal and commercial banks (100%) but excluding
privately-owned universal and commercial banks (49%) and venture capital companies
(60%), and (iv) invest in non-allied undertakings.
 Thrift Banks - Thrift banks include savings and mortgage banks, stock savings and loan
associations, private development banks. Thrift Banks may exercise similar powers with those
of a commercial bank, but with prior approval of the Monetary Board for particular activities,
such as: (a) opening of current accounts, (b) engaging in trust, quasi-banking, and money
market operations, (c) acting as collection agent for government entities, (d) acting as
official depository of national agencies where the thrift bank is located, and (e) issuing
mortgage and chattel mortgage certificates. Thrift banks may own up to 100% of the equity
of non-financial allied undertakings, and hold a minority equity stake in financial allied
undertakings including banks (although they may hold up to 60% of venture capital
companies).
 Rural Banks - Rural banks are mandated to make needed credit available in the rural areas
on reasonable terms and which are governed primarily by the Rural Banks Act (Rep. Act No.
6938). Unlike commercial banks, universal banks, and thrift banks, rural banks are required to
be entirely owned by Philippine citizens.
 Cooperative Banks - A Coop Bank shall primarily provide financial, banking and credit
services to cooperatives and their members, although it may provide the same services to
non-members or the general public.
 Islamic Banks - In addition to the general powers incident to corporations and those
provided in other laws, as well as in Circular No. 105 (Appendix 44), insofar as they are not
inconsistent or incompatible with the provisions of R.A. No. 6848, an IB may perform such
other similar activities as the Monetary Board has declared or may declare as appropriate
from time to time, subject to existing limitations imposed by law.

CLASSIFICATIONS OF BANKS
The government recognizes the vital role of banks
in providing an environment conducive to the
sustained development of the country’s
economy. Accordingly, it is the government’s
policy to promote and maintain a stable and
efficient banking system that is globally
competitive, dynamic and responsive to the
demands of a developing economy.

Principal Governmental &

Regulatory Policies
The General Banking Law governs not only universal banks
but also commercial banks. Section 71 thereof provides that
the organisation, ownership, capitalisation and powers of
thrift banks (composed of savings and mortgage banks,
stock savings and loan associations, and private
development banks), rural banks, cooperative banks, and
Islamic banks, as well as the general conduct of their
businesses are governed by the Thrift Banks Act, the Rural
Banks Act, the Philippine Cooperative Code and the
Charter of Al-Amanah Islamic Investment Bank of the
Philippines respectively. However, the General Banking Law
applies to thrift banks and rural banks, insofar as it is not in
conflict with the provisions of the special laws governing
such banks. On the other hand, the Philippine Cooperative
Code recognises the primacy of the General Banking Law in
the regulation of cooperative banks. The rules implementing
the above statutes are embodied in the Manual of
Regulations for Banks issued by the Bangko Sentral ng
Pilipinas (BSP), the Philippine central bank. From time to time,
additional circulars and other issuances are promulgated by
the BSP to cover new matters, if not to amend, repeal,
supplement, or otherwise modify existing rules.

Primary Statues and Regulations

The BSP, through its Monetary Board, is primarily
responsible for overseeing banks. The Philippine
Deposit Insurance Corporation (PDIC) can also
conduct examination of banks, with the prior
approval of the Monetary Board, provided that
no examination can be conducted by the PDIC
within 12 months of the last examination date.

Regulatory Authorities
The grant of loans and other credit accommodations by a bank to its
DOSRI (directors, officers, stockholders and their related interests) is
regulated. Corporations in which the lending bank owns at least 20 per
cent equity are considered as affiliates, which are deemed ‘related
interests’ of such bank. DOSRI loans must be approved by the board of
directors of the lending bank and granted upon terms not less
favourable to the bank than those offered to non-DOSRI borrowers.
Core banking consists of deposit taking and lending. In particular,
commercial banking includes:
• accepting drafts;
• issuing letters of credit;
• discounting and negotiating promissory notes, drafts, bills
of exchange, and other evidence of debt;
• accepting or creating demand deposits;
• receiving other types of deposits, as well as deposit
substitutes;
• buying and selling foreign exchange, as well as gold or
silver bullion;
• acquiring marketable bonds and other debt securities;
and
• extending credit – all subject to pertinent rules
promulgated by the Monetary Board. Universal banking includes the
above functions and two additional powers, namely the capacity to
invest in enterprises not allied to banking and to underwrite securities.
However, no bank in the Philippines can engage in insurance business as
insurer.

