Part I

ORGANIZATION &
OWNERSHIP OF BANKS

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a) R.A. No. 8791 - “The General Banking Law of 2000”
b) R.A. No. 7906 - “Thrift Banks Act of 1995”
c) R.A. No. 7353 - “Rural Banks Act of 1992”
d) R.A. No. 7721 - “An Act Liberalizing the Entry and Scope of
Operations of Foreign Banks in the Philippines & For Other
Purposes” (Approved: May 18,1994)

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e) R.A.No. 10574 - “An Act Allowing the Infusion Of Foreign Equity
In the Capital of Rural Banks, Amending R.A.No. 7353, Otherwise
Known As “The Rural Banks Act of 1992”, As Amended, and for
Other Purposes” (Approved: May 24, 2013)

f) R.A. No. 10641 - “An Act Allowing the Full Entry of Foreign Banks
in the Philippines, Amending for the Purpose. R.A. No. 7721”
(Approved July 15, 2014)

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 “The Grandfather Rule” - is a method by which the percentage of
Filipino equity in a corporation engaged in nationalised and/or partially
nationalised activities is computed.

To determine the percentage of foreign-owned voting stock – basis of

computation is citizenship of each stockholder. 

For corporate owners of voting stock - citizenship of the individual

owners of voting stock. (Cesar Villanueva, Philippine Corporate Law 54)

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Ownership Ceiling of Voting Stocks in Banks:
A. Under R.A. No. 10641:
• Foreign Banks may own 100% of the voting stock by
1) acquiring, purchasing or owning up to 100% of the voting  stock of an existing
bank;
2) investing in up to 100% of the voting stock of a new banking subsidiary
incorporated under Phil. laws; or
3) establishing branches with full banking authority 

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 Sec. 8 of the law (R.A.No. 10641) provides that any right, privilege
or incentive granted to foreign banks under the Act, shall be equally
enjoyed by and extended under the same conditions to Philippine banks.
To ensure that the banking system remains with Filipinos, Sec. 2 of
the same law mandates that at least 60% of the resources or assets of the
entire banking system is held by domestic banks which are majority-
owned by Filipinos.

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B. (1) Under R.A. No. 8791, R.A. No. 7906 & R.A. No. 10574:

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B. (2) Under R.A. No. 10574

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(A.) R.A. No. 8791 - “The General Banking Law of 2000”
a) Foreign/Filipino individuals - 40%
b) Foreign/Domestic Non-banks - 40%

NOTE:
Filipino individuals- 40% each
Domestic Non-banks - 40% each
And that, NO CEILING is provided on the aggregate ownership of the above-two shareholders
on their equity in a domestic bank!

WHEREAS,
Foreign individuals - 40% each
Foreign Non-banks - 40% each
BUT the aggregate ownership of the above-two shareholders should not exceed 40%

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(B.) R.A. No. 7721 - “An Act Liberalizing the Entry & Scope of
Operations of Foreign Banks in the Phil. & For Other Purposes”

a) Foreign Banks - 60%

b) Phil. Banks - 60% (under Section 8 which provides for equal treatment)

NOTE: A Filipino individual and a domestic non-bank corporation may each own up to forty percent
(40%) of the voting stock of a domestic bank. There shall be no aggregate ceiling on the ownership of
such individuals and corporations in a domestic bank.

It should be clarified, however, that while restriction on foreigners refers to the total equity
participation, the restriction on Filipinos and domestic non-bank corporations refer to individual equity
participation. (BSP Circular No. 256, Aug. 15, 2000)

The law does not prohibit ownership of the stock by members of the same family or related interest.
However the law requires that stockholdings of family groups or related interests must be fully
disclosed in all transactions by such an individual with the bank. (Section 12, GBL)

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(C.) R.A. No. 10641 - “An Act Allowing the Full Entry of Foreign
Banks in the Phil., Amending for the Purpose R.A. No. 7721.

(D.) R.A. No. 10574 - “An Act Allowing the Infusion of Foreign Equity
in the Capital of Rural Banks, Amending R.A. No. 7353, Otherwise
Known as “The Rural Banks Act of 1992” As Amended, and For Other
Purposes”. (Approved on May 24, 2013, this law now allows foreigners
of up to 60% of the voting stock in rural banks, amending Section 4 of
the Rural Banks Act.)

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 The citizenship of a corporation, which is a stockholder of a bank
shall follow the citizenship of the controlling stockholders of the
 corporation, irrespective of the place of incorporation. The term
 “controlling stockholders” shall refer to stockholders holding more than
50% of the voting stock of the corporate stockholders of the bank.
(MORB, s x126 [i][2] 2009, as amended by BSP Cir. No. 718 (2011).
The above MORB provision is the basis of BSP’s policy that shares
belonging to corporations more than 50% of the capital of which is
owned by Filipino citizens has a Filipino nationality, although both the
DOJ & The SEC use 60% as the threshold of controlling interest.

