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Regulatory framework

Key policies

What are the principal governmental and regulatory policies that govern the banking sector?

The government recognises 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.

Primary and secondary legislation

Summarise the primary statutes and regulations that govern the banking industry.

The General Banking Law governs not only universal banks but also commercial banks. Section 71 provides that the organisation, ownership, capitalisation and powers of thrift banks (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. The General Banking Law applies, however, 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 (MORB) 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.

Regulatory authorities

Which regulatory authorities are primarily responsible for overseeing banks?

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 previous examination date.

Government deposit insurance

Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.

Banks must insure their deposit liabilities with the PDIC. Each depositor is a beneficiary of the insurance for a maximum amount of 500,000 Philippine pesos or its foreign currency equivalent.

There are very few remaining government-owned or controlled banks (currently, only seven), owing to the government’s privatisation programme.

Transactions between affiliates

Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.

The grant of loans and other credit accommodations by a bank to its directors, officers, stockholders and their related interests (DOSRI) and to subsidiaries and affiliates is regulated. The MORB provides different ceilings for loans to DOSRI, and to subsidiaries and affiliates. Total outstanding loans to each of the bank’s DOSRI is limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank. On the other hand, total outstanding loans to each of the bank’s subsidiaries and affiliates must not exceed 10 per cent of the net worth of the lending bank. For these purposes, an affiliate is an entity linked directly or indirectly to a bank by means of:

  • ownership, control or power to vote of at least 20 per cent of the outstanding voting stock;
  • interlocking directorship or officership;
  • common stockholders owning at least 10 per cent of the outstanding voting stock of the bank and at least 20 per cent of the outstanding voting stock of the borrowing entity;
  • management contract or any arrangement granting power to the bank to direct or cause the direction of management and policies of the borrowing entity; or
  • permanent proxy or voting trusts in favour of the bank constituting at least 20 per cent of the outstanding voting stock of the borrowing entity, or vice versa.

The BSP recently excluded portions of loans and other credit accommodations covered by guarantees of international and regional institutions or multilateral financial institutions where the Philippine government is a member or shareholder, from the ceilings on loans granted by banks to their subsidiaries and affiliates.

Related-party transactions are generally allowed provided that these are done on an arm’s-length basis. Banks, including their non-bank financial subsidiaries and affiliates, are expected to exercise appropriate oversight and implement effective control systems for managing exposures arising from related-party transactions.

Core banking consists of deposit taking and lending; all of which is subject to pertinent rules promulgated by the Monetary Board. 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.

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 an insurer.

Regulatory challenges

What are the principal regulatory challenges facing the banking industry?

Among the principal regulatory challenges facing the banking industry at present are those posed by the use of financial technology, including compliance with know-your-customer (KYC) requirements, incorporating fintech into their systems and structures, and ensuring cybersecurity.

With the issuance of the implementing rules and regulations of the Data Privacy Act, banks (as with other entities that collect and process personal information) are expected to observe certain registration and compliance requirements. The BSP and the National Privacy Commission are currently reviewing possible overlaps in their functions with a view to harmonising them for a more efficient regulatory framework.

Consumer protection

Are banks subject to consumer protection rules?

Banks are subject to the BSP’s Financial Consumer Protection Framework, which sets out the minimum standards of consumer protection in the areas of:

  • disclosure and transparency;
  • protection of client information;
  • fair treatment;
  • effective recourse; and
  • financial education.

The BSP is responsible for enforcing these rules in the banking sector.

Future changes

In what ways do you anticipate the legal and regulatory policy changing over the next few years?

Legal and regulatory policy changes over the next few years will likely be driven by the following goals:

  • aligning the country’s financial regulations and policies with international standards to improve risk management and ensure competitiveness in view of Association of Southeast Asian Nations’ integration;
  • strengthening anti-money laundering capability and risk management systems to address weaknesses exposed by financial controversies;
  • promotion of financial inclusion and access to financial services by the poor; and
  • addressing risks arising out of new technology while at the same time encouraging innovation.