Legal & Regulatory Limitations

Between a Bank & its Affiliates
The BSP examines the books of every bank once every
12 months, and at such other times as the Monetary
Board may deem expedient. An interval of at least 12
months is required between annual examinations. The
BSP examiners are authorised to administer oaths to
any director, officer or employee of any bank and to
compel the presentation of all books, documents,
papers or records necessary to ascertain the facts
relative to the true condition of such bank. The PDIC
may also examine banks, with the prior approval of
the Monetary Board, to determine whether they are
engaging in unsafe and unsound banking practices.
No examination can be conducted by the PDIC within
12 months of the last examination date. To avoid
overlapping of efforts, the PDIC examination considers
the relevant reports and findings of the BSP pertaining
to the bank under examination.
Banks Supervision
Violations of any of the provisions of the General Banking Law
are subject to the penalties and other sanctions under the New
Central Bank Act. Any owner, director, officer or agent of a
bank who, being required in writing by the Monetary Board or
by the head of the supervising and examining department of
the BSP, wilfully refuses to file the required report or refuses to
permit a lawful examination into the affairs of such bank, will be
punished by a fine of between 50,000 and 100,000 Philippine
pesos or by imprisonment of not less than one year or no more
than five years, or both, at the discretion of the court.
On the other hand, the wilful making of a false or misleading
statement on a material fact to the Monetary Board or to the
BSP examiners will be punished by a fine of between 100,000
and 200,000 Philippine pesos or by imprisonment of not more
than five years, or both, at the court’s discretion. In turn, any
person who is responsible for wilful violation of the General
Banking Law or any order, instruction, rule, or regulation issued
by the Monetary Board will, at the court’s discretion, be
punished by a fine of between 50,000 and 200,000 Philippine
pesos or by imprisonment of not less than two years or no more
than 10 years, or both. Whenever a bank persists in carrying on
its business in an unlawful or unsafe manner, the Monetary
Board

Enforcement of Banking Laws &

Regulations
may take action for the receivership and liquidation of such
bank, without prejudice to the penalties provided in the first
sentence of this paragraph and the administrative sanctions
provided in the next paragraph. Without prejudice to the
foregoing criminal sanctions against culpable persons, the
Monetary Board may impose administrative sanctions for any
of the above violations, wilful violation of the charter or by-laws
of the bank, any commission of irregularities, or conducting
business in an unsafe or unsafe manner as determined by the
Monetary Board. These administrative sanctions are as follows:
• fines in amounts as may be determined by the
Monetary Board to be appropriate, but in no case to exceed
30,000 Philippine pesos a day for each violation, taking into
consideration the attendant circumstances, such as the nature
and gravity of the violation or irregularity and the size of the
bank;
• suspension of rediscounting privileges or access to
the BSP credit facilities;
• suspension of lending or foreign exchange
operations or authority to accept new deposits or make new
investments;
• suspension of interbank clearing privileges; and
• revocation of quasi-banking licence.

Enforcement of Banking Laws &

Regulations
In addition, the Monetary Board can suspend or
remove the offending director or officer of a
bank. In this respect, the termination (or even the
resignation) from office of such director or officer
will not exempt him from administrative or criminal
sanctions. Moreover, the erring corporation may
be dissolved by quo warranto proceedings
instituted by the solicitor general. In this
connection, an original quo warranto proceeding
may be commenced with the Supreme Court of
the Philippines.

Enforcement of Banking Laws &

Regulations
The Monetary Board may appoint a conservator for a
bank that 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 conservator will have
such powers as the Monetary Board deems necessary
to take charge of the assets and liabilities of the bank,
manage it or reorganise its management, collect all
monies and debts due it and restore its viability. If,
based on the report of the conservator or its own
findings, the Monetary Board determines that the
continuance in business of the bank would involve
probable loss to the depositors and other creditors of
the bank, the bank would be placed under
receivership and eventually liquidated.

Circumstances that Banks be taken

by the Government/Regulatory
Authorities
The PDIC is usually the designated receiver. If the
bank notifies the BSP or publicly announces a bank
holiday, or in any manner suspends the payment of its
deposit liabilities continuously for more than 30 days,
the Monetary Board may, summarily and without prior
hearing, close the bank and place it under
receivership of the PDIC.
The assets of a bank under liquidation are held in trust
for the equal benefit of all creditors. The receiver must
first pay the costs of the proceedings, before paying
the debts of the bank, in accordance with the rules on
concurrence and preference of credit under the Civil
Code of the Philippines. The shareholders last to
receive payment, if any funds remain. The depositors
can claim from the PDIC the amount of their insured
deposits.

