BANKING LAWS TSN

From the lectures of Father Agustin Nazareno,

SY 2016 - 2017

January 4, 2017 - Hernandez

Welcome to the most lively law subject! I think we are finish with the New Central Bank Act so we can go now to the functions
of the Central Bank. Is the Central Bank a true bank? We shall know the definition in the General Banking Law of 2000 (RA
8791).

What makes a bank a bank and not a pawnshop? Is a pawnshop open to the public? Of course, it is open! In ordinary
language you pawn something. In legal language, it is a pledge! A pledge has nothing to do with taking an oath. When you
pledge something you borrow money and you secure it with personal property which you turn over to the creditor for his
possession. The public vis-a-vis the pawnshop is the borrower but in banking, who is the borrower? The bank is the borrower,
opposite. It is the bank who is the borrower because it is not a contract of deposit. At least the contract of deposit you
mastered in civil law. It is a contract of mutuum. You lend the bank money.

The general rule in a contract of deposit is you cant deposit something that is fungible, only in exceptional cases. Because,
the personal property that you deposit must be returned to you as much as possible as close to its condition and state when
you deposited it.

You deposit your car with somebody. He agrees to be the depositary. What is his obligation? He accepts the obligation to do
the general things that a car owner will do to maintain the car in viable running condition. In the very least, now and then he
should start the motor of the car. He cant just set it aside, pasagdan kung baga. He is not doing the due diligence of a
depositary. Whether it is gratuitous in nature or with consideration there are basic duties of a depositary. One key duty, he
must not prefer his own property over and above that deposited property in his care. Example is the obligation to prioritize
saving the deposited car over his own in case of a fire.

This is not the case with a bank deposit. With the bank, the one who entrusts his money to the bank is the creditor and the
bank is the debtor. That is the first element of the definition of a bank in the General Banking Law (GBL).

Section 3. Definition and Classification of Banks. -

3.1. "Banks" shall refer to entities engaged in the lending of funds

obtained in the form of deposits.

Under Section 3.1 (which follows the format of the US law), banks are defined as entities engaged in the lending of funds
obtained in the form of deposits. So, in the form of deposits, banks accept deposits of money and lends out of the deposits.

[Recit]

Is the act of lending an act of disposition or an act of administration? It is an act of disposition because it involves
parting of the possession of the property which is an attribute of ownership.

Under what authority does the bank have in disposing the property, does the bank own the money? The GBL
authorizes banks to lend the money that the bank also borrows. The bank does not exercise rights to dispose the money out
of a contract.

There is a system of registration through the BSP. The bank must comply with the requirements. Once you have complied,
then you can be a bank. You have a license to engage in banking. Also, a bank must be a corporation and it cant be a
partnership. You must register first as a corporation and obtain a secondary franchise with the BSP to be able to lend out the
money that is deposited to you. And your authority to do that is the banking license.

The first basic concept outlined in the GBL is the classifications or categories of banks. This question has come out more
than thrice in the Bar. Give the different classes of banks that are provided in the GBL. The best way to answer is not to
enumerate because that would take so much of your time but that you know that there is a significance in each classification.
Give not only the correct answer but the incomparable one.

The underlying key is that there are classifications here that betray the definitions of banking. Why is it key? Because it is the
root cause of the past financial crises that the world experienced. Banks departed from their original definition.

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 BANKING LAWS TSN
From the lectures of Father Agustin Nazareno,
SY 2016 - 2017

Banking is people lend you money, you pay interest to this people, then you lend it out. And the difference between the
interest you pay to the people and the interest you earned from lending it is the gross profit. And you deduct the expenses
and administrative costs and then you arrive at a net profit.

3.2. Banks shall be classified into:

(a) Universal banks;

(b) Commercial banks;

(c) Thrift banks, composed of: (i) Savings and mortgage

banks, (ii) Stock savings and loan associations, and (iii)
Private development banks, as defined in the Republic Act
No. 7906 (hereafter the "Thrift Banks Act");

(d) Rural banks, as defined in Republic Act No. 73S3

(hereafter the "Rural Banks Act");

(e) Cooperative banks, as defined in Republic Act No 6938

(hereafter the "Cooperative Code");

(f) Islamic banks as defined in Republic Act No. 6848,

otherwise known as the "Charter of Al Amanah Islamic
Investment Bank of the Philippines"; and

(g) Other classifications of banks as determined by the

Monetary Board of the Bangko Sentral ng Pilipinas. (6-Aa)

Now there are classifications that allow banks to go beyond that particular function especially when they start classifying
commercial and universal banks.