The BSP has expressed its intention to reduce the reserve requirement for banks, which at 20 per cent is among the highest in Asia, but is awaiting the right timing, in order to balance the supply of liquidity and the demand for liquidity.

Supervision

Extent of oversight

How are banks supervised by their regulatory authorities? How often do these examinations occur and how extensive are they?

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.

Enforcement

How do the regulatory authorities enforce banking laws and regulations?

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 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 unsound 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 the quasi-banking licence.

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.

What are the most common enforcement issues and how have they been addressed by the regulators and the banks?

Cybersecurity concerns continue to confront financial institutions (both locally and worldwide). Top cyber-threats include card skimming, phishing attacks, ransomware and other malware. Accordingly, the BSP has directed banks to adopt advanced cybersecurity controls and countermeasures, and to improve the management of information security risks and exposures.

Meanwhile, the money laundering incident in 2016 where proceeds from the hacking of the Bangladesh Bank were permitted to enter the Philippine financial system prompted the BSP to update anti-money laundering guidelines. The new regulation emphasises the use of a risk-based approach to the KYC processes.

Resolution

Government takeovers

In what circumstances may banks be taken over by the government or regulatory authorities? How frequent is this in practice? How are the interests of the various stakeholders treated?

As noted in question 19, 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; 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. 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 are the last to receive payment, if any funds remain. The depositors can claim from the PDIC the amount of their insured deposits.

Bank failures

What is the role of the bank’s management and directors in the case of a bank failure? Must banks have a resolution plan or similar document?

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 herself 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.

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.

Domestic systemically important banks (DSIBs) are required to submit a recovery plan to the BSP.

Are managers or directors personally liable in the case of a 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.

Planning exercises

Describe any resolution planning or similar exercises that banks are required to conduct.

As discussed in question 13, DSIBs are required to submit a recovery plan to the BSP and to update the same annually. The recovery plan is intended to serve as a guide to recovery of a DSIB in distress. The recovery plan will take effect when the DSIB breaches the total required Common Equity Tier 1 capital or the minimum liquidity ratios prescribed by the BSP or both. The plan must contain a detailed list of options or courses of action that will be taken by the DSIB to address a range of severe stress scenarios to restore its financial strength and viability. It must take into account the DSIB’s nature, size, interconnectedness, level of substitutability and complexity. It should be capable of being carried out during the recovery stage, when the DSIB has not yet reached the point of non-viability and the prospect of recovery is reasonable if appropriate recovery measures are taken. It should not assume any access to or receipt of government or public financial support or aid from the Philippine government. The board of directors of a DSIB is required to put in place a robust governance structure and sufficient resources to support the recovery planning process.

The list of DSIBs is updated annually and is considered by the BSP to be confidential.

Capital requirements

Capital adequacy

Describe the legal and regulatory capital adequacy requirements for banks. Must banks make contingent capital arrangements?

The BSP prescribes the minimum level of capitalisation for banks. For instance, a universal bank with more than 100 branches must have a minimum capital of 20 billion Philippine pesos, while that of a commercial bank with similar number of branches is 15 billion Philippine pesos.

In addition, the BSP adopted Basel III-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 II-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). The qualifying capital is the sum of Tier 1 (going concern) capital and Tier 2 (gone-concern) capital, less required deductions.

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.

How are the capital adequacy guidelines enforced?

In the event 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, the servicing and the repayment of which are fully guaranteed by the Philippines.

Undercapitalisation

What happens in the event that a bank becomes undercapitalised?

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.

The amended charter of the PDIC also provides for a resolution framework, where the PDIC may, in coordination with the BSP, commence the resolution of a bank upon failure of prompt corrective action as declared by the Monetary Board, or upon request by the bank. For this purpose, the PDIC may, among other things, determine a resolution package for the bank, identify possible acquirers or investors, and conduct a bidding to determine the acquirer of the bank.

Insolvency

What are the legal and regulatory processes in the event that a bank becomes insolvent?

