BANKING LAW REVIEWER

BANKING LAW REVIEWER
I. BANKS ANG THE BUSINESS OF BANKING
Definition and nature of banks

Banks shall refer to entities in the lending of funds obtain in the
form of deposits.
- It facilitate borrowing, lending and safe-keeping of money and to
deal, in notes, bill of exchange, and credits.
*An investment company which loans out the money of its customers,
collects the interest and charges a commission to both lender and
borrower, is a BANK.
- Any person engaged in the business carried on by bank deposit, of
discount, or of circulation is doing a banking business, although but one of
these functions is exercised.
Banks operate (and earn income) by extending credit facilities
finances primarily by deposits from the PUBLIC. They plough back the bulk
of said deposits into the economy in the form of LOANs.
Since the bank deals with the public’s money, their viability depends
largely on their ability to return those deposits on DEMAND. For this
reason, banking is undeniably imbued with public interest. Consequently,
much importance is given to sound lending practices and good corporate
governance.
Shadow Banking
The activities include lending by unregulated individuals, entities
charging higher-than-market interest rates, sales of dubious securities and
other investment products, as well as in-house financing by real estate
developers. Shadow banking threatens the financial stability of
households and the economy as a whole.
The Essence of Banking

The essence of baking is the taking of deposits from the public and
lending out these funds.
- Deposit Taking
- Lending
However, an investment firm that purchased a promissory note on
discount, which was secured by Chattel Mortgage and a Continuing
Undertaking, for purposes of reinvesting, is not engaged in a loan
transaction or banking but is purely a purchase of receivable at a
discount.
Case:
BANAS executed a promissory note in favour of Dizon Construction
where BANAS promised to pay DC P390,000 in instalment. DC endorsed
the promissory note to Asia Pacific which was secured by a deed of chattel
mortgage over three heavy construction equipment and a continuing
undertaking by CENEN. DC subsequently defaulted prompting AP to sue
BANAS and DC. DC alleged that the transaction is actually a loan byt they
entered into a schemed to skit baking laws as AP is merely an investment
company.
ISSUE:
Is AP engaged in baking?
HELD:
NO. AP is an investment company. AN investment company refers to
any issuer which is or holds itself out as being engaged or proposes to
engage primarily in the business of investing, reinvesting or trading
securities, which is defined in Sec. 2 par (a) of the Revised Securities Act:
“shall include commercial papers evidencing indebtedness of anhy
person, financial or non-financial entity, irrespective of maturity, issued,
endorsed, sold, transferred or in any manner conveyed to another with or
without recourse, such as promissory notes.
Clearly the transaction between BANAS and AP was one involving
not a loan but purchase of receivables at a discount, well within the
purview of investing, reinvesting or trading in securities” which an
investment company, like AP, is authorized to perform and does not
constitute a violation of the General Banking Act.
NOTE: What is prohibited by law is for investment companies to lend funfs

obtained from the public through receipts of deposits, which is a function
of banking institutions. But here, the funds supposedly “lend” to BANAS
have not been shown to have been obtained from the public by way of
deposits, hence, the inapplicability of banking laws.
*Pawnshops are non-bank financial intermediaries

Pawnshop – a person or entity engaged in the business of lending
money on personal property delivered as security for loans and shall be
synonymous, and maybe used interchangeably, with pawnbroker or pawn
brokerage.
Pawnshop are to be treated as non-bank financial intermediaries.
Financial Intermediaries
Persons or entities whose principal function include lending,
investing or placement of funds or evidence of indebtedness or equity
deposited with them, acquired by them, or otherwise coursed through
thenm either for their own account or for the account of others.
NOTE: The need for an authority from the BSP for a person or entity to
engage in banking.
- No person or entity shall engage in banking operations without
authority from the BSP. The determination of whether a person or
entity is performing banking or quasi-banking functions without a
BSP authority shall be decided by the MB.
- The activity of an entity, without a banking license, in obtaining
funds from the public which was lent to persons suitable by it, is
ILLEGAL and VOID.
CLASSIFICATION OF BANKS
a. Universal Bank
b. Commercial Banks
c. Thrift banks, composed of
a. Savings and mortgage banks
b. Stock saving and loan association
c. Private development banks,
d. Rural Banks
e. Cooperative Banks
f. Islamic Banks
g. Other classification of banks as determined by the MB of BSP.
REQUISITES
a. The entity is a STOCK CORPORATION
b. Its FUNDS are obtained from the PUBLIC, which shall mean 20
or more persons
c. The minimum capital requirements prescribed by the MB for
each category of banks are satisfied.
Section 8 of the GBL further provides that

No new commercial bank shall be established within three years
from the effectivity of this act. In the exercise of the authority granted
herein, the MB shall take into consideration their capability in terms of
their financial

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BANKING LAW REVIEWER

I. BANKS ANG THE BUSINESS OF BANKING

Definition and nature of banks

The Essence of Banking

NOTE: What is prohibited by law is for investment companies to lend funfs

*Pawnshops are non-bank financial intermediaries

Section 8 of the GBL further provides that

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