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The Securities and Exchange Commission (SEC) gave this example in computing the foreign and Filipino equity in
Company X:
Company X:
Holding Company Y 69%
Filipino Stockholders 31%
100%
Holding Company Y:
Foreign Equity 53%
Filipino Equity 47%
100%
GRANDFATHER RULE:
Filipino Equity in Company X:
Company Y (47/100x69) 32.43%
Filipino Stockholders 31.00%
63.43%
Foreign Equity in Company X:
Company Y (53/100/69) 36.57%
100.00%
The Securities and Exchange Commission, in view of the state policy of encouraging foreign investments, held: 13
 The SEC has taken the view that in line with the government’s
policy of attracting foreign investments, there is a need to adopt a more
liberal interpretation of our laws, hence, it decided to do away with the
implementation of the more strict “grandfather rule” and adopted a more
lenient “control test” method.

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Stockholdings of Family Groups or Related Interests

• related within the 4th degree of consanguinity or affinity, legitimate or common law;

• Common-law relationship is included so as to subject common-law relatives to the same

restrictions attendant to those related legitimately

• the relationship need not be reported to the BSP. Disclosure of relationship must be made
in transactions with the bank (Op. Off. Gen. Counsel, 3/13/2001)

• in “affinity” , the marriage between husband & wife (according to canon law) makes
husband & wife one. The husband has the same relation by affinity to his wife’s blood
relatives as she has by consanguinity and vice versa (People vs. Berana, 311 SCRA 664
[July 29, 1999])

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Board of Directors
Composition of the Board of Directors-
• minimum of 5 and maximum of 15,
2 of whom should be independent directors
• 21 in case of merger or consolidation of banks

“Independent Director” - a person other than an officer or employee

of the bank, its subsidiaries, affiliates or related interests. (Sec. 15,
GBL)

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Public Officials - appointed or elected and whether full-time or part time
are prohibited by Sec. 19, GBL to serve as officer of any private
bank, except:
• where such service is incident to the financial assistance provided by the
gov’t.,
• Sec. 5 of the Rural Banks Act of 1992 which allows public officials to
serve as Director, Officer or consultant or in any capacity in the bank.

Meetings - may be conducted via modern technologies like

teleconferencing or video-conferencing (Sec. 15, GBL). But the
MORB & MORNBFI require that every board member shall
physically attend at least 25% of all Board meetings every year.

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“Fit and Proper Rule” - under this rule, it is the MB which is authorised
to pass rules providing for the qualifications and disqualification
of individuals elected or appointed bank directors or officers and to
disqualify those found unfit after due notice. In determining whether
the individual is fit for the position, regard shall be given to his
integrity, experience, education, training & competence (Sec. 16,
GBL)

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 The fit and proper rule has been implemented through BSP
regulations such as those prescribing the qualifications and
responsibilities of directors and officers, requiring the confirmation of
their election/appointment by the BSP, requiring attendance in
seminars on good governance, and requiring the election.

The “fit and proper” rules were intended to ensure that officials
in charge of banks and other financial institutions possessed the
required integrity and competence for prudent and sound
management. “ The basic principle is that banking is a public trust”.
(Tetangco Jr.)

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Minimum Qualifications:
- of Directors
1. at least 25 years old
2. a college graduate or 5 years business experience
3. have attended a BSP seminar on corporate governance for the board
4. must be fit and proper for the position

- of Officers
1. at least 21 years old
2. a college graduate or 5 years experience or had training in banking
3. fit & proper for the position

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Disqualification of Directors:
a) persons convicted for offenses involving dishonesty or breach of trust;
b) persons convicted for offenses punishable by imprisonment of more than 6
years;
c) persons convicted cor violation of banking laws, rules & regulations;
d) directors, officers & employees responsible for a bank’s closure as determined y
the MB;
e) directors & bank officers found administratively liable by the MB for violation
of banking laws where the penalty of removal from office is imposed which has
become final & executory, and
f) those found by the MB to be unfit for the position because they were found
administratively liable by another government agency for violation of banking
laws or any offense involving dishonesty or breach of trust &the finding has
become final & executory.
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General Responsibility of the Board of Directors
Sec. 2, X141.3 of MORB for Banks
Specific Duties and Responsibilities of:
(1) Board of Directors Itself - under Section X141.3 [c] of the
MORB for banks 
(2) Individual Directors - Sec. 4, Subsections.X141.3 (d)

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 “Doctrine of Apparent Authority” in corporate law also finds
application in banks. (First Phil. Intl. Bank vs. Court of Appeals, G.R.
No. 115849, Jan. 24, 1996). In Prudential Bank  vs. Court of Appeals,
223 SCRA 350, 1993, the Supreme Court, with reference to the
doctrine, reiterated the rule that the principal is liable for the obligations
contracted by its agents.