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.

Likewise, in case of a bank placed under resolution, in case the PDIC determines that the bank may not be resolved, the Monetary Board may place the bank under receivership and designate the PDIC as its receiver.

Recent and future changes

Have capital adequacy guidelines changed, or are they expected to change in the near future?

See question 16. The capital adequacy requirements are based on Basel III guidelines for universal and commercial banks. Eventually, thrift and rural banks must observe those guidelines.

Ownership restrictions and implications

Controlling interest

Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank. What constitutes ‘control’ for this purpose?

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. Under Republic Act No. 10641, a qualified foreign bank can be authorised by the BSP to acquire up to 100 per cent of the voting stock of an existing domestic bank, form a 100 per cent-owned banking subsidiary, or establish a Philippine branch with full banking licence.

Foreign ownership

Are there any restrictions on foreign ownership of banks?

See question 21.

Implications and responsibilities

What are the legal and regulatory implications for entities that control banks?

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.

What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?

See question 23. 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 or her stockholding in the bank, under the Securities Regulation Code.

What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?

The controlling entity or individual will not be liable to the creditors of the insolvent bank beyond the amount of its or his or her equity contribution to the bank.

Changes in control

Required approvals

Describe the regulatory approvals needed to acquire control of a bank. How is ‘control’ defined for this purpose?

Any sale or transfer, or series of sales or transfers that will result in the ownership or control of more than 20 per cent of the voting stock of a bank by any person, whether natural or juridical, will require the prior approval of the Monetary Board.

Moreover, parties to an acquisition, where the value of the transaction exceeds 1 billion Philippine pesos and as a result of which the acquirer will own at least 35 per cent (or more than 50 per cent, if the acquirer already owns 35 per cent) of the outstanding voting shares of the corporation, must notify the Philippine Competition Commission (PCC) before the execution of the definitive agreements relating to the transaction.

Acquisition by a private party of majority of the outstanding capital stock of a state-owned bank, and acquisition by the government of the controlling interest of a private bank, are subject to review by the Governance Commission for Government-Owned or Controlled Corporations, in consultation with the supervising government agency to which the bank is attached, for recommendation to and approval by the President of the Philippines.

Foreign acquirers

Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?

The regulatory process is no different for a foreign acquirer.

Factors considered by authorities

What factors are considered by the relevant regulatory authorities 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 must be widely owned or publicly listed, if not owned or controlled, by the government of its country of origin. The Monetary Board may also:

  • ensure geographical 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.

The Monetary Board must also ensure that control of 60 per cent of the resources or assets of the entire banking system is held by domestic banks, which are majority-owned by Filipinos, at all times.

On the other hand, the PCC will assess whether a proposed acquisition is likely to substantially prevent, restrict, or lessen competition in the relevant market or in the market for goods and services, and take into account any substantiated efficiencies put forward by the parties to the proposed acquisition, which are likely to arise from the transaction.

Filing requirements

Describe the required filings for an acquisition of control of a bank.

A written application (together with supporting documents) is to be filed with the BSP for the purpose of acquisition of control of a bank.

With respect to PCC notification, parties to the acquisition must give notification using the notification form prescribed by the PCC. An electronic copy of the form contained in a secure electronic storage device, must be submitted to the PCC, simultaneous with the filing of the aforementioned hard copy. Notification must be made within 30 days from the signing of the definitive agreements relating to the acquisition and prior to consummation of the transaction. The acquisition may not be consummated prior to the expiry of the waiting period prescribed under applicable law.

In case a bank is considered a reporting company under securities regulations, an acquisition of 35 per cent (or of such percentage as would cause the acquirer to own more than 50 per cent, if it already owns 35 per cent) of the outstanding voting shares of a bank in one or more transactions, within a period of 12 months, may trigger tender offer requirements.

Timeframe for approval

What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?

The approval process with the BSP can be completed within one month.

With respect to PCC notification, parties to the transaction are prohibited from consummating the transaction before the expiry of the relevant periods provided in the regulations.