In commercial banks (ComBanks), they are also allowed to engage in allied functions. The essence of commercial functions
is demand deposits or in laymans term, checking accounts. Monies that do not earn interest and by issuing a check you can
demand the money right then and there. Like in money that is deposited in thrift banks (i.e. savings and mortgage banks).

If you look at the bank book in fine print it says there that the bank reserves the right to require a certain period before they
will answer your withdrawal slip. Probably a day after youll be able to withdraw your money.

This is contrary to practice since we can withdraw our money immediately. Banks will not do that because based on
experience, refusal to allow withdrawal creates an impression that the bank has no money (bank run).

But actually the money that a depositor can only demand immediately is from a checking account because the bank keeps it
without interest.

But again, why is there some checking account that earns interest (like maxi or savings that you can automatically withdraw
from your current account)? That is a function of competition and marketing.

When you come down to licenses and permits; by virtue of you being issued a commercial banking license, you can issue
checking accounts. If you are a rural bank or a savings bank, how can you issue a checking account? Because you were
given a special license by the BSP but that does not go with you being a credit bank.

Again, commercial functions of commercial bank - Letters of credit, you can engage in transactions such as letters of credit.
Rural, savings and development banks are not licensed to do that because those are commercial banking functions that goes
with the license of ComBanks. Are checking accounts and letters of credit banking per se? No. It is an allied function of
banking. But you are allowed do that if you are a commercial bank.

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 BANKING LAWS TSN
From the lectures of Father Agustin Nazareno,
SY 2016 - 2017

Now you have a universal bank (UBank). The BSP cant allow them to do non-allied functions. Non-allied functions include
insurance. UBanks offer insurance right inside their offices. Large UBanks have their own insurance companies, MBTC have
Axa which is a non-allied function.

Who is the supervening oversight agency function of insurance? Insurance Commissioner. Are they exempt from the
oversight function of the Commissioner? No. But the insurance arm is controlled by the bank that is non-allied.

Another non-allied function is leasing or leasing companies. If you are engaged in trucking, you go to BDO Leasing. You
show your contract with SMB that you are authorized to carry thousands of SMB pale Pilsen between Davao and GSC.
Armed with the contract, you inform BDO Leasing that you want the use of trucks which they will allow. If you dont have
enough money, they will offer the services of the BDO bank. If youll later purchase the trucks, you will have lease-purchase
agreement with BDO Leasing. That is a question that was asked in the Bar.

What is a lease-purchase agreement? It is a contract that ostensibly the provisions appear that you are leasing the vehicle
from this owner-creditor but there is a built-in option that the lease payments can be at the same time considered as
amortization for the value of the property you are leasing. You can decide that this is just a lease and you can let the term
expire as a lease. But you have the choice. You can become a purchaser of the thing leased. How? At the end of the lease
payment your last payment becomes a balloon payment which you come across this balloon payment, the thing leased
becomes your own. The lease payment become amortization payment.

That is the lease option agreement created by the leasing company. But because they know that you lack collateral, you cant
use the truck since it is not under your name but of the leasing company but is in your possession. So, what is the security of
the leasing company which is the subsidiary of the UBank? They will make you sign a trust receipts agreement. The
proceeds you earned from using the vehicles under the name of the leasing company is not really yours. It is theirs. So, if you
fail to settle the lease payments, that is estafa. (Makes interjections about being prosecuted for estafa.)

Warehousing is also a non-allied function. Money changing, forex. It is not part of banking. But UBanks can do almost
everything. So much so that most the banks income is from forex than the banking functions. Theyll buy dollars and engage
in forex services. People believe that you are a great banker but out of nowhere the exchange rates plummet, how can you
recover?

This is the reason why Paul Volcker (former Federal Reserve Chairman) is pushing for the Volcker rule. The rule pushes for
the return to the original banking function as described by Section 3 of GBL. He is the successor of Alan Greenspan who
pushed for banks to be the one-stop shop of financial services needs like car service shops. He started the whole idea of
allowing banks to perform non-allied services. Result can be seen in Citicore which is now just one half its size of what it
used to be. It almost lost half its banks, its clients but luckily was saved unlike the other banks that went down the drain
because they engaged in other than the banking functions.

If the Bar Examiner sees that answer, they will be impressed because you did not only memorize the GBL but you
have seen the light on the loopholes of the GBL! (Interjections on the plan of PRRD to reappoint Tetanco as the BSP
Governor)

Supposed you tell your friends that you can accept deposit and lend money, are you engaged in banking? You have no
banking license from the BSP. You were able to get more than 20 friends to give you money. You were later reported to BSP,
can they run after you for engaging in banking without a license? That is already a decided US case, the moment you accept
deposits from at least twenty (20) people although you havent lent it out as long as you have intent to then you are engaged
in banking.