Circumstances that Banks be taken

by the Government/Regulatory
Authorities
The directors and officers of a failing bank must
cooperate with the regulators, including the
conservator and receiver. The following acts of a
director or an officer of such bank are subject to
criminal penalties:
• refusal to turn over bank records and assets to the
designated receiver;
• tampering with bank records;
• appropriating bank assets for himself or another party;
• causing the misappropriation and destruction of bank
assets;
• receiving or permitting or causing to be received in
the bank any deposit, collection of loans, or
receivables;
• paying out or permitting or causing to be paid out
any fund of the bank; and
• transferring or causing to be transferred securities or
property of the bank.
Role of the Bank’s Management &
Directors in case of Bank Failure
In addition, erring directors and officers will be
included in the list of persons disqualified by the
Monetary Board from holding any position in any
bank or financial institution.

No voluntary dissolution and liquidation of a bank

can be undertaken without the prior approval of
the Monetary Board.

For this purpose, a request for Monetary Board

approval must be accompanied by a liquidation
plan.

Role of the Bank’s Management &

Directors in case of Bank Failure
 The bank’s directors and officers who knowingly
assent to patently unlawful acts of the bank or
who are guilty of gross negligence or bad faith in
directing the affairs of the bank or acquire any
personal or pecuniary interest in conflict with
their duties as such directors or officers, will be
liable jointly and severally for all resulting
damages suffered by the bank and its
shareholders.

Bank’s Managers or Directors

Liability in case of Bank Failure
 The BSP prescribes the minimum level of capitalisation for
banks.
 For instance, a universal bank must have a minimum
capital of 4.95 billion Philippine pesos while that of a
commercial bank is 2.4 billion Philippine pesos. In addition,
the BSP adopted Basel II-based capital adequacy
requirements for universal banks and commercial banks.
 Thrift banks and rural banks that are not subsidiaries of
universal banks or commercial banks continue to be
subject to Basel I-based guidelines. In any case, the daily
risk-based capital ratio of a bank, expressed as a
percentage of qualifying capital to risk-weighted assets,
must not be less than 10 per cent for both a solo basis (ie,
head office plus branches) and a consolidated basis (ie,
parent bank plus subsidiary financial allied enterprises,
excluding an insurance company).

Capital Requirements
 Universal and commercial banks have their
respective internal capital adequacy assessment
process that supplements the BSP’s risk-based
capital adequacy framework.

 These banks are responsible for setting internal

capital targets consistent with their risk profile,
operating environment and strategic plans.

 The BSP has targeted the adoption by universal

and commercial banks by 2014 of Basel III
capital adequacy standards.

Capital Requirements
 In case of non-compliance by a bank with the prescribed
minimum ratio, the Monetary Board may, until that ratio is met or
restored by such bank:
 limit or prohibit the distribution of net profits by such bank,
and require that such profits be used, in full or in part, to
increase the capital accounts of such bank;
 restrict or prohibit the acquisition of major assets by such
bank; and
 restrict or prohibit the making of new investments by such
bank, with the exception of purchases of readily
marketable evidence of indebtedness of the Philippines
and the BSP, and other evidence of indebtedness or
obligation to the servicing and the repayment of which are
fully guaranteed by the Philippines.

 If a bank becomes undercapitalised, it may be placed under

conservatorship by the BSP, with a view to rectifying the capital
deficiency. It may be possible to correct this condition, and the
threatened insolvency of the bank may be averted by effective
management reforms and infusion of additional capital.

Capital Requirements
Enforcement
 The Monetary Board may first appoint a conservator
for a bank that 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’. If conservatorship is not
successful or not deemed proper by the Monetary
Board, the Monetary Board may summarily forbid the
bank from doing business and designate the PDIC as
its receiver. If the receiver determines that the bank
cannot be rehabilitated or permitted to resume
business, the Monetary Board may instruct the
receiver to liquidate the bank.

Legal & Regulatory Processes –

Insolvent Banks
 Control is defined as ownership of more than 50 per cent of
the voting stock of a bank.