“A bank is liable for the wrongful acts of its officers done in the
interest of the bank or in the course of dealings of the officers in their
representative capacity but not for acts outside the scope of their
authority.”

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 “ A bank holding out its officers and agents as worthy of confidence
will not be permitted to profit by the frauds they may thus be enabled to
perpetrate in the apparent scope of their employment; nor will they
permitted to shirk its responsibility for such frauds, even though no
benefit may accrue to the bank therefrom”

NOTE: The application of this doctrine is necessary because of the

fiduciary relationship of banks with the public.

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The basic concerns of banks in their operations are:
(1) Liquidity- must always have sufficient funds for deposit
withdrawals by depositors, and
(2) Security- activities that will not unduly expose the bank and its
funds to undue risks.

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Although a private enterprise, a bank’s stability affects the economic life
of the community. Because of this , the General Banking Law as well as
the New Central Bank Act contain clear provisions that safeguard the
twin concern of liquidity & security.

Thus,
a) The MB shall prescribe a minimum risk-asset ratio;
b) Imposition of loan limits & credit accommodations that banks can extend;
c) Limitation on bank’s exposure to DOSRI Loans;
d) Restrictions of collateral value on loans;
e) The MB may provide restrictions on unsecured loans, and
f) Restrictions on dividend declaration.

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 DIVIDENDS
Bank and quasi-bank cannot declare dividends if at the time of declaration:

(1) Its clearing account with the Bangko Sentral is overdrawn; or

(2) It is deficient in the required liquidity floor for government deposits for five or
more consecutive days; or

(3) It does not comply with the liquidity standards/ratios prescribed by the Bangko
Sentral for purposes of determining funds available for dividend declaration; or
(4) It has committed a major violation as may be determined by the Bangko Sentral.
(Section 57, GBL.)
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Treasury Shares - Banks are prohibited from purchasing/acquiring their
shares of stock (to become treasury shares), or accept their own
shares as collateral for a loan, except with prior MB approval but must
be sold or disposed of within 6 months at a public or private sale.
Ownership of Real Property - a bank may acquire real estate necessary
for its own use. But total investment over real estate, the
improvements including bank equipment shall not exceed 50% of
combined capital accounts.

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However, a bank may acquire, hold or convey real property under the
following circumstances:
1) those mortgaged to the bank as security for debts;
2) those conveyed to the bank by way of debt satisfaction, and
3) those purchased at sales under judgments, decrees & mortgages

Provided: the real property acquired under any of the above

circumstances is disposed/sold within 5 years. (Section 52, GBL; Union
Bank of the Phil. vs. Sps. Tiu, G.R No. 173090-1, September 7, 2011)

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“Unsound Banking Practices”
Under Sec. 56 of the GBL, the MB is authorised to determine what
are unsound banking practices acts of banks which may not necessarily
be prohibited by any law, Rule or regulation affecting banks, quasi-
banks and trust companies. The MB shall consider any of the following
circumstances:

1) The act or omission has resulted or may result in material loss or

damage, or abnormal risk or danger to the safety, stability, liquidity
or solvency of the institution;

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2) The act  or omission has resulted or may result in material loss or
damage, or abnormal risk to the institution’s depositors, creditors,
investors, stockholders or to the  BSP or to the public in general;
3) The act or omission has caused any undue injury, or has given any
unwarranted benefits, advantage or preference to the bank or any
party in the discharge by the director or officer of his duties and
responsibilities through manifest partiality, evident bad faith or gross
inexcusable negligence; or
4) The act or omission involves entering into any contract or
transaction manifestly or grossly disadvantageous to the bank, quasi-
bank or trust entity, whether or not the director or officer profited or
will profit thereby.

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Sanctions:
Sec. 56, GBL - “Whenever a bank, quasi-bank or trust entity persists
in conducting its business in an unsafe and unsound manner, the MB
may:
1) impose administrative sanctions provided in Sec. 37 of the
New Central Bank Act,
2) initiate proceedings for receivership or liquidation under Sec.
30 of the same Act, and/or
3) immediately exclude the erring bank from clearing.

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In this connection, whenever a bank, quasi-bank or trust entity conducts business in an
unsafe and unsound manner, BSP Circular No. 341 (Series of 2002), authorizes the BSP
to impose any or all of the following sanctions:

a) to issue a cease and desist order to the institution from conducting business in an
unsafe and unsound manner;
b) fines in amounts not exceeding P30,000 a day on a per transaction basis;
c) immediate exclusion from clearing;
d) suspension of rediscounting privileges;
e) suspension of responsible director/officer,
f) receivership and liquidation under Sec. 30 of R. A. 7653

The imposition of the above sanctions is without prejudice to the filing of appropriate
criminal charges against culpable persons as provided in Secs. 34, 35 & 36 of R. A.
 7653.
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