How can you accept deposits and lend out money to more than 20 people without being subjected to the BSP? You set up a
cooperative, a credit cooperative. This is actually a misnomer because it is not credit but lending. People do not join
cooperatives to be members but to borrow. You can do the same functions as a bank but you cant lend out to non-members
unlike a bank.

Rural banks are covered by specific law, the Rural Banks Act (RA 7353). It is confined to the countryside. Normally,
agricultural loans which are loans of small amount.

Now they have a new classification, micro-lending which began in Bangladesh, spread though out Pakistan whose founder
won a Noble Peace Prize (Muhammad Yunus). Micro-lending is very discriminatory because they only lend to women.
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 BANKING LAWS TSN
From the lectures of Father Agustin Nazareno,
SY 2016 - 2017

Women form themselves into selda, so the lending is not made individually but in the form of selda. You are 5 to 12 persons,
you are lent small amounts. This amount is used as income-generating capital for example in goat-raising as source of milk
for personal consumption and for sale.

What is the difference between micro lending and loan shark? 5/6 kumbaga. (Interjection on goat-raising versus pagkompra
ug pirit and the miraculous Sto. Nino) The difference is muscle. The loan shark can enforce his claims using muscle. Both are
unsecured loans. And the GBL prohibits lending without collateral.

Technically speaking, no bank can engage in micro lending. Thats why micro lending is by a non-bank, thats a micro lending
cooperative.

Thats why rural banks have a special window wherein rural banks can borrow from Land Bank which they lend out as an
extension of Land Bank. If you are a rural bank and you lend out funds from your own deposit, you might as well commit
suicide because these debtors cant pay their debts. If you will lend out without collateral, how can you collect your claims?
You need to have muscle. Thats why loan sharks have enforcers. Those who cant pay, you make it unpleasant for him for
not paying and you make everybody else know it. Kulatahon na siya in public.

How can you incorporate that in banking? The business of credit card, masakit man ka ana Illusions of plenty. You think
you have lots of money and you are drowned in debts. The BSP knows that and that is the reason why credit cards have
higher interest rates because it is unsecured. It is a violation of the GBL. This is the problem of modern society and the credit
card is a no arm bandit. Who can run credit cards? ComBanks after obtaining a special license and for UBank its included in
their regular license.

Other classification of banks is Islamic Banks under Charter of El Amanah Islamic Bank of the Philippines (RA 6848). Is the
establishment of an Islamic bank not a violation of a non-establishment clause found in the Constitution?

ARTICLE III - BILL OF RIGHTS

Section 5. No law shall be made respecting an
establishment of religion, or prohibiting the free exercise
thereof. The free exercise and enjoyment of religious
profession and worship, without discrimination or
preference, shall forever be allowed. No religious test shall
be required for the exercise of civil or political rights.

When you talk about religion in the bill of rights, there are supposed to be two rights. The first is the free exercise of religion.
Anybody can believe what he wants. The second is non-establishment. The government cant impose or officially establish a
religion as a partner of a govern nor force it upon the people. No religion can be established by the government.

No one has asked it yet so better think about it when you become lawyers. (Interjection about Tan vs Macapagal a case
related to the 1935 ConCon defining the elements of the SCs power of judicial review).

In the Quran, it says to lend upon interest is a great sin. It is prohibited. You cant take advantage of the difficulty of
somebody. It is not just a monopoly of what the Quran hold as the Old Testament also calls it. This is where the idea of usury
springs from. For the use of money, you cant ask for money.

But slowly, the Christian religion got over it. For the use of money, there can be interest charge but it should be reasonable
interest. But in the Islamic faith, it is still prohibited. So, they put up the Islamic Bank, to facilitate the extension of credit
without violating the Islamic religion.

Why is governmental intervention allowed by the law? Because the law considers that its a huge segment of the population
that will be deprived of banking services and they need the banking services. So, they how do they borrow money without
interest? You will have lots of contracts to sign so they can circumvent the prohibition in the Quran. That is the purpose of
the Islamic bank. This is the same for other Islamic jurisdictions.

The question is the BSP a real bank? It is not open to the public but to its own public which are banks. Do they lend money?
Yes, to the banks. Do they lend money to the public? No. So, is it a bank?

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 BANKING LAWS TSN
From the lectures of Father Agustin Nazareno,
SY 2016 - 2017

The BSP is not limited to the Volcker rule. It goes into proprietary transactions. It deals with buys and sells forex and credit
instruments like bonds and treasury bills. So how do they not violate the Volcker rule if they engage in non-allied
transactions? It is different for the BSP because they do not do it for profit but to influence the peso and the monetary policy
of the Philippines. They enter into proprietary functions to keep the peso healthy.