 Foreign individuals and non-bank corporations controlled by

foreign nationals can collectively own up to 40 per cent of the
voting stock of a universal or commercial bank. However,
Philippine citizens and non-bank corporations controlled by
Philippine citizens can collectively own up to 100 per cent of
the voting stock of such bank. However, foreign banks may be
allowed by the Monetary Board to own 100 per cent of the
voting stock of a universal or commercial bank. Up to 60 per
cent of the voting stock of a thrift bank may be foreign-
owned, but the capital stock of a rural bank is required to be
wholly-owned by Philippine nationals. On the other hand, the
series ‘C’ shares of Al-Amanah Islamic Investment Bank of the
Philippines, comprising 40 per cent of its capital stock, may be
foreign-owned.

Ownership Restrictions &

Implications
 Apart from being subject to DOSRI rules, entities
controlling a bank are expected to see to it that such
bank observes the BSP rules on corporate
governance, which are anchored on the principle of
transparency, accountability and fairness or equity.

 In respect of transparency, the controlling entity or

individual, as a ‘principal stockholder’ of a bank
classified as a ‘public company’, must disclose the
changes in its or his stockholding in such bank, under
the Securities Regulation Code.

 The controlling entity or individual will not be liable to

the creditors of the insolvent bank beyond the
amount of its or his equity contribution to such bank.
Legal & Regulatory Implications,
Duties and Responsibilities
 The BSP will want to know the organisational and
financial profile of the acquirer. For instance, a foreign
bank acquiring a local bank may be required to be
among the top 150 foreign banks in the world or the
top five banks in its country of origin. The Monetary
Board may also:
 ensure geographic representation and coverage;
 consider strategic trade and investment relationships
between the Philippines and the country of incorporation
of the foreign bank;
 study the demonstrated capacity, global reputation for
financial innovations and stability in a competitive
environment of the applicant;
 see to it that reciprocity rights are enjoyed by Philippine
banks in the applicant’s country; and
 consider the willingness of the applicant to fully share its
technology.

Factors in an Acquisition of
Control of a Bank
 The BSP will want to know the organisational and
financial profile of the acquirer. For instance, a foreign
bank acquiring a local bank may be required to be
among the top 150 foreign banks in the world or the
top five banks in its country of origin. The Monetary
Board may also:
 ensure geographic representation and coverage;
 consider strategic trade and investment relationships
between the Philippines and the country of incorporation
of the foreign bank;
 study the demonstrated capacity, global reputation for
financial innovations and stability in a competitive
environment of the applicant;
 see to it that reciprocity rights are enjoyed by Philippine
banks in the applicant’s country; and
 consider the willingness of the applicant to fully share its
technology.

Factors in an Acquisition of
Control of a Bank
 Offshore Banking Units (OBU) – An OBU is basically a foreign
bank’s counterpart of a local bank’s Foreign Currency
Deposit Unit (FCDU). Unlike the full-fledged branch of a
foreign bank, an OBU does not have full banking authority.
OBUs are authorized to conduct banking transactions only
with other OBUs, FCDUs, and non-residents, and only in
foreign currency. (ex: JP Morgan Int’l Finance, Ltd and
Taiwan Coop. Bank)

 Trust Entity – Entities granted a trust license may validly

engage in the trust and fiduciary business, as well as in
investment management activities. The trust business of a
bank must keep separate from its general business all
funds, properties, securities, and books in relation to its trust
functions. In order to protect the general public, self-
dealing transactions by a trust entity are prohibited, subject
to certain exceptions.

Other Bank Licenses/Activities

 END OF SLIDE – BANKING
OPERATIONS & REGULATIONS
References:
www.lwxmundi.com
www.syciplaw.com
www.bsp.gov.ph
Quasi-Banks – Quasi-Banks are entities engaged
in the borrowing of funds from the public through
the issuance, endorsement, or assignment with
recourse or acceptance of deposit substitutes for
purposes of re-lending or the purchase of
receivables. Universal and commercial banks are
automatically granted quasi-banking license.

Non-Bank Financial Institutions

 Non-Bank Financial Institutions with Quasi-Banking Functions
(NBQBs) - NBQBs are non-bank financial institutions (NBFIs)
authorized by BSP to borrow funds from 20 or more lenders for
their own account through issuances, endorsement or assignment
with recourse or acceptance of deposit substitutes for purposes of
re-lending or purchasing receivables and other obligations. NBFIs,
on the other hand, are financial institutions that do not have a full
banking license but facilitate bank-related financial services such
as investment, risk pooling, contractual savings and market
brokering. Only NBQBs and those without quasi-banking function
but are either subsidiaries or affiliates of banks are subject to BSP
supervision.
 There are 12 operating NBQBs in the country consisting of five
investment houses (IHs), six financing companies (FCs) and one
other non-bank with overall network of 75 consisting of 12 head
offices and 63 branches/other offices. Of the 12 operating NBQBs,
eight are linked to universal and commercial banks (three IHs and
five FCs). The total number of operating NBQBs represented only
0.2 percent of the total 6,114 NBFIs supervised/ regulated by the
BSP.

Non-Bank Financial Institutions

Categories
 Non-Stock Savings and Loan Associations (NSSLAs) - Non-
stock savings and loan associations (NSSLAs)32 are non-
stock, non-profit corporations engaged in the business of
accumulating member’s savings for lending to households
by providing long-term financing for home building and/or
development and for personal finance. (ex: PAL Employees
Savings & Loan Assoc.; Wyeth Philippines Employees
Savings & Loan Assoc., Inc.; SM Savings & Loan Assoc., Inc.)

 There are 71 operating NSSLAs accounting for only 1.2

percent of the total 6,114 operating NBFIs under the
supervision/regulation of BSP. NSSLAs’ overall network stood
at 199 with 71 head offices and 128 branches/other offices.

Non-Bank Financial Institutions

Categories
 Private Non-Bank Financial Institutions:
 Investment House/Banks – the term Investment House is
defined to mean as any enterprise which engages in the
underwriting of securities of other corporations. Underwriting
is the act or process of guaranteeing the distribution and
sale of securities of any kind issued by another corporation.
Securities are written evidences of ownership, interest or
participation in any enterprise or written evidences of
indebtedness of a person or enterprise.
 Building and Loan Associations – is a special type of savings
institution which receives savings from members and lend
the funds to them.
 Credit Unions – is another type of savings institutions. It also
has for its purpose the inculcation of habit of thrift, frugality
and the idea of helping one another.
 Private Insurance – is any insurance policy purchased by an
employer or by an individual from a private insurance
company.

Non-Bank Financial Institutions

Sub-Categories
 Private Non-Bank Financial Institutions:
 Pawnshop – provides credit to small borrowers who
are not qualified to obtain small loans from financial
institutions.
 Trust Companies – is any corporation formed or
organized for the purpose of acting as trustee or
administering any trust or holding property or on
deposit for the use or benefit of others.
 Financing Companies – are primarily organized for the
purpose of extending credit facilities to consumer and
to industrial, commercial or agricultural enterprises.
 Other Non-Bank Financial Institutions – these are
financing institution that are unknown to many
people. Fund managers, lending investor and venture
capital corporations are among these institution.

Non-Bank Financial Institutions

Sub-Categories
 Government Non-Bank Financial Institutions:
 Government Service Insurance System (GSIS) – by
virtue of Republic Act 656 and as amended by
PD 245, is mandated to insure all properties,
assets and interests of the government against
any insurable risk. GSIS offers various non-life
insurance products that provide protection to
both institutional and individual clients.
 Social Security System (SSS) – is a state-run social
insurance program in the Philippines to workers in
the private, professional and informal sectors. SSS
is established by virtue of Republic Act 1161
better known as Social Security Act of 1954 and
as amended by Republic Act 8282 in 1997.

Non-Bank Financial Institutions

Sub-Categories
 Implementation of Basel III
On 15 January 2013, the Bangko Sentral ng Pilipinas (BSP)
released Circular No. 781 which provides the implementing guidelines on the
revised risk-based capital adequacy framework particularly on the minimum
capital and disclosure requirements. The new framework which took effect in
2014 is applicable to all universal and commercial banks (U/KBs) and their
subsidiary banks and quasi-banks. This framework allowed a reasonable
transition period for banks to comply with the new minimum requirements.
While the international rules allow staggered implementation, the BSP
adopted the capital reforms in full, in recognition of the strong capital
position of the banking industry.
The BSP implements new minimum capital ratios of 6.0 percent
Common Equity Tier 1 (CET1) ratio, 7.5 percent Tier 1 ratio and 10.0 percent
Total Capital Adequacy Ratio (CAR). A capital conservation buffer (CCB) of
2.5 percent, comprised of CET1 capital was also prescribed.
In recognition of the distinct structure of foreign bank branches (FBBs) which
operate under the U/KB license, a calibrated Basel III framework was issued
under Circular No. 822 dated 13 December 2014. The reform highlighted the
role of Permanently Assigned Capital which is the CET1 equivalent for FBBs.
Shortly after, R.A. No. 10641 amending R.A. No. 7721, was approved to further
liberalize the entry of foreign banks. To implement this law, the BSP issued
Circular No. 858 dated 21 November 2014, providing the new capital
computation for FBBs.
In October 2014, Circular No. 856 Basel III Framework for Dealing
with Domestic Systemically Important Banks (DSIBs) was issued to address
systemic risk and interconnectedness by identifying banks which are
deemed systemically important within the domestic banking industry.
Minimum buffers composed of CET1 capital shall be required of systemically
important banks starting January 2017.

Risk-Based Capital Adequacy

Framework in the Philippines
 Implementation of Basel II
BSP Circular No. 538 dated 4 August 2006 contains the
implementing guidelines on the revised risk-based capital adequacy
framework for the Philippine banking system to conform with Basel II
recommendation. The guidelines which took effect on 1 July 2007
provide the approaches that may be used in computing the regulatory
capital requirements for credit, market and operational risks (Pillar I),
as well as additional supervisory information which needs to be disclosed
to the public (Pillar III).
To address the second pillar, the BSP issued Circular No. 639
on 15 January 2009. This took effect on 1 January 2011 and was made
applicable to U/KBs at a consolidated level only. Circular No. 639
contains the guiding principles that (1) banks should follow in designing
their Internal Capital Adequacy Assessment Process (ICAAP), and (2)
BSP supervision and examination personnel should consider in assessing
a bank’s ICAAP, engaging the bank in an ICAAP-dialogue, and
proposing prudential measures, if deemed necessary. On 28 July 2011,
the BSP came up with supplemental guidelines on the ICAAP submission
of Philippine branches of foreign banks which was embodied in Circular
No. 731 dated 28 July 2011. The ICAAP submissions of Philippine foreign
bank branches are expected to be designed in accordance with the
nature, size and complexity of their businesses in the Philippines.

Risk-Based Capital Adequacy

Framework in the Philippines
 Implementation of Basel 1.5

Stand-alone thrift banks (TBs), rural banks (RBs) and

cooperative banks (Coop Banks), which refer to TBs, RBs and
Coop Banks that are not subsidiaries of U/KBs, are covered by
a separate risk-based capital adequacy framework referred
to by the BSP as the Basel 1.5 framework which is a simplified
version of Basel II in view of the simple operations of these
covered banks. The implementing guidelines of Basel 1.5 are
contained in Circular No. 688 dated 26 May 2010 which took
effect on 1 January 2012.

Risk-Based Capital Adequacy

Framework in the Philippines
 Return on Average Equity (%)
 = (Net Income or Loss after Income Tax X 100) / Ave. Total Capital
Accounts
Where: Ave. Total Capital Accounts = Sum of Total Accounts as of the
12 month-ends in the calendar/fiscal year adopted by the QB / 12

 Return on Average Assets (%)

 = (Net Income or Loss after Income Tax X 100) / Ave. Total Assets
Where: Ave. Total Assets = Sum of Total Assets as of the 12 month-ends
in the calendar/fiscal year adopted by the QB / 12

 Net Interest Margin (%)

 = (Net Interest Income X 100) / Ave. Interest Earning Assets
Where: Net Interest Income = Total Interest Income – Total Interest
Expense
Average Interest Earning Assets = Sum of Total Interest Earning Assets as
of the 12 month-ends in the calendar/fiscal year adopted by the QB /
12

Formulas in Checking the

Condition or Soundness of the QBs
 DEMAND DEPOSITS
 CHECKING ACCOUNTS - No NSSLA shall have or carry
upon its books for any person any demand,
commercial or checking account, or any credit to be
withdrawn upon the presentation of any negotiable
check or draft.

 SAVINGS DEPOSITS
 Savings deposits are deposits evidenced by a
passbook consisting of funds deposited to the credit
of one (1) or more individuals with respect to which
the depositor may withdraw anytime, unless prior
notice in writing of an intended withdrawal is required
by the NSSLA.

DEPOSIT & BORROWING

OPERATIONS
 LENDING POLICIES
 It shall be the responsibility of the board of
trustees of NSSLAs to formulate written policies on
the extension of credit. Well-defined lending
policies and sound credit risk management
practices are essential if NSSLAs are to perform
their lending function effectively and minimize
the risk inherent in any extension of credit. The
responsibility should be approached in a way
that will provide assurance to the members, other
stakeholders and the supervisory authority that
timely and adequate action will be taken to
maintain the quality of the loan portfolio. (As
amended by Circular No. 789 dated 28 February
2013)

LOANS AND INVESTMENTS

 SECURED LOANS
 Kinds of Security. Loans by an NSSLA may be secured by any or all of the
following:
a. Mortgages on registered real estate;
b. Chattel mortgages on harvested or stored crops of non-perishable
character;
c. Chattel mortgages on livestock, tools, equipment or machinery,
supplies or materials, merchandise and other personal properties;
d. Assignment of quedans which gives the right of disposal of readily
marketable products;
e. Time and/or savings deposits and/ or capital contribution;
f. Pledge of bonds, stock and other securities of GOCCs and other bonds,
stocks or securities which are non-speculative in nature;
g. Land transfer certificates issued by the government to tenant farmers,
under the agrarian reform program to the extent of sixty percent (60%) of
the value of the farm holdings: Provided, That a certification shall be first
secured from the office of the Registry of Deeds to the effect that the
Land Transfer Certificate being presented is valid; and
h. Other securities as may be approved by the Monetary Board.

LOANS AND INVESTMENTS

 FUND INVESTMENTS
 An NSSLA may invest its funds in any or all of the following: a. In bonds and
securities in an aggregate amount not exceeding ten percent(10%) of itstotal
assets; any investment in excess of ten percent (10%) shall require the prior
approval of the Bangko Sentral: Provided, That NSSLAs may invest available
funds in excess of ten percent (10%) of total assets in sound nonspeculative
enterprise, particularly in readily marketable and high grade commercial
papers, bonds and securities issued by the Government of the Philippines or
any of its political subsidiaries, instrumentalities or corporations including
GOCCs, subject to the following conditions:
(1) The credit needs of the members shall be served/satisfied first;
(2) The investment in any one (1) corporation (excluding the Government
of the Philippines, any of its political subdivisions, instrumentalities, or corporations
including GOCCs), shall not exceed twenty-five percent (25%) of the NSSLA's
combined capital accounts; and
(3) The additional investment may be up to another ten percent (10%) of
the NSSLA’s total assets; b. In real property, in an aggregate amount not
exceeding at any one time five percent (5%) of the total assets of such NSSLA;
and c. In furniture, fixtures, furnishings and equipment, and leasehold
improvements for its offices, in amount not exceeding at any one time ten
percent (10%) of its total contributions.

LOANS AND INVESTMENTS

 REPUBLIC ACT # 3765 or the TRUTH IN LENDING ACT
 It is hereby declared to be the policy of the State to
protect its citizens from a lack of awareness of the true
cost of credit to the user by assuring a full disclosure of
such cost with a view of preventing the uninformed
use of credit to the detriment of the national
economy.

 The law covers any creditor, which is defined as any person

engaged in the business of extending credit (including any
person who as a regular business practice make loans or
sells or rents property or services on a time, credit, or
installment basis, either as principal or as agent) who
requires as an incident to the extension of credit, the
payment of a finance charge.

TRUTH IN LENDING ACT

(1) the cash price or delivered price of the property or
service to be acquired;
(2) the amounts, if any, to be credited as down
payment and/or trade-in;
(3) the difference between the amounts set forth under
clauses (1) and (2);
(4) the charges, individually itemized, which are paid or
to be paid by such person in connection with the
transaction but which are not incident to the extension
of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and
centavos; and
(7) the percentage that the finance bears to the total
amount to be financed expressed as a simple annual
rate on the outstanding unpaid balance of the
obligation.
INFORMATION REQUIRED
1. Any creditor who violates the law is liable in the
amount of P100 or in an amount equal to twice the
finance charged required by such creditor in
connection with such transaction, whichever is the
greater, except that such liability shall not exceed
P2,000 on any credit transaction. The action must be
brought within one year from the date of the
occurrence of the violation.
2. The creditor is also liable for reasonable attorney’s fees
and court costs as determined by the court.
3. Any person who willfully violates any provision of this
law or any regulation issued thereunder shall be fined
by not less than P1,00 or more than P5,000 or
imprisonment of not less than 6 months, nor more than
one year or both.
However, no punishment or penalty under this law shall
apply to the Philippine Government or any agency or any
political subdivision thereof.

PENALTIES IN CASE OF VIOLATION

 The Board of Directors (Board) of BSFIs (BSP Supervised
Financial Institutions) is ultimately responsible in ensuring
that consumer protection practices are embedded in
the BSFI’s business operations. BSFIs must adhere to the
highest service standards and embrace a culture of fair
and responsible dealings in the conduct of their
business through the adoption of a BSFI’s Financial
Consumer Protection Framework that is appropriate to
the BSFI’s corporate structure, operations, and risk
profile. The BSFI’s Financial Consumer Protection
Framework shall be embodied in its Board-approved
Financial Consumer Protection Manual. (Circular No.
857 dated 21 November 2014, as amended by Circular
No. 890 dated 02 November 2015)

BSP REGULATIONS ON FINANCIAL

CONSUMER PROTECTION
 Business Impact
Analysis and Risk
Management

Personnel Training
Strategy
and Plan BUSINESS Formulation
Maintenance
CONTINUITY
MANAGEMENT

Plan Plan
Testing Development

BUSINESS CONTINUITY
MANAGEMENT FRAMEWORK
 Business continuity management framework. BSFIs
should adopt a cyclical, process-oriented BCM
framework, which, at a minimum, should include five (5)
phases, namely: BIA and risk assessment, strategy
formulation, plan development, plan testing, and
personnel training and plan maintenance. This
framework represents a continuous cycle that should
evolve over time based on changes in business and
operating environment, audit recommendations, and
test results. This framework should cover each business
function and the technology that supports it. Other
related policies, standards, and processes should also
be integrated in the overall BCM framework.

BUSINESS CONTINUITY
MANAGEMENT FRAMEWORK
 Trust operations and investment management activities
of trust corporations shall be subject to the applicable
Q Regulations of the Manual of Regulations for Non-
Bank Financial Institutions (MORNBFI), as referred to and
unless otherwise specified by the provisions of this
Manual. (Circular No. 884 dated 22 July 2015)

 Trust entity shall refer to a: (a) bank or non-bank

financial institution (NBFI), through its specifically
designated business unit to perform trust functions, or
(b) trust corporation, authorized by the Bangko Sentral
to engage in trust and other fiduciary business under
Section 79 of Republic Act (R.A.) No. 8791 (The General
Banking Law of 2000) or to perform investment
management services under Section 53 of R.A. No.
8791.

REGULATIONS ON TRUST
CORPORATIONS
 A trust corporation (TC) shall be a stock corporation
created, and duly authorized by the Monetary Board,
to engage primarily in trust, other fiduciary business and
investment management activities, which shall act as
trustee or administer any trust or hold property in trust or
on deposit for the use and benefit of others, and/or as
financial consultant, investment adviser or portfolio
manager.

 Trust business shall refer to any activity resulting from a

trustor-trustee relationship (trusteeship) involving the
appointment of a trustee by the trustor for the
administration, holding, management of funds and/or
properties of the trustor by the trustee for the use,
benefit or advantage of the trustor or of others called
beneficiaries.

REGULATIONS ON TRUST
CORPORATIONS
 Unit Investment Trust Fund (UITF) shall refer to an open-
ended pooled trust fund denominated in pesos or any
acceptable currency, which are operated and
administered by a trust entity and made available by
participation. The term Unit Investment Trust Funds is
synonymous to common trust funds. As an open-ended
fund, participation or redemption is allowed as often as
stated in its plan rules.

 Assets under management (AUM) shall represent all

funds, properties and securities, denominated in peso
and other foreign currency, which the TC, acting as
trustee, fiduciary and agent, shall manage, administer,
hold, and/or take custody, for the use and/or benefit of
persons other than the TC.

REGULATIONS ON TRUST
CORPORATIONS
 The cardinal principle common to all trust and other
fiduciary relationships is fidelity. Policies predicated
upon this principle shall be directed towards
observance of the following:
 Prudent administration;
 Undivided loyalty and utmost care;
 Non-delegation of responsibilities;
 Preserving and protecting property; and
 Keeping and rendering true and accurate accounts.

STATEMENT OF PRINCIPLES
THANK YOU FOR LISTENING 
References:

www.bsp.gov.ph